-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iq97uArZt1BAP2d+7i/193NVNaw7ilixyYDx4LnBbCTCX4gsco+9KSy4SIKIW809 sYz/dMyyh+oB58aUy+bL3Q== 0000950131-98-002246.txt : 19980401 0000950131-98-002246.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950131-98-002246 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DADE INTERNATIONAL INC CENTRAL INDEX KEY: 0000942307 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 363949533 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-90462 FILM NUMBER: 98582481 BUSINESS ADDRESS: STREET 1: 1717 DEERFIELD RD CITY: DEERFIELD STATE: IL ZIP: 60115 BUSINESS PHONE: 7082675400 MAIL ADDRESS: STREET 1: 153 EAST 53RD ST CITY: NEWYORK STATE: NY ZIP: 600150778 10-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ---------------- (MARK ONE) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) [X] OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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. EMPLOYERIDENTIFICATION NO.) OFINCORPORATION OR ORGANIZATION) 1717 DEERFIELD ROAD, DEERFIELD, 60015-0778 ILLINOIS (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) 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 the 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 voting stock held by non-affiliates of the registrant as of March 20, 1998 was approximately zero. At March 20, 1998, 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 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. HISTORY The predecessor to Dade Behring Inc. ("Dade Behring" or the "Company", formerly Dade International Inc.), the Baxter Diagnostics business (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 and acquisitions to expand into the microbiology, immunochemistry and chemistry markets of the emerging in vitro diagnostic testing industry. From 1983 to 1985, Stratus and Paramax development, which began in the late 1970's, culminated in product introductions into the immunochemistry and clinical chemistry markets, respectively. The MicroScan product line was developed 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", formerly Diagnostics Holding, Inc.) and acquired the Predecessor from Baxter (the "Dade Acquisition"), with the Company becoming a wholly-owned subsidiary of Holdings. Since the Dade Acquisition, the Company has made significant progress in implementing and focusing its business strategy through acquisitions and the introduction of new products such as the Dimension RxL clinical chemistry analyzer, new hemostasis instrument platforms and its immunoassay module, the cardiac marker Troponin-I and the Platelet Function Analyzer. In May 1996, the Company purchased (the "Chemistry Acquisition") from DuPont its in vitro diagnostics business ("Dade Chemistry"), 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 clinical chemistry instruments is one of the largest in the world. In October 1997, the Company combined (the "Behring Combination") with the in vitro diagnostics business ("Behring") of Hoechst A.G. Behring was established in 1904 by Emil von Behring, the recipient of the first Nobel Prize in medicine. The Behring Combination has broadened the product offering and balanced 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. INDUSTRY In vitro (literally, "in glass") diagnostic ("IVD") tests are conducted outside the body and are used to identify and measure substances in patients' tissue, blood or urine samples which enable physicians to diagnose, treat and monitor patients. The most common IVD tests are traditional 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, fertility 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. As a result, management believes that future growth in IVD testing will be driven by: (i) greater automation in order to achieve more consistent test results at lower costs; (ii) applications for emerging test technologies (e.g., cardiac markers which test for the occurrence of heart attacks); (iii) demographic shifts such as the aging of the population; and (iv) applications which provide point-of-care or near-patient testing capabilities. Dade Behring serves the IVD market with instruments, reagents (compounds and liquids used to perform tests), consumables (primarily disposable reaction vessels, cuvettes, lids, etc.) and services targeted primarily at 2 clinical laboratories. Hospital and reference laboratories tend to use more precise, higher volume and more automated IVD systems. The definitions of the components of the IVD market in which the Company's products compete ("Company Served Markets") are as follows: . Clinical Chemistry Clinical chemistry instrument systems, the highest volume analyzers in most clinical laboratories, are primarily used to test for glucose, cholesterol, sodium and other substances found in large concentrations in the body. These tests are typically run for both routine and emergency patients to help doctors understand the performance of basic bodily functions prior to ordering more extensive testing. . Immunochemistry Immunochemistry instrument systems use targeted antibodies to identify and test enzymes, drugs, hormones and other substances found in relatively small concentrations in the body. The general immunochemistry discipline contains a number of distinct segments, including drugs, plasma proteins, infectious disease and allergy, as well as more general platforms designed for a broad range of analyses including cardiac arrest, cancer, anemia, fertility and pregnancy. . Drugs Drugs tests are used to measure the level of therapeutic drugs or drugs of abuse in either blood or urine. Although these tests have historically been categorized as part of the immunochemistry discipline, many drug assays are now also performed on routine chemistry analyzers and are therefore also defined as part of the clinical chemistry 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 and malnutrition. . Hemostasis Hemostasis instrument systems test blood coagulation (clotting) or platelet function. Hemostasis tests are typically run before or during most surgeries or are performed to monitor patients on an anti- coagulant therapy. . Microbiology Automated microbiology instrument systems identify disease- causing bacteria and determine their susceptibility to various antibiotics. These microbiology tests would include those for strep and staph infections. . Controls Controls are used to test instruments for accuracy and consistency. Because of the need for a high degree of accuracy in IVD testing, controls are run daily on most instruments in a clinical laboratory. 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. According to customer surveys and industry research, the most important criteria customers use to evaluate IVD systems are reliability, reagent quality and service. 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. A number of factors are likely to generate continued growth in the IVD market. Instrument automation trends such as sample handling, sample preparation and data management systems will improve the consistency and labor costs of IVD testing, thereby helping to reduce the overall cost of care. The development of new tests such as alternative cardiac markers will also encourage increased IVD usage in new and/or more frequent applications. An aging population is also expected to increase the overall level of demand for diagnostic testing. The development of point-of-care and near-patient diagnostic testing capability will expand the application of IVD in non-laboratory settings (e.g., operating room, home care). 3 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 Health Systems in order to compete for patients, develop strategic alliances with suppliers and leverage specialized departments. The formation of these Health Systems, as well as the consolidation occurring among competitors in the independent reference lab market presents larger IVD suppliers 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. OVERVIEW The Company is the largest supplier 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 $17.5 billion global IVD market, the Company serves a $10.7 billion segment that consists of IVD instruments, reagents, consumables and services targeted primarily at clinical laboratories. Within the Company Served Markets, the Company has market leadership positions in six of the seven core product segments (clinical chemistry, drugs, plasma protein, microbiology, hemostasis, and controls) and a strong niche position in the seventh (immunochemistry). IVD tests are conducted primarily in clinical laboratories which in the United States consists of approximately 6,000 hospital-based laboratories and 4,000 reference laboratories (independent from hospitals). The Company provides products and services to over 90% of domestic hospital-based clinical laboratories and to the majority of reference laboratories worldwide. Nearly all hospitals require laboratory testing capability due to the "STAT" or emergency nature of their diagnostic needs and, therefore, represent a stable, attractive customer segment for the Company to serve. The Company manufactures and markets a broad offering of IVD products and services which includes: (i) instruments (approximately 12% of sales); (ii) reagents and consumables (approximately 81% of sales); and (iii) services (approximately 7% of sales). In total, the Company has a worldwide installed base of approximately 39,500 instruments. With a typical instrument life of five years, the Company's installed base of instruments generates annual revenue of approximately $31,000 per instrument from ongoing sales of reagents, consumables and service. More importantly, over 75% 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 an attractive, stable and recurring stream of revenue from reagents, consumables and service contracts. Clinical Chemistry Routine clinical chemistry tests measure substances found in large concentrations in patients' blood, urine or other bodily fluids. These substances include cholesterol, glucose, iron and sodium and provide information on a patient's basic bodily functions. As the sensitivity of clinical chemistry analyzers has improved, more and more tests traditionally run on immunochemistry instruments have been developed for traditional chemistry instruments, such as those for therapeutic drug monitoring and drugs of abuse screening. This progression of tests to lower cost clinical chemistry analyzers allows customers to consolidate the number of instruments in their laboratory and reduce the labor costs associated with operating multiple instruments. The migration of certain immunochemistry tests from competitors' systems represents an attractive growth prospect for the Company due to its large installed base of routine and specialty analyzers. According to industry estimates, the United States automated clinical chemistry market in which the Company competes approximated $3.2 billion in sales in 1996. On average, hospitals operate two to three clinical chemistry analyzers, which serve such roles as routine, STAT and specialty testing. The routine clinical chemistry analyzer, such as the Dimension or Paramax, is 4 considered the workhorse of the clinical laboratory, accounting for up to 40% of all IVD tests performed in such laboratories. These analyzers are characterized by their high throughput capabilities. Specialty analyzers, such as the aca, are often dedicated to lower volume tasks such as emergencies, off-hours testing or drug screening. Specialty analyzers are characterized by their ease of use and test menu breadth. The Company's product line consists of three primary instrument platforms marketed to clinical laboratories (Dimension, aca and Paramax) and an instrument platform marketed to physicians, Analyst. The newest clinical chemistry analyzer, the Dimension RxL, was introduced in late 1996 and offers advanced automation and productivity features and a wide test menu. To exploit the migration of high volume tests from immunochemistry to clinical chemistry analyzers, Dimension launched a new immunoassay module in late 1997 to perform highly sensitive immunoassays along with routine chemistry tests. The aca, due to its legacy as the first automated analyzer and subsequent repositioning as a specialty and STAT analyzer, enjoys a strong representation across all hospital volume segments. The Company believes that the ability to provide a full clinical chemistry solution, regardless of hospital's size, is critical in order to be a strong competitor in clinical chemistry. The Company's broad product offering allows it to offer the variety of testing profiles and instrument performance characteristics necessary for a full chemistry solution. Immunochemistry Immunochemistry testing relies upon the properties of antibodies and antigens in the immune system as its key detection mechanism. Similar to clinical chemistry testing, immunoassays (immunochemistry tests) measure substances found in blood. Immunoassays are distinct, however, in their ability to measure relatively low concentration substances that are difficult to detect with conventional routine clinical chemistry methods. The Company's immunochemistry products include the Stratus, OPUS and BEP instruments. Both Stratus and OPUS are strong niche competitors in the United States immunochemistry market, with leadership positions in the cardiac testing segment. The Stratus analyzer currently offers a test menu of over 30 reagents and utilizes a patented tab technology which facilitates one of the fastest test processing times compared to those of competitors' instruments. OPUS analyzers run a menu of 40 reagents using a unique dry film technology which allows reagents to be completely self-contained. The Company's line of BEP instruments offer a menu of over 30 assays to test for infectious diseases, including AIDS and hepatitis. Despite the highly competitive nature of the immunochemistry market, Stratus and OPUS have been positioned to compete effectively in the cardiac testing niche. Stratus currently provides the fastest response time for cardiac testing and OPUS offers a broad panel of cardiac markers. Cardiac tests facilitate a physician's diagnosis of heart attacks or other forms of heart muscle damage by measuring blood markers such as CK-MB, Troponin-I and myoglobin. Demand for the Troponin-I assay has grown rapidly since its introduction in August 1995. Clinical data and market research indicates that Troponin-I will ultimately replace CK-MB as the standard for the detection of heart muscle damage. The Company believes there is tremendous value in properly screening people entering a hospital for chest pains. In the United States, approximately 6 million people each year arrive at a hospital for chest pain and almost 2 million are admitted, but only approximately 1 million of these people actually suffer a heart attack. The costs associated with incorrect admissions or, alternatively, incorrect discharges, are tremendous. Through the use of the Company's battery of cardiac tests, heart attacks can be more accurately identified and treated. In the future, the Company plans to continue to emphasize specific niche segments, especially cardiac, where it has established a market presence and where it can market its instruments' throughput and turnaround capabilities. To this end, the Company is developing a new point-of-care cardiac specific platform. 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 and malnutrition. Plasma protein tests are conducted on two types of instrument platforms. The majority of plasma 5 protein tests are run on dedicated nephelometers such as the Company's BNII; some laboratories, however, also run tests on routine clinical chemistry analyzers such as the Company's Dimension. The Company is the market leader in Plasma Protein worldwide market. The Company offers four dedicated plasma protein instruments: the BNII and BNA, targeted at large, high volume hospital and commercial laboratories; the BN 100, sold to small to medium sized labs; and the TurbiTimeSystem, a manual instrument sold to small hospitals and private labs. The BNII, a large, highly automated instrument, was released in late 1996 and has proven to be a successful upgrade path for former customers of the BNA and BN 100 who are striving to reduce lab costs and increase actual testing throughput. The Company's instruments offer up to 40 assays which cover the complete spectrum of plasma protein tests. 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 clinical chemistry analyzer market. The Company is also working to grow the plasma protein market by developing new markers for disorders such as malnutrition. Microbiology MicroScan serves a segment 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., strep and staph) 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. Growth in the microbiology testing market has been driven primarily by advances in automation, 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)-40 and the WalkAway(R)-96, fully automated instruments that use patented dry reagent panels to conduct bacterial identification and susceptibility testing at the same time. The Company has been able to achieve a leadership position in the Microbiology market by focusing on 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 pharmLINK 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 pharmLINK 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. In addition, as hospitals outside the United States continue to build the necessary information systems infrastructure, the Company expects to develop new versions of pharmLINK that are specific to a country's needs. In addition, the Company has begun work on the next generation WalkAway with a focus on reducing costs, improving ease of use and developing significant enhancements to its existing data management software. Hemostasis Hemostasis testing measures a patient's ability to form and dissolve blood clots, a critical factor in the stabilization of the cardiovascular system. These 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., 6 hemophilia). Market growth is expected to come from a continued growth in the number of surgeries performed as well as from new hemostasis tests which 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. Unlike most other product areas served by the Company, hemostasis instrument systems are "open" systems, meaning that customers can use reagents from a number of vendors with instruments manufactured by other vendors. Primarily for this reason, the Company has sold both third party instruments as well as those manufactured in house. The Company has a strong history of instrument product development, and has introduced two new systems (the BCS and BCT) over the past two years as well as committed significant resources to developing a Platelet Function Analyzer, a new system which provides more precise and consistent measurement of patient blood clotting functions in a less invasive and less time consuming manner than conventional testing procedures. The Company has an exclusive relationship with Cardiovascular Diagnostics Inc. ("CVDI") in distributing a new point-of-care hemostasis instrument in the United States market. Drugs 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 dedicated immunochemisty platforms such as the Company's ETS instruments, as well as routine clinical chemistry analyzers such as the Company's Dimension instruments. The Company manufacturers a wide range of products under the Syva name in the drugs market, including both dedicated instruments, as well as a line of over 40 reagents, which it markets to both clinical and non-clinical laboratories. Syva is the world leader in DAT testing and is also a leader in DAT innovation, with the broadest menu of assays available and a large pipeline of new tests. The Company's new test for LSD was chosen over the competition for use by the United States military. In order to increase the convenience of testing for its customers, the Company is developing new DAT sample collection technologies, such as a patch that detects drugs from sweat rather than urine. In addition, the Company is taking advantage of the trend in diagnostics toward testing at the point-of-care by developing a self- contained, unitized test device. 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 and recently acquired a license to test for FK506. 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. In order to take advantage of the growing need for drugs tests, the Company has been rapidly developing new sample collection methodologies and point-of- care devices. 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 clinical chemistry analyzers. The Company has been a leader in developing assays for those and other platforms, as exemplified by its new LSD test. Growth opportunities exist for the Company outside of the United States, where drug testing is currently less well penetrated. For example, the Company has been in discussions with the governments of Germany and France to use its testing devices on people involved in car accidents. Controls Controls are used by laboratory technicians to test instruments for accuracy and consistency. Tests are performed using controls (solutions formulated to specific, standardized values) to determine whether instruments are producing results valid within a statistically acceptable range. Because of the need for a high degree of 7 accuracy in IVD testing, controls are run daily on most instruments in a clinical laboratory. CLIA '88 subjects laboratories to impromptu inspection and subsequent fines/penalties for compliance violations; this and other governmental regulations mandating higher standards of quality control will continue to drive laboratories' needs for controls. The Company is a well recognized and respected name in the controls segment of the IVD industry. The Company developed the first commercially available control reagents in 1951 and has since maintained its reputation as a quality- assurance leader. The Company's Total Quality Control ("TQC") product line includes both controls, as well as controls-related quality assurance programs ("QAPs"). These programs are sophisticated statistical database systems that aid a laboratory in monitoring and maintaining the accuracy and precision of testing over time. The Company's controls business has several advantages over its competitors. In addition to being used by over 75% of its own customers, the Company has a proven ability to leverage its experience across many other platforms. In 1995, the Company established an exclusive controls supply relationship with Columbia/HCA and an OEM relationship with a European supplier of clinical chemistry analyzers. The Company's state-of-the-art QAPs have enabled users to monitor and compare system tests results with those obtained by thousands of other laboratories using similar systems around the world. With over 10,000 Dade Behring QAP participants, the Company possesses the world's largest inter-laboratory peer group database. The Company plans to complement this database with new real-time information and enhanced data management products. Other 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. This product line is considered non- core and has suffered from increased competition in recent years due to a new, simpler testing procedure. Integrated Services Division. The Company believes its Integrated Services Division ("ISD") organization is the largest service organization in the industry with over 1,200 product and service specialists worldwide. This organization provides in-warranty and out-of-warranty service on the Company's 39,500 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 180 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 international markets where it can leverage its existing distribution network. RESEARCH AND DEVELOPMENT Overview 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. Within the IVD industry, the Company has established a track record of innovation and timely product introduction. 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, 1997, there were approximately 750 employees involved in the Company's product development efforts. While management may adjust research and development levels to reflect the changing dynamics of the IVD industry, new product development will remain an important focus for continued growth and enhanced profitability. In order to maximize growth and enhance profitability, research and development activities are grouped into three primary categories: test menu development, next generation platform development and niche platform development. 8 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 of approximately 39,500 instruments thus represents significant potential for the Company's new reagent development efforts. The Company is currently developing a series of highly sensitive immunoassays for the Dimension RxL platform, cardiac markers for the point-of- care Stratus Cardiac System (Stratus CS), new acute phase protein markers like Cystatin C and SAA for the nephlometer platforms, as well as new and updated identification and antibiotic susceptibility panels for the MicroScan platforms. In addition, the Company is investing in new and enhanced tests for its hemostasis platforms as well as a next generation Hepatitis B Surface Antigen and new combined antibody/antigen HIV tests to expand the infectious disease product line menu. Next Generation Platform Development The Company is committed to continued investments in new platform development to maintain 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 is currently working on significant enhancements to its clinical chemistry and microbiology instruments that will further automate the laboratory and support total system cost reduction. As part of the next generation of the clinical chemistry instrument, the Company has invested in the concept of enhanced productivity through workstation consolidation. The Company has developed an immunochemistry module that has become an integrated component of the Dimension RxL platform creating the first platform capable of performing highly sensitive heterogeneous immunoassays along with routine chemistry, specialty tests, electrolytes, and metabolites. The Company is investing in on-line centrifugation technology to reduce excess sample handling and transportation time, increased use of sensor-based technology to enhance instrument efficiency, and a number of additional features that will enhance the product offering. The Company is also supporting the development of enhanced automation for the MicroScan WalkAway platforms to improve the sample handling process for the microbiology laboratory. 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 platform systems that are designed to meet the needs of the smaller volume customer for the plasma protein, Syva and hemostasis product lines. Niche Platform Development 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 include the recently introduced Platelet Function Analyzer (PFA-100). The PFA-100 is an instrument that automates the testing of platelet function and provides a quantifiable measurement of platelet function. Like most IVD instrument systems, the PFA- 100 uses proprietary reagents and consumables designed exclusively for this instrument. The Company is also investing in the development of the Stratus CS 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 the central laboratory. CUSTOMERS The Company has a broad customer base that includes primarily hospital and reference laboratories. The Company sells its products worldwide and derives 46% of its revenue from outside the United States. No end-consumer represents more than 4% of the Company's sales. Sales to Allegiance Healthcare Corporation, the Company's U.S. distribution for certain product lines, represented 26% of the Company's sales. 9 SALES, DISTRIBUTION AND MARKETING The Company employs over 2,300 people in its worldwide sales group, comprised of field sales representatives, manager's, 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 instuments. In the United States, the Company maintains sales offices in twelve cities. The Company maintains thirty sales offices outside the U.S. In the United States, this sales organization works closely with the Company's chief domestic distributor, Allegiance Healthcare Corporation ("Allegiance", Baxter's distributor successor), whose approximately 400 highly trained distribution professionals are capable of generating sales leads and important interactions with hospital decision makers. Together with the Company's domestic field salesforce, this team is capable of developing strong relationships with thousands of customers. In addition to sales prospecting, Allegiance also provides routine distribution and delivery functions such as order entry, invoicing, customer service, database management and physical warehousing and delivery. Chemistry and Syva products are sold directly to customers in the U.S. without an intervening distributor. In addition to its worldwide sales group, the Company employs approximately 350 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 $135,000. Approximately one-third of the Company's instrument placements in 1997 were sold to customers, approximately one-third were sold through third-party lessors and the remainder were financed directly by the Company. Approximately half of the Company's 1997 domestic instrument placements were sold to customers with the remaining half sold through third-party lessors. 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 capital leases, 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 3,500 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 Dade, MicroScan, Stratus, Analyst, Syva, Dimension and aca product lines as well as technology which has yet to be commercialized. The Company also licenses certain patents and other intellectual property rights 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 approximately 3,000 United States and non-U.S. registered trademarks, and service marks, including the Company's well-known and respected Dade(R), Syva(R), MicroScan(R), Stratus(R), Paramax(R) and Dimension(R) brand names. In addition, the Company has numerous 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. 10 EMPLOYEES As of December 31, 1997 the Company had approximately 7,400 full-time and part-time employees, 4,550 in the United States (including Puerto Rico), 2,250 in Europe, 300 in Japan and 300 in other locations around the world. The Company also contracted with approximately 550 temporary employees as of December 31, 1997. 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 does not expect to incur material capital expenditures for environmental controls in the current or succeeding fiscal year. 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:
FLOOR NO. OF AREA LOCATION SITES (SQ. FT.) OWNED/LEASED PRODUCTS - -------- ------ --------- ------------ ---------------------- Duedingen, Switzerland..... 2 184,700 1 Owned Immunohematology 1 Leased Miami, Florida............. 2 420,900 Owned Hemostasis, Chemistry, Controls Sacramento, California..... 2 236,900 1 Owned Microscan 1 Leased Glasgow, Delaware.......... 1 447,000 Owned Chemistry Newtown, Connecticut....... 1 22,000 Leased Chemistry Cupertino, California...... 1 110,000 Leased Syva Westwood, Massachusetts.... 1 155,000 Leased Chemistry, Immunochemistry Marburg, Germany........... 3 320,000 1 Owned Hemostasis, 2 Leased Plasma Proteins, Immunochemistry Scoppito, Italy............ 1 14,000 Leased Plasma Proteins Kawagoe, Japan............. 1 29,000 Leased Plasma Proteins --- --------- 15 1,939,500 === =========
11 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. 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 Predecessor and the Company as of the dates and for the periods shown. The selected historical financial data as of December 31, 1994, December 31, 1995, December 31, 1996 and December 31, 1997, for the period from December 17, 1994 through December 31, 1994 and for the three years ended December 31, 1997 were derived from the Company's financial statements, which, except for data as of December 31, 1994 and 1995 and for the period from December 17, 1994 through December 31, 1994, are included elsewhere in this Form 10-K. The selected historical financial data as of December 31, 1993 and the year then ended and for the period from January 1, 1994 through December 16, 1994 were derived from the Predecessor's financial statements, which were audited by Price Waterhouse LLP and do not appear in this Form 10-K. The selected historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Form 10- K.
