FORM 10-K
INVERNESS MEDICAL INNOVATIONS INC
(Annual Report)
Filed 3/15/2004 For Period Ending 12/31/2003
Address 51 SAWYER ROAD SUITE 200
WALTHAM, Massachusetts 02453
Telephone 781-647-3900
CIK 0001145460
Industry Biotechnology & Drugs
Sector Healthcare
Fiscal Year 12/31
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
For the fiscal year ended December 31, 2003
or
For the transition period from to
Commission file number 000-16789
INVERNESS MEDICAL INNOVATIONS, INC. (Exact Name of Registrant as Specified in Its Charter)
(781) 647-3900 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
�
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
�
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Delaware 04-3565120 (State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
51 Sawyer Road, Suite 200, Waltham, Massachusetts
02453
(Address of principal executive offices) (Zip Code)
Title of Each Class Name of Each Exchange
on Which Registered
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 � No �
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes � No �
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes � No �
The aggregate market value of the voting common stock held by non-affiliates of the registrant based on the closing price of the registrant's stock on the American Stock Exchange on June 30, 2003 (the last business day of the registrant's most recently completed second fiscal quarter) was $249,917,109. For this computation, the registrant has excluded the market value of all shares of common stock reported as beneficially owned by executive officers and directors of the registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the registrant.
As of March 12, 2004, the registrant had 20,094,405 shares of common stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 29, 2004 are incorporated by reference into Part III of this Form 10-K.
PART I
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as "may," "could," "should," "would," "intend," "will," "expect," "anticipate," "believe," "estimate," "continue" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other "forward-looking" information. There may be events in the future that we are not able to predict accurately or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. We caution investors that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those we discuss in this report. There are a number of important factors that could cause our actual results to differ materially from those projected by such forward-looking statements. These factors include, but are not limited to, the risk factors detailed in this report and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission. You should carefully review the factors discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors Affecting Future Results" and "Special Statement Regarding Forward-Looking Statements" beginning on pages 47 and 62, respectively, in this report and should not place undue reliance on our forward-looking statements. These forward-looking statements were based on information, plans and estimates at the date of this report. We undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Unless the context requires otherwise, references in this annual report on Form 10-K to "we," "us," "our," or "our company" refer to Inverness Medical Innovations, Inc. and its subsidiaries, and their respective predecessor entities for the applicable periods, considered as a single enterprise.
We have registered, applied to register or are using the following trademarks: Clearblue®, Clearblue Easy®, Fact plus®, Accu-Clear TM , ClearPlan®, ClearPlan Easy®, Persona®, Ferro-Sequels TM , Stresstabs®, Protegra®, Posture®, SoyCare TM , ALLBEE®, Z-BEC®, Clearview®, Wampole®, SureStep TM , Osteomark®, TestPack TM , Signify®, SmartCare®, Isolator TM , InstaCheck®, InstaCup®, InstaStick®, CheckCup®, ImmunoComb TM , DoubleCheck TM and ImmunoGold TM .
Common Stock, $0.001 per share par value American Stock Exchange
The following are trademarks of parties other than us: Abbott TestPack®, Abbott TestPack plus®, e.p.t®, Labotech®, Personal LAB TM , Athena Multi-Lyte TM , Micro Trak TM , Triomega®, Pronova Biocare® and Walgreens®.
ITEM 1. BUSINESS
OVERVIEW
We are a leading global developer, manufacturer and marketer of in vitro diagnostic products for the over-the-counter pregnancy and fertility/ovulation test market and the professional rapid diagnostic test market. Our business is organized into two reportable segments, consumer products and professional diagnostics. Through our consumer products segment, we hold a leadership position in the worldwide over-the-counter pregnancy and fertility/ovulation test market. We sell our pregnancy and fertility/ovulation test products in the premium branded sector, the value branded sector and the private label sector. In addition, we manufacture and market a variety of vitamins and nutritional supplements under our brands and those of private label retailers primarily in the U.S. consumer market. Through our professional diagnostics segment, we develop, manufacture and market an extensive array of innovative rapid diagnostic test products and other in vitro diagnostic tests to medical professionals and laboratories for detection of infectious diseases, drugs of abuse and pregnancy. Today, we are a leader in the worldwide professional rapid diagnostic test market. We have grown our consumer products and professional diagnostics segments by leveraging our strong intellectual property
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portfolio and making selected strategic acquisitions. Our consumer and professional diagnostic products are sold in approximately 90 countries through our direct sales force and an extensive network of independent global distributors.
Our consumer products segment primarily targets the women's health market through home pregnancy detection tests and home fertility/ovulation prediction tests. In this market, we offer premium branded products, including Clearblue, value branded products, including Accu-Clear, and private label products. Our Clearblue branded pregnancy test was the first one-step pregnancy test and currently holds a leadership position globally. We also recently launched our new digital pregnancy test, Clearblue Easy Digital, which was the first consumer pregnancy test to display test results in words, and our Clearblue Easy Fertility Monitor remains the only hormone-based reusable monitoring device available for home use to assist women attempting to conceive. Additionally, we have entered into two separate supply arrangements with Pfizer pursuant to which we agreed to supply Pfizer with a digital version of its e.p.t pregnancy tests on a non-exclusive basis beginning in December 2003 and the non-digital version of its premium branded e.p.t pregnancy tests beginning in June 2004 and continuing for five years. We sell our premium and value branded products over-the-counter through drugstores, groceries and mass merchandisers, and we sell our private label products to major retailers such as Walgreens, CVS, RiteAid and Boots. As a part of our consumer products segment, we also market a wide variety of vitamins and nutritional supplements through retail drug stores, mass merchandisers, groceries and warehouse clubs primarily within the United States.
Our professional diagnostics segment consists of diagnostic test products designed to assist medical professionals in both preventative and interventional medicine. We offer our customers an extensive array of rapid diagnostic test products, which address the need for quick, accurate results at the point-of-care. We also offer products in a variety of other platforms, including enzyme linked immunosorbent assay (ELISA, tests), the AtheNA Multi-Lyte ANA Test System, indirect fluorescent antibody and microbiology assay tests and serology diagnostic products. Our products test for infectious diseases, including tests for Epstein-Barr virus, strep throat, herpes simplex virus, measles and mumps; pregnancy; autoimmune disease; bone resorption, to assist in managing osteoporosis; and drugs of abuse. Through our direct sales force and distributor relationships, we have access to the major customers in the professional diagnostic test market, including hospitals, reference labs, physicians' offices and other point-of-care settings.
Inverness Medical Innovations, Inc. is a Delaware corporation. Our principal executive offices are located at 51 Sawyer Road, Suite 200, Waltham, Massachusetts 02453 and our telephone number is (781) 647-3900. Our common stock is listed on the American Stock Exchange under the symbol "IMA."
Our web site is www.invmed.com and we make available through this site, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. These reports may be accessed through our website's company information page.
RECENT DEVELOPMENTS
Private Placement of 8 3 / 4 % Senior Subordinated Notes
On February 10, 2004, we completed the sale of $150 million of 8 3 / 4 % senior subordinated notes due 2012 in a private placement to qualified institutional buyers. Interest on the senior subordinated notes is payable semi-annually in arrears on each February 15 and August 15,
commencing on August 15, 2004. The senior subordinated notes are unsecured and are subordinated to all of our existing and future senior debt, including our guarantee of all borrowings under our senior credit
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facility. The senior subordinated notes are guaranteed by all of our domestic subsidiaries that are guarantors or borrowers under our senior credit facility. The indenture governing the senior subordinated notes contains covenants that restrict our ability to, among other things, incur additional indebtedness, pay dividends, redeem stock, make investments, sell assets, incur liens and consolidate, merge or sell all or substantially all of our assets. We have agreed to file a registration statement that will enable the holders of the senior subordinated notes to exchange the privately placed notes for publicly registered notes with substantially identical terms.
We used $134.5 million of the proceeds to repay all of our outstanding term indebtedness, as well as to fully pay down the revolving credit facilities under our senior credit facility, and to fully repay our outstanding 9% subordinated promissory notes, including prepayment penalties. The net proceeds of approximately $11.4 million will be used for general corporate purposes, as well as to pay additional expenses related to the sale of the senior subordinated notes. We also retained access to up to $50 million in available credit under the revolving credit facilities that were repaid.
BUSINESS SEGMENTS AND GEOGRAPHIC AREA
Our major reportable segments are consumer products and professional diagnostics. Our consumer products are further divisible into consumer diagnostics, which includes our home pregnancy detection and fertility/ovulation prediction tests, and vitamins and nutritional supplements. We further categorize our sales by major geographic areas of the world. Below are discussions of each of our reportable segments. Financial information about our reportable segments is provided in Note 15 of the "Notes to Consolidated Financial Statements," which are included elsewhere in this report.
Industry
Consumer Products
Consumer Diagnostics. Our current consumer diagnostic products target the worldwide over-the-counter pregnancy and fertility/ovulation test market. There are numerous pregnancy self-tests on the market, which are typically urine-based tests and provide results in less than five minutes. These tests represent a safe, easy and effective method for women to manage their reproductive health at home. Fertility/ovulation prediction tests inform women of the best time to conceive a baby by detecting the surge of the luteinizing hormone, which precedes ovulation. Fertility/ovulation prediction tests are generally easy to use and urine-based fertility/ovulation prediction tests have become widely accepted for home use by professional fertility care providers and the general public. Urine-based fertility/ovulation tests consist of disposable stick tests, which are similar to pregnancy tests, and fertility monitoring devices, such as our Clearblue Easy Fertility Monitor, which is the only commercially available reusable monitoring device which measures estrogen levels as well as the luteinizing hormone. There are also saliva-based fertility/ovulation tests on the market which are lower cost alternatives to urine-based tests, but generally are not as easy to interpret and do not provide notification of ovulation as early as urine-based tests can.
Vitamins and Nutritional Supplements. According to Nutrition Business Journal estimates, total mass merchandise retail sales of vitamins and nutritional supplements in the United States during 2002 were approximately $6 billion. Most growth in the industry is attributed to new products that generate attention in the marketplace. Well-established market segments, where competition is greater and media commentary less frequent, are generally stable. Slow overall growth in the industry has resulted in retailers reducing shelf space for nutritional supplements and has forced many under-performing items out of distribution, including several broad product lines. Sales growth of private label products has generally outpaced the overall industry growth, as retailers continue to add to the number of private label nutritional products on their shelves.
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Professional Diagnostics
The professional diagnostics market consists of products designed to assist medical professionals in both preventative and interventional medicine. These products provide for qualitative or quantitative analysis of a patient's body fluids or tissue for evidence of a specific medical condition or disease state or to measure response to therapy. Today, we are a leader in the worldwide professional rapid diagnostic test market, which we define to include only the professional point-of-care pregnancy, infectious disease and drugs of abuse test markets. This market consists primarily of small and medium- sized, non-centralized laboratories and testing locations such as physician office laboratories, small blood banks, specialist mobile clinics and some rapid-response laboratories in larger medical centers. We distinguish the professional point-of-care rapid diagnostic test market from clinical diagnostic markets that consist of large, centralized laboratories that offer a wide range of highly-automated laboratory services in hospital or related settings.
We believe that the demand for infectious disease diagnostic products is growing faster than demand in many other segments of the non-laboratory, or point-of-care, immunoassay market due to the increasing incidence of certain diseases or groups of diseases, including lyme disease, viral hepatitis, acquired immunodeficiency syndrome, respiratory syncytial virus (RSV) and tuberculosis, as well as HIV, chlamydia and other sexually transmitted diseases. In general, we believe that the ability to deliver faster, accurate results at reasonable prices drives demand for professional diagnostic products. This means that while there is certainly growing demand for faster, more efficient automated equipment from large hospitals and major reference testing laboratories, there is also growing demand by point-of-care facilities and smaller laboratories for fast, high-quality, inexpensive, self-contained diagnostic kits. As the speed and accuracy of such products improve, we believe that these products will play an increasingly important role in achieving early diagnosis, timely intervention and therapy-monitoring outside of acute medicine environments.
Products
Consumer Products
Consumer Diagnostics. Through our consumer products business, we develop, manufacture and market home pregnancy and fertility/ovulation prediction tests. We offer premium branded products, value branded products and private label products. Our Clearblue home pregnancy and fertility/ovulation prediction tests are global leaders in terms of both sales and technology and our Clearblue Easy Fertility Monitor is the only hormone-based reusable monitoring device available for home use to assist women attempting to conceive. Our Accu-Clear branded pregnancy and fertility/ovulation prediction products are marketed to value-oriented consumers in the United States. We also recently acquired Fact plus, another leading brand pregnancy test from Abbott Laboratories, We are also a major U.S. supplier of private label home pregnancy detection and fertility/ovulation prediction products. We have supply arrangements with Pfizer pursuant to which we agreed to supply Pfizer with a digital version of its e.p.t pregnancy tests on a non-exclusive basis beginning in December 2003 and the non-digital version of its premium branded e.p.t pregnancy tests beginning in June 2004 and continuing for five years. We also sell Persona, a diagnostic monitoring device that provides for a natural method of contraception by allowing the user to monitor her menstrual cycle, in foreign countries, primarily in Germany and the United Kingdom.
• Pregnancy Test Products. We market our pregnancy self-test kits in both stick and cassette versions. The stick version has an exposed wick which absorbs urine when placed in the urine stream. The cassette version requires the user to first collect a urine sample in a cup and then use an enclosed dropper to place the urine sample in the test well. Both versions display visual results in approximately one minute or three minutes, depending on the product. Additionally, in the second quarter of 2003, we launched our new digital pregnancy test, Clearblue Easy Digital,
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which was the first consumer pregnancy test on the market to display test results in words. Instead of interpreting colored lines for a result, the digital display will spell out "Pregnant" or "Not Pregnant." We sell our premium and value branded products over-the-counter through drugstores, groceries and mass merchandisers, and we sell our private label products to major retailers such as Walgreens, CVS, RiteAid and Boots.
• Fertility/Ovulation Prediction Products. We market our fertility/ovulation prediction self-test kits in stick and cassette versions, each of which operates in a manner similar to the comparable version of our pregnancy self-test kits. We market our fertility/ovulation prediction test kits under our own brand names and under various store brand labels of retail drugstores, groceries and mass merchandisers. Our fertility/ovulation prediction test kits provide 24 to 48 hours notice of when ovulation is likely to occur. By identifying the days when a woman is most fertile, these products assist couples in planning conception. Clinically accurate results are available in approximately three minutes.
We also market an advanced fertility/ovulation prediction self-test device called the Clearblue Easy Fertility Monitor. The Fertility Monitor not only detects the surge of the luteinizing hormone, or LH, which causes ovulation, but it is also the only fertility/ovulation prediction device that identifies additional days when a woman may conceive by detecting a rise in estrogen levels that precedes the LH surge. The Fertility Monitor is comprised of a hand held monitoring device and disposable urine test sticks. This product is sold primarily in the United States and Canada.
• Persona. Persona is a diagnostic monitoring device that provides for a natural method of contraception by allowing the user to monitor her menstrual cycle. Persona is comprised of a hand-held monitoring device and disposable urine test sticks. Persona is sold in Europe, primarily in Germany and the United Kingdom, where it is classified as a contraceptive device. We do not have, and have not applied for, regulatory approval to sell Persona in the United States.
Vitamins and Nutritional Supplements. We market a wide variety of vitamins and nutritional supplements through retail drug stores, mass merchandisers, groceries and warehouse clubs primarily within the United States. Inverness Medical Nutritionals Group, or IMN, is a national supplier of private label vitamin and nutritional products for major drug and food chains and also manufactures bulk vitamins, minerals and nutritional supplements under contract for unaffiliated brand name distributors. IMN also manufactures an assortment of vitamin, mineral and nutritional supplement products for sale under Inverness Medical brand names.
Our Inverness Medical branded nutritional products are high quality products sold at moderate prices through national and regional drug stores, groceries and mass merchandisers. These branded products include Stresstabs, a B-complex vitamin with added antioxidants; Ferro-Sequels, a time-release iron supplement; Protegra, an antioxidant vitamin and mineral supplement; Posture-D, a calcium supplement; SoyCare, a soy supplement for menopause; ALLBEE, a line of B-complex vitamins; and Z-BEC, a zinc supplement with B-complex vitamins and added antioxidants. We also market these branded products under the SmartCare program, which assists consumers in matching their health concerns to the appropriate supplement products that we sell. SmartCare provides a means of linking our various nutritional supplement products, allowing for greater efficiencies in advertising, promotion and merchandising. We have recently entered into agreements to serve as the exclusive U.S. manufacturer and distributor of Triomega, an omega-3 dietary supplement owned by Pronova Biocare. We introduced Triomega, a leading brand in Europe, to the U.S. market in December 2003.
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Professional Diagnostic Products
We develop and market a broad range of diagnostic tests that are sold to professional diagnostic users. In the United States, our professional diagnostic products are sold under our Wampole, SureStep, Signify and Clearview labels and we also distribute products on behalf of third parties. Outside of the United States, we market our Clearview, SureStep and TestPack products, as well as several proprietary platforms of products manufactured by our subsidiary Orgenics, Ltd., located in Yavne, Israel. Our professional diagnostic products include:
• Rapid Membrane Test Products. We develop and market a wide variety of rapid membrane tests for pregnancy, drugs of abuse, mononucleosis, strep throat, C.difficile, lyme disease, chlamydia, H.pylori and rubella. These products, which include our Clearview, SureStep, Signify and TestPack brands, are qualitative, visually-interpreted rapid diagnostic tests that are used in point-of-care environments where a rapid response is desired or where the volume of testing is too low to warrant high-volume methods. Our DoubleCheck and ImmunoGold platforms are low-cost rapid tests sold outside of the United States and include tests for HIV and hepatitis.
• ELISA Products. We offer over 70 enzyme linked immunosorbent assays (ELISA) tests for infectious and sexually transmitted diseases, including tests for Epstein-Barr virus (EBV), TORCH (toxoplasmosis, rubella, cytomegalovirus and herpes simplex virus), H.pylori, lyme disease, syphilis, measles, mumps, varicella zoster virus, or VZV, and Legionella; enteric disease testing for C.difficile, Giardia, Cryptosporidium, E. histolytica and chlamydia; autoimmune disease; bone resorption to assist in managing osteoporosis; and cardiac risk assessment. We also offer a full line of automated instrumentation for processing ELISA assays including the Labotech and PersonalLAB systems. Our ImmunoComb line of products is a manual ELISA testing platform marketed outside the United States as a low cost alternative to more expensive automated ELISA platforms.
• AtheNA Multi-Lyte ANA Test System. We recently introduced, and are the exclusive U.S. distributor of, the AtheNA Multi-Lyte ANA Test System, which is capable of simultaneously performing an anti-nuclear antibody, or ANA, screen and reflex testing for nine specific auto-antibodies in a single well. The test system may be used as an aid in the diagnosis of patients with various autoimmune diseases and connective tissue disorders, such as systemic lupus erythematosus, mixed connective tissue disease, Sjogren's Syndrome, Crest syndrome and myositis. The AtheNA Multi-Lyte ANA test provides improved clinical sensitivity and comparable clinical specificity to ELISA in a labor saving, automated user-friendly format.
• IFA and Microbiology Assays. We also offer a line of indirect fluorescent antibody, or IFA, assays for over 20 viral, bacterial and autoimmune diseases. Our Isolator Blood Culture system provides rapid isolation and improved recovery of microorganisms in the blood, and our MicroTrak family of products test for sexually transmitted diseases, including Chlamydia EIA, Chlamydia DFA and herpes simplex virus.
• Serology Diagnostic Products. We also offer a full line of serology diagnostic products covering a broad range of disease categories, including mononucleosis, rheumatoid arthritis, C-reactive protein, syphilis, rubella and streptococcal infections. Many of our kits are available in multiple formats including rapid membrane, latex, red cell and color-enhanced agglutination. These serology assays provide cost-effective testing alternatives and most offer results in two minutes or less.
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Marketing and Sales
Consumer Products
Consumer Diagnostic Products. We market and sell our consumer diagnostic products under our own brand names as well as under store brands. Our customers include retail drug stores, drug wholesalers, groceries and mass merchandisers in North America, Europe and Japan. Our Clearblue brand pregnancy detection and fertility/ovulation prediction tests, which are marketed under the name Clearblue Easy in the United States, is a leading brand both in the United States and globally. Our Clearblue products are marketed as premium products and
compete intensively with other premium brand name products. Persona is also marketed as a premium product in Europe. Marketing of premium branded products focuses on brand awareness as well as feature and performance differentiation. We achieve this through television and print advertising. Our Fact plus and Accu-Clear brand products compete primarily based on price and are not heavily advertised. Our consumer diagnostic products are marketed in the United States, the United Kingdom and in Germany using our own sales managers and a network of sales representatives. In other areas of the world, including Japan, Canada, Australia and the rest of Europe, our Clearblue products are sold though distribution contracts with large consumer diagnostics companies. Private label and contract manufacturing arrangements accounted for 19% of our consumer diagnostics business' net product sales for 2003. Our five largest customers during the fiscal year ended December 31, 2003, based on net product sales, were Walgreen Co., Boots Company, CVS Corporation, Laboratoires Polive and RiteAid.
Vitamins and Nutritional Supplements. We primarily market and sell our vitamins and nutritional supplements in the United States through private label arrangements with retail drug stores, groceries, mass merchandisers and warehouse clubs who sell our products under their store brands. We also sell a variety of branded products, most of which we own but certain of which we distribute for third parties, to the retail drug stores, groceries and mass merchandisers. To a lesser extent we provide contract manufacturing services to third parties. Our two largest customers during 2003, based on net product sales, were Walgreens and Costco. Our rights to the trademarks Stresstabs, Ferro-Sequels, Posture-D, Protegra, ALLBEE and Z-BEC are limited to use in North America, but we are not restricted from marketing the formulations sold under those brand names under other brand names outside of North America.
Professional Diagnostic Products
In the United States, we distribute our professional diagnostic products to hospitals, reference laboratories, physician's offices and other point-of-care settings through our extensive sales and distribution network. For the fiscal year ended December 31, 2003, the five largest customers of our U.S. professional diagnostics business were Cardinal Health, Fisher Scientific, Laboratory Corporation of America, PSS World Medical and Quest Diagnostics.
In Germany, we also sell our Clearview products using our own sales force. Otherwise, we sell our Clearview products outside the United States through third party distributors. We also sell a C.difficile test and a Listeria test product that we manufacture at our Bedford facility to an unaffiliated company who markets the products under its own brands. That arrangement prohibits us from selling these tests directly or to other resellers with the exception that we sell the C.difficile test in the United States. Five countries, the United States, Germany, the United Kingdom, Japan and China, represent a majority of our sales of Clearview products.
We have also entered into a distribution arrangement with Abbott Laboratories in connection with our acquisition of the Abbott rapid diagnostics product lines. Under this arrangement, Abbott has also agreed to serve for two years from September 30, 2003 as our U.S. distributor for the Signify product line, except to physician office laboratories currently served by PSS World Medical, Inc., and, to the extent reintroduced in the United States, the TestPack product line. Outside the United States, Abbott
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will distribute the TestPack and Signify product lines for us for up to eighteen months from September 30, 2003.
Our Orgenics products are sold through sales offices, the largest of which are in Israel, France and Brazil, which market those products to smaller laboratories, blood banks, physicians' offices and other patient point-of-care sites in approximately 90 countries, principally in Europe, Latin America, Africa and Asia.
Many of our professional diagnostic products are manufactured by third parties and, in some cases, our distribution rights are limited to the United States. Our Orgenics products, one of our Clearview products and our TestPack products, are not approved for sale, and are not sold, in the United States.
Manufacturing
Consumer Products
Consumer Diagnostic Products. We manufacture nearly all of our disposable consumer diagnostic products at our facilities in Bedford, England, Galway, Ireland and San Diego, California. These facilities employ modern production techniques to produce consistent, high-quality components and each is ISO certified and registered with the United States Food and Drug Administration, the FDA. We use our Bedford facility to manufacture the diagnostic test portion of our new digital pregnancy test, Clearblue Easy Digital, and the digital e.p.t pregnancy test for Pfizer, and we anticipate using this facility to manufacture the non-digital e.p.t pregnancy test for Pfizer in connection with our five-year supply arrangement with Pfizer for this product that begins in June 2004. Our Fact plus pregnancy tests intended for distribution outside of the United States are currently manufactured by Abbott Laboratories under a transitional arrangement entered into in connection with our recent acquisition of the Abbott rapid diagnostics product lines. A significant portion of our products produced and assembled at our Galway plant is subsequently packaged by third parties under contract in the United States. We purchase the electronic portion of our digital pregnancy tests, our Clearblue Easy Fertility Monitor and Persona to our specifications from third party suppliers in Europe and China. Because most components of our consumer diagnostic products are produced to our specifications, some of our suppliers are single source suppliers with few,
if any, alternative sources immediately available.
We are currently using the Bedford facility pursuant to an agreement with Unilever entered into in connection with our acquisition of the Unipath business in 2001. For more information regarding our use of the Bedford facility and the risks associated with our arrangement to use this facility see "Certain Factors Affecting Future Results—We could experience significant manufacturing delays, disruptions to our ongoing research and development and increased production costs if Unilever is unable to successfully assign or sublease to us the lease for the multi-purpose facility that we currently use in Bedford, England."
Vitamins and Nutritional Supplements. We manufacture substantially all of our vitamin and nutritional products at IMN's facilities in Freehold and Irvington, New Jersey. The facility located in Freehold, New Jersey is equipped with large-volume blending, tableting and coating equipment, packaging equipment, including "cartoning," "stretch carding" and "blister carding" equipment, and testing and quality control laboratories. IMN internally manufactures substantially all of its softgel requirements at the Irvington facility. Our Freehold facility manufactures in full compliance with GMP standards recently proposed by the FDA for the dietary supplement industry. Our Irvington facility manufactures to GMP standards applicable to drug makers and is registered with both the United States Drug Enforcement Agency, or the DEA, and the FDA.
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Professional Diagnostic Products
Approximately 57% of the professional diagnostic products that we sell, based on net product sales for the fiscal year ended December 31, 2003, were manufactured by third parties. We manufacture the products we acquired through our acquisition of Applied Biotech, Inc., or ABI, as well as certain of the Abbott rapid diagnostics product lines, at our facilities in San Diego, California. Certain of the remaining Abbott rapid diagnostics product lines, namely the TestPack products, will be manufactured by Abbott under a transitional arrangement until we can transition manufacturing of these products to our own facilities. Most of the Signify products acquired from Abbott are currently manufactured by a third party, with the remainder manufactured by ABI. Our Clearview diagnostic products are manufactured at our facility in Bedford, England, which is described above, and our Orgenics products are manufactured in Yavne, Israel. A portion of our Osteomark products are manufactured at our Galway facility and we are in the process of transferring the manufacturing of the remaining products from our facilities in Seattle to a third-party manufacturer. The Bedford, Galway, Yavne and San Diego manufacturing facilities are ISO certified.
Research and Development
A significant portion our budget for research and development currently is allocated to the development of products targeting new markets that are new to us, including products for osteoporosis and cardiovascular disease management. The remainder of our research and development efforts is focused on enhanced features for our lines of consumer and professional diagnostic products. Most of our research and development activities are carried out at our corporate research and development center in Bedford, England, but we also conduct research and development at our facilities in Galway, San Diego, Yavne and Farum, Denmark. We may, from time to time, supplement our internal research and development efforts with third parties' efforts either through co-development or licensing arrangements, or through product or technology acquisitions. In connection with co-development or licensing activities that we may enter into in the future, we may provide financial development assistance to these parties and may also utilize our own research and development resources to design certain portions of such products.
Foreign Operations
Our business relies heavily on our foreign operations. Three of our seven current manufacturing facilities are outside the United States, including our primary consumer diagnostic manufacturing facilities in Bedford, England and Galway, Ireland. Approximately 36% of our net revenues were generated from outside of the United States during 2003. Our Clearblue products, pregnancy tests in particular, have historically been much stronger brands outside the United States, with 75% of our net product sales of Clearblue products coming from outside the United States during 2003. Persona is sold exclusively outside of the United States, and our Orgenics professional diagnostic products have always been sold exclusively outside of the United States. In addition, our newly acquired TestPack product line is sold exclusively outside the United States.
Competition
General
We have existing competitors, as well as a number of potential new competitors, who have greater name recognition, and significantly greater financial, technical and marketing resources than we do. These strengths may allow them to devote greater resources than we can to the development, marketing and sales of products. These competitors may also engage in more extensive research and development, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies and make more attractive offers to existing and potential employees, customers and clients.
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We expect that industry forces will impact us and our competitors. Our competitors will likely strive to improve their product offerings and price competitiveness. We also expect our competitors to develop new strategic relationships with providers, referral sources and payors, which could result in increased competition. The introduction of new and enhanced services, acquisitions and industry consolidation, and the development of strategic relationships by our competitors could cause a decline in sales or loss of market acceptance of our products, intensify price competition or make our products less attractive. We cannot assure you that we will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations.
Consumer Products
Consumer Diagnostic Products. Competition in the pregnancy detection and fertility/ovulation prediction market is intense. Our competitors in the United States, and worldwide, are numerous and include, among others, large medical and consumer products companies as well as numerous private label manufacturers. Our competitors for the sale of pregnancy test products worldwide include Armkel, Pfizer, Acon Laboratories, Omega Pharma, Princeton BioMeditech, Arax and Syntron Bioresearch, although we have recently entered into two separate supply arrangements with Pfizer pursuant to which we agreed to supply Pfizer with a digital version of its e.p.t pregnancy tests on a non-exclusive basis beginning in December 2003 and the non-digital version of its premium branded e.p.t pregnancy tests beginning in June 2004 and continuing for five years.. Our competitors for the sale of fertility/ovulation prediction tests include Armkel, Princeton BioMeditech, Syntron and Quidel. Competition among branded consumer diagnostic products is based on brand recognition and price. Products sold under well-established or "premium" brand names can demand higher prices and maintain high market shares due to brand loyalty. Our Clearblue brand qualifies as a premium brand worldwide with respect to both pregnancy tests and fertility/ovulation prediction products. Our Clearblue pregnancy tests are market leaders outside of the United States, and our Clearblue fertility/ovulation prediction products are market leaders both in the United States and globally. Our Fact plus and Accu-Clear branded consumer products compete based on price and do not attempt to compete based on brand recognition. For private label manufacturers, competition is based primarily on the delivery of products at lower prices that have substantially the same features and performance as brand name products. The Clearblue Fertility Monitor and Persona are unique products and their competitors or markets are not easily defined.
Certain of our competitors have substantially greater financial, production, marketing and distribution resources than we do. However, we believe that we can continue to compete effectively in the consumer diagnostics market based on our research and development capabilities, advanced manufacturing expertise, diversified product positioning, global market presence and established wholesale and retail distribution networks.
Vitamins and Nutritional Supplements. The market for private label vitamins and nutritional supplements is extremely price sensitive, with quality, customer service and marketing support also being important. Many of the companies that mass market branded vitamins and nutritionals, including NBTY, Pharmavite, Leiner Health Products, and Bayer, also sell to private label customers and constitute our major competitors for private label business. In addition, there are several companies, such as Perrigo and Contract Pharmacal, that compete only in the private label business.
In the branded nutritional supplements industry, competition is based upon brand name recognition, price, quality, customer service and marketing support. There are many companies, both small and large, selling vitamin products to retailers. A number of these companies, particularly manufacturers of nationally advertised brand name products, are substantially larger than we are and have greater financial resources. Among the major competitors of our branded products that are sold
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through groceries and other mass retailers are NBTY, Wyeth, Pharmavite, Leiner Health Products and GlaxoSmithKline.
Professional Diagnostic Products
In the rapid membrane market, our main competitors are Becton Dickinson, Quidel and Beckman Coulter. Some competitors in this market, such as Becton Dickinson are large companies with greater resources than we have. Other competitors in some product segments are small but aggressive companies such as Syntron Bioresearch, Princeton BioMeditech, VEDA.LAB and Trinity Biotech. Some automated immunoassay systems can be considered competitors when labor shortages force laboratories to automate or when the costs of such systems are lower. Such systems are provided by Abbott, Bayer, Roche Diagnostics, Beckman Coulter and other large diagnostic companies. In the infectious disease area, new technologies utilizing amplification techniques for analyzing molecular DNA gene sequences from companies such as Abbott, Roche and Gen-Probe are making in-roads into this market. Competition in this market is intense and is primarily based on price, breadth of line and distribution capabilities.
Our competitors in the ELISA diagnostics market include large corporations, such as Abbott Laboratories and Diagnostic Products
Corporation, which manufacture state-of-the-art automated immunoassay systems and a wide array of diagnostic products designed for processing on those systems. These entities benefit from economies of scale and have the resources to design and manufacture state-of-the-art automated equipment. Other competitors in this market, DiaSorin and Diamedics, in particular, are more similar in size to us and compete based on quality and service. In the United States and Canada, we focus on matching the instrumentation and product testing requirements of our customers by offering a wide selection of diagnostic products and test equipment. Our ImmunoComb product line, which consists of manual tests sold to small laboratories and point-of-care locations, competes against automated ELISA systems based on price.
The markets for our serology and our IFA and microbiology products are mature, and competition is based primarily on price and customer service. Our main competitors in serology and microbiology testing include Med-Ox Diagnostics, Biokit and Quidel. Our main competitors in IFA testing are Bio-Rad Laboratories, INOVA Diagnostics, Immuno Concepts, The Binding Site and DiaSorin. However, products in these categories also compete to a large extent against rapid membrane and ELISA products, which are often easier to perform and read and can be more precise.
Patents and Proprietary Technology; Trademarks
The medical products industry, including the diagnostic testing industry, places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our success will depend, in part, on our abilities to obtain enforceable patent protection for our products, to preserve our trade secrets and to avoid or neutralize threats from the proprietary rights of third parties. We have already built a strong intellectual property portfolio in the area of lateral flow immunoassays, the technology which underlies many rapid diagnostic test formats including most one step home pregnancy and fertility/ovulation tests. By the judicious use of acquisition and strategic licensing we have obtained rights to the major patent families in this area of technology. We believe that these intellectual property rights give us a distinct advantage over our competitors and underpin our continuing success in this area.
In addition to providing us with the rights we need to the lateral flow technology underlying so many of our current products, our intellectual property portfolio also includes an increasing number of other patents, patent applications and licensed patents protecting our vision of the technologies and products of the future. We cannot, however, guarantee our success or timeliness in obtaining future patents or licensed patents or as to the breadth or degree of protection that such patents might afford
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us. As evidenced in the area of lateral flow immunoassays, the patent position of medical products and diagnostic testing firms is often highly complex and requires resolution of significant legal and factual questions. We endeavor to secure commercially relevant patent and other protection for our technology in a timely manner in meaningful jurisdictions. There are, however, a number of factors that affect our activities and over which we do not have control, such as the workload at the individual patent offices and the policies applied by the patent offices during examination. Consequently, we cannot guarantee that patents will be issued on our technology or, if issued, will be of sufficient breadth so as to prevent competition from third parties.
The medical products industry, including the diagnostic testing industry, historically has been characterized by extensive litigation regarding patents, licenses and other intellectual property rights. We believe that our recent successes in enforcing our intellectual property rights in the United States and abroad demonstrate our resolve in enforcing our intellectual property rights, the strength of our intellectual property portfolio and the competitive advantage that we have in this area. We have incurred substantial costs both in asserting infringement claims against others and in defending ourselves against patent infringement claims, and we expect to incur substantial litigation costs as we continue to aggressively protect our technology and defend our proprietary rights. We currently have approximately fifteen suits pending against parties whom we believe manufacture or sell products that infringe our patents. To determine the priority of inventions, we may also have to participate in interference proceedings declared by the U.S. Patent and Trademark Office or foreign patent and trademark authorities, which could also result in substantial costs to us. If the outcome of any such litigation is adverse to us, our business could be materially adversely affected.
In addition, we sometimes obtain licenses to patents or other proprietary rights of third parties to manufacture and market our products. We cannot assure you that licenses required under any such patents or proprietary rights would be made available on terms acceptable to us, if at all. If we do not obtain such licenses, we may encounter delays in product market introductions while we attempt to design around such patents or other rights, or we may be unable to develop, manufacture or sell such products in certain countries, or at all.
We also seek to protect our proprietary technology, including technology that may not be patented or patentable, in part through confidentiality agreements and, if applicable, inventors' rights agreements with collaborators, advisors, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that our trade secrets will not otherwise be disclosed to, or discovered by, competitors or potential competitors. Moreover, we may from time to time conduct research through academic advisors and collaborators who are prohibited by their academic institutions from entering into confidentiality or inventors' rights agreements. In such circumstances, our ability to protect our proprietary developments may be limited.
Finally, we believe that certain of our trademarks are valuable assets that are important to the marketing of our products. Substantially all of these trademarks have been registered with the United States Patent and Trademark Office or internationally, as appropriate. We cannot assure you, however, that registrations will afford us adequate protection and will not be challenged as unenforceable or invalid, or will not be
infringed. In addition, we could incur substantial costs in defending suits brought against us or in prosecuting suits in which we assert rights under such registrations.
Government Regulation
Our research, development and clinical programs, as well as our manufacturing and marketing operations, are subject to extensive regulation by numerous governmental authorities in the United States and other countries. Most of our self-test products require governmental approvals for commercialization. Future products may require pre-clinical and clinical trials. Manufacturing and marketing of many of our products are subject to the rigorous testing and approval process of the FDA
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and corresponding foreign regulatory authorities. The marketing of our consumer diagnostic products is also subject to regulation by the U.S. Federal Trade Commission, or the FTC. Data obtained from pre-clinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. In addition, we may encounter delays or rejection as a result of changes in, or additions to, regulatory policies for device marketing authorization during the period of product development and regulatory review. Delays in obtaining such approvals could adversely affect our marketing of products developed and our ability to generate commercial product revenues.
In addition, we are required to meet regulatory requirements in countries outside the United States, which can change rapidly with relatively short notice, resulting in our products being banned in certain countries and an associated loss of revenues and income. Foreign regulatory agencies can also introduce test format changes which, if we do not quickly address, can result in restrictions on sales of our products. Such changes are not uncommon due to advances in basic research.
The manufacturing, processing, formulation, packaging, labeling and advertising of our nutritional supplements are subject to regulation by one or more federal agencies, including the FDA, the U.S. Drug Enforcement Administration, or DEA, the FTC and the Consumer Product Safety Commission. These activities are also regulated by various agencies of the states, localities and foreign countries in which our nutritional supplements are now sold or may be sold in the future. In particular, the FDA regulates the safety, manufacturing, labeling and distribution of dietary supplements, including vitamins, minerals and herbs, as well as food additives, over-the-counter and prescription drugs and cosmetics. The Good Manufacturing Practices promulgated by the FDA are different for nutritional supplement, drug and device products. In addition, the FTC has jurisdiction along with the FDA to regulate the promotion and advertising of dietary supplements, over-the-counter drugs, cosmetics and foods.
