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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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, 60015-0778
Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (847) 267-5300
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant as of March 22, 2000 was approximately zero. At March 22, 2000,
there were 1,000 shares of Common Stock outstanding, all held by the
registrant's parent, Dade Behring Holdings, Inc.
Documents Incorporated by Reference
NONE
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PART I
This information should be read in conjunction with the Consolidated
Financial Statements included herein. 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 the 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,
and the competitive environment in which the Company operates.
Item 1. Business.
History
The original predecessor company to Dade Behring Inc. ("Dade Behring" or
the "Company"), the Baxter Diagnostics division (the "Predecessor") of Baxter
International Inc. ("Baxter"), was established in 1949 as part of the Dade
County Blood Bank in Florida. The Predecessor initially distributed its blood
products through American Hospital Supply Corporation ("AHS") and was
subsequently acquired by AHS in 1956. Building upon its initial blood testing
base, AHS initiated extensive research and development efforts in the routine
chemistry/immunoassay markets of the emerging in vitro diagnostic testing
industry. From 1983 to 1985, those R&D efforts culminated in the product
introductions of the Stratus and Paramax instrument platform lines. AHS also
expanded into the microbiology market and established the MicroScan product
line through a series of acquisitions in the early 1980s. In 1985, Baxter
acquired AHS.
In December 1994, Bain Capital, Inc. ("Bain Capital") and GS Capital
Partners, L.P. ("GS Capital") formed Dade Behring Holdings, Inc. ("Holdings"),
and acquired the Predecessor from Baxter (the "Dade Acquisition"), with the
Company becoming a wholly-owned subsidiary of Holdings. The Company held
established leadership positions in hemostasis and microbiology, strong
routine chemistry/immunoassay market positions, and an extensive sales and
service organization.
In May 1996, the Company purchased (the "Chemistry Acquisition") DuPont's
in vitro diagnostics business, which had entered into the automated clinical
chemistry market in 1968 with the introduction of the first random access
automated chemistry analyzer in the world and whose installed base of routine
chemistry instruments was and still is one of the largest in the world. The
Chemistry Acquisition also provided the Company with world-class manufacturing
capabilities, automation technology, and strong management processes for
operations planning and product development.
In October 1997, the Company acquired (the "Behring Combination") the human
in vitro diagnostics business ("Behring") of Aventis S.A. (formerly Hoechst
A.G.) and was renamed Dade Behring. Behring was established in 1904 by Emil
von Behring, the recipient of the first Nobel Prize in medicine. The Behring
Combination provided complementary product lines for hemostasis and routine
immunochemistry and significantly broadened the overall product line portfolio
by adding leadership positions in plasma protein and drugs of abuse
testing/therapeutic drug monitoring. Behring also provided expanded technology
capabilities in platform development, assay development and the development of
emerging technologies. The acquisition of Behring also extended the geographic
scope of the Company's business.
Dade Behring, a corporation organized under the laws of Delaware, has its
principal executive offices located at 1717 Deerfield Road, Deerfield,
Illinois 60015-0778; its telephone number is (847) 267-5300.
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Industry--Overview
In vitro (literally, "in glass") diagnostic ("IVD") tests are conducted
outside the body and are used to identify and measure substances in patients'
bodily fluids such as whole blood, blood plasma, serum, or urine, which enable
physicians to diagnose, treat and monitor patients. The most common IVD tests
are traditional routine clinical chemistry tests which measure glucose,
cholesterol or sodium as part of routine blood checks. Other IVD tests measure
bodily functions such as blood clotting ability and cardiac function, or
measure the presence of infections or drugs. The wide range and important
nature of these tests have established IVD testing as an integral part of the
managed care environment, providing for accurate and timely patient diagnosis
and treatment. Increasingly, IVD testing is being recognized as making a
significant contribution to improving patient care and lowering total patient
costs. IVD tests are performed in a number of different clinical settings
including hospitals, reference laboratories, physicians' offices/ambulatory
care centers and consumers' homes.
The global IVD market is estimated at $18 billion, with the United States,
Western Europe and Japan comprising approximately 41%, 33% and 13%,
respectively. Management believes that the global IVD market will continue to
grow due to a number of key favorable industry trends: 1) Demographic shifts
resulting from the aging of the population and socio-economic improvements are
expected to increase the overall level of demand for diagnostic testing, 2)
Increased focus on lowering total healthcare expenditures will likely increase
demand for diagnostic testing as an effective tool to improve patient outcomes
and reduce the costs of misdiagnosis through earlier and more accurate
diagnosis and patient monitoring, 3) Emerging markets will provide additional
demand as economic improvements in these countries lead to increases in
healthcare expenditures, 4) Technology improvements in new tests, pathogens
and markers will result in the increased use of diagnostics to aid in the
diagnosis of diseases, 5) Improvements in lower cost point-of-care/near-
patient testing capabilities are expected to expand the application of
diagnostic testing capabilities into non-laboratory settings (e.g. operating
room, emergency room, acute care centers), 6) Increased automation of
diagnostic instruments is expected to lower the overall cost of diagnostic
testing and thereby increase accessibility and demand.
IVD systems are composed of instruments, reagents, consumables, service and
data management systems. Instruments typically have a five-year life and serve
to automate repetitive manual tasks, improve test accuracy and speed results
reporting. Reagents are liquid or powder chemical substances that react with
the patient sample to produce measurable, objective results. The consumable
accessories vary across application segments but are generally items such as
tubes and stoppers used during test procedures. Both reagents and consumables
are typically exclusive to their related instruments (thus, a "closed" system)
and, therefore, generate significant ongoing revenues for suppliers. Sample
handling and preparation devices, as well as data management systems are
becoming increasingly important components of the IVD system. These system
additions further reduce labor, improve safety and reduce cost through their
automation benefits. Providing a total integrated system solution that is
reliable and easy to use creates high switching costs and loyalty among
customers who value consistency and accuracy in test results.
Management believes that certain trends affecting the purchasers of IVD
instruments, as well as the maturation of many IVD testing applications will
drive further consolidation and globalization in the IVD industry. Over the
past several years, an increasing number of domestic hospitals have formed
into groups known as Integrated Health Systems in order to compete for
patients, develop strategic alliances with suppliers and leverage specialized
departments. The formation of these Integrated Health Systems, as well as the
consolidation occurring among competitors in the independent reference lab
market presents larger IVD suppliers with broad product and service offerings
and multiple leadership positions with the opportunity to drive
standardization of their products across all labs in a group. As testing
applications mature in these and other laboratories, IVD suppliers will need
to increase the scale of their operations and broaden the scope of their
product lines in order to leverage worldwide sales, service and research and
development infrastructures. Management believes that the Company, with its
global reach and broad product portfolio, is well positioned to take advantage
of these trends.
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Industry--Served Markets
The Company is one of the largest suppliers of IVD products and services to
clinical laboratories in the United States and the third largest IVD supplier
to clinical laboratories in the world. Of the total estimated $18 billion
global IVD market, the Company serves a $16 billion segment that consists of
IVD instruments, reagents, consumables, service and data management systems
targeted primarily at clinical laboratories and near-patient testing. Within
the Company's served markets, the Company has global market leadership
positions in six of the seven core product markets, which include routine
chemistry/immunoassay, cardiac, hemostasis, plasma protein, microbiology,
infectious disease diagnostics, and drugs of abuse testing/therapeutic drug
monitoring ("DAT/TDM").
IVD tests are conducted primarily in clinical laboratories, which include
primarily hospital-based laboratories and reference laboratories (independent
from hospitals). The Company's customer base consists of approximately 25,000
customers worldwide. The Company provides products and services to over 90% of
U.S. hospital-based clinical laboratories and to the majority of reference
laboratories worldwide.
The Company manufactures and markets a broad offering of IVD products and
services which include: (i) instruments (approximately 16% of sales); (ii)
reagents and consumables (approximately 77% of sales); and (iii) services
(approximately 7% of sales). In total, the Company has a worldwide installed
base of approximately 42,500 instruments. With a typical instrument life of
five years, the Company's installed base of instruments generates annual
revenue of approximately $28,000 per instrument from ongoing sales of
reagents, consumables and service. More importantly, over 78% of the Company's
instrument systems are "closed" systems, which require the exclusive use of
Company reagents and consumables in order to run tests. As a result, the
Company generates a stable and recurring stream of revenue from reagents,
consumables and service contracts.
A description of the Company's served markets is as follows:
Routine Chemistry/Immunoassay
Routine chemistry tests measure substances found in large concentrations in
patients' blood, tissue, urine or other bodily fluids. These substances
include cholesterol, glucose, iron and sodium and their concentration levels
provide information on a patient's basic bodily functions. Routine immunoassay
testing relies upon the properties of antibodies and antigens in the immune
system as its key detection mechanism. Immunoassays (immunochemistry tests)
measure relatively low concentrations of these substances found in blood.
These tests are performed for pre- and post-surgical procedures and to monitor
a patient's response to treatment and therapy. Historically, analyzers had
been developed separately for routine chemistry and immunoassay testing.
Today, high-volume tests are rapidly being consolidated to a single,
heterogeneous platform which significantly improves overall laboratory
productivity and costs.
On average, hospitals operate two to three routine chemistry/immunoassay
analyzers, which serve such roles as routine, STAT and specialty testing.
These instruments are considered the workhorse of the clinical laboratory,
accounting for up to 40% of all IVD tests performed in such laboratories and
are characterized by their high throughput capabilities.
Dade Behring has a broad range of routine chemistry/immunoassay instrument
platforms, including the Dimension(R), Opus(TM), and aca(R) instruments. Dade
Behring has been a leader in workstation consolidation with the introduction
of the heterogeneous module for the Dimension(R) RxL instrument, which allows
the integration of highly sensitive immunoassay testing with routine chemistry
onto one platform. With the Company's leadership position in workstation
consolidation, the continued consolidation of routine chemistry/immunoassay
testing onto a single platform represents a significant growth opportunity for
the Company. The Company has a comprehensive test menu of approximately 100
tests and is currently developing over 40 additional chemistry and immunoassay
tests.
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Cardiac
The Company's cardiac business is focused on immunoassay platforms targeted
at cardiac diagnostics. The cardiac market is one of the highest growth
segments of the broader immunoassay market, growing at 32% annually. Dade
Behring has a leading share in the high growth cardiac segment and was one of
the first to introduce a widely adopted testing system for the cardiac enzymes
Troponin I, CKMB and Myoglobin. The combination of rapid and accurate tests
for Troponin I, CKMB and Myoglobin has allowed for rapid diagnosis of cardiac
disease and has enhanced the physician's ability for triage and diagnosis of
chest pain in patients. Through its 12-year research collaboration with one of
the leading U.S. cardiac marker institutions, George Washington University,
the Company continues to innovate and introduce new products in the cardiac
segment.
The Company's Stratus(R) CS Cardiac system, launched in late 1998,
represents the industry's first quantitative near-patient cardiac instrument.
The Stratus(R) CS system rapid result time (13 minutes), accuracy, test menu
breadth and its direct correlation to central laboratory test results on the
Dimension(R) and Opus(TM) instrument platforms creates a strong competitive
advantage for the Company. The Stratus(R) CS system also offers significant
potential cost savings for healthcare providers. Currently, the average cost
to rule out myocardial infarction in a patient with chest pain ranges from
$1,300 to $5,600. Stratus(R) CS can achieve a result in 13 minutes which saves
significant time over conventional diagnostic measures, which reduces hospital
lengths of stay, avoids unnecessary testing and thereby reduces healthcare
costs significantly. Additionally, the Stratus(R) CS system also reduces
expenses related to unstable angina, a very common form of cardiac disease, by
offering testing for a new, second-generation Troponin I marker which is a
highly sensitive marker of unstable angina. The new, second-generation
Troponin I marker can serve as a rule-in diagnostic procedure which would
expedite follow-up treatment. The Stratus(R) CS system positions the Company
well in both the near-patient and central laboratory cardiac market.
Plasma Protein
Plasma protein instrument systems test serum, plasma, urine or cerebral
spinal fluid to help both diagnose diseases such as coronary heart diseases
and rheumatic diseases as well as to detect disorders such as tumors, renal
failure and malnutrition. Plasma protein tests are conducted on two types of
instrument platforms. The majority of plasma protein tests are run on
dedicated nephelometers such as the Company's BN(TM)II instrument; some
laboratories, however, also run tests on routine chemistry/immunoassay
analyzers such as the Company's Dimension(R) instrument.
The Company is the market leader in the worldwide plasma protein market.
The Company offers four dedicated plasma protein instruments: the BN(TM)II and
BN(TM)A instruments, targeted at large, high volume hospital and commercial
laboratories; the BN(TM)100 instrument, sold to small to medium sized labs;
and the TurbiTime(TM)System, a manual instrument sold to small hospitals and
private labs. The BN(TM)II, a large, highly automated instrument, was released
in late 1995 and has proven to be a successful upgrade path for former
customers of the BN(TM)A and BN(TM)100 instruments who are striving to reduce
lab costs and increase actual testing throughput. The Company's instruments
offer up to 60 assays which cover the complete spectrum of plasma protein
tests. The Company is launching a new instrument in the summer of 2000, the BN
ProSpec(TM), which will be targeted at the small to medium size customer
group.
The Company's focus on expanding its plasma protein business has led to the
development of the broadest portfolio of plasma protein products in the
market, allowing it to target customers of all sizes and usage profiles. In
addition, the Company has been able to further leverage its expertise in assay
development on dedicated nephelometers by offering plasma protein assays for
the routine chemistry/immunoassay analyzer market. The Company is also working
to grow the plasma protein market by developing new markers for disorders,
such as renal failure and cardiovascular risk.
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Microbiology
Dade Behring's MicroScan business serves a market that consists of
identification/antimicrobial susceptibility testing ("ID/AST") instruments,
reagent panels, data management systems, disposable accessories and service.
Microbiology laboratories use ID/AST products to identify infection-causing
bacteria (e.g., streptococci and staphylococci) and to determine the minimum
concentration of antibiotic (e.g., erythromycin and ampicillin) necessary to
inhibit or kill the bacteria. This information is critical to the optimum
management of patient therapy. Microbiology systems are "closed," meaning that
reagents and consumables can only be used on the instruments for which they
were produced. Continued evolutions in the microbiology testing market have
been driven primarily by advances in automation, new antibiotics, the
complexity of various microbes, and the increasing resistance of microbes to
antibiotics.
The Company manufactures and markets both manual and automated ID/AST
products. MicroScan's premier instruments are the WalkAway(R)-40si and the
WalkAway(R)-96si, fully automated instruments that use patented dry reagent
panels to conduct bacterial identification and susceptibility testing at the
same time.
The Company is the global leader in automated ID/AST microbiology systems
and has been able to maintain its leadership position in the microbiology
market by focusing on continuous instrument and panel product enhancement and
high growth international markets, as well as by upgrading its instruments to
help laboratories reduce their overall costs. In the United States, the
Company continues to secure business through the promotion of its conventional
panels, testing devices which produce more accurate results than competitive
systems, and through the placement of its pharmLINK(TM) systems, which provide
pharmacists, microbiologists and physicians with better information for the
management of antibiotic therapy. Because antibiotics represent approximately
30% of a typical hospital's drug budget, the potential for significant cost
savings will continue to drive the use of the pharmLINK(TM) system as an
important data management tool. In the future, the Company expects to continue
to aggressively develop international markets. Many international markets rely
predominately upon manual systems--creating a significant opportunity for
MicroScan as customers move to more efficient automated systems.
Infectious Disease Diagnostics
Infectious disease systems test serum, plasma or cerebral spinal fluid for
the presence of infectious microorganisms. This segment of Dade Behring's
business consists of bacteriology, parasitology and virology testing,
including HIV and hepatitis testing. The Company is devoting significant R&D
investments in order to develop next-generation infectious disease
diagnostics.
Dade Behring has a strong niche position in infectious disease diagnostics
as well as an ongoing development program in advanced diagnostics. Dade
Behring has also built strong market share positions in key European markets.
In addition, the Company possesses a strong intellectual property position for
HIV-O, a new variant of HIV recently discovered. Due to the increased
prevalence of HIV-O, any future HIV test platform will have to include HIV-O
to offer full HIV testing capability. The Company continues to invest in
expanded test menu capabilities on its existing instrument line and launched
the new Quadriga(TM) platform in 1998, that allows the Company to better serve
the high volume customer segment. Finally, the Company has made significant
investments in branch migration inhibition (BMI).
Hemostasis
Hemostasis testing measures a patient's ability to form and dissolve blood
clots, a critical factor in the stabilization of the cardiovascular system.
Hemostasis testing can be segmented into routine screening and specialty
tests. Routine hemostasis tests are typically performed before and during
surgical procedures. Hemostasis testing is also essential in post-surgical
treatments for patients with cardiovascular disorders (e.g., monitoring
treatments to "thin" the blood) and for patients with coagulation disorders
(e.g., hemophilia).
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Specialty tests are performed to further characterize congenital disease
states. Market growth is expected to come from continued growth in the number
of surgeries performed as well as from new hemostasis tests which more
accurately measure blood clotting and provide for improved patient treatment.
The Company pioneered the field of hemostasis and continues to maintain a
global leadership position through its commitment to innovation and its
development of new and improved products and services. The Company offers the
industry's broadest range of instrument platforms and tests, both routine and
specialty, to meet the needs of customers from small hospitals to large
reference labs. The Company has a strong history of instrument product
development and is capitalizing on an emerging near-patient technology
opportunity with the introduction of a novel system for monitoring platelet
function, which is an essential component of primary hemostasis. Platelet
testing today is performed manually, with Dade Behring offering the only
automated system in the market. The Company believes this will be a high-
growth market as new anti-platelet therapies are developed and introduced.
Drugs of Abuse Testing/Therapeutic Drug Monitoring ("DAT/TDM")
Drugs tests are used to measure the level of therapeutic drugs ("TDM") or
drugs of abuse ("DAT") in either blood or urine. TDM tests assist physicians
in ensuring that the level of therapeutic drugs patients receive do not exceed
safe ranges in the bloodstream. An example of a TDM application is testing
performed on transplant patients to monitor the level of immunosuppressive
drugs that they are given. Drugs of abuse tests screen for the use of illicit
substances such as cocaine and marijuana. Because of their range of
application, drugs tests are used at a variety of sites, from clinical
laboratories to employers' offices. Drugs tests are also conducted on multiple
platform types, including the Company's ETS(R) dedicated immunoassay
instrument platform, as well as its aca(R) clinical chemistry analyzers.
The Company manufactures a wide range of products under the Syva(R) brand
name in the drugs market, including both dedicated instruments, as well as a
line of over 50 reagents, which it markets to both clinical and non-clinical
laboratories. Syva is the world leader in DAT testing, with the broadest menu
of assays available. In order to increase the convenience of testing for its
customers, the Company is developing ready-to-use liquid DAT reagents for a
broad range of commercially available instrument platforms. In addition, the
Company is taking advantage of the trend in diagnostics toward testing at the
point-of-care by launching the Syva(R) Rapid Test(TM) product line, a self-
contained, unitized test device. This investment has been complemented by two
significant acquisitions in 1999, the first, the assets of Point-of-Care
Technologies, Inc., broadens the Company's portfolio by integrating the rapid
test into the urine collection device (Rapid Cup) and the second, Chimera
Research and Chemical, Inc., represents the Company's first foray into sample
adulteration testing. The Company also has a strong position in the TDM market
with an especially strong position in the high growth immunosuppressives
market. The Company has been successful at developing tests for
immunosuppressive drugs; it was the first to market a research-use only test
for MPA (Mycophenolic Acid) and is currently developing a test for FK506
(Tacrolimus).
The Company's plans for growth in the drugs market center on expanding the
scope of its testing platforms and assays, as well as international expansion.
The Company is also taking advantage of the market potential for tests on non-
dedicated platforms by extending its OEM relationships with manufacturers of
routine chemistry/immunoassay analyzers.
Other Served Markets
Immunohematology. Dade Behring immunohematology and related products are
typically used by hospital laboratories and blood donor centers to classify
blood products for use in transfusion procedures. The immunohematology line
consists of immunohematology reagents and base laboratory equipment such as
cell washers and automated centrifuges.
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Integrated Services(TM) Division. The Company believes its Integrated
Services(TM) Division ("ISD") organization is one of the largest service
organizations in the industry with approximately 1,000 product and service
specialists worldwide. This organization provides in-warranty and out-of-
warranty service on the Company's approximately 42,500 instruments and
provides service on a third-party basis to other medical instrument companies.
All of the Company's field service personnel are trained in the technical
aspects of one or more of the Company's major instrument systems. In the
United States, this field service organization provides rapid (usually within
six hours), on-site service to the Company's entire customer base. In the
United States, the Company also maintains a telephone-based, in-house
technical support and customer service group of over 300 people to provide
troubleshooting and other user help, which leverages the higher cost of on-
site service.
Third Party Product Distribution. The Company distributes various products
for third party manufacturers in select markets where it can leverage its
existing distribution network.
Research and Development
Overview
Within the IVD industry, the Company has established a track record of
innovation and timely product introduction. The Company maintains an active
research and development program focused on the development and
commercialization of products which both complement and update its existing
product offerings. In each of its core product lines, research and development
was instrumental in the development of key technologies which have helped to
create strategic product advantages. At December 31, 1999, there were
approximately 600 employees involved in the Company's product development
efforts.