THE PREDECESSOR(1) COMPANY(1) ------------------- --------------------------------------------------- PERIOD FROM PERIOD FROM PERIOD FROM 1/1/94 TO 12/17/94 TO 1/1/94 TO 1993 12/16/94 12/31/94(2) 12/31/94 1995(2)(3) 1996(6) 1997(7) ------ ----------- ----------- ----------- ---------- ------- ------- (DOLLARS IN MILLIONS) Net sales............... $690.2 $650.6 $19.0 $669.6 $614.3 $ 795.8 $ 980.5 Cost of sales........... $420.8 $391.4 $18.6 $410.0 $368.6 $ 444.1 $ 654.1 Gross profit............ $269.4 $259.2 $ 0.4 $259.6 $245.7 $ 351.7 $ 326.4 Marketing and administration expenses............... $179.2 $173.2 $ 2.4 $175.6 $171.1 $ 255.5 $ 366.8 Research and development expenses............... $ 47.2 $ 33.4 $ 1.1 $ 34.5 $ 26.5 $ 138.0 $ 61.7 Goodwill amortization expense (credit)....... $ 2.6 $ 2.6 $(0.1) $ 2.5 $ (0.4) $ 3.3 $ 5.4 Restructuring and downsizing costs(4).... $ 30.2 $ -- $ -- $ -- $ -- $ 15.0 $ 40.1 Income (loss) from operations............. $ 10.2 $ 50.0 $(3.0) $ 47.0 $ 48.5 $ (60.1) $(147.6) Extraordinary items..... $ -- $ -- $ -- $ -- $ -- $ (25.0) $ -- Cumulative effect of change in accounting principles(5).......... $ (3.3) $ -- $ -- $ -- $ -- $ -- $ -- Net income (loss)....... $ (1.9) $ 35.8 $ 1.9 $ 33.9 $ 12.7 $(105.3) $(142.6)
DECEMBER 31, -------------------------------------- 1993 1994 1995 1996 1997 ------ ------ ------ -------- -------- Total assets............................. $710.6 $696.2 $550.9 $1,005.1 $1,510.4 Long-term liabilities.................... $ 37.9 $300.3 $297.9 $ 807.9 $ 875.1
- -------- (1) The financial data of the Predecessor and the Company were prepared on different bases of accounting. (2) Financial data for the period from December 17, 1994 to December 31, 1994 and for the year ended December 31, 1995 exclude the results of the Bartels and Burdick & Jackson product lines, which have been reflected as "Net assets held for sale." (3) The Company's stockholder's equity and net loss for the period December 17, 1994 through December 31, 1994 includes a non-recurring pre-tax charge relating to the application of purchase accounting for a partial write-off of $5.6 million to cost of goods sold 12 related to the write-off of the $46.0 million of allocated purchase price made to record acquired finished goods and work-in-process inventory at fair market value. The Company's stockholder's equity and net income for the year ended December 31, 1995 include the non-recurring pre-tax write-off of the remaining $40.4 million of the inventory write-up discussed above. (4) In 1993, Baxter undertook a restructuring effort, charging the Predecessor with $30.2 million for downsizing its sales, general and administrative, instrument manufacturing and non-strategic research and development staffs in an effort to reorganize the businesses into a single operating division. 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. (5) In 1993, Baxter recorded a $3.3 million after-tax charge related to the Predecessor for the cumulative effect of adopting SFAS No. 109 "Accounting for Income Taxes." (6) 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 of allocated purchase price to record work-in-process and finished goods inventories to fair market values, (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 does 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 product line. (7) 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 of allocated purchase price to record acquired finished goods and work-in process inventories to fair market values, (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 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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, and cash flow and liquidity. Such forward-looking statements are based on Management's current expectations and are subject to a number of risks and uncertainties that could cause actual results in the future to differ significantly from 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. COMPARABILITY Comparisons drawn from the Company's Consolidated Financial Statements for 1995 through 1997 are impacted by the Dade Acquisition effective December 16, 1994, the Chemistry Acquisition effective May 1, 1996 and the Behring Combination effective October 1, 1997. These transactions were accounted for under the purchase method and accordingly their respective results have been included in the Consolidated Financial Statements from the date of acquisition. Certain significant purchase accounting related and other items impacting comparability include: 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. 13 . $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 which 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 non-cardiac and Paramax 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. 1996 . A $24.8 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 Chemistry Acquisition. . A $15.0 million restructuring charge was recorded to operating expense in connection with a restructuring plan designed to lower operating costs, increase efficiency and eliminate redundant operations. . The Company recorded a $98.1 million charge to research and development expense upon consummation of the Chemistry Acquisition pertaining to purchase price allocated to in-process research and development projects that have no alternative future use. . 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 2005 and the write-off of previously deferred financing fees. . A $9.5 million charge to cost of goods sold was recorded to establish a reserve for excess inventories related to the Paramax product line. This non-cash charge was a direct result of the Chemistry Acquisition and the decision to designate the Paramax product line as non-core. . The elimination of the reporting period lag for the Company's international operations added $12.3 million to the sales for the year ended December 31, 1996. The change in reporting period did not significantly impact earnings. 1995 . $40.4 million was charged to cost of goods sold related to the $46.0 million non-recurring step-up to fair value of work-in-process and finished goods inventory in connection with purchase price allocation for the Dade Acquisition. Results of Operations 1997 Compared to 1996 Net sales for 1997 were $980.5 million, an increase of $184.7 million or 23.2% over 1996. The increase was attributable primarily to the inclusion of sales from the Behring Combination during the three months of ownership in 1997 and the inclusion of twelve months of sales from the Chemistry Acquisition (versus eight months of sales in 1996). The strong U.S. dollar reduced international sales by $45.3 million in 1997 versus 1996. Gross profit for 1997 totaled $510.0 million as compared to $386.0 million in 1996, after adjusting for the following items impacting comparability; in 1996, the $24.8 million purchase accounting inventory step-up impact, the $9.5 million charge to establish a reserve for excess Paramax inventories recorded and in 1997, 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 recorded in 14 1997. The $124.0 million increase in gross profit over 1996 exclusive of the above impact was due to the inclusion of twelve months of results of the Chemistry Acquisition, as compared to only eight months of activity in 1996, three months of results of the Behring Combination, as well as the ongoing realization of manufacturing cost reduction initiatives and a shift toward higher margin products. The strong U.S. dollar reduced gross profit by $24.9 million in 1997 versus 1996. Gross margins for 1997 improved to 52.0% as compared to 48.5% in 1996 exclusive of the above adjustments. Marketing and administrative expense for 1997 totaled $345.5 million, excluding $21.3 million of non-recurring charges primarily related to the transition of non-core product lines, as compared to $255.5 million in 1996. The increase is due to the inclusion of twelve months of activity from the Chemistry Acquisition as compared to only eight months of activity in 1996 and the inclusion for 1997 of three months of operations from the Behring Combination and non-recurring costs related to the integration of Behring, offset by cost reduction programs and lower international expenses resulting from the strength of the U.S. dollar. Research and development increased by $20.7 million or 51.9% in 1997 as compared to 1996 exclusive of $98.1 million purchase accounting write-off of in-process research and development projects related to the Chemistry Acquisition in 1996 and the $1.1 million purchase accounting write-off of in- process research and development projects related to the Behring Combination in 1997. The increase is attributable to twelve months of operations from the Chemistry Acquisition as compared to only eight months of activity in 1996, three months of operations from the Behring Combination, offset partially by realized cost synergies. Research and development expenditures are primarily focused on supporting projects that are expanding test menus, developing the next generation Dimension RxL clinical chemistry instrument platform and developing a new point-of-care cardiac instrument platform. During 1997, the Company recorded a $40.1 million restructuring charge and allocated $77.7 million of the Behring Combination purchase price related to a restructuring plan to consolidate manufacturing and distribution operations and eliminate redundant sales, service and administrative functions. The restructuring plans include actions to close the Miami and Westwood manufacturing facilities, consolidate and reorganize the global sales, marketing and R&D organizations and eliminate administrative redundancies. Net interest expense for the year ended December 31, 1997 was $87.8 million as compared to $65.6 million for 1996. The increase is attributable to a full year of Chemistry Acquisition debt service recorded (versus eight months in 1996), offset partially by lower borrowing rates. Other income of $9.0 million in 1997 includes a gain of $9.5 million for a settlement with a supplier for non-performance under a contractual agreement partially offset by foreign currency transaction losses. An income tax benefit of $83.8 million (an effective rate of 37%) was recorded in 1997. The Company's pre-tax loss of $226.4 million was caused by purchase accounting related adjustments of $171.4 million for inventory step- up and $1.1 million for the write-off of in-proceess research and development projects with no alternative future use, the restructuring charge of $40.1 million and the other non-recurring charges of $33.5 million. At December 31, 1997, the Company had a net deferred tax asset of $383.1 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. The realization of the deferred tax asset is not dependent upon material improvement over the Company's forecast level of pre-tax income, significant changes in the current relationship between income reported for financial and tax purposes, or material asset sales or other transactions not in the normal course of business. For the year ended December 31, 1997, the Company had a net loss of $142.6 million as compared to a net loss of $105.3 million in 1996. The net loss in 1997 was due to the effects of purchase accounting, restructuring charges, increased interest expense related to a full year of Chemistry Acquisition debt service, non-recurring operating charges, incremental and duplicative operating costs and integration costs. 15 For the year ended December 31, 1997, the Company's EBITDA was $176.0 million, as compared to $126.5 million for 1996. The increase over 1996 is attributable to the full year of operations from the Chemistry Acquisition and three months of operations from the Behring Combination and realization of cost synergies from the integration of the Chemistry and Behring operations. Foreign currency exchange rate fluctuations had an adverse impact of $9.2 million on EBITDA during 1997 versus 1996. EBITDA, which is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness, represents the sum of net loss, depreciation and amortization, the purchase accounting write-offs related to inventory step-up and in-process research and development with no alternative future use, noncash stock-based compensation expense, integration expenses, restructuring and other non- recurring operating charges and other noncash charges. EBITDA should not be considered as an alternative to net income as a measure of a Company's operating results or to cash flows as a measure of liquidity. 1996 Compared to 1995 Net sales for 1996 were $795.8 million, an increase of $181.5 million or 29.5% over 1995. The increase was attributable primarily to the Chemistry Acquisition (particularly the Dimension system), which added $228.6 million of revenues during the eight months of ownership in 1996. The growth in net sales was also supported by the Company's other core product lines: microbiology, immunochemistry, hemostasis and TQC. Sales of the Stratus cardiac immunochemistry product line showed significant strength increasing $15.4 million or 36.4% over 1995. In connection with the Chemistry Acquisition, the Paramax and Stratus non-cardiac product lines were designated as non-core due to product line overlap and to better position and leverage the Company's product offerings in the cardiac market. Sales of these two non-core product lines declined in 1996, with combined sales slipping by $61.5 million from 1995 levels. Also impacting sales in 1996 was the adverse impact of foreign currency exchange as the U.S. dollar strengthened against most other currencies; the impact in 1996 was to reduce sales by $6.0 million. Cost of sales increased $75.5 million or 20.5% from 1995 to 1996. Excluding the non-recurring impacts of the purchase accounting inventory step-ups in 1995 and 1996, and the impact of the Paramax inventory reserve, the increase was $81.6 million. Gross margins, after giving effect to the above adjustments, increased from 46.6% in 1995 to 48.5% in 1996. The increase in gross margins is attributable to the Chemistry Acquisition and successful initiatives in 1996 to reduce manufacturing costs, offset partially by a competitive pricing environment and higher levels of depreciation expense. Marketing and administrative expenses increased by $84.4 million or 49.3% in 1996 as compared to 1995. The majority of this increase is related to the Chemistry Acquisition, with the balance due to incremental and duplicative expenses incurred to establish stand-alone finance, information systems and human resources functions, as the Company prepared for the termination of the transition services arrangements with Baxter and DuPont. Research and development expenses increased 50.6% to $39.9 million during 1996, net of the $98.1 million non-recurring write-off of in-process research and development projects related to the Chemistry Acquisition. This increase is attributable to eight months of incremental research and development for the Chemistry product line. Significant research and development expenditures in 1996 supported the development of the next generation Dimension RxL instrument, the Platelet Function Analyzer and a new cardiac instrument platform. Lower research and development expense levels were incurred related to the de-emphasized Paramax product line. During 1996, the Company accrued restructuring charges of $15.0 million in connection with a restructuring plan designed to lower operating costs, increase efficiency and eliminate redundant operations. Additional restructuring reserves of $15.0 million were established through the allocation of the Chemistry Acquisition purchase price. The plan includes actions to close two production facilities, reorganize the domestic field service function, downsize operations in Canada, and eliminate international management and marketing organizational redundancies. A total of 718 positions were identified for elimination as part of these actions, which are expected to be substantially completed in 1997. 16 Interest expense for the year ended December 31, 1996 was $65.6 million as compared to $30.8 million for 1995. The increase is related to the eight months of increased indebtedness incurred by the Company to finance the Chemistry Acquisition. Partially offsetting the higher borrowing levels was the impact of lower rates on the Company's 11 1/8% subordinated notes as compared to the 13% notes outstanding during 1995. Other income in 1996 includes a $2.7 million loss from a write-down of an investment in marketable equity securities, a gain of $2.8 million related to the settlement of a patent litigation matter, a loss on the sale of "Net assets held for sale" of $2.8 million and foreign currency transaction gains of $1.4 million. Income tax benefit of $45.4 million (an effective rate of 36.1%) was recorded for 1996. The Company's pre-tax loss of $125.7 million was primarily caused by the purchase accounting adjustments related to the Chemistry Acquisition as described above. At December 31, 1996 the Company had a net deferred tax asset of $214.7 million. In connection with the refinancing required for the Chemistry Acquisition, a premium was paid to retire the senior subordinated notes and previously deferred financing fees were written off. An extraordinary, net of tax loss of $25.0 million was recorded in the second quarter to reflect the impact of these transactions. For the year ended December 31, 1996 the Company had a net loss of $105.3 million as compared to net income of $12.7 million in 1995. The net loss was due to the impacts of purchase accounting, increased interest expense related to the increased level of indebtedness, restructuring charges and incremental and duplicative operating costs related to the establishment of stand-alone capabilities. Excluding the impact of purchase accounting, extraordinary losses and restructuring charges, the Company's 1996 net income would have been $7.8 million. Financial Condition and Liquidity The Company's primary liquidity requirements are for working capital, capital expenditures, restructuring expenditures and debt service. At December 31, 1997, the Company's entire $105.0 million revolving credit facility, as well as $115.7 million under various non-U.S. credit lines were available. (See further discussion in the notes to the consolidated financial statements.) Capital expenditures, including instrument placements in customer locations, totaled $68.4 million in 1997, compared to $57.3 million in 1996. The increase reflects the impact of a full year of ownership of Dade Chemistry, three months ownership of Behring, investment in reagent rental agreements (in which the Company retains title to an instrument and recoups the investment through premiums on reagents over a multi-year period) and incremental investments for stand-alone infrastructure needs, particularly in the area of information systems. Capital expenditures in 1998 are expected to exceed 1997 levels due primarily to a full year of activity related to the Behring Combination. Based on preliminary study, the Company expects to spend approximately $15.0 million to $17.0 million from 1997 through 1999 to replace or modify certain computer information systems to enable proper processing of transactions relating to the year 2000 and beyond. The Company continues to evaluate appropriate courses of corrective action. The Company does not expect the amounts required to be charged to operations over the next two years to have a material effect on its financial position or results of operations. The amount expensed in 1997 was not significant. Management believes cash from operating activities and the available revolving credit facility will be sufficient to permit the Company to meet its financial obligations and fund its operations and planned investments. Inflation affects the cost of goods and services used by the Company. Inflation has been modest in recent years. The competitive environment limits the ability of the Company to recover these higher costs through 17 increased selling prices, although the Company selectively increases prices for certain differentiated high value added products. 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. Outlook Management expects sales and operating income growth in 1998 over 1997 reflecting full results of the Behring Combination and the realization of synergies. Revenue growth domestically is subject to a relatively competitive pricing environment, with an increasing level of influence by large buying groups. Management believes the Company's broad product line offering and extensive sales and service infrastructure position it well in such an environment. Sales results outside the United States are subject to significant influence by foreign currency exchange rates. Continued growth by the Dimension product line is anticipated as the new heterogenous module for immunoassay testing was launched in late 1997. In addition, the launch of the new point-of-care Stratus CS platform, the new CA- 500 Hemostasis instrument positioned for smaller hospitals and the introduction of new assays will further contribute to sales growth. Management expects continued declines across mature product lines (such as Paramax and Stratus non-cardiac) as the Company continues its successful strategy of migrating customers from these non-core product lines to newer platforms (e.g. Dimension). The Company expects to achieve significant productivity gains in 1998 from the integration of the Behring Combination. Synergies will be achieved from the closure of the Miami, Florida and Westwood, Massachusetts facilities, consolidation of country sales and service organizations, elimination of duplicative administrative functions and the elimination of overlapping R&D projects. ITEM 8. FINANCIAL STATEMENTS. See the attached Consolidated Financial Statements (pages F-1 through F-28). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Executive officers and directors of Dade Behring are as follows
NAME AGE POSITION - ---- --- -------- Steven W. Barnes...................... 37 President, Chief Executive Officer and Director James W. P. Reid-Anderson............. 38 Chief Administrative Officer, Chief Financial Officer and Director Robert W. Brightfelt.................. 55 Group President, Chemistry and Director Friedhelm Blobel...................... 49 Group President, Biology John Sullivan......................... 58 President, Syva Robert W. Kleinert.................... 46 Executive Vice President Marc N. Casper........................ 29 Executive Vice President Thomas E. Hill........................ 47 Senior Vice President of Human Resources Scott T. Garrett...................... 48 Director Mark E. Nunnelly...................... 39 Director Stephen G. Pagliuca................... 43 Director Adam Kirsch........................... 36 Director John P. Connaughton................... 32 Director Joseph H. Gleberman................... 39 Director