Product Liability and Limited Insurance Coverage
The testing, manufacturing and marketing of consumer and professional diagnostic devices entail an inherent risk of product liability claims. In addition, the marketing of our vitamins and nutritional supplements may subject us to various product liability claims, including, among others, claims that our products have inadequate warnings concerning side effects and interactions with other substances. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. There can be no assurance that existing insurance can be renewed at a cost and level of coverage comparable to that presently in effect, if at all. In the event that we are held liable for a claim, against which we are not indemnified or for damages exceeding the limits of our insurance coverage, such liability could have a material adverse effect on our business, financial condition and results of operations.
Employees
As of March 1, 2004, we had a total of 1,435 full-time employees, of which 641 employees are located in the United States. In addition, we utilize the services of a number of consultants specializing in research and development in our targeted markets, regulatory compliance, strategic planning, marketing and legal matters.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal corporate administrative office, together with the administrative office for most of our United States operations, are housed in approximately 20,600 square feet of leased space located at 51 Sawyer Road, Waltham, Massachusetts at a monthly rent of approximately $43,000. Our lease of this facility has a term of five years and expires on May 31, 2008.
Our European operations are currently administered from a 150,000 square foot facility located in Bedford, England. The Bedford facility is also currently providing the manufacturing for our Clearblue
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and Clearview products, as well as for the pregnancy test products that we manufacture for Pfizer. It also serves as our primary research and development center. This facility contains fully automated assembly equipment, and state-of-the-art research laboratories, with capacity to support potential future expansion. We are currently using the Bedford facility pursuant to an agreement with Unilever entered into in connection with our acquisition of the Unipath business. Unilever currently leases this facility from a third party landlord. Pursuant to Unilever's lease, Unilever is not permitted to assign the lease to us or sublet the Bedford facility to us without obtaining the prior written consent of the landlord (which consent may not be unreasonably withheld). The landlord has indicated that it will not consent to an assignment of the lease to us, and we, Unilever and the landlord are therefore currently negotiating the terms of a sublease. The terms of our acquisition of the Unipath business in 2001 obligate Unilever to use its best efforts to obtain the landlord's consent to assignment or a sublease and, if necessary, to pursue the assignment or sublease through the courts. Unilever has also agreed to permit us to use the Bedford facility until such time as the lease is assigned to us or the facility is subleased to us by Unilever for the remaining term of the lease, which expires on December 11, 2021. Under the terms of this agreement, we are required to pay all amounts owed under the lease and otherwise comply with the terms of the lease. The annual rent for the Bedford facility is currently £1.46 million (approximately, $2.6 million) and is upwardly adjustable every five years, with the next adjustment to take place in September 2006. If Unilever is unable to successfully assign the lease to us or otherwise enable us to realize the benefit of its lease of the Bedford facility, we may be forced to renegotiate a lease of this facility on substantially less favorable terms, seek alternative, more costly means of producing our products or suffer other adverse effects to our business.
We also have manufacturing operations in Freehold, New Jersey, Irvington, New Jersey, San Diego, California, Seattle, Washington, Galway, Ireland and Yavne, Israel. We own a 160,000 square foot manufacturing facility in Freehold, New Jersey and lease a 35,000 square foot facility in Irvington, New Jersey. The Irvington lease has a current term of 5 years expiring on December 31, 2006, with an option to extend for an additional 5 years, and the monthly rent is currently approximately $18,100. The New Jersey facilities manufacture our vitamin and nutritional supplement products that we sell to private label customers, to third parties in bulk and under our own brands. ABI currently manufactures its professional diagnostic products, as well as Fact plus for sale in the United States, out of a 40,000 square foot leased facility in San Diego, California. This lease expires on November 30, 2004, and we have options to extend the lease for two consecutive five-year periods. Monthly rent for the San Diego facility is approximately $36,700.
We currently manufacture a portion of our Ostex products in Galway, Ireland. The remainder of these products are currently manufactured in a facility that we lease in Seattle, Washington, although we expect that during the first half of 2004 we will move the manufacturing of these products to a third party manufacturer. Our lease of the first Seattle facility, which consists of approximately 6,800 square feet of manufacturing space and approximately 24,500 square feet of office and laboratory space, expires on October 1, 2005. Our current monthly rent for this facility of approximately $43,300 is partially offset by monthly rental income of approximately $12,400 from several subleases of portions of the office and laboratory space. We also have a second manufacturing facility in Seattle that we are no longer using which carries monthly rent of approximately $9,000 and is the subject of a ten year lease expiring September 30, 2010. Our facility in Galway, Ireland consists of a 40,000 square foot space. We own half of the Galway facility and lease the other half from a private developer under a lease that expires in 2026. The Galway facility also houses the manufacturing of our Accu-Clear brands and most of our private label pregnancy detection and fertility/ovulation prediction test products, as well as some research and development. Annual lease payments for our Galway facility are approximately $230,000.
We also house the development, manufacturing, administrative and marketing operations related to our Orgenics professional diagnostic products in a leased facility of approximately 10,000 square feet in Yavne, Israel. The lease for this facility expires in 2008, and carries rent of approximately $15,000 per
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month. The facility includes a number of specialized features and equipment, including environmentally controlled areas, customized production equipment, and computerized systems for purchasing, inventory management and materials tracking.
We also have leases or other arrangements for administrative offices, lab space and warehouses in New Jersey (Freehold, Springfield, Irvington and Princeton), California (San Diego), Denmark (Farum), Belgium (Sint-Niklaas), Germany (Cologne) and Sweden (Lund), and our Orgenics products are sold through small sales offices in France, Brazil and several other countries. We believe that our facilities, along with certain third party manufacturing, packaging and distribution arrangements that we utilize, are adequate to support the operations of our businesses in the foreseeable future. We have insurance coverage for the properties and equipment that we own or lease.
ITEM 3. LEGAL PROCEEDINGS
Inverness Medical Switzerland GmbH, et al. v. Pfizer Inc., et al.
We previously had several lawsuits pending against Pfizer Inc. and certain other parties, including Princeton BioMeditech, or PBM, in the United States District Court for the District of New Jersey alleging, among other things, that pregnancy tests manufactured or sold by the defendants infringe patents owned by us. In early June 2003, we settled our litigation against Pfizer. However, our claims against PBM, a co-defendant in one of the infringement suits against Pfizer and the subject of two other related infringement suits initiated by us, remain active. PBM has brought several counterclaims against us. The counterclaims allege, among other things, that we have breached various obligations to
PBM arising out of a joint venture with us. We believe that we have strong defenses to all of the counterclaims and we are defending them vigorously.
Quidel Corporation v. Inverness Medical Innovations, Inc., et al.
In February 2004, Quidel Corporation was served in Germany with a suit that our subsidiary, Inverness Medical Switzerland, GmbH (IMS), had filed in January 2004 seeking damages and injunction for infringement of certain of our patents. In response, on February 20, 2004, Quidel named us and our subsidiaries IMS and ABI as defendants in a suit filed by Quidel in the United States District Court for the Southern District of California. Quidel alleges that we are infringing U.S. Patent No. 4,943,522, a patent that issued in 1990 titled "Lateral Flow, Non-Bibulous Membrane Assay Protocols." Quidel also asked the Court for a declaratory finding that Quidel does not infringe certain patents owned by IMS and certain other patents owned by co-defendant Armkel LLC, collectively the "Patents," and that the Patents are invalid and/or unenforceable. Quidel seeks injunctive relief and damages, and has indicated its intent to file a motion for preliminary injunction, the scope of which has not been disclosed. In early March, 2004, we filed an answer claiming that Quidel's claims are without merit and a counterclaim seeking damages and injunctive relief for Quidel's infringement of the Patents. We also filed a separate action against Quidel in the same court alleging infringement of certain other patents and seeking injunctive relief and damages. We intend to vigorously defend the Quidel claims and vigorously prosecute the infringement counterclaims and separate claims to enforce our own intellectual property rights.
Other Pending and Potential Litigation and Proceedings
Because of the nature of our business, we may be subject at any particular time to consumer product claims or various other lawsuits arising in the ordinary course of our business, including employment matters, and expect that this will continue to be the case in the future. Such lawsuits generally seek damages, sometimes in substantial amounts, for personal injuries or other commercial or employment claims. An adverse ruling in such a lawsuit could have a material adverse effect on our sales, operations or financial performance. In addition, we aggressively defend our patent and other
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intellectual property rights. This often involves bringing infringement or other commercial claims against third parties. We have approximately 15 lawsuits pending around the world against competitors whom we believe to be selling products that infringe our propriety rights, including a suit against Acon Laboratories. These suits can be expensive and result in counterclaims challenging the validity of our patents and other rights.
We have discussed in prior periodic reports an action in London by approximately 65 consumers claiming defects in Unipath's Persona contraceptive device, negligence and breach of contract, all allegedly leading to unwanted pregnancies by the claimants in or prior to 1998. Because this case is insured, in the aggregate, by Unilever's product liability insurance up to 50 million British pounds sterling or more, depending on when the events giving rise to the consumers' suit occurred, we do not believe that an adverse ruling against us would have a material adverse impact on our sales, operations or financial performance and we do not consider this to be a material legal proceeding.
In October 2003, in connection with an informal inquiry received from the SEC's Division of Enforcement, we met with two representatives of the SEC's Boston office to respond to questions regarding the resignation of Ernst & Young LLP, our former auditor, and certain of the accounting and financial matters that we discussed with the SEC during the second quarter of 2003 after filing our Current Report on Form 8-K, event date April 11, 2003, to disclose Ernst & Young's resignation. We responded fully to the staff's request for information. On January 28, 2004, in connection with its ongoing informal investigation, we received a request from the staff of the SEC for some additional factual information as a follow-up to our prior response. We have responded fully to this request for additional information. We cannot predict whether the SEC will seek additional information or what the outcome of the informal investigation will be.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECUR ITY HOLDERS.
No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2003.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AN D RELATED STOCKHOLDER MATTERS
Our common stock trades on the American Stock Exchange (AMEX) under the symbol "IMA." The following table sets forth the high and low closing sale prices of our common stock on AMEX for each quarter during fiscal 2003 and fiscal 2002.
On March 12, 2004, there were 504 holders of record of our common stock. The closing price of our common stock on March 12, 2004 was $20.75.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings to support our growth strategy and do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, on our common stock will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. In addition, restrictive covenants under our senior credit facility and the indenture governing the terms of the senior subordinated notes currently prohibit the payment of cash or stock dividends.
On November 18, 2003, we issued 93,214 shares of unregistered common stock to NKT Holding A/S as partial consideration for the acquisition by our subsidiary, Inverness Medical Switzerland GmbH, of the entire share capital of Scandinavian Micro Biodevices A/S. No underwriters or underwriting discounts or commissions were involved. There was no public offering in connection with our sale to NKT Holdings and we believe that the transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, based on the private nature of the transaction, because we understand NKT Holdings to be an accredited investor and because NKT Holdings acquired the securities for investment purposes and not with a view to the distribution thereof.
On December 11, 2003, we issued 230,000 shares of common stock upon conversion of 115,000 shares of our series A redeemable convertible preferred stock pursuant to an exemption afforded by Section 3(a)(9) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables provide selected consolidated financial data of our company as of and for each of the years in the five-year period ended December 31, 2003 and should be read in conjunction with our consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K.
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The selected consolidated financial data as of and for each of the years in the three-year period ended December 31, 2003 have been derived from our consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K. The information as of and for the years ended December 31, 2003 and 2002 included in our consolidated financial statements was audited by BDO Seidman, LLP, independent auditors, while the information for the year ended December 31, 2001 included in our consolidated financial statements was audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data as of December 31, 2001, 2000 and 1999 and for the years ended December 31, 2000 and 1999 have been derived from our audited consolidated financial statements not included herein, which were audited by Arthur Andersen LLP.
On November 21, 2001, our company was split-off as an independent public company as part of a split-off and merger transaction whereby Johnson & Johnson acquired our former parent company, Inverness Medical Technology, Inc., or IMT. As part of the split-off and merger, we acquired all rights to IMT's women's health, nutritional supplement and professional diagnostics businesses, as well as certain intellectual property. Because we had not historically been operated or accounted for as a stand-alone business, the financial results for the periods prior to the split-off on November 21, 2001, presented below in the selected consolidated financial data, are derived from consolidated financial statements of our businesses, which have been carved out of IMT's financial statements in accordance with the requirements of accounting principles generally accepted in the United States of America, or GAAP. Because the financial results for the periods prior to the split-off have been carved out of IMT's past financial statements, they may not reflect what our results of operations and financial position would have been had we been a separate stand-alone entity during those periods or be indicative of our future performance. In addition, the acquisitions of the Unipath business in December 2001, IVC Industries, Inc. (now operating as Inverness Medical Nutritionals Group, or IMN) in March 2002, Wampole Laboratories in September 2002, Ostex International, Inc. in June 2003, ABI in August 2003 and the Abbott rapid
High
Low
Fiscal 2003 Fourth Quarter $ 27.50 $ 20.50
Third Quarter $ 25.68 $ 19.10
Second Quarter $ 20.75 $ 15.25
First Quarter $ 20.14 $ 13.40
Fiscal 2002
Fourth Quarter $ 15.35 $ 8.00
Third Quarter $ 18.90 $ 9.49
Second Quarter $ 28.21 $ 17.45
First Quarter $ 25.41 $ 18.00
diagnostics product lines in September 2003 materially affected the comparability of the selected consolidated financial data. For a discussion of certain factors that materially affect the comparability of the selected consolidated financial data or cause the data reflected herein not to be indicative of our future results of operations or financial condition, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Factors Affecting Future Results."
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2003
2002(2)
2001
2000
1999
(in thousands, except per share data)
Statement of Operations Data: Net product sales $ 286,689 $ 201,641 $ 47,268 $ 49,728 $ 49,087 License revenue 9,728 6,405 — — —
Net revenue 296,417 208,046 47,268 49,728 49,087 Cost of sales 168,120 115,600 26,662 26,796 28,348
Gross profit 128,297 92,446 20,606 22,932 20,739 Operating expenses:
Purchased in-process research and development — — 6,980 — — Research and development 24,280 14,471 1,810 1,360 1,395 Sales and marketing 51,705 39,544 8,018 7,540 8,056 General and administrative 35,452 28,066 11,702 7,048 7,214 Charge related to asset impairment — 12,682 — — — Stock-based compensation 447 10,625 10,441 — —
Total operating expenses 111,884 105,388 38,951 15,948 16,665
Operating income (loss) 16,413 (12,942 ) (18,345 ) 6,984 4,074 Interest expense and other expenses, net (3,270 ) (3,362 ) (4,310 ) (2,423 ) (2,710 )
Income (loss) from continuing operations before income taxes 13,143 (16,304 ) (22,655 ) 4,561 1,364
Provision for income taxes 1,169 2,683 2,134 1,781 1,007
Income (loss) from continuing operations $ 11,974 $ (18,987 ) $ (24,789 ) $ 2,780 $ 357 Income (loss) from continuing operations available to common stockholders(1): Basic(1) $ 11,016 $ (30,935 ) $ (24,789 ) $ 2,780 $ 357
Diluted(1) $ 11,196 $ (30,935 ) $ (24,789 ) $ 2,780 $ 357 Income (loss) from continuing operations per common share(1): Basic(1) $ 0.70 $ (3.11 ) $ (3.89 ) $ 0.59 $ 0.11
Diluted(1) $ 0.63 $ (3.11 ) $ (3.89 ) $ 0.59 $ 0.11 Other Financial Data: EBITDA(3) $ 37,396 $ 7,650 $ (17,505 ) $ 9,303 $ 6,325
December 31,
2003
2002
2001
2000
1999
(in thousands)
Balance Sheet Data:
(1)
Cash and cash equivalents $ 24,622 $ 30,668 $ 52,024 $ 3,071 $ 661 Working capital (deficit) 45,220 27,980 19,555 (6,464 ) (4,060 ) Total assets 543,468 357,746 278,521 74,958 72,210 Total debt 176,181 104,613 78,124 12,830 19,076 Redeemable convertible preferred stock 6,185 9,051 51,894 — — Total stockholders' equity 269,549 162,904 89,614 41,812 34,953
Income (loss) available to common stockholders and basic and diluted income (loss) per share are computed as described in notes 1, 2(k) and 11 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(2) Upon the adoption of Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, we recorded an impairment charge of $12.1 million, or $1.22 per basic and diluted share, and accounted for the charge as a cumulative effect of a change in accounting principal which was subtracted from loss from continuing operations to arrive at net loss. Consequently, net loss in 2002 was $43.1 million, or $4.33 per basic and diluted share.
(3) EBITDA represents income (loss) from continuing operations before interest, income taxes, depreciation and amortization. EBITDA is presented because we believe that it is a useful indicator of our performance and ability to meet debt service
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and capital expenditure requirements. It allows investors and management to evaluate and compare our operating results from continuing operations from period to period in a meaningful and consistent manner in addition to standard financial measurements under GAAP. Management internally evaluates the performance of its businesses using EBITDA measures. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to cash flow from operating activities or net income, as a measure of liquidity or as an indicator of operating performance or any measure of performance derived in accordance with GAAP. Our calculation of EBITDA may be different from the calculation used by other companies and, accordingly, comparability may be limited. In addition, our calculation of EBITDA is different than that used in the covenants concerning our primary senior credit facilities and the definition of consolidated cash flow used in the indenture governing the senior subordinated notes that were issued on February 10, 2004.
Set forth in the table below is a reconciliation of income (loss) from continuing operations to EBITDA:
Income (loss) from continuing operations includes the following non-cash or unusual items. No adjustment to EBITDA has been made for these items.
Effect of the adoption of Statement of Financial Accounting Standard, or SFAS, No. 142, "Goodwill and Other Intangible Assets"
On January 1, 2002, we adopted SFAS No. 142 and, accordingly, no longer amortize goodwill and other intangible assets with indefinite lives, but rather such assets are subject to annual impairment reviews or more frequently, if events or circumstances indicate that they may be impaired. During the first quarter of 2002, we completed the implementation review as required under SFAS No. 142 and recorded an impairment of goodwill related to our nutritional supplements reporting unit in the amount of $12.1 million, which we accounted for as a cumulative effect of a change in accounting principle in our consolidated statement of operations in that period. The following table presents the income (loss) from continuing operations data of our company, as if no amortization of goodwill was recorded under SFAS No. 142 for all periods presented.
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2003
2002
2001
2000
1999
(in thousands)
Income (loss) from continuing operations $ 11,974 $ (18,987 ) $ (24,789 ) $ 2,780 $ 357 Interest expense, net of interest income 8,668 13,646 1,909 2,008 2,118 Income taxes 1,169 2,683 2,134 1,781 1,007 Depreciation and amortization 15,585 10,308 3,241 2,734 2,843
EBITDA $ 37,396 $ 7,650 $ (17,505 ) $ 9,303 $ 6,325
2003
2002
2001
2000
1999
(in thousands)
Non-cash stock-based compensation $ 447 $ 10,625 $ 10,441 $ — $ —Settlement with Unilever (3,803 ) — — — —Impairment of intangible assets — 12,682 — — —Gain from repurchase of beneficial conversion feature — (9,600 ) — — —Purchased in-process research and development charge — — 6,980 — —
Total non-cash and unusual items $ (3,356 ) $ 13,707 $ 17,421 $ — $ —
(1)
Year Ended December 31,
2003
2002
2001
2000
1999
(in thousands, except per share data)
Income (loss) from continuing operations $ 11,974 $ (18,987 ) $ (24,789 ) $ 2,780 $ 357 Add back: Goodwill amortization, net of tax — — 398 398 557 Adjusted income (loss) from continuing operations $ 11,974 $ (18,987 ) $ (24,391 ) $ 3,178 $ 914 Adjusted income (loss) from continuing operations available to common stockholders(1): Basic $ 11,016 $ (30,935 ) $ (24,391 ) $ 3,178 $ 914
Diluted $ 11,196 $ (30,935 ) $ (24,391 ) $ 3,178 $ 914 Adjusted income (loss) from continuing operations per common share(1): Basic $ 0.70 $ (3.11 ) $ (3.83 ) $ 0.67 $ 0.27
Diluted $ 0.63 $ (3.11 ) $ (3.83 ) $ 0.67 $ 0.27
Income (loss) available to common stockholders and basic and diluted income (loss) per share are computed as described in notes 1, 2(k) and 11 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
General
We are a leading global developer, manufacturer and marketer of in vitro diagnostic products for the over-the-counter pregnancy and fertility/ovulation test market and the professional rapid diagnostic test market. Our business is organized into two primary segments, consumer products and professional diagnostics. Through our consumer products segment, we hold a leadership position in the worldwide over-the-counter pregnancy and fertility/ovulation test market. We sell our pregnancy and fertility/ovulation test products in the premium branded sector, the value branded sector and the private label sector. In addition, we manufacture and market a variety of vitamins and nutritional supplements under our brands and those of private label retailers primarily in the U.S. consumer market. Through our professional diagnostics segment, we develop, manufacture and market an extensive array of innovative rapid diagnostic test products and other in vitro diagnostic tests to medical professionals and laboratories for detection of infectious diseases, drugs of abuse and pregnancy. Today, we are a leader in the worldwide professional rapid diagnostic test market. We have grown our consumer products and professional diagnostics segments by leveraging our strong intellectual property portfolio and making selected strategic acquisitions. Our consumer and professional diagnostic products are sold in approximately 90 countries through our direct sales force and an extensive network of independent global distributors. As a result, for the year ended December 31, 2003, approximately 36% of our net product sales were generated outside of the United States. For the year ended December 31, 2003, we had net product sales of $286.7 million and EBITDA of $37.4 million.
Our consumer products segment accounted for 69% of our net product sales for the year ended December 31, 2003 and primarily targets the women's health market through home pregnancy detection tests and home fertility/ovulation prediction tests. Approximately 81% of our net product sales in the over-the-counter women's health market in 2003 were sales of our own branded products while the remaining represented sales under private label and contract manufacturing arrangements. We have entered into two separate supply arrangements with Pfizer pursuant to which we began to supply Pfizer a digital version of its e.p.t pregnancy tests on a non-exclusive basis in December 2003 and agreed to also supply Pfizer with the non-digital version of its premium branded e.p.t pregnancy
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tests beginning in June 2004 and continuing for five years. As a part of our consumer products segment, we also market a wide variety of vitamins and nutritional supplements through retail drug stores, mass merchandisers, groceries and warehouse clubs, primarily within the
United States. Sales of these products accounted for 25% of our net product sales for the year ended December 31, 2003.
Our professional diagnostics segment, which accounted for 31% of our net product sales for the year ended December 31, 2003, consists of diagnostic test products designed to assist medical professionals in both preventative and interventional medicine. We are currently focusing a significant portion of our research and development efforts in the area of cardiology.
Our History
On November 21, 2001, Johnson & Johnson acquired IMT, our former parent, in a merger transaction and, simultaneously, our company was split off from IMT as a separate publicly traded company. Immediately prior to the consummation of these transactions, IMT restructured its operations so that we would hold all of IMT's non-diabetes businesses, including women's health, nutritional supplements and clinical diagnostics. At the closing of the transaction, all of the shares of our common stock held by IMT were split-off from IMT in a pro rata distribution to IMT's stockholders, and IMT (which then consisted of its diabetes business) merged with and became a wholly-owned subsidiary of Johnson & Johnson.
On December 20, 2001, we acquired Unipath Limited, a global leader in home pregnancy and ovulation testing, and its associated companies and assets from Unilever plc and certain affiliated entities. The Unipath acquisition provided us with leading brand name consumer diagnostic products that complement our existing value branded and private label home pregnancy detection and fertility/ovulation prediction products. In connection with the acquisition of the Unipath business, we also acquired rights to certain antibody clones and other intellectual property rights.
On March 19, 2002, we acquired IVC Industries, Inc., a manufacturer and distributor of hundreds of different vitamin and nutritional supplement products sold under brand names and through private label arrangements with retailers. Since our acquisition of IVC, we have consolidated substantially all of our vitamin and nutritional supplement manufacturing at IVC and discontinued most of our outsourced manufacturing arrangements. IVC is now doing business as Inverness Medical Nutritionals Group, or IMN.
On September 20, 2002, we acquired the Wampole Laboratories division of MedPointe Inc., a developer, marketer, seller and distributor of in vitro diagnostic tests and test systems. Wampole is a leader in enzyme linked immunosorbent assay, or ELISA, testing within the professional laboratory marketplace and also offers a broad line of visually-read assays for point-of-care testing. Wampole's products are sold to hospitals, major reference testing laboratories, physicians' offices and clinics through an extensive U.S. distribution network and these products compliment our existing professional diagnostic products lines and international distribution networks.
On June 30, 2003, we acquired Ostex International, Inc., which develops and commercializes osteoporosis diagnostic products. This acquisition provides us with intellectual property rights in the field of osteoporosis diagnostics.
On August 27, 2003, we acquired Applied Biotech, Inc. from Apogent Technologies Inc. ABI is a developer, manufacturer and distributor of rapid diagnostic products in the areas of women's health, infectious disease and drugs of abuse testing. In the transaction, we also acquired ABI's wholly-owned subsidiary, Forefront Diagnostics, Inc. Forefront develops, manufactures and distributes rapid diagnostic products for drugs of abuse testing.
On September 30, 2003, we acquired from Abbott Laboratories certain assets related to Abbott's Fact plus line of consumer diagnostic pregnancy tests and Abbott TestPack, Abbott TestPack plus and
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Signify lines of professional rapid diagnostics for various testing needs, including strep throat, pregnancy and drugs of abuse. The acquired assets also include certain transferred and licensed intellectual property related to these products.
On February 10, 2004, we completed the sale of $150.0 million of 83/4% senior subordinated notes, or Bonds, due 2012 in a private placement to qualified institutional buyers. Net proceeds from this offering amounted to $145.9 million which was net of underwriters' commissions of $4.1 million. Of the net proceeds, we used $125.3 million to repay all of our outstanding indebtedness and related financing fees under our primary senior credit facility and $9.2 million to prepay our outstanding 9% subordinated promissory notes and related prepayment penalties. The remaining $11.4 million of unused proceeds will be used for Bond offering expenses and general corporate purposes. We also retained the $50.0 million in available credit under our primary senior credit facility after our repayment of the outstanding borrowings using the Bond proceeds.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net Product Sales. Net product sales increased by $85.1 million, or 42%, to $286.7 million in 2003 from $201.6 million in 2002.
Excluding the favorable impact of currency translation, net product sales in 2003 grew by approximately $76.6 million, or 38%, over 2002. The majority of the revenue increase resulted from our acquired businesses: (i) IMN, which we acquired in March 2002, contributed $11.3 million of such increase, (ii) Wampole, which we acquired in September 2002, contributed $33.3 million of such increase, including revenue from certain osteoporosis products acquired as part of our acquisition of Ostex in June 2003, (iii) ABI, which we acquired in August 2003, contributed $9.3 million of such increase, and (iv) the rapid diagnostic product lines from Abbott, which we acquired in September 2003, contributed $11.2 million of such increase. The remaining increase in net product sales from 2002 to 2003, or $11.5 million, primarily represents organic growth, including the launch of our new Clearblue Easy Digital pregnancy test in June 2003, and the commencement of our supply of the digital version of Pfizer's e.p.t pregnancy test in December 2003.
Net Product Sales by Business Segment. Net product sales by business segment for 2003 and 2002 are as follows:
The increase in net product sales from our consumer products, which includes our consumer diagnostic products and our vitamins and nutritional supplements, from 2002 to 2003 primarily resulted from our acquisition of the IMN business, the organic growth in our women's health care business and the launch of our Clearblue Easy Digital pregnancy test in June 2003. To a lesser extent, our acquisition of Abbott's Fact plus line of consumer diagnostic pregnancy tests contributed to the increase in net product sales from our consumer products. We expect net product sales from our consumer products to increase in 2004, as we continue the launch of our Clearblue Easy Digital pregnancy test and supply of Pfizer's digital and non-digital e.p.t pregnancy tests, the latter of which will begin in June 2004.
The increase in net product sales from our professional diagnostic products from 2002 to 2003 primarily resulted from our acquisitions of Wampole, ABI and the Abbott TestPack, Abbott TestPack plus and Signify product lines from Abbott.
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Net Product Sales by Geographic Location. Net product sales by geographic location for 2003 and 2002 are as follows:
The increase in net product sales in the United States from 2002 to 2003 primarily resulted from our acquisitions of the IMN and Wampole businesses, the products of which are primarily sold in the United States, and the launch of our new digital pregnancy tests in the United States. To a lesser extent, our acquisition of the Signify product line from Abbott, which is primarily sold in the United States, contributed to the increase in net product sales in the United States. The increase in net product sales in regions other than United States and Europe from 2002 to 2003 resulted partially from our acquisitions of the Abbott Testpack, Abbott Testpack plus and Fact plus product lines, Ostex and ABI. In addition, IMN and Wampole recorded higher sales in Canada due to these businesses being included in our results for the full year in 2003 versus partial year in 2002 since their respective acquisition dates. The remaining increase in regions other than United States and Europe resulted from organic growth of our business.
License Revenue. License revenue represents license and royalty fees from intellectual property license agreements with third-parties. License revenue increased by $3.3 million, or 52%, to $9.7 million in 2003 from $6.4 million in 2002. The increase largely resulted from royalty fees from Pfizer. Beginning in the third quarter of 2003 and continuing through June 2004, we began to record and collect royalty fees from Pfizer as part of the settlement of our infringement litigation against it. During 2003, we recorded $1.7 million in royalties from Pfizer. The acquisition of Wampole also provided us with additional license agreements which generated $621,000 in license revenue in 2003 compared to $227,000 in 2002. The remainder of the increase in license revenue resulted from increased sales and minimum royalty payments by certain of our licensees. We expect license revenue in 2004 to decrease, as the revenue stream from one of the significant license agreements ended on December 31, 2003 in accordance with the license agreement. This license agreement provided us with $2.5 million in license
2003
2002
% Increase
(in thousands)
Consumer products $ 198,398 $ 168,601 18 % Professional diagnostic products 88,291 33,040 167 % Total net product sales $ 286,689 $ 201,641 42 %
2003
2002
% Increase
(in thousands)
United States $ 182,285 $ 108,056 69 % Europe 69,594 67,863 3 % Other 34,810 25,722 35 % Total net product sales $ 286,689 $ 201,641 42 %
revenue in 2003.
Gross Profit from Net Product Sales. Gross profit from net product sales represents total gross profits less gross profits associated with license revenue. Gross profit from net product sales increased by $32.9 million, or 37%, to $121.8 million in 2003 from $88.9 million in 2002. Consistent with the growth in net product sales, the increase of gross profit from net product sales primarily resulted from our acquisitions: (i) Wampole contributed $11.9 million of such increase, (ii) ABI contributed $2.4 million of such increase, and (iii) the rapid diagnostic product lines from Abbott contributed $4.3 million of such increase. The remaining increase in gross profit from net product sales from 2002 to 2003, or $14.3 million, primarily resulted from organic growth, including the launch of our new Clearblue Easy Digital pregnancy test in June 2003, and the commencement of our supply of the digital version of Pfizer's e.p.t pregnancy test in December 2003.
Overall gross margin from net product sales was 42% in 2003 compared to 44% in 2002. Gross margin was adversely impacted in 2003 by the continued weakening of the U.S. Dollar against the Euro and British Pound Sterling. Such movements in foreign exchange currencies negatively impacted the gross margin percentage for our products manufactured at our European subsidiaries and sold in U.S. Dollars. This currency impact had the effect of reducing gross margins by 1.7 percentage points from 2002 to 2003. In addition, the decline in overall gross margin from net product sales from 2002 to 2003
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resulted from the Wampole business being included in our 2003 results for the full year, compared to only three months in our 2002 results and the addition of the acquired Abbott products, both of which, on average, have contributed lower gross margins than our other products. The impact of including the Wampole business for the full year and the Abbott business in our 2003 results was a 1.1 percentage point reduction in the overall gross margin percentage. Since we completed the Abbott transaction, Abbott has continued to distribute certain of the acquired products on our behalf and to manufacture certain of the acquired products for us under transition agreements. Over the course of 2004, we will transfer all of the Abbott business to our existing manufacturing and distribution networks and, by doing so, we expect the gross margins on the acquired Abbott products to increase during 2004. Partially offsetting the negative impact to gross margin due to foreign currency movements and the Wampole and Abbott products were sales of our Clearblue Easy Digital pregnancy test in 2003, which generated a higher than average margin as compared to some of our other consumer products.
Gross Profit from Net Product Sales by Business Segment. Gross profit from net product sales by business segment for 2003 and 2002 are as follows:
The increase in gross profit from our consumer product sales from 2002 to 2003 primarily resulted from the organic growth in our women's health care business, including the launch of our Clearblue Easy Digital pregnancy test in June 2003, and our acquisition of Abbott's Fact plus line of consumer diagnostic pregnancy tests. We expect gross profit from our consumer product sales to continue to increase in 2004 as we continue the launch of our Clearblue Easy Digital pregnancy test and supply of Pfizer's digital and non-digital e.p.t pregnancy tests, the latter of which will begin in June 2004. Gross margin from our consumer product sales was 43% in both 2003 and 2002. Although gross margin from our consumer product sales was consistent with the prior year, movements in foreign currencies negatively impacted the gross margin by 2.4 percentage points for our consumer products manufactured at our European subsidiaries and sold in U.S. Dollars. The negative impact of foreign currency movements on gross margin from our consumer products was basically offset by the organic growth in our women's health care sales, including the sales of our Clearblue Easy Digital pregnancy test, which generated a higher than average margin as compared to some of our other consumer products.
The increase in gross profit from our professional diagnostic product sales from 2002 to 2003 primarily resulted from our acquisitions of Wampole, ABI and the Abbott TestPack, Abbott TestPack plus and Signify product lines from Abbott. Gross margin of our professional diagnostic products was 41% in 2003 compared to 47% in 2002. The decline in gross margin of our professional diagnostic products primarily resulted from the inclusion of Wampole's business for the full year in 2003, compared to only three months in 2002 because on average the Wampole products generate a lower gross margin than our other products. The professional diagnostic product lines acquired from Abbott that are currently being manufactured or sold by Abbott under transition agreements also generate lower margins than our other products. The effect on gross margin percentage of our professional diagnostic products as a result of the incremental Wampole business due to it being included in our 2003 results for the full year compared to the three month results included in 2002, and the Abbott product lines was a 5% point reduction.
Research and Development Expense. Research and development expense increased by $9.8 million, or 68%, to $24.3 million in 2003 from $14.5 million in 2002. The primary reason for the increase in research and development expense was our heavy investment in the
2003
2002
% Increase
(in thousands)
Consumer products $ 85,192 $ 73,256 16 % Professional diagnostic products 36,637 15,688 134 % Total gross profit from net product sales $ 121,829 $ 88,944 37 %
development of new
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products, particularly in the field of cardiology and infectious diseases. For example, a pro-thrombin test is scheduled for release late 2004, subject to regulatory approvals, and a congestive heart failure product remains on track for launch in 2005. Further, we expect to launch several infectious disease products in 2004, including a high-sensitivity strep throat test, rapid influenza A & B tests and a rapid HIV test. For factors that may impact our ability to meet our expectations to launch these products, see "Certain Factors Affecting Future Results." To a lesser extent, our acquisitions of Ostex and ABI contributed to the increase in research and development expense from 2002 to 2003. We expect the level of research and development expenditure in 2004 to be in the range of $25 million to $26 million.
Sales and Marketing Expense. Sales and marketing expense increased by $12.2 million, or 31%, to $51.7 million in 2003 from $39.5 million in 2002. Of the increase in sales and marketing expense from 2002 to 2003, $4.9 million resulted from Wampole's results being included for the full year in 2003 compared to only three months in 2002. Similarly, the acquisitions of Ostex and ABI contributed $898,000 of the increase in sales and marketing expense. In addition, sales and marketing expense increased due to our organic growth, primarily the launch of our Clearblue Easy Digital pregnancy test.
Sales and marketing expense as a percentage of net product sales decreased to 18% in 2003 from 20% in 2002, which primarily resulted from the Wampole business which incur lower sales and marketing expense as a percentage of sales compared to our other businesses. Further, we have not incurred significant incremental sales and marketing expenses with the addition of the product lines we acquired from Abbott in 2003. We expect to maintain sales and marketing expense at or below 18% of net product sales in 2004.
General and Administrative Expense. General and administrative expense increased by $7.4 million, or 26%, to $35.5 million in 2003 from $28.1 million in 2002. Of the increase in general and administrative expense from 2002 to 2003, $1.9 million resulted from Wampole's results being included for the full year in 2003 compared to only three months in 2002. Similarly, the acquisitions of Ostex and ABI contributed $1.8 million of the increase in general and administrative expense. In addition, a portion of the increase in general and administrative expense resulted from our investment in increased management and infrastructure, higher insurance premiums and our continued significant investment to pursue legal remedies against potential infringers of our intellectual property. Partially offsetting the increase in general and administrative expense from 2002 to 2003 was the recognition of $554,000 representing a reimbursement by insurance of legal costs previously incurred in connection with the Persona lawsuit, for which we assumed the defense when we acquired the Unipath business in December 2001. In addition, another $187,000 of such recovery of legal costs is included in other income (expense), net, as that portion represented recovery of legal costs incurred prior to our acquisition of the Unipath business. For a further discussion of the Persona lawsuit, see "Item 3. Legal Proceedings" in this Annual Report on Form 10-K.
General and administrative expense as a percentage of net product sales decreased to 12% in 2003 from 14% in 2002. The improvement of general and administrative expense as a percentage of net product sales was achieved through sales increase, the above mentioned legal cost recovery and the addition of the product lines acquired from Abbott, for which we have not incurred significant incremental general and administrative costs in 2003. We expect to maintain general and administrative expense at or around 12% of net product sales in 2004.
Stock-Based Compensation Expense. Stock-based compensation expense was $447,000 in 2003 compared to $10.6 million in 2002. Stock-based compensation expense in 2003 primarily represented a non-cash compensation charge for stock options granted in lieu of salary of certain senior executives. In 2002, the majority of the stock-based compensation charge represented the amortization of deferred compensation expense that arose from a sale of our company's restricted stock made to our chief executive officer at a price below the market value of our stock on the measurement date of the transaction.
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Interest Expense. Interest expense includes interest charges, amortization of deferred financing costs and non-cash discounts associated with our debt issuances and the change in market value of our interest rate swap agreement which did not qualify as a hedge for accounting purposes. Interest expense decreased by $5.4 million, or 36%, to $9.7 million in 2003 from $15.1 million in 2002. In 2002, we recorded an aggregate of $4.5 million in amortization of deferred financing costs, non-cash original issue discounts and discounts in the form of a beneficial conversion feature related to early extinguishment of certain subordinated promissory notes and bank debt. Also in 2002, we recorded a non-cash charge of $1.2 million to mark to market our interest rate swap agreement that was entered into early 2002. During 2003, the market value of our obligation under the swap agreement decreased by $528,000 which was recorded as a reduction of interest expense. Excluding the non-cash charges related to early extinguishment of debt in 2002 and the change in the market value of the interest rate swap agreement, interest expense actually increased by $0.8 million from 2002 to 2003. Such increase resulted from our increased average debt balance as a result of funding our acquisitions of ABI and the rapid diagnostic product lines from Abbott, but partially offset by lower average interest rates in 2003.