Dade Behring spent an average of 8% of revenues over the last three years
on R&D for its core product lines, with some product lines reaching 12% of
sales. Furthermore, the Company's hemostasis instrument manufacturing partners
have made considerable investments in instrument and technology upgrades in
collaboration with the Company.
The Company's project portfolio development process ensures that priority
spending is matched with strategies and core competencies. The project
development process employs a market-driven, milestone-based, phase gate
process to support projects from concept to post-commercialization. In
addition, the Company has a strong quality management system that is the
foundation of its technical product development capabilities.
To provide focus for growth and profit enhancement, research and
development activities are grouped into two primary categories: platform and
systems development and test menu development across all product segments. In
addition, Dade Behring has identified specific growth opportunities in near-
patient/point-of-care testing, information management and advanced diagnostics
development.
In addition to the product development areas described below, Dade Behring
has an active program in place to seek and establish alliances. The Company
has an alliance with Sysmex Corporation (formerly TOA Medical Electronics Co.,
Ltd.), a leading Japanese manufacturer of medical instruments, to produce a
variety of hemostasis instruments.
Platform Development
The Company is committed to continued investments in new platforms to
maintain and enhance its competitive advantage. Management believes that
clinical laboratories are increasingly looking to IVD suppliers to help them
reduce labor costs, the largest cost component in the laboratory. Among the
activities that drive labor costs are sample preparation, instrument setup,
throughput and maintenance, manual data entry and manipulation, and the
verification and reporting of results. The Company has been a leader in
laboratory
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productivity and workstation automation and is engaged in a broad range of
platform development programs that will further automate the laboratory and
reduce total laboratory costs.
In the routine chemistry/immunoassay segment, the Company created the
industry's first platform capable of performing highly sensitive heterogeneous
immunoassays along with routine clinical chemistry, specialty tests,
electrolytes and metabolites with the Dimension(R) RxL instrument platform.
The Company is investing to maintain its leadership in laboratory productivity
through a number of additional platform enhancements to the RxL. In addition,
with a continued focus on laboratory efficiency and integrated solutions for
today's laboratory, the Company is developing Central Laboratory Chemistry
Work Cells that will interface multiple analytical systems to create an
integrated solution for enhanced productivity. Working with a partner, the
Company is also investing in the area of pre-analytical sample preparation and
sample handling.
For the higher volume laboratory, the Company will develop a platform that
builds on the strengths of integrated chemistry and immunochemistry testing
and incorporates the latest concepts in system flexibility and enhanced
productivity. For the lower volume chemistry laboratory, the Company is
developing a new platform incorporating the recent advances in Dimension
technology and targeting to meet the specific needs of this market segment.
The Company also markets two new high-end automated platforms, one for the
Plasma Protein product line, the second for the Hemostasis segment. Current
new product initiatives include exciting new platform systems that are
designed to meet the needs of the small to mid-size volume customer for the
Plasma Protein and Hemostasis product lines. The Company has also recently
launched an enhanced version of the MicroScan WalkAway-System(R) and has
initiated development of a next generation platform for the microbiology
laboratory. The first generation of the Quadriga System, automation of high
volume processing of microtiter plate infectious disease tests, was recently
launched in Europe and the team is now working on additional configurations of
the system to meet the needs of different size laboratories.
In addition to improvements in the existing portfolio of instruments, the
Company continues to seek out new opportunities through the focused
development of certain niche instruments. Such products have included the
Platelet Function Analyzer (PFA-100(R)) instrument, which automates the
testing and quantifiable measurement of platelet function. Like most IVD
instruments, the PFA-100(R) instrument uses proprietary reagents and
consumables designed exclusively for this instrument. The Company has also
developed and launched the Stratus(R)CS instrument in 1998, which is designed
to address the need for rapid measurement of cardiac-specific markers in the
emergency room and other near-patient care environments, as well as in the
central laboratory.
Test Menu Development
Once the Company places an instrument, the development of new reagents to
conduct additional tests represents a highly leveraged growth opportunity. The
Company's large installed base represents significant potential for the
Company's new reagent development efforts. The Company is currently developing
a series of highly sensitive immunoassays and important biochemical tests for
the Dimension(R) RxL instrument platform. It is also increasing the specialty
tests on this system with incremental plasma protein methods as well as new
drugs of abuse assays.
For the specialty and niche platforms, a number of new tests are under
development, such as, additional acute care markers for the Stratus(R) CS
instrument including hsCRP, an important marker for characterizing cardiac
risk. New protein markers, such as Cystatin C, CDT and others for the plasma
protein systems and new and enhanced tests for the hemostasis platforms, such
as D-Dimer, are being developed. The Company is developing a family of TDM
assays for immunosuppressive drugs important for the ongoing treatment and
maintenance of organ transplant patients and MicroScan continues to add new
antibiotics to AST panels. The
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Company continues to focus on menu expansion on all its systems in many
important disease states. Examples of a few are cardiovascular disease,
nutritional assessment, prostate cancer, and transplantation.
Near-Patient/Point-of-Care Development
The Company has identified near-patient testing and point-of-care testing
as emerging growth opportunities in diagnostics. The Company invests across
various segments of the near-patient market and has the leadership position in
the point-of-care cardiac segment today. Recent product introductions include
the successful launch of the Syva(R) Rapid Test, Syva(R) Rapid Cup and
AdultraCheck(TM), as well as the PFA-100(R) instrument and the Stratus(R) CS
platform. Furthermore, the Company is evaluating alternatives to leverage its
global hemostasis position in the point-of-care market.
Advanced Diagnostics and Information Technology
Information management is critical to a laboratory success. The Company is
developing products and services that will support the laboratory's need for
enhanced connectivity and remote diagnostics as well as value added Clinical
Decision-Assist products. Information products are being developed that
support the Company's menu expansion into the important clinical areas of
prostate and cardiovascular disease and increase the productivity and the
partnership between the physician, pharmacist, and laboratory in antibiotic
therapy. The Company also maintains an active program in advanced development,
with a focus on detection technologies and molecular diagnostics.
Customers
The Company has a broad customer base that includes primarily hospital and
reference laboratories. The Company sells its products worldwide and derives
47% of its revenue from outside the United States. No end-consumer represents
more than 3% of the Company's sales. Sales to Allegiance Healthcare
Corporation, the Company's U.S. distributor for certain product lines,
represented 12% of the Company's sales.
Sales, Distribution and Marketing
The Company maintains 6 sales offices in the U.S. and 41 sales offices
outside the U.S. and employs approximately 2,000 people in its worldwide sales
group, comprised of field sales representatives, managers, clinical
application specialists ("CASs") and field service representatives. Field
sales representatives are the traditional salesforce and are organized by
product line. The CASs provide troubleshooting in the field, customer
training, and conduct workshops and seminars. The CASs are also organized by
major product lines. Field service representatives install instruments at
customer locations and provide maintenance and service work on the
instruments. In addition, the Company utilizes twelve distributors outside of
the U.S.
The Company maintains a dedicated Health Systems sales team in the U.S.
that is exclusively focused on leveraging the Company's broad product line
capabilities with Integrated Health Systems. Integrated Health Systems are
large hospital networks in integrated delivery systems and represent an
increasingly important portion of the customer base. The Health Systems sales
team is focused on the top Integrated Health System accounts and provides
overlay support for the sales representatives.
In the United States, the sales organization works closely with the
Company's chief domestic distributor, Allegiance Healthcare Corporation
("Allegiance"). Allegiance provides routine distribution and delivery
functions such as order entry, invoicing, customer service, database
management and physical warehousing and delivery for the Hemostasis and
Microbiology products. Chemistry, Cardiac, Plasma Proteins, Infectious Disease
and Syva(R) products are sold directly to customers in the U.S. without a
distributor.
9
<PAGE>
In addition to its worldwide sales group, the Company employs approximately
360 marketing personnel worldwide with extensive knowledge and understanding
of industry issues, market trends, customer needs and competitive dynamics.
Instrument Placements
The Company's instruments range in retail price from $20,000 to $210,000.
Globally, approximately twenty-five percent of the Company's instrument
placements in 1999 were sold to customers, approximately twenty-five percent
were sold through third-party lessors and the remainder were financed directly
by the Company.
The Company offers customers a variety of financing options designed to
offset the large up-front capital outlay necessary to purchase an IVD
instrument. The two most common financing methods are (i) third-party leasing,
and (ii) reagent rental agreements in which Dade Behring retains title to the
instrument and recoups the cost via premiums on its reagents.
Intellectual Property
The Company owns over 3,000 United States and non-U.S. patents, and has
hundreds of patent applications currently pending in the United States and
abroad. These patents and patent applications cover a broad base of technology
relating to the Company's MicroScan(R), Stratus(R), Syva(R), Dimension(R),
Opus(TM), aca(R), Hemostasis and Plasma Protein product lines as well as
technology which has yet to be commercialized. The Company also licenses
certain patents and other intellectual property from third parties. In
addition to its extensive patent portfolio, the Company possesses a wide array
of unpatented proprietary technology and know-how.
The Company owns over 1,700 United States and non-U.S. registered
trademarks and service marks, including the Company's well known and respected
Syva(R), MicroScan(R), Stratus(R), and Dimension(R) brand names. In addition,
the Company has hundreds of applications for registration of trademarks and
service marks pending in the United States and abroad. The Company also owns
several United States copyright registrations.
In the aggregate, these patents, patent applications, trademarks,
copyrights and licenses are of material importance to the Company's business.
However, the Company believes that no single patent, trademark or copyright
(or related group of patents, trademarks or copyrights) is material in
relation to the Company's business as a whole.
Employees
As of December 31, 1999, the Company had approximately 6,460 full-time and
part-time employees, 3,650 in the United States, 2,270 in Europe, 240 in Japan
and 300 in other locations around the world. The Company also contracted with
approximately 630 temporary employees as of December 31, 1999.
Environmental, Health and Safety Matters
The Company is subject to federal, state, local and foreign environmental
laws and regulations and is subject to liabilities and compliance costs
associated with the handling, processing, storing and disposing of hazardous
substances and wastes. The Company's operations are also subject to federal,
state, local and foreign occupational health and safety laws and regulations.
The Company devotes resources to maintaining environmental compliance and
managing environmental risk and believes that it conducts its operations in
substantial compliance with applicable environmental and occupational health
and safety laws and regulations. Nonetheless, from time to time, the
operations of the Company may result in noncompliance with environmental or
occupational health and safety laws or liability pursuant to such laws. The
Company expects to incur no material capital expenditures for environmental
controls in the current and succeeding fiscal years.
10
<PAGE>
Item 2. Properties.
The Company provides its customers with high quality products by
controlling each stage of production. Below is an overview of the Company's
manufacturing facilities including key products manufactured:
<TABLE>
<CAPTION>
Floor
No. of Area
Location Sites (Sq. Ft.) Owned/Leased Products
-------- ------ --------- ------------ ------------------------------
<S> <C> <C> <C> <C>
Duedingen, Switzerland.. 2 184,700 1 Owned Immunohematology Reagents
1 Leased
Sacramento, California.. 2 236,900 1 Owned Microbiology Instruments and
1 Leased Reagents
Glasgow, Delaware....... 2 447,000 1 Owned Cardiac,
1 Leased Routine Chemistry/Immunoassay
Reagents
Brookfield, Connecticut. 1 100,000 Leased Cardiac,
Routine Chemistry/Immunoassay
Instruments
Cupertino, California... 1 110,000 Leased Drugs of Abuse Testing,
Therapeutic Drug Monitoring
Reagents
Marburg, Germany........ 3 320,000 Owned Hemostasis, Plasma Protein,
Infectious Disease Diagnostics
Reagents
Mountain View,
California............. 1 62,235 Leased Drugs of Abuse Testing,
--- ---------
Therapeutic Drug Monitoring
Reagents
12 1,460,835
=== =========
</TABLE>
Item 3. 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.
The Company is presently pursuing resolution of a series of disputes with a
business partner through an independent arbitrator. While the outcome of this
arbitration is uncertain, the Company does not believe it will have a
significant effect on its reported results of operations or financial
position.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
None.
Item 6. Selected Financial Data.
Set forth below are selected historical financial data of the Company as of
the dates and for the periods shown (dollars in millions). The selected
historical financial data were derived from the Company's financial
statements, which, except for data as of December 31, 1995, 1996 and 1997 and
for the years ended December 31, 1995 and 1996, are included elsewhere in this
Form 10-K. The selected historical financial data should be
11
<PAGE>
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and accompanying notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1995(1)(2) 1996(5) 1997(6) 1998(7) 1999(8)
---------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................... $614.3 $ 795.8 $ 980.5 $1,285.2 $1,309.2
Cost of goods sold............ $368.6 $ 444.1 $ 654.1 $ 529.4 $ 571.0
Gross profit.................. $245.7 $ 351.7 $ 326.4 $ 755.8 $ 738.2
Marketing and administration
expenses..................... $171.1 $ 255.5 $ 366.8 $ 513.9 $ 564.9
Research and development
expenses..................... $ 26.5 $ 138.0 $ 61.7 $ 88.2 $ 90.6
Goodwill amortization expense
(credit)..................... $ (0.4) $ 3.3 $ 5.4 $ 5.4 $ 5.3
Restructuring expense (3)..... $ -- $ 15.0 $ 40.1 $ (4.5) $ 13.3
Income (loss) from operations. $ 48.5 $ (60.1) $(147.6) $ 152.8 $ 64.1
Extraordinary items (4)....... $ -- $ (25.0) $ -- $ -- $ (8.8)
Net income (loss)............. $ 12.7 $(105.3) $(142.6) $ 43.5 $ (38.5)
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1995 1996 1997 1998 1999
------ -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Total assets.......................... $550.9 $1,005.1 $1,510.4 $1,533.4 1,665.8
Long-term liabilities................. $297.9 $ 807.9 $ 875.1 $ 815.6 1,359.9
</TABLE>
- --------
(1) Financial data for the year ended December 31, 1995 excludes the results
of the Burdick & Jackson and Bartels product lines, which were reflected
as "Net assets held for sale."
(2) Stockholder's equity and net income for the year ended December 31, 1995
include a non-recurring pre-tax write-off of $40.4 million of allocated
purchase price made to record acquired finished goods and work-in-process
inventory at fair market value.
(3) In 1996, a $15.0 million restructuring charge was recorded related to a
plan to eliminate redundancies and rationalize production capacity in
connection with the Chemistry Acquisition. In 1997, the Company recorded a
$40.1 million restructuring charge to consolidate manufacturing and
distribution operations and eliminate redundant sales, service and
administrative functions. In 1998, $4.5 million of the 1997 reserve was
determined to be excess and was reversed to income. In 1999 the Company
recorded a $16.5 million restructuring charge to reorganize management
structure and to reduce operating costs in the sales, service and R&D
groups. In addition, net adjustments to the 1997 reserves of $3.2 million
were reversed to income.
(4) In 1996, two extraordinary charges totaling $25.0 million after tax were
made to record the costs associated with the repurchase of the original
13% senior subordinated notes due in 2005 and the write-off of previously
deferred financing fees. In 1999, net deferred financing fees of $14.7
million related to the 1998 Amended Bank Credit Agreement were written off
as an extraordinary loss of $8.8 million, net of taxes.
(5) The pre-tax loss for the year ended December 31, 1996 reflects the
following pre-tax charges resulting from purchase accounting for the
Chemistry Acquisition and other items: (i) a charge to cost of goods sold
for $24.8 million related to the step-up to fair value of acquired work-
in-process and finished goods inventories, (ii) a $15.0 million
restructuring charge designed to lower operating costs, increase
efficiency, and eliminate redundant operations, (iii) a $98.1 million
charge to research and development expense for acquired research and
development projects which do not have alternative applications or
separable economic value, and (iv) a $9.5 million charge to cost of goods
sold to establish a reserve for excess spare parts inventories related to
the Paramax(R) product line.
(6) The net loss for the year ended December 31, 1997 reflects the following
pre-tax charges resulting from application of purchase accounting for the
Behring Combination related to the following: (i) a charge to cost of
goods sold for $171.4 million related to the step-up to fair value of
acquired finished goods and work-in process inventories, (ii) a $40.1
million restructuring charge to consolidate manufacturing and distribution
operations and eliminate redundant sales, service and administrative
functions, (iii) a $1.1
12
<PAGE>
million charge to research and development expense for acquired research
and development projects which do not have alternative applications or
separable economic value, (iv) $33.5 million of charges related to
distribution costs, increased inventory reserves resulting from plant
closures and non-core product transition costs, (v) $11.4 million of stock-
based compensation charges related to grants of stock options and purchase
rights, and (vi) $2.0 million of integration costs associated with the
Behring Combination.
(7) Net income for the year ended December 31, 1998 reflects the following
pre-tax charges: (i) $13.1 million of stock-based compensation charges
related to grants of stock options and purchase rights, (ii) $24.6 million
of integration costs associated with the Behring Combination, and (iii)
$5.4 million in Year 2000 ("Y2K") remediation costs.
(8) The net loss for the year ended December 31, 1999 reflects the following
pre-tax charges: (i) $16.8 million, $14.7 million and $22.7 million of
advisory fees, refinancing fees, and stock compensation expense,
respectively, related to the June 1999 recapitalization plan, (ii) $23.5
million of Y2K remediation costs and (iii) $26.3 million of integration
costs associated with the Behring Combination, and (iv) a $16.5 million
restructuring charge in connection with a reorganization of the Company's
management structure to reduce operating costs and increase productivity
in the Company's U.S. and European sales, service, and R&D groups.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Comparability
Comparisons drawn from the Company's Consolidated Financial Statements for
1997 through 1999 are impacted by certain significant purchase accounting-
related and other items. Such items include, but may not be limited to:
1999
. $16.8 million of 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 to the June 1999
recapitalization.
. $16.5 million restructuring charge in connection with a reorganization of
the Company's management structure to reduce operating costs and plans to
increase productivity in the Company's U.S. and European sales and
service and R&D groups.
. $22.7 million of nonrecurring stock-based compensation expense related to
the June 1999 recapitalization.
. $23.5 million of Year 2000 ("Y2K") costs.
. $26.3 million of integration costs associated with the Behring
Combination.
. $14.0 million of non-recurring costs associated with the remediation of
the new Delaware product distribution system.
. The reversal to income of $5.9 million of various excess purchase
accounting and restructuring reserves.
. The reversal to income of approximately $11.0 million of various legal
related reserves as a result of settlement or discontinuation of several
legal proceedings.
13
<PAGE>
1998
. $13.1 million of stock-based compensation charges were recorded related
to grants of stock options and purchase rights.
. $24.6 million of integration costs associated with the Behring
Combination.
. $5.4 million of Year 2000 ("Y2K") costs.
1997
. A $171.4 million charge was recorded to cost of goods sold related to the
step-up to fair value of work-in-process and finished goods inventory in
connection with the purchase price allocation for the Behring
Combination.
. A $40.1 million restructuring charge was recorded to consolidate
manufacturing and distribution operations and eliminate redundant sales,
service and administrative functions.
. $1.1 million was charged to research and development expense upon
consummation of the Behring Combination pertaining to purchase price
allocated to acquired research and development projects that have no
alternative future use.
. $33.5 million of charges were recorded including $12.2 million charged to
cost of goods sold primarily for distribution costs and increased
inventory reserves resulting from the Miami plant closure actions and
$21.3 million charged to marketing and administrative expense related
primarily to the transition of the Stratus(R) non-cardiac and Paramax(R)
product lines.
. $11.4 million of stock-based compensation charges were recorded related
to grants of stock options and purchase rights.
. $2.0 million of integration costs associated with the Behring
Combination.
Results of Operations
1999 Compared to 1998
Net Sales. Net sales for 1999 totaled $1,309.2 million as compared to
$1,285.2 million in 1998. The $24 million or 1.9% increase over 1998 was
attributable primarily to strong sales growth from Dimension(R), Stratus(R)
CS, 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 the third quarter of 1998.
Excluding sold businesses, revenues grew by $48.7 million or 3.9% in 1999
as compared to 1998. During 1999, the Company experienced 13% sales growth
from core product lines, offset by planned declines in non-core product lines.
Foreign exchange rate fluctuations did not have a material impact on net sales
in 1999 as compared to 1998.
Gross Profit. Gross profit for 1999 decreased $17.6 million or 2.3% to
$738.2 million as compared to $755.8 million in 1998. Gross margins for 1999
were 56.4% compared to 58.8% in 1998. The decrease in gross profit for 1999 is
attributable primarily to increased depreciation expense and Year 2000
remediation expenses.
Marketing and Administrative Expense. Marketing and administrative expense
for 1999 totaled $564.9 million as compared to $513.9 million in 1998. The
$51.0 million or 9.9% increase in marketing and administrative expense for
1999 is attributable primarily to the non-recurring June 1999 stock-based
compensation expense related to the recapitalization, non-recurring advisory
fees and out-of-pocket expenses related to the Company's review and
consideration of strategic alternatives and merger and acquisitions leading up
to the recapitalization transaction, non-recurring remediation costs of the
new Delaware product distribution system, and Year 2000 remediation expenses.
14
<PAGE>
Research and Development Expense. Research and development expense for 1999
totaled $90.6 million. Research and development expense for 1998 totaled $88.2
million. The $2.4 million or 2.7% increase in research and development expense
for 1999 is attributable primarily to increased investment in new products
partially offset by cost synergies related to eliminating overlapping or
redundant R&D projects.