Steven W. Barnes served as the Company's President of Global Products and Chief Operating Officer beginning in 1996, and was appointed President, Chief Executive Officer and Director in 1997. 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. and Claricom, Inc., where he served as President and Director. From 1988 to 1996 Mr. Barnes served various positions including President and Director of the Holson Burnes Group, Inc. and from 1982 to 1988 Mr. Barnes served various positions with Price Waterhouse. Mr. Barnes is also currently a Director of Claricom, Inc. and Miltex, Inc. James W. P. Reid-Anderson became Executive Vice President and Chief Financial Officer in August 1996 and was subsequently promoted to Chief Administrative Officer and Chief Financial Officer in October 1997 following the Behring Combination. Prior to joining the Company, Mr. Reid-Anderson was Chief Administrative Officer and Chief Financial Officer of Wilson Sporting Goods; in addition concurrently he was Chief Operating Officer of Wilson and served as Vice President and General Manager of Wilson's International Markets. Mr. Reid-Anderson has also served in various financial positions of increasing responsibility for Pepsico, Inc., Grand Metropolitan PLC and Mobil Oil Corporation. Robert W. Brightfelt joined the DuPont Company in 1967 as a mechanical engineer and served in positions of increasing responsibility in new product development, manufacturing, R&D and plant management. In 1981, he joined the DuPont in vitro diagnostics business as Manager of Product Management and Strategic Planning. He was named New Product Development Manager in 1984, Worldwide Marketing Director in 1987, and Worldwide Business Director in 1989. Mr. Brightfelt became Executive Vice President of Dade Behring, Chemistry Systems, effective with the close of the sale of DuPont Diagnostics to Dade Behring in May 1996. He became Group President, Chemistry, effective with the Behring Combination in October 1997. Mr. Brightfelt is also a member of the Board of Directors of Molecular Biosystems, Inc. in San Diego, CA. 19 Freidhelm Blobel, PhD, has more than twenty years of experience in the diagnostics industry with Boehringer Mannheim Corporation. In his most recent position with Boehringer Mannheim, he was Senior Vice President, Development, Manufacturing and Quality within the Patient Care Division. Dr. Blobel joined Dade Behring as Group President, Biology following the merger in October 1997. He was previously Chief Technology Officer and Head of Worldwide Product Supply and Technology of Behring. John Sullivan was formerly the President and CEO of Behring Diagnostics, Inc. and Head of Worldwide Business Development for Behring and subsequently became President, Syva following the Behring Combination. Mr. Sullivan has spent over 30 years in management and executive positions at United Carbon, Celanese Fibers, Inc. and Hoechst Celanese. Robert W. Kleinert, Jr. joined the Predecessor as a sales representative in 1974 and held various positions with the Predecessor in marketing, product management and business planning, including President of Clintec Nutrition Company, a joint venture created by Baxter and Nestle S.A., President of Baxter Diagnostics Europe, and President of MicroScan prior to becoming Executive Vice President in 1993. In this role he has been responsible for Hemostasis, Controls, Immunohemotology, Baxter Equipment and Burdick & Jackson. Additional duties have included the global regional sales organization of Europe, Japan, North America and worldwide field operations. Mr. Kleinert is currently responsible for U.S. sales and service. Marc N. Casper joined Dade Behring in January 1997 with responsibility for the international sales organization and international country operations. Prior to joining the Company, Mr. Casper was an Associate with Bain Capital and worked with the Company as a member of Bain Capital's Portfolio Management Group. Mr. Casper has also worked as a strategy consultant at Bain & Company where he held several positions of increasing responsibility. Following the merger, Mr. Casper has responsibility for the regional sales organizations and country operations in Europe, Asia and Intercontinental, which includes Canada, Latin America and South America. Thomas E. Hill, PhD, served as the Predecessor's Senior Vice President of Human Resources since 1991. Dr. Hill joined American Hospital Supply in 1980, and has held a number of positions within the human resource function including Personnel Planning Consultant, Manager of Personnel Research, Director of Human Resource Information Systems, Director of Corporate Compensation, Director of Compensation and Benefits for the Global Businesses and Vice President of Corporate Human Resource Planning and Staffing for Baxter. Scott T. Garrett joined Baxter in 1975 as a product development engineer, and has served in a number of research, strategic planning and management positions since that time. Mr. Garrett was named Vice President and General Manager of the Predecessor's European operations in 1987, and was named President of the Paramax Systems Division in 1989. Mr. Garrett became Executive Vice President of the Predecessor 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. Mark E. Nunnelly has been a Managing Director of Bain Capital since May, 1993, and a general partner of Bain Venture Capital since 1990. Prior to joining Bain Venture Capital, Mr. Nunnelly was a partner at Bain & Company where he managed several relationships in the manufacturing sector and he also served with Procter and Gamble in product management. He serves on the board of several companies including Corporate Software and Technology, The Learning Company, SR Research and DoubleClick. Stephen G. Pagliuca has been a Managing Director of Bain Capital since May 1993, and a general partner of Bain Venture Capital since 1989. Prior to joining Bain Venture Capital, Mr. Pagliuca was a partner at Bain & Company, where he worked extensively in the health care arena. He also worked as a senior accountant and international tax specialist for Peat Marwick Mitchell & Company in the Netherlands. He serves on the board of several companies including Gartner Group, Coram Healthcare, Physio Control, Wesley Jessen and Vivra Specialty Partners. 20 Adam Kirsch has been a Managing Director of Bain Capital since May 1993 and a general partner of Bain Venture Capital since 1990. Mr. Kirsch joined Bain Venture Capital in 1985 as an associate and prior to joining Bain Venture Capital, Mr. Kirsch was a consultant at Bain & Company, where he worked in mergers and acquisitions. He serves on the board of several companies including Therma Wave, Wessley Jessen, Stage Stores and Brookstone. John P. Connaughton has been a Managing Director of Bain Capital since 1997 and a member of the firm since 1989. Prior to joining Bain Capital in 1989, 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. Joseph H. 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 currently serves as a director of Applied Analytical Industries, Inc., Biofield Corporation and several privately-held companies. 21 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ----------------------- ------------------------------------------ NAME AND PRINCIPAL OPTIONS(3)/ LTIP ALL OTHER POSITION YEAR SALARY($) BONUS($) SAR(#) PAYMENTS($)(4) COMPENSATION($) ------------------ ---- --------- -------- ----------- -------------- --------------- Steven W. Barnes........ 1997 -0- -0- 180,000 President, Chief Executive Officer and Director (1) Scott T. Garrett........ 1997 377,648 188,800 44,776 3,200 (5) Director (2) 15,900 (6) 11,648 (7) 250,000(10) 1996 310,602 55,650 -0- 4,500 (5) 13,368 (6) 9,900 (7) 1995 297,480 285,000 129,000 4,500 (5) 9,750 (6) James W.P. Reid- Anderson............... 1997 330,000 178,500 49,850 5,755 (6) Chief Administrative Officer, 29,230 (8) Chief Financial Officer and Director 1996 116,769 148,500 69,000 Robert W. Kleinert...... 1997 240,824 85,000 17,910 3,200 (5) Executive Vice President 8,973 (6) 7,756 (7) 1996 202,862 32,680 -0- 3,200 (5) 6,914 (6) 6,300 (7) 1995 198,707 177,600 29,230 11,870 3,200 (5) 3,586 (6) Robert W. Brightfelt.... 1997 233,538 95,000 17,910 3,200 (5) Group President, 2,881 (6) Chemistry and Director 18,076 (9) 1996 134,700 30,933 42,000 Marc N. Casper.......... 1997 190,903 107,500 55,000 9,969 (7) Executive Vice President
- -------- 1. Effective October 1997, Mr. Barnes became CEO. Mr. Barnes' current annual base salary is $350,000. Mr. Barnes' salary and bonus were paid by Bain Capital through December 31, 1997. 2. Mr. Garrett resigned as CEO in October 1997. 3. The options were granted under Holdings' Executive Management Equity Plan. 4. The Predecessor issued value rights under the Baxter Diagnostics Inc. Long-Term Incentive Plan. No new Value Rights were issued in 1996 or 1995. Dade Behring's Board of Directors approved a set price of $2.50 per value right to be paid to holders of existing Value Rights in two equal installments if Dade Behring met EBITDA targets in 1995 and 1996. Dade Behring met its 1995 EBITDA targets and, as a result, half of the value rights were paid out. The EBITDA target was not reached in 1996 and, accordingly, all value rights expired as of December 31, 1996. 5. Reflects amounts contributed by Dade Behring for the benefit of the named executive officers under the Savings Investment Plan. 22 6. Reflects amounts contributed by Dade Behring for the benefit of the named executive officers under the Deferred Compensation Plan. 7. Reflects amounts contributed by the Company for an automobile allowance. 8. Reflects amounts provided by the Company for home leave allowance. 9. Reflects payment by the Company and reimbursed by DuPont for vacation accrued under the DuPont vacation bank policy. 10. Mr. Garrett resigned as CEO effective October 31, 1997. As part of a separation agreement, he received a payment of $250,000 in November 1997. He will also receive $41,667 per month from January 1, 1998 through December 31, 1998, and $16,667 per month from January 1, 1999 to December 31, 1999.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION OF INDIVIDUAL GRANTS OPTION TERMS(1) ----------------------------------------------------------- ----------------------- % OF TOTAL OPTIONS NUMBER OF GRANTED SECURITIES TO EMPLOYEES EXERCISE OR UNDERLYING IN FISCAL BASE PRICE EXPIRATION NAME OPTIONS GRANTED(2) YEAR ($/SH) DATES 5% 10% - ---- ------------------ ------------ ----------- --------------- ----------- ----------- Steven W. Barnes........ 180,000 18.8% $16.00 October 1, 2008 $13,979,059 $23,965,234 Scott T. Garrett........ 22,388 18.6% $ 7.00 January 1, 2008 $ 1,940,176 $ 3,182,235 22,388 18.6% $16.00 January 1, 2008 $ 1,738,684 $ 2,980,743 James W.P. Reid- Anderson............... 14,925 12.4% $ 7.00 January 1, 2008 $ 1,293,422 $ 2,121,442 14,925 12.4% $16.00 January 1, 2008 $ 1,159,097 $ 1,987,117 20,000 2.1% $16.00 October 1, 2008 $ 1,553,229 $ 2,662,804 Robert W. Brightfelt.... 8,955 7.4% $ 7.00 January 1, 2008 $ 776,053 $ 1,272,865 8,955 7.4% $16.00 January 1, 2008 $ 695,458 $ 1,192,270 Robert W. Kleinert...... 8,955 7.4% $ 7.00 January 1, 2008 $ 776,053 $ 1,272,865 8,955 7.4% $16.00 January 1, 2008 $ 695,458 $ 1,192,270 Marc N. Casper.......... 20,000 23.1% $ 4.00 January 1, 2008 $ 1,793,229 $ 2,902,804 15,000 12.5% $ 7.00 January 1, 2008 $ 1,299,922 $ 2,132,103 15,000 12.5% $16.00 January 1, 2008 $ 1,164,922 $ 1,997,103 5,000 .4% $34.50 October 1, 2008 $ 295,807 $ 573,201
The following table sets forth information concerning the option grants by Holdings in 1997 to each of the named executive officers: - -------- 1. These amounts represent certain assumed rates of appreciation over a ten year period utilizing annual rates of appreciation of 5% and 10%, in accordance with rules of the Securities Exchange Commission. Holdings' Common Stock is not publicly traded. The assumed fair values of Holdings' Common Stock (as defined herein) and Class L Common (as defined herein) are $57.50/share and $107.00/share, respectively, the values determined by independent appraisal as of October 1, 1997. 2. All options were granted for shares of Holdings' Common Stock (as defined herein) pursuant to the Holdings' Executive Management Equity Plan. 3. The stock options expire earlier upon the termination of the employee. 23 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
COMPANY --------------------------- SHARES ACQUIRED VALUE NAME ON EXERCISE REALIZED(1) ---- --------------- ----------- Robert W. Brightfelt.......................... 3,600 $50,400
- -------- 1. Holdings' Common Stock is not publicly traded. The assumed fair values of Holdings Common Stock (as defined) as of the date of the exercise (May 28, 1997) was $18.00/share. PENSION PLAN BENEFITS Effective January 1, 1997, Dade Behring transitioned its pension plan from a final average pay to a cash balance plan design. Under the Dade Behring Cash Balance Plan (the Plan), 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. Individuals participating in the Plan as of December 31, 1996 will 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. Of the named executive officers, three participated in the Plan as of December 31, 1996. The following table sets forth anticipated annual pension plan benefits under the final average pay formula of the Plan. PENSION PLAN TABLE
YEARS OF PLAN PARTICIPATION -------------------------------------------- REMUNERATION 15 20 25 30 35 - ------------ -------- -------- -------- -------- -------- 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
The above estimated pension benefit amounts assume that benefit payments begin at age 65 under a single life 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 which 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 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. 24 As of January 1, 1998, the eligible named executive officers' years of plan participation and Final Average Pay for purposes of calculating pension benefits payable under the Plan are as follows: Mr. Garrett, 21 years and $433,299, and Mr. Kleinert, 23 years and $273,512, and Mr. Brightfelt, 30 years and $283,756. Mr. Barnes, Mr. Reid-Anderson, and Mr. Casper did not participate in the Plan as of December 31, 1996. CASH BALANCE PLAN DESIGN Employees with an accrued benefit in the Plan as of December 31, 1996 were credited with an opening cash balance based on the lump-sum present 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:
POINTS FOR AGE PLUS SERVICE TRANSITIONAL BENEFIT SUPPLEMENT --------------------------- ------------------------------- less than 35............................ 110% 35 to 44................................ 115% 45 to 54................................ 120% 55 or more.............................. 125%
As of January 1, 1997, the named executive officers had transitional benefit supplements as follows: Mr. Barnes, $0, Mr. Garrett, $94,961, Mr. Reid- Anderson, $0, Mr. Kleinert, $54,197, Mr. Brightfelt, $18,722, and Mr. Casper, $0. These transitional benefits include supplements to the qualified and non- qualified pension plans. The following table sets forth the annual credits posted to Cash Balance accounts:
POINTS FOR AGE PLUS SERVICE AS OF COMPANY CREDITS DECEMBER 31 OF THE PREVIOUS PLAN YEAR AS A PERCENT OF PAY ------------------------------------- ------------------- 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%
As of December 31, 1997, the named executive officers had company and interest credits as follows: Mr. Barnes, $0, Mr. Garrett, $67,273, Mr. Reid- Anderson, $5,731, Mr. Kleinert, $40,565, Mr. Brightfelt, $32,509, and Mr. Casper, $0. These credits were posted to the qualified and non-qualified pension plans. 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. 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"), 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 are entitled to one vote per share on all matters to be voted upon by the stockholders of Holdings, including the election of directors. Bain Capital and its related investors, GS 25 Capital and its related investors, and Hoechst A.G. own 36.1%, 18.0%, and 31.4%, respectively, of the Common Stock and 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 Hoechst A.G. 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. In 1995, 1996 and 1997, certain members of Dade Behring's management acquired voting common stock of Holdings, and members of Dade Behring's management are eligible to receive additional common stock of Holdings in part based upon the operating performance of Dade Behring. The following tables set forth certain information as of December 31, 1997 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
COMMON STOCK (VOTING) --------------------------------------- PERCENTAGE NAME AND ADDRESS OF BENEFICIAL NUMBER OF OF PERCENTAGE OF OWNER SHARES CLASS (1) CLASS-UNDILUTED (2) - ------------------------------ --------- ---------- ------------------ Bain Capital Entities(3) 5,960,000 36.1% 40.7% c/o Bain Capital Two Copley Place Boston, Massachusetts 02116 The Goldman Sachs Group, L.P. and 2,980,000 18.0% 20.4% related investors(4) 85 Broad Street New York, New York 10004 Hoechst A.G. 5,188,609 31.4% 35.2% Bruningstrasse 50 D-65929 Frankfurt a. M. Germany
- -------- 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. Excludes warrant held by Hoechst A.G. to purchase 1,279,587 shares of voting Common Stock. 2. The percentages are based on ownership of outstanding shares as of December 31, 1997. 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"). 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. 26 SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
COMMON STOCK CLASS L COMMON STOCK (VOTING) (NON-VOTING) --------------------- -------------------------- PERCENTAGE NUMBER OF OF CLASS NUMBER OF PERCENTAGE OF NAME OF BENEFICIAL OWNER SHARES (1) (1) SHARES (1) CLASS (1) ------------------------ --------- ---------- ------------ ------------- Steven W. Barnes.............. 180,000 1.1% 0 0 Scott T. Garrett.............. 253,876 1.5% 8,900 0.6% James W.P. Reid-Anderson...... 122,450 0.7% 400 --% Robert W. Kleinert............ 92,410 0.6% 5,000 0.3% Robert W. Brightfelt.......... 85,110 0.5% 2,800 0.2% Marc N. Casper................ 66,250 0.4% 1,250 0.1% Mark E. Nunnelly (2).......... 5,960,000 36.1% 662,222.22 42.7% Stephen G. Pagliuca (2)....... 5,960,000 36.1% 662,222.22 42.7% Adam Kirsch (2)............... 5,960,000 36.1% 662,222.22 42.7% John P. Connaughton (2)....... 5,960,000 36.1% 662,222.22 42.7% Joseph H. Gleberman (3)....... 2,980,000 18.1% 331,111.11 21.3% All executive officers and directors of Dade Behring as a group (11 people).......... 9,740,096 65.9% 1,011,683.33 65.1%
- -------- 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. All shares shown are held by the Bain Capital Entities. Messrs. Kirsch, 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. Kirsch, Nunnelly, Connaughton and Pagliuca may be deemed to share voting and dispositive power as to the shares held by the Bain Capital Entities. Messrs. Kirsch, Nunnelly, Connaughton and Pagliuca disclaim beneficial ownership of such shares. 3. 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 the Goldman Sachs Group, L.P. ("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. The Company has a Management Services Agreement with Bain Capital and Goldman, Sachs & Co., an affiliate of GS Capital pursuant to which the Company will pay an aggregate annual fee of $3.0 million plus their respective out-of- pocket expenses to Bain Capital and Goldman, Sachs & Co., subject to compliance with the terms of the Indenture. Pursuant to the Management Services Agreements, Bain Capital and Goldman, Sachs & Co. have provided, and continue to provide, management consulting in the areas of corporate finance, corporate strategy, investment analysis, market research and business development, advisory services and support, negotiation and analysis of financial alternatives, acquisitions and dispositions and other services. In connection with the Behring Combination, the Company paid Bain Capital, Goldman Sachs & Co. and Hoechst at closing, in aggregate, a cash financial advisory fee of $18.8 million, plus their respective out-of-pocket expenses. Dade Behring believes that the fees paid for the professional services rendered are at least as favorable to the Company as those which could be negotiated with an unaffiliated third party. STOCKHOLDERS AGREEMENT On December 20, 1994, Holdings, 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 a Stockholders Agreement (the 27 "Stockholders Agreement") whereby prior to the fifth anniversary of the date of the Stockholders Agreement, if Holdings requires certain services of an investment banking firm, Holdings agrees to retain Goldman, Sachs & Co. to provide such services unless Holdings' Board of Directors determines that the retention of another investment banking firm would provide a material additional benefit to Holdings. On October 31, 1997, Holdings, Hoechst, 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 SERVICES AGREEMENT Pursuant to Transition Services Agreements dated September 30, 1997, Hoechst provides 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 to Hoechst related to this agreement for the year ended December 31, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a 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. (i) On October 20, 1997, the Company filed a Current Report on Form 8-K providing information with respect to Diagnostics Holding, Inc.'s acquisition of the stock of various subsidiaries of Hoechst A.G. and certain of its affiliates. (ii) On December 16, 1997, the Company filed an Amendment No. 1 to its Current Report on Form 8-K (which was originally filed on October 20, 1997) providing Financial Statements and Pro Forma Financial Information related to Diagnostics Holding, Inc.'s acquisition of the stock of various subsidiaries of Hoechst A.G. and certain of its affiliates. (iii) On December 18, 1997, the Company filed an Amendment No. 2 to its Current Report on Form 8-K (which was originally filed on October 20, 1997) providing corrected Financial Statements and Pro Forma Financial Information related to Diagnostics Holding, Inc.'s acquisition of the stock of various subsidiaries of Hoechst A.G. and certain of its affiliates. 28 DADE BEHRING INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE ---- Report of Independent Accountants......................................... F-2 Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997. F-3 Consolidated Statements of Operations for the three years ended December 31, 1997................................................................. F-4 Consolidated Statements of Cash Flows for the three years ended December 31, 1997................................................................. F-5 Consolidated Statements of Changes in Stockholder's Equity (Deficit) for the three years ended December 31, 1997.................................. F-6 Notes to Consolidated Financial Statements................................ F-7 Financial Statements Schedule (Schedule II)............................... F-29
F-1 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, 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards 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. Price Waterhouse LLP Chicago, Illinois March 25, 1998 F-2 DADE BEHRING INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS, EXCEPT SHARE-RELATED DATA)
DECEMBER 31, DECEMBER 31, ASSETS 1996 1997 ------ ------------ ------------ Current assets: Cash and cash equivalents.......................... $ -- $ 20.5 Restricted cash.................................... -- 3.7 Accounts receivable, net........................... 183.8 359.6 Inventories........................................ 155.0 272.5 Prepaid expenses and other current assets.......... 9.6 11.9 Deferred income taxes.............................. 45.5 97.0 -------- -------- Total current assets............................. 393.9 765.2 -------- -------- Property, plant and equipment, net................... 187.0 214.5 Debt issuance costs, net............................. 42.4 37.0 Goodwill, net........................................ 135.3 135.6 Deferred income taxes................................ 171.9 286.1 Other assets......................................... 74.6 72.0 -------- -------- Total assets..................................... $1,005.1 $1,510.4 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) ---------------------------------------------- Current liabilities: Current portion of long-term debt.................. $ 3.4 $ 3.7 Short-term debt.................................... 15.8 54.4 Accounts payable................................... 56.5 89.2 Accrued liabilities................................ 146.5 283.9 -------- -------- Total current liabilities........................ 222.2 431.2 -------- -------- Long-term debt, less current portion................. 436.6 416.9 Senior subordinated notes............................ 350.0 350.0 Other liabilities.................................... 21.3 108.2 -------- -------- Total liabilities................................ 1,030.1 1,306.3 -------- -------- Commitments and contingencies (Note 18).............. -- -- Stockholder's equity (deficit): Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding................ -- -- Additional paid-in capital......................... 87.2 468.4 Notes receivable on capital contribution........... -- (0.7) Accumulated deficit................................ (110.3) (252.9) Unrealized gain (loss) on marketable equity securities........................................ 0.1 (0.1) Cumulative translation adjustment.................. (2.0) (10.6) -------- -------- Total stockholder's equity (deficit)............. (25.0) 204.1 -------- -------- Total liabilities and stockholder's equity (deficit)....................................... $1,005.1 $1,510.4 ======== ========
See accompanying notes to consolidated financial statements. F-3 DADE BEHRING INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31, ------------------------ 1995 1996 1997 ------ ------- ------- Net sales............................................ $614.3 $ 795.8 $ 980.5 ------ ------- ------- Operating costs and expenses: Cost of goods sold................................. 368.6 444.1 654.1 Marketing and administrative expenses.............. 171.1 255.5 366.8 Research and development expenses.................. 26.5 138.0 61.7 Goodwill amortization expense...................... (0.4) 3.3 5.4 Restructuring expenses............................. -- 15.0 40.1 ------ ------- ------- Income (loss) from operations........................ 48.5 (60.1) (147.6) Other income (expense): Interest expense, net.............................. (30.8) (65.6) (87.8) Other.............................................. 2.2 -- 9.0 ------ ------- ------- Income (loss) before income taxes.................... 19.9 (125.7) (226.4) Income tax expense (benefit)......................... 7.2 (45.4) (83.8) ------ ------- ------- Income (loss) before extraordinary items............. 12.7 (80.3) (142.6) Extraordinary items (net of tax benefit of $14.7): Write-off of deferred financing fees............... -- (11.4) -- Premium on purchase of 13% senior subordinated notes............................................. -- (13.6) -- ------ ------- ------- Net income (loss).................................... $ 12.7 $(105.3) $(142.6) ====== ======= =======