On February 10, 2004, we completed a sale of $150 million of 8.75% senior subordinated notes due 2012 in a private placement to
qualified institutional buyers. Of the proceeds, we used $125 million to pay down our term loans and revolving credit facility under our senior credit facility and $9 million to pay down our 9% subordinated notes. We retained the remaining proceeds, net of fees and expenses related to the transaction, for general corporate purposes. As a result of the prepayment of outstanding balances under our senior credit facility and the 9% subordinated notes, we will record a write-off of deferred financing costs and prepayment fees and penalties related to the prepayment of the debt aggregating $3.5 million in the first quarter of 2004. These charges will be recorded to interest expense. In addition, because the senior subordinated notes accrue interest at a higher rate than the borrowings under our senior credit facility, we expect interest expense to increase in 2004.
Other Income (Expense), Net. Other income (expense), net, includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. The components and the respective amounts of other income (expense), net, are summarized as follows:
Interest income decreased by $380,000, or 27%, to $1.0 million in 2003 from $1.4 million in 2002. The decrease in interest income resulted from our lower average cash balance during 2003, as we had used a significant portion of our cash to help finance our acquisitions.
A significant portion of other income (expense), net, generally represents foreign currency exchange gains and losses. In 2003, we recognized foreign exchange gains of $5,000 compared to $975,000 in 2002. In 2002, the foreign exchange gain included a $2.6 million realized foreign exchange transaction gain upon the partial settlement of an inter-company loan between two of our subsidiaries with different functional currencies. Excluding such unusual foreign exchange gain, we incurred foreign exchange losses of $1.6 million. The significant foreign exchange loss in 2002 resulted from the weakened U.S. Dollar against the Japanese Yen and Euro, as one of our bank loans, which was prepaid in November 2002, was denominated in Japanese Yen and certain receivables of our Irish subsidiary are denominated in U.S. Dollar while its functional currency is the Euro, respectively.
Further, included in other income (expense), net, in 2003 was an aggregate of $1.3 million of past royalties awarded to us as part of several patent infringement settlements and a one-time gain of $3.8
28
million recorded in connection with an agreement with Unilever which resolved certain issues that arose out of our acquisition of the Unipath business. In addition, other income (expense), net, in 2003 included a gain for the recovery of legal costs of $187,000 as noted above in our discussion of general and administrative expense. Included in other income (expense), net, in 2002 was a one-time non-cash gain of $9.6 million which resulted from the repurchase of the beneficial conversion feature associated with the early extinguishment of an issue of $20 million in subordinated promissory notes in March 2002.
Provision for Income Tax. Provision for income taxes decreased by $1.5 million, or 56%, to $1.2 million in 2003 from $2.7 million in 2002. The effective tax rate was 9% in 2003 compared to 17% in 2002. The significant decrease in the effective tax rate from 2002 to 2003 related to the recognition and benefit of certain deferred tax assets. In 2003, we recognized $440,000 of benefit from the reduction of the valuation allowance on the net operating loss, or NOL, carry-forward of our Irish subsidiary due to our assessment that we would more likely than not realize the benefit of this NOL. In addition, we recognized $780,000 of tax benefit in the United Kingdom for the enhanced deduction for research and development activity at our Unipath operations. Lastly, as a result of certain favorable developments with foreign tax authorities in the fourth quarter of 2003, we recognized $645,000 of tax benefit in the United Kingdom from the use of interest expense to offset operating profits at our Unipath operations, which we had previously not benefited from. Of the 2003 provision for income taxes, $860,000 related to the Unipath business. The remaining businesses recorded state or local tax provisions totaling $340,000. We did not record any provision for U.S. federal income taxes because of the availability of NOL's and NOL carry-forwards. We currently anticipate our 2004 effective tax rate to be approximately 18%.
Income (Loss) from Continuing Operations. We generated income from continuing operations in 2003 of $12.0 million while in 2002 we generated a loss from continuing operations of $19.0 million. After taking into account charges for dividends, redemption premium and amortization of a beneficial conversion feature related to our Series A redeemable convertible preferred stock, we had income from continuing operations available to common stockholders of $11.0 million and $11.2 million, or $0.70 and $0.63 per basic and diluted common share, respectively, in 2003 and a loss from continuing operations available to common stockholders of $30.9 million, or $3.11 per basic and diluted common share, in 2002. The addition of Wampole in September 2002 and the rapid diagnostic products from Abbott in September 2003
2003
2002
(in thousands)
Interest income $ 1,043 $ 1,423 Foreign exchange gains and losses, net 5 975 Other 5,393 9,309 Total other income (expense), net $ 6,441 $ 11,707
contributed an incremental income of $2.8 million and $4.1 million, respectively, in 2003 compared to 2002. The remaining income in 2003 and the significant losses in 2002 resulted predominantly from various non-cash, nonrecurring and/or infrequent gains and charges recorded in the respective years as described above and in the following section titled " Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 ." See note 11 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for the calculation of earnings per share.
EBITDA. EBITDA represents income (loss) from continuing operations before interest, income taxes, depreciation and amortization. We generated EBITDA in 2003 of $37.4 million while in 2002 we generated EBITDA of $7.7 million. The fluctuation in EBITDA from 2002 to 2003 primarily resulted from the addition of Wampole in September 2002 and the rapid diagnostic products from Abbott in September 2003, which contributed an incremental EBITDA of $6.4 million and $4.3 million, respectively, in 2003 compared to 2002. The remaining increase in EBITDA from 2002 to 2003 resulted from various non-cash, nonrecurring and/or infrequent gains and charges recorded in the respectively years as described above and in the following section titled " Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 ", excluding depreciation and amortization of $15.6 million and $10.3 million in 2003 and 2002, respectively. See footnote 3 to the selected consolidated financial data table included under Item 6 of this Annual Report on Form 10-K for (i) a reconciliation of income (loss) from continuing operations to EBITDA and (ii) the reasons why our management believes that the
29
presentation of EBITDA provides useful information to investors regarding our financial condition and results of operations.
Cumulative Effect of a Change in Accounting Principle. On January 1, 2002, we adopted Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets . SFAS No. 142 requires annual impairment tests to be performed on all reporting units, as defined in the statement, with carrying values for goodwill. Based on the results of an independent appraisal obtained on the nutritional supplements business that we acquired in 1997, we recorded an impairment charge of $12.1 million to write-off the carrying value of the goodwill related to that business on January 1, 2002. This impairment charge was recorded as a cumulative effect of a change in accounting principle. There were no charges due to a change in accounting principle during 2003.
Net Income (Loss). We generated net income in 2003 of $12.0 million while in 2002 we generated a net loss of $31.1 million. After taking into account charges for dividends, redemption premium and amortization of a beneficial conversion feature related to our Series A redeemable convertible preferred stock, we had net income available to common stockholders of $11.0 million and $11.2 million, or $0.70 and $0.63 per basic and diluted common share, respectively, in 2003 and a loss available to common stockholders of $43.1 million, or $4.33 per basic and diluted common share, in 2002. The addition of Wampole in September 2002 and the rapid diagnostic products from Abbott in September 2003 contributed an incremental income of $2.8 million and $4.1 million, respectively, in 2003 compared to 2002. The remaining income in 2003 and the significant losses in 2002 resulted predominantly from various non-cash, nonrecurring and/or infrequent gains and charges as described above and in the following section titled " Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 ." See note 11 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for the calculation of earnings per share.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Product Sales. Net product sales increased by $154.3 million, or 326%, to $201.6 million in 2002 from $47.3 million in 2001. The significant increase resulted predominantly from our acquisitions of the Unipath business, IMN and Wampole. The Unipath business, which primarily includes our Clearblue products, contributed $88.4 million to our growth in net product sales, as it generated net product sales of $90.5 million in 2002, compared to only $2.2 million in 2001 (because it was acquired late 2001). IMN and Wampole contributed $44.4 million and $12.5 million, respectively, to our growth of net product sales in 2002 since their respective acquisition dates. Our business units that existed prior to these acquisitions also contributed $5.1 million of the growth in net product sales in 2002, or a 12% growth from their 2001 net product sales, which primarily resulted from an increase in sales volume in private label home pregnancy detection and ovulation prediction tests and a change in product sales mix, as well as increased advertising efforts relating to our nutritional supplements. Additionally, our subsidiary in Ireland contributed a one-time $4.0 million net product sales increase during 2002 through its diabetes-related packaging contract with a subsidiary of Johnson & Johnson. This packaging contract, which generated net product sales of $5.1 million in 2002 and $1.1 million in 2001, was a transitional service arrangement arising out of the November 21, 2001 split-off and merger transaction, in which Johnson & Johnson acquired IMT. The transitional service arrangement, together with the revenue generated therefrom, terminated in August 2002.
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Net Product Sales by Business Segment. Net product sales by business segment for 2002 and 2001 are as follows:
2002
2001
% Increase
(in thousands)
The growth in net product sales from our consumer products was primarily the result of our acquisitions of the Unipath business and IMN. The increase in net product sales from our professional diagnostic products was primarily the result of our acquisitions of the Unipath business and Wampole.
Net Product Sales by Geographic Location. Net product sales by geographic location for 2002 and 2001 are as follows:
The increase in net product sales in the United States primarily resulted from the addition of the Clearblue products from the Unipath business, the Wampole products and the IMN products and the increased sales of private label home pregnancy detection and ovulation prediction tests. The increase in net product sales in Europe and other countries resulted from our acquisition of the Unipath business.
License Revenue. During 2002, we collected $6.4 million in license and royalty fees, of which $6.2 million, or 96%, was generated from the license agreements acquired as part of our acquisition of the Unipath business. We also acquired certain revenue generating license agreements as part of our acquisition of Wampole, which license agreements contributed $227,000, or 4%, of our license revenue in 2002. Until we acquired the Unipath business in late 2001, we did not hold license and royalty revenue generating agreements. Therefore, we did not collect any such revenue in 2001.
Gross Profit from Net Product Sales. Gross profit from net product sales increased by $68.3 million, or 332%, to $88.9 million in 2002 from $20.6 million in 2001. Total gross margin from net product sales was 44% in both 2002 and 2001. Consistent with the growth in net product sales, the increase in gross profit was primarily due to our acquisitions of the Unipath business, IMN and Wampole, which contributed increases of gross profit from net product sales of $52.3 million, $4.5 million and $4.9 million, respectively, in 2002. Sales of our private label home pregnancy detection and ovulation prediction tests contributed $3.2 million to the increase in gross profit from net product sales as a result of volume-related sales growth and manufacturing efficiencies. Our branded nutritional supplements net product sales increase, together with reduced returns as a result of the change in product mix, contributed $3.1 million of the increase in gross profit from net product sales.
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Gross Profit from Net Product Sales by Business Segment. Gross profit from net product sales by business segment for 2002 and 2001 are as follows:
Gross margin from our consumer product sales was 43% in 2002, compared to 41% in 2001. The increase in gross margin from our consumer product sales primarily resulted from the addition of the consumer diagnostic products we obtained in connection with our acquisition of the Unipath business. Gross margin from our professional diagnostic product sales was 47% in 2002, compared to 53% in 2001, which decrease resulted from the change in the product mix.
Consumer products $ 168,601 $ 36,677 360 % Professional diagnostic products 33,040 10,591 212 % Total net product sales $ 201,641 $ 47,268 327 %
2002
2001
% Increase
(in thousands)
United States $ 108,056 $ 33,269 225 % Europe 67,863 6,800 898 % Other 25,722 7,199 257 % Total net product sales $ 201,641 $ 47,268 327 %
2002
2001
% Increase
(in thousands)
Consumer products $ 73,256 $ 14,999 388 % Professional diagnostic products 15,688 5,607 180 % Total gross profit from net product sales $ 88,944 $ 20,606 332 %
Purchased In-Process Research and Development. In the fourth quarter of 2001, we recorded a $7.0 million non-cash charge for an in-process research and development project, or IPRD Project, that we acquired as part of the Unipath business. At the time of the acquisition, the research and development staff of the Unipath business was seeking to develop a digital-based technology. However, the technology being sought under this specific IPRD Project had not yet reached technological feasibility and had no alternative future use at the date of acquisition, and therefore, the portion of the purchase price allocated to this IPRD Project, or $7.0 million, was charged to expense on the acquisition date. The amount of the purchase price allocated to this IPRD Project represented the estimated fair value of the project determined using the income approach, whereby projected future cash flows were discounted to value the technology. An estimated royalty rate of 4% was applied to projected revenues to calculate pretax royalty savings attributed to completed technology. A 30% tax rate was used and then a risk-adjusted discount rate of 24% was applied. At the time of the Unipath business acquisition, we believed that many of the complex technical issues have been resolved; however, we had not obtained FDA approval of this technology. Therefore, the risk of not achieving commercialization was not only a developmental risk, but a regulatory risk as well. The work of a full project, which included demonstrating feasibility, defining the project, design, development, verification and clinical testing, and regulatory submission and approval, would need to be completed prior to a launch of a product based on this technology. In the second quarter of 2003, as we had initially anticipated, we obtained FDA clearance to market and sell our pregnancy test that uses the digital-based technology. We did not record any in-process research and development charges in 2002.
Research and Development Expense. Research and development expense increased by $12.7 million, or 706%, to $14.5 million in 2002 from $1.8 million in 2001. The increase resulted predominantly from our decision to invest extensively in research and development of new products and to improve upon our existing products, as evidenced by our acquisition of the Unipath business, pursuant to which we acquired a large research and development center located in Unipath's facility in Bedford, England. Prior to the acquisition of the Unipath business, our research and development expense was mostly related to the development of professional diagnostic products by our subsidiary in Israel.
Sales and Marketing Expense. Sales and marketing expense increased by $31.5 million, or 394%, to $39.5 million in 2002 from $8.0 million in 2001. Of this increase, $25.4 million resulted from the addition of the Unipath business. The IMN and Wampole acquisitions accounted for $2.1 million and $1.9 million, respectively, of the increase in sales and marketing expense from 2001 to 2002. The remaining increase in sales and marketing expense resulted primarily from our new radio advertising efforts in 2002 in an attempt to boost our nutritional supplement product sales. Sales and marketing expense as a percentage of net product sales increased to 20% in 2002 from 17% in 2001.
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General and Administrative Expense. General and administrative expense increased by $16.4 million, or 140%, to $28.1 million in 2002 from $11.7 million in 2001. General and administrative expense as a percentage of net product sales decreased to 14% in 2002, compared to 25% in 2001. The addition of the Unipath business accounted for $12.7 million of the increase in general and administrative expenses in 2002. The IMN and Wampole acquisitions accounted for $2.4 million and $847,000, respectively, of the increase in general and administrative expenses in 2002. The remaining increase in general and administrative expense primarily resulted from increased legal fees for our defenses in certain litigation matters, some of which were inactive during 2001 and others were acquired through our business combinations or initiated by us in 2002.
Charge Related to Asset Impairment. In the first quarter of 2002, we recorded a non-cash impairment charge of $12.7 million to write-off a portion of the value that was assigned to trademarks and brand names related to certain of our nutritional supplement lines that we acquired in 1997. This charge was recorded in connection with the results of a separate impairment review performed on the carrying value of the goodwill related to such nutritional supplement lines, as discussed below in the caption "Cumulative Effect of a Change in Accounting Principle". See also note 5 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. No impairment charge was recorded during 2001.
Stock-Based Compensation Expense. Stock-based compensation expense was $10.6 million in 2002 and $10.4 million in 2001. The majority of the 2002 expense relates to a sale of our company's restricted stock made to our chief executive officer in 2001. At the time of the sale in 2001, we recorded a non-cash deferred compensation expense of $10.6 million because the purchase price of the stock was below its market value on the measurement date of the transaction. This deferred compensation expense was originally set to amortize over the vesting period of the restricted stock, and accordingly, we recorded compensation expense of $451,000 in 2001. However, due to an amendment in the terms of the restricted stock agreement in February 2002, we fully recognized the remaining unamortized deferred compensation expense, or $10.1 million, at that time. See note 12(c) of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Additionally, this amendment resulted in a new measurement date for this security. In the event that the employee ceases employment with our company prior to the full vesting of this security, additional compensation expense will be recorded. Also during 2001, we recorded a $9.3 million non-cash stock-based compensation expense, which represents the difference between the market value and exercise price of certain stock option grants to executive officers on the measurement date. See note 12(c) of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The remaining stock-based compensation expense in both 2002 and 2001 primarily represents the fair value of options and warrants to acquire our company's common stock that were issued to non-employees.
Interest Expense. Interest expense increased by $12.8 million, or 557%, to $15.1 million in 2002 from $2.3 million in 2001. The increase in interest expense in 2002 resulted from two debt financings, which aggregated $82.5 million and $35.0 million, which we conducted to fund the acquisitions of the Unipath business and Wampole, respectively. We also obtained additional financing in the aggregate amount of
$53.0 million in November 2002, a significant portion of which we used to refinance the debt issued in connection with the acquisition of the Unipath business. In March and November of 2002, we recorded an aggregate of $4.5 million in amortization of deferred financing costs, non-cash original issue discounts and discounts in the form of a beneficial conversion feature related to the early extinguishment of certain subordinated promissory notes and bank debt. In addition, during 2002, we recorded a non-cash charge of $1.2 million to mark to market an interest rate swap agreement because the swap agreement did not qualify as a hedge for accounting purposes. See notes 6 and 9 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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Other Income (Expense), Net. Other income (expense), net, includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. The components and the respective amounts of other income (expense), net, are summarized as follows:
Interest income increased by $1.0 million, or 264%, to $1.4 million in 2002 from $385,000 in 2001. The increase in interest income resulted from higher average cash balances during a portion of 2002 due to a follow-on public offering of 1.6 million shares of our common stock at $23 per share in May 2002 and a $41.4 million capitalization by our former parent, IMT, during our split-off from IMT in November 2001. During 2002, we recognized $975,000 in foreign exchange transaction gains, net of losses, which included a $2.6 million realized foreign exchange transaction gain upon the settlement of an inter-company loan between two of our subsidiaries with different functional currencies. Excluding such unusual foreign exchange gain, we incurred foreign exchange losses of $1.6 million in 2002, compared to losses of $727,000 during 2001. The increase in foreign exchange transaction losses in 2002 resulted from the weakened U.S. Dollar versus the Japanese Yen and Euro as one of our bank loans, which was prepaid in November 2002, was denominated in Japanese Yen and certain receivables of our Irish subsidiary are denominated in the U.S. Dollar while its functional currency is the Euro, respectively. Also included in other income (expense), net, in 2002 is a one-time non-cash gain of $9.6 million which resulted from the repurchase of the beneficial conversion feature associated with the early extinguishment of an issue of $20.0 million in subordinated promissory notes in March 2002 and a litigation settlement charge of $218,000. During 2001, we also recorded a litigation settlement charge of $1.7 million which is included in other income (expense), net.
Provision for Income Taxes. Provision for income taxes increased by $549,000, or 26%, to $2.7 million in 2002 from $2.1 million in 2001. Of the 2002 provision for income taxes, $2.4 million related to the Unipath business. The remaining businesses recorded local tax provisions totaling only $309,000 in 2002 because of the availability of net operating losses, or NOL, and NOL carryforwards. Included in the 2001 provision for income taxes was a charge of $1.3 million to write-off certain deferred tax assets which we did not believe would provide us with future tax benefits as a result of the split-off from IMT in November 2001. See note 14 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Income (Loss) from Continuing Operations. In 2002, we generated a loss from continuing operations of $19.0 million. After taking into account charges for dividends, redemption premium and amortization of discounts in the form of beneficial conversion feature with respect to our Series A redeemable convertible preferred stock, we had a loss from continuing operations available to common stockholders of $30.9 million, or $3.11 per basic and diluted share, in 2002. In 2001, we generated a loss from continuing operations of $24.8 million, or $3.89 per basic and diluted share. The losses in 2002 and 2001 resulted from various factors as described above.
EBITDA. EBITDA represents income (loss) from continuing operations before interest, income taxes, depreciation and amortization. We generated EBITDA in 2002 of $7.7 million while in 2001 we generated EBITDA of $(17.5) million. Most significantly, the increase in EBITDA from 2001 to 2002 resulted from the addition of the Unipath business in December 2001, which contributed an incremental EBITDA of $13.3 million in 2002 compared to 2001. The remaining fluctuation in EBITDA from 2001 to 2002 resulted from various factors as described above, excluding depreciation
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and amortization of $10.3 million and $3.2 million in 2002 and 2001, respectively. See footnote 3 to the selected consolidated financial data table included under Item 6 of this Annual Report on Form 10-K for (i) a reconciliation of income (loss) from continuing operations to
2002
2001
(in thousands)
Interest income $ 1,423 $ 385 Foreign exchange gains and losses, net 975 (727 ) Other 9,309 (1,674 ) Total other income (expense), net $ 11,707 $ (2,016 )
EBITDA and (ii) the reasons why our management believes that the presentation of EBITDA provides useful information to investors regarding our financial condition and results of operations.
Cumulative Effect of a Change in Accounting Principle. On January 1, 2002, we adopted Statement of Financial Accounting Standard, or SFAS, No. 142, Goodwill and Other Intangible Assets . SFAS No. 142 requires annual impairment tests to be performed on all reporting units, as defined in the statement, with values recorded for goodwill. Based on the results of an independent appraisal obtained on the nutritional supplements business that we acquired in 1997, we recorded an impairment charge of $12.1 million to write-off the carrying value of the goodwill related to that business on January 1, 2002. This impairment charge was recorded as a cumulative effect of a change in accounting principle. See note 5 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. There were no charges due to a change in accounting principle in 2001.
Net Income (Loss). We generated a net loss of $31.1 million in 2002. After taking into account charges for dividends, redemption premium and amortization of discounts in the form of beneficial conversion feature with respect to our Series A redeemable convertible preferred stock, we had a net loss available to common stockholders of $43.1 million, or $4.33 per basic and diluted share, in 2002. The net loss in 2002 resulted from various factors as described above. In 2001, we generated a net loss of $24.7 million, or $3.88 per basic and diluted share. In 2001, there were no dividends or discounts that would have reduced net loss available to common stockholders. See notes 1, 2(k) and 11 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for the calculation of earnings per share.
Supplementary Quarterly Financial Information
Selected quarterly financial data for 2003 and 2002 are summarized below:
(1)
2003
2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(2)
(3)
(4)
(5)
(6)
(7)
(in thousands, except per share data)
Net revenue $ 64,807 $ 65,717 $ 72,393 $ 93,500 $ 37,248 $ 51,712 $ 53,947 $ 65,139 Gross profit 29,535 28,674 31,491 38,597 18,820 20,609 23,792 29,225 Income (loss) before accounting change 1,998 5,602 1,662 2,712 (19,309 ) (2,688 ) 1,141 1,869 Net income (loss) 1,998 5,602 1,662 2,712 (31,457 ) (2,688 ) 1,141 1,869 Income (loss) before accounting change available to common stockholders(1):
Basic 1,824 5,461 1,519 2,212 (20,838 ) (4,961 ) (6,725 ) 1,589 Diluted 1,824 5,610 1,519 2,212 (20,838 ) (4,961 ) (6,725 ) 1,589
Income (loss) per common share before accounting change(1):
Basic $ 0.13 $ 0.39 $ 0.09 $ 0.12 $ (2.94 ) $ (0.58 ) $ (0.65 ) $ 0.12 Diluted $ 0.12 $ 0.34 $ 0.08 $ 0.11 $ (2.94 ) $ (0.58 ) $ (0.65 ) $ 0.11
Income (loss) before accounting change available to common stockholders and basic and diluted income (loss) per share are computed as consistent with the annual per share calculations described in notes 1, 2(k) and 11 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(2) Included in income before accounting change and net income in the second quarter of 2003 is a one-time gain of $3.8 million recorded in connection with an agreement with Unilever which resolved certain issues that arose out of our acquisition of the Unipath business.
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(3) Included in income before accounting change and net income in the third quarter of 2003 is a one-time gain of $741,000 as a result of insurance recovery of legal costs previously incurred.
(4) Included in income before accounting change and net income in the fourth quarter of 2003 are (i) reversals of allowances for returns and trade spending of specific products aggregating $905,000, which were established in prior years and were deemed no longer needed based upon current business trends, and (ii) tax benefits aggregating $1.2 million, which resulted from the reduction of the valuation allowance on the NOL carryforward of our Irish subsidiary due to our assessment that we would more likely than not realize the benefit of this NOL and for the enhanced deduction for research and development activity at our Unipath operations in the United Kingdom.
(5) Included in the loss before accounting change in the first quarter of 2002 are (i) an impairment charge of $12.7 million representing a write-off of certain intangible assets, (ii) a non-cash stock-based compensation charge of $10.1 million relating to a restricted stock award made in 2001, the terms of which were amended in 2002, and (iii) a gain of $9.6 million related to the early extinguishment of certain subordinated promissory notes and the related repurchase of the beneficial conversion feature associated with these subordinated promissory notes, which was included as a component of other income, net, in the consolidated statement of operations included elsewhere in this Annual Report on Form 10-K. Net loss for the first quarter of 2002 also includes a $12.1 million charge for the cumulative effect of an accounting change.
(6) The second quarter of 2002 includes a $217,000 charge for a litigation settlement.
(7) Included in income before accounting change and net income in the fourth quarter of 2002 is a one-time foreign exchange gain of $2.6 million on the settlement of a portion of an inter-company loan between two of our subsidiaries and interest expense of $3.2 million related to an early extinguishment of debt.
Liquidity and Capital Resources
Based upon our current working capital position, current and long-term operating plans and expected business conditions, we believe that our existing capital resources and credit facilities will be adequate to fund our operations, including our outstanding debt and other commitments, as discussed below, for the next 12 months and the foreseeable future. This may be adversely impacted by unexpected costs associated with defending our existing lawsuits and/or unforeseen lawsuits against us and integrating the operations of Ostex and ABI and the product lines acquired from Abbott Laboratories. We also cannot be certain that our underlying assumed levels of revenues and expenses will be realized. In addition, we intend to continue to make significant investments in our research and development efforts related to the substantial intellectual property portfolio we now own, including the intellectual property acquired in connection with our acquisitions of Ostex and ABI and from Abbott Laboratories. We may also choose to further expand our research and development efforts and may pursue the acquisition of new products and technologies through licensing arrangements, business acquisitions, or otherwise. We may also choose to make significant investment to pursue legal remedies against potential infringers of our intellectual property. If we decide to engage in such activities, or if our operating results fail to meet our expectations, we could be required to seek additional funding through public or private financings or other arrangements. In such event, adequate funds may not be available when needed, or, may be available only on terms which could have a negative impact on our business and results of operations. In addition, if we raise additional funds by issuing equity or convertible securities, dilution to then existing stockholders may result.
Changes in Cash Position
As of December 31, 2003, we had cash and cash equivalents of $24.6 million, a $6.0 million decrease, or 20%, from December 31, 2002. We have historically funded our business through operating cash flows, proceeds from borrowings and the issuance of equity securities, as well as contributions from our former parent prior to the split-off and merger transaction with Johnson & Johnson in November 2001. During 2003, we generated cash of $9.8 million from operating activities, which resulted from net income, adjusted for non-cash items, of $28.0 million, offset by a net working capital increase, excluding change in the cash balance, of $18.2 million. Our non-equity financing activities, primarily borrowings under our senior credit facility, net of scheduled principal repayments and
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financing fees, provided us with cash of $66.0 million during 2003. In addition, we received $4.0 million in proceeds from the exercises of common stock options and warrants during 2003.
During 2003, we used cash of $89.1 million for our investing activities. Our investing activities consisted of $78.5 million paid for acquisitions of businesses and intellectual property and $11.1 million in capital expenditures, offset by $0.5 million related to a decrease in other non-current assets and proceeds received from the sale of property and equipment.
On February 10, 2004, we sold $150.0 million of 8 3 / 4 % senior subordinated notes, or Bonds, due 2012 in a private placement to qualified institutional buyers. Net proceeds from this offering after underwriters' commissions and the prepayment of certain debt facilities and related financing fees and prepayment penalties, as discussed below, amounted to $11.4 million. We intend to use the net proceeds from the Bonds issuance for the payment of related offering expenses and general corporate purposes.
Investing Activities
On June 30, 2003, we acquired 100% of the outstanding common stock of Ostex through a merger transaction. The preliminary aggregate purchase price of Ostex was $33.4 million, which consisted of 1,596,821 shares of our company's common stock with an aggregate fair value of $23.5 million, the assumption of fully-vested stock options and warrants to purchase an aggregate of 303,000 shares of our company's common stock, which options and warrants have an aggregate fair value of $1.8 million, preliminary exit costs of $3.6 million (which includes severance, facility lease and exit costs, and disposal of assets), direct acquisition costs of $1.6 million and $2.9 million in assumed debt. We intend to exit the current facilities of Ostex in Seattle, Washington, and merge the operations into our other business units by mid-2004. Consequently, although we have a detailed exit plan and believe that our current estimated exit costs of $3.6 million are reasonable, actual spending for exit activities may differ from our current estimated total exit costs, which might impact the final aggregate purchase price.
On August 27, 2003, we acquired 100% of the outstanding common stock of ABI from Apogent. The preliminary aggregate purchase price of ABI was $28.8 million, which consisted of $13.4 million in cash, 692,506 shares of our common stock with an aggregate fair value of $14.3 million and preliminary direct acquisition costs of $1.1 million. We financed the cash portion of the purchase price by borrowing under our senior credit facility, as discussed below. The aggregate purchase price is preliminary as we are working to settle a working capital adjustment with Apogent under the purchase agreement and management is in the process of finalizing a restructuring plan for the operations of ABI, both of which could result in adjustments to the aggregate purchase price.
On September 30, 2003, we acquired from Abbott Laboratories certain assets related to Abbott's Fact plus line of consumer diagnostic pregnancy tests and the Abbott TestPack, Abbott TestPack plus and Signify lines of professional rapid diagnostics for various testing needs, including strep throat, pregnancy and drugs of abuse. The assets also included certain transferred and licensed intellectual property related to
the products. The aggregate purchase price was $95.0 million, which consisted of $55.0 million in cash, $37.5 million in the form of 1,550,933 shares of our common stock, and direct acquisition costs of $2.5 million. We financed the cash portion of the purchase price by borrowings under our senior credit facility, as discussed below.
During 2003, we incurred $11.0 million in capital expenditures. A significant portion of our capital expenditure spending in 2003 was incurred to prepare our facilities for the manufacture of Pfizer's e.p.t products and to purchase equipment for the manufacture of an improved version of our traditional Clearblue pregnancy test. In addition, we made significant investments in laboratory instrument systems that we placed with our customers in connection with our national roll out of the AtheNa Multi-Lyte ANA Test System during 2003. To a lesser extent, capital expenditures in 2003 related to equipment purchased to support the manufacture of our new Clearblue Easy Digital pregnancy test. We also
37
purchased equipment to support our various research and development activities. We expect our 2004 capital expenditure spending to be at least equal to the level of the 2003 spending.
Financing Activities
On February 10, 2004, we completed the sale of $150.0 million of 8 3 / 4 % Bonds due 2012 in a private placement to qualified institutional buyers. Net proceeds from this offering amounted to $145.9 million, which was net of underwriters' commissions of $4.1 million. Of the net proceeds, we used $125.3 million to repay all of our outstanding indebtedness and related financing fees under our primary senior credit facility and $9.2 million to prepay our outstanding 9% subordinated promissory notes and related prepayment penalties, as discussed below. The remaining $11.4 million of unused proceeds will be used for Bond offering expenses and general corporate purposes. We also retained the $50.0 million in available credit under our primary senior credit facility after our repayment of the outstanding borrowings using the Bond proceeds.
The Bonds accrue interest from the date of their issuance, or February 10, 2004, at the rate of 8.75% per year. Interest on the Bonds will be payable semi-annually in arrears on each February 15 and August 15, commencing on August 15, 2004. We may redeem the Bonds, in whole or in part, at any time on or after February 15, 2008, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest. In addition, prior to February 15, 2007, we may redeem up to 35% of the aggregate principal amount of the Bonds issued with the proceeds of qualified equity offerings at a redemption price equal to 108.75% of the principal amount, plus accrued and unpaid interest. If we experience a change of control, we may be required to offer to purchase the Bonds at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest. We might not be able to pay the required price for Bonds presented to us at the time of a change of control because our primary senior credit facility or other indebtedness may prohibit payment or we might not have enough funds at that time.
The Bonds are unsecured and are subordinated in right of payment to all of our existing and future senior debt, including our guarantee of all borrowings under our primary senior credit facility. The Bonds are effectively subordinated to all existing and future liabilities, including trade payables, of those of our subsidiaries that do not guarantee the Bonds.
The Bonds are guaranteed by all of our domestic subsidiaries that are guarantors or borrowers under our primary senior credit facility, which excludes our subsidiary IMN in New Jersey. The guarantees are general unsecured obligations of the guarantors and are subordinated in right of payment to all existing and future senior debt of the applicable guarantors, which includes their guarantees of, and borrowings under our primary senior credit facility.
The indenture governing the Bonds contains covenants that will limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in the aggregate, subject to our interest coverage ratio, pay dividends or make other distributions or repurchase or redeem our stock, make investments, sell assets, incur liens, enter into agreements restricting our subsidiaries' ability to pay dividends, enter into transactions with affiliates and consolidate, merge or sell all or substantially all of our assets. These covenants are subject to certain exceptions and qualifications.
On November 14, 2002, our company and certain of our subsidiaries entered into our primary senior credit agreement with a group of banks for credit facilities in the aggregate amount of up to $55.0 million. On August 27, 2003, to finance the cash portion of our acquisition of ABI, we amended the senior credit agreement, whereby we increased our borrowing capacity under the senior credit facilities to $70.0 million. On September 30, 2003, to finance the cash portion of our acquisition of the rapid diagnostics product lines from Abbott Laboratories, we further amended the senior credit agreement, whereby the aggregate amount available under the senior credit facilities was further increased to $135.0 million. The amended senior credit agreement dated September 30, 2003 consisted
38
of two U.S. term loans, Term Loan A for $35.1 million and Term Loan B for $40.0 million, a European term loan for $9.9 million, a U.S. revolving line of credit of up to $25.0 million, and a European revolving line of credit of up to $25.0 million. Aggregate borrowings as of December 31, 2003 amounted to $84.9 million under the term loans and $39.9 million under the revolving lines of credit. The unused portion of the revolving lines of credit totaled $10.1 million as of December 31, 2003. As discussed above, we repaid all outstanding borrowings under our primary senior credit agreement with the proceeds from the Bonds issuance in February 2004 and we will retain the $50 million availability under the revolving lines of credit, subject to continuing covenant compliance.
We may repay any future borrowings under the revolving lines of credit at any time but in no event later than March 31, 2008. We are required to make mandatory prepayments under our primary senior credit facility if we meet certain cash flow thresholds, issue equity securities or subordinated debt, or sell assets not in the ordinary course of our business.
Borrowings under the revolving lines of credit bear interest at either (1) the London Interbank Offered Rate, or LIBOR, as defined in the credit agreement, plus applicable margins or, at our option, (2) a floating Index Rate, as defined in the credit agreement, plus applicable margins. Applicable margins if we choose to use the LIBOR or the Index Rate can range from 3.25% to 4.00% or 2.00% to 2.75%, respectively, depending on the quarterly adjustments that are based on our consolidated financial performance, commencing with the quarter ending March 31, 2004. As of December 31, 2003, the applicable interest rate under the revolving lines of credit, including the applicable margin, was 5.14%.
Borrowings under our primary senior credit facilities are secured by the stock of our U.S. and European subsidiaries, substantially all of our intellectual property rights and the assets of our businesses in the U.S. and Europe, excluding those assets of IMN, Orgenics Ltd., our Israeli subsidiary, and Unipath Scandinavia AB, our Swedish subsidiary, and the stock of IMN, Orgenics and certain smaller subsidiaries. Under the amended senior credit agreement, we must comply with various financial and non-financial covenants. The primary financial covenants pertain to, among other things, fixed charge coverage ratio, capital expenditures, various leverage ratios, earnings before interest, taxes and depreciation and amortization, or EBITDA, and a minimum cash requirement. Additionally, the amended senior credit agreement currently prohibits us from paying dividends. As of December 31, 2003, we were in compliance with the covenants.
On September 20, 2002, we sold units having an aggregate purchase price of $20.0 million to private investors to help finance our acquisition of Wampole. Each unit was issued for $50,000 and consisted of (1) a 10% subordinated promissory note in the principal amount of $50,000 and (2) a warrant to acquire 400 shares of our common stock at an exercise price of $13.54 per share. In the aggregate, we issued fully vested warrants to purchase 160,000 shares of our common stock, which may be exercised at any time on or prior to September 20, 2012. In addition, the placement agent for the offering of the units received a warrant to purchase 37,700 shares of our common stock, the terms of which are identical to the warrants sold as a part of the units. The 10% subordinated notes accrue interest on the outstanding principal amount at 10% per annum, which is payable quarterly in arrears on the first day of each calendar quarter starting October 1, 2002. The 10% subordinated notes mature on September 20, 2008, subject to acceleration in certain circumstances, and we may prepay the 10% subordinated notes at any time, subject to certain prepayment penalties. Subject to the consent of our senior lenders, we may repay the 10% subordinated notes and pay any prepayment penalty, in cash or in shares of our common stock valued at 95% of the average closing price of such stock over the ten consecutive trading days immediately preceding the payment date. The 10% subordinated notes are expressly subordinated to up to $150.0 million of indebtedness for borrowed money incurred or guaranteed by our company plus any other indebtedness that we incur to finance or refinance an acquisition. Among the purchasers of the units were three of our directors and officers and an entity controlled by our chief executive officer, who collectively purchased an aggregate of 37 units consisting
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of 10% subordinated notes in the aggregate principal amount of $1.85 million and warrants to purchase an aggregate of 14,800 shares of our common stock.
On September 20, 2002, also in connection with the financing of the Wampole acquisition, we sold 9% subordinated promissory notes in an aggregate principal amount of $9.0 million and 3% subordinated convertible promissory notes in an aggregate principal amount of $6.0 million to private investors for an aggregate purchase price of $15.0 million. The 9% subordinated notes and 3% convertible notes accrue interest on the outstanding principal amount at 9% and 3% per annum, respectively, which is payable quarterly in arrears on the first day of each calendar quarter starting October 1, 2002.
The 9% convertible notes were set to mature on September 20, 2008, subject to acceleration in certain circumstances, and we were allowed to prepay the outstanding principal balance at any time, subject to certain prepayment penalties and the consent of our senior lenders. In February 2004, we prepaid the outstanding balance of the 9% subordinated notes, or $9.0 million, and the consequential prepayment penalty of $180,000 with the proceeds from the Bond issuance in February 2004, as discussed above.