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.
Restructuring expense. The Company recorded a $16.5 million restructuring
charge in 1999 to reorganize the Company's management structure and to reduce
operating cost in the sales, service and R&D groups. In addition net
adjustments of $3.2 million to the 1997 reserves recorded in connection with
the Behring Combination were reversed to income in 1999. See also Note 7 to
the Consolidated Financial Statements.
While management believes substantial integration of its acquired
businesses has been achieved, management also believes that continued
globalization of its product offerings and services is necessary. Management
is committed to an ongoing review of business processes and systems and may
initiate additional restructuring actions to reduce its operating costs and
enhance global synergies.
Income from Operations. Income from operations for 1999 decreased $88.7
million to $64.1 million as compared to $152.8 million in 1998. The decrease
in income from operations is due primarily to the $22.7 million non-recurring
June 1999 stock-based compensation expense related to the recapitalization,
$23.5 million of Year 2000 remediation expenses, $16.8 million of 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, $16.5 million of
the non-recurring June 1999 restructuring charge, approximately $5.0 million
of increased depreciation expense and $14.0 million of non-recurring
remediation costs of the new Delaware product distribution system. Excluding
these non-recurring charges, income from operations in 1999 could have been
$162.6 million. Foreign exchange rate fluctuations did not have a material
impact on income from operations in 1999 as compared to 1998.
Net Interest Expense. Net interest expense for 1999 totaled $108.0 million
as compared to $80.5 million in 1998. The $27.5 million, or 34.2% increase was
attributable primarily to higher borrowing levels as a result of the June 1999
recapitalization, which is discussed more completely in Liquidity and Capital
Resources.
Other Income. Other income of $6.2 million in 1999 includes $3.6 million of
royalty income and a gain of $2.3 million from the settlement of a patent
infringement matter.
Income Taxes. An income tax benefit of $8.0 million (an effective rate of
21.2%) was recorded in 1999. At December 31, 1999, the Company had net
deferred tax assets of $399.6 million. In assessing the realizability of the
deferred tax asset, management has analyzed the Company's forecast of future
taxable income by jurisdiction and other relevant factors, including
carryforward limitations, and has concluded that recoverability of the net
deferred tax asset is more likely to occur than not. See also Note 10 to the
Consolidated Financial Statements.
Net Income (Loss) before extraordinary item. For the year ended December
31, 1999, the Company incurred a net loss before extraordinary item of $29.7
million, as compared to net income of $43.5 million in 1998. The decrease in
net income is attributable primarily to lower income from operations,
increased interest expense, partially offset by the gains included in other
income.
Net Income (Loss). For the year ended December 31, 1999, the Company
incurred a net loss of $38.5 million as compared to net income of $43.5
million in 1998. The decrease in net income is attributed primarily to lower
level of income from operations, and an extraordinary loss related to early
retirement of debt partially offset by the gains included in other income.
15
<PAGE>
EBITDA. EBITDA, as defined by the Company, represents the sum of net income
(loss), interest, taxes, depreciation and amortization, non-recurring charges,
including non-cash stock-based compensation expenses, Y2K costs, integration
costs, purchase accounting related charges, restructuring charges and certain
other non-cash and/or non-recurring charges. EBITDA is in management's opinion
a widely accepted financial indicator of the Company's ability to service or
incur indebtedness. While the Company does not advocate EBITDA to be
considered as a substitute for net income or cash flows, it is the primary
financial metric used by management. EBITDA for 1999 totaled $265.9 million as
compared to $258.6 million in 1998. The $7.3 million or 2.8% increase over
1998 was attributable primarily to a continued realization of cost synergies
from the integration of the Behring operations.
Integration costs stem from the Behring acquisition and pertain to expenses
incurred in connection with the Company's efforts to combine complementary
product lines, eliminate manufacturing redundancies, consolidate
infrastructure and leverage the unique core competencies of the predecessor
and acquired business. The principal elements of such costs include: (i)
manufacturing variances, moving, personnel retention, and start-up costs
associated with the transfer of manufacturing capacity from Miami, Florida to
Marburg, Germany, (ii) personnel costs related to the consolidation of
information technology, logistics management, and various other functions
within Europe and (iii) costs associated with the cross training of personnel
among the combined product lines.
Y2K remediation costs represent baseline and incremental costs incurred at
the direction of the Company's Y2K program office in connection with achieving
Y2K readiness. Baseline costs represent allocated payroll expenses attributed
to the estimated time employees spent on the Y2K remediation effort.
1998 Compared to 1997
Net Sales. Net sales for 1998 totaled $1,285.2 million as compared to
$980.5 million in 1997. The $304.7 million or 31.1% increase over 1997 was
attributable primarily to the inclusion of a full year of sales from the
Behring Combination versus three months of sales in 1997. The strong U.S.
dollar reduced sales outside of the U.S. by $5.2 million in 1998 versus 1997.
Gross Profit. Gross profit for 1998 totaled $755.8 million compared to
$326.4 million in 1997. Excluding the $14.6 million of non-recurring costs
related to the Behring integration, 1998 gross profit was $770.4 million.
Gross profit for 1997 totaled $510.0 million, exclusive of the $171.4 million
purchase accounting inventory step-up and the $12.2 million charge related
primarily to distribution costs and to increased inventory reserves resulting
from the Miami plant closure actions. Exclusive of the above impacts, gross
profit increased $260.4 million or 51.1% over 1997, with gross margins
improving to 59.9% as compared to 52.0% in 1997. This increase was
attributable primarily to the inclusion of a full year of operations from the
Behring Combination versus three months of operations in 1997, the ongoing
realization of manufacturing cost reductions initiated as a result of the
combination and a favorable shift toward higher margin products.
Marketing and Administrative Expense. Marketing and administrative expense
for 1998 totaled $513.9 million as compared to $366.8 million in 1997. During
1998 $8.6 million of non-recurring costs related to the Behring integration
were included in marketing and administrative expenses. Marketing and
administrative expense for 1997 included $21.3 million of non-recurring
charges primarily related to the transition of non-core product lines.
Exclusive of the above impacts, the $159.8 million or 46.3% increase over 1997
was attributable primarily to the inclusion of a full year of operations from
the Behring Combination versus three months of operations in 1997, offset by
cost reduction programs initiated as a result of the combination.
Research and Development Expense. Research and development expense for 1998
totaled $88.2 million, or $86.9 million exclusive of $1.3 million of non-
recurring costs related to the Behring integration. Research and development
expense for 1997 totaled $60.6 million, exclusive of the $1.1 million purchase
accounting write-off of in-process research and development projects related
to the Behring Combination. Exclusive of the above impacts, the $26.3 million
or 43.4% increase over 1997 was attributable primarily to the inclusion of a
full year
16
<PAGE>
of operations from the Behring Combination versus three months of operations
in 1997, and increased investment in new products offset by cost synergies
related to eliminating overlapping or redundant R&D projects. 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.
Restructuring Expense. The restructuring credit of $4.5 million in 1998
related to the reversal of excess severance charges initially established in
1997, as a result of higher than projected levels of employee turnover at the
Company's Miami facility. See also Note 7 to the Consolidated Financial
Statements.
Income (Loss) from Operations. Income from operations for 1998 increased
$300.4 million to $152.8 million as compared to a loss from operations of
$147.6 million in 1997. The pre-tax net loss in 1997 was attributable
primarily to the effects of purchase accounting, restructuring charges, non-
recurring operating charges, incremental and duplicative operating costs and
integration costs.
Net Interest Expense. Net interest expense for 1998 totaled $80.5 million
as compared to $87.8 million in 1997. The $7.3 million or 8.3% decrease was
attributable primarily to lower borrowing rates.
Other Income. Other income of $5.6 million in 1998 includes gains of $2.4
million for the sale of two non-strategic businesses and $2.9 million for the
sale of a former manufacturing facility in Miami.
Income Taxes. Income tax expense of $34.4 million (an effective rate of
44.2%) was recorded in 1998. At December 31, 1998, the Company had net
deferred tax assets of $375.3 million. In assessing the realizability of the
deferred tax asset, management has analyzed the Company's forecast of future
taxable income by jurisdiction and other relevant factors and has concluded
that recoverability of the net deferred tax asset is more likely to occur than
not.
Net Income (Loss). For the year ended December 31, 1998, the Company had
net income of $43.5 million, as compared to a net loss of $142.6 million in
1997. The net loss in 1997 reflects the impacts of purchase accounting,
restructuring charges, non-recurring operating charges, incremental and
duplicative operating and integration costs.
EBITDA. EBITDA, as defined by the Company, represents the sum of net income
(loss), interest, taxes, depreciation and amortization, non-recurring charges,
including non-cash stock-based compensation expenses, Y2K remediation costs,
integration costs, purchase accounting related charges, restructuring charges
and certain other non-cash and/or non-recurring charges. EBITDA is in
management's opinion a widely accepted financial indicator of the Company's
ability to service or incur indebtedness. While the Company does not advocate
EBITDA to be considered as a substitute for net income or cash flows, it is
the primary financial metric used by management. EBITDA for 1998 totaled
$258.6 million as compared to $176.0 million in 1997. The $82.6 million or
46.9% increase over 1997 was attributable primarily to the inclusion of a full
year of operations from the Behring Combination versus three months of
operations in 1997 and realization of cost synergies from the integration of
Behring operations.
Integration costs stem from the Behring acquisition and pertain to expenses
incurred in connection with the Company's efforts to combine complementary
product lines, to eliminate manufacturing redundancies, to consolidate
infrastructure and leverage the unique core competencies of the predecessor
and acquired business. The principal elements of such costs include: (i)
manufacturing variances, personnel retention, moving and start-up costs
associated with the transfer of manufacturing capacity from Miami, Florida to
Marburg, Germany, (ii) personnel costs related to the consolidation of
information technology, logistics management, and various other functions
within Europe and (iii) costs associated with the cross training of personnel
among the combined product lines.
Y2K remediation charges represent baseline and incremental costs incurred
at the direction of the Company's Y2K program office in connection with
achieving Y2K readiness. Baseline costs represent allocated payroll expenses
attributed to the estimated time employees spent on the Y2K remediation
effort.
17
<PAGE>
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. 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 and to
fund its operations and planned investments.
In connection with a plan to redeem a portion of the equity interests of
certain of its shareholders, Holdings initiated a leveraged recapitalization
of the Company in 1999. To fund the transaction, the Company refinanced its
existing bank credit facility by entering into a $1.25 billion senior bank
credit facility and used $420.1 million of the net proceeds to pay a dividend
to Holdings. The new bank credit facility consists of $875 million of term
loans and $225.0 million of U.S. dollar and $150 million of Eurodollar
denominated revolving credit facilities. 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 rate. At December 31, 1999, the
company funded the term loan borrowings using LIBOR loans Eurodollar Rate. The
LIBOR rate in effect at December 31, 1999 was 5.85% in respect of A Term Loan,
6.09% in respect of B Term Loan, 6.09% in respect of C Term Loan.
At December 31, 1999, the Company had utilized $34.0 million of its $150
million Eurodollar denominated revolving credit facility and had $225.0
million available under its $225.0 million U.S. dollar revolving credit
facility and $43.5 million available under various non-U.S. credit lines.
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
June 30, 2005. The revolving credit facilities are subject to a commitment fee
of .50%.
The Company's new 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 (including the
11 1/8% senior subordinated notes), liens and encumbrances and other matters
customarily restricted in such agreements.
Working capital at December 31, 1999 totaled $248.0 million as compared to
$267.6 million at December 31, 1998. The $19.6 million or 7.3% decrease is
attributable primarily to a 3.7% decrease in inventory levels and a 6.4%
decrease in accounts receivable as a result of aggressive working capital
reduction initiatives.
Capital expenditures, including instrument placements in customer
locations, totaled $122.7 million in 1999 as compared to $139.0 million in
1998. The $16.3 million or 11.7% decrease is attributable primarily to
decreased Behring integration capital spending in 1999.
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.
The Company is significantly leveraged and its ability to meet its debt
obligations will depend upon future operating performance which will be
affected by many factors, certain of which are beyond the Company's
18
<PAGE>
control. The Company anticipates that its operating cash flows and available
credit facilities will be sufficient to meet its financial obligations and
fund its operational investments. Moreover, at present, the Company believes
it is in compliance with all restrictive covenants in its debt agreements and
anticipates ongoing compliance. If however, the Company is unable to service
its debt requirements as they become due or is unable to maintain ongoing
compliance with restrictive covenants, the Company may be forced to adopt
alternative strategies that may include reducing or delaying capital
expenditures, selling assets, restructuring or refinancing indebtedness or
seeking additional equity capital. There can be no assurances that any of
these strategies could be effected on satisfactory terms, if at all.
Other Matters
Delaware Product Distribution System Issue
In July 1999, the Company's Delaware warehouse experienced start-up
problems with its new warehouse management system. The Company incurred
approximately $14.0 million of non-recurring remediation costs in 1999 related
to the resolution of these system issues; the Company does not expect to incur
significant additional remediation costs in 2000.
Year 2000 Readiness
Certain information systems in use prior to January 1, 2000 were not able
to interpret dates after December 31, 1999 because such systems allowed only
two digits to indicate the year in a date. As a result, such systems were
unable, for example, to distinguish January 1, 2000 from January 1, 1900. Such
inability to properly distinguish between dates could have resulted in adverse
consequences on the operations of a business and the integrity of information
processing. This potential problem was commonly referred to as the "Year 2000"
or "Y2K" issue.
The Company implemented a comprehensive program to address Year 2000 issues
and all necessary implementation efforts were completed as of December 31,
1999. There have been no significant Year 2000 issues associated with the
Company's internal systems, customers, products and services, or suppliers and
other critical business partners. Management does not expect any significant
Year 2000 issues in the future.
In connection with the resolution of Year 2000 issues, the Company incurred
expenses of approximately $23.5 million during 1999. Expenses in 2000 are not
expected to be significant.
New Accounting Pronouncements
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, due to its limited use of derivative instruments, the
adoption of SFAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The information below about the Company's market sensitive financial
instruments constitutes a "forward-looking statement." Actual results in the
future may differ materially from projected results due to actual developments
in the global financial markets. The methods used by the Company to assess and
mitigate risk should not be considered projections of future events or losses.
The Company enters into contracts with major
19
<PAGE>
financial institutions, thereby minimizing the risk of credit loss. Although
the Company does not anticipate nonperformance by counterparties,
nonperformance would expose the Company to credit loss.
In the ordinary course of business, the Company utilizes various financial
instruments that inherently have some degree of market risk. The principal
market risks to which the Company is exposed are changes in interest rates and
foreign currency exchange rates. The Company does not enter into contracts for
speculative or trading purposes. Contract periods are consistent with related
underlying exposures and do not constitute positions independent of those
exposures. The qualitative and quantitative information presented below
summarizes the Company's market risks associated with debt obligations and
other significant financial instruments outstanding at December 31, 1999. Fair
values included herein have been determined based on quoted market prices. The
information presented below should be read in conjunction with Note 2 to the
Consolidated Financial Statements.
Interest Rate Risk
The Company is subject to interest rate risk on its long-term variable
interest rate debt. The Company enters into debt obligations primarily to
support general corporate purposes, including capital expenditures and working
capital needs. To manage a portion of its exposure to interest rate increases
on its outstanding debt, the Company has purchased zero-cost collars. The
Company will receive cash payments from the counterparty if an indexed rate
(three-month LIBOR) exceeds the cap and conversely will pay the counterparty
if the indexed rate falls below the floor. At December 31, 1999 the indexed
rate was between the floor and cap on all contracts.
At December 31, 1999 the Company had outstanding three zero-cost collars,
two having a notional amount of $80 million each and one having a notional
amount of $102.5 million. The zero-cost collars mature on October 4, 2001 and
November 5, 2001, respectively. The following table sets forth, as of December
31, 1999, the Company's principal cash flows for its long-term debt
obligations under its bank credit agreement, related weighted average index
rates, and the notional amount and weighted average index rates of the
Company's zero collars, by expected maturity dates (U.S. dollars in millions):
<TABLE>
<CAPTION>
Estimated
Fair Value
Expected Maturity Dates at
---------------------------------------------------- December 31,
2000 2001 2002 2003 2004 Thereafter Total 1999
---- ------ ----- ----- ----- ---------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term variable rate
debt................... $6.0 $ 33.9 $47.3 $61.0 $74.8 $685.4 $908.4 $908.4
Weighted average
interest rate.......... 6.1% 5.9% 5.9% 5.9% 5.9% 6.0%
Zero-cost collars....... $262.5 $262.5
Weighted average receive
rate................... 7.3%
Weighted average pay
rate................... 5.6%
</TABLE>
Foreign Currency Risk
The Company is subject to foreign currency risk on certain short-term
intercompany borrowing arrangements denominated in foreign currencies. The
Company enters into these arrangements primarily to support the underlying
working capital needs of non-U.S. subsidiaries. In addition, at December 31,
1999, the Company's non-U.S. short-term borrowings totaled $74.9 million.
Finally, the Company is subject to foreign currency risk on trade accounts
payable and receivable, primarily intercompany, where the receivable or
payable is denominated in a currency other than the functional currency of the
entity. To manage a portion of these exposures to foreign currency
fluctuations, the Company uses forward currency exchange contracts.
At December 31, 1999, the Company had outstanding 30 short-term forward
currency exchange contracts denominated in Australian, British Pound,
Canadian, French, Japanese, Singapore, Swiss, Dutch and Euro currencies having
a total notional contract amount of $115.8 million. The contracts mature
between January and June, 2000. The cost to settle the contracts, which is not
material to any individual contract, was $3.3 million at December 31, 1999.
The following table sets forth, as of December 31, 1999, the contract amounts
at the contract
20
<PAGE>
exchange rates as of the contract maturity dates for significant forward
currency exchange contracts outstanding (U.S. dollars in millions). Due to the
short-term nature of these contracts, contract amounts approximated fair
values, and contract exchange rates approximated weighted average contract
foreign currency exchange rates at December 31, 1999.
<TABLE>
<CAPTION>
Estimated
Fair Value
at
Contract December 31,
Amount Contract Rate 1999
-------- ------------- ------------
<S> <C> <C> <C>
Receive U.S. Dollar/Pay:
Australian Dollar................... $ (2.6) 0.6359-0.6372 $ (2.6)
Canadian Dollar..................... $ (4.5) 1.467 $ (4.5)
Swiss Franc......................... $(11.6) 1.477-1.4858 $(10.9)
French Franc........................ $ (7.4) 6.100 $ (7.0)
Japanese Yen........................ $(50.6) 101.90-113.30 $(53.2)
Dutch Guilder....................... $ (1.3) 2.0780 $ (1.2)
Singapore Dollar.................... $ (1.9) 1.6248 $ (1.9)
Pay U.S. Dollar/Receive:
Australian Dollar................... $ 0.7 0.6538 $ 0.6
German Mark......................... $ 0.1 1.9469 $ 0.1
Euro................................ $ 10.8 1.0072-1.0074 $ 10.9
French Franc........................ $ 7.4 6.1222 $ 7.0
Japanese Yen........................ $ 15.7 101.16-102.71 $ 15.7
Dutch Guilder....................... $ 1.3 2.0340-2.0462 $ 1.2
</TABLE>
Item 8. Financial Statements.
See the attached Consolidated Financial Statements (pages F-1 through F-
33).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Executive officers and directors of Dade Behring are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Steven W. Barnes.......... 39 Chief Executive Officer and Director
President and Chief Operating Officer and
James W. P. Reid-Anderson. 40 Director
Robert W. Brightfelt...... 57 President, Global Products and Director
Donal M. Quinn............ 44 President, Europe, Middle East and Africa
Marc N. Casper............ 31 President, Americas
Hiroshi Uchida............ 39 President, Asia
Susan A. Evans............ 52 Senior Vice President, Research and Development
Senior Vice President, Regulatory Affairs and
Robert A. Boghosian....... 54 Quality Systems
Senior Vice President, Chief Information
David G. Edelstein........ 43 Officer
Nelson Chai............... 34 Senior Vice President, Business Development
Robert Maple.............. 40 Senior Vice President, Human Resources
Mark E. Nunnelly.......... 41 Director
Stephen G. Pagliuca....... 45 Director
John P. Connaughton....... 34 Director
Joseph H. Gleberman....... 41 Director
Scott T. Garrett.......... 49 Director
Adam Kirsch............... 37 Director
</TABLE>
21
<PAGE>
Mr. Barnes was appointed Chief Executive Officer and Director in 1997.
Prior to this assignment, he served as the Company's President of Global
Products and Chief Operating Officer since 1996. In 1996 and 1997, Mr. Barnes
was Executive Vice President of Bain Capital, where he was responsible for
several portfolio companies, including Dade Behring Inc., Miltex Inc. and
Claricom Inc., where he served as President and Director. From 1988 to 1996,
Mr. Barnes served in various positions, including President and Director of
Holson Burnes Group Inc., a publicly traded consumer products company. From
1982 to 1988, Mr. Barnes served in various positions with Price Waterhouse.
Mr. Barnes also currently serves as a member of the Board of Directors of the
Health Industry Manufacturing Association (HIMA) and is Chairman of the IVD
sub-committee. Mr. Barnes is also a member of the Board of Overseers of
Children Hospital in Boston, Massachusetts.