See accompanying notes to consolidated financial statements. F-4 DADE BEHRING INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ------- ------- ------- (DOLLARS IN MILLIONS) OPERATING ACTIVITIES: Net income (loss)................................... $ 12.7 $(105.3) $(142.6) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Write-off of in-process research and development... -- 98.1 1.1 Depreciation and amortization expense.............. 7.7 44.1 56.6 Stock-based compensation expense................... -- -- 11.4 Other non-cash charges............................. -- -- 37.1 Write-off of deferred financing fees............... -- 18.1 -- Amortization of inventory step-up.................. 40.4 24.8 171.4 Restructuring expenses............................. -- 15.0 40.1 Non-cash write-off of excess spare parts........... -- 9.5 -- Loss on sale of "Net asset held for sale".......... -- 2.8 -- Loss on write-down of marketable equity securities........................................ -- 2.7 -- Premium on purchase of 13% senior subordinated notes............................................. -- 21.6 -- Deferred income taxes.............................. 1.6 (48.2) (86.1) Changes in balance sheet items: -- Accounts receivable, net......................... (76.9) 1.0 (3.3) Inventories...................................... 0.8 (6.9) (6.3) Accounts payable................................. 32.2 1.5 (11.0) Accrued liabilities.............................. 5.0 (34.2) (66.0) Other............................................ (5.5) (11.8) 53.8 ------- ------- ------- Net cash flow provided by operating activities. 18.0 32.8 56.2 ------- ------- ------- INVESTING ACTIVITIES: Acquisitions, net of acquired cash.................. -- (522.5) (0.9) Capital expenditures................................ (35.3) (57.3) (68.4) Proceeds from sale of fixed assets.................. (2.0) -- 0.7 Proceeds from Baxter for purchase price adjustments. 8.0 9.7 -- ------- ------- ------- Net cash flow utilized by investing activities. (29.3) (570.1) (68.6) ------- ------- ------- FINANCING ACTIVITIES: Proceeds from sale of "Net assets held for sale".... 16.5 54.8 -- Proceeds from issuance of short-term debt, net of repayments......................................... 2.1 15.7 (0.5) Cash dividend to parent for Behring Combination..... -- -- (34.8) Cash dividend to parent for redemption of parent's preferred stock from Baxter........................ (15.8) -- -- Proceeds from revolving credit facility............. 23.0 205.0 259.4 Repayment of borrowings under revolving credit facility........................................... (23.0) (205.0) (259.4) Proceeds from issuance of 11 1/8% senior subordinated notes................................. -- 350.0 -- Repayment of borrowings and premium paid on 13% senior subordinated notes.......................... -- (141.6) -- Proceeds from issuance of long-term loans........... 35.0 460.0 50.0 Repayment of borrowings under long-term loans....... (21.5) (183.5) (69.4) Contribution from parent............................ 1.8 0.4 88.4 Debt issuance costs................................. (1.7) (46.2) (0.4) ------- ------- ------- Net cash flow provided by financing activities. 16.4 509.6 33.3 ------- ------- ------- Effect of foreign exchange rates on cash............ 0.4 (0.2) (0.4) ------- ------- ------- Net increase (decrease) in cash and cash equivalents................................... 5.5 (27.9) 20.5 CASH AND CASH EQUIVALENTS: Beginning of Period................................. 22.4 27.9 -- ------- ------- ------- End of Period....................................... $ 27.9 $ -- $ 20.5 ======= ======= ======= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest............ $ 25.0 $ 62.0 $ 92.2 ======= ======= ======= Cash paid during the period for income taxes........ $ 7.7 $ 2.4 $ 7.8 ======= ======= ======= Installment note to Baxter paid from restricted cash............................................... $(200.0) -- -- ======= ======= ======= Non Cash Supplemental Disclosure of Cash Flow Information: Acquired company contributed by parent.............. -- -- $ 316.0 ======= ======= =======
See accompanying notes to consolidated financial statements. F-5 DADE BEHRING INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT) (DOLLARS IN MILLIONS)
UNREALIZED NOTES GAIN (LOSS) TOTAL COMMON STOCK ADDITIONAL RECEIVABLE ON MARKETABLE CUMULATIVE STOCKHOLDER'S ------------- PAID-IN ON CAPITAL ACCUMULATED EQUITY TRANSLATION EQUITY SHARES AMOUNT CAPITAL CONTRIBUTION DEFICIT SECURITIES ADJUSTMENT (DEFICIT) ------ ------ ---------- ------------ ----------- ------------- ----------- ------------- Balance at December 31, 1994.................... 1,000 $-- $ 85.0 $ -- $ (1.9) $ -- $ -- $ 83.1 ----- ---- ------ ----- ------- ----- ------ ------- Net income.............. 12.7 12.7 Capital contribution from parent............. 2.0 2.0 Notes receivable on capital contribution.... (0.2) (0.2) Cash dividend to parent on common stock......... (15.8) (15.8) Unrealized loss on marketable equity securities.............. (1.1) (1.1) Cumulative translation adjustment.............. 0.5 0.5 ----- ---- ------ ----- ------- ----- ------ ------- Balance at December 31, 1995.................... 1,000 -- 87.0 (0.2) (5.0) (1.1) 0.5 81.2 ----- ---- ------ ----- ------- ----- ------ ------- Net loss................ (105.3) (105.3) Forgiveness of shareholder debt........ 0.1 0.1 Payments on notes receivable.............. 0.1 0.1 Capital contribution from parent............. 0.4 0.4 Recognition of other than temporary impairment of marketable equity securities....... 1.1 1.1 Unrealized gain on marketable equity securities.............. 0.1 0.1 Cash dividend to parent on common stock......... (0.2) (0.2) Cumulative translation adjustment.............. (2.5) (2.5) ----- ---- ------ ----- ------- ----- ------ ------- Balance at December 31, 1996.................... 1,000 -- 87.2 -- (110.3) 0.1 (2.0) (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) Stock-based compensation............ 11.4 11.4 Unrealized loss on marketable equity securities.............. (0.2) (0.2) Cumulative translation adjustment.............. (8.6) (8.6) ----- ---- ------ ----- ------- ----- ------ ------- Balance at December 31, 1997.................... 1,000 $-- $468.4 $(0.7) $(252.9) $(0.1) $(10.6) $ 204.1 ===== ==== ====== ===== ======= ===== ====== =======
See accompanying notes to consolidated financial statements. F-6 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Dade Behring Inc., formerly Dade International Inc., as successor by merger to Dade Acquisition, Inc., (the "Company") was incorporated in Delaware in 1994 to effect the acquisition (the "Dade Acquisition") of the in vitro diagnostics products manufacturing and services businesses and net assets of Baxter Diagnostics, Inc. and certain of its affiliates (the"Predecessor"), from Baxter International Inc. and its affiliates ("Baxter"). The Company develops, manufactures and markets in vitro diagnostic equipment, reagents, consumable supplies and services worldwide. The Company is a wholly-owned subsidiary of Dade Behring Holdings, Inc., formerly Diagnostics Holding Inc. ("Holdings"). Bain Capital, Inc. ("Bain Capital"), GS Capital Partners, L.P., an affiliate of the Goldman Sachs Group, L.P. ("GS Capital"), their respective related investors, Hoechst A.G. and certain of its affiliates ("Hoechst") and the management of the Company own substantially all of the capital stock of Holdings at December 31, 1997. The Dade Acquisition was completed on December 20, 1994, effective as of December 16, 1994, under the terms of the purchase agreement between Baxter and Holdings (Note 6). The financial statements present the consolidated accounts of the Company. 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 ("DuPont") (Note 5). The results of operations of Dade Chemistry and the allocation of purchase price to the acquired assets and assumed liabilities, as determined in accordance with the purchase method of accounting, are included in the Company's consolidated financial statements since the effective date of the Chemistry Acquisition. Effective October 1, 1997, Holdings acquired the stock and beneficial interest (the "Stock") of various subsidiaries of Hoechst that operate the worldwide business of the research, development, manufacture, marketing, sale, distribution and service of in vitro diagnostic equipment, reagents, consumable supplies and services ("Behring") (Note 4). The Stock was contributed to the Company (the "Behring Combination") effective October 1, 1997. The results of operations of Behring and the preliminary allocation of purchase price to the acquired assets and assumed liabilities, as determined in accordance with the purchase method of accounting, are included in the Company's consolidated financial statements since the effective date of the Behring Combination. 2. CHANGE IN NON-U.S. REPORTING PERIOD Prior to 1996, the Company's non-U.S. operations reported financial results on a fiscal year ending November 30. For 1995, results of non-U.S. operations for the period from December 17, 1994 through November 30, 1995 are included in the Company's 1995 Consolidated Statement of Operations. The omission of one-half month of non-U.S. Operations from the Company's 1995 consolidated results of operations are not material to the consolidated financial statements. Effective January 1, 1996, the Company's non-U.S. operations changed to a calendar year-end. As a consequence, the Company's results of operations for 1996 include 13 months of non-U.S. operations' results. The Company has designated the month of December 1995 as the "lag month" for purposes of comparability to future periods. Non-U.S. operations during the lag month reported net sales of approximately $12.3 million, thus increasing consolidated net sales by this amount for the year ended December 31, 1996. The impact on net income was not significant. F-7 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. 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 unless otherwise noted. 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. 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 include $0.2 million and $10.1 million invested in short-term money market investments at December 31, 1996 and 1997, respectively. Accounts Receivable Accounts receivable are net of bad debt reserves of $9.6 million and $27.7 million at December 31, 1996 and 1997, 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 4), $1.1 million of the purchase price was allocated to acquired in-process research and development for projects which have no alternative future use. Such costs were expensed immediately following consumation of the Behring Combination. In conjunction with the Chemistry Acquisition in 1996 (Note 5), $98.1 million of the purchase price was allocated to acquired in-process research and development projects which have no alternative future. Accordingly, such costs were expensed immediately following the consummation of the Chemistry Acquisition. F-8 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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: Buildings.................................................. 15 to 40 years Machinery and equipment.................................... 3 to 15 years Equipment placed with customers............................ 3 to 8 years
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 the Chemistry Acquisition. Goodwill at December 31, 1996 aggregated $135.3 million, net of accumulated amortization of $3.7 million, based upon the Chemistry Acquisition purchase price allocation. Goodwill at December 31, 1997 aggregated $135.6 million, net of $9.4 million of accumulated amortization, and reflects the finalization of the Chemistry Acquisition purchase price allocation. Goodwill is being amortized using the straight-line method over 25 years. The carrying value of goodwill and other long-lived assets are 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. Patents and Trademarks Patents and trademarks are being amortized over their legal or estimated useful lives, whichever is shorter (generally not exceeding 17 years). Patents and trademarks totaled $30.0 million and $26.8 million, net of accumulated amortization of $2.1 million and $5.3 million, at December 31, 1996 and 1997, respectively. Debt Issuance Costs Debt issuance costs, which are being amortized over the applicable terms of the Bank Credit Agreement (7 years weighted average) and 11 1/8% senior subordinated notes (10 years), totaled $42.4 million at December 31, 1996, net of accumulated amortization of $3.8 million and $37.0 million at December 31, 1997, net of accumulated amortization of $9.6 million. 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 all unremitted earnings of non-U.S. subsidiaries. The Company's operations are included in Holdings' consolidated United States federal and state income tax returns. F-9 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, except for highly inflationary economies, 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 these contracts are deferred and amortized to expense over the life of the contract. Gains and losses on forward contracts resulting from revaluations are recorded to expense. At the maturity of the forward contracts the currencies involved are exchanged based on the contracted exchange rate. At December 31, 1996 and December 31, 1997, deferred amounts relating to these contracts were not material to the consolidated financial statements, and 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):
DECEMBER 31, ------------ 1996 1997 ----- ------ Forward purchases............................................ $16.1 $ 79.0 Forward sales................................................ $32.5 $139.2
The Company also utilizes 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, 1996 and 1997. Premiums paid for the purchase of the caps are recorded to interest expense over the life of the caps. Amounts received, if any, are recorded as a reduction of interest expense over the related period. As of December 31, 1996 and 1997, capitalized amounts relating to the caps are not material to the consolidated financial statements. 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 which potentially subject the Company to concentration of credit risk consist principally of trade accounts receivable. A large percentage of U.S. accounts receivable was generated by 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. A number 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, 1996 and 1997, approximately $20.2 million or 22% and $59.9 million or 17%, 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. F-10 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Fair Value of Financial Instruments The carrying values of cash equivalents and other current assets and liabilities approximate fair value at December 31, 1996 and 1997 because of the short maturity of these instruments. The excess of the fair values of derivative financial instruments over carrying values aggregated $0.2 million and $1.7 million at December 31, 1996 and 1997, respectively, using year-end published exchange rates. The carrying value of the long-term debt of $436.6 million and $416.9 million at December 31, 1996 and 1997, 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 $379.8 and $390.3 million at December 31, 1996 and 1997, respectively, based on the trading value at that 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 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. Reclassifications Certain reclassifications have been made to prior period balances to conform to the current year presentation. 4. BEHRING COMBINATION Effective October 1, 1997, Holdings completed its acquisition of Behring from Hoechst. As consideration for the acquisition, Holdings issued equity securities to Hoechst providing Hoechst with a 32.5% interest in Holdings and paid $0.1 million to Hoechst at closing, which amounts are subject to adjustments based on changes in Net Assets (as defined in the Agreement and Plan of Contribution related to the acquisition) of Behring. The equity securities issued to Hoechst comprise 5,702,383 shares of Holdings' Common Stock and a warrant expiring October 1, 1999 to acquire 1,403,663 additional shares of Holdings' 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 a capital contribution of $403.7 million, representing the aforementioned appraised values and direct costs of the acquisition of $34.8 million. 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 preliminarily allocated to assets acquired and liabilities assumed ($293.4 million) 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 preliminary allocation of purchase price resulted in a prorata write-down of non-current assets, including in-process research and development projects. The estimated fair values are based on independent appraisals and management estimates, and are subject to adjustments upon resolution of certain preacquisition contingencies that may impact the value of certain assets acquired and liabilities assumed. The following represents the unaudited pro forma results of operations of the Company as if the Behring Combination had occurred on January 1, 1996 and January 1, 1997, respectively, after giving effect to the F-11 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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):
PRO FORMA YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) Net sales......................................... $1,449.4 $1,412.1 ======== ======== Income (loss) from operations..................... $ (186.5) $ (109.4) ======== ======== Loss before extraordinary items................... $ (163.9) $ (116.9) ======== ======== Net loss.......................................... $ (188.9) $ (116.9) ======== ========
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, 1996 and January 1, 1997 and are not intended to be a projection of future results or trends. Income (loss) from operations, includes the following significant items:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) Write-off of in-process research and development.. $ 99.2 $ 1.1 Write-off of inventory step-up.................... 196.2 171.4 Restructuring costs............................... 55.5 51.1 Stock-based compensation expense.................. -- 11.4 Behring transaction related employee expenses..... -- 13.9 International lag month........................... (2.4) -- Non-cash charge for excess spare parts............ 9.5 -- Other charges..................................... -- 33.5 ------- ------- 358.0 282.4 Pro forma income (loss) from operations, as above.......................................... (186.5) (109.4) ------- ------- $ 171.5 $ 173.0 ======= =======
The pro forma results of operations excludes the $9.0 million of other income recorded in 1997 and includes incremental and duplicative expenses associated with the development of stand-alone infrastructure in the areas of information systems, finance and human resources as the Company prepares for the termination of the transition service agreements with Baxter, DuPont and Hoechst. Additionally, the Company was adversely impacted by foreign currency exchange rates during 1997. Moreover, the synergistic savings that are expected to be realized as a result of the Behring Combination are not reflected in the unaudited pro forma results presented above. 5. 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. F-12 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Since the purchase price exceeded the fair market value of the net assets acquired, the residual, aggregating $145.0 million, was recorded as goodwill. The estimated fair values, which were finalized during 1997, are based on independent appraisals, management estimates and arms-length negotiations with DuPont. The summary of assets acquired, liabilities assumed and the purchase price paid is as follows (in millions): Cash consideration................................................ $504.1 Costs of acquisition.............................................. 19.3 ------ 523.4 Liabilities assumed............................................... 62.5 ------ Costs of assets acquired.......................................... $585.9 ======
The Company's allocation of the Dade Chemistry purchase price includes $98.1 million of costs attributed to in-process research and development projects which have no alternative future use. Accordingly, such costs were expensed upon the consummation of the Chemistry Acquisition. During the fourth quarter of 1996, the Company recorded a non-cash charge of $9.5 million to cost of goods sold, to provide for excess spare parts for the Paramax product line. This non-cash charge, which was a direct result of the designation of the Paramax product line as non-core due to the Chemistry Acquisition, appropriately relates to the second quarter of 1996. The following represents the unaudited pro forma results of operations of the Company as if the Chemistry Acquisition had occurred on January 1, 1995 and January 1, 1996, respectively, after giving effect to the following adjustments: write-off of in-process research and development, write-off of inventory step-up, increased depreciation of property, plant and equipment, increased amortization of intangibles, increased amortization of goodwill, increased interest expense on acquisition debt, refinancing charges, and related income tax effects of these adjustments (in millions):
PRO FORMA YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) Net sales......................................... $ 959.0 $ 910.6 ======= ======= Loss before extraordinary items................... $ (89.2) $ (83.6) ======= ======= Net loss.......................................... $(114.2) $(108.6) ======= =======
The unaudited pro forma results of operations presented above are not necessarily indicative of the results that would have been obtained if the Chemistry Acquisition had actually occurred on January 1, 1995 and January 1, 1996 and are not intended to be a projection of future results or trends. The decline in net sales for the year ended December 31, 1996 is primarily due to the rationalization of overlapping product lines and product repositioning following the integration of Dade Chemistry. The losses for both periods include a $98.1 million charge related to the write-off of in-process research and development projects which have no alternative future use and the $24.8 million write-off of inventory step-up. In addition, results for 1996 include $15.0 million of restructuring costs, a $9.5 million non-cash charge for excess spare parts as well as incremental and duplicative expenses associated with the development of stand-alone infrastructure in the areas of information systems, finance and human resources as the Company prepared for the termination of the transition service agreements with Baxter and DuPont. Moreover, the synergistic savings that are expected to be realized as a result of the Chemistry Acquisition and the adjustment for the differences in reporting periods for the Company's non-U.S. operations are not reflected in the unaudited pro forma results presented above. F-13 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. DADE ACQUISITION Effective December 16, 1994, the Company, in separate transactions, acquired certain net assets and businesses of the Predecessor, including the stock of various non-U.S subsidiaries. The Dade Acquisition was recorded in accordance with the purchase method of accounting. Accordingly, the purchase price plus direct costs of the Dade Acquisition were allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The estimated fair values were based on independent appraisals, management estimates, and arms-length negotiations with Baxter. Since the estimated fair values of the net assets acquired significantly exceeded total acquisition cost, the Company's non-current assets and in-process research and development projects were reduced to zero and the residual aggregating $6.1 million was recorded as negative goodwill. A summary of assets acquired, liabilities assumed and the purchase price paid is as follows (in millions): Cash consideration................................................ $ 65.9 Installment note payable to Baxter................................ 200.0 Preferred stock of Holdings issued to Baxter (Note 14)............ 40.0 Costs of acquisition.............................................. 8.3 Preliminary purchase price adjustment............................. (3.7) ------ 310.5 Liabilities assumed............................................... 133.4 ------ Cost of assets acquired........................................... $443.9 ======