The 3% subordinated notes mature on September 20, 2008, subject to acceleration in certain circumstances. If we repay 3% convertible notes, we may do so in cash or in shares of our common stock valued at 95% of the average closing price of such stock over the ten consecutive trading days immediately preceding the payment date. At any time prior to the maturity date, the holders of the 3% convertible notes have the option to convert all of their outstanding principal amounts and unpaid interest into shares of our common stock at a conversion price equal to $17.45. Additionally, the outstanding principal amount and unpaid interest on the 3% convertible notes will automatically convert into common stock at a conversion price equal to $17.45 if, at any time after September 20, 2004, the average closing price of our common stock in any
consecutive thirty day period is greater than $22.67. An entity controlled by our chief executive officer purchased 3% convertible notes in the aggregate principal amount of $3.0 million.
As of December 31, 2003, our subsidiary IMN had a total outstanding debt balance of $16.8 million, of which $13.1 million represented borrowings under a credit agreement with its senior lender and $3.7 million related to various notes payable and capital leases. Under the credit agreement with its senior lender, as amended, IMN can borrow up to $15.0 million under a revolving credit commitment and $4.2 million under a term loan commitment, subject to specified borrowing base limitations. Borrowings under the revolving credit commitment and the term loan bear interest at either 1.50% above the bank's prime rate or, at IMN's option, at 3.75% above the Adjusted Eurodollar Rate used by the bank. As of December 31, 2003, the interest rates on the loans with its senior lender ranged from 4.92% to 5.50%. The notes are collateralized by substantially all of IMN's assets. The credit agreement with its senior lender requires IMN to maintain minimum tangible net worth and contains various restrictions customary in such financial arrangements, including limitations on the payment of cash dividends. As of December 31, 2003, IMN was in compliance with such requirements and restrictions. The loans with its senior lender mature on October 15, 2004 and under the credit agreement, the loans are automatically extended for one year at each maturity date unless a ninety day termination notice is given in writing by either party to the agreement. IMN's other notes payable and capital leases mature on various dates through July 2008.
As of December 31, 2003, our subsidiary Orgenics had bank debt balances totaling $478,000. Orgenics' bank debt is collateralized by certain of Orgenics' assets. Orgenics' notes bear interest at rates ranging from 3.5% to 5.7% at December 31, 2003 and are payable on various dates through 2005.
As of December 31, 2003, there were 208,060 shares of our Series A redeemable convertible preferred stock, or Series A Preferred Stock, outstanding. The number of shares of common stock to be issued upon any voluntary conversion of one share of Series A Preferred Stock was equal to such
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number as was determined by dividing $30 by the conversion price in effect at the time of conversion. As of December 31, 2003, the conversion price was $15, subject to adjustment. Accordingly, each share of Series A Preferred Stock was convertible into two shares of common stock. Commencing on December 20, 2003, we had the right to convert the Series A Preferred Stock into common stock in the event that the average closing price of our common stock exceeded $20 for any consecutive thirty trading day period ending not more than 10 days prior to the date of our mandatory conversion notice. Consequently, as of January 14, 2004, we converted all outstanding shares of the Series A Preferred Stock into shares of our common stock at a conversion rate of two shares of common stock per share of Series A Preferred Stock.
Each share of Series A Preferred Stock accrued dividends on a quarterly basis at $2.10 per annum, but only on those days when the closing price of our common stock was below $15. During 2003, we accrued $33,000 in dividends which were payable only if declared by the board of directors. No dividends were declared by the board of directors prior to the conversion of all outstanding shares of Series A Preferred Stock on January 14, 2004. In addition, our primary senior credit agreement would have prohibited us from paying dividends.
Income Taxes
As of December 31, 2003, we had approximately $73.8 million and $20.6 million of domestic and foreign net operating loss carryforwards, respectively, which either expire on various dates through 2023 or can be carried forward indefinitely. These losses are available to reduce federal and foreign taxable income, if any, in future years. These losses are also subject to review and possible adjustments by the applicable taxing authorities and may be limited in the event of certain cumulative changes in ownership interests of significant shareholders over a three-year period in excess of 50%. We have recorded a valuation allowance against a portion of the deferred tax assets related to our net operating losses and certain of our other deferred tax assets to reflect uncertainties that might affect the realization of such deferred tax assets, as these assets can only be realized via profitable operations. As of December 31, 2003, we determined that approximately $4.4 million of foreign net operating losses in Ireland were more likely than not to be realized due to recent and anticipated future profitable operations by our Irish subsidiary. Thus, we reduced the valuation allowance that was established against the deferred tax asset related to our net operating loss carryforwards in Ireland by $440,000 in 2003 to reflect this estimate.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2003.
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Contractual Obligations
The following table summarizes our principal contractual obligations as of December 31, 2003 and the effects such obligations are expected to have on our liquidity and cash flow in future periods.
(1)
Payments Due by Period
Contractual Obligations
Total
2004
2005 - 2006
2007 - 2008
Thereafter
(in thousands)
Long-term debt obligations(1) $ 174,837 $ 14,055 $ 848 $ 26,100 $ 133,834 Capital lease obligations(2) 2,764 636 1,202 926 —Operating lease obligations(3) 66,247 6,422 10,520 8,944 40,361 Pension obligations 1,424 1,424 — — —Obligations under interest rate swap(4) 771 771 — — —Minimum royalty obligations 120 20 40 40 20 Purchase obligations(5) 15,600 15,600 — — — Total $ 261,763 $ 38,928 $ 12,610 $ 36,010 $ 174,215
See description of various financing arrangements in this section and note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Included in the payments obligation amount in 2004 is $13.1 million representing borrowings under IMN's senior credit agreement due to mature in October 2004. However, IMN's senior credit agreement renews automatically for one year at each maturity date unless a ninety day termination notice is given in writing by either party to the agreement.
(2) See note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(3) See note 10(a) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(4) Obligations under our interest rate swap agreement are calculated using current interest rates level.
(5) Purchase obligations include firm capital expenditure commitments and open purchase orders of other goods and services.
Critical Accounting Policies
The consolidated financial statements included elsewhere in this Annual Report on Form 10-K are prepared in accordance with accounting principles generally accepted in the United States of America. The accounting policies discussed below are considered by our management and our audit committee to be critical to an understanding of our financial statements because their application depends on management's judgment, with financial reporting results relying on estimates and assumptions about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast and the best estimates routinely require adjustment. In addition, the notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, include a comprehensive summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements.
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Revenue Recognition
We primarily recognize revenue when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collection is reasonably assured.
The majority of our revenues are derived from product sales. We generally do not enter into arrangements with multiple element deliverables. We recognize revenue upon title transfer of the products to third-party customers, less a reserve for estimated product returns and allowances. Determination of the reserve for estimated product returns and allowances is based on our management's analyses and judgments regarding certain conditions, as discussed below in the critical accounting policy "Use of Estimates for Sales Returns and Other Allowances and Allowance for Doubtful Accounts." Should future changes in conditions prove management's conclusions and judgments on previous analyses to be incorrect, revenue recognized for any reporting period could be adversely affected.
We also receive license and royalty revenue from agreements with third-party licensees. Revenue from fixed fee license and royalty agreements are recognized on a straight-line basis over the obligation period of the related license agreements. License and royalty fees that the licensees calculate based on their sales, which we have the right to audit under most of our agreements, are generally recognized upon receipt of the license or royalty payments unless we are able to reasonably estimate the fees as they are earned. License and royalty fees that are
determinable prior to the receipt thereof are recognized in the period they are earned.
Use of Estimates for Sales Returns and Other Allowances and Allowance for Doubtful Accounts
Sales arrangements with customers for our consumer products generally require us to accept product returns. From time to time, we also enter into sales incentive arrangements with our retail customers, which generally reduce the sale prices of our products. As a result, we must establish allowances for potential future product returns and claims resulting from our sales incentive arrangements against product revenue recognized in any reporting period. Calculation of these allowances requires significant judgments and estimates. When evaluating the adequacy of the sales returns and other allowances, our management analyzes historical returns, current economic trends, and changes in customer demand and acceptance of our products. Material differences in the amount and timing of our product revenue for any reporting period may result if changes in conditions arise that would require management to make different judgments or utilize different estimates.
Our total provision for sales returns and other allowances related to sales incentive arrangements amounted to approximately $46.5 million, $43.9 million and $4.8 million in 2003, 2002 and 2001, respectively, which had been recorded against product sales to derive our net product sales.
Similarly, our management must make estimates regarding uncollectible accounts receivable balances. When evaluating the adequacy of the allowance for doubtful accounts, management analyzes specific accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms and patterns. Our accounts receivable balance was $55.4 million and $37.3 million, net of allowances for doubtful accounts of $797,000 and $871,000, as of December 31, 2003 and 2002, respectively.
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Valuation of Inventories
We state our inventories at the lower of the actual cost to purchase or manufacture the inventory or the estimated current market value of the inventory. In addition, we periodically review the inventory quantities on hand and record a provision for excess and obsolete inventory. This provision reduces the carrying value of our inventory and is calculated based primarily upon factors such as forecasts of our customers' demands, shelf lives of our products in inventory, loss of customers and manufacturing lead times. Evaluating these factors, particularly forecasting our customers' demands, requires management to make assumptions and estimates. Actual product sales may prove our forecasts to be inaccurate, in which case we may have underestimated or overestimated the provision required for excess and obsolete inventory. If, in future periods, our inventory is determined to be overvalued, we would be required to recognize the excess value as a charge to our cost of sales at the time of such determination. Likewise, if, in future periods, our inventory is determined to be undervalued, we would have over-reported our cost of sales, or understated our earnings, at the time we recorded the excess and obsolete provision. Our inventory balance was $47.0 million and $37.2 million, net of a provision for excess and obsolete inventory of $2.1 million and $1.3 million, as of December 31, 2003 and 2002, respectively.
Valuation of Goodwill and Other Long-Lived and Intangible Assets
Our long-lived assets include (1) property, plant and equipment, (2) goodwill and (3) other intangible assets. As of December 31, 2003, the balances of property, plant and equipment, goodwill and other intangible assets, net of accumulated depreciation and amortization, were $57.0 million, $233.8 million and $102.3 million, respectively.
Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions of intellectual property. The values we record for goodwill and other intangible assets represent fair values calculated by independent third-party appraisers. Such valuations require us to provide significant estimates and assumptions which are derived from information obtained from the management of the acquired businesses and our business plans for the acquired businesses or intellectual property. Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to: (i) future expected cash flows from product sales, customer contracts and acquired developed technologies and patents, (ii) expected costs to complete any in-process research and development projects and commercialize viable products and estimated cash flows from sales of such products, (iii) the acquired companies' brand awareness and market position, (iv) assumptions about the period of time over which we will continue to use the acquired brand, and (v) discount rates. These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur. If estimates and assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets, as discussed below, may indicate impairment which will require us to record an impairment charge in the period in which we identify the impairment.
Where we believe that property, plant and equipment and intangible assets have finite lives, we depreciate and amortize those assets over their estimated useful lives. For purposes of determining whether there are any impairment losses, as further discussed below, our management has historically examined the carrying value of our identifiable long-lived tangible and intangible assets and goodwill, including their useful lives where we believe such assets have finite lives, when indicators of impairment are present. In addition, SFAS No. 142 requires that impairment reviews be performed on the carrying values of all goodwill on at least an annual basis. For all long-lived tangible and intangible
assets and goodwill, if an impairment loss is identified based on the fair value of the asset, as compared to the carrying value of the asset, such loss would be charged to expense in the period we identify the impairment. Furthermore, if our review of the carrying values of the long-lived tangible and intangible assets with finite lives indicates impairment of such assets, we may determine that shorter estimated
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useful lives are more appropriate. In that event, we will be required to record additional depreciation and amortization in future periods, which will reduce our earnings.
Valuation of Goodwill
We have goodwill balances related to our consumer diagnostics and professional diagnostics reporting units, which amounted to $91.3 million and $142.5 million, respectively, as of December 31, 2003. As of December 31, 2003, we performed our annual impairment review on the carrying values of such goodwill using the discounted cash flows approach. Based upon this review, we do not believe that the goodwill related to our consumer diagnostics and professional diagnostics reporting units were impaired. Because future cash flows and operating results used in the impairment review are based on management's projections and assumptions, future events can cause such projections to differ from those used at December 31, 2003, which could lead to significant impairment charges of goodwill in the future. No events or circumstances have occurred since our review as of December 31, 2003, that would require us to reassess whether the carrying values of our goodwill have been impaired.
Valuation of Other Long-Lived Tangible and Intangible Assets
Factors we generally consider important which could trigger an impairment review on the carrying value of other long-lived tangible and intangible assets include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of our use of acquired assets or the strategy for our overall business; (3) underutilization of our tangible assets; (4) discontinuance of product lines by ourselves or our customers; (5) significant negative industry or economic trends; (6) significant decline in our stock price for a sustained period; (7) significant decline in our market capitalization relative to net book value; and (8) goodwill impairment identified during an impairment review under SFAS No. 142. Although we believe that the carrying value of our long-lived tangible and intangible assets was realizable as of December 31, 2003, future events could cause us to conclude otherwise.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure and assessing temporary differences resulting from differing treatment of items, such as reserves and accruals and lives assigned to long-lived and intangible assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered through future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within our tax provision.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $66.7 million as of December 31, 2003 due to uncertainties related to the future benefits, if any, from our deferred tax assets related primarily to our U.S. businesses and certain foreign net operating losses and tax credits. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance or reduce our current valuation allowance which could materially impact our tax provision.
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Legal Contingencies
Because of the nature of our business, we may from time to time be subject to consumer product claims or various other lawsuits arising in the ordinary course of our business, and we expect this will continue to be the case in the future. These lawsuits generally seek damages, sometimes in substantial amounts, for personal injuries or other commercial claims. In addition, we aggressively defend our patent and other intellectual property rights. This often involves bringing infringement or other commercial claims against third parties, which can be expensive and can result in counterclaims against us. We are currently involved in certain legal proceedings, as discussed in "Item 3. Legal Proceedings" in this Annual Report on Form 10-K. We do not accrue for potential losses on legal proceedings where our company is the defendant when we are not able to quantify our potential liability, if any, due to uncertainty as to the nature, extent and validity of the claims against us, uncertainty as to the nature and extent of the damages or other relief sought by the plaintiff and the complexity of the issues involved. Our potential
liability, if any, in a particular case may become quantifiable and probable as the case progresses, in which case we will begin accruing for the expected loss.
In addition, in the section of this Annual Report on Form 10-K titled "Item 3. Legal Proceedings," we have reported on certain legal proceedings as to which we do not believe a final ruling against us could have a material adverse impact on our financial position and operations. To the extent that unanticipated facts or circumstances arise that cause us to change this assessment with respect to any matter, our future results of operations and financial position could be materially affected.
Recently Issued Accounting Standards
In November 2002, the Emerging Issues Task Force, or EITF, reached consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables . Revenue arrangements with multiple deliverables include arrangements which provide for the delivery or performance of multiple products, services and/or rights to use assets where performance may occur at different points in time or over different periods of time. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of the guidance under this consensus did not have an impact on our financial position, results of operations or cash flows.
In April 2003, the Financial Accounting Standards Board, or FASB, issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities , which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of an underlying (as initially defined in SFAS No. 133) to conform it to language used in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others , and amends certain other existing pronouncements. SFAS No. 149 is effective for all contracts entered into or modified after June 30, 2003, subject to certain exceptions. The adoption of this statement did not have an impact on our financial position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity , which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), while many of such instruments were previously classified as equity or "mezzanine" equity. The statement also requires that income statement treatment be consistent with the balance sheet classification. That is, if the instrument is classified as a liability, payments to the
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holders are interest expense, not dividends, and changes in value are recorded in earnings. The statement relates to three specific categories of instruments: mandatorily redeemable shares, freestanding written put options and forward contracts that obligate an entity to purchase its own shares, and freestanding contracts that obligate an entity to pay with its own shares in amounts that are either unrelated, or inversely related, to the price of the shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective in the first interim period beginning after June 15, 2003. The adoption of this statement did not have an impact on our financial position, results of operations, or cash flows.
In December 2003, the FASB issued a revision to FASB Interpretation, or FIN, No. 46, Consolidation of Variable Interest Entities . The revised FIN No. 46, which replaces the original FIN No. 46 issued in January 2003, clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements , to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. While this interpretation exempts certain entities from its requirements, it also expands the definition of a variable interest entity, or VIE, to a broader group of entities than those previously considered special-purpose entities, or SPE's, and specifies the criteria under which it is appropriate for an investor to consolidate VIE's. Application of the revised FIN No. 46 is required in financial statements of public entities that have interest in structures that are commonly referred to as SPE's for periods ending after December 15, 2003. For all other types of VIE's, application of the revised FIN No. 46 by public entities is required for periods ending after March 15, 2004. The application of this interpretation with respect to structures commonly referred to as SPE's did not have a material impact on our financial position, results of operations, or cash flows. We currently do not expect the application of this interpretation with respect to other types of VIE's to have a material impact on our financial position, results of operations, or cash flows.
In December 2003, the Securities and Exchange Commission, or SEC, published Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition . SAB No. 104 was effective upon issuance and supersedes SAB No. 101, Revenue Recognition in Financial Statements , and rescinds the accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements that was superseded by EITF Issue No. 00-21. Accordingly, SAB No. 104 rescinds portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins. While the wording of SAB No. 104 has changed to reflect the guidance of EITF 00-21, the revenue recognition principles of SAB No. 101 have remained largely unchanged. The adoption of SAB No. 104 did not have a material effect on our financial position, results of operations, or cash flows.
Certain Factors Affecting Future Results
There are various risks, including those described below, which may materially impact your investment in our company or may in the future, and, in some cases already do, materially affect us and our business, financial condition and results of operations. You should carefully consider these factors with respect to your investment in our securities. This section includes or refers to certain forward-looking statements; you should read the explanation of the qualifications and limitations on such forward-looking statements beginning on pages 2 and 62 of this report.
Our business has substantial indebtedness, which could have adverse consequences for us.
We currently have, and we will likely continue to have a substantial amount of indebtedness. As of February 29, 2004, we had approximately $192.1 million aggregate principal amount of indebtedness outstanding, of which $16.1 million is secured indebtedness, and $51.5 million of additional borrowing capacity under the revolving portions of our credit facilities. In addition, subject to restrictions in our
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credit facilities and the indenture governing the senior subordinated notes, we may incur additional indebtedness.
Our substantial indebtedness could affect our future operations in important ways. For example, it could:
• make it more difficult to satisfy our obligations under the senior subordinated notes, our credit facilities and our other debt-related instruments;
• require us to use a large portion of our cash flow from operations to pay principal and interest on our indebtedness, which would reduce the amount of cash available to finance our operations and other business activities and may require us, in order to meet our debt service obligations, to delay or reduce capital expenditures or the introduction of new products and/or forego business opportunities, including acquisitions, research and development projects or product design enhancements;
• limit our flexibility to adjust to market conditions, leaving us vulnerable in a downturn in general economic conditions or in our business and less able to plan for, or react to, changes in our business and the industries in which we operate;
• impair our ability to obtain additional financing;
• place us at a competitive disadvantage compared to our competitors that have less debt; and
• expose us to fluctuations in the interest rate environment with respect to our indebtedness that bears interest at variable rates.
We expect to obtain the money to pay our expenses and to pay the principal and interest on the senior subordinated notes, our senior credit facility and our other debt from cash flow from our operations and from additional loans under our senior credit facility, subject to continued covenant compliance. Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets in which we operate and pressure from competitors. We cannot be certain that our cash flow will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. If our cash flow and capital resources prove inadequate, we could face substantial liquidity problems and might be required to dispose of material assets or operations, restructure or refinance our debt, including the notes, seek additional equity capital or borrow more money. We cannot guarantee that we will be able to do so on terms acceptable to us. In addition, the terms of existing or future debt agreements, including the credit agreement governing our senior credit facility and the indenture governing the senior subordinated notes, may restrict us from adopting any of these alternatives.
We have entered into agreements governing our indebtedness that subject us to various restrictions that may limit our ability to pursue business opportunities.
The agreements governing our indebtedness, including the credit agreement governing our senior credit facility and the indenture governing the senior subordinated notes, subject us to various restrictions on our ability to engage in certain activities, including, among other things, our ability to:
• incur additional indebtedness;
• pay dividends or make distributions or repurchase or redeem our stock;
• acquire other businesses;
• make investments;
• make loans to or extend credit for the benefit of third parties or our subsidiaries;
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• enter into transactions with affiliates;
• raise additional capital;
• make capital or finance lease expenditures;
• dispose of or encumber assets; and
• consolidate, merge or sell all or substantially all of our assets.
These restrictions may limit our ability to pursue business opportunities or strategies that we would otherwise consider to be in our best interests.
Our credit facilities contain certain financial covenants that we may not satisfy which, if not satisfied, could result in the acceleration of the amounts due under our credit facilities and the limitation of our ability to borrow additional fun ds in the future.
As of February 29, 2004, we had approximately $12.0 million of indebtedness outstanding under our various credit facilities and approximately $51.5 million of additional borrowing capacity under these credit facilities. The agreements governing these credit facilities subject us to various financial and other covenants with which we must comply on an ongoing or periodic basis. These include covenants pertaining to fixed charge coverage, capital expenditures, various leverage ratios, minimum EBITDA, total net worth and minimum cash requirements. If we violate any of these covenants, there may be a material adverse effect on us. Most notably, our outstanding debt under one or more of our credit facilities could become immediately due and payable, our lenders could proceed against any collateral securing such indebtedness, and our ability to borrow additional funds in the future may be limited.
A default under any of our agreements governing our indebtedness could result in a default and acceleration of indebtedness under other agreements.
The agreements governing our indebtedness, including our senior credit facility and the indenture governing the senior subordinated notes, contain cross-default provisions whereby a default under one agreement could result in a default and acceleration of our repayment obligations under other agreements. If a cross-default were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on commercially reasonable terms or terms that are acceptable to us. If some or all of our indebtedness is in default for any reason, our business, financial condition and results of operations could be materially and adversely affected.
We may not be able to satisfy our debt obligations upon a change of control.
Upon the occurrence of a "change of control," as defined in the indenture governing the senior subordinated notes, each holder of our senior subordinated notes will have the right to require us to purchase the notes at a price equal to 101% of the principal amount, together with any accrued and unpaid interest. Our failure to purchase, or give notice of purchase of, the senior subordinated notes would be a default under the indenture, which would in turn be a default under our senior credit facility. In addition, a change of control may constitute an event of default under our senior credit facility. A default under our senior credit facility would result in an event of default under our 3% convertible notes, 10% subordinated notes and, if the lenders accelerate the debt under our senior credit facility, the indenture, and may result in the acceleration of any of our other indebtedness outstanding at the time.
If a change of control occurs, we may not have enough assets to repay all of our indebtedness or to purchase all of the senior subordinated notes. Upon the occurrence of a change of control we could
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seek to refinance our existing indebtedness or obtain a waiver from the lenders or the holders of the senior subordinated notes. If we are not able to obtain a waiver or refinance our indebtedness on commercially reasonable terms, or at all, we may not be able to satisfy our obligations to holders of the senior subordinated notes upon a change of control.
Our acquisitions, and in particular our recent acquisitions of Ostex, ABI and the Abbott rapid diagnostics product lines, may not be profitable, and the integration of these businesses or product lines may be difficult and may lead to adverse effects.
Since we commenced activities in November 2001, we have acquired and attempted to integrate into our operations the Unipath business, IVC (now doing business as Inverness Medical Nutritionals Group, or IMN) and Wampole. On June 30, 2003, we acquired Ostex, on August 27, 2003, we acquired ABI, and on September 30, 2003, we acquired the Abbott rapid diagnostics product lines. The ultimate success of all of our acquisitions depends, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating these businesses or product lines into our existing businesses. However, the successful integration of independent companies or product lines is a complex, costly and time-consuming process. The difficulties of integrating companies and acquired assets include among others:
• consolidating manufacturing and research and development operations, where appropriate;
• integrating newly acquired businesses or product lines into a uniform financial reporting system;
• coordinating sales, distribution and marketing functions;
• establishing or expanding manufacturing, sales, distribution and marketing functions in order to accommodate newly acquired businesses or product lines;
• preserving the important licensing, research and development, manufacturing and supply, distribution, marketing, customer and other relationships;
• minimizing the diversion of management's attention from ongoing business concerns; and
• coordinating geographically separate organizations.
We may not accomplish the integration of our acquisitions smoothly or successfully. The diversion of the attention of our management from our current operations to the integration effort and any difficulties encountered in combining operations could prevent us from realizing the full benefits anticipated to result from these acquisitions and adversely affect our other businesses. Ultimately, the value of any company, product line or assets that we have acquired may not be greater than or equal to their purchase prices.
If we choose to acquire or invest in new and complementary businesses, products or technologies instead of developing them ourselves, such acquisitions or investments could disrupt our business and, depending on how we finance these acquisitions or investments, could result in the use of significant amounts of cash.
Our success depends in part on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. Accordingly, from time to time we may seek to acquire or invest in businesses, products or technologies instead of developing them ourselves. Acquisitions and investments involve numerous risks, including:
• the inability to complete the acquisition or investment;
• disruption of our ongoing businesses and diversion of management attention;
• difficulties in integrating the acquired entities, products or technologies;
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• difficulties in operating the acquired business profitably;
• the inability to achieve anticipated synergies, cost savings or growth opportunities;
• potential loss of key employees, particularly those of the acquired business;
• difficulties in transitioning key customer, distributor and supplier relationships;
• risks associated with entering markets in which we have no or limited prior experience; and
• unanticipated costs.
In addition, any future acquisitions or investments may result in:
• issuances of dilutive equity securities, which may be sold at a discount to market price;
• use of significant amounts of cash;
• the incurrence of debt;
• the assumption of significant liabilities;
• unfavorable financing terms;
• large one-time expenses; and
• the creation of certain intangible assets, including goodwill, the write-down of which may result in significant charges to
earnings.
Any of these factors could materially harm our business or our operating results.
If goodwill that we have recorded in connection with our acquisitions of other businesses becomes impaired, we could have to take significant charges against earnings.
In connection with the accounting for our acquisitions of the Unipath business, Wampole, Ostex, ABI and the Abbott rapid diagnostics product lines, we have recorded a significant amount of goodwill and other intangible assets. Under current accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other intangible assets has been impaired. Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings which could materially adversely affect our results of operations in future periods.
We could experience significant manufacturing delays, disruptions to our ongoing research and development and increased production costs if Unilever is unable to successfully assign or sublease to us the lease for the multi-purpose facility that we currently use in Bedford, England.
One of our primary operating facilities is located in Bedford, England. The Bedford facility is a multi-purpose facility that is registered with the FDA, contains state-of-the-art research laboratories and is equipped with specialized manufacturing equipment. This facility currently provides the manufacturing for our Clearblue and Clearview products, serves as our primary research and development center and serves as the administrative center for our European operations. We also use this facility to manufacture the digital e.p.t pregnancy test for Pfizer, and we anticipate using this facility to manufacture the non-digital e.p.t pregnancy test for Pfizer in connection with our five-year supply arrangement with Pfizer for this product that begins in June 2004. We are currently using the Bedford facility pursuant to our acquisition agreement with Unilever relating to our acquisition of the Unipath business in late 2001. Unilever currently leases this facility from a third party landlord. Pursuant to the terms of Unilever's lease, Unilever cannot assign the lease or sublet the Bedford facility to us without first obtaining the landlord's consent. The landlord has not yet, and may not in the future, consent to an assignment of the lease or a sublease to us. The terms of our acquisition
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agreement obligate Unilever to provide to us the benefit of its lease of the Bedford facility. If Unilever is unable to successfully acquire such consent or otherwise enable us to realize the benefit of Unilever's lease of the Bedford facility, or if its lease is terminated, we may be forced to renegotiate a lease of the Bedford facility on substantially less favorable terms or seek alternative means of producing our products, conducting our research and housing our European administrative staff. In either case, we may experience increased production costs or manufacturing delays, which could prevent us from meeting contractual supply obligations or jeopardize important customer relationships. We may also suffer disruptions to our ongoing research and development while we are resolving these issues. We cannot assure you that we will be able to renegotiate a lease for the Bedford facility on terms that are acceptable to us or find an acceptable replacement for this facility. Any one or more of these events may have a material adverse effect on us.
Manufacturing problems or delays could severely affect our business.
We produce most of our consumer products in our manufacturing facilities located in New Jersey, San Diego, Bedford, England and Galway, Ireland and some of our professional diagnostic tests in our manufacturing facilities located in Bedford, England, San Diego, Seattle and Yavne, Israel. Our production processes are complex and require specialized and expensive equipment. Replacement parts for our specialized equipment can be expensive and, in some cases, can require lead times of up to a year to acquire. In addition, our private label consumer products business, and our private label and bulk nutritional supplements business in particular, rely on operational efficiency to mass produce products at low margins per unit. We also rely on third parties to supply production materials and in some cases there may not be alternative sources immediately available.
In addition, we rely on third parties to manufacture most of our professional diagnostic products and certain components of our consumer diagnostic products, including products in development. For example, certain of the Abbott rapid diagnostics product lines are currently manufactured for us by Abbott Laboratories in Chicago under the terms of a transitional arrangement. Any event impacting our manufacturing facilities, our manufacturing systems or equipment, or our contract manufacturers or suppliers, including, without limitation, wars, terrorist activities, natural disasters and outbreaks of infectious disease (such as SARS), could delay or suspend shipments of products or the release of new products or could result in the delivery of inferior products. Our revenues from the affected products would decline or we could incur
losses until such time as we were able to restore our production processes or put in place alternative contract manufacturers or suppliers. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies.
We may not be successful in manufacturing, shipping and selling our new digital pregnancy test.
In the second quarter of 2003, we shipped the first orders for our new digital pregnancy test, Clearblue Easy Digital, which is the first consumer pregnancy test on the market to display test results in words. We also entered into a supply agreement with Pfizer pursuant to which we have agreed to supply Pfizer with a digital version of its e.p.t pregnancy tests on a non-exclusive basis, which began in December 2003. Instead of interpreting colored lines for a result, the digital display will spell out "Pregnant" or "Not Pregnant." Manufacturing or distribution problems, or other factors beyond our control, could negatively impact the effectiveness of these new products and prevent us from meeting customer demand or our own sales forecasts. In addition, we cannot assure you that the market will accept these new products or that any such acceptance will not dilute market acceptance of our other consumer pregnancy test products or the non-digital e.p.t pregnancy test, which we will manufacture for Pfizer for a period of five years beginning in June 2004. Accordingly, there is no assurance that these new products will increase our overall revenues or profitability.
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We may experience difficulties that may delay or prevent our development, introduction or marketing of new or enhanced products.
We intend to continue to invest in product and technology development. The development of new or enhanced products is a complex and uncertain process. We may experience research and development, manufacturing, marketing and other difficulties that could delay or prevent our development, introduction or marketing of new products or enhancements. We can not be certain that:
• any of the products under development will prove to be effective in clinical trials;
• we will be able to obtain, in a timely manner or at all, regulatory approval to market any of our products that are in development or contemplated;
• any of such products can be manufactured at acceptable cost and with appropriate quality; or
• any such products, if and when approved, can be successfully marketed.
While we currently expect to launch a pro-thrombin test in late 2004, a congestive heart failure product in 2005 and new infectious disease products (including a high sensitivity strep throat test, rapid influenza A & B tests and a rapid HIV test) in 2004, the factors listed above, as well as manufacturing or distribution problems, or other factors beyond our control, could delay these launches. In addition, we cannot assure you that the market will accept these products. Accordingly, there is no assurance that our overall revenues will increase if and when these new products are launched.
If we fail to meet strict regulatory requirements, we could be required to pay fines or even close our facilities.
Our facilities and manufacturing techniques generally must conform to standards that are established by government agencies, including those of European and other foreign governments, as well as the FDA, and, to a lesser extent, the U.S. Drug Enforcement Administration, or the DEA, and local health agencies. These regulatory agencies may conduct periodic audits of our facilities to monitor our compliance with applicable regulatory standards. If a regulatory agency finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us or if such a regulatory agency determines that our non-compliance is severe, it may close our facilities. Any adverse action by an applicable regulatory agency could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers' demands. These regulatory agencies may also impose new or enhanced standards that would increase our costs as well as the risks associated with non-compliance. For example, we anticipate that the FDA may soon finalize and implement "good manufacturing practice," or GMP, regulations for nutritional supplements. GMP regulations would require supplements to be prepared, packaged and held in compliance with certain rules, and might require quality control provisions similar to those in the GMP regulations for drugs. While our manufacturing facilities for nutritional supplements have been subjected to, and passed, third party inspections against anticipated GMP standards, the ongoing compliance required in the event that GMP regulations are adopted would involve additional costs and would present new risks associated with any failure to comply with the regulations in the future.
If we deliver products with defects, our credibility may be harmed, market acceptance of our products may decrease and we may be exposed to liability in excess of our product liability insurance coverage.
The manufacturing and marketing of consumer and professional diagnostic products involve an inherent risk of product liability claims. In addition, our product development and production are extremely complex and could expose our products to defects. Any defects could harm our credibility and decrease market acceptance of our products. In addition, our marketing of vitamins and nutritional supplements may cause us to be subjected to various product liability claims, including, among others, claims that the vitamins and nutritional supplements have
inadequate warnings concerning side effects
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and interactions with other substances. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. In the event that we are held liable for a claim for which we are not indemnified, or for damages exceeding the limits of our insurance coverage, that claim could materially damage our business and our financial condition.
Our sales of branded nutritional supplements have been trending downward since 1998 due to the maturity of the market segments they serve and the age of that product line and we may experience further declines in sales of those products.
Our sales of branded nutritional products have declined each year since 1998 until the year 2002 when they increased slightly as compared to 2001. We believe that these products have under-performed because they are, for the most part, aging brands with limited brand recognition that face increasing private label competition. The overall age of this product line means that we are subject to future distribution loss for under-performing brands, while our opportunities for new distribution on the existing product lines are limited. Though we did experience a slight increase in sales during 2002, the overall trend of declining sales for these products continued in 2003. More recently we have added new distribution of Posture D and entered into an agreement to serve as the exclusive U.S. distributor of Triomega. Otherwise, we do not expect significant sales growth of our existing branded nutritional products and we may experience further declines in overall sales of our branded nutritional products in the future.
The vitamin and nutritional supplements market is subject to significant fluctuations based upon media attention and new developments.
Most growth in the vitamin and nutritional supplement industry is attributed to new products that tend to generate greater attention in the marketplace than do older products. Positive media attention resulting from new scientific studies or announcements can spur rapid growth in individual segments of the market, and also impact individual brands. Conversely, news that challenges individual segments or products can have a negative impact on the industry overall as well as on sales of the challenged segments or products. Most of our vitamin and nutritional supplements products serve well-established market segments and, absent unforeseen new developments or trends, are not expected to benefit from rapid growth. A few of our vitamin and nutritional products are newer products that are more likely to be the subject of new scientific studies or announcements, which could be either positive or negative. News or other developments that challenge the safety or effectiveness of these products could negatively impact the profitability of our vitamin and nutritional supplements business.
We market our Orgenics professional diagnostic products to small and medium sized customers in approximately 90 countries at considerable cost that reduces the operating margins for those products.
Because small and medium sized laboratories are the principal customers of our Orgenics professional diagnostic products, we sell these products worldwide in order to maintain sufficient sales volume. Our Orgenics professional diagnostic products are marketed in approximately 90 countries, including many third world and developing nations where smaller laboratories are the norm, more expensive technologies are not affordable and infectious diseases are often more prevalent. This worldwide sales strategy is expensive and results in lower margins than would be possible if we could generate sufficient sales volume by operating in fewer markets.
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We could suffer monetary damages, incur substantial costs or be prevented from using technologies important to our products as a result of a number of pending legal proceedings.
We are involved in various legal proceedings arising out of our consumer diagnostics, nutritional supplements and professional diagnostics business. Our current material legal proceedings are:
• a counterclaim by Princeton BioMeditech Corporation, or PBM, against us in a patent infringement suit maintained by our subsidiaries, Inverness Medical Switzerland GmbH and Unipath Diagnostics, Inc., against PBM et. al. in which PBM alleges that we have breached various obligations to PBM arising out of its joint venture with us; and
• a suit brought by Quidel Corporation alleging that we are infringing U.S. Patent No. 4,943,522 and seeking a declaratory finding that Quidel does not infringe certain of our patents and certain other patents owned by co-defendant Armkel LLC and that the patents are invalid and/or unenforceable.
In connection with our split-off from IMT, we agreed to assume, to the extent permitted by law, and indemnify IMT for, all liabilities arising out of the women's health, nutritional supplements and professional diagnostics businesses before or after the split-off to the extent such
liabilities are not otherwise retained by IMT. Through our acquisitions of the Unipath business, IMN, Wampole, Ostex and ABI, we also assumed or acquired substantially all of the liabilities of those businesses. We are unable to assess the materiality or costs associated with these lawsuits at this time. We cannot assure you that these lawsuits or any future lawsuits relating to our businesses will not have a material adverse effect on us.
In October 2003, we met with the SEC regarding an informal inquiry concerning the resignation of our former independent accountants, Ernst & Young LLP, and certain accounting and financial matters that we discussed with the SEC in October 2003. On January 28, 2004, we received a request from the SEC for some additional factual information. We cannot predict what the outcome of this informal investigation will be.
In October 2003, in connection with an informal inquiry, we met with two representatives of the Boston office of the SEC's Division of Enforcement to respond to questions regarding Ernst & Young LLP's resignation and certain of the accounting and financial matters that we discussed with the SEC during the second quarter of 2003 after filing our Current Report on Form 8-K, event date April 11, 2003, to disclose Ernst & Young's resignation. We responded fully to the staff's requests for information. On January 28, 2004, in connection with its informal investigation, we received a request from the staff of the SEC for some additional factual information as a follow-up to our past response. We have fully responded to this request for additional information. We cannot predict whether the SEC will seek additional information or what the outcome of this informal investigation will be.
The profitability of our consumer products businesses may suffer if we are unable to establish and maintain close working relationships with our customers.
Our consumer products businesses rely to a great extent on close working relationships with our customers rather than long-term exclusive contractual arrangements. Customer concentration in these businesses is high, especially in our private label nutritional supplements business. In addition, customers of our branded and private label consumer products businesses purchase products through purchase orders only and are not obligated to make future purchases. We therefore rely on our ability to deliver quality products on time in order to retain and generate customers. If we fail to meet our customers' needs or expectations, whether due to manufacturing issues that affect quality or capacity issues that result in late shipments, we will harm our reputation and likely lose customers. The loss of a major customer and the failure to generate new accounts could significantly reduce our revenues or prevent us from achieving projected growth.
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The profitability of our consumer products businesses may suffer if Pfizer Inc. is unable to successfully market and sell its e.p.t pregnancy tests.