Mr. Reid-Anderson was promoted to President and Chief Operating Officer in
1999, and is also a Director of the Company. In this role, he has
responsibility for Global Sales and Service, Research and Development,
Marketing, Operations, Regulatory Affairs, Quality Assurance, Human Resources
Management and Finance. Prior to this assignment, Mr. Reid-Anderson was Chief
Administrative Officer and Chief Financial Officer. Prior to joining the
Company, he was Chief Operating Officer and Chief Administrative Officer of
Wilson Sporting Goods in addition to running Wilson's international unit. Mr.
Reid-Anderson also served in various financial positions of increasing
responsibility for Pepsico Inc., Diageo PLC (formerly Grand Metropolitan PLC)
and Mobil Oil Corporation in Europe, Asia and North America. Mr. Reid-Anderson
is also currently a Director of Epoch Senior Living, Trustmark Insurance, the
Lake Forest Montesorri School and the Boys and Girls Clubs of Chicago.
Mr. Brightfelt was appointed President, Global Products in 1999 and is also
a Director of the Company. In this role, he is responsible for Global Research
and Development, Strategic Planning, Product Management, Marketing, and
Manufacturing Operations across the Company's uniquely wide range of products
and systems for Clinical Chemistry, immunochemistry, hemostasis, microbiology,
infectious-disease diagnostics, plasma-protein analysis, cardiac diagnostics
and drug monitoring. Prior to his appointment in 1999, he was group president
for Chemistry products. From 1967 to 1995, he served in a number of executive
positions for the DuPont Company in a variety of areas, including Business
Director of the Diagnostics Business; Worldwide Marketing Manager, IVD; IVD
New Products Manager; Manager of Product Management and Strategic Planning;
and Production Control and Planning. Mr. Brightfelt is also a Director of
Molecular BioSystems.
Mr. Quinn was appointed President, Europe, Middle East and Africa in 1999.
He joined Dade Behring in 1998 and was Group President, Biology, where he was
responsible for worldwide management of the Hemostasis, Plasma Protein and
Immunohematology product lines, as well as the Marburg, Germany, and
Duedingen, Switzerland facilities. Prior to joining the Company, Mr. Quinn was
employed by Mallinckrodt Medical in a number of executive positions since
1982, including Vice President and General Manager for Anesthesiology, Europe;
Vice President and Managing Director Europe and Hemocue; and Vice President
and Managing Director, Critical Care Division.
Mr. Casper was appointed President, Americas in 1999. In this role, he is
responsible for the Company's sales, service and marketing operations for
North, Central and South America. He joined Dade Behring in 1997 as Executive
Vice President for Europe, Asia and Intercontinental. Prior to joining the
Company, Mr. Casper was an associate of Bain Capital and worked with the
Company since 1995 as a member of Bain Capital's Portfolio Management Group.
Mr. Casper also worked as a strategic consultant for Bain and Company, where
he held several positions of increasing responsibility. Mr. Casper is also a
director of Sunol Molecular Systems.
Mr. Uchida was appointed President for Asia in 1999. He had been Vice
President and General Manager for the Asia-Pacific region since joining Dade
Behring in 1997. Mr. Uchida previously was a Director with Arthur D. Little,
heading the Asia Pacific health-care practice, and Vice President at Bain
Consulting.
Dr. Evans was appointed Senior Vice President of Research and Development
at the former Diagnostics Group of Baxter in 1991. In her current role at the
Company, Dr. Evans is responsible for leading the research
22
<PAGE>
and development activities for the Company worldwide. She joined Baxter in
1981 as a Senior Research Scientist and held a variety of positions including
Vice President Research and Development, Dade Division, responsible for
development programs in immunochemistry, hemostasis, control products and
immunohematology. Dr. Evans is the Secretary of the American Association for
Clinical Chemistry and is active in the NCCLS and the International Federation
of Clinical Chemistry and Laboratory Medicine.
Dr. Boghosian joined the Company in 1995 and currently holds the position
of Senior Vice President, Regulatory Affairs and Quality Systems. In this
role, he is responsible for setting Regulatory Affairs and Quality Assurance
policy, assuring compliance with regulations and corporate policy, and
directing Health, Safety and Environmental Affairs. For the nine years prior
to joining the Company, Dr. Boghosian held management positions of increasing
responsibility in Clinical, Regulatory and Quality Affairs, Research and
Development and General Management with Johnson and Johnson Corporate and
Ortho Diagnostic Systems Inc. From 1969 to 1986, Dr. Boghosian held Operations
and Management positions for Warner-Lambert's IVD and pharmaceutical
businesses.
Mr. Edelstein joined Dade Behring in 1998 as Senior Vice President and
Chief Information Officer. In this role, he is responsible for leading the
development of advanced information systems to support the Company's worldwide
organization. Prior to joining the Company, Mr. Edelstein was Vice President
of Information Management and Productivity, responsible for financial and
supply-chain systems at Bristol Myers Squibb. He also held various positions
in Information Technology for IBM. Mr. Edelstein currently serves on the
Advisory Board at Syracuse University, L.C. Smith College of Engineering and
Computer Science.
Mr. Chai was appointed Senior Vice President, Business Development in 1999.
He is responsible for leading the corporate business development function and
the strategic planning process. He joined the company in 1997 and served as
Corporate Vice President, Worldwide Field Finance prior to this appointment.
From 1995 to 1997, Mr. Chai served in general management and senior finance
positions at Allied Signal, Inc. He has also worked for Philip Morris
Companies, Inc. and Pepsi-Cola Co. in finance and strategy positions.
Mr. Maple joined Dade Behring in December 1999, as Senior Vice President,
Human Resources. In this role, he is responsible for all Human Resource
activities worldwide. Prior to joining the Company, Mr. Maple was Vice
President Human Resource Performance Solutions at Allstate Insurance Company.
Prior to joining Allstate Company, he was a Partner and Managing Director at
Arthur Andersen. Mr. Maple is a member of the Executive Development Network,
the International Society of Performance Improvement and the HR Planning
Society. He is also a Director of the American Society of Training and
Development National Board.
Mr. Nunnelly has been a Managing Director of Bain Capital since May 1993
and a general partner of Bain Capital since 1990. Prior to joining Bain
Capital, Mr. Nunnelly was a partner at Bain & Company, where he managed
several relationships in the manufacturing sector and served with Procter and
Gamble in product management. He is also a Director of Corporate Software and
Technology, SR Research and DoubleClick.
Mr. Pagliuca has been a Managing Director of Bain Capital since May 1993
and a general partner of Bain Capital since 1989. Prior to joining Bain
Capital, Mr. Pagliuca was a partner at Bain & Company, where he worked
extensively in the healthcare arena. Mr. Pagliuca also worked as a senior
accountant and international tax specialist for Peat Marwick Mitchell &
Company in the Netherlands. He is also a Director of Gartner Group, Epoch
Senior Living, Wesley Jessen and Dynamic Details.
Mr. Connaughton has been a Managing Director of Bain Capital since 1997 and
a member of the firm since 1989. Prior to joining Bain Venture Capital, Mr.
Connaughton was a consultant at Bain & Company, where he worked in consumer
products and healthcare strategy consulting. Following the Chemistry
Acquisition, Mr. Connaughton became a Director of the Company. Mr. Connaughton
is also currently a Director of Epoch Senior Living, Stericycle, Dealtime.com
and Vivra Specialty Partners.
23
<PAGE>
Mr. Gleberman is a Managing Director in the Principal Investment Area of
Goldman, Sachs & Co. He joined Goldman Sachs in 1982 in the Mergers and
Acquisitions Department. In 1990 he became head of Mergers and Acquisitions
for Asia and moved to Tokyo. Mr. Gleberman joined the Principal Investment
Area in 1993 and returned to New York. He is also a Director of Applied
Analytical Industries Inc., Biofield Corporation and several privately held
companies.
Mr. Garrett joined Baxter in 1975 as a product development engineer and
served in a number of research, strategic planning and management positions.
Mr. Garrett was named Vice President and General Manager of Baxter
Diagnostics, Inc.'s European operations in 1987 and was named President of the
Paramax(R) Systems Division in 1989. Mr. Garrett became Executive Vice
President of Baxter Diagnostics, Inc. in 1990, with responsibility for all
divisions and operations associated with manufactured product lines. Mr.
Garrett served as Chief Executive Officer from 1994-1997. Mr. Garrett is a
member of the American Association for Clinical Chemistry and also currently
serves on the Health Industry Manufacturers Association Board of Directors. He
is also a Director of Sunol Molecular Corporation. Mr. Garrett resigned from
the Company effective October 31, 1997.
Mr. Kirsch was a Managing Director of Bain Capital from 1993 to 1999 and a
general partner of Bain Capital since 1990. Mr. Kirsch joined Bain Capital in
1985 as an associate. Prior to joining Bain Capital, Mr. Kirsch was a
consultant at Bain & Company, where he worked in mergers and acquisitions. He
is also a Director of Therma Wave, Wessley Jessen, Stage Stores and
Brookstone.
Item 11. Executive Compensation.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Principal All Other
Position Year Salary($) Bonus($) Options(1) Compensation($)
- ------------------ ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Steven W. Barnes........ 1999 465,000 475,000 300,000 3,200(2)
Chief Executive Officer 8,843(3)
and Director 12,000(4)
3,385,817(13)
1998 365,038 525,000 720,000 100,000(9)
652(3)
1997 -- -- --
James W.P. Reid-Anderson
....................... 1999 419,231 385,000 240,000 3,200(2)
President, Chief
Operating 37,209(3)
Officer and Director 12,000(4)
42,345(5)
7,138(7)
4,468(8)
3,166,833(13)
144,652(14)
1998 352,132 450,000 -- 3,200(2)
13,001(3)
1,385(4)
28,388(5)
7,500(7)
1997 330,000 178,500 199,400 3,200(2)
5,506(3)
29,230(5)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
All Other
Name and Principal Position Year Salary($) Bonus($) Options(1) Compensation($)
- --------------------------- ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Donal M. Quinn............. 1999 301,906 213,614 140,000 18,875(7)
President, Europe, Middle
East 14,439(12)
and Africa 57,012(10)
312(11)
237,548(13)
1998 121,756 -- 200,000 6,618(12)
112,155(20)
1997 -- -- --
Marc N. Casper............. 1999 300,769 190,650 120,000 3,200(2)
President, Americas 14,971(3)
10,462(4)
9,714(7)
3,248(8)
55,000(10)
1,084,393(13)
449,464(14)
7,078(15)
1,278(16)
22,122(17)
1998 262,239 240,000 -- 3,027(2)
5,777(3)
10,800(4)
7,500(7)
1997 190,903 107,500 220,000 9,969(4)
Robert W. Brightfelt....... 1999 313,077 160,000 80,000 3,200(2)
President, Global Products 30,537(3)
and Director 10,000(4)
8,549(7)
1,400,877(13)
1,132,002(14)
3,138(18)
1998 277,497 140,000 40,000 3,200(2)
8,105(3)
6,539(4)
7,500(7)
1997 233,538 95,000 71,640 3,200(2)
2,881(3)
18,076(19)
</TABLE>
- --------
(1) The options were granted under Holdings' Executive Management Equity
Plan.
(2) Reflects amounts contributed by Dade Behring for the benefit of the named
executive officers under the Savings Investment Plan.
(3) Reflects amounts contributed by Dade Behring for the benefit of the named
executive officers under the Deferred Compensation Plan and related
interest.
(4) Reflects amounts contributed by the Company for an automobile allowance.
(5) Reflects amounts provided by the Company for a home leave allowance.
25
<PAGE>
(6) Mr. Barnes became CEO on November 1, 1997. Mr. Barnes did not receive any
cash remuneration from the Company during 1997.
(7) Reflects amounts provided by the Company for a personal financial
planning allowance.
(8) Reflects amounts provided by the Company for a legal service allowance.
(9) Reflects amounts received by Mr. Barnes as a sign on bonus when he became
an employee of the Company.
(10) Reflects amounts received by the named executive as a discretionary cash
award.
(11) Reflects amounts received by Mr. Quinn as vacation pay.
(12) Reflects amounts provided by the Company for company car.
(13) Reflects amounts received by named executives under the share repurchase
program.
(14) Reflects long term capital gain amount received by named executives under
the share repurchase program.
(15) Reflects amounts provided by the Company as housing allowance.
(16) Reflects amounts provided by the Company as spouse travel allowance.
(17) Reflects amounts provided by the Company as home trip allowance.
(18) Reflects amounts provided by the Company for household relocation.
(19) Reflects payment by the Company and reimbursed by Dupont for vacation
accrued under the Dupont vacation bank policy.
(20) Reflects amounts received by Mr. Quinn as a sign on bonus when he was
hired in July 1998.
The following table sets forth information concerning the option grants by
Holdings in 1999, reflecting the four-for-one stock split, to each of the
named executive officers:
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------
Potential Realizable Value
Number % of Total at Assumed Annual Rates of
of Securities Options Stock Appreciation of
Underlying Granted to Exercise or Option Terms ($)(1)
Options Employees in Base Price ---------------------------
Name Granted Fiscal Year(2) ($/Sh) Expiration Date (3) 5% 10%
- ---- ------------- -------------- ----------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven W. Barnes........ 300,000 10.1% $15 7/1/2009 3,587,462 8,377,931
James W.P. Reid-
Anderson............... 240,000 8.1% $15 7/1/2009 2,869,969 6,702,345
Donal M. Quinn.......... 140,000 4.7% $12.94 7/1/2009 1,962,549 4,198,101
Marc N. Casper.......... 120,000 4.1% $15 7/1/2009 1,434,985 3,351,173
Robert W. Brightfelt.... 80,000 2.7% $15 7/1/2009 956,656 2,234,115
</TABLE>
- --------
(1) These amounts represent certain assumed rates of appreciation in
accordance with rules of the Commission. Holdings' common stock is not
publicly traded. (The assumed fair value of Holdings' Common Stock (as
defined herein) is $16.55 share, the value adopted by Holdings for the
Share Repurchase Program.)
(2) All options were granted for shares of Holdings' Common Stock (as defined
herein) pursuant to Holdings' executive management equity plan.
(3) The stock options expire earlier upon the termination of the employee.
26
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year and
Fiscal Year End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Company Options/SARs Options/SARs
------------------------ ------------------------- -------------------------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven W. Barnes ....... -- $--
Time Options........... 450,160 300,000 $6,077,160 $ 750,000
James W.P. Reid-
Anderson............... -- --
Time Options .......... 138,468 251,200 2,134,674 784,800
Performance Options.... 103,760 -- 1,517,490 --
Donal M. Quinn.......... -- --
Time Options........... 65,016 245,000 576,692 1,569,750
Marc N. Casper.......... -- --
Time Options........... 22,008 180,000 317,352 1,198,440
Performance Options.... 60,032 -- 877,968 --
Robert W. Brightfelt....
Time Options........... -- -- 26,408 132,800 344,172 888,080
Performance Options.... -- -- 83,864 -- 1,226,511 --
</TABLE>
Pension Plan Benefits
Dade Behring maintains a defined benefit pension plan (the "Plan") for the
benefit of its U.S. employees. Under the Dade Behring cash balance formula
design, credits to an eligible participant's account are posted to a notional
account based on eligible compensation and service. Moreover, interest credits
are posted to each notional account as of the end of each quarter at the
prevailing rate of return for 10-year U.S. Treasury bills at the end of the
previous quarter.
Cash Balance Formula Design
The cash balance formula design became effective January 1, 1997 when Dade
Behring transitioned its pension plan from a final average pay formula design
to a cash balance formula design. Employees with an accrued benefit under the
final average pay formula design as of December 31, 1996 were credited with an
opening cash balance based on the lump-sum presented value of the final
average pay formula accrued benefit. In addition, the present value of the
aforementioned accrued benefit was increased by a transitional benefit
supplement expressed as a percentage multiplier. This transitional benefit
supplement recognized the sum of age and service as of December 31, 1996, as
follows:
<TABLE>
<CAPTION>
Transitional Benefits
Points for Age Plus Services Supplement
---------------------------- ---------------------
<S> <C>
less than 35........................................ 110%
35 to 54............................................ 115%
55 or more.......................................... 125%
</TABLE>
As of January 1, 1997, the named executive officers had transitional
benefit supplements as follows: Mr. Brightfelt $18,722. The benefits include
supplements to the qualified and non-qualilfied pension plans. Mr. Barnes, Mr.
Reid-Anderson, Mr. Quinn and Mr. Casper did not participate in the plan as of
December 31, 1996.
27
<PAGE>
The following table sets forth the annual credits posted to cash balance
accounts:
<TABLE>
<CAPTION>
Company Credits
Points for Age plus Service as of as a Percent of
December 31 of the Previous Plan Year Pay
------------------------------------- ---------------
<S> <C>
Less than 35.............................................. 4%
35 to 44.................................................. 5%
45 to 54.................................................. 6%
55 to 64.................................................. 7%
65 to 74.................................................. 8%
75 to 84.................................................. 9%
85 or more................................................ 10%
</TABLE>
The named executive officers had 1999 company and interest credits as
follows: Mr. Barnes, $49,309, Mr. Reid-Anderson, $46,743, and Mr. Casper,
$23,020. These credits were posted to the qualified and non-qualified pension
plans.
Final Average Pay Formula Design
Individuals participating in the Plan under the final average pay formula
design as of December 31, 1996 continue to accrue service and have their
benefits calculated under both the final average pay formula and the cash
balance formula through June 30, 1999.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Plan Participation
--------------------------------------------
Remuneration 15 20 25 30 35
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
125,000...................... $ 32,810 $ 43,750 $ 54,680 $ 65,620 $ 76,560
150,000...................... 39,370 52,500 65,620 78,750 91,870
175,000...................... 45,930 61,250 76,560 91,870 107,180
200,000...................... 52,500 70,000 87,500 105,000 122,500
225,000...................... 59,060 78,750 98,430 118,120 137,810
250,000...................... 65,620 87,500 109,370 131,250 153,120
300,000...................... 78,750 105,000 131,250 157,500 183,750
400,000...................... 105,000 140,000 175,000 210,000 245,000
450,000...................... 118,120 157,500 196,870 236,250 275,620
500,000...................... 131,250 175,000 218,750 262,500 306,250
</TABLE>
The above estimated pension benefit amounts assume that benefit payments
begin at age 65 under a single lift annuity form. Such amounts do not reflect
the social security offset incorporated by the pension benefit formula. The
social security offset amount is determined by a participant's social security
earnings history and normal retirement date of age 65. The estimated pension
amounts include benefits payable from the qualified and non-qualified pension
plans. The non-qualified pension plan provides benefits derived by the
qualified plan's formula that exceed legal maximum benefit limitations. The
pension benefit formula is:
1.75% of "final average pay" multiplied by the number of years of plan
participation, minus
1.75% of "social security primary insurance amount ("PIA")" multiplied by
the number of years of plan participation (social security offset not to
exceed 60% of PIA)
where "final average pay" is defined as a participant's five highest
consecutive calendar year earnings (base salary and bonus) out of the last
ten calendar years before retirement.
As of January 1, 2000, the eligible named executive officers' years of plan
participation and final average pay for purposes of calculating pension
benefits payable under the Plan under the final average pay formula design are
as follows: Mr. Brightfelt 32 years and $293.539. Mr. Barnes, Mr. Reid-
Anderson, Mr. Quinn and Mr. Casper did not participate in the former Plan as
of December 31, 1996.
Compensation of Directors
Directors are not entitled to receive any compensation for serving on Dade
Behring's Board of Directors. Directors are reimbursed for their out-of-pocket
expenses incurred in connection with such services.
28
<PAGE>
Item 12. Security Ownership of Management and Directors.
Dade Behring is a wholly-owned subsidiary of Holdings. The common stock of
Holdings consists of Common Stock, par value $.01 per share (the "Common
Stock"), Class B Common Stock, par value $.01 per share (the "Class B Common
Stock"), and Class L Common Stock, par value $.01 per share (the "Class L
Common"). The holders of Class L Common have no voting rights except as
required by law. The holders of the Common Stock and Class B Common Stock are
entitled to one vote per share and five votes per share, respectively, on all
matters to be voted upon by the stockholders of Holdings, including the
election of directors. Bain Capital and its related investors, GS Capital and
its related investors, and Aventis S.A. are parties to a stockholder agreement
regarding the ownership (including the voting) of such stock. By virtue of
such stock ownership and stockholder agreement, Bain Capital, GS Capital, and
Aventis S.A. have the power to control all matters submitted to a vote of
stockholders of, and to elect all directors of, Holdings and, indirectly, to
elect all directors of Dade Behring. Between 1996 and 1999, certain members of
Dade Behring's management acquired voting common stock of Holdings.
The following tables set forth certain information, as of December 31,
1999, regarding the beneficial ownership of (i) voting common stock by each
person (other than directors and executive officers of Dade Behring) known to
Dade Behring to own more than 5% of the outstanding voting common stock of
Holdings and (ii) voting and non-voting common stock by each director of Dade
Behring, each named executive officer and all of Dade Behring's directors and
executive officers as a group. To the knowledge of Dade Behring, each of such
stockholders has sole voting and investment power as to the shares shown
unless otherwise noted.