The Dade Acquisition was financed by the issuance of $45.0 million of Holdings' common stock, $150.0 million of bank debt, $120.0 million of senior subordinated debt, and $40.0 million of Holdings' preferred stock. Of the $270.0 million of debt proceeds, $22.0 million was used for debt issuance costs and approximately $25.0 million was used for working capital purposes. The installment note payable to Baxter was paid in full plus accrued interest on January 6, 1995 with restricted cash. In addition to the $3.7 million preliminary purchase price adjustment and in accordance with provisions of the Purchase and Sale Agreement, the Company had submitted a reimbursement request to Baxter for approximately $16.4 million of "Excluded General Liabilities" related to recorded pre-Dade Acquisition period "Taxes" and "Employee Benefits" obligations, as defined, which were paid on Baxter's behalf by the Company. The Company received a substantial portion of the estimated amounts due from Baxter, including final receipt in January 1996 from Baxter of $9.7 million. The negotiated amount of the final purchase price that was not received was charged to negative goodwill in the finalization of acquisition accounting. 7. INVENTORIES Inventories consist of the following (in millions):
DECEMBER 31, ------------- 1996 1997 ------ ------ Raw materials............................................... $ 33.1 $ 59.5 Work-in-process............................................. 39.9 64.0 Finished products........................................... 82.0 149.0 ------ ------ Total inventories........................................... $155.0 $272.5 ====== ======
In connection with the Dade Acquisition (Note 6), the Chemistry Acquisition (Note 5) and the Behring Combination (Note 4), which were each recorded in accordance with the purchase method of accounting, the Company's inventories were written-up to fair value by $46.0 million, $24.8 million and $171.4 million, respectively. Of the $46.0 million Dade Acquisition write-up, $40.4 million was charged to cost of goods sold F-14 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) during the period January 1, 1995 through March 31, 1995. The $24.8 million Chemistry Acquisition write-up was charged to cost of goods sold during the second quarter of 1996. In the fourth quarter of 1997, the $171.4 million write-up of inventory relating to the Behring Combination was charged to cost of goods sold. 8. NET ASSETS HELD FOR SALE The Predecessor operated two businesses (Burdick & Jackson and Bartels) which, along with certain excess land and warehouse facilities at another location, were identified at the date of the Dade Acquisition (Note 6) as operations and assets to be sold. In allocating acquisition cost related to the Dade Acquisition, the Company recorded "Net assets held for sale" which represented the estimated proceeds to be received from the sale of these operations and the excess land and warehouse facilities plus expected operating cash flow during the holding period, offset by interest expense on bank debt to be repaid with the estimated sales proceeds. Interest expense allocated to net assets held for sale aggregated $6.1 million for the year ended December 31, 1995. During 1995, Bartels was sold for gross proceeds of $16.5 million. The excess of the actual net proceeds over the Bartels carrying value at the date of its sale resulted in an adjustment and reallocation of the acquisition cost of the Company. The excess land facilities were sold during the first quarter of 1996 for the expected net proceeds of $10.8 million. Burdick & Jackson was sold during the fourth quarter of 1996 for cash proceeds of $44.0 million which resulted in a pre-tax loss of $2.8 million. 9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following (in millions):
DECEMBER 31, -------------- 1996 1997 ------ ------ Land...................................................... $ 5.7 $ 7.0 Buildings and leasehold improvements...................... 36.0 60.1 Machinery and equipment................................... 95.2 402.5 Equipment placed with customers........................... 43.8 82.9 Construction in progress.................................. 38.7 26.5 ------ ------ Total property, plant and equipment, at cost.............. 219.4 579.0 Accumulated depreciation and amortization................. (32.4) (364.5) ------ ------ Net property, plant and equipment..................... $187.0 $214.5 ====== ======
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 $22.0 million and $46.4 million at December 31, 1996 and 1997, respectively. Management believes the carrying value of this equipment is recoverable from the revenues anticipated from future reagent sales. 10. RESTRUCTURING In connection with the Behring Combination, the Company recorded a $40.1 million restructuring charge and allocated $77.7 million of the Behring Combination purchase price for a restructuring plan to consolidate manufacturing and distribution operations and 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 consolidation and reorganization of the global sales, marketing and research and development organizations and elimination of administrative redundancies. The actions are expected to be substantially completed within two years. A total of approximately 1,600 employees have been identified F-15 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) for termination resulting from these initiatives; approximately 825 of which were employees of the Company prior to the Behring Combination. Of the $40.1 million restructuring charge, $26.4 million relates to employee severance and $13.0 million relates to lease terminations and facility dispositions with the remainder relating to other exit costs. The Behring Combination reserve includes $42.4 million related to employee severance and $29.2 million related to facility exit costs with the remainder relating to other exit costs. As of December 31, 1997, 69 of the 825 identified Company employees described above have been severed, while 58 of the 775 identified Behring employees have been severed. During 1997, an aggregate of $3.7 million was paid for severance and $9.0 million was paid for exit costs. The reserve as of December 31, 1997 for these restructuring actions was $105.1 million. In conjunction with the Chemistry Acquisition, the Company recorded a $15.0 million restructuring charge and also allocated $15.0 million of the Chemistry Acquisition purchase price to provide for the costs of a restructuring plan designed to decrease operating costs, increase efficiencies and eliminate redundant field service operations. Restructuring actions, which were substantially complete within one year, included closing two production facilities, reorganizing the domestic field service function, streamlining operations in Canada and eliminating non-U.S. management and marketing redundancies. A total of 718 employees were identified for termination as part of these actions; 595 of which were employees of the Company prior to the Chemistry Acquisition. Of the $15.0 million restructuring charge, $10.6 million related to severance, with the balance relating to exit costs. Of the $15.0 million reserve established through the allocation of the Chemistry Acquisition purchase price, $8.9 million related to severance, $0.3 million related to relocation and the balance related to other exit costs. As of December 31, 1997, the restructuring program was substantially completed and remaining reserve amounts were not material. During 1996, an aggregate of $3.2 million was paid for severance and $5.8 million was paid for exit costs. At the time of the Dade Acquisition, the Company's management had identified a series of strategic restructuring actions for which it accrued an aggregate reserve of $21.0 million to cover severance actions ($10.8 million) and direct costs to exit certain facilities ($10.2 million) as part of a facilities and plant rationalization program. This overall plan was designed to improve the Company's future profitability. Restructuring actions included moving certain reagent production from Puerto Rico to Miami, Florida; consolidation and relocation of Paramax's manufacturing operations from Irvine, California; exiting an existing leased facility in Miami and moving the operations to owned facilities in Miami, Florida; streamlining the European sales force and exiting the Company's in-house printing and labeling functions in favor of third-party outsourcing. A total gross headcount reduction of 482 was identified as a part of these actions, consisting primarily of manufacturing and manufacturing support personnel at the affected operations and sales force personnel in Europe. The program was completed by December 1996 and all reserve amounts were expended. 11. ACCRUED LIABILITIES Accrued liabilities consist of the following (in millions):
DECEMBER 31, ------------- 1996 1997 ------ ------ Salaries, wages, commissions, withholdings and other pay- roll taxes............................................... $ 39.3 $ 64.7 Restructuring............................................. 21.0 55.6 Property, sales and use and other taxes................... 7.1 12.2 Deferred service contract revenue/warranty................ 19.5 16.7 Interest payable.......................................... 11.1 11.1 Vendor lease obligations.................................. -- 42.7 Other..................................................... 48.5 80.9 ------ ------ $146.5 $283.9 ====== ======
F-16 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. DEBT Long-term debt consists of the following (in millions):
DECEMBER 31, -------------- 1996 1997 ------ ------ Revolver.................................................. $ -- $ -- Bank Credit Agreement: A Term Loan............................................. 165.0 124.5 B Term Loan............................................. 90.0 104.8 C Term Loan............................................. 90.0 104.8 D Term Loan............................................. 95.0 86.5 11 1/8% Senior Subordinated Notes......................... 350.0 350.0 ------ ------ 790.0 770.6 Less current portion.................................... (3.4) (3.7) ------ ------ $786.6 $766.9 ====== ======
To fund the Chemistry Acquisition, the Company refinanced its existing indebtedness by entering into a new credit agreement with a number of banks ("Bank Credit Agreement") providing for borrowing up to $585.0 million, issued $350.0 million of 11 1/8% senior subordinated notes, and repurchased its $120.0 million 13% senior subordinated notes. The Company filed a registration statement on Form S-1 in October 1996 under the Securities Act of 1933, to register $350.0 million of its Series B 11 1/8% senior subordinated notes due 2006, which were exchanged for its then outstanding 11 1/8% senior subordinated notes due 2006. Bank Credit Agreement The Bank Credit Agreement consisted of $460.0 million in term loans and $125.0 million in a revolving credit facility ("Revolving Credit Facility"). The borrowings are guaranteed by Holdings and the Company's domestic subsidiaries, and are secured by substantially all the domestic assets and certain non-U.S. assets of the Company. At December 31, 1996, indebtedness under the Bank Credit Agreement bore interest at (i) the Base Rate (as defined) plus margins ranging from 1.75% to 2.75% or (ii) the Eurodollar Rate plus margins ranging from 2.75% to 3.75%. At December 31, 1996, the Company funded its borrowings using the Eurodollar Rate. The Eurodollar Rate in effect at December 31, 1996 was 5.94% in respect of A Term Loan, 5.56% in respect of B Term Loan, 5.56% in respect of C Term Loan, and 5.63% in respect of D Term Loan. In 1997, the Company amended the Bank Credit Agreement to consist of $460.0 million in term loans and $105.0 million in a Revolving Credit Facility. In addition, the interest on the Borrowings were amended to (i) the Base Rate (as defined) plus margins ranging from 1.25% to 2.00% or (ii) the Eurodollar Rate plus margins ranging from 2.25% to 3.00%. At December 31, 1997, the Company funded the borrowings using the Eurodollar Rate. 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 1998, the Company amended certain of the terms of the Bank Credit Agreement. Under the amended terms borrowings will bear interest at (i) the Base Rate (as defined) plus margins ranging from 1% to 2% or (ii) the Eurodollar Rates plus margins ranging from 2% to 3%. F-17 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Bank Credit Agreement contains various restrictive covenants including mandatory repayments under certain conditions, minimum levels of earnings before interest, taxes, depreciation and amortization (as defined therein), 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 Bank Credit Agreement, the Company is required to maintain specified levels of interest rate protection. The Company has purchased a series of interest rate caps under which the Company will receive cash payment from the counterparties if certain indexed rates of interest are exceeded. Premiums paid for the purchase of the caps are capitalized and amortized to interest expense over the life of the cap. The Revolving Credit Facility may be repaid and reborrowed at any time and is due December 31, 2001. The Company is required to pay to the lenders under the Bank Credit Agreement (as amended) a commitment fee equal to 1/2 of 1% per annum, payable on a quarterly basis, on the daily unused portions of the Revolving Credit Facility during such quarter. At December 31, 1996 and 1997, no amounts were outstanding under the Revolving Credit Facility. The A, B, C, and D Term Loans mature on December 31, 2001, 2002, 2003, and 2004, respectively. 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 part, at the Company's option commencing May 1, 2001. The 11 1/8% senior subordinated notes contain restrictive covenants which include, among others the incurrence of additional debt, mergers and change of control. In connection with the 1996 debt refinancing and purchase of the 13% senior subordinated notes due 2005, $18.1 million ($11.4 million net of tax) and $21.6 million ($13.6 million net of tax) of premiums were recognized as extraordinary items. Other Credit Facilities At year end December 31, 1997, the Company's non-U.S. subsidiaries had credit lines from various financial institutions totaling $170 million. The majority of the credit lines do not have commitment fees. However, the Company is required to pay under a DEM 50 million bank line a commitment fee equal to 0.3125% per annum, payable on a quarterly basis, on the daily unused portion of the bank line. These credit lines are pricipally to provide working capital financing in local currencies. The Company had utilized $54.4 million of these credit lines at December 31, 1997 at the prevailing market interest rates in the local country of debt. Aggregate Maturities of Long-Term Debt The aggregate maturities of long-term debt at December 31, 1997 are as follows (in millions): 1998............................................................... $ 3.7 1999............................................................... 14.8 2000............................................................... 46.2 2001............................................................... 74.8 2002............................................................... 102.0 Thereafter......................................................... 529.1 ------ $770.6 ======
F-18 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. INCOME TAXES Income (loss) before income tax expense is as follows (in millions):
YEARS ENDED DECEMBER 31, ----------------------- 1995 1996 1997 ----- ------- ------- U.S. (including Puerto Rico).................... $20.5 $(103.8) $(184.9) Non-U.S......................................... (0.6) (21.9) (41.5) ----- ------- ------- Income (loss) before income tax expense......... $19.9 $(125.7) $(226.4) ===== ======= =======
Tax Expense (Benefit) Income tax expense (benefit) consists of the following (in millions):
YEARS ENDED DECEMBER 31, -------------------- 1995 1996 1997 ---- ------ ------ CURRENT U.S. Federal.......................................... $1.0 $ -- $ 0.2 State and local (including Puerto Rico).......... 3.6 2.6 0.9 Non-U.S............................................ 1.0 0.2 1.2 ---- ------ ------ Current tax expense.............................. 5.6 2.8 2.3 ---- ------ ------ DEFERRED U.S. Federal.......................................... (0.3) (38.5) (63.2) ---- ------ ------ State and local (including Puerto Rico).......... 0.2 (6.5) (9.7) Non-U.S............................................ 1.7 (3.2) (13.2) ---- ------ ------ Deferred income tax expense (benefit)............ 1.6 (48.2) (86.1) ---- ------ ------ Total income tax expense (benefit)............. $7.2 $(45.4) $(83.8) ==== ====== ======
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):
YEARS ENDED DECEMBER 31, -------------------- 1995 1996 1997 ---- ------ ------ Income tax expense (benefit) at statutory rate..... $7.0 $(44.0) $(79.3) Tax exempt operations.............................. (4.8) (2.9) (3.0) Nondeductible (non-taxable) goodwill............... (0.2) 0.5 0.4 Nondeductible items................................ 0.8 1.4 1.1 State and local taxes (net of federal benefit)..... 0.5 (4.5) (8.3) Valuation allowances............................... 3.1 6.3 2.8 U.S. tax on unremitted foreign earnings............ 1.1 (0.1) 0.7 Excess foreign tax benefit......................... (0.3) (2.9) (1.1) Other factors...................................... -- 0.8 2.9 ---- ------ ------ Income tax expense (benefit)....................... $7.2 $(45.4) $(83.8) ==== ====== ======
F-19 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred Taxes Deferred tax assets (liabilities) are comprised of the following (in millions):
DECEMBER 31, -------------- 1996 1997 ------ ------ Gross deferred tax liabilities........................... $ (2.7) $ (2.9) ------ ------ Property, plant and equipment basis differences.......... 27.4 78.3 Trade receivables basis difference....................... 5.3 13.7 Inventory basis difference............................... 19.3 19.1 Accrued liabilities not currently deductible............. 25.0 88.4 Other intangible assets basis difference................. 89.5 119.0 Net operating loss carryforwards......................... 64.6 122.8 Other.................................................... 5.4 7.0 ------ ------ Gross deferred tax assets................................ 236.5 448.3 Valuation allowance...................................... (19.1) (65.2) ------ ------ Net deferred tax assets.................................. 217.4 383.1 ------ ------ $214.7 $380.2 ====== ======
In assessing the realizability of the gross deferred tax assets at December 31, 1997, management analyzed the Company's forecast for future taxable earnings (and losses) by jurisdiction and other relevant factors and concluded that recoverability of the deferred tax asset of $383.1 million, net of a $65.2 million valuation allowance, was more likely than not. This analysis also supported the release in 1997 of $6.2 million of valuation allowance previously established against deferred tax assets arising in Italy. The Company received a tax exemption grant from Puerto Rico during 1996 which provides that its manufacturing operations be partially exempt from local taxes until the year 2014. Appropriate taxes have been provided for these operations assuming repatriation of all available earnings. Total tax benefit for the year ended December 31, 1997 includes tax benefits aggregating $4.1 million related to this grant. In addition, the Company has filed a section 936 election for its Puerto Rico operations. Total income tax benefit for the year ended December 31, 1997 includes tax benefits aggregating $3.0 million related to the section 936 election. At December 31, 1996 and 1997, the Company had net operating loss carryforwards available in the United States for federal income tax return purposes of $104.8 million and $211.4 million, respectively, which expire during 2004 through 2012. United States tax rules impose limitations on the use of net operating losses and excess tax bases following certain changes in ownership. If such a change were to occur, the limitation could reduce the amount of these benefits that would be available to offset future taxable income, starting with the year of ownership change. The $211.4 million of net operating loss carryforward at December 31, 1997, includes $56.5 million of United States net operating loss carryforward from the pre-combination Behring entity. Since the use of these loss carryforwards is subject to the change in ownership limitation, a full deferred tax valuation has been recorded. Additionally, at December 31, 1997, the Company had net operating loss carryforwards available in countries outside of the United States of $90.0 million with various dates of expiration. Deferred United States federal income taxes and non-U.S. withholding taxes have been provided on the undistributed earnings of non-U.S. subsidiaries deemed available for repatriation. 14. 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, 1996 and 1997. All outstanding shares at December 31, 1996 and 1997 were owned by Holdings. F-20 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Preferred Stock of Holdings Preferred stock of Holdings, with a fair value of $40.0 million, was issued to Baxter on December 20, 1994 as part of the total consideration paid to Baxter for the Company. Such consideration was contributed by Holdings to the capital of the Company and was classified as "Additional paid-in capital". A portion of the preferred stock was repurchased by Holdings from Baxter in a negotiated transaction and canceled by Holdings in December 1995 for an aggregate purchase price less than its fair value at issuance. The Company distributed $15.8 million to Holdings in December 1995 for Holdings' use for such preferred stock repurchase. 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 53,594 shares of Holdings' Class L Common Stock and the sale or granting of options of 2,823,402 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 the owners of Holdings (Performance Options). All stock options vest within ten years of the date of grants. During 1995, 44,444 shares of Holding's Class L Common Stock and 399,996 shares of Holdings' Common Stock were sold at $40.50 and $0.50 per share, respectively. During 1996 and 1997, 6,050 shares of Holdings' Class L Common Stock and 54,450 shares of Holdings' Common Stock were sold at $44.00 and $4.00 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, 24,000 shares of Holdings' Common Stock were acquired by certain executives of the Company at a price $32.50 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. All stock options granted during 1995 and 1996 have exercise prices that management believes equaled or exceeded the fair market value of the Holdings' Common Stock on the dates of the grants. During 1997, certain option grants were made with exercise prices below fair market values of Holdings' Common Stock, based on independent valuations. The Time Options vest ratably over a five year period and have a ten year term. The Performance Options become exercisable at $7 or $16 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, 1996 and 1995 was as follows:
1995 1996 1997 ------- ------- --------- Outstanding at January 1..................... -- 629,170 684,170 TIME OPTIONS ------------ Granted...................................... 318,200 84,000 994,400 Exercised.................................... -- (54,900) (40,840) Forfeited.................................... (11,000) (9,500) (59,340) PERFORMANCE OPTIONS ------------------- Granted...................................... 325,970 60,400 262,574 Exercised.................................... -- -- -- Forfeited.................................... (4,000) (25,000) (58,514) ------- ------- --------- Outstanding at December 31................... 629,170 684,170 1,782,450 ======= ======= ========= Exercisable at December 31................... 61,440 62,740 114,080 Available for grant at December 31........... 22,500 22,500 336,912
F-21 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Weighted average option exercise price information for 1997, 1996 and 1995 is as follows:
TIME OPTIONS 1995 1996 1997 ------------ ------ ------ ------ Outstanding at January 1............................ -- $ 0.50 $ 1.40 Granted............................................. $ 0.50 $ 4.00 $30.41 Exercised........................................... $ 0.50 $ 0.50 $ 1.35 Forfeited........................................... $ 0.50 $ 0.50 $ 1.25 Outstanding at December 31.......................... $ 0.50 $ 1.40 $24.90 Exercisable at December 31.......................... $ 0.50 $ 0.50 $ 0.67 PERFORMANCE OPTIONS ------------------- Outstanding at January 1............................ -- $11.50 $11.50 Granted............................................. $11.50 $11.50 $11.50 Exercised........................................... -- -- -- Forfeited........................................... $11.50 $11.50 $11.50 Outstanding at December 31.......................... $11.50 $11.50 $11.50 Exercisable at December 31.......................... -- -- --