Under the terms of a manufacturing, packaging and supply agreement that we entered into in June 2003 with Pfizer Inc., through one of its wholly-owned subsidiaries, Pfizer will purchase its non-digital e.p.t pregnancy tests from us beginning on June 6, 2004 and continuing until June 6, 2009. Additionally, under the terms of a separate supply agreement, in December 2003 we began supplying Pfizer with a digital version of its e.p.t pregnancy test on a non-exclusive basis. The amount of revenues or profits that we generate under these agreements will depend on the volume of orders that we receive from Pfizer. As a result, if Pfizer is unable to successfully market and sell its e.p.t pregnancy tests, or if other events adversely affect the volume of Pfizer's sales of its e.p.t pregnancy tests, then our future revenues and profit may be adversely affected.
Our private label nutritional supplements business is a low margin business susceptible to changes in costs and pricing pressures.
Our private label nutritional supplements business operates on low profit margins and we rely on our ability to efficiently mass produce nutritional supplements in order to make meaningful profits from this business. Changes in raw material or other manufacturing costs can drastically cut into or eliminate the profits generated from the sale of a particular product. For the most part, we do not have long-term supply contracts for our required raw materials and, as a result, our costs can increase with little notice. The private label nutritional supplements business is also highly competitive such that our ability to raise prices as a result of increased costs is limited. Customers generally purchase private label products via purchase order, not through long-term contracts, and they often purchase these products from the lowest bidder on a product by product basis. The internet has enhanced price competition among private label manufacturers through the advent of on-line auctions, where customers will auction off the right to manufacture a particular product to the lowest bidder.
Retailer consolidation poses a threat to existing retailer relationships and can result in lost revenue.
In recent years there has been a rapid consolidation within the mass retail industry. Drug store chains, grocery stores and mass merchandisers, the primary purchasers of our consumer diagnostic products and vitamins and nutritional supplements, have all been subject to this trend. Because these customers purchase through purchase orders, consolidation can interfere with existing retailer relationships, especially private label relationships, and result in the loss of major customers and significant revenue streams.
Our financial condition or results of operations may be adversely affected by international business risks.
Approximately 36% of our net revenues were generated from outside the United States for the year ended December 31, 2003. A significant number of our employees, including manufacturing, sales, support and research and development personnel, are located in foreign countries, including England, Ireland and Israel. Conducting business outside of the United States subjects us to numerous risks, including:
• increased costs or reduced revenue as a result of movements in foreign currency exchange rates;
• decreased liquidity resulting from longer accounts receivable collection cycles typical of foreign countries;
• lower productivity resulting from difficulties managing our sales, support and research and development operations across many countries;
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• lost revenues resulting from difficulties associated with enforcing agreements and collecting receivables through foreign legal systems;
• lost revenues resulting from the imposition by foreign governments of trade protection measures;
• higher cost of sales resulting from import or export licensing requirements;
• lost revenues or other adverse affects as a result of economic or political instability in or affecting foreign countries in which we sell our products or operate; and
• adverse effects resulting from changes in foreign regulatory or other laws affecting the sales of our products or our foreign operations.
Because our business relies heavily on foreign operations and revenues, changes in foreign currency exchange rates and our ability to convert currencies may negatively affect our financial condition and results of operations.
Our business relies heavily on our foreign operations. Three of our manufacturing facilities are outside the United States, in Bedford, England, Galway, Ireland and Yavne, Israel. Approximately 36% of our net revenues were generated from outside the United States during the year ended December 31, 2003. Our Clearblue pregnancy test product sales have historically been much stronger outside the United States, with 75% of net product sales of these products coming from outside the United States during the year ended December 31, 2003. In addition, the Abbott rapid diagnostics product lines, which were acquired on September 30, 2003, generate a majority of their profits from sales outside the United States. Furthermore, Persona is sold exclusively outside of the United States and our Orgenics professional diagnostic products have always been sold exclusively outside of the United States. Because of our foreign operations and foreign sales, we face exposure to movements in foreign currency exchange rates. Our primary exposures are related to the operations of our European subsidiaries. These exposures may change over time as business practices evolve and could result in increased costs or reduced revenue and could impact our actual cash flow.
Our Orgenics subsidiary is located in Israel, and its operations could be negatively affected due to military or political tensions in the Middle East.
Our wholly-owned subsidiary, Orgenics, which develops, manufactures and sells certain of our professional diagnostic products, is incorporated under the laws of the State of Israel. The administrative offices and development and manufacturing operations of our Orgenics business are located in Yavne, Israel. Although most of Orgenics's sales currently are to customers outside of Israel, political, economic and military conditions in Israel could nevertheless directly affect its operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Despite its history of avoiding adverse effects, our Orgenics business could be adversely affected by any major hostilities involving Israel.
Terrorist attacks or acts of war may seriously harm our business.
Terrorist attacks or acts of war may cause damage or disruption to our company, our employees, our facilities and our customers, which could significantly impact our revenues, costs and expenses and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially adversely affect our business, results of operations and financial condition. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war, including the current conflict in Iraq, or hostility have created many economic and political
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uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that we currently cannot predict.
Intense competition could reduce our market share or limit our ability to increase market share, which could impair the sales of our products and harm our financial performance.
The medical products industry is rapidly evolving and developments are expected to continue at a rapid pace. Competition in this industry, which includes both our consumer diagnostics and professional diagnostics businesses, is intense and expected to increase as new products and technologies become available and new competitors enter the market. Our competitors in the United States and abroad are numerous and include, among others, diagnostic testing and medical products companies, universities and other research institutions. Our future success depends upon maintaining a competitive position in the development of products and technologies in our areas of focus. Our competitors may:
• develop technologies and products that are more effective than our products or that render our technologies or products obsolete or noncompetitive;
• obtain patent protection or other intellectual property rights that would prevent us from developing our potential products; or
• obtain regulatory approval for the commercialization of their products more rapidly or effectively than we do.
Also, the possibility of patent disputes with competitors holding foreign patent rights may limit or delay expansion possibilities for our diagnostics businesses in certain foreign jurisdictions. In addition, many of our existing or potential competitors have or may have substantially greater research and development capabilities, clinical, manufacturing, regulatory and marketing experience and financial and managerial resources.
The market for the sale of vitamins and nutritional supplements is also highly competitive. This competition is based principally upon price, quality of products, customer service and marketing support. There are numerous companies in the vitamins and nutritional supplements industry selling products to retailers such as mass merchandisers, drug store chains, independent drug stores, supermarkets, groceries and health food stores. As most of these companies are privately held, we are unable to obtain the information necessary to assess precisely the size and success of these competitors. However, we believe that a number of our competitors, particularly manufacturers of nationally advertised brand name products, are substantially larger than we are and have greater financial resources.
The rights we rely upon to protect the intellectual property underlying our products may not be adequate, which could enable third parties to use our technology and would reduce our ability to compete in the market.
Our success will depend in part on our ability to develop or acquire commercially valuable patent rights and to protect our intellectual property. Our patent position is generally uncertain and involves complex legal and factual questions. The degree of present and future protection for our proprietary rights is uncertain.
The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:
• the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents;
• the claims of any patents which are issued may not provide meaningful protection;
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• we may not be able to develop additional proprietary technologies that are patentable;
• the patents licensed or issued to us or our customers may not provide a competitive advantage;
• other parties may challenge patents or patent applications licensed or issued to us or our customers;
• patents issued to other companies may harm our ability to do business; and
• other companies may design around technologies we have patented, licensed or developed.
In addition to patents, we rely on a combination of trade secrets, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. Nevertheless, these measures may not be adequate to safeguard the technology underlying our products. If they do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced. In addition, employees, consultants and others who participate in the development of our products may breach their agreements with
us regarding our intellectual property and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries. For a variety of reasons, we may decide not to file for patent, copyright or trademark protection or prosecute potential infringements of our patents. We also realize that our trade secrets may become known through other means not currently foreseen by us. Despite our efforts to protect our intellectual property, our competitors or customers may independently develop similar or alternative technologies or products that are equal or superior to our technology and products without infringing on any of our intellectual property rights or design around our proprietary technologies.
Claims by other companies that our products infringe on their proprietary rights could adversely affect our ability to sell our products and increase our costs.
Substantial litigation over intellectual property rights exists in both the consumer and professional diagnostic industries. We expect that our products and products in these industries could be increasingly subject to third party infringement claims as the number of competitors grows and the functionality of products and technology in different industry segments overlaps. Third parties may currently have, or may eventually be issued, patents on which our products or technology may infringe. Any of these third parties might make a claim of infringement against us. Any litigation could result in the expenditure of significant financial resources and the diversion of management's time and resources. In addition, litigation in which we are accused of infringement may cause negative publicity, have an impact on prospective customers, cause product shipment delays or require us to develop non-infringing technology, make substantial payments to third parties, or enter into royalty or license agreements, which may not be available on acceptable terms, or at all. If a successful claim of infringement was made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our revenue may decrease and we could be exposed to legal actions by our customers.
We have initiated, and may need to further initiate, lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would reduce our ability to compete in the market.
We rely on patents to protect a portion of our intellectual property and our competitive position. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to:
• assert claims of infringement;
• enforce our patents;
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• protect our trade secrets or know-how; or
• determine the enforceability, scope and validity of the proprietary rights of others.
Currently, we have initiated a number of lawsuits against competitors who we believe to be selling products that infringe our proprietary rights. These current lawsuits and any other lawsuits that we initiate could be expensive, take significant time and divert management's attention from other business concerns. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us.
Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. We may not prevail in any of these suits and the damages or other remedies awarded, if any, may not be commercially valuable. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive any of these results to be negative, our stock price could decline.
Non-competition obligations and other restrictions will limit our ability to take full advantage of our management team, the technology we own or license and our research and development capabilities.
Members of our management team have had significant experience in the diabetes field. In addition, technology we own or license may have potential applications to this field and our research and development capabilities could be applied to this field. However, in conjunction with our split-off from IMT, we agreed not to compete with IMT and Johnson & Johnson in the field of diabetes for 10 years. In addition, Mr. Ron Zwanziger, our Chairman, Chief Executive Officer and President, and two of our senior scientists, Dr. David Scott and Dr. Jerry McAleer, have entered into consulting agreements with IMT that impose similar restrictions. Further, our license agreement with IMT prevents us from using any of the licensed technology in the field of diabetes. As a result of these restrictions, we cannot pursue opportunities in the field of diabetes.
We are obligated to indemnify IMT and others for liabilities and could be required to pay IMT and others amounts that we may not
have.
The restructuring agreement, post-closing covenants agreement and related agreements entered into in connection with the split-off and merger transaction with Johnson & Johnson provide that we will indemnify IMT and other related persons for specified liabilities related to our businesses, statements in the proxy statement/prospectus issued in connection with the split-off and merger about our businesses and breaches of our obligations under the restructuring agreement, post-closing covenants agreement and related agreements.
In addition, under our tax allocation agreement with IMT and Johnson & Johnson, we will indemnify Johnson & Johnson and IMT for any unpaid tax liabilities attributable to the pre-split-off operation of our consumer diagnostics, vitamins and nutritional supplements and professional diagnostics businesses.
While no claims for indemnification have yet been made, or may ever be made, we are unable to predict the amount, if any, that may be required for us to satisfy our indemnification obligations under these agreements. However, if claims are made for indemnification and we are liable for such claims, the amount could be substantial. In such an event, we may not have sufficient funds available to satisfy our potential indemnification obligations. In addition, we may be unable to obtain the funds on terms satisfactory to us, if at all. If we are unable to obtain the necessary funds, we will need to consider other alternatives, including sales of assets, to raise necessary funds.
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You are unlikely to be able to exercise effective remedies against Arthur Andersen LLP, our former independent public accountants.
Although we dismissed Arthur Andersen LLP as our independent public accountants in June 2002 and we now engage BDO Seidman, LLP, our consolidated financial statements as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, to the extent included in this report or previously filed reports or registration statements, were audited by Arthur Andersen.
On March 14, 2002, Arthur Andersen was indicted on federal obstruction of justice charges arising from the government's investigation of Enron Corporation. On June 15, 2002, a jury in Houston, Texas found Arthur Andersen guilty of these federal obstruction of justice charges. In light of the jury verdict and the underlying events, Arthur Andersen subsequently substantially discontinued operations and dismissed essentially its entire workforce. You are therefore unlikely to be able to exercise effective remedies or collect judgments against Arthur Andersen for any untrue statement of a material fact contained in the financial statements audited by Arthur Andersen or any omissions to state a material fact required to be stated in those financial statements.
Our operating results may fluctuate due to various factors and as a result period-to-period comparisons of our results of operations will not necessarily be meaningful.
Factors relating to our business make our future operating results uncertain and may cause them to fluctuate from period to period. Such factors include:
• the timing of new product announcements and introductions by us and our competitors;
• market acceptance of new or enhanced versions of our products;
• changes in manufacturing costs or other expenses;
• competitive pricing pressures;
• the gain or loss of significant distribution outlets or customers;
• increased research and development expenses;
• the timing of any future acquisitions;
• general economic conditions; or
• general stock market conditions or other economic or external factors.
Our historical financial information relating to pe riods beginning prior to our split-off from Inverne ss Medical Technology, Inc. on November 21, 2001 may not be representative of our results as a separate company.
On November 21, 2001, we were split-off from IMT and became an independent, publicly owned company as part of a transaction by which IMT was acquired by Johnson & Johnson. Prior to that time, we had been a majority owned subsidiary of IMT, and the businesses that
we acquired in connection with the restructuring that preceded the split-off represented approximately 20% of IMT's net product sales during the calendar quarter concluded immediately prior to the split-off. The historical financial information relating to any periods beginning prior to November 21, 2001, included in our reports filed with the SEC, report on time periods prior to the split-off and reflect the operating history of our businesses when we were a part of IMT. As a result, the financial information may not reflect what our results of operations, financial position and cash flows would have been had we been a separate, stand-alone company during those periods. This financial information also may not reflect what our results of operations, financial position and cash flows will be in the future. This is not only
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related to the various risks associated with the fact that we have not been a stand-alone company for a long period of time, but also because:
• various adjustments and allocations have been made to produce these financial statements because IMT did not account for us as a single stand-alone business for those periods presented; and
• the information, to the extent it does not report on a period ending on or after November 21, 2001, does not reflect many significant changes that occurred in our financial condition, capital structure and operations as a result of our separation from IMT.
The adjustments and allocations we made in preparing the financial information for any periods beginning prior to November 21, 2001 may not appropriately reflect our operations during those periods as if we had operated as a stand-alone company.
Period-to-period comparisons of our operating results may not be meaningful due to our acquisitions.
We have engaged in a number of significant acquisitions in recent years which make it difficult to analyze our results and to compare them from period to period, including the acquisitions of the Unipath business in December 2001, IVC in March 2002, Wampole in September 2002, Ostex in June 2003, ABI in August 2003 and the Abbott rapid diagnostics product lines in September 2003. Period-to-period comparisons of our results of operations may not be meaningful due to these acquisitions and are not indications of our future performance. Any future acquisitions will also make our results difficult to compare from period to period in the future.
SPECIAL STATEMENT REGARDING FORWARD-LOOKING STATEME NTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as "may," "could," "should," "would," "intend," "will," "expect," "anticipate," "believe," "estimate," "continue" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other "forward-looking" information. There may be events in the future that we are not able to predict accurately or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. We caution investors that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those we discuss in this report. These differences may be the result of various factors, including those factors described in the "Certain Factors Affecting Future Results" section in this report and other risk factors identified from time to time in our periodic filings with the SEC. Some important additional factors that could cause our actual results to differ materially from those projected in any such forward-looking statements are as follows:
• economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates, and the potential effect of such fluctuations on revenues, expenses and resulting margins;
• competitive factors, including technological advances achieved and patents attained by competitors and generic competition;
• domestic and foreign healthcare changes resulting in pricing pressures, including the continued consolidation among healthcare providers, trends toward managed care and healthcare cost containment and government laws and regulations relating to sales and promotion, reimbursement and pricing generally;
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• government laws and regulations affecting domestic and foreign operations, including those relating to trade, monetary and fiscal policies, taxes, price controls, regulatory approval of new products and licensing;
• manufacturing interruptions, delays or capacity constraints or lack of availability of alternative sources for components for our products, including our ability to successfully maintain relationships with suppliers, or to put in place alternative suppliers on
terms that are acceptable to us;
• difficulties inherent in product development, including the potential inability to successfully continue technological innovation, complete clinical trials, obtain regulatory approvals in the United States and abroad, gain and maintain market approval of products and the possibility of encountering infringement claims by competitors with respect to patent or other intellectual property rights which can preclude or delay commercialization of a product;
• significant litigation adverse to us including product liability claims, patent infringement claims and antitrust claims;
• product efficacy or safety concerns resulting in product recalls or declining sales;
• the impact of business combinations, including acquisitions and divestitures, such as our recent acquisitions of Applied Biotech, Inc. and the Abbott rapid diagnostics product lines, and organizational restructurings consistent with our evolving business strategies;
• our ability to satisfy the financial covenants and other conditions contained in the agreements governing our indebtedness;
• our ability to obtain required financing on terms that are acceptable to us; and
• the issuance of new or revised accounting standards by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board or the SEC.
The foregoing list sets forth many, but not all, of the factors that could impact upon our ability to achieve results described in any forward-looking statements. Readers should not place undue reliance on our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described above and elsewhere in this report could harm our business, prospects, operating results and financial condition. We do not undertake any obligation to update any forward-looking statements as a result of future events or developments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE S ABOUT MARKET RISK
The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those discussed in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate Risk
We are exposed to market risk from changes in interest rates primarily through our investing and financing activities. In addition, our ability to finance future acquisition transactions or fund working capital requirements may be impacted if we are not able to obtain appropriate financing at acceptable rates.
Our investing strategy, to manage interest rate exposure, is to invest in short-term, highly liquid investments. Our investment policy also requires investment in approved instruments with an initial maximum allowable maturity of eighteen months and an average maturity of our portfolio that should not exceed six months, with at least $500,000 cash available at all times. Currently, our short-term
63
investments are in money market funds with original maturities of 90 days or less. At December 31, 2003, our short-term investments approximated market value.
At December 31, 2003, we had two U.S. term loans totaling $75.1 million and a European term loan of $9.9 million outstanding and $16.9 million outstanding borrowings on a U.S. revolving line of credit and $23.0 million outstanding borrowings on a European revolving line of credit under our amended senior credit agreement dated September 30, 2003. In February 2004, using the proceeds of our sale of $150 million of 8.75% senior subordinated notes we prepaid all outstanding borrowings under the amended senior credit facility while we retain $50 million availability, in the aggregate, under the revolving lines of credit. We may repay any future borrowings under the revolving lines of credit at any time but in no event later than March 31, 2008. Borrowings under the revolving lines of credit bear interest at either (i) the London Interbank Offered Rate, or LIBOR, as defined in the agreement, plus applicable margins or, at our option, (ii) a floating Index Rate, as defined in the agreement, plus applicable margins. Applicable margins if we choose to use the LIBOR or the Index Rate can range from 3.25% to 4.00% or 2.00% to 2.75%, respectively, depending on the quarterly adjustments that are based on our consolidated financial performance, commencing with the quarter ending March 31, 2004. As of December 31, 2003, the applicable interest rate under the revolving lines of credit, including the applicable margin, was 5.14%.
We have an interest rate swap agreement with a bank in place, which was intended to provide us with limited protection from fluctuations
in the LIBOR rate. Under the interest rate swap agreement, the LIBOR rate is at a minimum of 3.36% and a maximum of 5% and applies to $34.8 million to $36.3 million of any of our U.S. Dollar denominated loans, depending upon the interest period, for the remaining term of the agreement. This interest rate swap agreement is effective through December 30, 2004.
As of December 31, 2003, the LIBOR and Index rates applicable under the amended senior credit agreement were 1.14% and 4%, respectively. Assuming no changes in our leverage ratio, which would affect the margin of the interest rate under the amended senior credit agreement, and as long as we borrow only up to the amounts covered under the interest rate swap agreement, increase in the LIBOR rate by 1% point or 2% points would not affect our interest expense. However, assuming no changes in our leverage ratio, the effect of interest rate fluctuations on each $1.0 million borrowings under the revolving lines of credit in excess of the amounts covered under the interest rate swap agreement over the next twelve months is quantified and summarized as follows:
Our subsidiary IMN has a credit agreement with its bank, under which it can borrow up to $15.0 million under a revolving credit commitment and $4.2 million under a term loan commitment, subject to specified borrowing base limitations. These IMN loans mature on October 15, 2004, but the maturity date is automatically extended for one year at each maturity date unless a ninety day termination notice is given in writing by either party to the agreement. As of December 31, 2003, total borrowings outstanding under the credit agreement with the bank were $13.1 million. Borrowings under the revolving credit commitment and the term loan bear interest at either 1.5% above the bank's prime rate or, at IMN's option, at 3.75% above the Adjusted Eurodollar Rate used by the bank. As of December 31, 2003, the interest rate on $3.3 million of the outstanding borrowings was at the Adjusted Eurodollar Rate of 1.17% plus the spread of 3.75% and the interest rate on the remaining $9.9 million
64
of the outstanding borrowings was at the prime rate of 4.00% plus the spread of 1.5%. The effect of interest rate fluctuations on the loans under IMN's credit agreement over the next twelve months, assuming the credit agreement is automatically extended for one year at the current maturity date, is quantified and summarized as follows:
Foreign Currency Risk
We face exposure to movements in foreign currency exchange rates whenever we, or any of our subsidiaries, enter into transactions with third parties that are denominated in currencies other than our, or its, functional currency. Intercompany transactions between entities that use different functional currencies also expose us to foreign currency risk. In 2003, the net impact of foreign currency changes on transactions was a gain of $5,000. Generally, we do not use derivative financial instruments or other financial instruments to hedge such economic exposures. However, if our foreign currency exchange exposure in these transactions continues to be significant, we may decide to use such instruments in the future.
Gross margins of products we manufacture at our European plants and sell in U.S. Dollar are also affected by foreign currency exchange rate movements. Our overall gross margin on net product sales was 42.5% in 2003. If the U.S. dollar had been stronger by 1%, 5% or 10%, compared to the actual rates in 2003, our overall gross margin on net product sales would have been 42.7%, 43.3% and 44.1%, respectively.
In addition, because a substantial portion of our earnings is generated by our foreign subsidiaries, whose functional currencies are other than the U.S. dollar (in which we report our consolidated financial results), our earnings could be materially impacted by movements in foreign currency exchange rates upon the translation of the earnings of such subsidiaries into the U.S. dollar. If the U.S. dollar had been stronger by 1%, 5% or 10%, compared to the actual average exchange rates used to translate the financial results of our foreign subsidiaries, our net revenue and net income would have been lower by approximately the following amounts:
Interest Expense Increase
If compared to the rate at December 31, 2003, LIBOR increases by 1% point and aggregate borrowings exceed the amount applicable under the interest rate swap agreement $ 10,000 LIBOR increases by 2% point and aggregate borrowings exceed the amount applicable under the interest rate swap agreement $ 20,000
Interest Expense Increase
If compared to the rates at December 31, 2003, Interest rates increase by 1% point $ 122,000 Interest rates increase by 2% points 243,000
Approximate Decrease in
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY D ATA
The financial statements and supplementary data are listed under Item 15(a) and have been filed as part of this report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUN TANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The disclosure called for by paragraph (a) of Item 304 of Regulation S-K has been previously reported in (i) our Current Report on Form 8-K, dated and filed June 28, 2002, relating to our dismissal of Arthur Andersen LLP and our engagement of Ernst & Young, LLP, as our independent auditors, and (ii) our Current Report on Form 8-K, dated April 11, 2003 and initially filed on April 18, 2003, as amended on May 29, 2003, relating to the resignation of Ernst & Young, LLP and our engagement of BDO Seidman, LLP, as our independent auditors.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusions regarding the effectiveness of our disclosure controls and procedures
Our management evaluated, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at that time. We and our management understand nonetheless that controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. In reaching their conclusions stated above regarding the effectiveness of our disclosure controls and procedures, our CEO and CFO concluded that such disclosure controls and procedures were effective as of such date at the "reasonable assurance" level.
Changes in internal control over financial reporting
There was no change in our internal control over financial reporting that occurred during our fourth fiscal quarter of 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As part of our ongoing efforts to enhance our controls and procedures, however, we have taken certain actions during 2003 which may directly or indirectly affect our internal control over financial reporting. In July 2003, we engaged Protiviti, Inc., an independent risk consulting firm, to assist us in assessing, documenting and testing our internal controls starting in 2003 to ensure that we can comply with the rules and regulations promulgated under Section 404 of the Sarbanes-Oxley Act of 2002 when they take effect for us for the fiscal year ended December 31, 2004. We are also continually striving to improve our management and operational efficiency, manage our growth and integrate acquired businesses and we expect that our efforts in these regards may from time to time directly or indirectly affect our internal controls. In that regard, we hired Christopher Lindop as our Chief Financial Officer during the third quarter of 2003 and we have added significant additional capacity and expertise to our finance, tax and legal staff. We have also integrated the financial accounting systems of certain of our businesses with the system used by our corporate finance team and upgraded the information technology capabilities of certain of our subsidiaries.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Net Revenue
Net Income
If during 2003, the U.S. dollar was stronger by: 1% $ 804,000 $ 23,000 5% 4,018,000 117,000 10% 8,036,000 234,000
The information regarding our directors and executive officers included in our definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with our 2004 Annual Meeting of Shareholders (the Proxy Statement) is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation included in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIA L OWNERS AND MANAGEMENT
The information regarding security ownership of certain beneficial owners and management included in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANS ACTIONS
The information regarding certain relationships and related transactions included in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information regarding principal accounting fees and services included in the Proxy Statement is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES , AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The financial statements listed below have been filed as part of this report on the pages indicated:
2.
Report of Independent Auditors F-2 Report of Independent Public Accountants F-4 Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 F-5 Consolidated Balance Sheets as of December 31, 2003 and 2002 F-6 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2003, 2002 and 2001
F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 F-10 Notes to Consolidated Financial Statements F-13
Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have been omitted.
3. Exhibits.
2.1 Sale Agreement, dated December 20, 2001, between Inverness Medical Innovations, Inc. (the "Company") and
Unilever U.K. Holdings Limited (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 20, 2001)
2.2
Amendment to Agreement and Plan of Merger dated as of February 18, 2003, by and among Inverness Medical Innovations, Inc., Geras Acquisition Corp. and Ostex International, Inc. (incorporated by reference to Exhibit 99.2 to the Company's Current Report of Form 8-K dated February 19, 2003)
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2.3
Stock Purchase Agreement, dated as of July 30, 2003, by and among Inverness Medical Innovations, Inc., Applied Biotech, Inc. and Erie Scientific Company (incorporated by reference to Exhibit 2.1 to the Company's Current Report of Form 8-K dated August 27, 2003)
2.4
Asset Purchase Agreement, as of September 30, 2003, by and among Abbott Laboratories and Inverness Medical Innovations, Inc. and Inverness Medical Switzerland GmbH, Morpheus Acquisition Corp. and Morpheus Acquisition LLC. (incorporated by reference to Exhibit 2.1 to the Company's Current Report of Form 8-K dated September 30, 2003)
3.1
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
3.2
Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated December 20, 2001)
3.3
Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
4.1
Specimen certificate for shares of Common Stock of the Company (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4, as amended (File No. 333-67392))
4.2
Registration Rights Agreement, as of September 30, 2003, by and among Inverness Medical Innovations, Inc. and Abbott Laboratories (incorporated by reference to Exhibit 99.2 to the Company's Current Report of Form 8-K dated September 30, 2003)
*4.3
Indenture, dated as of February 10, 2004, between Inverness Medical Innovations, Inc., the Guarantors named therein and U.S. Bank Trust National Association
*4.4
Registration Rights Agreement, as of February 10, 2004, by and among Inverness Medical Innovations, Inc., the guarantors named therein and UBS Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated
10.1
Post-Closing Covenants Agreement, dated as of November 21, 2001, by and among Johnson & Johnson, IMT, the Company, certain subsidiaries of IMT and certain subsidiaries of the Company (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.2
Tax Allocation Agreement, dated as of November 21, 2001, by and among Johnson & Johnson, IMT and the Company (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.3
Supply of Goods Agreement, dated July 28, 1998, between Schleicher & Schuell GmbH and Unipath Limited (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.4
Lease, dated as of January 12, 1999, by and among Cambridge Diagnostics Ireland Limited and the Industrial Development Agency (Ireland) (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4, as amended (File No. 333-67392))
10.5
Inverness Medical Innovations, Inc. 2001 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4, as amended (File No. 333-67392))
10.6
Inverness Medical Innovations, Inc. 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-4, as amended (File No. 333-67392))
10.7
Inverness Medical Innovations, Inc. 2001 Employee Stock Purchase Plan—First Amendment (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.8
Restricted Stock Agreement under the Inverness Medical Innovations, Inc. 2001 Stock Option and Incentive Plan, dated as of August 15, 2001, between the Company and Ron Zwanziger (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31,
69
2001)
10.9
Promissory Note, dated August 16, 2001, from Ron Zwanziger to the Company (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.10
Pledge Agreement, dated as of August 16, 2001, between Ron Zwanziger and the Company (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.11
Non-Qualified Stock Option Agreement under the Inverness Medical Innovations, Inc. 2001 Stock Option and Incentive Plan, dated as of August 15, 2001, between the Company and Jerry McAleer (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.12
Promissory Note, dated December 4, 2001, from Jerry McAleer to the Company (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.13
Pledge Agreement, dated as of December 4, 2001, between Jerry McAleer and the Company (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.14
Non-Qualified Stock Option Agreement under the Inverness Medical Innovations, Inc. 2001 Stock Option and Incentive Plan, dated as of August 15, 2001, between the Company and David Scott (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.15
Promissory Note, dated December 4, 2001, from David Scott to the Company (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.16
Pledge Agreement, dated as of December 4, 2001, between David Scott and the Company (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.17
Stock Purchase Agreement, dated as of December 14, 2001, between the Company and the investors named therein (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated March 14, 2002)
10.18
Note and Warrant Purchase Agreement, dated as of December 14, 2001, between the Company and the investors named therein (incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated December 20, 2001)
10.19
Form of Subordinated Promissory Note issued pursuant to the Note and Warrant Purchase Agreement dated as of December 14, 2001 (incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K dated December 20, 2001)
10.20
Form of Warrant for the Purchase of Shares of Common Stock of the Company issued pursuant to the Note and Warrant Purchase Agreement dated as of December 14, 2001 (incorporated by reference to Exhibit 99.5 to the Company's Current Report on Form 8-K dated December 20, 2001)
10.21
Warrant for the Purchase of Shares of Common Stock of the Company, dated as of December 20, 2001, issued to Zwanziger Family Ventures, LLC (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.22
Loan and Security Agreement, dated as of October 16, 2000, between IVC and Congress Financial Corporation (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.23
Amendment No. 1 to Loan and Security Agreement, dated June 13, 2001, by and between Congress Financial Corporation and IVC (incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K,
70
71
as amended, for the year ended December 31, 2001)
10.24
Amendment No. 2 to Loan and Security Agreement, dated as of June 14, 2001, by and between Congress Financial Corporation and IVC (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.25
Amendment No. 3 to Loan and Security Agreement, dated as of March 19, 2002, by and between Congress Financial Corporation and IVC (incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.26
Agreement, dated December 1, 1986, between Bernard Levere, Zelda Levere, Pioneer Pharmaceuticals, Inc. and Essex Chemical Corp. and Unconditional Guarantee by Essex Chemical Corp. (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.27
Option to Assume and Extend Lease, dated as of February 1995, between Bernard Levere, Zelda Levere and International Vitamin Corporation (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001)
10.28
Inverness Medical Innovations, Inc. Executive Bonus Plan (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4, as amended (File No. 333-67392))
10.29
Licensing Agreement, dated March 14, 1988, between Unilever Plc and Behringwerke AG (incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K, as amended, for the period ended December 31, 2001)
10.30
Supplemental Agreement, dated October 16, 1994, between Unilever Plc, Unilever NV and Behringwerke AG (incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K, as amended, for the period ended December 31, 2001)
10.31
Supply of Goods Agreement, dated December 19, 1994, between AFC Worldwide and Unipath Limited (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, as amended, for the period ended March 30, 2002)
10.32
Amendment to Supply of Goods Agreement, dated March 14, 2002, between Schleicher & Schuell GmbH and Unipath Limited (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, as amended, for the period ended March 30, 2002)
10.33
Amendment No. 1 to Inverness Medical Innovations, Inc. 2001 Stock Option and Incentive Plan (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8 (File No. 333-90530))
10.34
Subordinated Note and Warrant Purchase Agreement dated as of September 20, 2002 between the Company and the investors named therein ("Note and Warrant Purchase Agreement") (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated September 20, 2002)
10.35
Form of Subordinated Promissory Note issued pursuant to the Note and Warrant Purchase Agreement (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated September 20, 2002)
10.36
Form of Warrant Agreement issued pursuant to the Note and Warrant Purchase Agreement (incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated September 20, 2002)
10.37
Subordinated Note Purchase Agreement dated as of September 20, 2002 between the Company and the investors named therein ("Note Purchase Agreement") (incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K dated September 20, 2002)
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*
10.38 Form of Subordinated Promissory Note issued pursuant to the Note Purchase Agreement (incorporated by reference to Exhibit 99.5 to the Company's Current Report on Form 8-K dated September 20, 2002)
10.39
Form of Convertible Subordinated Promissory Note issued pursuant to the Note Purchase Agreement (incorporated by reference to Exhibit 99.6 to the Company's Current Report on Form 8-K dated September 20, 2002)
10.40
Second Amended and Restated Credit Agreement, dated as of September 30, 2003, by and among Inverness Medical Innovations, Inc., Wampole Laboratories, Inc., Inverness Medical (UK) Holdings Limited, the other Credit Parties Signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as administrative agent for lenders, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as co-syndication agent, UBS AG, Stamford Branch, as co-syndication agent, and GECC Capital Markets Group, Inc. and ML Capital, as co-lead arrangers (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated November 14, 2003)
*10.41
First Amendment and Consent to Second Amended and Restated Credit Agreement, dated as of November 17, 2003, by and among General Electric Capital Corporation, as agent and lender, Inverness Medical Innovations, Inc., Wampole Laboratories, Inc. and Inverness Medical (UK) Holdings Limited, as borrowers, the other credit parties signatory thereto, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as documentation agent and co-syndication agent, UBS Securities LLC, as co-syndication agent, and the lenders signatory thereto from time to time
*10.42
Second Amendment to Second Amended and Restated Credit Agreement, dated as of December 31, 2003, by and among General Electric Capital Corporation, as agent and lender, Inverness Medical Innovations, Inc., Wampole Laboratories, Inc. and Inverness Medical (UK) Holdings Limited, as borrowers, the other credit parties signatory thereto, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as documentation agent and co-syndication agent, UBS Securities LLC, as co-syndication agent, and the lenders signatory thereto from time to time
*10.43
Commercial Lease, dated August 1, 1998, by and between The Chang Family Trust and Applied Biotech, Inc.
*10.44
Amendment to Commercial Lease, dated April , 2003, by and between The Chang Family Trust and Applied Biotech, Inc.
*10.45
Manufacturing, Packaging and Supply Agreement, dated as of June 6, 2003, among Inverness Medical Innovations, Inc., Inverness Medical Switzerland GmbH, Unipath, Ltd. and Warner-Lambert Company LLC+
*10.46
First Amendment to Subordinated Promissory Notes, dated as of November 14, 2003
*10.47
First Amendment to Convertible Subordinated Promissory Notes, dated as of January 15, 2004
*14.1
Inverness Medical Innovations Business Conduct Guidelines
*21.1
List of Subsidiaries of the Company as of March 15, 2004
*23.1
Consent of BDO Seidman, LLP
*31.1
Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes
*31.2
Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes
*32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes
Filed herewith.
+ Portions of this exhibit have been omitted pursuant to a request for confidential treatment. (b) Reports on Form 8-K
On October 9, 2003 we filed a Current Report on Form 8-K dated September 30, 2003 (Item 2) in connection with our acquisition of certain assets from Abbott Laboratories.
On November 5, 2003 we filed a Current Report on Form 8-K dated November 5, 2003 (Item 12) in connection with our press release relating to our financial results for the third quarter of 2003.
On November 10, 2003 we filed a Current Report on Form 8-K/A (Amendment No. 1) dated August 27, 2003 (Item 7) in order to file the financial statements and pro forma financial information required by Item 7 of Form 8-K, in connection with our acquisition of the Applied Biotech, Inc.
On November 20, 2003 we filed a Current Report on Form 8-K/A (Amendment No. 1) dated September 30, 2003 (Item 7) in order to file the financial statements and pro forma financial information required by Item 7 of Form 8-K, in connection with our acquisition of certain assets from Abbott Laboratories.
On December 17, 2003 we filed a Current Report on Form 8-K dated December 10, 2003 (Item 5) in connection with our entry into manufacturing and supply agreement with Warner-Lambert Company, LLC.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INVERNESS MEDICAL INNOVATIONS, INC. Date: March 15, 2004
By:
/s/ RON ZWANZIGER
Ron Zwanziger Chairman, Chief Executive Officer and President
Signature
Title
Date
/s/ RON ZWANZIGER
Ron Zwanziger
Chief Executive Officer, President and Director (Principal Executive Officer)
March 15, 2004
/s/ CHRISTOPHER J. LINDOP
Christopher J. Lindop
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
March 15, 2004
/s/ ERNEST A. CARABILLO, JR.
Ernest A. Carabillo, Jr.
Director
March 15, 2004
/s/ CAROL R. GOLDBERG
Carol R. Goldberg
Director
March 15, 2004
/s/ ROBERT P. KHEDERIAN
Robert P. Khederian
Director
March 15, 2004
/s/ JOHN F. LEVY
John F. Levy
Director
March 15, 2004
/s/ JERRY MCALEER
74
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S
CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Inverness Medical Innovations, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Inverness Medical Innovations, Inc. and Subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for the two years ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of the Company as of December 31, 2001, and for the year then ended were audited by other auditors who have ceased operations and whose report dated March 28, 2002 expressed an unqualified opinion on those statements before the reclassifications and adjustments described below.