Security Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
Common Stock and
Class B Common Stock
-----------------------------------
Percentage
Number of Percentage of Class--
Name and Address of Beneficial Owner Shares Of Class(1) Undiluted(2)
- ------------------------------------ --------- ----------- ------------
<S> <C> <C> <C>
Bain Capital Entities (3)................. 11,927,152 22.6% 26.5%
c/o Bain Capital
Two Copley Place
Boston, Massachusetts 02116
The Goldman Sachs Group, L.P. and related
investors (4)............................ 5,963,576 11.3% 13.2%
85 Broad Street
New York, New York 10004
Aventis S.A. (formally Hoechst A.G.)...... 25,857,700 49.0% 57.4%
Bruningstrasse 50
D-65929 Frankfurt a. M.
Germany
</TABLE>
- --------
(1) The percentages assume that all options held by Dade Behring's management
have been exercised. Certain of the options held by Dade Behring's
management are exercisable in accordance with certain time and performance
criteria.
(2) The percentages are based on ownership of outstanding shares as of
December 31, 1999 and reflect the economic interests of the beneficial
owners in Common Stock and Class B Common Stock. Class B Common Stock and
Common Stock are identical in all respects except that Class B Common
Stock is entitled to five votes per share and Common Stock is entitled to
one vote per share. The aggregate Common Stock and Class B Common Stock
percentage voting interests are Bain Capital Entities, 40.4%; The Goldman
Sachs Group, L.P. and related investors, 20.2%; and Aventis S.A., 37.3%.
(3) Amounts shown represent the aggregate number of shares held by Bain
Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates and
BCIP Trust Associates, L.P. (the "Bain Capital Entities").
29
<PAGE>
(4) Includes shares beneficially owned by certain investment limited
partnerships of which affiliates of the Goldman Sachs Group, L.P. ("GS
Group") are the general partners or the managing general partners. GS
Group disclaims beneficial ownership of shares held by such investment
partnerships to the extent partnership interests in such partnerships are
held by persons other than GS Group and its affiliates.
Security Ownership of Management and Directors
<TABLE>
<CAPTION>
Common Stock and
Class B Common Stock Class L Common Stock
(Voting) (Non-voting)
--------------------- --------------------
Number of Percentage Number of Percentage
Name of Beneficial Owner Shares of Class Shares of Class
- ------------------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Steven W. Barnes (1)................ 750,160 1.4% -- --
James W.P. Reid-Anderson (1)........ 500,632 0.95% 800 0.02%
Donal M. Quinn (1).................. 310,016 0.59% -- --
Marc N. Casper (1).................. 284,552 0.54% 2,500 0.05%
Robert W. Brightfelt (1)............ 300,704 0.57% 5,600 0.1%
Scott T. Garrett (2)................ 534,432 1.0% 17,808 0.4%
Mark E. Nunnelly (3)................ 11,927,152 22.6% 1,325,240 28.8%
Stephen G. Pagliuca (3)............. 11,927,152 22.6% 1,325,240 28.8%
Adam Kirsch......................... -- -- -- --
John P. Connaughton (3)............. 11,927,152 22.6% 1,325,240 28.8%
Joseph H. Gleberman (4)............. 5,963,576 11.3% 662,620 14.4%
All executive officers and directors
of Dade Behring as a group (11
people)............................ 20,571,224 39.0% 2,014,568 43.7%
</TABLE>
- --------
(1) The number of shares held by management and the percentages assume that
all options held by management have been exercised. Certain options held
by management are exercisable in accordance with certain time and
performance criteria.
(2) The number of shares held by Scott T. Garrett and the percentages assume
that all his options have been exercised.
(3) All shares shown are held by the Bain Capital Entities. Messrs. Nunnelly,
Connaughton and Pagliuca, who serve as directors of Dade Behring, and are
managing directors of Bain Capital, which is the general partner of
certain of the Bain Capital Entities, and are limited partners of Bain
Capital Partners IV, L.P., the general partner of certain of the Bain
Capital Entities. Accordingly, Messrs. Nunnelly, Connaughton and Pagliuca
may be deemed to share voting and dispositive power as to the shares held
by the Bain Capital Entities. Messrs. Nunnelly, Connaughton and Pagliuca
disclaim beneficial ownership of such shares.
(4) Mr. Gleberman is a general partner of Goldman, Sachs, & Co. The shares
reported herein include shares beneficially owned by certain investment
limited partnerships of which affiliates of GS Group are the general
partners or the managing general partners. Mr. Gleberman disclaims
beneficial ownership of such shares.
Item 13. Certain Relationships and Related Transactions.
Management Services Agreements
The Company entered into Management Services Agreements with Bain Capital
and Goldman, Sachs & Co. (an affiliate of GS Capital). Pursuant to these
agreements, the Company will pay Bain Capital and Goldman, Sachs & Co.,
subject to compliance with the terms of the indenture governing the 11 1/8%
senior subordinated notes, an aggregate annual fee of up to $3.0 million plus
their respective out-of-pocket expenses in return for
30
<PAGE>
management consulting in the areas of corporate finance; corporate strategy;
investment analysis; market research and business development; advisory
services and support, negotiation; analysis of financial alternatives,
acquisitions and dispositions; and other services. For the year ended December
31, 1999, the Consolidated Statement of Operations and Comprehensive Income
includes advisory fees and related expenses of $3.2 million incurred under
these agreements.
Stockholders Agreement
On April 14, 1999, Holdings, Aventis S.A., Bain Capital Fund IV, L.P., Bain
Capital Fund IV-B, L.P., GS Capital Partners, L.P. and certain other parties
signatory thereto entered into an Amended and Restated Stockholders Agreement
(the "Amended and Restated Stockholders Agreement"). The Amended and Restated
Stockholders Agreement provides certain conditions in connection with the
election of directors, transfer of stock, sale of the Company and certain
restrictions on Dade Behring's activities.
Transition Service Agreements
Pursuant to Transition Services Agreements dated September 30, 1997,
Aventis S.A. provided the Company with certain support services including
administrative support, warehousing and distribution services, human resource
support, information systems support, accounting support and office space. The
Transition Services Agreements have various terms from October 1, 1997 through
December 31, 1999. The Company paid $22.9 million to Aventis S.A. related to
these agreements for the year ended December 31, 1999.
Other Agreements
Aventis S.A. subleases office space to the Company pursuant to a sublease
dated October 1, 1997. Rent expense related to this sublease totaled $3.6
million for the year ended December 31, 1999. See Note 12 to Consolidated
Financial Statements.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report.
(i) See "Index to Financial Statements and Schedule" on page F-1
hereof.
(ii) See "Index to Exhibits" on page X-1 hereof.
(b) Reports on Form 8-K.
None.
31
<PAGE>
DADE BEHRING INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1999. F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for
the three years ended December 31, 1999.................................. F-4
Consolidated Statements of Cash Flows for the three years ended December
31, 1999................................................................. F-5
Consolidated Statements of Changes in Stockholder's Equity (Deficit) for
the three years ended
December 31, 1999....................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Financial Statements Schedule (Schedule II)............................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of Dade Behring Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income (loss),
of cash flows and of changes in stockholder's equity (deficit) present fairly,
in all material respects, the financial position of Dade Behring Inc. (a
wholly-owned subsidiary of Dade Behring Holdings, Inc.) and its subsidiaries
(the "Company") at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 10, 2000
F-2
<PAGE>
DADE BEHRING INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share-related data)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1998 1999
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 25.8 $ 49.8
Restricted cash.................................... -- 11.4
Accounts receivable, net........................... 353.5 330.9
Inventories........................................ 265.9 256.2
Prepaid expenses and other current assets.......... 7.3 28.7
Deferred income taxes.............................. 76.8 78.2
-------- --------
Total current assets............................. 729.3 755.2
-------- --------
Property, plant and equipment, net................... 304.7 341.0
Debt issuance costs, net............................. 31.2 43.3
Goodwill, net........................................ 126.5 125.8
Deferred income taxes................................ 269.7 284.2
Other assets......................................... 72.0 116.3
-------- --------
Total assets..................................... $1,533.4 $1,665.8
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt.................. $ 13.0 $ 6.0
Short-term debt.................................... 96.4 74.9
Accounts payable................................... 130.7 125.9
Accrued liabilities and other...................... 228.4 241.9
-------- --------
Total current liabilities........................ 468.5 448.7
-------- --------
Long-term debt, less current portion................. 373.0 902.4
Senior subordinated notes............................ 350.0 350.0
Other liabilities.................................... 92.6 107.5
-------- --------
Total liabilities................................ $1,284.1 $1,808.6
-------- --------
Commitments and contingencies........................ -- --
Stockholder's equity (deficit):
Common stock, $.01 par value, 1,000 shares
authorized, issued and outstanding................ -- --
Additional paid-in capital......................... 493.0 184.1
Unearned stock-based compensation.................. (11.5) (8.1)
Notes receivable on capital contribution........... (0.2) --
Accumulated deficit................................ (209.4) (247.9)
Accumulated other comprehensive loss............... (22.6) (70.9)
-------- --------
Total stockholder's equity (deficit)............. 249.3 (142.8)
-------- --------
Total liabilities and stockholder's equity
(deficit)....................................... $1,533.4 $1,665.8
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DADE BEHRING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $ 980.5 $1,285.2 $1,309.2
------- -------- --------
Operating costs and expenses:
Cost of goods sold............................. 654.1 529.4 571.0
Marketing and administrative expenses.......... 366.8 513.9 564.9
Research and development expenses.............. 61.7 88.2 90.6
Goodwill amortization expense.................. 5.4 5.4 5.3
Restructuring expenses......................... 40.1 (4.5) 13.3
------- -------- --------
Income (loss) from operations.................... (147.6) 152.8 64.1
Other income (expense):
Interest expense, net.......................... (87.8) (80.5) (108.0)
Other.......................................... 9.0 5.6 6.2
------- -------- --------
Income (loss) before income taxes................ (226.4) 77.9 (37.7)
Income tax expense (benefit)..................... (83.8) 34.4 (8.0)
------- -------- --------
Income (loss) before extraordinary items......... (142.6) 43.5 (29.7)
Extraordinary loss related to early retirement of
debt (net of $5.9 million income tax benefit)... -- -- (8.8)
------- -------- --------
Net income (loss)................................ (142.6) 43.5 (38.5)
------- -------- --------
Other comprehensive loss, before tax:
Foreign currency translation adjustments....... (8.6) (11.6) (46.9)
Unrealized gain (loss) on marketable
securities.................................... (0.2) (0.3) 0.4
Minimum pension liability adjustment........... -- -- (1.8)
------- -------- --------
Other comprehensive loss......................... (8.8) (11.9) (48.3)
Income tax benefit related to items of
comprehensive loss.............................. -- -- --
------- -------- --------
(8.8) (11.9) (48.3)
------- -------- --------
Comprehensive income (loss)...................... $(151.4) $ 31.6 $ (86.8)
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DADE BEHRING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
Years ended December
31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)................................. $(142.6) $ 43.5 $ (38.5)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Write-off of in-process research and
development.................................... 1.1 -- --
Depreciation and amortization expense........... 56.6 56.7 66.8
Stock-based compensation expense................ 11.4 13.1 31.3
Other non-cash charges.......................... 37.1 3.8 6.1
Amortization of inventory step-up............... 171.4 -- --
Write-off of debt issuance costs................ -- -- 14.7
Restructuring expenses.......................... 40.1 -- 13.3
Gain on sales of assets......................... -- (5.3) (8.6)
Deferred income taxes........................... (86.1) 29.6 (18.0)
Sale of trade accounts receivable............... -- -- 14.2
Changes in balance sheet items, net of
acquisitions:
Accounts receivable, net...................... (3.3) 1.5 (28.3)
Inventories................................... (6.3) (30.5) (3.5)
Accounts payable.............................. (11.0) 42.1 (0.7)
Prepaid expenses and other current assets..... -- -- (27.8)
Accrued liabilities........................... (66.0) (21.3) 3.4
Other liabilities............................. 86.9 (63.9) 1.6
Other, net.................................... (33.1) (2.0) (8.6)
------- ------- -------
Net cash flow provided by operating
activities.................................. 56.2 67.3 17.4
------- ------- -------
Investing Activities:
Acquisitions and purchase price adjustments, net
of acquired cash................................. (0.9) 30.5 (12.2)
Capital expenditures.............................. (68.4) (139.0) (122.7)
Proceeds from sale of assets...................... 0.7 36.2 11.3
------- ------- -------
Net cash flow utilized by investing
activities.................................. (68.6) (72.3) (123.6)
------- ------- -------
Financing Activities:
Increase in restricted cash....................... -- -- (11.4)
Proceeds from collateralized borrowing............ -- -- 17.4
Net proceeds/repayments related to short-term
debt............................................. (0.5) 44.3 (21.8)
Borrowings under revolving credit facility........ 259.4 94.0 500.0
Repayment of borrowings under revolving credit
facility......................................... (259.4) (75.0) (485.5)
Proceeds from borrowings under bank credit
agreement........................................ 50.0 -- 875.0
Repayment of borrowings under bank credit
agreement........................................ (69.4) (53.6) (3.8)
Dividend to parent................................ (34.8) -- (420.1)
Retirement of previous bank credit agreement...... -- -- (366.2)
Capital contribution from parent.................. 88.4 -- 80.0
Debt issuance costs............................... (0.4) -- (33.2)
------- ------- -------
Net cash flow provided by financing
activities.................................. 33.3 9.7 130.4
------- ------- -------
Effect of foreign exchange rates on cash........... (0.4) 0.6 (0.2)
------- ------- -------
Net increase in cash and cash equivalents.... 20.5 5.3 24.0
Cash and Cash Equivalents:
Beginning of period............................... -- 20.5 25.8
------- ------- -------
End of period..................................... $ 20.5 $ 25.8 $ 49.8
======= ======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.......... $ 92.2 $ 77.3 $ 89.0
======= ======= =======
Cash paid during the period for income taxes...... $ 7.8 $ 4.6 $ 3.7
======= ======= =======
Non-Cash Supplemental Disclosure of Cash Flow
Information:
Acquired company contributed by parent............ $ 316.0 $ -- $ --
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DADE BEHRING INC.
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,
1996................... 1,000 $ -- $ 87.2 $-- $ -- $(110.3) $ (1.9) $ (25.0)
----- ----- ------- ---- ------ ------- ------ -------
Net loss................ (142.6) (142.6)
Capital contribution
from parent............ 404.6 404.6
Notes receivable on
capital contribution... (0.7) (0.7)
Cash dividend to parent
on Common Stock........ (34.8) (34.8)
Issuance of unearned
stock-based
compensation........... 33.2 (33.2) --
Amortization of unearned
stock-based
compensation........... 11.4 11.4
Unrealized loss on
marketable securities.. (0.2) (0.2)
Cumulative translation
adjustment............. (8.6) (8.6)
----- ----- ------- ---- ------ ------- ------ -------
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)
===== ===== ======= ==== ====== ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Dade Behring Inc. (the "Company"), was incorporated in Delaware in 1994 and
is a wholly-owned subsidiary of Dade Behring Holdings, Inc. ("Holdings"). Bain
Capital, Inc., GS Capital Partners, L.P. (an affiliate of Goldman Sachs Group,
L.P.), their respective related investors, Aventis S.A. 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 interests 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. Summary of Significant Accounting Policies
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the accompanying consolidated financial
statements. These policies are in conformity with generally accepted
accounting principles and have been applied consistently.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. Actual results could differ from those
estimates.
Principles of Consolidation
The consolidated financial statements include all majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition
Revenues for products sold are recognized upon shipment of products to
customers and are recorded on the basis of the sales price to such customers.
Revenues for products that are subject to a distribution agreement in the
United States are recognized upon shipment of products to the distributor or
direct shipment of the products by the Company to third party customers. Such
revenues are recorded on the basis of the estimated sales price to third party
customers (i.e., generally the end consumer) less a contractual distribution
discount to the distributor.
F-7
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated discount recorded by the Company may be revised in the future as
actual selling price information becomes available.
Revenues under product service contracts, which are generally for one year,
are deferred and recognized ratably over the term of the contract.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
demand deposits and cash equivalents which are highly liquid instruments with
maturities of three months or less at the time of purchase and are held to
maturity. Cash equivalents were not significant at December 31, 1998. Cash
equivalents included $7.0 million invested in short-term money market
investments at December 31, 1999.
Restricted Cash
Restricted cash of $11.4 million at December 31, 1999, represents a portion
of the proceeds from the sale of trade receivables in Italy that is
temporarily unavailable for use by the Company. The cash is recorded as
restricted since the sale of the Italian trade receivables was not finalized
as of year-end. At December 31, 1999, the trade receivables for sale have been
segregated in other current assets and the proceeds have been recorded in
accrued liabilities in the consolidated balance sheet. At February 29, 2000,
the sale of the trade receivables was finalized and the restrictions on the
cash were removed.
Accounts Receivable
Accounts receivable are net of bad debt reserves of $18.0 million and $18.5
million at December 31, 1998 and 1999, respectively. Accounts receivable are
unsecured.
Research and Development Expenses
Expenditures by the Company for research and development are expensed as
incurred.
In 1997, in connection with the Behring Combination (Note 3), $1.1 million
of the purchase price was allocated to acquired in-process research and
development for projects which had no alternative future use. Such costs were
expensed immediately following consummation of the Behring Combination.
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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided for financial reporting purposes principally on the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings................................................... 40 years
Machinery and equipment..................................... 3 to 10 years
Equipment placed with customers............................. 5 years
</TABLE>
F-8
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assets recorded under capital leases are amortized over the life of the
lease. Leasehold improvements are capitalized and amortized over their
estimated useful lives or over the terms of the related leases, if shorter.
Goodwill
Goodwill represents the excess cost over the fair value of net assets
acquired in connection with various acquisitions made by the Company,
primarily the Chemistry acquisition. Negative goodwill was recorded in
association with both the Dade Acquisition and the Behring Acquisition; the
unamoritized balances remaining at December 31, 1999, are included in other
long-term liabilities, and represent the amounts that the fair value of net
assets acquired exceeded the respective total purchase price, as adjusted by
the pro rata write-off of certain non-current assets. The carrying value of
goodwill and other long-lived assets is reviewed for impairment when events or
changes in circumstances indicate the carrying value of the asset may not be
recoverable. This review compares projected future undiscounted cash flows
before interest to the carrying value of the asset.
Goodwill at December 31, 1999, aggregated $125.8 million, net of $21.9
million of accumulated amortization. Negative goodwill aggregated $22.4
million at December 31, 1999, net of $3.6 million of accumulated amortization.
Goodwill and negative goodwill are being amortized using the straight-line
method over 25 years.
Patents, Trademarks and Other Identifiable Intangible Assets
Patents, trademarks and other identifiable intangible assets are being
amortized over their legal or estimated useful lives, whichever is shorter
(generally not exceeding 17 years). Patents and trademarks totaled $23.5
million and $20.3 million, net of accumulated amortization of $8.6 million and
$11.8 million, at December 31, 1998 and 1999, respectively. Other identifiable
intangible assets totaled $10.9 million and $31.9 million, net of accumulated
amortization of $36.3 and $45.0 at December 31, 1998 and 1999, respectively.
Debt Issuance Costs
Debt issuance costs, which are being amortized over the applicable terms of
the bank credit agreement and 11 1/8% senior subordinated notes, totaled $31.2
million at December 31, 1998, net of accumulated amortization of $15.4
million, and $43.2 million at December 31, 1999, net of accumulated
amortization of $9.8 million. The Company capitalized approximately $33.2
million in financing fees related to the June 1999 bank credit facility
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.
Income Taxes
Deferred tax assets and liabilities are recognized at current tax rates for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Deferred tax
assets are recognized, net of any valuation allowance, for the estimated
future tax effects of deductible temporary differences and tax operating loss
and credit carryforwards. Additionally, the Company provides deferred tax
liabilities for the eventual tax effect of repatriating unremitted earnings of
certain non-U.S. subsidiaries. The Company's operations are included in
Holdings' consolidated United States Federal and state income tax returns.
F-9
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation
The Company has determined that the local currencies of its non-U.S.
operations are their functional currencies. Assets and liabilities of the non-
U.S. subsidiaries are translated at the year-end exchange rates. Revenues and
expenses are translated at average rates of exchange in effect during the
year.
Derivative Financial Instruments
The Company utilizes derivative financial instruments for purposes other
than trading, specifically to manage its exposure to foreign currency and
interest rate fluctuations.
The Company enters into forward currency exchange contracts with highly
rated counterparties to manage its exposure to foreign currency fluctuations
on short-term intercompany borrowing arrangements denominated in foreign
currencies. The intercompany borrowing arrangements support the underlying
working capital needs of non-U.S. subsidiaries. Premiums and discounts on
forward rate option contracts are deferred and amortized to other income over
the life of the contract. Gains and losses on forward contracts resulting from
revaluations are recorded to other income. At the maturity of the forward
contracts the currencies involved are exchanged based on the contracted
exchange rate. At December 31, 1998 and December 31, 1999, the replacement
value of "in-the-money" contracts was not significant. Total notional contract
value of foreign currency exchange contracts outstanding were as follows (in
millions):
<TABLE>
<CAPTION>
December
31,
-----------
1998 1999
----- -----
<S> <C> <C>
Forward purchases............................................. $ 2.9 $36.0
Forward sales................................................. $87.2 $79.9
</TABLE>
The Company has utilized purchased interest rate caps, for which the
Company will receive cash payments from the counterparty if an indexed rate of
interest is exceeded, to manage a portion of its exposure to interest rate
increases on its outstanding debt. The notional value of these caps was $230.0
million at December 31, 1998. Premiums paid for the purchase of the caps were
recorded to interest expense over the life of the caps. Amounts received, if
any, were recorded as a reduction of interest expense over the related period.