Effective April 1, 1997, 46,500 Time Options with an exercise price of $4.00, 99,787 Performance Options with an exercise price of $7.00 and 99,787 Performance Options with an exercise price of $16.00 were granted, which represented discounts of $14.00, $11.00 and $2.00, respectively, below fair market value of Holdings' Common Stock at that date, as established by an independent valuation. Effective October 1, 1997, 860,900 Time Options with an exercise prices of $0.50-$34.50 were granted, which represented a discount of $23.00-$57.00 from fair market value of Holding's Common Stock at that date, as established by an independent appraisal. Accordingly, stock compensation expense of $10.6 million was recorded by the Company in 1997 related to these grants. Significant option groups outstanding at December 31, 1997 and related weighted average price and life information is as follows:
REMAINING OPTIONS OPTIONS EXERCISE LIFE GRANT DATE OUTSTANDING EXERCISABLE PRICE (YEARS) - ---------- ----------- ----------- -------- --------- Time Options--7/31/95... 210,420 108,680 $ 0.50 8 Time Options--7/31/96... 63,200 5,400 $ 4.00 9 Time Options--2/5/97- 8/25/97................ 86,500 -- $ 4.00 10 Time Options--10/1/97... 860,900 -- $22.07 10 Performance Options-- 7/31/95................ 121,328 -- $ 7.00 8 Performance Options-- 7/31/95................ 121,328 -- $16.00 8 Performance Options-- 7/31/96................ 28,100 -- $ 7.00 9 Performance Options-- 7/31/96................ 28,100 -- $16.00 9 Performance Options-- 2/5/97-8/25/97......... 131,287 -- $ 7.00 10 Performance Options-- 2/5/97-8/25/97......... 131,287 -- $16.00 10
As Holdings' Common Stock is not publicly traded, the fair value of options was estimated using the minimum value method as proscribed in SFAS No. 123, using the following assumptions:
1995 1996 1997 ---- ---- ---- Expected life (years): Time Options............................ 5 5 5 Performance Options..................... 3 3 2 Interest rate: Time Options............................ 6.1% 5.5% 5.7% Performance Options..................... 5.9% 5.4% 5.6% Dividend yield: Time Options............................ 0.0% 0.0% 0.0% Performance Options..................... 0.0% 0.0% 0.0%
F-22 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The fair value at the date of grant of the Time Options and Performance Options granted during 1997 were $36.1 million and $1.6 million, respectively. The fair value at the date of grant of the Time Options and Performance Options granted during 1996 were $0.1 million and $0.1 million, respectively. The fair value at the date of grant of the Time Options and Performance Options granted during 1995 were $0.1 million and $0.5 million, respectively. No stock-based compensation expense was recorded in 1995 and 1996. Pro forma stock-based compensation would not have been significant in 1995 or 1996 had the fair value of options granted in those years had been recognized as compensation expense on a straight-line basis over the vesting of the grants. 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 1997 been recognized as compensation expense on a straight-line basis over the vesting of the grants. 15. TRANSACTIONS WITH BAXTER AND ALLEGIANCE Commencing in December 1994, the Company and Baxter entered into a distribution agreement within the United States. The U.S. Distribution Agreement, which became effective at the closing of the Dade Acquisition, gave Baxter's U.S. Distribution Division the right, generally on an exclusive basis, to sell the Predecessor's domestic products in the areas in which Baxter's U.S. Distribution Division previously sold the Predecessor's products. Effective October 1, 1996, Baxter "spun-off" its distribution business as Allegiance and Allegiance assumed the Company's Distribution Agreement. The term of this agreement, as amended, extends to December 31, 2000. Allegiance may terminate the agreement at any time after the four year anniversary date by providing the Company with at least six months prior written notice. The Company may also terminate the agreement at any time after the eighteen month anniversary with at least six months prior written notice. Net sales to Baxter's U.S. Distribution Division aggregated $348.6 million for the year ended December 31, 1995 and $221.8 million for the year ended December 31, 1996. Net sales to Allegiance totaled $72.2 million and $257.5 million for the years ended December 31, 1996 and 1997, respectively. At December 31, 1996 and 1997, receivables from Allegiance totaled $47.3 million and $67.8 million, respectively. 16. RELATED PARTY TRANSACTIONS The Company and Holdings entered into five year Management Services Agreements with Bain Capital and Goldman, Sachs & Co. (an affiliate of GS Capital) pursuant to which they will pay Bain Capital and Goldman, Sachs & Co. an aggregate annual fee of up to $3.0 million, subject to compliance with the terms of the indenture governing the 11 1/8% senior subordinated notes, plus their respective out-of-pocket expenses. Pursuant to the Management Services Agreements, Bain Capital and Goldman, Sachs & Co. have provided, and will continue to provide, management consulting, advisory services and support, negotiation and analysis of financing alternatives, acquisitions, divestitures and other services agreed upon by the Company, Bain Capital and Goldman, Sachs & Co. In connection with the Chemistry Acquisition (Note 5), the Company paid $11.4 million for advisory fees and expenses to Bain Capital and $3.6 to Goldman, Sachs & Co. The Company paid, in the aggregate, $18.8 million to Bain Capital, Goldman, Sachs & Co. and Hoechst in connection with the Behring Combination (Note 4). Advisory fees and related expense reimbursements under the Management Services Agreements of $1.8 million and $0.3 million to Bain Capital and Goldman, Sachs & Co., respectively, are included in the Consolidated Statement of Operations for the year ended December 31, 1995. For the year ended December 31, 1996 the Consolidated Statement of Operations includes advisory fees and related expenses of $2.7 million and $0.3 million to Bain Capital and Goldman, Sachs & Co., respectively. The Consolidated Statement of Operations for the year ended December 31, 1997 includes advisory fees and related expenses of $1.4 million and $0.3 million to Bain Capital and Goldman, Sachs & Co., respectively. Pursuant to Transition Services Agreements dated September 30, 1997, Hoechst provides 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 to Hoechst related to these agreements for the year ended December 31, 1997. F-23 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. RETIREMENT PROGRAMS 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"). Through December 31, 1996, the U.S. Plans' benefits are based on years of service and the employees compensation during five of the last ten years of employment as defined by the plans. Effective January 1, 1997, the Company amended its pension plan covering U.S. employees to change to a cash balance formula. The Company's funding policy is to make contributions to the trusts of the plans which meet or exceed the minimum requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). Under the terms of the Behring Combination (Note 4), effective January 1, 1998, the employees' pension assets and liablities 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 Hoechst 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 5), the transferred DuPont employees' pension assets and liabilities were transferred directly into the existing Domestic 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. Under the terms of the Dade Acquisition (Note 6), Baxter retained liability for future benefits payable to existing retirees and non-transferred employees of the Predecessor as of the Dade Acquisition date, and the Company established new plans for retained active employees. During 1995, substantially all of the assets were transferred to the new plans. At December 31, 1996 and December 31, 1997, plan assets primarily consist of stocks, bonds and contracts with insurance companies. Assets held by the trusts of the Company's plans consist of the following (in millions):
DECEMBER 31, ------------- 1996 1997 ------ ------ Total assets--U.S. Plans................................... $104.0 $111.9 Total assets--Non-U.S. Plans............................... $ 12.7 $ 24.3
Pension Expense Pension expense includes the following components (in millions):
YEARS ENDED DECEMBER 31, -------------------- 1995 1996 1997 ----- ----- ------ Service cost-benefits earned during the period...... $ 4.5 $ 7.4 $ 9.6 Interest cost on projected benefit obligation....... 2.9 5.8 8.1 Actual return on assets............................. (2.0) (8.8) (12.2) Net amortization and deferral....................... (0.3) 1.5 0.7 Curtailment gains................................... -- (2.1) -- ----- ----- ------ Total pension expense............................... $ 5.1 $ 3.8 $ 6.2 ===== ===== ======
Curtailment gains of $1.5 million and $0.6 million related to restructuring actions and the sale of Burdick & Jackson, respectively, were recognized in 1996. F-24 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Assumptions used for the above pension expense calculations include:
YEARS ENDED DECEMBER 31, ----------------- 1995 1996 1997 ----- ----- ----- Discount rate applied to benefit obligation: U.S. plans............................................ 8.75% 7.75% 8.25% Non-U.S. plans (average).............................. 4.30% 5.00% 5.20% Long-term return on assets: U.S. plans............................................ 9.50% 9.50% 9.50% Non-U.S. plans (average).............................. 5.00% 5.40% 4.90%
Funded Status The following tables set forth the funded status of the Plans (in millions):
UNDERFUNDED OVERFUNDED PLANS PLANS DECEMBER 31, DECEMBER 31, -------------- ---------------- 1996 1997 1996 1997 ------ ------ ------- ------- Actuarial present value of benefit obliga- tion: Vested benefits............................ $ 15.5 $ 38.4 $ 65.4 $ 86.3 ------ ------ ------- ------- Accumulated benefits....................... 18.0 41.7 70.4 89.8 ------ ------ ------- ------- Projected benefits......................... 24.6 52.3 70.7 90.6 Less accumulated plan assets at fair value... (14.3) (21.7) (102.4) (114.5) ------ ------ ------- ------- Plan assets (in excess of) less than pro- jected benefit obligation................... 10.3 30.6 (31.7) (23.9) Unrecognized net gains (losses) and unrecog- nized prior service cost.................... (0.3) (1.2) 5.7 -- ------ ------ ------- ------- Net pension liabilities (assets)......... $ 10.0 $ 29.4 $ (26.0) $ (23.9) ====== ====== ======= =======
Assumptions used for the above funded status calculations include:
YEARS ENDED DECEMBER 31, ----------------- 1995 1996 1997 ----- ----- ----- Annual rate of increase in compensation levels: U.S. plans............................................ 4.50% 4.50% 4.50% Non-U.S. plans (average).............................. 3.10% 4.00% 3.40% Discount rate applied to benefit obligation: U.S. plans............................................ 7.75% 8.25% 7.75% Non-U.S. plans (average).............................. 4.30% 5.00% 5.20%
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 $2.6 million for the year ended December 31, 1995, $3.2 million for the year ended December 31, 1996 and $2.9 million for the year ended December 31, 1997. F-25 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 18. 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. Letters of Credit As of December 31, 1997, the Company has letters of credit outstanding of approximately $16.7 million. Operating Leases The Company leases certain facilities and equipment under operating leases expiring at various dates. Most of these operating leases contain renewal options. Future minimum lease payments (including interest) under noncancelable operating leases at December 31, 1997 are as follows (in millions): 1998............................................................... $ 31.5 1999............................................................... 23.7 2000............................................................... 18.0 2001............................................................... 16.4 2002............................................................... 13.8 Thereafter......................................................... 62.3 ------ Total.......................................................... $165.7 ======
Total expense for all operating leases was $12.9 million for the year ended December 31, 1995, $14.1 million for the year ended December 31, 1996 and $22.9 million for the year ended December 31, 1997. F-26 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 19. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company is a leading manufacturer of diagnostic test equipment and supplies and provides related services to the hospital and reference lab market which is considered to be a single business segment. Financial information by geographic area for the years ended December 31, 1997, 1996 and 1995 is summarized as follows (in millions):
UNITED OTHER GENERAL INTER-AREA STATES EUROPE INTERNATIONAL CORPORATE ELIMINATIONS TOTAL ------ ------ ------------- --------- ------------ -------- DECEMBER 31, 1997 AND THE YEAR THEN ENDED --------------------- Trade sales............. $649.1 217.5 113.9 $ 980.5 Inter-area sales........ 111.9 27.4 -- (139.3) -- ------ ----- ----- ------ -------- Total sales............. $761.0 244.9 113.9 (139.3) $ 980.5 ====== ===== ===== ====== ======== Pretax income (loss)(1). $ 31.3 (59.7) (9.7) (188.2) -- $ (226.3) ====== ===== ===== ====== ====== ======== Identifiable assets(5).. $763.1 349.8 102.9 294.6 -- $1,510.4 ====== ===== ===== ====== ====== ======== DECEMBER 31, 1996 AND THE YEAR THEN ENDED (4) ----------------------- Trade sales............. $559.5 149.1 87.2 $ 795.8 Inter-area sales........ 61.0 1.5 -- (62.5) -- ------ ----- ----- ------ -------- Total sales............. $620.5 150.6 87.2 (62.5) $ 795.8 ====== ===== ===== ====== ======== Pretax income (loss)(2). $(40.5) 15.3 12.2 (112.7) $ (125.7) ====== ===== ===== ====== ======== Identifiable assets (5). $594.7 135.5 51.8 223.1 $1,005.1 ====== ===== ===== ====== ======== DECEMBER 31, 1995 AND THE YEAR THEN ENDED (4) ----------------------- Trade sales............. $428.2 110.9 75.2 $ 614.3 Inter-area sales........ 60.3 1.5 -- (61.8) -- ------ ----- ----- ------ -------- Total sales............. $488.5 112.4 75.2 (61.8) $ 614.3 ====== ===== ===== ====== ======== Pretax income (loss)(3). $ 55.8 14.3 5.9 (56.1) $ 19.9 ====== ===== ===== ====== ======== Identifiable assets (5). $232.4 91.0 40.1 187.4 $ 550.9 ====== ===== ===== ====== ========
- -------- (1) The pre-tax loss for the year ended December 31, 1997 reflects the following pre-tax charges resulting from purchase accounting for the Behring Combination and other items: (i) a charge to cost of goods sold for $171.4 million of allocated purchase price to record acquired finished goods and work-in-process inventories to fair market values, (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 million charge to research and development expense for acquired research and development projects which do not have alternative applications or separable economic values, (iv) $33.5 million of non-recurring charges related to increased inventory reserves relating to plant closures, non-recurring distribution costs 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 non-recurring integration costs associated with the Behring Combination. (2) 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 of allocated purchase price to record work-in-process and finished goods inventories to fair market values, (ii) a $15.0 million restructuring charge designed to lower operating costs, increase F-27 DADE BEHRING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) efficiency, and eliminate redundant operations, (iii) a $15.3 million charge to research and development expense for acquired research and development projects which do not have alternative applications or separable economic value, (iv) a $9.5 million charge to cost of goods sold to establish a reserve for excess spare parts inventories related to the Paramax product line. (3) The pre-tax income for the year ended December 31, 1995 reflects a charge to cost of goods sold for the remaining $40.4 million of allocated purchase price related to the $46.0 million recorded step-up to fair market value of work-in-process and finished goods inventory in connection with the Dade Acquisition. (4) As described in Note 2, non-U.S. results of operations for the period December 17, 1994 through December 31, 1994 are not material and have been included in the 1995 consolidated financial statements. During 1996, the one month reporting lag for non-U.S. operations was eliminated and therefore operating results for the year ended December 31, 1996 include thirteen months of non U.S. operating results. (5) At December 31, 1995, general corporate identifiable assets include net assets held for sale of $54.9 million and net deferred tax assets of $143.0 million. At December 31, 1996, general corporate identifiable assets include net deferred tax assets of $188.3 million. At December 31, 1997, general corporate identifiable assets include net deferred tax assets of $259.6 million. Inter-area transactions are accounted for at cost. Identifiable assets are those assets associated with a specific geographic area. Non-U.S. net sales (including U.S. export sales) of all combined non-U.S. entities were $202.2 million for the year ended December 31, 1995, $236.6 million for the year ended December 31, 1996 and $331.4 million for the year ended December 31, 1997. Non-U.S. net assets were $123.3 million and $210.9 million as of December 31, 1996 and 1997, respectively. F-28 SCHEDULE II Valuation and qualifying accounts and reserves (in millions)
ADDITIONS ----------------- CHARGED BALANCE AT TO COSTS CHARGED BALANCE AT JANUARY 1, AND TO OTHER DECEMBER 31, DESCRIPTION 1997 EXPENSES ACCOUNTS DEDUCTIONS 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)
- -------- (1) Impact of foreign currency translation. (2) Acquired in the Behring Combination F-29 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, 1998. /s/ Steven W. Barnes By: _________________________________ Name: Steven W. Barnes Title: President and 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, 1998.
SIGNATURE TITLE --------- ----- /s/ Steven W. Barnes President, Chief Executive Officer and ___________________________________________ Director (principal executive officer) Steven W. Barnes /s/ James W. P. Reid-Anderson Chief Administrative Officer, Chief ___________________________________________ Financial Officer and Director (principal James W. P. Reid-Anderson financial officer) /s/ Glenn R. Richter Vice President/Controller ___________________________________________ (principal accounting officer) Glenn R. Richter /s/ Robert W. Brightfelt Group President, Chemistry 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
INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 3.1 Certificate of Incorporation of Dade Behring Inc. Incorporated by reference to Exhibit 3.1 to Dade's Form S-1 Registration Statement under the Securities Act of 1933, as filed on Octo- ber 4, 1996 as amended effective October 1, 1997. 3.2 Amended and Restated By-laws of Dade Behring Inc. 4.1 Indenture dated as of May 7, 1996 between Dade International, Inc. and IBJ Schroder Bank & Trust Company. Incorporated by reference to Exhibit 4.1 to Dade's Form S-1 Registration Statement under the Securities Act of 1933, as filed on Octo- ber 4, 1996. 4.2 Purchase Agreement dated as of April 30, 1996 among Dade In- ternational Inc., BT Securities Corporation, CS First Boston Corporation and Morgan Stanley & Co. Incorporated. Incorpo- rated by reference to Exhibit 4.2 to Dade's Form S-1 Registra- tion Statement under the Securities Act of 1933, as filed on October 4, 1996. 4.3 Registration Rights Agreement dated as of May 7, 1996 among Dade International Inc., BT Securities Corporation, CS First Boston Corporation and Morgan Stanley & Co. Incorporated. In- corporated by reference to Exhibit 4.3 to Dade's Form S-1 Reg- istration Statement under the Securities Act of 1933, as filed on October 4, 1996. 10.1 Amended and Restated Credit Agreement dated as of April 29, 1997 among Diagnostics Holdings, Inc., Dade International Inc., various lending institutions and Bankers Trust Company, as Agent. Incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q under the Securities Act of 1934, as filed on May 15, 1997. 10.2 Security Agreement dated as of May 7, 1996 among Diagnostics Holding, Inc., Dade International Inc., certain subsidiaries of Dade International Inc. and Bankers Trust Company as Col- lateral Agent. Incorporated by reference to Exhibit 10.2 to Dade's Form S-1 Registration Statement under the Securities Act of 1933, as filed on October 4, 1996. 10.3 Pledge Agreement dated as of May 7, 1996 among Diagnostics Holding, Inc., Dade International Inc., various subsidiaries of Dade International Inc. and Bankers Trust Company as Col- lateral Agent. Incorporated by reference to Exhibit 10.3 to Dade's Form S-1 Registration Statement under the Securities Act of 1933, as filed on October 4, 1996. 10.4 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. incorpo- rated by reference to Exhibit 2.1 to the Company's Form 8-K under the Securities Act of 1934, as filed on May 22, 1996 (No. 33-90462). 10.5 Agreement and Plan of Combination by and between Diagnostics Holdings, Inc. and Hoechst A.G. 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 ref- erence to Exhibit 2.1 to the Company's Form 8-K under the Se- curities Act of 1934, as filed on October 20, 1997. 10.6 Transitional Services Agreement entered into as of May 7, 1996, effective as of April 30, 1996 by and between E.I. du Pont Nemours and Company and Dade Chemistry Systems Inc. In- corporated by reference to Exhibit 10.5 to Dade's Form S-1 Registration Statement under the Securities Act of 1933, as filed on October 4, 1996. 10.7 Manufacturing Agreement entered into as of May 7, 1996, effec- tive as of April 30, 1996 by and between E.I. du Pont Nemours and Company and Dade Chemistry Systems Inc. Incorporated by reference to Exhibit 10.6 to Dade's Form S-1 Registration Statement under the Securities Act of 1933, as filed on Octo- ber 4, 1996.
X-1
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 10.8 Stockholders Agreement made as of December 20, 1994 by and among Dade International Inc. and the other parties signatory thereto incorporated by reference to Exhibit 10.6 to the Company's Form S-4 Registration Statement under the Securities Act of 1933, as filed on March 20, 1995 (No. 33-90462). 10.9 Management Services Agreement dated as of December 20, 1994 by and among Dade International Inc. and Bain Capital, Inc. In- corporated 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 Amend- ment No. 1 to Management Services Agreement dated as of May 7, 1996, incorporated by reference to Exhibit 10.8 to Dade'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 Dade International Inc. and Goldman, Sachs & Co. In- corporated 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 Dade International Inc. and Baxter Healthcare Corporation as amended on September 26, 1996. Incorporated by reference to Exhibit 10.11 to Dade's Form S-1 Registration Statement under the Securities Act of 1933, as filed on October 4, 1996. 10.13 1995 Executive Stock Purchase and Option Plan incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q under the Securities Act of 1934, as filed on August 14, 1995 (No. 33- 90462). 10.14 1995 Management Stock Option Plan incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q under the Securities Act of 1934, as filed on August 14, 1995 (No. 33-90462). 10.15 Form of Agreement under 1995 Executive Stock Purchase and Op- tion Plan incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q under the Securities Act of 1934, as filed on August 14, 1995 (No. 33-90462). 10.16 Form of Agreement under 1995 Management Stock Option Plan in- corporated by reference to Exhibit 10.4 to the Company's Form 10-Q under the Securities Act of 1934, as filed on August 14, 1995 (No. 33-90462). 10.17 1996 Executive Stock Purchase and Option Plan. Incorporated by reference to Exhibit 10.16 to Dade's Form S-1 Registration Statement under the Securities Act of 1933, as filed on Octo- ber 4, 1996. 10.18 Form of Agreement under 1996 Executive Stock Option Plan. In- corporated by reference to Exhibit 10.17 to Dade's Form S-1 Registration Statement under the Securities Act of 1933, as filed on October 4, 1996. 10.19 1997 Executive Stock Purchase and Option Plan incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q under the Securities Act of 1934, as filed on May 15, 1997. 10.20 Form of Agreement under 1997 Executive Stock Purchase and Op- tion Plan incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q under the Securities Act of 1934, as filed on May 15, 1997. 10.21 1997 Management Stock Option Plan incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q under the Securities Act of 1934, as filed on May 15, 1997. 10.22 Form of Agreement under 1997 Management Stock Option Plan in- corporated by reference to Exhibit 10.4 to the Company's Form 10-Q under the Securities Act of 1934, as filed on May 15, 1997. 10.23 1997 Executive Stock Purchase and Option Plan. 21.1 Subsidiaries of Dade Behring Inc. 23.1 Report of Independent Accountants on Financial Statement Schedule. 27.1 Financial Data Schedule.