Jerry McAleer Director March 15, 2004
/s/ JOHN A. QUELCH
John A. Quelch
Director
March 15, 2004
/s/ DAVID SCOTT
David Scott
Director
March 15, 2004
/s/ PETER TOWNSEND
Peter Townsend
Director
March 15, 2004
/s/ ALFRED M. ZEIEN
Alfred M. Zeien
Director
March 15, 2004
Page
Report of Independent Auditors F-2 Report of Independent Public Accountants
F-4
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001
F-5
Consolidated Balance Sheets as of December 31, 2003 and 2002
F-6
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2003, 2002 and 2001
F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001
F-10
Notes to Consolidated Financial Statements
F-13
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Inverness Medical Innovations, Inc. and Subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the two years ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
As discussed above, the financial statements of the Company as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations. In 2002, the Company adopted the accounting required pursuant to Emerging Issues Task Force ("EITF") Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products, Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections, and SFAS No. 142, Goodwill and Other Intangible Assets . The 2001 consolidated financial statements have been adjusted (i) to reclassify certain amounts between net product sales and sales and marketing expenses in the statement of operations, as required by EITF Issue No. 01-09, and (ii) to reclassify certain amounts between extraordinary loss and other income (expense), net, as required by SFAS No. 145. Note 5 of the consolidated financial statements discloses the effect of adjusting the statement of operations to exclude goodwill amortization for 2001, as required by SFAS No. 142.
We audited the adjustments that were applied to reclassify certain amounts between net product sales and sales and marketing expenses in the statement of operations for 2001. Our procedures included (i) agreeing the adjusted amounts of net product sales and sales and marketing expenses to the Company's underlying accounting records obtained from management and (ii) testing the mathematical accuracy of the adjusted amounts of net product sales and sales and marketing expenses. We also audited the adjustments that were applied to reclassify amounts between the extraordinary loss on the early extinguishment of debt and other income (expense), net, in the statement of operations for 2001. Our procedures included (i) agreeing the adjusted amounts of other income (expense), net, to the Company's underlying accounting records obtained from management and (ii) testing the mathematical
F-2
accuracy of the adjusted amounts of other income (expense), net. Our audit procedures with respect to goodwill disclosures in Note 5 relating to 2001 included (i) agreeing the previously reported net income (loss) and the adjustments to reported net income (loss) representing amortization expense recognized in 2001 related to goodwill to the previously issued financial statements and underlying accounting records obtained from management and (ii) testing the mathematical accuracy of the reconciliation of adjusted net income (loss) to reported net income (loss) and the related earnings (loss) per share amounts. In our opinion, such adjustments and disclosures are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the consolidated financial statements as of December 31, 2001 and for the year then ended taken as a whole.
F-3
Provided below, pursuant to Rule 2-02(e) of Regulation S-X, is a copy of the accountants report issued by Arthur Andersen LLP, our former independent public accountants, in connection with the filing of our Annual Report of Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen in connection with the filing of this Annual Report on Form 10-K for the year ended December 31, 2003. We are unable to obtain a reissued accountants report from Arthur Andersen, and we will be unable to obtain future accountants reports from Arthur Andersen, because Arthur Andersen has discontinued its auditing practice. This means that we will also be unable to obtain consents to incorporate any financial statements audited by Arthur Andersen into registration statements that we may file in the future. Accordingly, investors will not be able to sue Arthur Andersen pursuant to section 11(a)(4) of the Securities Act with respect to any such registration statements and, therefore, ultimate recovery on a successful claim may be limited. The ability of investors to recover from Arthur Andersen may also be limited as a result of Arthur Andersen's financial condition or other matters resulting from the various civil and criminal lawsuits against that firm.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
/s/ BDO Seidman, LLP Boston, Massachusetts February 17, 2004
To Inverness Medical Innovations, Inc.:
We have audited the accompanying consolidated balance sheets of Inverness Medical Innovations, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Inverness Medical Innovations, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
F-4
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
ARTHUR ANDERSEN LLP Boston, Massachusetts March 28, 2002
2003
2002
2001
Net product sales $ 286,689 $ 201,641 $ 47,268 License revenue 9,728 6,405 —
Net Revenue 296,417 208,046 47,268 Cost of sales 168,120 115,600 26,662
Gross profit 128,297 92,446 20,606
Operating expenses:
Purchased in-process research and development (Note 4(f)) — — 6,980
Research and development 24,280 14,471 1,810
Sales and marketing 51,705 39,544 8,018
General and administrative 35,452 28,066 11,702
Charge related to asset impairment (Note 5) — 12,682 —
Stock-based compensation (1) (Notes 1 and 12(c)) 447 10,625 10,441
Total operating expenses 111,884 105,388 38,951
Operating income (loss) 16,413 (12,942 ) (18,345 ) Interest expense, including amortization of discounts (Note 6) (9,711 ) (15,069 ) (2,294 ) Other income (expense), net 6,441 11,707 (2,016 )
Income (loss) from continuing operations before income taxes 13,143 (16,304 ) (22,655 ) Provision for income taxes 1,169 2,683 2,134
Income (loss) from continuing operations 11,974 (18,987 ) (24,789 ) Income from discontinued operations, net of taxes (Note 16(d)) — — 58
The accompanying notes are an integral part of these consolidated financial statements.
F-5
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
Income (loss) before cumulative effect of a change in accounting principle 11,974 (18,987 ) (24,731 ) Cumulative effect of a change in accounting principle (Note 5) — (12,148 ) —
Net income (loss) $ 11,974 $ (31,135 ) $ (24,731 )
Income (loss) available to common stockholders—basic (Note 11):
Income (loss) from continuing operations $ 11,016 $ (30,935 ) $ (24,789 )
Net income (loss) $ 11,016 $ (43,083 ) $ (24,731 )
Income (loss) available to common stockholders—diluted (Note 11):
Income (loss) from continuing operations $ 11,196 $ (30,935 ) $ (24,789 )
Net income (loss) $ 11,196 $ (43,083 ) $ (24,731 )
Income (loss) per common share—basic (Notes 2(k) and 11):
Income (loss) from continuing operations $ 0.70 $ (3.11 ) $ (3.89 )
Net income (loss) $ 0.70 $ (4.33 ) $ (3.88 )
Income (loss) per common share—diluted (Notes 2(k) and 11):
Income (loss) from continuing operations $ 0.63 $ (3.11 ) $ (3.89 )
Net income (loss) $ 0.63 $ (4.33 ) $ (3.88 )
Weighted average shares—basic 15,711 9,940 6,368
Weighted average shares—diluted 17,834 9,940 6,368
(1) Stock-based compensation expense by statement of operations classifications is as follows:
Research and development $ 87 $ 37 $ 9,346 Sales and marketing — 26 — General and administrative 360 10,562 1,095
Total stock-based compensation $ 447 $ 10,625 $ 10,441
December 31,
2003
2002
ASSETS
Current assets:
Cash and cash equivalents $ 24,622 $ 30,668
Accounts receivable, net of allowances of $10,610 and $7,047 at December 31, 2003 and 2002, respectively 55,418 37,283
Inventories 47,043 37,155
Deferred tax assets 1,178 2,137
Prepaid expenses and other current assets 10,599 6,456
Total current assets 138,860 113,699
The accompanying notes are an integral part of these consolidated financial statements.
F-6
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S
Property, plant and equipment, net
56,999
46,029
Goodwill 233,792 108,915 Trademarks and trade names with indefinite lives 38,119 31,719 Core technology and patents, net 36,423 25,805 Other intangible assets, net 27,743 22,374 Deferred financing costs, net, and other non-current assets 7,457 4,908 Deferred tax assets 4,075 4,297
Total assets $ 543,468 $ 357,746
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 14,055 $ 17,200
Current portion of capital lease obligations 457 642
Accounts payable 38,006 29,229
Accrued expenses and other current liabilities 41,122 38,648
Total current liabilities 93,640 85,719
Long-term liabilities:
Long-term debt 159,838 84,533
Capital lease obligations 1,831 2,238
Deferred tax liabilities 9,118 9,365
Other long-term liabilities 3,307 3,936
Total long-term liabilities 174,094 100,072
Commitments and contingencies (Notes 8 and 10)
Series A redeemable convertible preferred stock, $0.001 par value:
Authorized—2,667 shares
Issued—2,527 shares at December 31, 2003 and 2002
Outstanding—208 and 323 shares at December 31, 2003 and 2002, respectively 6,185 9,051
Stockholders' equity:
Preferred stock, $0.001 par value: Authorized—2,333 shares, none issued — —
Common stock, $0.001 par value: Authorized—50,000 shares Issued and outstanding—19,640 and 14,907 shares at December 31, 2003 and 2002, respectively 20 15
Additional paid-in capital 341,703 251,457
Notes receivable from stockholders (14,691 ) (14,691 )
Deferred compensation — (48 )
Accumulated deficit (66,703 ) (77,720 )
Accumulated other comprehensive income 9,220 3,891
Total stockholders' equity 269,549 162,904
Total liabilities and stockholders' equity $ 543,468 $ 357,746
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (Continued)
(in thousands, except per share amounts)
Common Stock
Notes Receivable
from Stockholders
Accumulated Other
Comprehensive
Income
Number of
Shares
$0.001 Par
Value
Additional
Paid-in Capital
Deferred Compensation
Accumulated Deficit
Total Stockholders
Equity
Comprehensive
Income (Loss)
BALANCE, DECEMBER 31, 2000 5,828 $ 6 $ 54,839 $ — $ — $ (13,799 ) $ 766 $ 41,812 Common stock issued by IMT effected by exchange ratio and related stock split (Note 1) 757 1 (1 ) — — — — — $ — Capital contribution from IMT related to income taxes for Inverness Medical, Inc — — 987 — — — — 987 — Capital contribution from IMT in connection with split-off (Note 1) — — 46,712 — — — — 46,712 — Exercise of common stock options and warrants 279 — 568 — — — — 568 — Issuance of stock for notes receivable 1,818 2 14,690 (14,691 ) — — — 1 — Deferred compensation (Note 12(c)) — — 20,586 — (20,586 ) — — — — Amortization of deferred compensation expense (Note 12(c)) — — — — 10,441 — — 10,441 — Beneficial conversion feature on issuance of series A redeemable convertible preferred stock, net of issuance costs of $52 (Note 12(b)) — — 7,928 — — — — 7,928 — Amortization of beneficial conversion feature related to series A redeemable convertible preferred stock (Note 12(b)) — — — — — (25 ) — (25 ) — Original issue discount and beneficial conversion feature on issuance of convertible debt (Notes 6(f) and (g)) — — 5,020 — — — — 5,020 — Changes in cumulative translation adjustment — — — — — — 901 901 901 Net loss — — (3,918 ) — — (20,813 ) — (24,731 ) (24,731 )
Total comprehensive loss $ (23,830 )
BALANCE, DECEMBER 31, 2001 8,682 $ 9 $ 147,411 $ (14,691 ) $ (10,145 ) $ (34,637 ) $ 1,667 $ 89,614
Common Stock
Notes Receivable
from Stockholders
Accumulated Other
Comprehensive
Income
Number of
Shares
$0.001 Par
Value
Additional
Paid-in Capital
Deferred Compensation
Accumulated Deficit
Total Stockholders
Equity
Comprehensive
Income (Loss)
BALANCE, DECEMBER 31, 2001 8,682 $ 9 $ 147,411 $ (14,691 ) $ (10,145 ) $ (34,637 ) $ 1,667 $ 89,614 Issuance of common stock, net of issuance costs of $2,521 1,600 2 34,277 — — — — 34,279 $ — Exercise of common stock options and warrants 217 — 1,043 — — — — 1,043 — Conversion of series A redeemable convertible preferred stock to common stock 4,408 4 67,877 — — (8,811 ) — 59,070 — Excess of redemption value related to issuance of series A redeemable convertible preferred stock, net of issuance costs of $183 (Note 12(b)) — — 4,610 — — — — 4,610 — Beneficial conversion feature on issuance of series A redeemable convertible preferred stock (Note 12(b)) — — 2,867 — — — — 2,867 — Dividends related to series A redeemable convertible preferred stock (Note 12(b)) — — — — — (326 ) — (326 ) —
Redemption interest and amortization of beneficial conversion feature related to series A redeemable convertible preferred stock
The accompanying notes are an integral part of these consolidated financial statements.
F-8
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (Continued)
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
F-9
(Note 12(b)) — — — — — (2,811 ) — (2,811 ) — Beneficial conversion feature related to early extinguishment of convertible debt (Note 6(g)) — — (9,600 ) — — — — (9,600 ) — Warrants issued with subordinated debt (Note 6(b)) — — 1,502 — — — — 1,502 — Fair value of assumed and issued fully-vested stock options related to acquisition of IVC Industries, Inc. (Note 4(e)) — — 1,299 — — — — 1,299 — Stock-based compensation related to grants of common stock options and warrants to non-employees — — 477 — — — — 477 — Deferred compensation related to grants of common stock options to non-employees — — 51 — (51 ) — — — — Amortization of deferred compensation (Note 12(c)) — — — — 10,148 — — 10,148 — Changes in net parent company investment — — (357 ) — — — — (357 ) — Changes in cumulative translation adjustment — — — — — — 2,224 2,224 2,224 Net loss — — — — — (31,135 ) — (31,135 ) (31,135 )
Total comprehensive loss $ (28,911 )
BALANCE, DECEMBER 31, 2002 14,907 $ 15 $ 251,457 $ (14,691 ) $ (48 ) $ (77,720 ) $ 3,891 $ 162,904
Common Stock
Notes Receivable
from Stockholders
Accumulated Other
Comprehensive
Income
Number of
Shares
$0.001 Par
Value
Additional
Paid-in Capital
Deferred Compensation
Accumulated Deficit
Total Stockholders
Equity
Comprehensive
Income (Loss)
BALANCE, DECEMBER 31, 2002 14,907 $ 15 $ 251,457 $ (14,691 ) $ (48 ) $ (77,720 ) $ 3,891 $ 162,904 Issuance of common stock in connection with acquisitions and purchase of intellectual property, net of issuance costs of $50 4,068 4 80,220 — — — — 80,224 $ — Exercise of common stock options and warrants 435 1 4,051 — — — — 4,052 — Conversion of series A redeemable convertible preferred stock to common stock (Note 12(b)) 230 — 3,824 — — (362 ) — 3,462 — Dividends related to series A redeemable convertible preferred stock (Note 12(b)) — — — — — (33 ) — (33 ) — Redemption interest and amortization of beneficial conversion feature related to series A redeemable convertible preferred stock (Note 12(b)) — — — — — (562 ) — (562 ) — Fair value of assumed and fully-vested stock options and warrants related to acquisition of Ostex International, Inc. (Note 4(c)) — — 1,752 — — — — 1,752 — Stock-based compensation related to grants of common stock options — — 399 — — — — 399 — Amortization of deferred compensation — — — — 48 — — 48 — Other — — — — — — 136 136 136 Pension liability adjustment (Note 8(b)) — — — — — — (434 ) (434 ) (434 ) Changes in cumulative translation adjustment — — — — — — 5,627 5,627 5,627 Net income — — — — — 11,974 — 11,974 11,974
Total comprehensive income $ 17,303
BALANCE, DECEMBER 31, 2003 19,640 $ 20 $ 341,703 $ (14,691 ) $ — $ (66,703 ) $ 9,220 $ 269,549
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2003
2002
2001
Cash Flows from Operating Activities: Net income (loss) $ 11,974 $ (31,135 ) $ (24,731 ) Income from discontinued operations — — (58 )
Net income (loss), excluding discontinued operations 11,974 (31,135 ) (24,789 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Interest expense related to amortization of noncash original issue discount, noncash beneficial conversion feature and deferred financing costs 1,565 7,499 839
Noncash (income) expense related to interest rate swap agreement (528 ) 1,223 —
Noncash stock-based compensation expense 447 10,625 10,441
Charge for in-process research and development — — 6,980
Noncash beneficial conversion feature related to early extinguishment of convertible debt — (9,600 ) —
Noncash charge related to asset impairment and cumulative effect of a change in accounting principle — 24,830 —
Depreciation and amortization 15,585 10,308 3,241
Deferred income taxes (1,047 ) 26 419
Other noncash items — 354 546
Capital contribution from Inverness Medical Technology, Inc. related to income taxes for Inverness Medical, Inc. — — 987
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net (9,213 ) 848 1,756
Inventory (1,942 ) (2,202 ) (223 )
Prepaid expenses and other current assets (4,102 ) 468 (1,817 )
Accounts payable 6,715 8,847 (736 )
Accrued expenses and other current liabilities (9,653 ) (10,362 ) 15,095
Due to Inverness Medical Technology, Inc. and affiliates — — 2,649
Net cash provided by continuing operations 9,801 11,729 15,388
Net cash used in discontinued operations — — (1,170 )
Cash Flows from Investing Activities: Purchases of property, plant and equipment (11,135 ) (6,077 ) (3,594 ) Proceeds from sale of property, plant and equipment 152 1,545 141 Cash paid for purchase of assets from Abbott Laboratories (55,947 ) — — Cash paid for purchase of Applied Biotech, Inc., net of cash acquired (14,042 ) — — Cash paid for purchase of Ostex International, Inc., net of cash acquired (1,903 ) — — Cash paid for purchase of the Wampole Division of MedPointe Inc. (1,460 ) (70,608 ) — Cash paid for purchase of IVC Industries, Inc., net of cash acquired (535 ) (7,112 ) — Cash paid for purchase of Unipath business, net of cash acquired (649 ) (2,832 ) (146,154 ) Cash paid for purchase of other businesses and intellectual property (4,007 ) — — Loan to Ostex International, Inc. — (1,000 ) — Decrease (increase) in other assets 396 (560 ) 129
Net cash used in investing activities (89,130 ) (86,644 ) (149,478 )
Cash Flows from Financing Activities: Cash paid for financing costs (4,533 ) (3,975 ) (2,196 ) Proceeds from issuance of common stock, net of issuance costs 4,003 35,322 568 Proceeds from issuance of preferred stock, net of issuance costs — 20,567 59,798 Net proceeds received under revolving line of credit 19,331 2,649 — Proceeds from borrowings under notes payable 57,621 84,421 82,552 Repayments of notes payable (5,785 ) (82,240 ) (4,307 ) Principal payments of capital lease obligations (651 ) (494 ) — Contribution from Inverness Medical Technology, Inc. — — 47,659
Net cash provided by financing activities 69,986 56,250 184,074
Foreign exchange effect on cash and cash equivalents 3,297 (2,691 ) 138
Net (decrease) increase in cash and cash equivalents (6,046 ) (21,356 ) 48,952
Cash and cash equivalents, beginning of year 30,668 52,024 3,072
The accompanying notes are an integral part of these consolidated financial statements.
F-10
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Cash and cash equivalents, end of year $ 24,622 $ 30,668 $ 52,024
2003
2002
2001
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 9,091 $ 4,519 $ 895
Taxes paid $ 1,447 $ 2,728 $ 45
Supplemental Disclosure of Noncash Activities:
Net assets of discontinued operations (Note 16(d)) $ — $ — $ (19,400 )
Long-term debt discharged as part of split-off from Inverness Medical Technology, Inc. (Note 1) $ — $ — $ 8,084
Forgiveness of amounts due to Inverness Medical Technology, Inc. and affiliates, net (Note 16(b)) $ — $ — $ 10,369
On September 30, 2003, the Company acquired certain assets from Abbott Laboratories (Note 4 (a))—
Property, plant and equipment $ 536 $ — $ —
Intangible assets 94,451 — —
Accrued acquisition costs (1,540 ) — —
Cash paid for purchase of certain assets from Abbott Laboratories (55,947 ) — —
Fair value of common stock issued $ 37,500 $ — $ —
On August 27, 2003, the Company acquired Applied Biotech, Inc. (Note 4 (b))—
Accounts receivable $ 6,368 $ — $ —
Inventory 6,056 — —
Property, plant and equipment 5,352 — —
Intangible assets 15,615 — —
Other assets 117 — —
Accounts payable and accrued expenses (4,669 ) — —
Accrued acquisition costs (530 ) — —
Cash paid for purchase of Applied Biotech, Inc., net of cash acquired (14,042 ) — —
Fair value of common stock issued $ 14,267 $ — $ —
On June 30, 2003, the Company acquired Ostex International, Inc. (Note 4(c)) —
Accounts receivable $ 1,264 $ — $ —
Inventory 506 — —
Property, plant and equipment 629 — —
Intangible assets 31,468 — —
Other assets 177 — —
Accounts payable and accrued expenses (1,891 ) — —
The accompanying notes are an integral part of these consolidated financial statements.
F-11
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Long-term debt (2,875 ) — —
Accrued acquisition costs (2,086 ) — —
Cash paid for purchase of Ostex International, Inc., net of cash acquired (1,903 ) — —
$ 25,289 $ — $ —
Fair value of common stock issued $ 23,537 $ — $ —
Fair value of assumed and issued fully-vested stock options and warrants 1,752 — —
Total fair value of equity instruments issued $ 25,289 $ — $ —
2003
2002
2001
On September 20, 2002, the Company acquired the Wampole Division from MedPointe Inc. (Note 4(d))—
Accounts receivable $ (451 ) $ 8,737 $ —
Inventory (75 ) 4,924 —
Other current assets 1 967 —
Property and equipment 156 2,061 —
Intangible assets 1,138 56,301 —
Accounts payable and accrued expenses (201 ) (1,490 ) —
Accrued acquisition costs 892 (892 ) —
Cash paid for purchase of the Wampole Division (1,460 ) (70,608 ) —
$ — $ — $ —
On March 19, 2002, the Company acquired IVC Industries, Inc. (Note 4(e))—
Accounts receivable $ — $ 4,716 $ —
Inventory — 9,832 —
Property and equipment — 23,016 —
Other assets — 1,755 —
Accounts payable and accrued expenses — (12,495 ) —
Other accrued acquisition costs 535 (1,054 ) —
Long-term debt — (17,359 ) —
Cash paid for purchase of IVC Industries, Inc., net of cash acquired (535 ) (7,112 ) —
Fair value of assumed and issued fully-vested stock options $ — $ 1,299 $ —
On December 20, 2001, the Company acquired the Unipath business (Note 4(f))—
Accounts receivable $ — $ — $ 15,960
Inventory 39 — 13,067
Other current assets — — 2,369
Property and equipment — — 15,182
Intangible assets (624 ) 484 134,523
Unfunded pension liability — 1,052 (3,685 )
Other accrued acquisition costs 822 1,296 (3,266 )
Other liabilities 412 — (27,996 )
The accompanying notes are an integral part of these consolidated financial statements.
F-12
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(1) Description of Business and Basis of Presentation
Inverness Medical Innovations, Inc. and subsidiaries (the "Company") develop, manufacture and market diagnostic products for the over-the-counter pregnancy and fertility/ovulation test market and the professional rapid diagnostic test market worldwide. In addition, the Company manufactures a variety of vitamins and nutritional supplements that it markets under its brands and those of private label retailers in the consumer market primarily in the United States.
The Company's business is organized into two reportable segments, consumer products and professional diagnostics. The consumer products segment includes the Company's over-the-counter pregnancy and fertility/ovulation tests and vitamins and nutritional supplements. The professional diagnostic products segment includes an array of innovative rapid diagnostic test products and other in vitro diagnostic tests marketed to medical professionals and laboratories for detection of infectiouse diseases, drugs of abuse and pregnancy.
On November 21, 2001, pursuant to an Agreement and Plan of Split-Off and Merger dated May 23, 2001 (the "Merger Agreement"), Johnson & Johnson acquired Inverness Medical Technology, Inc. ("IMT") in a merger transaction and, simultaneously, the Company, a then subsidiary of IMT, was split-off from IMT as a separate publicly traded company. Pursuant to the terms of the Merger Agreement and related agreements, immediately prior to the consummation of the transaction, IMT restructured its operations so that all of IMT's non-diabetes businesses (women's health, nutritional supplements and professional diagnostics) were held by the Company and its subsidiaries. At the closing of the transaction, all of the shares of the Company's common stock held by IMT were split-off from IMT in a pro rata distribution to IMT stockholders and IMT (which then consisted primarily of its diabetes care business) merged with and became a wholly-owned subsidiary of Johnson & Johnson.
The Company was incorporated on May 11, 2001 for the purpose of receiving IMT's contribution of its women's health, nutritional supplements and professional diagnostics businesses in connection with the transactions described in the Merger Agreement and related agreements. The Company's consolidated financial statements include IMT subsidiaries and businesses that were contributed to the Company for all periods presented as if such subsidiaries and businesses were historically organized in a manner consistent with the restructuring set forth in the Merger Agreement and related agreements. The primary subsidiaries and businesses that were contributed to the Company by IMT are as follows:
•
Cash paid for purchase of Unipath business, net of cash acquired (649 ) (2,832 ) (146,154 )
$ — $ — $ —
During 2003, the Company acquired other businesses and intellectual property—
Accounts receivable $ 116 $ — $ —
Property, plant and equipment 616 — —
Intangible asset 10,445 — —
Other assets 39 — —
Accounts payable and accrued expenses (356 ) — —
Deferred tax liabilities (1,884 ) — —
Cash paid for purchase of other businesses and intellectual property (4,007 ) — —
Fair value of common stock issued $ 4,969 $ — $ —
Dividends, interest and amortization of beneficial conversion feature related to preferred stock (Notes 11 and 12(b)) $ 958 $ 11,948 $ —
Conversion of preferred stock to common stock (Note 12(b)) $ 3,824 $ 67,881 $ —
Inverness Medical, Inc. ("IMI"), a U.S. corporation, and its wholly-owned subsidiary, Can-Am Care Corporation ("Can-Am"), a U.S. corporation
• Cambridge Diagnostics Ireland Ltd. ("CDIL"), an Irish corporation
• Orgenics, Ltd. ("Orgenics"), an Israeli corporation
• The women's health business of Inverness Medical Europe GmbH ("IME"), a German corporation
• Inverness Medical Benelux Bvba ("IMB"), a Belgian corporation
• The women's health assets held by IMT, plus allocations to the Company of IMT common expenditures
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The Company has consolidated the financial statements of the above individual legal entities and the newly acquired entities and businesses, as discussed below, along with the assets, liabilities, revenues and expenses of the businesses. For all periods prior to the split-off and merger, the financial statements were combined in a manner consistent with the consolidated financial statements. All material intercompany transactions and balances have been eliminated. Amounts due to IMT and IMT affiliates that are not part of the Company are reflected as amounts due to Inverness Medical Technology, Inc. and affiliates. The Company's equity accounts for all periods presented reflect the par value of the Company's stock at the date of incorporation, effected for the fixed exchange ratio set forth in the Merger Agreement and related agreements and the related stock split (Note 2(k)); the historical equity accounts of the legal entities that comprise the Company are consolidated as if such subsidiaries and businesses were historically organized in a manner consistent with the restructuring set forth in the Merger Agreement and related agreements.
Pursuant to the Merger Agreement and related agreements, on November 21, 2001, immediately prior to the split-off and merger, the Company transferred to IMT those entities or businesses that conduct business in the diabetes segment, principally the Can-Am subsidiary of IMI and the diabetes businesses of CDIL and IMB. As a result, the Company has presented the historical diabetes operations of these subsidiaries as discontinued operations in the accompanying consolidated financial statements under Accounting Principles Board ("APB") Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
The discontinuation of the diabetes businesses is one of a number of transactions that occurred upon the closing of the transactions set forth in the Merger Agreement and related agreements that had a significant impact on the Company's financial statements. Prior to the split-off and merger, IMT capitalized the Company with approximately $41,400 in cash in connection with the restructuring of the businesses as described herein. IMT also assumed or discharged all of the Company's third-party and related-party debt, except for the third-party debt maintained by CDIL and Orgenics. At the closing of the transactions set forth in the Merger Agreement and related agreements, IMT distributed to its stockholders one share of common stock of the Company for every five IMT shares held. In order for IMT to do so, the Company declared a stock split, which it effected as a dividend. Accordingly, earnings per share information for all periods presented represents the actual number of shares of the Company's common stock outstanding as of the date of its incorporation, effected for the fixed exchange ratio set forth in the Merger Agreement and related agreements and the related stock split (Notes 2(k) and 11).
The Company's consolidated financial statements for all periods prior to the split-off and merger also reflect the allocation of IMT's common expenditures. Such allocations have been made in accordance with Staff Accounting Bulletin ("SAB") No. 55, Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity.
The accompanying consolidated financial statements reflect substantially all costs of doing business, including those incurred by IMT on the Company's behalf. Costs that are clearly identifiable as being applicable to a Company subsidiary or business have been allocated to the Company. The most significant costs included in this category include salary and benefits of certain employees and legal and
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other professional fees. Costs of centralized departments and corporate operations that serve all operations have been allocated, where such allocations would be material, using relevant allocation measures, such as estimated percentage of time worked for salary and benefits of certain executives and employees and square feet occupied for occupancy costs in shared facilities. Corporate costs that clearly relate to businesses or subsidiaries that were retained by IMT or that do not provide any significant direct or indirect benefit to the Company have not been allocated to the Company. For all periods prior to the split-off and merger, the Company accounted for income taxes using the separate return method, pursuant to Statement of Financial Accounting Standard ("SFAS") No. 109, Accounting for Income Taxes. IMT historically charged interest on loans made to its subsidiaries. Accordingly, the Company's consolidated statements of operations for all periods prior to the split-off and merger reflect interest expense on amounts due to entities not included in the Company's consolidated financial statements (primarily to IMT) (Note 16(b)). Interest expense also reflects amounts recorded on third-party notes payable when such notes relate specifically to the Company's operations. Interest expense does not include amounts recorded on general corporate borrowings of IMT. The Company believes that the allocation methods described herein are reasonable and fairly reflect its financial position and results of operations.
Immediately prior to the split-off and merger, each IMT option or warrant was split into a new IMT option or warrant and a Company option or warrant (the new IMT options and warrants were subsequently converted into Johnson & Johnson options or warrants in the merger). The option or warrant split was accomplished in such a manner that the aggregate intrinsic value of the two options or warrants equals the intrinsic value of the IMT option or warrant before the split. The option or warrant split also required that the ratio of intrinsic value to market value for each option or warrant be the same. Accordingly, the total number of shares of common stock underlying stock options and warrants the Company issued in the split-off was 929 and 118, respectively. Concurrent with the option split, (1) the vesting for all Company options was accelerated and (2) the period of exercisability for IMT employees who did not become employees of the Company was extended. Such actions are deemed to be award modifications pursuant to Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 44, Accounting for Certain Transactions Involving Stock Compensation. Under FIN No. 44, the Company measured compensation at the date of the award modifications based on the intrinsic value of the option and recognized (or will recognize in the future) such compensation if, absent the modifications, the award would have been forfeited pursuant to the award's original terms. For IMT employees who did not become employees of the Company, the recognition of this charge, or $645, was immediate and recorded as stock-based compensation expense in the accompanying consolidated statements of operations during 2001. For IMT employees who became Company employees, the Company has measured this potential charge, a maximum of $1,173, at the date of the modification, but will not record any such compensation charge unless and until such time as these Company employees terminate their employment with the Company. At such time, the portion of the award that, absent the modification, would have been forfeited under the award's original terms would be recognized as compensation expense. During 2003 and 2002, the Company recognized stock-based compensation expense related to certain of the IMT employees who became Company employees in the amount of $2 and $121, respectively, as such employees terminated their employment with the Company.
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Since the consummation of the split-off and merger described above, the Company has completed a number of acquisitions. During 2003, the Company acquired certain assets from Abbott Laboratories ("Abbott") on September 30, 2003 (the "Abbott business"), Applied Biotech, Inc. and subsidiary ("ABI") from Apogent Technologies Inc. on August 27, 2003 and Ostex International, Inc. ("Ostex") on June 30, 2003 (Note 4). The assets acquired from Abbott relate to consumer diagnostic pregnancy tests and various professional rapid diagnostic product lines, as well as certain transferred and licensed intellectual property related to these products. ABI is a developer, manufacturer and distributor of consumer diagnostic and professional diagnostic products in the areas of women's health, infectious disease and drugs of abuse testing. Ostex develops and commercializes osteoporosis diagnostics products and holds intellectual property rights in the field of osteoporosis diagnostics. In addition, the Company acquired a small research and development facility, Scandinavian Micro Biodevices A/S ("SMB"), on November 18, 2003.
Acquisitions that occurred during 2002 and 2001 include the Company's acquisition of the Wampole Division of MedPointe Inc. ("Wampole") on September 20, 2002, IVC Industries, Inc. (d/b/a Inverness Medical Nutritionals Group or "IMN") on March 19, 2002 and certain entities, businesses and intellectual property of Unilever Plc (the "Unipath business") on December 20, 2001 (Note 4). Wampole markets and distributes point-of-care and professional medical diagnostic products. IMN manufactures and distributes vitamins and nutritional supplements. The Unipath business develops, manufactures and distributes women's health and professional diagnostics products.
The results of these acquisitions are included in the consolidated financial statements of the Company since their respective acquisition dates.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
To prepare its financial statements in conformity with accounting principles generally accepted in the United States of America, the Company's management must make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.
(b) Foreign Currencies
The Company follows the provisions of SFAS No. 52, Foreign Currency Translation . In general, the functional currencies of the Company's foreign subsidiaries are the local currencies. For purpose of consolidating the financial statements of the Company's foreign subsidiaries, all assets and liabilities of the foreign subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date while the stockholders' equity accounts are translated at historical exchange rates. Translation gains and losses that result from the conversion of the balance sheets of the foreign subsidiaries into U.S. dollars are recorded to cumulative translation adjustment which is a component of accumulated other comprehensive income within stockholders' equity (Note 13).
The income and expense accounts of the Company's foreign subsidiaries are translated using the average rates of exchange during each reporting period. Net realized and unrealized foreign currency
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exchange transaction gains of $5 and $975 and losses of $727 during 2003, 2002 and 2001, respectively, are included as a component of other income (expense), net, in the accompanying consolidated statements of operations. The foreign currency exchange transaction gain for 2002 included a one-time foreign exchange gain of $2,593 on the settlement of a portion of an inter-company loan between two of the Company's subsidiaries.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less at the date of acquisition to be cash equivalents. Cash equivalents consisted of money market funds at December 31, 2003 and 2002.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
(e) Depreciation and Amortization
The Company records property, plant and equipment at historical cost or, in the case of a business combination, at fair value on the date of the business combination. Depreciation and amortization are computed using the straight-line method based on the following estimated useful lives of the related assets: machinery, laboratory equipment and tooling (3-16 years), buildings (20-39 years), leasehold improvements (lesser of remaining term of lease or estimated useful life of asset), computer software and equipment (3-6 years) and furniture and fixtures (3-10 years). Depreciation and amortization expense related to property, plant and equipment amounted to $10,116, $6,364 and $1,864 in 2003, 2002 and 2001, respectively.
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(f) Goodwill and Other Intangible Assets
The following is a summary of goodwill and other intangible assets as of December 31, 2003:
The Company amortizes intangible assets with finite lives using the straight-line method over the above estimated useful lives of the respective intangible asset. The Company believes that the straight-line method is appropriate, as it approximates the pattern in which economic benefits are consumed. Amortization expense of intangible assets, which amounted to $5,469, $3,944 and $1,377 in 2003, 2002 and 2001, respectively, is included in cost of sales and research and development in the accompanying consolidated statements of operations. The following is a summary of estimated aggregate amortization expense of intangible assets for each of the five succeeding fiscal years as of December 31, 2003:
Gross Carrying Amount
Accumulated Amortization
Useful Life
Amortized intangible assets: Core technology and patents $ 42,888 $ 6,465 10-15 years
Other intangible assets—
Supplier relationships 11,020 1,410 10 years
Trademarks and trade name 9,978 4,600 5-25 years
License agreements 8,903 2,585 7 years
Other 6,596 159 15 years $ 79,385 $ 15,219 Intangible assets with indefinite lives: Goodwill $ 233,792
Trademarks and trade names 38,119 $ 271,911
2004 $ 6,456 2005 6,449
The Company has historically amortized goodwill that was generated from acquisitions prior to June 30, 2001 over the estimated useful life of such goodwill. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Asset, and accordingly, no longer amortizes goodwill and other intangible assets with indefinite lives that were acquired prior to June 30, 2001 (Note 5). For goodwill acquired subsequent to June 30, 2001, the provisions of SFAS No. 142 were effective immediately. Also under SFAS No. 142, the Company performs annual impairment tests of the carrying value of its goodwill by reporting unit. During 2002, the Company recorded a goodwill impairment charge of $12,148 as a result of an independent appraisal of its nutritional supplement reporting unit (Note 5). Based on an impairment review on December 31, 2003, the Company does not believe that goodwill related to its consumer products and professional diagnostic products business segments was impaired. The values assigned to the trade names that were acquired as part of the
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Abbott business and Wampole acquisitions (Notes 4(a) and (d)) and trademarks that were acquired as part of the Unipath business acquisition (Note 4(f)), have been assigned indefinite lives and therefore, in accordance with SFAS No. 142 are not being amortized.
The Company allocates goodwill by segment based on the percentage of estimated future revenues generated for the respective segment as of the acquisition date. Goodwill allocated by business segment is as follows:
(g) Impairment of Other Long-Lived Tangible and Intangible Assets
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company examines on a periodic basis the carrying value of its long-lived tangible and intangible assets to determine whether there are any impairment losses. If indicators of impairment were present with respect to long-lived tangible and intangible assets used in operations and undiscounted future cash flows were not expected to be sufficient to recover the assets' carrying amount, an impairment loss would be charged to expense in the period the impairment is identified based on the fair value of the asset. Accordingly, the Company recorded an impairment charge of $12,682 during 2002, related to trademarks and brand names of the Company's nutritional supplements business (Note 5). The Company believes that the remaining carrying values of its other long-lived tangible and intangible assets were realizable as of December 31, 2003.
(h) Income Taxes
The Company follows the provisions of SFAS No. 109 under which deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The provisions of SFAS No. 109 also require the recognition of future tax benefits such as net operating loss carry-forwards, to the extent that the realization of such benefits is more likely than not. To the extent that it is not likely that the Company will benefit from such benefits, the Company must establish a valuation allowance against the related deferred tax assets (Note 14).
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2006 6,449 2007 6,430 2008 6,290
Consumer Products
Professional Diagnostic Products
Total
Goodwill, at December 31, 2001 $ 78,317 $ 7,058 $ 85,375 Acquisitions 200 35,362 35,562
Impairment charge (Note 5) (12,148 ) — (12,148 )
Other 124 2 126 Goodwill, at December 31, 2002 66,493 42,422 108,915 Acquisitions (Note 4) 25,387 98,971 124,358
Other (589 ) 1,108 519 Goodwill, at December 31, 2003 $ 91,291 $ 142,501 $ 233,792
(i) Revenue Recognition
The majority of the Company's revenues are derived from product sales. The Company generally does not enter into arrangements with multiple element deliverables. The Company recognizes revenue when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collection is reasonably assured. The Company recognizes revenue upon title transfer of the products to third-party customers, less a reserve for estimated product returns and allowances.
To a lesser extent, the Company also receives license and royalty revenue from agreements with third-party licensees. Revenue from fixed fee license and royalty agreements are recognized on a straight-line basis over the obligation period of the related license agreements. License and royalty fees that are calculated based on the licensees' sales are generally recognized upon receipt of the license or royalty payments unless the Company is able to reasonably estimate the fees as they are earned. License and royalty fees that are determinable prior to the receipt thereof are recognized in the period they are earned.