Beginning in 1999 the Company purchased interest rate caps while
simultaneously selling an interest rate floor; these transactions are known as
zero-cost collars. The Company will receive cash payments from the
counterparty if an indexed rate exceeds the cap and conversely will pay the
counterparty if the indexed rate falls below the floor. At December 31, 1999,
the indexed rate was between the floor and cap on all contracts. The notional
amount of these contracts was $262.5 million at December 31, 1999.
Earnings (Loss) Per Share
Earnings (loss) per share is not presented for the Company, as its common
stock is not publicly traded.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of trade accounts receivable. At December
31, 1998 and 1999, $51.0 and $40.6 million, respectively, of U.S. accounts
receivable results from the Company's sales to Allegiance Healthcare
Corporation ("Allegiance"). This credit risk is mitigated due to the large
number of entities comprising Allegiance's worldwide customer base and their
dispersion across different regional economies. Net sales to Allegiance
aggregated $257.5, $230.7 and $160.7 million, in the year ended December 31,
1997, 1998 and 1999, respectively.
F-10
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Substantially all of the Company's customers operate in the hospital and
reference laboratory market, which may be subject to legislated healthcare
reforms. Additionally, at December 31, 1998 and 1999, approximately $68.0
million or 29% and $53.6 million or 27%, respectively, of the Company's non-
U.S. accounts receivable were geographically concentrated in Italy. The
Company does not expect these risk factors to have a material adverse impact
on its results of operations, financial position or liquidity.
Fair Value of Financial Instruments
The carrying values of cash equivalents and other current assets and
liabilities approximate fair value at December 31, 1998 and 1999, because of
the short maturity of these instruments.
The excess of the carrying values of derivative financial instruments over
fair values aggregated $3.0 million at December 31, 1998. The excess of the
carrying values of derivative financial instruments over fair values
aggregated $1.9 million at December 31, 1999. Fair values are based upon year-
end published exchange rates.
The carrying value of the long-term debt of $373.0 million and $902.4
million at December 31, 1998 and 1999, respectively, approximates fair value
as the interest rate on each instrument adjusts based upon market interest
rate changes. The fair value of the $350.0 million 11 1/8% senior subordinated
notes was $379.2 million and $349.6 million at December 31, 1998 and 1999,
respectively, based on the trading value at the date.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", encourages, but does not require, the use of a
fair value method for recording compensation expense for stock-based
compensation plans. The Company has elected to continue to account for its
stock-based compensation plans using the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Under the intrinsic value method,
compensation cost for stock options is based on the excess, if any, of the
fair value of the stock at the date of the grant over the amount the employee
must pay to acquire the stock (see Note 11).
New Accounting Pronouncements
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, due to its limited use of derivative instruments, the
adoption of SFAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
Reclassifications
Certain reclassifications have been made to prior period balances to
conform to the current year presentation.
F-11
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Behring Combination
Effective October 1, 1997, Holdings completed its acquisition of Behring
from Aventis S.A.. As consideration for the acquisition, Holdings issued
equity securities to Aventis S.A. providing Aventis S.A. with a 32.5% interest
in Holdings and paid $0.1 million to Aventis S.A. at closing. Subsequent to
closing, Aventis S.A. paid Holdings $54.8 million related to certain
adjustments and changes in the Net Assets (as defined in the Agreement and
Plan of Contribution related to the acquisition) of Behring, which were
treated as a reduction to the final purchase price. The equity securities
issued to Aventis S.A. comprise 22,809,532 shares of Holdings' Common Stock
and a warrant, which was exercised in 1999 (Note 12), to acquire a total of
5,599,568 additional shares of Holdings' Class L Common and Common Stock for
$80.0 million. The issued shares and warrant were valued by independent
appraisal at $352.8 million and $16.1 million, respectively, as of October 1,
1997. Holdings contributed Behring to the Company effective October 1, 1997
and the Company recorded in 1997 a capital contribution of $404.6 million,
representing the aforementioned appraised values and direct costs of the
acquisition. The transaction was accounted for as a purchase and, accordingly,
the operating results of Behring have been included in the consolidated
operating results since October 1, 1997. The purchase price has been allocated
to assets acquired and liabilities assumed based on fair market values at the
date of acquisition. Since the estimated fair values of the net assets
acquired exceeded total acquisition cost, the allocation of purchase price
resulted in a pro rata write-off of non-current assets, including in-process
research and development projects and the initial establishment of $18.6
million of negative goodwill, which is being amortized using the straight-line
method over 25 years.
The summary of assets acquired, liabilities assumed and the purchase price
paid is as follows (in millions):
<TABLE>
<S> <C>
Consideration: stock and warrant issued, net of purchase price
adjustments..................................................... $314.1
Costs of acquisition............................................. 37.9
------
352.0
Liabilities assumed.............................................. 349.0
------
Costs of assets acquired......................................... $701.0
======
</TABLE>
The following represents the unaudited pro forma results of operations of
the Company as if the Behring Combination had occurred on January 1, 1997,
after giving effect to the following adjustments: write-off of in-process
research and development, write-off of inventory step-up, decreased
depreciation of property, plant and equipment, decreased amortization of
intangibles, decreased amortization of goodwill, and related income tax
effects of these adjustments (in millions):
<TABLE>
<CAPTION>
Pro forma
Year ended
December 31, 1997
-----------------
(Unaudited)
<S> <C>
Net sales............................................... $1,412.1
========
Loss from operations.................................... $ (109.4)
========
Loss before extraordinary items......................... $ (116.9)
========
Net loss................................................ $ (116.9)
========
</TABLE>
The unaudited pro forma results of operations presented above are not
necessarily indicative of the results that would have been obtained if the
Behring Combination had actually occurred on January 1, 1997 and are not
intended to be a projection of future results or trends.
F-12
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Dade Chemistry Acquisition
Effective May 1, 1996, the Company completed the acquisition of Dade
Chemistry from DuPont, which was accounted for as a purchase. Accordingly, the
purchase price and the direct costs of the Chemistry Acquisition, which
aggregated $585.9 million, were allocated to the assets acquired and the
liabilities assumed based upon their fair market values at the date of the
acquisition. The Chemistry Acquisition was financed principally by the
issuance of $350.0 million of senior subordinated notes, a refinancing of bank
debt and cash. Since the purchase price exceeded the fair market value of the
net assets acquired, the residual, aggregating $145.0 million, was recorded as
goodwill. During 1998, $5.0 million of remaining unused restructuring reserves
were charged against goodwill and $7.3 million of liabilities established in
purchase accounting were not ultimately funded and were reversed to income.
The estimated fair values, which were finalized during 1997, are based on
independent appraisals, management estimates and negotiations with DuPont.
5. Inventories
Inventories consist of the following (in millions):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Raw materials............................................... $ 48.8 $ 45.9
Work-in-process............................................. 52.3 43.1
Finished products........................................... 164.8 167.2
------ ------
Total inventories....................................... $265.9 $256.2
====== ======
</TABLE>
6. Property, Plant and Equipment
Property, plant and equipment consist of the following (in millions):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- ------
<S> <C> <C>
Land..................................................... $ 6.8 $ 7.6
Buildings and leasehold improvements..................... 46.0 76.3
Machinery and equipment.................................. 100.3 154.0
Equipment placed with customers.......................... 281.6 372.6
Construction in progress................................. 57.1 28.0
Capitalized software..................................... 40.9 65.0
------- ------
Total property, plant and equipment, at cost............. 532.7 703.5
Accumulated depreciation and amortization................ (228.0) (362.5)
------- ------
Net property, plant and equipment.................... $ 304.7 $341.0
======= ======
</TABLE>
Equipment placed with customers includes instruments provided at no charge
in exchange for contractual commitments for ongoing reagent revenues. The net
book value of this equipment was $102.9 million and $126.2 million at December
31, 1998 and 1999, respectively. Management believes the carrying value of
this equipment is recoverable from the revenues anticipated from future
reagent sales.
7. Restructuring
In 1997, in connection with the Behring Combination, the Company recorded a
$40.1 million restructuring accrual against operating expenses (the "1997
Reserve") and allocated $74.3 million of the Behring
F-13
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Combination purchase price (the "Behring Allocation Reserve") for a
restructuring plan to consolidate manufacturing and distribution operations
and to eliminate redundant sales, service and administrative functions. These
restructuring actions include the closure of the Company's Miami, Florida and
Behring's Westwood, Massachusetts manufacturing facilities, the exit from the
San Jose administrative/research facility, the consolidation and
reorganization of the global sales, marketing and research and development
organizations and elimination of administrative redundancies. In 1998 and
1999, excess severance accruals under the 1997 Reserve of $4.5 million and
$4.1 million, respectively, resulting from higher than projected employee
turnover, were identified and credited to income. Severance costs of $0.9
million in excess of the original severance reserves established under the
Behring Allocation Reserve were identified, charged to restructuring expense,
and paid in 1999.
A total of 1,528 employees were identified for termination resulting from
these activities, 824 of which were employees of the Company prior to the
Behring Combination. Of the 824 employees identified and accrued for in the
1997 Reserve, 69, 341, and 277 were severed during 1997, 1998, and 1999,
respectively. No additional employees are expected to be terminated under the
plan which established the 1997 Reserve. Of the 704 employees identified and
accrued for in the Behring Allocation Reserve, 58, 467, and 90 were severed
during 1997, 1998, and 1999, respectively. No additional employees are
expected to be terminated under the Behring Allocation Reserve; however,
approximately $1.5 million of severance costs relating to employees terminated
prior to year-end were not paid as of December 31, 1999. The Company expects
approximately $5.0 million of cash outlays in fiscal year 2000 on the
remaining Behring Allocation Reserve with the balance relating to future
scheduled rent payments on an exited facility. At December 31, 1998 and
December 31, 1999, $24.0 and $15.3 million respectively, of the Behring
Allocation Reserve is classified in other long term liabilities.
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
"1999 Reserve"). A total of approximately 140 employees were identified for
termination resulting from these activities. As of December 31, 1999, 40
employees had been severed. The Company expects that substantially all of the
remaining reserve will be utilized in fiscal year 2000.
The following table summarizes the Company's restructuring activity for the
years ended December 31, 1997, 1998, and 1999 (in millions):
<TABLE>
<CAPTION>
Facility and
Other Exit
1997 Reserve Costs Severance Total
- ------------ ------------ --------- ------
<S> <C> <C> <C>
Reserve established as of October 1, 1997........ $ 13.7 $ 26.4 $ 40.1
cash payments.................................. (1.3) (1.4) (2.7)
------ ------ ------
Reserve balance, December 31, 1997............... 12.4 25.0 37.4
cash payments.................................. (9.9) (10.4) (20.3)
reversal to income............................. -- (4.5) (4.5)
------ ------ ------
Reserve balance, December 31, 1998............... 2.5 10.1 12.6
cash payments ................................. (2.5) (6.0) (8.5)
reversal to income............................. -- (4.1) (4.1)
------ ------ ------
Reserve balance, December 31, 1999............... $ -- $ -- $ --
====== ====== ======
</TABLE>
F-14
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Facility and
Other Exit Severance and
1997 Behring Allocation Reserve Costs Relocation Total
- ------------------------------- ------------ ------------- ------
<S> <C> <C> <C>
Reserve established as of October 1, 1997.... $ 47.6 $ 26.7 $ 74.3
cash payments.............................. (7.8) (2.2) (10.0)
------ ------ ------
Reserve balance, December 31, 1997........... 39.8 24.5 64.3
cash payments.............................. (16.9) (17.0) (33.9)
------ ------ ------
Reserve balance, December 31, 1998........... 22.9 7.5 30.4
charge to income........................... -- 0.9 0.9
cash payments.............................. (4.4) (6.9) (11.3)
------ ------ ------
Reserve balance, December 31, 1999........... $ 18.5 $ 1.5 $ 20.0
====== ====== ======
<CAPTION>
1999 Reserve
- ------------
<S> <C> <C> <C>
Reserve established as of June 1999.......... $ 0.6 $ 15.9 $ 16.5
Cash payments.............................. (.2) (5.4) (5.6)
------ ------ ------
Reserve balance, December 31, 1999........... $ 0.4 $ 10.5 $ 10.9
====== ====== ======
</TABLE>
8. Accrued Liabilities and Other
Accrued liabilities and other consist of the following (in millions):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Salaries, wages, commissions, withholdings and other
payroll taxes............................................ $ 77.5 $ 72.4
Restructuring............................................. 19.2 15.6
Property, sales and use and other taxes................... 22.0 19.0
Deferred service contract revenue/warranty................ 14.1 11.0
Interest payable.......................................... 10.6 23.9
Other..................................................... 85.0 100.0
------ ------
$228.4 $241.9
====== ======
</TABLE>
9. Debt
Long-term debt consists of the following (in millions):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------ --------
<S> <C> <C>
Revolver ............................................... $ 19.0 $ 34.0
Bank Credit Agreement:
A Term Loan........................................... 109.6 275.0
B Term Loan .......................................... 91.1 298.5
C Term Loan........................................... 91.1 298.5
D Term Loan........................................... 75.2 --
11 1/8% Senior Subordinated Notes....................... 350.0 350.0
Other................................................... -- 2.4
------ --------
736.0 1,258.4
Less current portion................................ (13.0) (6.0)
------ --------
$723.0 $1,252.4
====== ========
</TABLE>
F-15
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bank Credit Agreement
During 1998, the Company maintained a Bank Credit Agreement (the
"Agreement") consisting of $460.0 million in term loans and $125.0 million in a
revolving credit facility. The borrowings were guaranteed by Holdings and the
Company's domestic subsidiaries, and substantially all the domestic assets of
the Company were pledged as collateral. During 1998, the Company amended
certain terms of the Agreement. Under the amended terms, term-loan borrowings
between January 8 and October 31, 1998 bore interest at (i) the Base Rate (as
defined) plus margins ranging from 1.00% to 2.00% or (ii) the Eurodollar Rates
plus margins ranging from 2.00% to 3.00%. Effective November 1, 1998, term-loan
interest rates reverted to rates in effect during 1997. At December 31, 1998
and 1997, the Company funded the borrowings using the Eurodollar Rate (as
defined). The Eurodollar Rate in effect at December 31, 1998 was 5.06% in
respect of A Term Loan, 4.99% in respect of B Term Loan, 5.13% in respect of C
Term Loan, and 5.19% in respect of D Term Loan. The Eurodollar Rate in effect
at December 31, 1997 was 5.75% in respect of A Term Loan, 5.88% in respect of B
Term Loan, 5.88% in respect of C Term Loan, and 5.88% in respect of D Term
Loan.
During 1999, in connection with Holdings recapitalization and stock
redemption plan (see Note 12) the Company refinanced its existing bank credit
facility by entering into a new $1.25 billion Senior Bank Credit Facility ("New
Credit Agreement") consisting of $875 million of term loans and $375 million of
revolving credit facilities. Similar to the prior bank credit facility,
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 December 31, 1999, the company funded the term loan
borrowings using LIBOR loans. The LIBOR rate in effect at December 31, 1999 was
5.85% in respect of A Term Loan, 6.09% in respect of B Term Loan, and 6.09% in
respect of C Term Loan.
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 June 30,
2005.
The New 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 (including the 11 1/8% senior
subordinated notes), liens and encumbrances and other matters customarily
restricted in such agreements.
Under the terms of the New Credit Agreement, the Company is required to
maintain specified levels of interest rate protection. The Company has
purchased a series of interest rate collars under which the Company will
pay/receive cash to/from the counterparties if certain indexed rates of
interest are exceeded.
The revolver may be repaid and reborrowed at any time and is due June 30,
2005. At December 31, 1999, the company funded the revolver using the LIBOR
loans Rate. The Company is required to pay to the lenders under the New Credit
Agreement a commitment fee of .50% per annum, payable on a quarterly basis, on
the daily unused portions of the revolving credit facility during such quarter.
Senior Subordinated Notes
Interest on the 11 1/8% senior subordinated notes due 2006 accrues from the
date of issuance and is payable semi-annually on May 1 and November 1. The 11
1/8% senior subordinated notes are redeemable in whole or in
F-16
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
part, at the Company's option, commencing May 1, 2001. The 11 1/8% senior
subordinated notes contain restrictive covenants that include, among others,
restrictions on the incurrence of additional debt, mergers and change of
control as well as cross-default provisions referencing the Company's other
debt agreements.
Other Credit Facilities
At year-end December 31, 1999, the Company's non-U.S. subsidiaries had
credit lines from various financial institutions totaling $118.9 million.
Approximately $88.0 million of the credit lines had committment fees ranging
from .25% to .50% per annum. These credit lines are principally to provide
working capital financing for local operations.
The Company had utilized $74.9 million of these credit lines at December
31, 1999 at the prevailing local market interest rates. Such borrowings are
included in short-term debt in the consolidated balance sheet.
Aggregate Maturates of Long-Term Debt
The aggregate maturities of long-term debt at December 31, 1999 are as
follows (in millions):
<TABLE>
<S> <C>
2000............................ $ 6.0
2001............................ 33.9
2002............................ 47.3
2003............................ 61.0
2004............................ 74.8
Thereafter...................... 1,035.4
--------
Total........................... $1,258.4
========
</TABLE>
10. Income Taxes
Income (loss) before income tax expense is as follows (in millions):
<TABLE>
<CAPTION>
Years ended December
31,
---------------------
1997 1998 1999
------- ----- ------
<S> <C> <C> <C>
U.S. (including Puerto Rico)...................... $(184.9) $45.3 $(34.2)
Non-U.S........................................... (41.5) 32.6 (3.5)
------- ----- ------
Income (loss) before income tax expense........... $(226.4) $77.9 $(37.7)
======= ===== ======
</TABLE>
F-17
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax Expense (Benefit)
Income tax expense (benefit) consists of the following (in millions):
<TABLE>
<CAPTION>
Years ended
December 31,
--------------------
1997 1998 1999
------ ----- ------
<S> <C> <C> <C>
Current
U.S.
Federal........................................ $ 0.2 $ -- $ --
State and local (including Puerto Rico)........ 0.9 0.3 0.8
Non-U.S.......................................... 1.2 4.5 3.3
------ ----- ------
Current income tax expense..................... 2.3 4.8 4.1
------ ----- ------
Deferred
U.S.
Federal........................................ (58.2) 10.2 (13.8)
State and local (including Puerto Rico)........ (14.7) 3.6 --
Non-U.S.......................................... (13.2) 15.8 1.7
------ ----- ------
Deferred income tax expense (benefit).......... (86.1) 29.6 (12.1)
------ ----- ------
Total income tax expense (benefit)........... $(83.8) $34.4 $ (8.0)
====== ===== ======
</TABLE>
Tax Rates
Differences between income taxes computed using the U.S. Federal income tax
statutory rate of 35% and income tax expense recorded by the Company are
attributable to the following (in millions):
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory
rate ..................................... $ (79.3) $ 27.3 $ (13.2)
Tax exempt operations...................... (3.0) -- --
Nondeductible (non-taxable) goodwill....... 0.4 (0.2) 0.2
Nondeductible items........................ 1.1 1.7 2.4
State and local taxes, net of Federal
benefit................................... (8.3) 2.7 (1.7)
Valuation allowances....................... 2.8 3.3 6.8
Tax on unremitted foreign earnings......... 0.7 1.0 --
Excess foreign tax charge (benefit)........ (1.1) 1.4 --
Adjustment for prior year items............ -- (3.1) (3.1)
Other factors.............................. 2.9 0.3 0.6
-------- ------- --------
Income tax expense (benefit)............... $ (83.8) $ 34.4 $ (8.0)
======== ======= ========
</TABLE>
F-18
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Taxes
Deferred tax assets (liabilities) are comprised of the following (in
millions):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Gross deferred tax liabilities............................ $(33.5) $(41.2)
------ ------
Property, plant and equipment basis differences........... 53.5 38.0
Trade receivables basis difference........................ 10.5 9.9
Inventory basis difference................................ 30.5 8.4
Accrued liabilities not currently deductible.............. 57.1 32.3
Intangible assets basis difference........................ 69.6 61.2
Net operating loss carryforwards.......................... 202.2 280.0
Other..................................................... 8.1 33.0
------ ------
Gross deferred tax assets................................. 431.5 462.8
Valuation allowance....................................... (56.2) (63.2)
------ ------
Net deferred tax assets................................... 375.3 399.6
------ ------
$341.8 $358.4
====== ======
</TABLE>
As discussed more completely below, the valuation allowance has been
recorded principally in respect of net operating loss carryforward benefits,
that because of statutory limitations, management believes will expire unused.
The Company has changed its beginning of the year assumption with respect to
the realizability of certain state carryforward benefits and accordingly,
increased the valuation allowance at December 31, 1999, by $6.0 million.
The Company received a tax exemption grant from Puerto Rico during 1996
which provided that its manufacturing operations be partially exempt from
local Puerto Rico taxes until the year 2014. The tax benefit of this local
grant was approximately $4.1 million for the year ended December 31, 1997.