X-2 EX-3.2 2 AMENDED AND RESTATED BY-LAWS Exhibit 3.2 AMENDED AND RESTATED -------------------- BY-LAWS ------- OF -- DADE BEHRING INC. ----------------- A Delaware Corporation ARTICLE I --------- OFFICERS -------- Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be located at 1209 Orange Street, Corporation Trust Center, in the City of Delaware, County of New Castle 19801. The name of the corporation's registered agent at such address shall be The Corporation Trust Company. The registered office and/or registered agent of the corporation may be changed from time to time by action of the board of directors. Section 2. Other Offices. The corporation may also have offices at such other places, both within and without the State of Delaware, as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II ---------- MEETINGS OF STOCKHOLDERS ------------------------ Section 1. Place and Time of Meetings. An annual meeting of the stockholders shall be held on the first Wednesday of March each year if not a legal holiday and if a legal holiday, then on the next secular day following, at 10:00 A.M., or at such other date and time as shall be designated from time to time by the board of directors Section 2. Special Meetings. Special meetings of stockholders may be called for any purpose and may be held at such time and place, within or without the State of Delaware, as shall be stated in a notice of meeting or in a duly executed waiver thereof. Section 3. Place of Meetings. The board of directors may designate any place, either within or without the State of Delaware, as the place of meeting for any annual meeting or for any special meeting called by the board of directors. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal executive office of the corporation. Section 4. Notice. Whenever stockholders are required or permitted to take action at a meeting, written or printed notice stating the place, date, time, and, in the case of special meetings, the purpose or purposes, of such meeting, shall be given to each stockholder entitled to vote at such meeting. Section 5. Stockholders List. The officer having charge of the stock ledger of the corporation shall make, at least 10 days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 6. Quorum. The holders of a majority of the outstanding shares of capital stock, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders, except as otherwise provided by statute or by the certificate of incorporation. If a quorum is not present, the holders of a majority of the shares present in person or represented by proxy at the meeting, and entitled to vote at the meeting, may adjourn the meeting to another time and/or place. Section 7. Adjourned Meetings. When a meeting is adjourned to another time and place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 8. Vote Required. When a quorum is present, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the question is one upon which by express provisions of an applicable law or of the certificate of incorporation a different vote is -2- required, in which case such express provision shall govern and control the decision of such question. Section 9. Voting Rights. Except as otherwise provided by the General Corporation Law of the State of Delaware or by the certificate of incorporation of the corporation or any amendments thereto and subject to Section 3 of Article VI hereof, every stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of common stock held by such stockholder. Section 10. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him or her by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Section 11. Action by Written Consent. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken and bearing the dates of signature of the stockholders who signed the consent or consents, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in the state of Delaware, or the corporation's principal place of business, or an officer or agent of the corporation having custody of the book or books in which proceedings of meetings of the stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. All consents properly delivered in accordance with this section shall be deemed to be recorded when so delivered. No written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered to the corporation as required by this section, written consents signed by the holders of a sufficient number of shares to take such corporate action are so recorded. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Any action taken pursuant to such written consent or consents of the stockholders shall have the same force and effect as if taken by the stockholders at a meeting thereof. -3- ARTICLE III ----------- DIRECTORS --------- Section 1. General Powers. The business and affairs of the corporation shall be managed by or under the direction of the board of directors. Section 2. Number, Election and Term of Office. The number of directors shall be established from time to time by resolution of the board. There shall be an elected position entitled Chairman of the Board of Directors. The directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote in the election of directors. The directors shall be elected in this manner at the annual meeting of the stockholders, except as provided in Section 4 of this Article lilt Each director elected shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as hereinafter provided. Section 3. Removal and Resignation. Any director or the entire board of directors may be removed at any time, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of any class or series are entitled to elect one or more directors by the provisions of the corporation's certificate of incorporation, the provisions of this section shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole. Any director may resign at any time upon written notice to the corporation. Section 4. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director. Each director so chosen shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as herein provided. Section 5. . The annual meeting of each newly elected board of directors shall be held without other notice than this by-law immediately after, and at the same place as the annual meeting of stockholders. Section 6. Other Meetings and Notice. Regular meetings, other than the annual meeting, of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by resolution of the board. Special meetings of the board of directors may be called by or at the request of the president on at least 24 hours notice to each director, either personally, by telephone, by mail, or by telegraph. -4- Section 7. Quorum, Required Vote and Adjournment. A majority of the total number of directors shall constitute a quorum for the transaction of business. The vote of a majority of directors present at a meeting at which a quorum is present shall be the act of the board of directors. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 8. Committees. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation, which to the extent provided in such resolution or these by-laws shall have and may exercise the powers of the board of directors in the management and affairs of the corporation except as otherwise limited by law. The board of directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. Section 9. Committee Rules. Each committee of the board of directors may fix its own rules of procedure and shall hold its meetings as provided by such rules, except as may otherwise be provided by a resolution of the board of directors designating such committee. In the event that a member and that member's alternate, if alternates are designated by the board of directors as provided in Section 8 of this Article III, of such committee is or are absent or disqualified, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in place of any such absent or disqualified member. Section 10. Communications Equipment. Members of the board of directors or any committee thereof may participate in and act at any meeting of such board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in the meeting pursuant to this section shall constitute presence in person at the meeting. Section 11. Waiver of Notice and Presumption of Assent. Any member of the board of directors or any committee thereof who is present at a meeting shall be conclusively presumed to have waived notice of such meeting except when such member attends for the express purpose of objecting at the -5- beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Such member shall be conclusively presumed to have assented to any action taken unless his or her dissent shall be entered in the minutes of the meeting or unless his or her written dissent to such action shall be filed with the person acting as the secretary of the meeting before the adjournment thereof or shall be forwarded by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to any member who voted in favor of such action. Section 12. Action by Written Consent. Unless otherwise restricted by the certificate of incorporation, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. ARTICLE IV -------- OFFICERS -------- Section 1. Number. The officers of the corporation shall be elected by the board of directors and shall consist of a chief executive officer, president, any number of vice presidents, a secretary, any number of assistant secretaries and such other officers and assistant officers as may be deemed necessary or desirable by the board of directors. Any number of offices may be held by the same person. In its discretion, the board of directors may choose not to fill any office for any period as it may deem advisable, except that the offices of president and secretary shall be filled as expeditiously as possible. Section 2. Election and Term of Office. The officers of the corporation shall be elected annually by the board of directors at its first meeting held after each annual meeting of stockholders or as soon thereafter as conveniently may be. Vacancies may be filled or new offices created and filled at any meeting of the board of directors. Each officer shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as hereinafter provided. Section 3. Removal. Any officer or agent elected by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 4. Vacancies. Any vacancy occurring in any office because of death, resignation, removal, disqualification or otherwise, may be -6- filled by the board of directors for the unexpired portion of the term by the board of directors then in office. Section 5. Compensation. Compensation of all officers shall be fixed by the board of directors, and no officer shall be prevented from receiving such compensation by virtue of his or her also being a director of the corporation. Section 6. Chief Executive Officer. The chief executive officer of the corporation, subject to the powers of the board of directors, shall have general and active management of the business of the corporation; and shall see that all orders and resolutions of the board of directors are carried into effect. The chief executive officer shall have such other powers and perform such other duties as may be prescribed by the chairman of the board, the chief executive officer or the board of directors or as may be provided in these bylaws. Section 7. President. The president shall be the chief executive officer of the corporation; shall preside at all meetings of the stockholders and board of directors at which he or she is present; subject to the powers of the board of directors, shall have general charge of the business, affairs and property of the corporation, and control over its officers, agents and employees; and shall see that all orders and resolutions of the board of directors are carried into effect. The president shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. The president shall have-such other powers and perform such other duties as may be prescribed by the board of directors, the chief executive officer or as may be provided in these by-laws. Section 8. Vice-Presidents. The vice-president, or if there shall be more than one, the vice-presidents in the order determined by the board of directors shall, in the absence or disability of the president, act with all of the powers and be subject to all the restrictions of the president. The vice- presidents shall also perform such other duties and have such other powers as the board of directors, the chief executive officer, the president or these by- laws may, from time to time, prescribe. Section 9. The Secretary and Assistant Secretaries. The secretary shall attend all meetings of the board of directors, all meetings of the committees thereof and all meetings of the stockholders and record all the proceedings of the meetings in a book or books to be kept for that purpose. Under the president's supervision, the secretary shall give, or cause to be given, -7- all notices required to be given by these by-laws or by law; shall have such powers and perform such duties as the board of directors, the president or these by-laws may, from time to time, prescribe; and shall have custody of the corporate seal of the corporation. The secretary, or an assistant secretary, shall have authority to affix the corporate seal to any instrument requiring it and when so affixed, it may be attested by his or her signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his or her signature. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers. as the board of directors, the chief executive officer or the president may, from time to time, prescribe. Section 10. The Treasurer and Assistant Treasurer. The treasurer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation; shall deposit all monies and other valuable effects in the name and to the credit of the corporation as may be ordered by the board of directors; shall cause the funds of the corporation to be disbursed when such disbursements have been duly authorized, taking proper vouchers for such disbursements; and shall render to the president and the board of directors, at its regular meeting or when the board of directors so requires, an account of the corporation; shall have such powers and perform such duties as the board of directors, the president or these by-laws may, from time to time, prescribe. If required by the board of directors, the treasurer shall give the corporation a bond (which shall be rendered every six years) in such sums and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of the office of the treasurer and for the restoration to the corporation, in case of death, resignation, retirement, or removal from office, of all books, papers, vouchers, money, and other property of whatever kind in the possession or under the control of the treasurer belonging to the corporation. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors, shall in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer. The assistant treasurers shall perform such other duties and have such other powers as the board of directors, the chief executive officer or the president may, from time to time, prescribe. Section 11. Other Officers, Assistant Officers and Agents. Officers, assistant officers and agents, if any, other than those whose duties are provided for in these by-laws, shall have such authority and perform such duties as may from time to time be prescribed by resolution of the board of directors. -8- Section 12. Absence or Disability of Officers. In the case of the absence or disability of any officer of the corporation and of any person hereby authorized to act in such officer's place during such officer's absence or disability, the board of directors may by resolution delegate the powers and duties of such officer to any other officer or to any director. or to any other person whom it may select. ARTICLE V --------- INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS ------------------------------------------------- Section 1. Nature of Indemnity. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, is or was a director or officer, of the corporation or is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee, fiduciary or agent or in any other capacity while serving as a director, officer, employee, fiduciary or agent, shall be indemnified and held harmless by the corporation to the fullest extent which it is empowered to do so by the General Corporation Law of the State of Delaware, as the same e)exists or may hereafter be amended against all expense, liability and loss (including attorneys' fees actually and reasonably incurred by such person in connection with such proceeding) and such indemnification shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 2 hereof, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the corporation. The right to indemnification conferred in this Article V shall be a contract right and, subject to Sections 2 and 5 hereof, shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition. The corporation may, by action of its board of directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. Section 2. Procedure for Indemnification of Directors and Officers. Any indemnification of a director, officer, employee, fiduciary or agent of the corporation under Section 1 of this Article V or advance of expenses under Section 5 of this Article V shall be made promptly, and in any event within 30 days, upon the written request of the director, officer, employee, fiduciary or agent. If a determination (as defined in the General Corporation Law of the State of Delaware) by the corporation that the director, officer, employee, -9- fiduciary or agent is entitled to indemnification pursuant to this Article V is required, and the corporation fails to respond within sixty days to a written request for indemnity, the corporation shall be deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within 30 days, the right to indemnification or advances as granted by this Article V shall be enforceable by the director, officer, employee, fiduciary or agent in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the corporation (including its board of directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 3. Article Not Exclusive. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. Section 4. Insurance. The corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was a director, officer, employee, fiduciary, or agent of the corporation or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, whether or not the corporation would have the power to indemnify such person against such liability under this Article V. Section 5. Expenses. Expenses incurred by any person described in Section 1 of this Article V in defending a proceeding shall be paid by the -10- corporation in advance of such proceeding's final disposition upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. Section 6. Employees and Agents. Persons who are not covered by the foregoing provisions of this Article V and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors. Section 7. Contract Rights. The provisions of this Article V shall be deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article V and the relevant provisions of the General Corporation Law of the State of Delaware or other applicable law are in effect, and any repeal or modification of this Article V or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing. Section 8. Mercer or Consolidation. For purposes of this Article V, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article V with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. ARTICLE VI ---------- CERTIFICATES OF STOCK --------------------- Section 1. Form. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by the chief executive officer, the president, or a vice-president and the secretary or any assistant secretary of the corporation, certifying the number of shares owned by such holder in the corporation. If such a certificate is countersigned (1) by a transfer agent or an assistant transfer agent other than the corporation -11- or its employee or (2) by a registrar, other than the corporation or its employee, the signature of the chief executive officer, the president, any vice- president, secretary, or any assistant secretary may be facsimiles. In case any officer or . officers who have signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer or officers of the corporation whether because of death, resignation or otherwise before such certificate or certificates have been delivered by the corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the corporation. All certificates for shares shall be consecutively numbered or otherwise identified. The name of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the books of the corporation. Shares of stock of the corporation shall only be transferred on the books of the corporation by the holder of record thereof or by such holder's attorney duly authorized in writing, upon surrender to the corporation of the certificate or certificates for such shares endorsed by the appropriate person or persons, with such evidence of the authenticity of such endorsement, transfer authorization, and other matters as the corporation may reasonably require, and accompanied by all necessary stock transfer stamps. In that event. it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate or certificates, and record the transaction on its books. The board of directors may appoint a bank or trust company organized under the laws of the United States or any state thereof to act as its transfer agent or registrar, or both in connection with the transfer of any class or series of securities of the corporation. Section 2. Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates previously issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates the board of director may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his or her legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against the corporation on account of the loss, theft or destruction of any such certificate or the issuance of such new certificate Section 3. Fixing a Record Date for Stockholder Meetings. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date -12- upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the next day preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Section 4. Fixing a Record Date for Action by Written Consent. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by statute, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by statute, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action. Section 5. Fixing a Record Date for Other Purposes. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment or any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purposes of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. -13- Section 6. Registered Stockholders. Prior to the surrender to the corporation of the certificate or certificates for a share or shares of stock with a request to record the transfer of such share or shares, the corporation may treat the registered owner as the person entitled to receive dividends, to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner. Section 7. Subscriptions for Stock. Unless otherwise provided for in the subscription agreement, subscriptions for shares shall be paid in full at such time, or in such installments and at such times, as shall be determined by the board of directors. Any call made by the board of directors for payment on subscriptions shall be uniform as to all shares of the same class or as to all shares of the same series. In case of default in the payment of any installment or call when such payment is due, the corporation may proceed to collect the amount due in the same manner as any debt due the corporation. ARTICLE VII ----------- GENERAL PROVISIONS ------------------ Section 1. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or any other purpose and the directors may modify or abolish any such reserve in the manner in which it was created. Section 2. Checks, Drafts or Orders. All checks, drafts, or other orders for the payment of money by or to the corporation and all notes and other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation, and in such manner, as shall be determined by resolution of the board of directors or a duly authorized committee thereof. Section 3. Contracts. The board of directors may authorize any officer or officers, or any agent or agents, of the corporation to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. -14- Section 4. Loans. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. Section 5. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the board of directors. Section 6. Corporate Seal. The board of directors may provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 7. Voting Securities Owned by Corporation. Voting securities in any other corporation held by the corporation shall be voted by the president, unless the board of directors specifically confers authority to vote with respect thereto, which authority may be general or confined to specific instances, upon some other person or officer. Any person authorized to vote securities shall have the power to appoint proxies, with general power of substitution Section B. Inspection of Books and Records' Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean any purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in the State of Delaware or at its principal place of business. -15- Section 9. Section Headings. Section headings in these by-laws are for convenience of reference only and shall not be given any substantive effect in limiting or otherwise construing any provision herein. Section 10. Inconsistent Provisions. In the event that any provision of these by-laws is or becomes inconsistent with any provision of the certificate of incorporation, the General Corporation Law of the State of Delaware or any other applicable law, the provision of these by-laws shall not be given any effect to the extent of such inconsistency but shall otherwise be given full force and effect. ARTICLE VIII ------------ AMENDMENTS ---------- These by-laws may be amended, altered, or repealed and new bylaws adopted at any meeting of the board of directors by a majority vote. The fact that the power to adopt, amend, alter, or repeal the by-laws has been conferred upon the board of directors shall not divest the stockholders of the same powers. -16- EX-10.23 3 1997 EXECUTIVE STOCK PURCHASE AND OPTION PLAN Exhibit 10.23 Dade Behring Holdings, Inc. --------------------------- 1997 EXECUTIVE STOCK PURCHASE AND OPTION PLAN --------------------------------------------- 1. Purpose of Plan. This 1997 Executive Stock Purchase and Option Plan (the "Plan") of Dade Behring Holdings, Inc. (the "Company") is designed to provide incentives to such present and future officers, employees, consultants or advisors of the Company or its subsidiaries as may be selected in the sole discretion of the Board (collectively, "Participants"), through the grant of Options by the Company to Participants or through the sale of Common Stock to Participants. Only those Participants who are employees of the Company and its Subsidiaries shall be eligible to receive incentive stock options. 2. Definitions. Certain terms used in this Plan have the meanings set forth below: "Board" means the Company's board of directors. "Cause" shall have the meaning assigned to such term in any individual Participant's written employment arrangements with the Company or any of its Subsidiaries or, in the absence of any such written employment arrangements, "Cause" shall mean (i) the intentional disregard of a written direction from the Board to a Participant to which such Participant has not objected within ten (10) days of receiving such written direction, which intentional disregard is materially injurious to the Company or any of its Subsidiaries, (ii) the knowing and intentional theft by such Participant of property of the Company or any of its Subsidiaries, which property has a substantial value, (iii) the commission by such Participant of an act of moral turpitude which is materially injurious to the Company or any of its Subsidiaries or (iv) any material breach of this or any employment agreement between the Company or its Subsidiaries and such Participant or any material breach of any executive agreement evidencing the purchase and sale of Common Stock or the grant of Options by the Company to such Participant. "Class L Common" means the Company's Class L Common Stock, par value $.01 per share, or, in the event that the outstanding shares of Class L Common are hereafter recapitalized, converted into or exchanged for different stock or securities of the Company, such other stock or securities. "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. "Common" means the Company's Common Stock, par value $.01 per share, or, in the event that the outstanding shares of Common are hereafter recapitalized, converted into or exchanged for different stock or securities of the Company, such other stock or securities. "Common Stock" means the Class L Common and the Common. "Disability" means (i) any physical or mental incapacitation which results in a Participant's inability to perform his or her duties and responsibilities for the Company and its Subsidiaries for a total of 120 days during any 12 month period, as determined by the Board in its good faith judgment and (ii) shall be deemed to have occurred on the 120th day of such inability to perform. "Executive Stock" with respect to a Participant, means any Common Stock purchased by such Participant hereunder and any Common Stock issued to such Participant upon exercise of any Options granted hereunder. "Fair Market Value" of a share of Common Stock means (a) the mean between the highest and lowest reported sale prices of a share of Common Stock on the New York Stock Exchange--Composite Transactions Table (or, if not so reported, on any domestic stock exchanges on which the Common Stock is then listed); or (b) if the Common Stock is not listed on any domestic stock exchange, the mean between the closing high bid and low asked prices of a share of Common Stock as reported by the National Association of Securities Dealers Automated Quotation System (or, if not so reported, by the system then regarded as the most reliable source of such quotations); or (c) if the Common Stock is listed on a domestic stock exchange or quoted in the domestic over-the-counter market, but there are not reported sales or quotations, as the case may be, on the given date, the value determined pursuant to (a) or (b) above using the reported sale prices or quotations on the last previous date on which so reported; or (d) if none of the foregoing clauses apply, the fair market value of a share of Common Stock without discounts as determined in good faith by the Board and stated in writing in a notice delivered to the holders of the Common Stock involved (a "Determination Notice"). "Independent Third Party" means any person who, immediately prior to the contemplated transaction, does not own in excess of 5% of the Company's Common Stock on a fully-diluted basis (a "5% Owner"), who is not controlling, controlled by or under common control with any such 5% Owner and who is not the spouse or descendent (by birth or adoption) of any such 5% Owner or a trust for the benefit of such 5% Owner and/or such other persons. "Investors" means the Persons listed on Schedule A hereto. "Option" means any option enabling the holder thereof to purchase any class of Common Stock from the Company granted by the Board pursuant to the provisions of this Plan. Options to be granted under this Plan may be incentive stock options within the meaning of Section 422 of the Code ("Incentive Stock Options") or in such other form, consistent with this Plan, as the Board may determine. "Original Value" for each share of Executive Stock will be equal to the price paid by the Participant for each share of Common Stock (as proportionally adjusted for all stock splits, stock dividends, and other recapitalizations affecting the Common Stock subsequent to the date of adoption hereof). "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time the option is granted, each of the corporations other than the last corporation in the chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. Grant of Options. The Board shall have the right and power to grant to any Participant, at any time prior to the termination of this Plan, Options in such quantity, at such price, on such terms and subject to such conditions that are consistent with this Plan and established by the Board. Options granted under this Plan shall be in one of the forms described in this paragraph 3 below, or in such other form or forms as the Board may determine, and shall be subject to such additional terms and conditions and evidenced by agreements as shall be determined from time to time by the Board. Except as otherwise set forth in such an agreement between the Company and any Participant, Options shall be subject to all of the terms and conditions contained in this Plan. (a) Target Options. (i) A "Tranche I Option" shall entitle a Participant to purchase from the Company one or more shares of Common and shall have an exercise price per share as determined by the Board and evidenced in such Participant's executive agreement (the "Tranche I Price"). (ii) A "Tranche II Option" shall entitle a Participant to purchase from the Company one or more shares of Common and shall have an exercise price per share as determined by the Board and evidenced in such Participant's executive agreement (the "Tranche II Price"). (iii) Tranche I Options and Tranche II Options are referred to herein as "Target Options," and the shares issued upon exercise of the Tranche I Options or the Tranche II Options are referred to herein as "Target Option Shares". The number of Target Option Shares, the Tranche I Price and the Tranche II Price will be equitably adjusted for any stock split, stock dividend, reclassification or recapitalization of the Company which occurs subsequent to the date of adoption hereof. The Target Options will expire on the earlier of the tenth anniversary of the date of grant or the date of termination of the respective Participant's employment with the Company or any of its Subsidiaries for any reason (the "Termination Date"); provided that any portion of the Target Options which has not vested and become exercisable prior to the Termination Date shall expire on the Termination Date and may not be exercised under any circumstance; provided further that any portion of the Target Options which has vested and become exercisable prior to the Termination Date will expire on the earlier of (i) 30 days after the Termination Date and (ii) the tenth anniversary of the date such options are granted. Target Options are not intended to be "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code. (iv) Exercisability. Target Options will immediately vest and become exercisable -3- with respect to Target