(j) Employee Stock-Based Compensation Arrangements
The Company adopted an employee stock option plan in 2001 (Note 12(c)). For all periods presented in the accompanying consolidated financial statements, the Company accounted for its employee stock-based compensation arrangements using the intrinsic value method under the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees , and related interpretations. The Company has elected to use the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation , and as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. In addition, in accordance with FIN No. 44, the Company has included in these disclosures all IMT options held by those individuals who became the Company's employees at the time of the split-off and merger, retroactively converted into the Company's options as if such options had historically been granted by the Company (Note 12(c)).
Had compensation expense for stock option grants to employees been determined based on the fair value method at the grant date for awards under the stock option plans consistent with the method
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prescribed by SFAS No. 123, the Company's net income (loss) would have been decreased (increased) to the pro forma amounts indicated as follows:
(a)
2003
2002
2001
Net income (loss)—as reported $ 11,974 $ (31,135 ) $ (24,731 ) Stock-based employee compensation—as reported (a) 397 10,268 9,796 Pro forma stock-based employee compensation (6,161 ) (18,920 ) (16,015 ) Net income (loss)—pro forma $ 6,210 $ (39,787 ) $ (30,950 ) Income (loss) per common share—basic Net income (loss)—as reported $ 0.70 $ (4.33 ) $ (3.88 ) Stock-based employee compensation—as reported 0.02 1.03 1.54 Pro forma stock-based employee compensation (0.39 ) (1.90 ) (2.52 ) Net income (loss) per share—pro forma $ 0.33 $ (5.20 ) $ (4.86 ) Income (loss) per common share—diluted Net income (loss)—as reported $ 0.63 $ (4.33 ) $ (3.88 ) Stock-based employee compensation—as reported 0.02 1.03 1.54 Pro forma stock-based employee compensation (0.35 ) (1.90 ) (2.52 ) Net income (loss) per share—pro forma $ 0.30 $ (5.20 ) $ (4.86 )
Stock-based employee compensation expense as reported represents the amortization of deferred compensation of certain stock options and restricted stock that were granted below fair market value and options granted in lieu of cash compensation.
The Company has computed the pro forma disclosures for stock options granted to employees after January 1, 1995 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The assumptions used during each of the three years ended December 31, 2003
were as follows:
The weighted average fair value under the Black-Scholes option pricing model of options granted to employees during 2003, 2002 and 2001 was $9.34, $9.19 and $10.35, respectively.
(k) Net Income (Loss) per Common Share
Net income (loss) per common share, computed in accordance with SFAS No. 128, Earnings per Share , is based upon the actual number of common shares issued and outstanding upon incorporation of the Company, for all periods presented, effected for the fixed exchange ratio set forth in the Merger Agreement and related agreements and the related stock split (Notes 1 and 11).
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(l) Other Operating Expenses
The Company expenses advertising costs as incurred. In 2003, 2002 and 2001, advertising costs amounted to $18,594, $14,306 and $354, respectively, and are included in sales and marketing expenses in the accompanying consolidated statements of operations.
Shipping and handling costs are included in cost of sales in the accompanying consolidated statements of operations. Additionally, to the extent that the Company charges its customers for shipping and handling costs, these costs are recorded as product revenues.
(m) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk primarily consist of cash and cash equivalents and accounts receivable. The Company invests its excess cash primarily in high quality securities and limits the amount of its credit exposure to any one financial institution. The Company does not require collateral or other securities to support customer receivables; however, it performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.
There were no accounts receivable balances outstanding at December 31, 2003, that were in excess of 10% of the gross accounts receivable balance on that date. The Company had an accounts receivable balance outstanding at December 31, 2002 from one customer, which represented 14% of its gross accounts receivable balance on that date. During 2003 and 2001, the Company had one customer that represented 11% and 14%, respectively, of its net revenues. There were no customers during 2002 that represented more than 10% of the Company's net revenues.
The Company relies on a number of third parties to manufacture certain of its products. If any of the Company's third party manufacturers cannot or will not manufacture the Company's products in the required volumes, on a cost-effective basis, in a timely manner, or at all, the Company will have to secure additional manufacturing capacity. Any interruption or delay in manufacturing could have a material adverse effect on the Company's business and operating results.
In February 2002, the Company entered into an interest rate swap agreement which was intended to protect it from interest rate fluctuations related to a portion of its senior long-term debt. Other than this interest rate swap agreement, the Company had no significant other concentration of credit risks such as foreign exchange contracts, option contracts or other foreign hedging arrangements at December 31, 2003 and 2002. The Company had no off-balance sheet arrangements as of December 31, 2003. See Note 15 for financial information by geographic area and business segment.
(n) Financial Instruments and Fair Value of Financial Instruments
The Company's primary financial instruments at December 31, 2003 and 2002 consisted of cash equivalents, accounts receivable and debt. In addition, the Company also has an interest rate swap agreement. The estimated fair value of these financial instruments approximates their carrying values at December 31, 2003 and 2002. The estimated fair values have been determined through information obtained from market sources. Additionally, the Company's subsidiary in England enters into short-term foreign currency exchange forward contracts from time to time to minimize its exposure to
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2003
2002
2001
Risk-free interest rate 2.33-3.49 % 2.6-4.9 % 4.3-4.8 % Expected dividend yield — — — Expected lives 5 years 5 years 0.3-7 years Expected volatility 55 % 58 % 54-82 %
foreign currency exchange fluctuations because a substantial portion of its business is transacted in currencies other than its functional currency. At December 31, 2003, the Company had no foreign currency exchange forward contracts outstanding. The Company accounts for its derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , and related amendments, including SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities .
(o) Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables . Revenue arrangements with multiple deliverables include arrangements which provide for the delivery or performance of multiple products, services and/or rights to use assets where performance may occur at different points in time or over different periods of time. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of the guidance under this consensus did not have an impact on the Company's financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149 which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of an underlying (as initially defined in SFAS No. 133) to conform it to language used in FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others , and amends certain other existing pronouncements. SFAS No. 149 is effective for all contracts entered into or modified after June 30, 2003, subject to certain exceptions. The adoption of this statement did not have an impact on the Company's financial position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity , which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), while many of such instruments were previously classified as equity or "mezzanine" equity. The statement also requires that income statement treatment be consistent with the balance sheet classification. That is, if the instrument is classified as a liability, payments to the holders are interest expense, not dividends, and changes in value are recorded in earnings. The statement relates to three specific categories of instruments: mandatorily redeemable shares, freestanding written put options and forward contracts that obligate an entity to purchase its own shares, and freestanding contracts that obligate an entity to pay with its own shares in amounts that are either unrelated, or inversely related, to the price of the shares. SFAS No. 150 is effective immediately for financial instruments entered into or modified after May 31, 2003 and otherwise is effective in the first interim period beginning after June 15, 2003. The adoption of this statement did not have an impact on the Company's financial position, results of operations, or cash flows.
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In December 2003, the FASB issued a revision to FIN No. 46, Consolidation of Variable Interest Entities . The revised FIN No. 46, which replaces the original FIN No. 46 issued in January 2003, clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements , to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. While this interpretation exempts certain entities from its requirements, it also expands the definition of a variable interest entity ("VIE") to a broader group of entities than those previously considered special-purpose entities ("SPE's") and specifies the criteria under which it is appropriate for an investor to consolidate VIE's. Application of the revised FIN No. 46 is required in financial statements of public entities that have interest in structures that are commonly referred to as SPE's for periods ending after December 15, 2003. For all other types of VIE's, application of the revised FIN No. 46 by public entities is required for periods ending after March 15, 2004. The application of this interpretation with respect to structures commonly referred to as SPE's did not have a material impact on the Company's financial position, results of operations, or cash flows. The Company currently does not expect the application of this interpretation with respect to other types of VIE's to have a material impact on its financial position, results of operations, or cash flows.
In December 2003, the Securities and Exchange Commission ("SEC") published SAB No. 104, Revenue Recognition . SAB No. 104 was effective upon issuance and supersedes SAB No. 101, Revenue Recognition in Financial Statements , and rescinds the accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements that was superseded by EITF Issue No. 00-21. Accordingly, SAB No. 104 rescinds portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins. While the wording of SAB No. 104 has changed to reflect the guidance of EITF 00-21, the revenue recognition principles of SAB No. 101 have remained largely unchanged. The adoption of SAB No. 104 did not have a material effect on the Company's financial position, results of operations, or cash flows.
(p) Reclassifications
Certain prior-year account balances have been reclassified to be consistent with the current year's presentation.
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(3) Other Balance Sheet Information
Components of selected captions in the consolidated balance sheets consist of:
(4) Business Combinations
(a) Acquisition of the Abbott business
On September 30, 2003, the Company acquired from Abbott certain assets related to Abbott's lines of consumer diagnostic pregnancy tests and professional rapid diagnostics for various testing needs, including strep throat, pregnancy and drugs of abuse (Note 1). The acquired assets also include certain transferred and licensed intellectual property related to these products. This acquisition compliments the Company's consumer and professional diagnostic product portfolios, as well as helps to establish a larger global presence in which to facilitate the introduction of new products.
The aggregate purchase price was $94,987, which consisted of $55,000 in cash, $37,500 in the form of 1,551 shares of the Company's common stock and direct acquisition costs of $2,487. The Company financed the cash portion of the purchase price by obtaining loans under its amended senior credit facility (Note 6(a)).
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The aggregate purchase price was allocated to the assets acquired as follows:
December 31,
2003
2002
Inventory: Raw materials $ 19,606 $ 13,447 Work-in-process 12,631 7,076 Finished goods 14,806 16,632 $ 47,043 $ 37,155 Property, plant and equipment: Machinery, laboratory equipment and tooling $ 51,428 $ 34,750 Buildings 8,919 8,726 Leasehold improvements 8,349 6,094 Computer software and equipment 5,505 4,741 Furniture and fixtures 2,714 2,120 76,915 56,431 Less—Accumulated depreciation and amortization 19,916 10,402 $ 56,999 $ 46,029 Accrued expenses and other current liabilities: Compensation and compensation-related $ 10,259 $ 8,851 Advertising and marketing 9,146 9,299 Professional fees 6,518 5,688 Royalty obligations 4,810 1,116 Other 10,389 13,694 $ 41,122 $ 38,648
Property, plant and equipment $ 536 Goodwill 86,451
The fair value assigned to property, plant and equipment and trade names were based upon an independent appraisal.
The acquisition of the Abbott business is accounted for as a purchase under SFAS No. 141, Business Combinations . Accordingly, the operating results of the Abbott business have been included in the Company's consolidated statements of operations after the acquisition date as part of each of the Company's consumer diagnostic products and professional diagnostic products reporting units. The acquired goodwill, all of which is deductible for tax purposes over a period of 15 years, is allocated by business segment based on estimated future revenue of the acquired assets as follows: $23,385 to consumer products and $63,066 to professional diagnostic products. The Company has assigned an indefinite life to the Signify trade name and 5 years in useful life for the Fact plus trade name. The Signify and Fact plus trade names are included on the accompanying consolidated balance sheet as of December 31, 2003 in trademark and trade names with indefinite lives and other intangible assets, net, respectively.
Under the terms of the acquisition agreements, Abbott will provide transitional services for up to eighteen months for several of the acquired products and up to two years for others. The transitional services primarily include distributing the acquired products, but also include limited manufacturing.
(b) Acquisition of ABI
On August 27, 2003, the Company acquired ABI from Apogent Technologies Inc. ("Apogent") (Note 1). ABI is a developer, manufacturer and distributor of rapid diagnostic products in the areas of women's health, infectious disease and drugs of abuse testing. In the transaction, the Company also acquired ABI's wholly-owned subsidiary, Forefront Diagnostics, Inc. ("Forefront"). Forefront develops, manufactures and distributes rapid diagnostic products for drugs of abuse testing. These products broaden the Company's professional diagnostic product portfolio. ABI also provides the Company with additional manufacturing capabilities and new distribution channels for the Company's professional diagnostic products.
The preliminary aggregate purchase price of ABI was $28,840, which consisted of $13,400 in cash, 693 shares of the Company's common stock with an aggregate fair value of $14,267 and preliminary direct acquisition costs of $1,173. The fair value of the Company's common stock was determined based on the average market price of the Company's common stock over the periods just prior to and following the date of the merger agreement, pursuant to EITF Issue No. 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination.
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The Company financed the cash portion of the purchase price by obtaining a loan under its amended senior credit facility (Note 6(a)).
The aggregate purchase price is preliminary as the Company is working to settle a working capital adjustment with Apogent under the purchase agreement and management is in the process of finalizing a restructuring plan for the operations of ABI, both of which could result in adjustments to the aggregate purchase price. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed at the date of acquisition:
The values assigned to the property, plant and equipment and intangible assets were based upon the results of an independent appraisal.
The acquisition of ABI is accounted for as a purchase under SFAS No. 141. Accordingly, the operating results of ABI have been included
Trade name—Signify 6,400 Trade name—Fact plus 1,600 $ 94,987
Cash and cash equivalents $ 1 Accounts receivable 6,368 Inventory 6,056 Property, plant and equipment 5,352 Goodwill 10,115 Customer relationships 2,000 Manufacturing know how 3,500 Other assets 117 Accounts payable and accrued expenses (4,669 ) $ 28,840
in the accompanying consolidated financial statements since the acquisition date as part of each of the Company's consumer diagnostic products and professional diagnostic products reporting units. The Company has allocated goodwill of $2,003 and $8,112 to the consumer products and professional diagnostic products business segments, respectively, based on estimated future revenue of the acquired businesses. Goodwill generated from this acquisition is not deductible for tax purposes. The Company estimates the useful lives of both intangible assets to be 15 years and has included them in other intangible assets, net, in the accompanying consolidated balance sheet at December 31, 2003. The weighted average amortization period for the acquired intangible assets with finite lives is estimated to be 15 years.
(c) Acquisition of Ostex
On June 30, 2003, the Company acquired Ostex through a merger transaction (Note 1). Ostex develops and commercializes osteoporosis diagnostic products. This acquisition also provides the Company with intellectual property rights in the field of osteoporosis diagnostics.
The preliminary aggregate purchase price of Ostex was $33,424, which consisted of 1,597 shares of the Company's common stock with an aggregate fair value of $23,537, the assumption of fully-vested stock options and warrants to purchase an aggregate of 303 shares of the Company's common stock, which options and warrants have an aggregate fair value of $1,752, estimated exit costs of $3,632, which primarily consists of severance and costs to vacate Ostex's manufacturing and administrative facilities in
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accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination , direct acquisition costs of $1,628 and $2,875 in assumed debt. The fair value of the Company's common stock issued to acquire all of Ostex's outstanding common stock was determined based on the average market price of the Company's common stock over the periods just prior to and following the date of the merger agreement, as amended, pursuant to EITF Issue No. 99-12. The fair value of the assumed fully-vested stock options and warrants was calculated using the Black-Scholes option pricing model.
As a result of the business combination with Ostex, the Company established a restructuring plan whereby it will exit the current facilities of Ostex in Seattle, Washington, and combine such activities with the Company's existing manufacturing and distribution facilities by mid-2004. The total number of employees to be terminated involuntarily will be 41, of which 30 remain to be terminated as of December 31, 2003. Total severance costs associated with employees to be terminated involuntarily are estimated to be $1,592, of which $1,132 has been paid as of December 31, 2003. The Company estimated costs to vacate the Ostex facilities to be approximately $100, none of which has been paid as of December 31, 2003. Additionally, the remaining costs to exit operations, primarily facilities lease commitments, are estimated at $1,940, of which $414 has been paid as of December 31, 2003. Total unpaid estimated exit costs amounted to $2,086 as of December 31, 2003.
Although the Company believes its plan and estimated exit costs to be reasonable, actual spending for exit activities may differ from current estimated exit costs, which might impact the final aggregate purchase price. The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
The values assigned to the property, plant and equipment and intangible assets were based upon the results of independent appraisals.
The acquisition of Ostex is accounted for as a purchase under SFAS No. 141. Accordingly, the results of Ostex have been included in the accompanying consolidated financial statements since the acquisition date as part of the Company's professional diagnostic products reporting unit and business segment. Goodwill generated from this acquisition is not deductible for tax purposes. The Company estimates the useful lives of both the core technology and customer relationships to be 15 years and includes them in core technology and patents, net, and other intangible assets, net, respectively, in the
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Cash and cash equivalents $ 1,271 Accounts receivable 1,264 Inventory 506 Property, plant and equipment 629 Goodwill 24,840 Core technology 5,532 Customer relationships 1,096 Other assets 177 Accounts payable and accrued expenses (1,891 ) $ 33,424
accompanying consolidated balance sheet at December 31, 2003. The weighted average amortization period for the acquired intangible assets with finite lives is estimated to be 15 years.
(d) Acquisition of Wampole
On September 20, 2002, the Company acquired Wampole, a distributor of professional diagnostic and point-of-care medical diagnostic products primarily in the United States (Note 1). This acquisition allows the Company to expand its business in the point-of-care market in the United States and provides the Company with certain intellectual property. The aggregate purchase price of Wampole is $72,068, which consisted of $70,489 in cash and $1,579 in direct acquisition costs. The acquisition was funded by the issuance of $35,000 in subordinated debt (Notes 6(b) and (c)) and a portion of the Company's existing cash at the time of the acquisition. The aggregate purchase price for Wampole was allocated to the acquired assets and assumed liabilities as follows:
The above allocation of the aggregate purchase price for Wampole to the acquired intangible assets is based upon an independent appraisal.
The acquisition of Wampole is accounted for as a purchase under SFAS No. 141. Accordingly, the results of Wampole have been included in the accompanying consolidated financial statements since the acquisition date as part of the Company's professional diagnostic products reporting unit and business segment. The Company has assigned indefinite lives to the acquired goodwill and trade name. The value of such goodwill is fully deductible for tax purposes over 15 years. The values allocated to the acquired patents and supplier relationships are being amortized on a straight-line basis over their estimated useful lives of 13 and 10 years, respectively. The weighted average amortization period for the acquired intangible assets with finite lives is estimated to be 10.8 years. The trade name, patents, and supplier relationships are allocated respectively to trademarks and trade names with indefinite lives, core technology and patents, net, and other intangible assets, net, on the accompanying consolidated balance sheets as of December 31, 2003 and 2002.
(e) Acquisition of IVC
On March 19, 2002, the Company acquired IVC (now d/b/a IMN), a manufacturer and distributor of vitamins and nutritional supplements primarily in the United States (Note 1). With the addition of IMN, the Company consolidated certain of its vitamin and nutritional supplement manufacturing at
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IMN and discontinued most of its outsourced manufacturing arrangements. The aggregate purchase price of IMN was $27,300, which consisted of $5,619 in cash representing $2.50 for each outstanding share of IMN's common stock, fully-vested stock options to purchase an aggregate of 116 shares of the Company's common stock, which options had an aggregate fair value of $1,299, calculated using the Black-Scholes option pricing model, $1,587 in costs to exit certain activities of IMN, primarily severance costs of involuntarily terminated employees in accordance with EITF Issue No. 95-3, $17,359 in assumed debt and $1,436 in direct acquisition costs. The acquisition was funded by the Company's existing cash. The aggregate purchase price for IMN was allocated to the acquired assets and assumed liabilities as follows:
Accounts receivable $ 8,286 Inventory 4,849 Property, plant and equipment 2,217 Goodwill 36,499 Trade name 6,020 Patents 3,900 Supplier relationships 11,020 Other assets 968 Accounts payable and accrued expenses (1,691 ) $ 72,068
Cash and cash equivalents $ 476 Accounts receivable 4,716 Inventory 9,832 Property, plant and equipment 23,016 Other assets 1,755 Accounts payable and accrued expenses (12,495 ) $ 27,300
The acquisition of IMN is accounted for as a purchase under SFAS No. 141. Accordingly, the results of IMN have been included in the accompanying consolidated financial statements since the acquisition date. The acquired assets and assumed liabilities of IMN were assigned to the Company's nutritional supplements business reporting unit which is included in the Company's consumer products business segment.
Immediately after the close of the acquisition, the Company reorganized the business operations of IMN to improve efficiencies and eliminate redundant activities on a company-wide basis. The restructuring affected all cost centers within the organization, but most significantly responsibilities at the sales and executive levels, as such activities were combined with the Company's existing business operations. Also as part of the restructuring plan, the Company is in the process of relocating one of IMN's warehouses to a closer proximity of the manufacturing facility to improve efficiency. The warehouse relocation is expected to be completed by mid-2004. Of the $1,587 in total exit costs, which include severance costs of involuntarily terminated employees and costs to vacate the warehouse, $1,068 have been paid and $519 remain unpaid as of December 31, 2003. The total number of involuntarily terminated employees was 47, all of which have been terminated as of December 31, 2003.
(f) Acquisition of the Unipath Business
On December 20, 2001, the Company acquired the Unipath business from Unilever Plc ("Unilever") (Note 1). The Unipath business, with its core operations based in England, develops, manufactures and distributes home pregnancy and ovulation testing and natural family planning products that are sold worldwide. Together with the acquisition of the Unipath business, the Company also acquired rights to certain antibody clones and other intellectual property. The Unipath business provides the Company with leading brand name consumer diagnostic products that compliment the
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Company's existing value branded and private label home pregnancy detection and ovulation prediction products.
The aggregate purchase price for the Unipath business of $158,446 consisted of $146,490 in cash, $4,159 in costs to exit certain activities of the acquired business, primarily severance costs in accordance with EITF Issue No. 95-3, estimated unfunded pension liability of $2,634 upon the assumption of the pension benefits of the acquired employees based in England (Note 8(b)) and $5,163 in direct acquisition costs. The acquisition was funded by the issuance of 1,995 shares of series A convertible redeemable preferred stock ("Series A Preferred Stock") with aggregate proceeds of $59,850 (Note 12(b)), $62,500 in loans under a series of credit agreements with a bank and entities related to this bank (Note 6(f)), the issuance of subordinated promissory notes and warrants for aggregate proceeds of $20,000 (Note 6(g)) and the Company's existing cash.
The aggregate purchase price of the Unipath business was allocated to the acquired assets and assumed liabilities as follows:
The allocation of the purchase price to the assets acquired is based upon the results of an independent appraisal of the fair value of the assets.
The acquisition of the Unipath business was accounted for as a purchase under SFAS No. 141. Accordingly, the results of the Unipath business have been included in the accompanying consolidated financial statements since the acquisition date and are primarily included in the Company's women's health reporting unit within the consumer products business segment. To a much lesser extent, the results of the Unipath business are included in the Company's professional diagnostics business segment. The acquired goodwill, the majority of which is not deductible for tax purposes, and trademarks are assigned indefinite lives. Goodwill of $65,703 and $7,026 has been allocated to the consumer products and professional diagnostic products business segments, respectively, based on estimated future revenue of the acquired Unipath business. The Company is amortizing the portion of the purchase price allocated to certain intangible assets with finite lives, which are comprised of core technology and patents and license agreements, on a straight-line basis over their estimated useful lives of 13 and 7 years, respectively. The weighted average amortization period for these assets is 11.2 years. The trademarks, core technology and patents, and license agreements are allocated to trademarks and
Cash and cash equivalents $ 5,030 Accounts receivable 15,960 Inventory 13,106 Other current assets 2,369 Property and equipment 15,182 Goodwill and trademarks 98,428 In-process research and development 6,980 Core technology and patents 20,072 License agreements 8,903 Liabilities assumed (27,584 ) $ 158,446
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trade names with indefinite lives, core technology and patents, net, and other intangible assets, net, respectively, in the accompanying consolidated balance sheets at December 31, 2003 and 2002.
At the time of the acquisition, the research and development staff of the Unipath business was seeking to develop a digital-based technology. However, the technology being sought under this specific in-process research and development project ("IPRD Project") had not yet reached technological feasibility and had no alternative future use at the date of acquisition, and therefore, the portion of the purchase price allocated to this IPRD Project, or $6,980, was charged to expense upon the acquisition. The amount of the purchase price allocated to this IPRD Project represents its estimated fair value determined using the income approach, whereby projected future cash flows are discounted to value the technology. An estimated royalty rate of 4% was applied to projected revenues to calculate pretax royalty savings attributed to completed technology. A 30% tax rate was used and then a risk-adjusted discount rate of 24% was applied. At the time of the Unipath business acquisition, management believed that many of the complex technical issues had been resolved; however, the Company had not obtained Food and Drug Administration ("FDA") approval of this technology. Therefore, the risk of not achieving commercialization was not only a developmental risk, but a regulatory risk as well. The work of a full project, which included demonstrating feasibility, defining the project, design, development, verification and clinical testing, and regulatory submission and approval, would need to be completed prior to a launch of a product based on this technology. In the second quarter of 2003, as originally anticipated, the Company obtained FDA clearance to market and sell its pregnancy test that uses the digital-based technology.
As a result of the business combination, the Company reorganized the operations of the Unipath business for purposes of improving efficiencies and achieving economies of scale on a company-wide basis. Such reorganization affected all major cost centers at the operations in England. Additionally, most business activities of the U.S. division were merged into the Company's existing U.S. businesses. The total number of involuntarily terminated employees was 65, all of which have been terminated as of December 31, 2002. Total exit costs, which primarily related to severance, were initially estimated at $2,340. During 2002, the Company finalized all restructuring activities and recorded an additional $1,819 in exit costs. The additional exit costs were recorded as adjustments to the Unipath business purchase price. As of December 31, 2003, $1,347 (adjusted for foreign exchange effect) in exit costs remained unpaid.
(g) Pro Forma Financial Information
The following table presents selected unaudited financial information of the Company, including the Abbott business, ABI, Ostex, Wampole, and IMN as if the acquisitions of these entities had occurred on January 1, 2002. Pro forma results exclude adjustment for SMB as the acquisition did not materially affect the Company's results of operations. The unaudited pro forma results are not
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necessarily indicative of the results that would have occurred had the above acquisitions been consummated on January 1, 2002 or future results.
2003
2002
(unaudited)
Pro forma net revenue
$ 349,828
$ 344,742
Pro forma income (loss) before accounting change $ 14,761 $ (12,913 ) Cumulative effect of a change in accounting principle — (12,148 ) Pro forma net income (loss) $ 14,761 $ (25,061 ) Pro forma income (loss) available to common stockholders—basic:(1) Pro forma income (loss) before accounting change $ 13,804 $ (24,861 )
Pro forma net income (loss) $ 13,804 $ (37,009 ) Pro forma income (loss) available to common stockholders—diluted:(1) Pro forma income (loss) before accounting change $ 13,984 $ (24,861 )
Pro forma net income (loss) $ 13,984 $ (37,009 )
(1)
Pro forma income (loss) per common share—basic: Pro forma income (loss) before accounting change $ 0.76 $ (1.80 )
Pro forma net income (loss) $ 0.76 $ (2.69 ) Pro forma income (loss) per common share—diluted: Pro forma income (loss) before accounting change $ 0.69 $ (1.80 )
Pro forma net income (loss) $ 0.69 $ (2.69 )
Earnings per share are computed as described in Note 11.
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(5) Goodwill and Other Intangible Assets
On January 1, 2002, the Company adopted SFAS No. 142 which addresses changes in the financial accounting and reporting for acquired goodwill and other intangible assets with indefinite lives. As a result, the Company no longer records amortization of goodwill. During 2001, the Company recorded amortization expense of $398 related to goodwill. This amortization expense was allocated to general and administrative expenses in the accompanying consolidated statement of operations in 2001. The following table presents the loss from continuing operations and net loss of the Company, as if no amortization of goodwill was recorded under SFAS No. 142 in this period:
SFAS No. 142 also provides specific guidance for determining and measuring impairment of goodwill. Based upon the results of an independent impairment review, as required by SFAS No. 142, the Company recorded an impairment charge of $12,148, representing the remaining goodwill related to its reporting unit that comprises the nutritional supplement lines the Company acquired in 1997. This amount represented the excess of the carrying value over the fair value of such asset. The fair value was determined using a combination of the income approach and the market approach of valuing a business. The income approach valued the business by discounting projected future cash flows and the market approach valued the security underlying the business by comparing it to those of similar businesses. The most significant facts and circumstances that led to the conclusion of this impairment were (a) future cash flows from these nutritional supplement lines are expected to be reduced, (b) selling, general and administrative expenses relating to these nutritional supplement lines are forecasted to increase as a percentage of sales, and (c) the nutritional supplements business is experiencing a larger percentage decline in revenues than most of the comparable businesses of other companies. This impairment charge was recorded in the first quarter of 2002 and classified in accordance with SFAS No. 142 as a cumulative effect of a change in accounting principle in the accompanying statement of operations in 2002.
Because the independent appraisal of the fair value of the reporting unit underlying the Company's nutritional supplements business indicated a goodwill impairment of that reporting unit, as discussed above, the Company proceeded to also obtain an independent impairment review of the
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2001
Loss from continuing operations $ (24,789 ) Add back: Goodwill amortization, net of tax 398 Adjusted loss from continuing operations $ (24,391 ) Net loss $ (24,731 ) Add back: Goodwill amortization, net of tax 398 Adjusted net loss $ (24,333 ) Adjusted loss per common share—basic and diluted: Adjusted loss from continuing operations $ (3.83 ) Adjusted net loss $ (3.82 )
carrying value assigned to related trademarks and brand names in accordance with SFAS No. 144. The results of the impairment review under SFAS No. 144 indicated an impairment of the carrying value of such trademarks and brand names because the full carrying amount of these intangible assets was not expected to be recoverable and exceeded its fair value. The carrying amount of these intangible assets was not recoverable because it exceeded the sum of the undiscounted cash flows expected to result from the use and eventual disposition of these assets. The fair value of these intangible assets was determined using a combination of the discounted cash flow approach and the relief from royalty approach, the latter of which valued the trademarks as if they were licensed from a third party. Based on these results, the Company recorded an impairment charge of $12,682 during the first quarter of 2002, which was included in operating expenses in the accompanying statement of operations in 2002. The remaining carrying value of these intangible assets was $3,858 at December 31, 2003, which is being amortized over the remaining useful life of the intangible asset of 18 years.
(6) Long-term Debt
The Company had the following long-term debt balances outstanding:
The following describes each of the above listed debt instruments:
(a) Senior Credit Facilities
On November 14, 2002, the Company and certain of its subsidiaries entered into a senior credit agreement with a group of banks for credit facilities in the aggregate amount of up to $55,000, of which $44,111 was used to prepay the outstanding principal balances and any accrued and unpaid interest on the term loans and line of credit under a series of former credit agreements (Note 6(f)). On August 27, 2003, to finance the cash portion of its acquisition of ABI (Note 4(b)), the Company amended the senior credit agreement, whereby the borrowing capacity under the credit facilities was increased to $70,000. On September 30, 2003, to finance the cash portion of its acquisition of the Abbott business (Note 4(a)), the Company further amended its senior credit agreement, whereby the borrowing capacity under the credit facilities was further increased to $135,000. The amended senior
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credit agreement of September 30, 2003 consisted of two U.S. term loans, Term Loan A for $35,075 and Term Loan B for $40,000, a European term loan for $9,900, a U.S. revolving line of credit of up to $25,000, and a European revolving line of credit of up to $25,000. Aggregate borrowings as of December 31, 2003 amounted to $84,975 under the term loans and $39,859 under the revolving lines of credit. The aggregate unused portion of the revolving lines of credit totaled $10,141 as of December 31, 2003.
On February 10, 2004, all outstanding borrowings and accrued and unpaid interest under the senior credit agreement, aggregating $125,046, were prepaid with the proceeds from the Company's sale of $150,000 of 8.75% senior subordinated notes (the "Bonds"or "Bond issuance") (Note 6(h)). The Company retained the $50,000 availability under the revolving lines of credit, subject to continued covenant compliance, and may repay any future borrowings under the revolving lines of credit at any time but in no event later than March 31, 2008. The Company is required to make mandatory prepayments under the senior credit facilities if it meets certain cash flow thresholds, issues equity securities or subordinated debt, or sells assets not in the ordinary course of business.
The Company treated the prepayment of the outstanding borrowings under the senior credit facilities, using the proceeds form the Bond
December 31,
2003
2002
Senior credit facilities $ 124,834 $ 52,960 10% Subordinated notes 20,000 20,000 9% Subordinated notes 9,000 9,000 3% Convertible notes 6,000 6,000 IMN credit facilities 13,075 11,741 IMN bonds payable 1,450 2,655 Other 478 521 174,837 102,877 Less: Unamortized original issue discount 944 1,144 Less: Current portion 14,055 17,200 $ 159,838 $ 84,533
offering, as a refinancing in accordance with SFAS No. 6, Classification of Short-Term Obligations Expected to Be Refinanced . Therefore, the outstanding principal balances under the senior credit facilities, that were originally due to be repaid within one year, were reclassified from current to long-term liabilities in the accompanying consolidated balance sheet at December 31, 2003.
Borrowings under the credit facilities bear interest at either (i) the London Interbank Offered Rate ("LIBOR"), as defined in the agreement, plus applicable margins or, at the Company's option, (ii) a floating Index Rate, as defined in the agreement, plus applicable margins. Applicable margins if the Company chooses to use the LIBOR or the Index Rate can range from 3.25% to 4.50% or 2.00% to 2.75%, respectively, depending on the quarterly adjustments that are based on the Company's consolidated financial performance, commencing with the quarter ending March 31, 2004. As of December 31, 2003, the interest rate under the revolving lines of credit, including the applicable margin, was 5.14%. Interest rates ranging from 5.14% to 5.64% were applicable to borrowings under the term loans at December 31, 2003. The Company recorded interest expense, including amortization of deferred financing costs, under these senior credit facilities in the aggregate amount of $4,602 and $521 in 2003 and 2002, respectively. On February 10, 2004, in connection with the prepayment of the outstanding balances under the senior term loans, the Company also recorded interest expense of $3,297 to write-off the remaining related unamortized deferred financing costs of $2,847 and to expense a financing fee of $450 paid to the banks.
Borrowings under the senior credit facilities are secured by the stock of certain of the Company's U.S. and European subsidiaries, substantially all of the Company's intellectual property rights and the assets of the Company's business in the U.S. and Europe, excluding those assets of IMN, Orgenics Ltd., the Company's Israeli subsidiary, and Unipath Scandinavia AB, the Company's Swedish subsidiary. Under the senior credit agreement, the Company must comply with various financial and non-financial covenants. The primary financial covenants pertain to, among other things, fixed charge coverage ratio, capital expenditure, various leverage ratios, earnings before interest, taxes, depreciation and amortization ("EBITDA") and minimum cash requirement. Additionally, the senior credit agreement
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currently prohibits the payment of dividends. As of December 31, 2003, the Company was in compliance with the covenants.
(b) Subordinated Promissory Notes, 10%, Principal Amount $20,000
On September 20, 2002, the Company sold units ("Units") having an aggregate purchase price of $20,000 to private investors to help finance the Wampole acquisition (Note 4(d)). Each Unit consisted of (i) a 10% subordinated promissory note (a "10% Subordinated Note") in the principal amount of $50 and (ii) a warrant to acquire 0.4 shares of the Company's common stock at an exercise price of $13.54 per share. In the aggregate, the Company issued fully vested warrants to purchase 160 shares of its common stock, which may be exercised at any time on or prior to September 20, 2012. Interest accrues at 10% per annum, compounded daily, on the outstanding principal amount and is payable quarterly in arrears on the first day of each calendar quarter, which started on October 1, 2002. The 10% Subordinated Notes mature on September 20, 2008, subject to acceleration in certain circumstances, and the Company may prepay the 10% Subordinated Notes at any time, subject to certain prepayment penalties. The Company may, at its option, repay the 10% subordinated notes and pay any prepayment penalty, if applicable, in cash or in shares of its common stock valued at 95% of the average closing price of such stock over the ten consecutive trading days immediately preceding the payment date. The 10% Subordinated Notes are expressly subordinated to up to $150,000 of indebtedness for borrowed money incurred or guaranteed by the Company plus any other indebtedness that the Company incurs to finance an acquisition.
The Company allocated $1,200 of the principal amount of the 10% Subordinated Notes to the warrants as original issue discount, which represented the fair value of the warrants at the date of issuance. In addition, the placement agent for the offering of the 10% Subordinated Notes received cash commissions and an expense allowance totaling $970 and a warrant to purchase 38 shares of the Company's common stock, the terms of which are identical to the warrants sold as part of the Units. The value of the warrant issued to the placement agent of $302, and the cash commission and expense allowance are recorded as deferred financing costs. The original issue discount related to the warrants issued to the subscribers and the deferred financing costs are being amortized to interest expense over the six year term of the 10% Subordinated Notes. Interest expense, including amortization of original issue discount and deferred financing costs, related to the 10% Subordinated Notes was $2,465 and $693 in 2003 and 2002, respectively.
Among the purchasers of the 10% Subordinated Notes were three directors and officers of the Company and an entity controlled by the Company's chief executive officer, who collectively purchased Units that aggregated $1,850 in principal amount and warrants to purchase an aggregate of 15 shares of the Company's common stock.
(c) Subordinated Promissory Notes, 9%, Principal Amount $9,000, and Convertible Subordinated Promissory Notes, 3%, Principal Amount $6,000
On September 20, 2002, also in connection with the financing of the Wampole acquisition (Note 4(d)), the Company sold subordinated promissory notes in an aggregate principal amount of $9,000 (the "9% Subordinated Notes") and subordinated convertible promissory notes in an aggregate principal amount of $6,000 (the "3% Convertible Notes") to private investors. The 9% Subordinated
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Notes and 3% Convertible Notes bear interest at 9% and 3% per annum, respectively, on the outstanding principal balance and are payable quarterly in arrears on the first day of each calendar quarter, which started on October 1, 2002. The Company recorded interest expense, including amortization of deferred financing costs, on these notes of $1,003 and $282 in 2003 and 2002, respectively. The 3% Convertible Notes mature on September 20, 2008, subject to acceleration in certain circumstances. On February 10, 2004, the Company prepaid the 9% Subordinated Notes with the proceeds from the Bond issuance (Note 6(h)). The total payment made on the prepayment date aggregated $9,271, which represented the principal balance outstanding plus accrued and unpaid interest as well as a prepayment penalty of $180, which equated to 2% of the principal balance repaid. The prepayment penalty along with the remaining unamortized deferred financing cost write-off, aggregating $216, was charged to interest expense in February 2004.
Upon maturity of the 3% Convertible Notes, the Company has the option to repay the notes in cash or in shares of its common stock valued at 95% of the average closing price of such stock over the ten consecutive trading days immediately preceding the payment date. At any time prior to the maturity date, holders of the 3% Convertible Notes have the option to convert all of their outstanding principal amounts and unpaid interest into the Company's common stock at a conversion price equal to $17.45 per share, which was 125% of the average closing price of the Company's common stock over the ten consecutive trading days ending two days prior to September 20, 2002. Additionally, the outstanding principal amount and unpaid interest on the 3% Convertible Notes will automatically convert into the Company's common stock at a conversion price equal to $17.45 if, at any time after September 20, 2004, the average closing price of the Company's common stock in any consecutive thirty-day period is greater than $22.67.