The Company has also filed an election to be taxed under Section 936 for
its Puerto Rico operations for Federal income tax purposes. The total Federal
income tax benefit of Section 936 treatment was approximately $3.0 million for
the year ended December 31, 1997.
The Company ceased its manufacturing operations in Puerto Rico in the first
quarter of 1998. Accordingly, no local or Federal tax benefits were recorded
for these operations in 1998 or 1999. Appropriate taxes have been provided for
the cost of repatriation of all available earnings generated prior to the
closing of these operations.
The realization of the net deferred tax asset will require substantial
aggregate worldwide taxable income in future years. In assessing the
realizability of the net deferred tax assets at December 31, 1999, management
analyzed the Company's forecast for future taxable earnings (and losses) by
jurisdiction and other relevant factors and concluded the recoverability of
the net deferred tax asset of $399.6 million was more likely than not. This
assessment of profitability takes into account the Company's recent non-
recurring charges related to the integration of the Behring acquisition,
including several restructuring charges, the costs associated with the
recapitalization of the Company, remediation efforts associated with Year 2000
and the Delaware Distribution Facility.
United States tax rules impose limitations on the use of net operating
losses and excess tax bases following certain changes in ownership. In June
1999, in connection with a recapitalization and stock redemption plan at
Holdings (See Note 12), such an ownership change occurred. Management does not
believe, however, that the resultant annual limitations have reduced the
amount of NOL benefits available to offset future taxable income.
F-19
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998 and 1999, the Company had net operating loss
carryforwards available in the United States for Federal income tax return
purposes of $367.8 million and $551.7 million (including $77.9 million
pertaining to pre-combination Behring entity), respectively, which expire in
various amounts in 2004 through 2019. Loss carryforwards expiring in years
2004 through 2008 pertain to the pre-combination Behring entity carryforwards.
Management believes these loss carryforwards will not be available to offset
future taxable income due to the change in ownership limitations, and
accordingly, a full deferred tax valuation allowance has been recorded against
them.
Additionally, at December 31, 1999, the Company had net operating loss
carryforwards available in countries outside the United States of $146.0
million with various dates of expiration. Since the use of a portion of these
benefits is subject to statutory carryforward limitations, valuation
allowances aggregating $53.6 million have been recorded at December 31, 1999.
Deferred United States Federal income taxes and non-U.S. withholding taxes
have been provided on the undistributed earnings of certain subsidiaries
deemed available for dividend repatriations, principally Puerto Rico and
Switzerland. In other foreign jurisdictions with accumulated earnings, it is
management's intent to permanently reinvest earnings locally or use available
cash to pay down local debt. No provision has been made for non-U.S.
withholding taxes or U.S. Federal or state taxes on undistributed earnings of
approximately $1.7 million and $0.0 million at December 31, 1998 and 1999,
respectively. Should such earnings be remitted to the Company, there would be
limited use of credits, if any, which could be used to offset the U.S. taxes
due upon repatriation.
11. Stockholder's Equity
Common Stock
The Company's Common Stock consists of 1,000 authorized shares of $.01 par
value stock with voting rights, of which 1,000 shares were issued and
outstanding at December 31, 1998 and 1999. All outstanding shares at December
31, 1998 and 1999 were owned by Holdings.
Stock Purchase and Option Plans
Holdings has various stock purchase and option plans ("Plans") principally
for the benefit of the Company's employees. The Plans provide for the sale of
214,376 shares of Holdings' Class L Common Stock and the sale or granting of
options of 11,293,608 shares of Holdings' Common Stock. The stock options are
exercisable either over time (Time Options) or upon the achievement of certain
investment return levels by certain owners of Holdings (Performance Options).
All stock options vest within ten years of the date of grants.
On December 15, 1999, Holdings' Board of Directors authorized a four-for-
one stock split of its Common Stock. All references in the notes to the
financial statements to number of shares and market prices of Holdings' common
stock have been restated to reflect the increased number of shares.
During 1996 and 1997, 24,200 shares of Holdings' Class L Common Stock and
217,800 shares of Holdings' Common Stock were sold at $11.00 and $1.00 per
share, respectively. Management believes the purchase prices for these stock
purchases reasonably approximated the fair market value of the stock at the
respective dates of sale. Additionally, during 1997, 96,000 shares of
Holdings' Common Stock were acquired by certain executives of the Company at a
price $8.13 below the fair market value of Holdings' Common Stock at that
date, as established by an independent valuation. Stock compensation expense
of $0.8 million was recorded by the Company in 1997 related to these stock
purchases. No shares of Holdings' Class L Common Stock or of Holdings' Common
Stock were sold during 1998 or 1999.
F-20
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1997, 1998 and 1999, certain option grants were made with exercise
prices below fair market values of Holdings' Common Stock on the dates of the
grants, based on independent valuations. Time Options generally vest ratably
over a five-year period and have a ten-year term. Performance Options become
exercisable at $1.75 or $4.00 per share either within ten years of grant or
earlier if investment returns (as defined) of three times or five times,
respectively, the total investment (as defined) of the original investors of
the Company is achieved. Stock option activity during 1997, 1998, and 1999 was
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Outstanding at January 1................ 2,736,680 7,129,800 7,526,392
Time Options
Granted............................... 3,977,600 728,000 3,039,200
Exercised............................. (163,360) (60,400) (61,880)
Cancelled/Repurchased................. (237,360) (198,704) (1,634,140)
Performance Options
Granted............................... 1,050,296 -- 41,600
Exercised............................. -- -- (12,584)
Cancelled/Repurchased................. (234,056) (72,304) (1,108,232)
--------- --------- ----------
Outstanding at December 31.............. 7,129,800 7,526,392 7,790,356
========= ========= ==========
Exercisable at December 31.............. 456,320 2,528,132 2,018,972
Available for grant at December 31...... 1,347,648 890,656 1,690,976
</TABLE>
Weighted average option exercise price information for 1997, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Time Options
Outstanding at January 1............................ $0.35 $3.99 $ 4.74
Granted............................................. $4.84 $9.43 $14.68
Exercised........................................... $0.34 $0.42 $ 6.14
Cancelled........................................... $0.31 $5.30 $ 8.51
Outstanding at December 31.......................... $3.99 $4.74 $ 9.27
Exercisable at December 31.......................... $0.49 $3.15 $ 3.87
Performance Options
Outstanding at January 1............................ $2.88 $2.88 $ 2.88
Granted............................................. $2.88 $ -- $ 2.88
Exercised........................................... $ -- $ -- $ 2.88
Cancelled........................................... $2.88 $2.88 $ 2.88
Outstanding at December 31.......................... $2.88 $2.88 $ 2.88
Exercisable at December 31.......................... $ -- $ -- $ --
</TABLE>
Effective April 1, 1997, 186,000 Time Options with an exercise price of
$1.00, 399,148 Performance Options with an exercise price of $1.75 and 399,148
Performance Options with an exercise price of $4.00 were granted, which
represented discounts of $3.50, $2.75 and $.50, respectively, below fair
market value of Holdings' Common Stock at that date, as established by an
independent valuation. Effective October 1, 1997, 3,443,600 Time Options with
exercise prices of $.13-$8.63 were granted, which represented a discount of
$5.75-$14.25 from fair market value of Holdings' Common Stock at that date, as
established by an independent valuation. Accordingly, stock compensation
expense of $10.6 million was recorded by the Company in 1997 related to these
grants. Between March and October 1998, 728,000 Time Options with exercise
prices of $8.63-$12.94 were granted, which represented a discount of $1.44-
$5.75 from the approximate fair market value of Holdings' Common Stock at
those dates. Accordingly, stock compensation expense of $1.5 million was
recorded by the Company in 1998 related to these grants.
F-21
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant option groups outstanding at December 31, 1999 and related
weighted average price and life information is as follows:
<TABLE>
<CAPTION>
Exercisable
Options Outstanding Options
---------------------------------- ------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Number Exercise
Grant Date Shares Life (in years) Price of Shares Price
---------- --------- --------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Time Options--7/31/95... 498,128 6 $ 0.30 398,796 $0.35
Time Options--7/31/96... 157,608 7 $ 1.00 40,328 $1.00
Time Options--2/5/97-
8/25/97................ 276,824 8 $ 1.00 55,388 $1.00
Time Options--10/1/97... 2,202,972 8 $ 5.58 1,321,504 $4.31
Time Options--3/98-
10/98.................. 604,624 9 $ 9.57 202,956 $9.26
Time Options--1999
Grants................. 2,956,000 10 $14.68 -- --
Performance Options--
7/31/95................ 256,596 6 $ 1.75 -- --
Performance Options--
7/31/95................ 256,596 6 $ 4.00 -- --
Performance Options--
7/31/96................ 46,412 7 $ 1.75 -- --
Performance Options--
7/31/96................ 46,412 7 $ 4.00 -- --
Performance Options--
2/5/97-8/25/97......... 244,092 8 $ 1.75 -- --
Performance Options--
2/5/97-8/25/97......... 244,092 8 $ 4.00 -- --
</TABLE>
As Holdings' Common Stock is not publicly traded, the fair value of options
was estimated using the minimum value method as prescribed in SFAS No. 123,
using the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (years):
Time Options............................................ 5 5 5
Performance Options..................................... 2 -- 1
Interest rate:
Time Options............................................ 5.7% 5.4% 5.2%
Performance Options..................................... 5.6% -- 4.8%
Dividend yield:
Time Options............................................ 0.0% 0.0% 0.0%
Performance Options..................................... 0.0% -- 0.0%
</TABLE>
The fair values at the date of grant of the Time Options and Performance
Options granted during 1997 were $36.1 million and $1.6 million, respectively.
Pro forma stock-based compensation for 1997 would not be materially different
from the recorded expense had the fair value of the options granted in 1996
and 1997 been recognized as compensation expense on a straight-line basis over
the vesting of the grants. The fair values at the dates of grant of the Time
Options granted during 1998 were $5.2 million. Pro forma stock-based
compensation for 1998 would have been $2.2 million higher than the recorded
expense had the fair value of the options granted in 1996 through 1998 been
recognized as compensation expense on a straight-line basis over the vesting
of the grants. The fair values at the date of grant of the Time Options and
Performance Options granted during 1999 were $18.1 million and $0.5 million,
respectively. Pro forma stock-based compensation for 1999 would have been $3.3
million higher than the recorded expense had the fair value of the options
granted in 1996 through 1999 been recognized as compensation expense on a
straight-line basis over the vesting of the grants.
F-22
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Related Party Transactions
The Company entered into five-year Management Services Agreements with Bain
Capital and Goldman, Sachs & Co. (an affiliate of GS Capital). Pursuant to
these agreements, the Company will pay Bain Capital and Goldman, Sachs & Co.,
subject to compliance with the terms of the indenture governing the 11 1/8%
senior subordinated notes, an aggregate annual fee of up to $3.0 million plus
their respective out-of-pocket expenses in return for management consulting in
the areas of corporate finance; corporate strategy; investment analysis;
market research and business development; advisory services and support,
negotiation; analysis of financial alternatives, acquisitions and
dispositions; and other services. The Company paid, in the aggregate, $18.8
million to Bain Capital, Goldman, Sachs & Co. and Aventis S.A. in connection
with the Behring Combination (Note 3).
Included in marketing and administrative expense for the years 1997, 1998
and 1999 are advisory fees and expenses paid to Bain Capital and Goldman,
Sachs & Co. totaling $1.7 million, $3.3 million, and $3.2 million,
respectively. 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 paid to Bain Capital and Goldman Sachs & Co. and expensed in
June 1999. Also in 1998 and 1999, strategic consulting fees of $0.9 million
and $1.1 million, respectively, were paid to Bain and Company, an affiliate of
Bain Capital.
In June 1999, Holdings completed a recapitalization plan that included the
repurchase by Holdings of a portion of its Common Stock held or obtainable
upon exercise of options by Bain Capital, GS Capital, management and others.
Under the recapitalization, a portion of Class L Common and Common Stock owned
by Bain Capital and GS Capital was repurchased by Holdings for $365.4 million.
Additionally, a portion of Holdings' stock options and Class L Common and
Common Stock was repurchased for $33.4 million and $21.3 million,
respectively. Holdings funded the cost of the recapitalization from the
proceeds of a $420.1 million dividend from the Company, which the Company
recorded as a return of capital. The Company funded the dividend through
borrowings under its New Credit Agreement.
In September 1999, Holdings issued to Aventis S.A. 5,103,264 shares of
voting Common Stock and 496,304 shares of Class L Common Stock pursuant to
Aventis S.A.'s exercise of its warrant, increasing Aventis S.A.'s ownership
percentage of Holdings to approximately 57%. As a result of this transaction,
Aventis S.A.'s voting rights percentage in Holdings increased to approximately
37%. The Company recorded an $80.0 million capital contribution from Holdings
in connection with this warrant exercise.
In December 1999, Holdings received $1.7 million from Aventis S.A. related
to the reimbursement of incremental costs incurred to close a manufacturing
facility in Italy that was purchased by Holdings in the 1997 Behring
Combination.
Pursuant to Transition Services Agreements dated September 30, 1997,
Aventis S.A. provided the Company with certain support services including
administrative support, warehousing and distribution services, human resource
support, information systems support, accounting support and office space. The
Transition Services Agreements have various terms from October 1, 1997 through
December 31, 1999. The Company paid $7.9 million, $48.4 million, and $22.9
million to Aventis S.A. related to these agreements for the three months ended
December 31, 1997 and for the years ended December 31, 1998 and 1999,
respectively.
F-23
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Aventis S.A. subleases office space to one of the Company's former Behring
sites pursuant to a sublease dated October 1, 1997. Rent expense related to
this sublease totaled $0.9 million, $3.5 million, and $3.6 million for the
three months ended December 31, 1997 and for the years ended December 31, 1998
and 1999, respectively.
Net sales to Aventis S.A. totaled $14.1 million, $52.7 million, and $7.3
million for the three months ended December 31, 1997 and for the years ended
December 31, 1998 and 1999, respectively. At December 31, 1998 and 1999,
receivables from Aventis S.A. totaled $11.7 million and $0.2 million,
respectively. At December 31, 1998 and 1999, payables to Aventis S.A. totaled
$13.9 million and $9.2 million, respectively.
13. Retirement Programs
Pension Plans
The Company maintains non-contributory defined benefit pension plans
covering substantially all employees in the United States and Puerto Rico
("U.S. Plans") and a combination of contributory and non-contributory plans in
certain non-U.S. locations ("Non-U.S. Plans"). The U.S. Plans' benefits are
based on a cash balance formula. The Company's funding policy is to make
contributions to the trusts of the plans that meet or exceed the minimum
requirements of the Employee Retirement Income Security Act of 1974 ("ERISA").
Under the terms of the Behring Combination (Note 3), effective January 1,
1998, the employees' pension assets and liabilities of Behring were
transferred into various Company Plans and the Company assumed responsibility
for the liability for future benefits payable under the terms of the Company's
Plans for those employees as of January 1, 1998. The Company reimbursed
Aventis S.A. for the service costs of those Plans for the period October 1,
1997 through December 31, 1997.
Under the terms of the Chemistry Acquisition (Note 4), the transferred
DuPont employees' pension assets and liabilities were transferred directly
into the existing U.S. Plans and the Company assumed responsibility for the
liability for future benefits payable under the terms of the Company's plan
for those employees as of the Chemistry Acquisition date.
F-24
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998 and December 31, 1999, plan assets primarily consist
of stocks, bonds and contracts with insurance companies.
<TABLE>
<CAPTION>
1998 1999
---------------- ----------------
U.S. Non-U.S. U.S. Non-U.S.
------ -------- ------ --------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year... $ 90.9 $ 52.0 $107.0 $ 57.0
Service cost.............................. 10.2 2.2 9.7 3.5
Interest cost............................. 7.6 1.7 7.5 2.0
Plan participants' contributions.......... -- -- -- .4
Amendments................................ -- -- -- .3
Actuarial (gain) loss..................... 6.8 (0.9) (5.2) 1.9
Curtailments.............................. 0.2 (0.4) -- --
Benefits paid............................. (8.7) (1.4) (12.2) (4.8)
Foreign currency changes.................. -- 3.8 -- (6.4)
------ ------ ------ ------
Benefit obligation at end of year........... $107.0 $ 57.0 $106.8 $ 53.9
------ ------ ------ ------
Change in plan assets:
Fair value of plan assets at beginning of
year..................................... $112.0 $ 24.2 $108.2 $ 25.8
Actual return on plan assets.............. 5.0 0.3 28.6 .6
Employer contribution..................... -- 0.2 .1 .9
Plan participants' contributions.......... -- -- -- .4
Benefits paid............................. (8.7) (0.6) (12.2) (1.6)
Foreign currency changes.................. -- 1.7 -- (3.1)
------ ------ ------ ------
Fair value of plan assets at end of year.. $108.3 $ 25.8 $124.7 $ 23.0
------ ------ ------ ------
Funded status at end of year:
Funded status............................. $ 1.2 $(24.7) $ 18.1 $(32.3)
Unrecognized net actuarial (gain) loss.... 21.4 (0.7) (3.5) 2.8
Unrecognized prior service cost........... (7.1) -- (6.2) .3
Foreign currency changes.................. -- (5.0) -- 1.8
------ ------ ------ ------
Net amount recognized--(accrued) prepaid
at end of year........................... $ 15.5 $(30.4) $ 8.4 $(27.4)
------ ------ ------ ------
<CAPTION>
1998 1999
---------------- ----------------
U.S. Non-U.S. U.S. Non-U.S.
------ -------- ------ --------
<S> <C> <C> <C> <C>
Amounts recognized in the statement of
financial position consist of:
Net prepaid benefit cost (accrued benefit
liability)............................... $ 15.5 $(24.7) $ 8.1 $(31.1)
Intangible asset.......................... -- (0.3) .2 .4
Accumulated other comprehensive income.... -- -- .1 1.7
Foreign currency charges.................. -- (5.4) -- 1.6
------ ------ ------ ------
Net amount recognized--(accrued) prepaid
at end of year........................... $ 15.5 $(30.4) $ 8.4 $(27.4)
------ ------ ------ ------
</TABLE>
F-25
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- ----------------
U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S.
----- --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average
assumptions as of
December 31:
Discount rate.......... 7.75% 3.5%-6.5% 7.00% 3.5%-6.0% 8.0% 3.0-6.5%
Expected return on plan
assets................ 9.50% 3.5%-5.5% 9.50% 3.0%-5.5% 9.50% 4.5-5.5%
Rate of compensation
increase.............. 4.50% 3.25%-4.0% 4.50% 2.5%-4.0% 4.50% 2.0-3.0%
Components of net
periodic benefit cost:
Service cost........... $ 7.6 $ 1.8 $ 10.2 $ 2.9 $ 9.7 $3.5
Interest cost.......... 6.8 1.2 7.6 2.2 7.5 2.0
Expected return on plan
assets................ (9.7) (0.7) (10.4) (0.8) (10.2) (.7)
Amortization of prior
service cost.......... (1.1) -- (1.1) 0.1 (1.1) .1
Recognized net
actuarial loss........ -- -- -- -- 1.2 --
----- --------- ------ -------- ------ -------
SFAS 87 cost........... 3.6 2.3 6.3 4.4 7.1 4.9
----- --------- ------ -------- ------ -------
SFAS 88 charges:
Curtailment charge
(credit).............. -- -- (0.3) 0.8 -- --
----- --------- ------ -------- ------ -------
Total net periodic
benefit cost........ $ 3.6 $ 2.3 $ 6.0 $ 5.2 $ 7.1 $4.9
===== ========= ====== ======== ====== =======
</TABLE>
The aggregate accumulated benefit obligation and fair value of plan assets
for the plans with obligations in excess of the plan assets were $33.4 and
$6.8 million, respectively, at December 31, 1999.
Savings Plan
Most U.S. employees are eligible to participate in a Company sponsored
qualified 401(k) plan. Participants may contribute up to 12% of their annual
compensation, up to certain limits, to the 401(k) plan and the Company matches
the participants' contributions, up to 2% of compensation. Matching
contributions made by the Company were $2.9 million, $3.6 million, and $3.3
million for the years ended December 31, 1997, 1998, and 1999, respectively.
14. Commitments and Contingencies
Legal Proceedings
The Company is a party in a number of legal proceedings. Based on the
advice of legal counsel, management believes that any potential liability
relative to the various legal proceedings pending against the Company will not
have a material adverse effect on the Company's conduct of its business, its
results of operations, its financial position or its liquidity.
The Company is presently pursuing resolution of a series of disputes with a
business partner through an indpendent arbitrator. While the outcome of this
arbitration is uncertain, the Company does not believe it will have a
significant effect on its reported results of operations or financial
position.
Letters of Credit
As of December 31, 1999, the Company has letters of credit outstanding of
approximately $4.3 million.
F-26
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating Leases
The Company leases certain facilities and equipment under operating leases
expiring at various dates. Many of these operating leases contain renewal
options. Future minimum lease payments under noncancelable operating leases at
December 31, 1999 are as follows (in millions):
<TABLE>
<S> <C>
2000.............................. $ 35.9
2001.............................. 30.8
2002.............................. 23.3
2003.............................. 17.7
2004.............................. 13.0
Thereafter........................ 53.2
------
Total......................... $173.9
======
</TABLE>
Total expense for all operating leases was $22.9 million, $43.9 million,
and $38.6 million for the years ended December 31, 1997, 1998, and 1999,
respectively.