Option Shares on the date immediately prior to the tenth anniversary of the date of adoption hereof; provided that upon the occurrence of a Tranche I Acceleration Event, all of the Tranche I Options will immediately vest and become exercisable and upon the occurrence of a Tranche II Acceleration Event, all of the Tranche II Options will immediately vest and become exercisable. For this purpose, a Tranche I Acceleration Event shall be the date on which the purchasers of the Company's common stock under that certain Stock Purchase Agreement dated as of December 20, 1994 (the "Stock Purchase Agreement") as set forth on Exhibit A attached hereto (collectively, the "Investors") have achieved an Investor Return Multiple (as defined below) of at least three (a "Tranche I Acceleration Event") and a Tranche II Acceleration Event shall be the date on which the Investors have achieved an Investor Return Multiple of at least five (a "Tranche II Acceleration Event"). A Tranche I Acceleration Event and Tranche II Acceleration Event are also referred to herein as "Acceleration Events." (v) Vesting of Target Option Shares. Target Option Shares shall be fully vested immediately upon exercise of the Target Options with respect thereto. (vi) Procedure for Exercise. At any time after all or any portion of the Target Options have become exercisable with respect to any Target Option Shares and prior to the Expiration Date, a Participant may exercise all or a portion of his or her Target Options with respect to Target Option Shares which have become vested and exercisable by delivering written notice of exercise to the Company together with (i) a written acknowledgment that such Participant has read and has been afforded an opportunity to ask questions of management of the Company regarding all financial and other information provided to such Participant regarding the Company and (ii) payment in full by delivery of a cashier's, certified check or wire transfer in the amount equal to the product of (A) in the case of the Tranche I Option, the Tranche I Price multiplied by the number of Tranche I Option Shares to be acquired and (B) in the case of the Tranche II Option, the Tranche II Price multiplied by the number of Tranche II Option Shares to be acquired. As a condition to any exercise of a Target Option, a Participant will permit the Company to deliver to him or her all financial and other information regarding the Company and its Subsidiaries which it believes necessary to enable such Participant to make an informed investment decision. (vii) Determination of Investor Return Multiple. (A) "Acceleration Event" will be the first to occur of (i) a Sale of the Company or (ii) on any date subsequent to the date that (A) the Company sells any shares of its common stock pursuant to a registration statement filed under the Securities Act of 1933, as amended and (B) the Investors or their affiliates cease to own in the aggregate at least 20% of the outstanding common stock of the Company. (B) "Investor Return Multiple" means the number determined by dividing Cash Inflows (as defined below) by Cash Outflows (as defined below). The calculation of the -4- Investor Return Multiple will be determined in good faith by the Board. (C) "Cash Inflows" as used herein shall include the sum of all cash payments received by the Investors on the consummation of or prior to an Acceleration Event with respect to debt or equity securities of the Company purchased by the Investors (excluding all management fees, points, and other fees paid to the Investors by or on behalf of the Company and/or its Subsidiaries) prior to such Acceleration Event (whether such payments are received from the Company or any third party, and whether such payments are received as interest, dividends, proceeds with respect to sale or redemption of such securities, upon a liquidation of the Company or otherwise), including reimbursement for payments made by Investors in respect of fees and expenses incurred in connection therewith. (D) "Cash Outflows" as used herein shall include the sum of all cash payments and investments made by the Investors to and in the Company and to others to acquire debt or equity securities of the Company prior to an Acceleration Event, including payments made by Investors in respect of fees and expenses incurred in connection therewith. (E) "Sale of the Company" means any transaction involving the Company and an Independent Third Party or affiliated group of Independent Third Parties pursuant to which such party or parties acquire (i) a majority of the outstanding shares of capital stock of the Company entitled to vote generally in the election of the Company's board of directors (whether by merger, consolidation or sale or transfer of the Company's capital stock) or (ii) all or substantially all of the Company's assets determined on a consolidated basis (for purposes hereof "all or substantially all" shall have the meaning given such phrase in the Revised Model Business Corporation Act). (b) Time Options. (i) A "Time Option" shall entitle a Participant to purchase one or more shares of Common ("Time Option Shares") and shall have an exercise price per share as determined by the Board and evidenced in such Participant's executive agreement (the "Option Price"). The Option Price and the number of Time Option Shares will be equitably adjusted for any stock split, stock dividend, reclassification or recapitalization of the Company which occurs subsequent to the date of adoption hereof. The Time Options will expire on the earlier of the tenth anniversary of the date of grant or the Termination Date; provided that any portion of the Time Options which has not vested and become exercisable prior to the Termination Date shall expire on the Termination Date and may not be exercised under any circumstance; provided further that any portion of the Time Options which has vested and become exercisable prior to the Termination Date will expire on the earlier of (i) 30 days after the Termination Date and (ii) the tenth anniversary of the date such options are granted. Time Options are not intended to be "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code. (ii) Exercisability. On each date set forth below, the Time Options will vest, and -5- thus become exercisable as set forth in the agreement between the Company and the Participant, or, in the absence of such a term in such agreement, with respect to the cumulative percentage of Time Option Shares set forth opposite such date if the respective Participant is, and has been, continuously employed by the Company or any of its Subsidiaries from the date of grant through such date:
Cumulative Percentage Date of Time Options Vested ---- ---------------------- October 1, 1998 20% October 1, 1999 40% October 1, 2000 60% October 1, 2001 80% October 1, 2002 100%
(iii) Vesting of Time Option Shares. Time Option Shares shall be fully vested immediately upon exercise of the Time Option with respect thereto. (iv) Procedure for Exercise. At any time after all or any portion of the Time Options have become exercisable with respect to any Time Option Shares and prior to the Expiration Date, a Participant may exercise all or a portion of his or her Time Option with respect to the Time Option Shares which have become vested and exercisable by delivering written notice of exercise to the Company together with (i) a written acknowledgment that such Participant has read and has been afforded an opportunity to ask questions of management of the Company regarding all financial and other information provided to such Participant regarding the Company and (ii) payment in full by delivery of a cashier's, certified check or wire transfer in the amount equal to the product of the Option Price multiplied by the number of Time Option Shares to be acquired. As a condition to any exercise of a Time Option, a Participant will permit the Company to deliver to him or her all financial and other information regarding the Company and its Subsidiaries which it believes necessary to enable such Participant to make an informed investment decision. 4. Sale of Common Stock. The Board shall have the power and authority to sell to any Participant any class or classes of Common Stock ("Purchased Stock") at any time prior to the termination of this Plan in such quantity, at such price, on such terms and subject to such conditions that are consistent with this Plan and established by the Board. Common Stock sold under this Plan shall be subject to such terms and evidenced by agreements as shall be determined from time to time by the Board. 5. Repurchase Option. In the event that a Participant is no longer employed by the Company or any of its Subsidiaries for any reason (the date of such termination being referred to -6- herein as the "Termination Date"), the Executive Stock issued to such Participant, whether held by such Participant or one or more transferees, will be subject to repurchase by the Company and the Investors (solely at their option) pursuant to the terms and conditions set forth in this paragraph 5 (the "Repurchase Option"), unless otherwise set forth in the agreement between the Company and the Participant. (a) Termination Other than for Cause. If a Participant is no longer employed by the Company or any of its Subsidiaries as a result of any reason other than such Participant's termination for Cause, then on or after the Termination Date, the Company may elect to purchase all or any portion of the Executive Stock issued to such Participant at a price per share equal to the Fair Market Value thereof (x) as determined on the Termination Date, if the Repurchase Notice (as defined in subparagraph (c) below) has been delivered within three months of the Termination Date or (y) as determined on a date determined by the Board within 30 days prior to the delivery of the Repurchase Notice, if the Repurchase Notice is delivered after the third month following the Termination Date. (b) Termination for Cause. If a Participant is no longer employed by the Company or any of its Subsidiaries as a result of such Participant's termination for Cause, then on or after the Termination Date, the Company may elect to purchase all or any portion of the Executive Stock issued to such Participant at a price per share equal to the lower of its Original Value or the Fair Market Value thereof. (c) Repurchase Procedures. Pursuant to the Repurchase Option, the Company may elect to exercise the right to purchase all or any portion of the shares of Executive Stock issued to a Participant by delivering written notice (the "Repurchase Notice") to the holder or holders of the such Executive Stock. The Repurchase Notice will set forth the number of shares of Executive Stock to be acquired from such holder(s), the Fair Market Value for such shares, the aggregate consideration to be paid for such shares and the time and place for the closing of the transaction. In the event that the Company elects to purchase a portion of such Executive Stock pursuant to the terms of this paragraph 5, if any shares of such Executive Stock are held by transferees of such Participant, the Company shall purchase the shares elected to be purchased from such holder(s) of Executive Stock, pro rata according to the number of shares of Executive Stock held by such holder(s) at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest share). If Executive Stock of different classes is to be purchased by the Company and Executive Stock is held by transferees of such Participant, the number of shares of each class of Executive Stock to be purchased will be allocated among such holders, pro rata according to the total number of shares of Executive Stock to be purchased from such persons. (d) Investor Rights. (i) If for any reason the Company does not elect to purchase all of the Executive Stock (issued to a particular Participant) pursuant to the Repurchase Option prior to the 180th day following the Termination Date, the Investors will be entitled to exercise the Repurchase Option, in the manner set forth in this paragraph 5, for the Executive Stock the Company has -7- not elected to purchase (the "Available Shares"). As soon as practicable, but in any event within thirty (30) days after the Company determines that there will be any Available Shares, the Company will deliver written notice (the "Option Notice") to the Investors setting forth the number of Available Shares and the price for each Available Share as determined pursuant to the provisions of this paragraph 5. (ii) Each of the Investors will initially be permitted to purchase its pro rata share (based upon the number of shares of Common Stock then held by such Investors) of the Available Shares. Each Investor may elect to purchase any number of the Available Shares (subject to all of the terms of this paragraph 5) by delivering written notice to the Company within 30 days after receipt of the Option Notice from the Company (such 30-day period being referred to herein as the "Investor Election Period"). (iii) As soon as practicable but in any event within five (5) days after the expiration of the Investor Election Period, the Company will, if necessary, notify the Investors electing to purchase Available Shares of any Available Shares which Investors have elected not to purchase and each of the electing Investors will be entitled to purchase the remaining Available Shares on the same terms as described above (the "Second Option Notice"); provided that if in the aggregate such Investors elect to purchase more than the remaining Available Shares, such remaining Available Shares purchased by each such Investor will be reduced on a pro rata basis based upon the number of shares of Common Stock then held by such Investors. Each Investor may elect to purchase any of the remaining Available Shares available to such Investor by delivering written notice to the Company within 10 days after the delivery of the Second Option Notice (with such 10-day period referred to herein as the "Second Investor Election Period"). (iv) As soon as practicable but in any event within five (5) business days after the expiration of the Investor Election Period or the Second Investor Election Period (if any), the Company will, if necessary, notify the holder(s) of the Executive Stock as to the number of shares of Executive Stock being purchased from the holder(s) by the Investors (the "Supplemental Repurchase Notice"). At the time the Company delivers a Supplemental Repurchase Notice to the holder(s) of such Executive Stock, the Company will also deliver to each electing Investor written notice setting forth the number of such shares of Executive Stock that the Company and each Investor will acquire, the aggregate purchase price to be paid and the time and place of the closing of the transaction. (v) The Company shall have the option at any time to repurchase from any Investor any shares of Common Stock purchased by such Investor pursuant to the terms hereof at a price per share equal to the amount paid therefor by such Investor plus 8% per annum from the date such Investor purchased such shares to the date of repurchase of such shares by the Company. For purposes of determining an Investor Return Multiple, the amount of cash payments to, and investments by, Investors under this paragraph 5 shall not be taken into account in determining Cash Inflows and Cash Outflows. -8- (e) Closing. The closing of the transactions contemplated by this paragraph 5 will take place on the date designated by the Company in the Repurchase Notice or the Supplemental Repurchase Notice, as the case may be, which date will not be more than 90 days after the delivery of such notice. The Company and/or the Investors, as the case may be, will pay for the Executive Stock to be purchased pursuant to the Repurchase Option by delivery of, in the case of each Investor, a check payable to the holder of Executive Stock, and in the case of the Company (i) a check payable to the holder of such Executive Stock or (ii) if the repurchase price to be paid by the Company is greater than $100,000, the Company may elect to deliver a check payable to the holder of such Executive Stock in an amount equal to the greater of $100,000 or one-third (1/3) of the repurchase price to be paid by the Company, and a note or notes in the amount of the balance of the repurchase price to be paid by the Company, which note or notes shall be payable in three equal annual installments beginning on the first anniversary of the closing of such purchase and bearing interest (payable quarterly) at a rate per annum equal to 8%. Any notes issued by the Company pursuant to this paragraph 5(e) shall be subject to any restrictive covenants to which the Company is subject at the time of such purchase. The Company and/or the Investors, as the case may be, will receive customary representations and warranties from each seller regarding the sale of Executive Stock, including, but not limited to, the representation that such seller has good and marketable title to the Executive Stock to be transferred free and clear of all liens, claims and other encumbrances. (f) Restrictions on Repurchase. Notwithstanding anything to the contrary contained in this Plan, all repurchases of Executive Stock by the Company shall be subject to applicable restrictions contained in the Delaware General Corporation Law and in the Company's and its Subsidiaries' debt and equity financing agreements. If any such restrictions prohibit the repurchase of Executive Stock hereunder which the Company is otherwise entitled to make, the Company may make such repurchases as soon as it is permitted to do so under such restrictions. 6. Administration of the Plan. The Board shall have the power and authority to prescribe, amend and rescind rules and procedures governing the administration of this Plan, including, but not limited to, the full power and authority (i) to interpret the terms of this Plan, the terms of any Options granted under this Plan, and the rules and procedures established by the Board governing any such Options and (ii) to determine the rights of any person under this Plan, or the meaning of requirements imposed by the terms of this Plan or any rule or procedure established by the Board. Each action of the Board shall be binding on all persons. 7. Participation Rights. At least 30 days prior to any sale or exchange (a "Transfer") of any class of Common Stock by an Investor (other than a Transfer among the Investors, their affiliates or an employee of the Company or its Subsidiaries), such Investor (the "Transferring Stockholder") will deliver a written notice (the "Sale Notice") to the Company and the holders of such class of Executive Stock (the "Other Stockholders"), specifying in reasonable detail the identity of the prospective transferee(s) and the terms and conditions of the Transfer. The Other Stockholders may elect to participate in the contemplated Transfer by delivering written notice to the Transferring Stockholder within 30 days after delivery of the Sale Notice. If any Other -9- Stockholders have elected to participate in such Transfer, each of the Transferring Stockholder and such Other Stockholders will be entitled to sell in the contemplated Transfer, at the same price and on the same terms, a number of shares of such class of Common Stock equal to the product of (i) the quotient determined by dividing the number of shares of such class of Common Stock owned by such person by the aggregate number of shares of such class of Common Stock owned by the Transferring Stockholder and the Other Stockholders participating in such sale and (ii) the number of shares of such class of Common Stock to be sold in the contemplated Transfer. Notwithstanding the foregoing, in the event that the Transferring Stockholder intends to transfer more than one class of Common Stock, the Other Stockholders participating in such transfer shall be required to sell in the contemplated Transfer a pro rata portion of shares of all classes of Common Stock, which portion shall be determined in the manner set forth immediately above. The Transferring Stockholder will use reasonable efforts to obtain the agreement of the prospective transferee(s) to the participation of the Other Stockholders in any contemplated Transfer, and the Transferring Stockholder will not Transfer any of its shares of Common Stock to the prospective transferee(s) unless (i) the prospective transferee(s) agrees to allow the participation of the Other Stockholders or (ii) the Transferring Stockholder agrees to purchase the number of shares of such class of Common Stock from the Other Stockholders which the Other Stockholders would have been entitled to sell pursuant to this Paragraph 7. 8. Anti-Dilution. (a) If and whenever on or after the date of adoption hereof, the Company issues or sells, or in accordance with this paragraph 8 is deemed to have issued or sold, any shares of Common Stock (including shares held in the Company's treasury) ("New Stock") some or all of which are issued and/or sold, other than pursuant to the terms hereof, to any of the Investors or any of their affiliates (the "Existing Stockholders"), then immediately upon such issuance or sale the Company shall, in a written notice (a "New Stock Notice") delivered to each Participant no later than the tenth (10th) day following such issuance or sale, offer for sale to each Participant a number of additional shares of Common Stock such that the number of shares of Common Stock, plus the number of unexercised Options, held by such Participant immediately after such issuance or sale (assuming purchase by such Participant of such additional shares) equals the number of shares of Common Stock, plus the number of unexercised Options, held by such Participant immediately prior to such issuance or sale multiplied by a fraction, the numerator of which equals the total number of shares of Common Stock deemed under this paragraph 8 to be outstanding immediately after such issuance or sale, and the denominator of which equals the total number of shares of Common Stock deemed under this paragraph 8 to be outstanding immediately prior to such issuance or sale. The New Stock Notice shall state the number of shares offered for sale to such Participant pursuant to this paragraph 8, the purchase price per share therefor, as determined pursuant to this paragraph 8, and the time and place for the closing of the purchase in the event such Participant accepts the offer. The date of such closing shall be not more than ninety (90) days following the issuance or sale of the New Stock. (b) A Participant may elect to purchase all, none, or any portion not less than 20% of the Common Stock offered for sale in a New Stock Notice by delivering to the Company written notice -10- thereof within fifteen (15) days following such Participant's receipt of such New Stock Notice. In the event any one or more Participants elect to purchase less than all of the shares offered for sale to such Participants in New Stock Notices with respect to a particular issuance or sale, the Company shall make available any such shares which such Participants elect not to purchase on a pro rata basis to all other Participants, in a manner substantially similar to that provided in paragraph 5(d) hereof with respect to Investors' rights. (c) For purposes of the computation referred to in this paragraph 8, the number of shares of Common Stock outstanding shall be deemed to include all shares issuable to the holders of any securities exercisable for, or convertible into, shares of Common Stock. For purposes of the computation of the consideration per share received, as referred to in this paragraph 8, the consideration received upon issuance or sale of securities shall be deemed to include the consideration received for all securities issued in the same transaction to the same purchaser, as appropriate under the circumstances. The Common Stock offered for sale pursuant to this paragraph 8 shall be of the same class as the New Stock; and, if the New Stock is comprised of Common Stock of more than one class, the stock offered for sale pursuant to this paragraph 8 shall be comprised of the same classes in the same proportions as the New Stock. The purchase price per share for Common Stock offered for sale pursuant to this paragraph 8 shall be equal to the price per share at which the New Stock is sold. (d) The Existing Stockholders may, in their sole discretion, elect to fulfill the Company's obligations to Participants under this paragraph 8 out of such Existing Stockholders' holdings of Common Stock. In the event the Existing Stockholders fulfill the Company's obligations to Participants under this paragraph 8 with respect to an issuance or sale of Common Stock, the Company shall have no further obligations to such Participants under this paragraph 8 with respect to such issuance or sale. 9. Limitation on the Aggregate Number of Shares. The number of shares of Common Stock issued under this Plan (including the number of shares of Common Stock with respect to which Options may be granted under this Plan (and which may be issued upon the exercise or payment thereof)) shall not exceed, in the aggregate, 1,000,000 shares of Common (as such number is equitably adjusted pursuant to the terms hereof). If any Options expire unexercised or unpaid or are canceled, terminated or forfeited in any manner without the issuance of Common Stock or payment thereunder, the shares with respect to which such Options were granted shall again be available under this Plan. Similarly, if any shares of Common Stock issued hereunder, either as Purchased Stock or upon exercise of Options, are repurchased hereunder, such shares shall again be available under this Plan for reissuance as Executive Stock. In addition, if any party other than the Company purchases shares of Common Stock in lieu of repurchase by the Company, the Company will, as promptly as legally permissible, purchase such shares from such party and such shares shall again be available under this Plan for reissuance as Executive Stock. Shares of Common Stock to be issued upon exercise of the Options or shares of Common Stock to be sold directly hereunder may be either authorized and unissued shares, treasury shares, or a combination thereof, as the Board shall determine. -11- 10. Incentive Stock Options. All Incentive Stock Options (i) shall have an exercise price per share of Common Stock of not less than 100% of the fair market value of such share on the date of grant, (ii) shall not be exercisable more than ten years after the date of grant, (iii) shall not be transferable other than by will or under the laws of descent and distribution and, during the lifetime of the Participant to whom such Incentive Stock Options were granted, may be exercised only by such Participant (or his guardian or legal representative), and (iv) shall be exercisable only during the Participant's employment by the Company or a Subsidiary, provided, however, that the Board may, in its discretion, provide at the time that an Incentive Stock Option is granted that such Incentive Stock Option may be exercised for a period ending no later than either (x) the termination of this Plan in the event of the Participant's death while an employee of the Company or a Subsidiary, or (y) the date which is three months after termination of the Participant's employment for any other reason. The Board's discretion to extend the period during which an Incentive Stock Option is exercisable shall only apply if and to the extent that (i) the Participant was entitled to exercise such Option on the date of termination, and (ii) such Option would not have expired had the Participant continued to be employed by the Company or a Subsidiary. To the extent that the aggregate fair market value of stock with respect to which Incentive Stock Options are exercisable for the first time by any individual during any calendar year exceeds $100,000, such Options shall be treated as Options which are not Incentive Stock Options. 11. Listing, Registration and Compliance with Laws and Regulations. Each Option shall be subject to the requirement that if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any state or federal securities or other law or regulation, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to or in connection with the granting of such Option or the issue or purchase of shares thereunder, no such Option may be exercised or paid in Common Stock in whole or in part unless such listing, registration, qualification, consent or approval (a "Required Listing") shall have been effected or obtained, and the holder of the Option will supply the Company with such certificates, representations and information as the Company shall request which are reasonably necessary or desirable in order for the Company to obtain such Required Listing, and shall otherwise cooperate with the Company in obtaining such Required Listing. In the case of officers and other persons subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, the Board may at any time impose any limitations upon the exercise of an Option which, in the Board's discretion, are necessary or desirable in order to comply with Section 16(b) and the rules and regulations thereunder. If the Company, as part of an offering of securities or otherwise, finds it desirable because of federal or state regulatory requirements to reduce the period during which any Options may be exercised, the Board may, in its discretion and without the consent of the holders of any such Options, so reduce such period on not less than 15 days' written notice to the holders thereof. 12. Cash Payments Upon Exercise. Upon the written request of the holder of exercisable Options which are not Incentive Stock Options, the Board may provide that such holder shall, as soon as practicable after the exercise of the Options, receive, in lieu of any issuance of -12- Common Stock, a cash payment in such amount as the Board and such holder may agree, but not more than the excess of the Fair Market Value of a share of Common Stock (on the date the holder recognizes taxable income) over the Option's exercise price multiplied by the number of shares as to which the Option is exercised. 13. Adjustment for Change in Common Stock. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation or other change in the Common Stock, the Board shall make appropriate changes in the number and type of shares authorized by this Plan, the number and type of shares covered by outstanding Options and the prices specified therein. 14. Taxes. The Company shall be entitled, if necessary or desirable, to withhold (or secure payment from the Plan participant in lieu of withholding) the amount of any withholding or other tax due from the Company or any subsidiary with respect to any amount payable and/or shares issuable under this Plan, and the Company or any subsidiary may defer such payment or issuance unless indemnified to its satisfaction. 15. Termination and Amendment. The Board at any time may suspend or terminate this Plan and make such additions or amendments as it deems advisable under this Plan, except that they may not, without further approval by the Company's stockholders, (a) increase the maximum number of shares as to which Options may be granted under this Plan, except pursuant to an express provision hereof or (b) extend the term of this Plan; provided that, subject to paragraph 11 hereof, the Board may not change any of the terms of a written agreement with respect to an Option between the Company and the holder of such Option without the approval of the holder of such Option. No Options shall be granted or shares of Common Stock issued hereunder after October 1, 2007; provided that, if the term of this Plan is otherwise extended, no Incentive Stock Options shall be granted hereunder after October 1, 2007. -13- Schedule A Investors --------- Bain Capital Fund IV, L.P. Bain Capital Fund IV-B, L.P. BCIP Associates BCIP Trust Associates, L.P. Randolph Street Partners GS Capital Partners, L.P. Bridge Street Fund 1994, L.P. Stone Street Fund 1994 -14- EX-21.1 4 SUBSIDIARIES OF DADE BEHRING, INC. EXHIBIT 21.1 SUBSIDIARIES OF DADE BEHRING INC.
State or Jurisdiction of Subsidiary Incorporation or Organization ---------- ----------------------------- Dade B.V. The Netherlands Dade AG Switzerland Dade Diagnostics Lda Portugal Dade Diagnostics, SL Spain Dade Diagnostics Corporation Canada Dade Diagnostics of P.R., Inc. Delaware Dade Diagnostics Pty. Ltd Australia Dade Diagnostika GmbH Germany Dade Export Corporation Delaware Dade Foreign Sales Corporation Barbados W.I. Dade Finance, Inc. Delaware Dade Limited Japan Dade Ltda. Brazil Dade Microscan Inc. Delaware Dade S.A. Belgium Dade S.A. France Dade S.A. de CV Mexico Dade S.p.A. Italy Syva Diagnostics Holding Company San Jose Syva Company San Jose Syva Childcare Inc. San Jose Dade Behring Canada Inc. Canada Behring Diagnostica de Mexico, S.A. de C.V. Mexico Behring Diagnostica Ltda Brazil Dade International de Venezuela C.A. Venezuela Dade Behring Holding GmbH Germany Dade Behring Marburg GmbH Germany Dade Behring Vertriebs GmbH Germany Dade Behring Grundstucks GmbH Germany Dade Behring SA France Dade Behring Diagnostica S.p.A. Italy Instituto Behring S.p.A. Italy Behring Diagnostics Iberica SA Spain Behring Diagnostics Portugal Portugal Syva Diagnostica B.V. Netherlands Syva European Distribution BV Netherlands Dade Behring SA Belgium Behring Diagnostics Benelux s.a.-n.v. Belgium Behring Diagnostica Austria Ges.m.b.H. Austria Behring Diagnostica Denmark A/S Denmark Behring Diagnostics Finland Oy/Ab Finland Behring Diagnostika Norway AS Norway Behring Diagnostika Sweden AS Sweden Behring Diagnostics UK Ltd UK Behring Diagnostika Hellas ABEE Greece
X-3 Behring Diagnostics Polska Sp.ro.o. Poland Behring Diagnostics AG Switzerland Dade Diagnostics AG Switzerland Hoechst Behring Diagnotics Ltd Japan Behring Diagnostics Australia Pty Ltd Australia Behring Diagnostics Ltd., NZ New Zealand Behring Diagnostics Asia Pte. Ltd. Singapore Behring Diagnostics (Malaysia) San Bhd Malaysia PT Behrindonusa Perkasa Indonesia Behring Diagnostics Philippines, Inc. Philippines
X-4 EX-23.1 5 REPORT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Dade Behring Inc. Our audits of the consolidated financial statements of Dade Behring Inc. referred to in our report dated March 25, 1998 (which report and consolidated financial statements are listed in the "Index to Financial Statements and Schedule" of this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)(i) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Chicago, Illinois March 25, 1998 X-5 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Dade Behring and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 20,500 0 359,600 27,700 272,500 765,200 214,500 364,500 1,510,400 431,200 350,000 0 0 0 204,100 1,510,400 980,500 980,500 654,100 1,128,100 (9,000) 17,000 87,800 (226,400) (83,800) (142,600) 0 0 0 (142,600) 0 0
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