15. 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.
EBITDA, as defined by the Company, represents the sum of net income (loss),
interest, taxes, depreciation and amortization, non-recurring charges,
including non-cash stock-based compensation expenses, Y2K remediation costs,
integration costs, purchase accounting related charges, restructuring charges
and certain other non-cash and/or non-recurring charges. 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 EBITDA to be
considered as a substitute for net income or cash flows, it is the primary
financial metric used by management.
Integration costs stem from the Behring acquisition and pertain to expenses
incurred in connection with the Company's efforts to combine complementary
product lines, to eliminate manufacturing redundancies, to consolidate
infrastructure and leverage the unique core competencies of the predecessor
and acquired business. The principal elements of such costs include: (i)
manufacturing variances, personnel retention, moving and start-up costs
associated with the transfer of manufacturing capacity from Miami, Florida to
Marburg, Germany; (ii) personnel costs related to the consolidation of
information technology, logistics management, and various other functions
within Europe, and (iii) costs associated with the cross training of personnel
among the combined product lines.
Y2K remediation charges represent base line and incremental costs incurred
at the direction of the Company's Y2K program office in connection with
achieving Y2K readiness. Baseline costs represent allocated payroll expenses
attributed to the estimated time employees spent on the Y2K remediation
effort.
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 incurred approximately $14.0 million of non-
recurring costs in 1999 related principally to remediation of these systems
issues and the Company does not expect to incur significant additional
remediation costs in 2000 as a result of this issue.
F-27
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial information by segment for the years ended December 31, 1997,
1998, and 1999 is summarized as follows (in millions):
<TABLE>
<CAPTION>
Other
United States Germany Europe Asia-Pacific All Other (1) Total
------------- ------- ------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997 and
the year then ended
Revenue from external
customers............ $ 649.1 $ 71.7 $145.8 $ 82.6 $ 31.3 $ 980.5
Intersegment revenues. 111.9 15.1 12.3 -- -- 139.3
Interest expense...... 86.6 -- 2.1 0.6 0.3 89.6
Segment EBITDA........ 117.7 27.3 22.0 6.0 3.0 176.0
Segment assets........ 1,482.3 189.6 243.8 74.5 34.4 2,024.6
Expenditures for
segment assets....... 39.9 4.0 19.5 4.3 0.7 68.4
December 31, 1998 and
the year then ended
Revenue from external
customers............ 687.2 158.6 293.9 111.7 33.8 1,285.2
Intersegment revenues. 74.1 182.0 108.6 1.3 -- 366.0
Interest expense...... 78.0 3.1 0.9 0.8 0.8 83.6
Depreciation and
amortization......... 28.2 13.6 25.0 5.2 (13.2) 58.8
Segment EBITDA........ 100.0 26.3 108.7 17.9 5.7 258.6
Segment assets........ 2,048.5 491.7 233.3 90.0 (696.2) 2,167.3
Expenditures for
segment assets....... $ 57.6 $ 26.4 $ 42.8 $ 12.0 $ 0.2 $ 139.0
December 31, 1999 and
the year then ended
Revenue from external
customers............ 686.7 155.0 315.3 117.1 35.1 1,309.2
Intersegment revenues. 143.8 180.2 31.0 -- -- 355.0
Interest expense...... 102.9 3.4 1.4 0.4 (0.1) 108.0
Depreciation and
amortization......... 64.2 22.5 31.6 8.9 (66.7) 60.5
Segment EBITDA........ 90.3 (6.0) 145.7 28.8 7.1 265.9
Segment assets........ 1,943.0 312.5 342.4 114.4 (447.4) 2,264.9
Expenditures for
segment assets....... $ 56.7 $ 16.1 $ 35.7 $ 13.8 $ 3.9 $ 126.3
</TABLE>
- --------
(1) Includes the effects of purchase accounting which have not been reflected
in segment accounting records. Consequently, asset write-downs resulting
from bargain purchases are reflected in the All Other column.
F-28
<PAGE>
DADE BEHRING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of segment EBITDA to income (loss) before income taxes for
the years ended December 31, 1997, 1998, and 1999 is summarized as follows (in
millions):
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C> <C>
Reconciliation of reportable segments:
Revenues
Total revenue for reportable segments...... $1,088.5 $1,617.4 $1,629.1
Other revenues............................. 31.3 33.8 35.1
Elimination of intersegment revenues....... (139.3) (366.0) (355.0)
-------- -------- --------
Total consolidated revenues............ $ 980.5 $1,285.2 $1,309.2
-------- -------- --------
EBITDA to Income (Loss) Before Taxes
Total EBITDA............................... $ 176.0 $ 258.6 $ 265.9
Less: Depreciation and amortization........ (50.7) (56.7) (60.5)
Interest expense, net................... (87.8) (80.5) (108.0)
Purchase accounting related charges..... (172.5) -- --
Restructuring (charges) credits......... (40.1) 4.5 (13.3)
Non-recurring charges and other......... (4.4) (5.1) (9.9)
Stock-based compensation................ (11.4) (13.1) (31.3)
Y2K remediation......................... -- (5.2) (23.5)
DDC remediation......................... -- -- (14.0)
Non-recurring advisory fees associated
with the June 1999
recapitalization........................ -- -- (16.8)
Integration costs....................... (35.5) (24.6) (26.3)
-------- -------- --------
Income (loss) before taxes................. $ (226.4) $ 77.9 $ (37.7)
======== ======== ========
Assets
Total assets for reportable segments....... $1,990.2 $2,863.5 $2,264.9
Other assets............................... 34.4 (696.2) --
Elimination of intercompany receivables.... (514.2) (633.9) (599.1)
-------- -------- --------
Total consolidated assets.............. $1,510.4 $1,533.4 $1,665.8
======== ======== ========
</TABLE>
F-29
<PAGE>
DADE BEHRING INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in millions)
<TABLE>
<CAPTION>
Additions
-----------------
Balance Charged Balance
at to costs Charged at
Beginning and to other End of
of Period Expenses Accounts Deductions Period
--------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for bad debts....... $ 9.6 17.0 6.3(2) (5.2) $27.7
Income tax valuation
allowance.................... $19.1 9.0 45.2(2) (6.2) $65.2
(1.9)(1)
Year ended December 31, 1998
Allowance for bad debts....... $27.7 4.0 1.3 (15.0) $18.0
Income tax valuation
allowance.................... $65.2 3.3 1.2(1) (13.5) $56.2
Year ended December 31, 1999
Allowance for bad debts....... $18.0 11.4 0.8 (9.2) $18.5
(2.5)(1)
Income tax valuation
allowance.................... $56.2 9.8 (2.8)(1) -- $63.2
</TABLE>
- --------
(1) Impact of foreign currency translation.
(2) Acquired in the Behring combination.
F-30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, in the City of Deerfield, State of Illinois, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 30, 2000.
/s/ Steven W. Barnes
By: _____________________________________
Name: Steven W. Barnes
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 30, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Steven W. Barnes Chief Executive Officer and Director
___________________________________________ (principal executive officer)
Steven W. Barnes
/s/ James W. P. Reid-Anderson President, Chief Operating Officer and
___________________________________________ Director
James W. P. Reid-Anderson
/s/ John M. Duffey Corporate Vice President and Controller
___________________________________________ (principal accounting officer)
John M. Duffey
/s/ Robert W Brightfelt President, Global Products and Director
___________________________________________
Robert W. Brightfelt
/s/ Mark E. Nunnelly Director
___________________________________________
Mark E. Nunnelly
/s/ Stephen G. Pagliuca Director
___________________________________________
Stephen G. Pagliuca
/s/ Adam Kirsch Director
___________________________________________
Adam Kirsch
/s/ John P. Connaughton Director
___________________________________________
John P. Connaughton
/s/ Joseph H. Gleberman Director
___________________________________________
Joseph H. Gleberman
/s/ Scott T. Garrett Director
___________________________________________
Scott T. Garrett
</TABLE>
F-31
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S> <C>
3.1 Certificate of Incorporation of the Company, Incorporated by
reference to Exhibit 3.1 to the Company's Form S-1
Registration Statement under the Securities Act of 1933, as
filed on October 4, 1996.
3.2 Amendment of Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 3.2 to the Company's Form
10-K under the Securities Exchange Act of 1934, as filed on
March 29, 1999.
3.3 Amended and Restated By-laws of the Company. Incorporated by
reference to Exhibit 3.2 to the Company's Form 10-K under the
Securities and Exchange Act of 1934, as filed on March 31,
1998.
4.1 Indenture as of May 7, 1996 between the Company and IBJ
Schroeder Bank & Trust Company. Incorporated by reference to
Exhibit 4.1 to the Company's Form S-1 Registration Statement
under the Securities Act of 1933, as filed on October 4, 1996.
4.2 Amended and Restated Registration Agreement dated as of
October 1, 1997 among Dade Behring Holdings, Inc. and Aventis
S.A. and other parties signature thereto. Incorporated by
reference to Exhibit 4.2 to the Company's Form 10-K under the
Securities Exchange Act of 1934, as filed on March 29, 1999.
10.1 Credit Agreement dated as of June 29, 1999 by and among Dade
Behring Holdings, Inc., the Company, 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.
Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K under the Securities Exchange Act of 1934, as filed
on July 26, 1999.
10.2 Pledge Agreement dated as of June 29, 1999 by and between the
Company and Bankers Trust Company, as Collateral Agent.
Incorporated by reference to Exhibit 10.2 to the Company's
Form 8-K under the Securities Exchange Act of 1934, as filed
on July 26, 1999.
10.3 Amended and Restated Stockholders Agreement dated as of April
14, 1999 by and among Dade Behring Holdings, Inc., Aventis
S.A. and those investors listed on the signature pages
thereto. Incorporated by reference to Exhibit 10.3 to the
Company's Form 8-K under the Securities Exchange Act of 1934,
as filed on July 26, 1999.
10.4 Recapitalization Agreement dated as of April 14, 1999 by and
among Dade Behring Holdings, Inc., Aventis S.A. and those
investors listed on the signature pages thereto. Incorporated
by reference to Exhibit 10.4 to the Company's Form 8-K under
the Securities Exchange Act of 1934, as filed on July 26,
1999.
10.5 Asset Purchase and Sale Agreement dated December 11, 1995, as
amended and restated on May 7, 1996, between E.I. du Pont de
Nemours and Company and Dade Chemistry Systems Inc.
Incorporated by reference to Exhibit 2.1 to the Company's Form
8-K under the Securities Exchange Act of 1934, as filed on May
22, 1996 (No. 33-90462).
10.6 Agreement and Plan of Combination by and between Diagnostics
Holding, Inc. and Aventis S.A. dated as of June 24, 1997 and
supplemented on July 2, 1997 and as further supplemented on
September 29, 1997 and September 30, 1997. Incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K under the
Securities Exchange Act of 1934, as filed on October 20, 1997.
10.7 Cooperation and Collaboration Agreement executed as of October
1, 1997 between Dade Behring Holdings, Inc. and Aventis S.A..
Incorporated by reference to Exhibit 10.18 to the Company's
Form 8-K under the Securities Exchange Act of 1934, as filed
on October 20, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S> <C>
10.8 Transition Services Agreement dated as of September 30, 1997
between Diagnostics Holding, Inc. and Aventis S.A..
Incorporated by reference to Exhibit 10.15 to the Company's
Form 10-K under the Securities Exchange Act of 1934, as filed
on March 29, 1999.
10.9 Management Services Agreement dated as of December 20, 1994 by
and among the Company and Bain Capital, Inc. Incorporated by
reference to Exhibit 10.7 to the Company's Form S-4
Registration Statement under the Securities Act of 1933, as
filed on March 20, 1995 (No. 33-90462) as amended by Amendment
No. 1 to Management Services Agreement dated as of May 7,
1996. Incorporated by reference to Exhibit 10.8 to the
Company's Form S-1 Registration Statement under the Securities
Act of 1933, as filed on October 4, 1996.
10.10 Management Services Agreement dated as of December 20, 1994 by
and among the Company and Goldman, Sachs & Co. Incorporated by
reference to Exhibit 10.8 to the Company's Form S-4
Registration Statement under the Securities Act of 1933, as
filed on March 20, 1995 (No. 33-90462).
10.11 Tax Law Change Indemnification dated as of December 16, 1994
between Baxter International Inc. and Diagnostics Holding,
Inc. Incorporated by reference to Exhibit 10.9 to the
Company's Form S-4 Registration Statement under the Securities
Act of 1933, as filed on March 20, 1995 (No. 33-90462).
10.12 Amended and Restated Exclusive Distribution Agreement dated as
of September 15, 1995, by and between the Company and Baxter
Healthcare Corporation as amended on September 26, 1996.
Incorporated by reference to Exhibit 10.11 to the Company's
Form S-1 Registration Statement under the Securities Act of
1933, as filed on October 4, 1996.
10.13 Second Amendment to Amended and Restated Exclusive
Distribution Agreement made and entered into as of October 1,
1997 by and between the Company and Allegiance Healthcare
Corporation. Incorporated by reference to Exhibit 10.11 to the
Company's Form 8-K under the Securities Exchange Act of 1934,
as filed on October 20, 1997.
10.14 Third Amendment to the Amended and Restated Exclusive
Distribution Agreement dated as of May 27, 1998 between the
Company and Allegiance Healthcare Corporation. Incorporated by
reference to the Company's Form-K under the Securities
Exchange Act of 1934, as filed on March 29, 1999.
10.15 1995 Executive Stock Purchase and Option Plan. Incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q
Registration Statement under the Securities Exchange Act of
1934, as filed on August 14, 1995 (No. 33-90462).
10.16 1995 Management Stock Option Plan. Incorporated by reference
to Exhibit 10.2 to the Company's Form 10-Q under the
Securities Exchange Act of 1934, as filed on August 14, 1995
(No. 33-90462).
10.17 Form of Agreement under 1995 Executive Stock Purchase and
Option Plan. Incorporated by reference to Exhibit 10.3 to the
Company's Form 10-Q under the Securities Exchange Act of 1934,
as filed on August 14, 1995 (No. 33-90462).
10.18 Form of Agreement under 1995 Management Stock Option Plan.
Incorporated by reference to Exhibit 10.4 to the Company's
Form 10-Q under the Securities Exchange Act of 1934, as filed
on August 14, 1995 (No. 33-90462).
10.19 1996 Executive Stock Purchase and Option Plan. Incorporated by
reference to Exhibit 10.16 to the Company's Form S-1
Registration Statement under the Securities Act of 1933, as
filed on October 4, 1996.
10.20 Form of Agreement under 1996 Executive Stock Option Plan.
Incorporated by reference to Exhibit 10.17 to the Company's
Form S-1 Registration Statement under the Securities Act of
1933, as filed on October 4, 1996.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S> <C>
10.21 1997 Executive Stock Purchase and Option Plan. Incorporated by
reference to Exhibit 10.1 to Company's Form 10-Q under the
Securities Exchange Act of 1934, as filed on May 15, 1997.
10.22 Form of Agreement under 1997 Executive Stock Purchase and
Option Plan. Incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q under the Securities Exchange Act of 1934,
as filed on May 15, 1997.
10.23 1997 Management Stock Option Plan. Incorporated by reference
to Exhibit 10.3 to the Company's Form 10-Q under the
Securities Exchange Act of 1934, as filed on May 15, 1997.
10.24 Form of Agreement under 1997 Management Stock Option Plan.
Incorporated by reference to Exhibit 10.4 to the Company's
Form 10-Q under the Securities Exchange Act of 1934, as filed
on May 15, 1997.
10.25 1997 Executive Stock Purchase and Option Plan. Incorporated by
reference to Exhibit 10.23 to the Company's Form 10-K under
the Securities Exchange Act of 1934, as filed on March 31,
1998.
10.26 Employment Agreement effective as of October 1, 1997 between
the Company and Steve Barnes. Incorporated by reference to
Exhibit 10.3 to the Company's Form 10-Q under the Securities
Exchange Act of 1934, as filed on May 15, 1998.
10.27 Employment Agreement Addendum effective October 1, 1997
between the Company and Steve Barnes. Incorporated by
reference to Exhibit 10.4 to the Company's Form 10-Q under the
Securities Act of 1934, as filed on May 15, 1998.
10.28 Employment letter dated August 1, 1996 between the Company and
James Reid-Anderson. Incorporated by reference to Exhibit
10.36 to the Company's Form 10-K under the Securities Exchange
Act of 1934, as filed on March 29, 1999.
10.29 Employment letter dated January 8, 1997 between the Company
and Marc Casper. Incorporated by reference to Exhibit 10.38 to
the Company's Form 10-K under the Securities Exchange Act of
1934, as filed on March 29, 1999.
10.30 Separation Arrangement dated July 20, 1998 between the Company
and Marc Casper. Incorporated by reference to Exhibit 10.39 to
the Company's Form 10-K under the Securities Exchange Act of
1934, as filed on March 29, 1999.
10.31 Executive Agreement dated as of October 1, 1997 between Dade
Behring Holdings, Inc. and Steve Barnes. Incorporated by
reference to Exhibit 10.40 to the Company's Form 10-K under
the Securities Exchange Act of 1934, as filed on March 29,
1999.
10.32 Executive Agreement dated as of October 1, 1997 between Dade
Behring Holdings, Inc. and James Reid-Anderson. Incorporated
by reference to Exhibit 10.41 to the Company's Form 10-K under
the Securities Exchange Act of 1934, as filed on March 29,
1999.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
</TABLE>
3
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF DADE BEHRING INC.
<TABLE>
<CAPTION>
State or Jurisdiction of
Subsidiary Incorporation or Organization
- ---------- -----------------------------
<S> <C>
Dade Microscan Inc. Delaware
Dade Export Corporation Delaware
Dade Finance, Inc. Delaware
Dade Foreign Sales Corporation Barbados
Syva Diagnostics Holding Company Delaware
Syva Company Delaware
Syva Childcare Inc. Delaware
Dade Behring B.V. Netherlands
Dade Behring S.A. Belgium
D. Diagnosticos Lda. Portugal
Dade Behring S.A. France
Dade Behring Vertriebs Beteiligungs GmbH Germany
Dade Behring AG Switzerland
Dade Diagnostics AG Switzerland
Dade Behring Canada Inc. Canada
Dade Behring, S.A. de C.V. Mexico
Dade Behring Ltd. Japan
Dade Behring Diagnosticos Ltda. Brazil
Dade Behring de Venezuela C.A. Venezuela
Dade Behring Argentina, S.A. Argentina
Dade Behring Diagnostics Pty., Ltd. Australia
Dade Behring Holding GmbH Germany
Dade Behring Marburg GmbH Germany
Dade Behring Grundstrucks GmbH Germany
Dade Behring Vertriebs GmbH & Co. OHG Germany
Dade Behring Austria Ges.m.b.H Austria
Behring Diagnostics Benelux S.A. Belgium
Dade Behring A/S Denmark
Dade Behring OY Finland
Dade Behring Hellas ABEE Greece
Dade Behring Diagnostica S.p.A. Italy
Instituto Behring S.p.A. Italy
Dade Behring S.p.A. Italy
Syva Diagnostica B.V. Netherlands
Syva European Distribution B.V. Netherlands
Dade Behring AS Norway
Dade Behring Polska Sp.z.o.o. Poland
Behring Diagnostios Portugal--Meios de
Diagnostico Medico, Lda. Portugal
Dade Behring Diagnostics S.A. Spain
Dade Behring AB Sweden
Dade Behring Diagnostik Ticaret Ltd. Sirketi Turkey
Dade Behring Ltd. U.K.
Behring Diagnostika AG Switzerland
Behring Diagnostics Australia Pty. Ltd. Australia
Dade Behring Diagnostics Ltd., NZ New Zealand
Dade Behring Diagnostics Asia Pte. Ltd. Singapore
Dade Behring Diagnostics S.A.E. Egypt
Dade Behring South Africa Ltd. South Africa
Dade Behring Diagnostics (Malaysia) SDN BHD Malaysia
Dade Behring Hong Kong Ltd. Hong Kong
Dade Behring Diagnostics Ltd. Thailand
Dade Behring Diagnostics Philippines, Inc. Philippines
Chimera Research Corporation Florida
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Dade Behring Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 49,800
<SECURITIES> 0
<RECEIVABLES> 349,400
<ALLOWANCES> 18,500
<INVENTORY> 256,200
<CURRENT-ASSETS> 755,200
<PP&E> 703,500
<DEPRECIATION> 362,500
<TOTAL-ASSETS> 1,665,800
<CURRENT-LIABILITIES> 448,700
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (142,800)
<TOTAL-LIABILITY-AND-EQUITY> 1,665,800
<SALES> 1,309,200
<TOTAL-REVENUES> 1,309,200
<CGS> 571,000
<TOTAL-COSTS> 1,245,100
<OTHER-EXPENSES> (6,200)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,000
<INCOME-PRETAX> (37,700)
<INCOME-TAX> (8,000)
<INCOME-CONTINUING> (29,700)
<DISCONTINUED> 0
<EXTRAORDINARY> (8,800)
<CHANGES> 0
<NET-INCOME> (38,500)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