The 3% Convertible Notes are expressly subordinated to up to $150,000 of indebtedness for borrowed money incurred or guaranteed by the Company plus any other indebtedness the Company incurs to finance an acquisition, provided that the 3% Convertible Notes rank equally with the 10% Subordinated Notes.
An entity controlled by the Company's chief executive officer purchased 3% Convertible Notes in the aggregate principal amount of $3,000.
(d) IMN Credit Facilities
In connection with the acquisition of IMN, the Company assumed IMN's borrowings under a senior credit agreement ("IMN Credit Agreement"). Pursuant to the IMN Credit Agreement, as amended, IMN can borrow up to $15,000 under a revolving credit commitment and $4,200 under a term loan commitment, subject to specified borrowing base limitations. As of December 31, 2003, IMN had $10,783 in outstanding borrowings under the revolving credit commitment and $2,292 in outstanding principal amount under the term loan. Borrowings under the IMN Credit Agreement will mature on October 15, 2004 and are automatically extended for one year at each maturity date unless a ninety day termination notice is given in writing by either party to the agreement. Borrowings under the revolving credit commitment and the term loan bear interest at either 1.50% above the bank's prime rate or, at IMN's option, at 3.75% above the Adjusted Eurodollar Rate used by the bank. At December 31, 2003, the interest rates on the loan facilities ranged from 4.92% to 5.50%. Interest expense, including amortization of deferred financing costs, on IMN's credit facilities was $835 and
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$661 in 2003 and 2002, respectively. At December 31, 2003, availability under the revolving credit commitment amounted to $426, which had been reduced by borrowing base limitations.
The notes are collateralized by substantially all of IMN's assets. The IMN Credit Agreement requires IMN to maintain minimum tangible net worth and contains various restrictions customary in such financial arrangements, including limitations on the payment of cash dividends. As of December 31, 2003, IMN was in compliance with such requirements and restrictions.
(e) IMN Bonds Payable
Also in connection with the acquisition of IMN, the Company assumed IMN's bonds payable ("IMN Bonds"), which had an aggregate outstanding balance of $1,450 as of December 31, 2003. The bonds are payable in various installments through June 30, 2007 and the bonds payable balance bear interest at 6.90%. Interest on the bonds payable balance is payable semi-annually and IMN recorded interest expense, including amortization of deferred financing costs, on such bonds of $121 and $214 during 2003 and 2002, respectively. The bonds are collateralized by certain property and equipment of IMN. Additionally, the bonds require IMN to maintain letters of credit from a bank equal to the outstanding principal balances of the bonds and the fees on such letters was .85% per annum until November 30, 2003 and 1% per annum thereafter.
(f) Term Loans and Revolving Line of Credit
On December 20, 2001, a wholly-owned subsidiary of the Company entered into a series of credit agreements (the "Former Credit Agreements") with a bank and entities related to such bank for various credit facilities in the aggregate amount of $65,000, as amended. The
proceeds of the Former Credit Agreements were used to finance a portion of the cash used to acquire the Unipath business (Note 4(f)). The per annum interest rate on the loans was LIBOR plus a spread from 1.50% to 3.50% (and an additional 2.00% in case of default), depending on the type of loan (senior or junior) and the interest period. In addition, under the Former Credit Agreement, interest at 4.00% per annum was expensed and deferred on the junior loan. As part of the Former Credit Agreements, the Company issued the bank a warrant to acquire 65 shares of the Company's common stock at nominal cost. The Company had allocated $1,105 of the loan proceeds to this warrant as original issue discount, which represented the fair value of the warrant at the date of issuance. Interest expense, including amortization of original issue discount and deferred financing costs, in 2002 and 2001 was $2,733 and $134, respectively.
On November 14, 2002, the Company prepaid the outstanding principal balances and any unpaid interest under the Former Credit Agreements, aggregating $44,111, with proceeds from the senior credit facilities obtained on that date (Note 6(a)). The Company accounted for the prepayment as an early extinguishment of debt. Accordingly, on November 14, 2002, the Company accelerated the amortization of the remaining unamortized original issue discount and deferred financing costs of $972 and $2,237, respectively, which were recorded as a component of interest expense in the accompanying statements of operations.
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(g) Subordinated Bridge Notes
The Company entered into a note and warrant purchase agreement pursuant to which, on December 20, 2001, it issued subordinated promissory notes ("Subordinated Bridge Notes") having an aggregate principal amount of $20,000 for the purpose of funding its acquisition of the Unipath business (Note 4(f)). The original maturity date of the Subordinated Notes was April 1, 2002, with an extension option, and interest accrued at 12% per annum, or 18% if and when the maturity date was extended. The Subordinated Bridge Notes were convertible into shares of the Company's Series A Preferred Stock at the option of the holder. Due to such conversion feature of the notes, the Company recorded a discount on the notes in the form of a beneficial conversion feature of $3,243 in accordance with EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios , and EITF Issue No. 00-27, Application of EITF Issue No. 98-5 to Certain Convertible Instruments . The value assigned to the beneficial conversion feature was being amortized to interest expense over the life of the Subordinated Bridge Notes.
As part of the note and warrant purchase agreement, in addition to the Subordinated Bridge Notes, the Company also issued 10-year warrants to purchase a total of 55 shares of the Company's common stock at an exercise price of $18.12 per share. The Company allocated $672 of the aggregate proceeds from the Subordinated Bridge Notes to the warrants as original issue discount, which represented the relative fair value of the warrants at the date of issuance, and was amortizing this discount to interest expense over the life of the Subordinated Bridge Notes. Interest expense in 2002 and 2001, including amortization of the original issue discount, beneficial conversion feature and deferred financing costs was $2,974 and $564, respectively.
On March 6, 2002, the Company prepaid the Subordinated Bridge Notes, which had an aggregate outstanding balance of $20,000, and related accrued interest of $568. The Company accounted for the prepayment of the Subordinated Bridge Notes and the reacquisition of the related beneficial conversion feature as an early extinguishment of debt and recorded $9,600 related to the gain on early extinguishment of debt as other income (expense), net, and $1,260 related to the unamortized original issue discount, initial beneficial conversion feature and deferred financing costs as additional interest expense. In accordance with EITF Issue Nos. 98-5 and 00-27, the gain of $9,600 was calculated by first allocating the reacquisition price to the beneficial conversion feature, measured based on its intrinsic value at the date of extinguishment, with the residual amount allocated to the Subordinated Bridge Notes.
An entity controlled by the Company's chief executive officer was a holder of a $10,000 Subordinated Bridge Note and holds a warrant, issued in connection with such note, to purchase 28 shares of the Company's common stock.
(h) $150,000 Senior Subordinated Notes
On February 10, 2004, the Company completed the sale of $150,000 of 8.75% Bonds, due 2012 in a private placement to qualified institutional buyers. Net proceeds from this offering amounted to $145,950 which was net of underwriters' commissions of $4,050. Of the net proceeds, $125,259 was used to repay all of the outstanding indebtedness and related financing fees under the senior credit facilities (Note 6(a)) and $9,180 was used to prepay the outstanding 9% Subordinated Notes and related
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prepayment penalties (Note 6 (c)). The Company retained the remaining unused proceeds for Bond offering expenses and general corporate purposes.
The Bonds accrue interest from the date of their issuance, or February 10, 2004, at the rate of 8.75% per year. Interest on the Bonds will be payable semi-annually in arrears on each February 15 and August 15, commencing on August 15, 2004. The Company may redeem the
Bonds, in whole or in part, at any time on or after February 15, 2008, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest. In addition, prior to February 15, 2007, the Company may redeem up to 35% of the aggregate principal amount of the Bonds issued with the proceeds of qualified equity offerings at a redemption price equal to 108.75% of the principal amount, plus accrued and unpaid interest. If the Company experiences a change of control, it may be required to offer to purchase the Bonds at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest.
The Bonds are unsecured and are subordinated in right of payment to all of the Company's existing and future senior debt, including the guarantee of all borrowings under the Company's senior credit facilities. The Bonds are effectively subordinated to all existing and future liabilities, including trade payables, of those subsidiaries that do not guarantee the Bonds.
The Bonds are guaranteed by all of the Company's domestic subsidiaries that are guarantors or borrowers under the senior credit facilities which excludes its subsidiary IMN in New Jersey. The guarantees are general unsecured obligations of the guarantors and are subordinated in right of payment to all existing and future senior debt of the applicable guarantors, which includes their guarantees of, and borrowings under the Company's senior credit facilities. See Note 18 for guarantor financial information.
The indenture governing the Bonds contains covenants that will limit the Company's ability and the ability of its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem stock, make investments, sell assets, incur liens, enter into agreements restricting its subsidiaries' ability to pay dividends, enter into transactions with affiliates and consolidate, merge or sell all or substantially all of the Company's assets. These covenants are subject to certain exceptions and qualifications.
(i) Maturities of Long-Term Debt
The following is a summary of the maturities of long-term debt outstanding on December 31, 2003:
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(7) Capital Leases
The Company's subsidiary IMN maintains a capital lease for its warehouse and distribution facility, which expires in July 2008 and is renewable for two successive five-year periods. This lease was classified as a capital lease as a result of a sale-leaseback transaction that IMN entered into prior to it being acquired by the Company. The aggregate monthly minimum payments remaining under this capital lease are $2,643 as of December 31, 2003. In addition, the Company has various other capital leases for certain machinery and equipment and computer equipment that expire at various dates through 2006, with remaining aggregate monthly minimum payments of $121. The following is a schedule of the future minimum lease payments under the capital leases, together with the present value of such payments as of December 31, 2003:
2004 $ 14,055 2005 548 2006 300 2007 100 2008 26,000 Thereafter 133,834 174,837 Less: Unamortized original issue discount (944 ) $ 173,893
2004 $ 636 2005 609 2006 593 2007 585 2008 341 Total future minimum lease payments 2,764 Less: Imputed interest (476 ) Present value of future minimum lease payments 2,288 Less: Current portion (457 ) $ 1,831
At December 31, 2003, the capitalized amounts of the building, machinery and equipment and computer equipment under the capital leases were as follows:
The amortization expense of assets recorded under capital leases is included in depreciation and amortization expense of property, plant and equipment.
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(8) Postretirement Benefit Plans
(a) Employee Savings Plans
The Company and several of its U.S. based subsidiaries sponsor various 401(k) savings plans, to which eligible domestic employees may voluntarily contribute a portion of their income, subject to statutory limitations. In addition to the participants' own contributions to these 401(k) savings plans, the Company matches such contributions up to a designated level. Prior to the split-off from IMT, the Company's employees, at their option, participated in IMT's 401(k) savings plan which had similar terms to the Company's current plans. The Company's results for 2001 prior to the split-off from IMT include allocations of IMT's matching contribution related to its 401(k) savings plan, which allocations have been made in accordance with SAB No. 55 (Note 1). Total matching contributions related to employee savings plans were $308, $125 and $15 in 2003, 2002 and 2001, respectively.
(b) UK Pension Plans
The Company's subsidiary in England, Unipath Ltd., adopted a pension plan (the "Unipath Pension Scheme") in December 2002. The Unipath Pension Scheme consists of two parts: (i) the defined benefit section (the "Defined Benefit Plan"), and (ii) the defined contribution section (the "Defined Contribution Plan"). Employees of Unipath Ltd. were allowed to join the Unipath Pension Scheme starting on December 1, 2002.
As part of the purchase agreement of the Unipath business, the Company agreed to establish a new defined benefit pension plan for the acquired employees based in England, who are former participants of the Unilever pension plan (the "Acquired UK Employees"), and to continue to accumulate benefits under such plan for a period of at least three years after the acquisition date of the Unipath business. Consequently, the Defined Benefit Plan was established as part of the Unipath Pension Scheme, which covers the Acquired UK Employees during the last two years of the three year post-acquisition period starting on December 1, 2002. During the first year of the three year post-acquisition period through November 2002, the Acquired UK Employees continued to accumulate benefits under the Unilever pension plan, to which Unipath Ltd. contributed $1,919 in that period.
At the time of the acquisition, pursuant to SFAS No. 87, Employer's Accounting for Pensions , and SFAS No. 88, Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits , the Company recorded an unfunded pension liability of $3,685 as part of the purchase price of the Unipath business (withdrawal obligation). Such unfunded pension liability represented the excess of the benefit obligation, or $20,485, over the fair value of the plan assets, or $16,800, initially allocated by Unilever to the plan assets for the benefit of the Acquired UK Employees. As some of the Acquired UK Employees were terminated under the Company's restructuring plan upon acquisition, the unfunded pension liability initially recorded by the Company, or $3,685, was reduced by the portion of these employees' severance pay-out that represented pension benefits, or $1,051, which was reclassified to severance costs for purposes of aggregating the purchase price of the Unipath business (Note 4(f)).
The Acquired UK Employees may also elect, at their option, to transfer contributions and benefits from the Unilever pension plan to the Defined Benefit Plan. The Company believes that the UK Defined Benefit Plan is no less favorable to the Acquired UK Employees than Unilever's plan and the Company intends to maintain this benefit for a period of three years from the acquisition date.
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Machinery, laboratory equipment and tooling $ 152 Buildings 2,186 Computer equipment 22 2,360 Less: Accumulated amortization (673 ) $ 1,687
Nevertheless, the Company and Unilever are currently engaged in litigation over this issue and the outcome of such litigation cannot be estimated at this time.
As of December 31, 2003, the number and identities of Acquired UK Employees who may elect to transfer their contributions and benefits to the Defined Benefit Plan are unknown. In addition, the current dispute between Unilever and the Company over certain terms of the Defined Benefit Plan could affect the amount of withdrawal obligation, if any, required by the Company, if and when the Acquired UK Employees elect to transfer their contributions and benefits from Unilever's pension plan. Therefore, the withdrawal obligation of the Company for such Acquired UK Employees, if any, who will elect to participate in and transfer their pension assets from Unilever's pension plan to the Defined Benefit Plan was not estimable at December 31, 2003. As a result, the remaining pension liability balance of $2,634, that was initially recorded as part of the purchase price of the Unipath business and included in other liabilities in the accompanying consolidated balance sheet, may need to be adjusted upon settlement of the disputed terms of the plan and the election by the Acquired UK Employees to transfer their contributions and benefits from Unilever's pension plan to the Defined Benefit Plan, if any.
The Defined Benefit Plan is contributory and is established solely for the purpose of substituting Unilever's pension plan for the Acquired UK Employees. Therefore, only Acquired UK Employees are eligible to join the Defined Benefit Plan. At the end of 2004, the end of the three year post-acquisition period, the Defined Benefit Plan will be frozen and all participants will be transferred into the Defined Contribution Plan while their accumulated benefits and plan assets remain in the Defined Benefit Plan. Until then, only new employees are eligible to participate in the Defined Contribution Plan. In 2003, Unipath Ltd. contributed $172 to the Defined Contribution Plan, which was recognized as an expense in the accompanying consolidated statement of operations. In 2002, contributions into the Defined Contribution Plan were nominal.
Because the Defined Benefit Plan had only been operating for one month during 2002, changes in benefit obligations and plan assets and net amount recognized in the accompanying consolidated financial statements during 2002 and at December 31, 2002 were nominal. The following table sets
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forth an analysis of the changes in the benefit obligation, the plan assets and the funded status of the Defined Benefit Plan during 2003:
The net amount recognized in the accompanying consolidated balance sheet that relates to the Defined Benefit Plan during 2003 consists of:
Change in benefit obligation Benefit obligation at beginning of year $ 171
Service cost 1,481
Interest cost 62
Plan participants' contributions 559
Actuarial loss 445
Benefits paid (151 )
Benefit obligation at end of year $ 2,567 Change in plan assets Fair value of plan assets at beginning of year $ 155
Actual return on plan assets 37
Employer contribution 1,364
Plan participants' contributions 559
Benefits paid (151 )
Fair value of plan assets at end of year $ 1,964 Funded status $ (603 ) Unrecognized net actuarial loss 472
Net amount recognized $ (131 )
Accrued benefit liability $ (565 )
The measurement date used to determine plan assets and benefit obligations for the Defined Benefit Plan was December 31, 2003. Accumulated benefit obligation for the Defined Benefit Plan amounted to $2,530 at December 31, 2003.
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The following table provides the weighted-average actuarial assumptions:
The actuarial assumptions are reviewed on an annual basis. The overall expected long-term rate of return on plan assets assumption was determined based on historical investment return rates on portfolios with a high proportion of equity securities.
The annual cost of the Defined Benefit Plan is as follows:
The plan assets of the Defined Benefit Plan comprise of a mix of stocks and fixed income securities and other investments. At December 31, 2003, these stocks and fixed income securities represented 55% and 23%, respectively, of the market value of the pension assets. The trustee of the Defined Benefit Plan has adopted a long-term investment strategy of investing 37.5% in UK equities, 37.5% in equities outside of the UK and 25% in corporate bonds. The plan assets are being switched to these allocations as market opportunities arise. In addition, the funding objective is to maintain a funding level of at least 100% on an ongoing basis.
Unipath Ltd. expects to contribute approximately 800 British Pounds Sterling (or $1,424 at December 31, 2003) to the Defined Benefit Plan in 2004, subject to the withdrawal obligation if and when the Acquired UK Employees elect to transfer from Unilever's pension plan and the Company's settlement on the terms of the Defined Benefit Plan with Unilever.
(c) Orgenics Severance Obligations
Israeli law provides that employers have certain severance obligations to employees in Israel. Orgenics' liability for severance pay pursuant to such law is provided by insurance policies and severance pay funds. Severance expenses were $127, $96 and $12 during 2003, 2002 and 2001, respectively. As of December 31, 2003, Orgenics had made fund payments in excess of the liability by $7, which was included in prepaid expenses and other current assets in the accompanying balance sheet. The balance of unfunded severance liability was $10 at December 31, 2002, which the Company had accrued for on that date.
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France has a government-run mandatory pension plan to which contributions are made monthly by both the employee and employer based on the employee's gross monthly salary. Orgenics' liability for its employees in France is fully covered by these contributions. In addition, pursuant to industry employment agreements, a lump-sum severance is payable upon retirement to employees still in the service of Orgenics' French subsidiary at the date of retirement. There were no such obligations outstanding as of December 31, 2003 and 2002.
Accumulated other comprehensive income 434 Net amount recognized $ (131 )
Assumptions used to determine benefit obligations at December 31, 2003 Discount rate 5.50 % Rate of compensation increase 4.25 % Assumptions used to determine net periodic benefit cost in 2003
Discount rate 5.70 % Expected return on plan assets 6.20 % Rate of compensation increase 3.80 %
Service cost $ 1,481 Interest cost 62 Expected return on plan assets (64 ) Net periodic benefit cost $ 1,479
(9) Derivative Instrument
The Company entered into an interest rate swap agreement with one of its lenders, effective February 25, 2002, which was intended to protect the Company's long-term debt on which interest is charged at the LIBOR against fluctuation in such rate. Under the interest rate swap agreement, the LIBOR is set at a minimum of 3.36% and a maximum of 5.00%. Because the interest rate swap agreement did not qualify as a hedge for accounting purposes under SFAS No. 133 and related amendments, the Company recorded income of $528 and expense of $1,223 during 2003 and 2002, respectively, to mark to market this interest rate swap agreement. The adjustment to fair value of the interest rate swap agreement was recorded as a component of interest expense in the accompanying consolidated statements of operations and the fair value was included as a component of accrued expenses and other current liabilities in the accompanying consolidated balance sheets.
(10) Commitments and Contingencies
(a) Operating Leases
The Company has operating lease commitments for certain of its facilities and equipment that expire on various dates through 2027. The following schedule outlines future minimum annual rental payments under these leases at December 31, 2003:
Rent expense relating to operating leases was approximately $5,755, $4,311 and $1,029 during 2003, 2002 and 2001, respectively.
The operations of the Unipath business in England are currently housed in a 150 square foot manufacturing, research and office facility in Bedford, England. The lease of this facility is between Unilever and a third party landlord and the Unipath business in England continues to use the facility pursuant to an agreement with Unilever in connection with the acquisition. Future minimum annual rent payments under this facility lease range from 1,460 British Pounds Sterling to 1,560 British Pounds Sterling (approximately $2,599 to $2,777) with upward adjustments every 5 years, but only to the extent
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the rent is below market rate. The lease expires in December 2021. Unilever has agreed to use its best efforts to obtain the landlord's consent, which consent is required under the lease agreement and cannot be unreasonably withheld, so it may assign the lease to the Company for its remaining term. Because the Company is required to pay all amounts owed under the lease, as agreed upon at the acquisition, it has included in the table above all future minimum lease payments under this facility lease. If Unilever is unable to successfully assign the lease to the Company or otherwise enable the Company to realize the benefit of its lease of the Bedford facility, the Company may be forced to renegotiate a lease of this facility on substantially less favorable terms, seek alternative, more costly means of producing its products or suffer other adverse effects to its business.
(b) Capital Expenditure Commitments
At December 31, 2003, the Company had total outstanding non-cancelable equipment purchase commitments of $2,084.
(c) Legal Proceedings
Because of the nature of its business, the Company may be subject at any particular time to consumer product claims or various other lawsuits arising in the ordinary course of its business, including employment matters, and expects that this will continue to be the case in the future. Such lawsuits generally seek damages, sometimes in substantial amounts, for personal injuries or other commercial or employment claims. Potential product liability claims may exceed the amount of the Company's insurance coverage or may be excluded from coverage under the terms of the policy. There can be no assurance that existing insurance can be renewed at a cost and level of coverage comparable to that presently in effect, if at all. In the event that the Company is held liable for a claim, against which it is not indemnified or for damages exceeding the limits of its insurance coverage, such liability could have a material adverse effect on its business, financial condition and results of operations.
In addition, the Company aggressively defends its patent and other intellectual property rights. This often involves bringing infringement
2004 $ 6,422 2005 5,557 2006 4,963 2007 4,713 2008 4,231 Thereafter 40,361 $ 66,247
or other commercial claims against third parties, which can be expensive and result in counterclaims challenging the validity of the Company's patents and other rights. In addition, a final ruling on such counterclaims against the Company could have a material adverse impact on its sales, operations or financial performance.
The Company previously had several lawsuits pending against Pfizer Inc. and certain other parties including Princeton BioMeditech ("PBM") alleging, among other things, that pregnancy tests manufactured or sold by the defendants infringe patents owned by the Company. In early June 2003, the Company settled the litigation against Pfizer. However, its claims against PBM, a co-defendant in one of the infringement suits against Pfizer and the subject of two other related infringement suits initiated by the Company, remain active. PBM has brought several counterclaims against the Company. The counterclaims allege, among other things, that the Company has breached various obligations to PBM arising out of a joint venture with the Company. The Company believes that it has strong defenses to all of the counterclaims and is defending them vigorously.
In February 2004, Quidel Corporation was served in Germany with a suit that the Company's subsidiary, Inverness Medical Switzerland, GmbH ("IMS"), had filed in January 2004 seeking damages
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and injunction for infringement of certain of the Company's patents. In response, on February 20, 2004, Quidel named the Company and its subsidiaries IMS and ABI as defendants in a suit filed by Quidel. Quidel alleges that the Company is infringing its patent that was issued in 1990 titled "Lateral Flow, Non-Bibulous Membrane Assay Protocols." Quidel also asked the Court for a declaratory finding that Quidel does not infringe certain patents owned by IMS and certain other patents owned by co-defendant Armkel LLC and that these patents are invalid and/or unenforceable. Quidel seeks injunctive relief and damages, and has indicated its intent to file a motion for preliminary injunction, the scope of which has not been disclosed. In early March, 2004, the Company filed an answer claiming that Quidel's claims are without merit and a counterclaim seeking damages and injunctive relief for Quidel's infringement of these patents. The Company also filed a separate action against Quidel in the same court alleging infringement of certain other patents and seeking injunctive relief and damages. The Company intends to vigorously defend the Quidel claims and vigorously prosecute the infringement counterclaims and separate claims to enforce its intellectual property rights.
(d) Orgenics Royalty Commitment
Orgenics has received participation payments in programs sponsored by the Chief Scientist of the Ministry of Industry and Commerce of Israel (the "Chief Scientist") for the support of its research and development projects. In the event that development of the products in which the Chief Scientist participates is successful, Orgenics will be obligated to pay royalties at the rate of 2.0% to 3.5% of the sales of products developed with funds provided by the Chief Scientist, up to an amount equal to 100% of the Chief Scientist's participation payments to such projects. The balance of the maximum contingent royalty as of December 31, 2003 and 2002 was $200. Orgenics does not have any liability to the State of Israel for amounts received in support of unsuccessful programs or unsaleable products. During 2001, Orgenics paid $169 in royalties to the Chief Scientist. There were no royalties paid during 2003 and 2002.
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(11) Earnings Per Share
The following table sets forth the computation of basic and diluted income (loss) per share:
2003
2002
2001
Numerator: Income (loss) from continuing operations $ 11,974 $ (18,987 ) $ (24,789 )
Dividends, redemption interest and amortization of beneficial conversion feature related to Series A Preferred Stock (Note 12(b)) (958 ) (11,948 ) —
Income (loss) from continuing operations available to common stockholders 11,016 (30,935 ) (24,789 )
Income from discontinued operations — — 58
Income (loss) before accounting change available to common stockholders 11,016 (30,935 ) (24,731 )
Cumulative effect of a change in accounting principle — (12,148 ) —
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The Company had the following potential dilutive securities outstanding on December 31, 2003: (a) options and warrants to purchase an aggregate of 800 shares of the Company's common stock at a weighted average exercise price of $22.87 per share, and (b) Series A Preferred Stock convertible into an aggregate of 416 shares of the Company's common stock. Such potential dilutive securities were not included in the calculation of diluted income per share in 2003 because the inclusion thereof, together with the add back of the Series A Preferred Stock redemption interest and dividends, would be antidilutive.
The Company had the following potential dilutive securities outstanding on December 31, 2002: (a) options and warrants to purchase an aggregate of 3,553 shares of the Company's common stock at a weighted average exercise price of $14.65 per share, (b) Series A Preferred Stock convertible into an aggregate of 646 shares of the Company's common stock, (c) 3% Convertible Notes convertible into an aggregate of 344 shares of the Company's common stock, (d) 1,214 shares of unvested restricted common stock issued to certain executive officers, and (e) 16 shares of common stock held in escrow. Potential dilutive securities were not included in the computation of diluted loss per share in 2002 because the inclusion thereof would be antidilutive.
The Company had the following potential dilutive securities outstanding on December 31, 2001: (a) options and warrants to purchase an aggregate of 2,576 shares of the Company's common stock at a weighted average exercise price of $12.85 per share, (b) Series A Preferred Stock convertible into an aggregate of 3,990 shares of the Company's common stock, (c) 1,818 shares of unvested restricted common stock issued to certain executive officers, and (d) 32 shares of common stock held in escrow. Potential dilutive securities were not included in the computation of diluted loss per share in 2001 because the inclusion thereof would be antidilutive.
Net income (loss) available to common stockholders—basic 11,016 (43,083 ) (24,731 ) Interest related to convertible debt 180 — —
Net income (loss) available to common stockholders—diluted $ 11,196 $ (43,083 ) $ (24,731 ) Denominator:
Denominator for basic income (loss) per share—weighted average shares (Note 2(k)) 15,711 9,940 6,368
Effect of dilutive securities: — — Employee stock options 635 — — Warrants 213 — — Restricted stock and escrow shares 931 — — Convertible promissory notes 344 — —
Potential dilutive common shares 2,123 — —
Denominator for dilutive income (loss) per share—adjusted weighted average shares and assumed conversions 17,834 9,940 6,368
Income (loss) per share—basic: Income (loss) from continuing operations $ 0.70 $ (3.11 ) $ (3.89 ) Income from discontinued operations — — 0.01
Income (loss) before accounting change 0.70 (3.11 ) (3.88 ) Cumulative effect of a change in accounting principle — (1.22 ) —
Net income (loss) $ 0.70 $ (4.33 ) $ (3.88 ) Income (loss) per share—diluted: Income (loss) from continuing operations $ 0.63 $ (3.11 ) $ (3.89 ) Income from discontinued operations — — 0.01
Income (loss) before accounting change 0.63 (3.11 ) (3.88 ) Cumulative effect of a change in accounting principle — (1.22 ) —
Net income (loss) $ 0.63 $ (4.33 ) $ (3.88 )
(12) Stockholders' Equity
In this note, all amounts pertaining to shares and share prices for all securities issued or granted prior to the Company's split-off from IMT in November 2001 have been restated assuming the stock split described in Note 1, as if the split-off from IMT had occurred on the dates such securities were issued.
(a) Common Stock
As of December 31, 2003, the Company had 50,000 shares of common stock, $0.001 par value, authorized, of which 19,640 shares were issued and outstanding, 416 shares were reserved for issuance upon conversion of outstanding Series A Preferred Stock, 344 shares were reserved for issuance upon conversion of outstanding 3% Convertible Notes, 3,985 shares were reserved for issuance upon grant and exercise of stock options under current stock option plans and 712 shares were reserved for issuance upon exercise of outstanding warrants.
(b) Preferred Stock
As of December 31, 2003, the Company had 5,000 shares of preferred stock, $0.001 par value, authorized, of which 2,667 shares were designated as Series A Preferred Stock, $0.001 par value. On March 6, 2002, the Company sold to private investors 532 shares of Series A Preferred Stock at $39.01
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per share for gross proceeds of $20,750. On December 20, 2001, the Company sold to private investors 1,995 shares of Series A Preferred Stock at $30.00 per share for gross proceeds of $59,850 to help finance its acquisition of the Unipath business (Note 4(f)). The private investors of the December 2001 issuance include certain directors of the Company and entities affiliated with such directors and the Company's chief executive officer, who in the aggregate purchased 627 shares of Series A Preferred Stock. The number of shares of common stock to be issued upon any voluntary conversion of one share of Series A Preferred Stock is equal to such number as is determined by dividing $30.00 by the conversion price in effect at the time of conversion. As of December 31, 2003, the conversion price was $15.00, subject to adjustment. Accordingly, each share of Series A Preferred Stock was convertible into two shares of common stock at December 31, 2003. During 2003 and 2002, 115 and 2,204 shares of Series A Preferred Stock were converted into 230 and 4,408 shares of the Company's common stock and 208 shares of Series A Preferred Stock remained outstanding as of December 31, 2003.
Starting on the second anniversary of the original issue date, the Company had the right to convert any remaining Series A Preferred Stock into common stock in the event that the average closing price of its common stock exceeds $20 for any consecutive 30 trading day period. Consequently, as of January 14, 2004, the Company converted all remaining outstanding shares of the Series A Preferred Stock into shares of common stock at a conversion rate of two shares of common stock per share of Series A Preferred Stock.
Each share of Series A Preferred Stock accrued dividends on a quarterly basis at $2.10 per annum, but only on those trading days when the closing price of the Company's common stock is less than $15.00. As a result, the Company accrued dividends of $33 and $326 during 2003 and 2002, respectively, which reduced earnings available to common stockholders in the computation of earnings per share (Note 11). No dividends were recorded in 2001, as the Company's stock price did not close below $15.00 during the period in 2001, in which Series A Preferred Stock were outstanding. Dividends accrued were payable only if declared by the board of directors. No dividends were declared by the board of directors prior to the conversion of all outstanding shares of Series A Preferred Stock on January 14, 2004. In addition, the Company's senior credit agreement currently prohibits it from paying dividends (Note 6(a)).
The effective purchase price for the shares of common stock underlying the Series A Preferred Stock issued on March 6, 2002 and December 20, 2001 represented a discount of $2.70 (or 12%) and $2 (or 11.8%), respectively, to the fair value of the Company's common stock on the respective issuance dates. In accordance with EITF Issue No. 98-5 and EITF Issue No. 00-27, the Company recorded a beneficial conversion feature in the form of a discount on the two issuances of Series A Preferred Stock of $2,867 and $7,980, respectively, which was being amortized to accumulated deficit over the redemption period (as discussed below). The amortization of this discount reduces earnings available to common stockholders in the computation of earnings per share. In 2003 and 2002, the Company amortized $509 and $9,575, respectively, of such discount, of which $362 and $8,811, respectively, represented acceleration of amortization due to conversions of Series A Preferred Stock. The total amount of the discount amortized in 2001 was not material to the Company's consolidated financial statements. Upon the conversions of the remaining outstanding Series A Preferred Stock on January 14, 2004, the remaining unamortized discount of $739 was accelerated and charged to accumulated deficit.
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Because the Series A Preferred Stock could have been redeemed upon a vote by the holders of at least 66 2 / 3 % of the outstanding shares on or after June 30, 2011, the Company classified the outstanding Series A Preferred Stock outside of stockholders' equity in the accompanying
consolidated balance sheets and statements of stockholders' equity and comprehensive income (loss). The redemption price per share of Series A Preferred Stock would have been equal to $30.00 plus accrued redemption interest calculated at 5% per annum from the date of issuance. The Company recorded accrued redemption interest of $415 and $2,048 in 2003 and 2002, respectively, which reduced earnings available to common stockholders in the computation of earnings per share. The amount of the accrued redemption interest in 2001 was not material to the Company's consolidated financial statements.
The holders of Series A Preferred Stock have liquidation preferences over the holders of the Company's common stock and other classes of stock, if any, outstanding at the time of liquidation. Upon liquidation, the holders of outstanding Series A Preferred Stock would receive an amount equal to $30 per share of Series A Preferred Stock, subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization, plus any undeclared or unpaid dividends.
Each holder of Series A Preferred Stock has two votes for every one share of Series A Preferred Stock, which is currently equal to the number of common shares if converted. The holders of Series A Preferred Stock shall vote together with the holders of the Company's common stock as a single class.
(c) Stock Options and Awards
In 2001, the Company adopted the 2001 Stock Option and Incentive Plan (the "2001 Plan") which allows for the issuance of up to 5,324 shares of common stock and other awards, as amended. The 2001 Plan is administered by the Compensation Committee of the Board of Directors in order to select the individuals eligible to receive awards, determine or modify the terms and conditions of the awards granted, accelerate the vesting schedule of any award and generally administer and interpret the 2001 Plan. The key terms of the 2001 Plan permit the granting of incentive or nonqualified stock options with a term of up to ten years and the granting of stock appreciation rights, restricted stock awards, unrestricted stock awards, performance share awards and dividend equivalent rights. The 2001 Plan also provides for option grants to non-employee directors and automatic vesting acceleration of all options and stock appreciation rights upon a change in control, as defined by the 2001 Plan. As of December 31, 2003, there are 587 shares available for future grant under the 2001 plan.
On August 15, 2001, the Company sold to its chief executive officer 1,168 shares of restricted common stock at a price of $9.13 per share. Two-thirds of the restricted stock, or 779 shares, vest ratably over 36 months; the remaining one-third, or 389 shares, vests ratably over 48 months. Except for the par value of the common stock, which was paid in cash, the chief executive officer purchased the restricted stock with a five-year promissory note, which, for accounting purposes, was treated as a non-recourse note. The total interest under the promissory note is fully recourse to the Company's chief executive officer. The balance of the promissory note is recorded as a note receivable and is classified in stockholders' equity in the accompanying consolidated balance sheets. The note is due and payable on August 16, 2006 and bears interest at an annual rate of 4.99%. Interest income recorded under this note amounted to $532, $532 and $200 in 2003, 2002 and 2001, respectively. The Company accounted for this arrangement pursuant to FIN No. 44, EITF Issue No. 95-16, Accounting for Stock Compensation Arrangements with Employer Loan Features under APB Opinion No. 25 , and EITF Issue
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No. 00-23, Issues Related to Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44 . Accordingly, on November 20, 2001, the date on which this arrangement was approved by the stockholders, the Company measured total compensation expense to be approximately $10,595 based on the intrinsic value of the stock on that date. The amount of compensation expense is deferred and amortized ratably over the vesting periods of the restricted stock because, under the terms of the original restricted stock agreement, the Company could repurchase unvested shares at cost in certain circumstances. In February 2002, the terms of the restricted stock agreement were amended, pursuant to which the Company may repurchase unvested shares at the then fair value in certain circumstances. Also, in connection with this amendment, the chief executive officer surrendered 50 shares of his nonqualified stock options in the Company. Because the repurchase rights on unvested shares are at fair value subsequent to the amendment in February 2002, the Company fully amortized the remaining portion of the deferred compensation expense associated with the restricted stock in 2002. Amortization of deferred compensation related to this restricted stock arrangement was $10,145 and $451 in 2002 and 2001, respectively, which was recorded as stock-based compensation in the accompanying consolidated statements of operations. Additionally, this amendment resulted in a new measurement date for this security. In the event that the employee ceases employment with the Company prior to the full vesting of this security, additional compensation expense would be recorded.
In August 2001, the Company granted two nonqualified stock options to purchase an aggregate of 779 shares of common stock at an exercise price of $6.20 per share to two other key executive officers. These options were set to expire on January 31, 2002. In December 2001, the executive officers exercised these options (one fully; one partially) by paying cash in the amount of par value and delivering promissory notes for the difference, as permitted pursuant to the terms of the original grant. For accounting purposes, the promissory notes were treated as non-recourse notes. The balance of the promissory notes is recorded as a note receivable and classified in stockholders' equity in the accompanying consolidated balance sheets. The notes are due and payable on December 4, 2006 and bear interest at an annual rate of 3.97%, the applicable federal rate for a five-year note in effect during the month of exercise. Interest income recorded under these notes amounted to $160, $160 and $12 in 2003, 2002 and 2001, respectively. Shares issued upon exercise vest ratably over 36 months. Under certain circumstances, the Company may repurchase unvested shares at the then fair value. One of these executive officers exercised the option for only a portion of the underlying shares; as a result, in accordance with the terms of the original option agreement, the Company granted a replacement option to this executive officer for the remaining unexercised shares with an exercise price equal to the fair value of the common
stock on the date of grant. The Company accounted for these arrangements under FIN No. 44, EITF Issue Nos. 95-16 and 00-23. Accordingly, on November 20, 2001, the date on which these arrangements were approved by the stockholders, the Company measured total compensation expense to be $9,346 based on the intrinsic value of the stock on that date. Because the repurchase rights on unvested shares are at fair value, the Company recorded the full intrinsic value as stock-based compensation in the accompanying consolidated statements of operations in 2001.
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The Company also granted immediately after the effective date of the split-off from IMT options to purchase an additional 389 shares of common stock to these two key executive officers. These options vest ratably over four years and expire 10 years from the date of grant. The exercise price per share was equal to the fair value of the Company's common stock on the date of grant. The options permit exercise for cash, the Company's shares paid for at least 6 months prior to the exercise date or with proceeds from a promissory note that will contain terms that are substantially the same as those described above.
In connection with the Former Credit Agreements (Note 6(f)), the Company's chief executive officer was required to enter into a lock up agreement with the bank, pursuant to which he was restricted in the trading of the Company's securities for various specified periods and amounts. The lock up agreement has since been terminated as a result of the prepayments of outstanding borrowings under the Former Credit Agreements. In consideration of his entry into this lock up agreement, the Company granted the chief executive officer an option to acquire 115 shares of the Company's common stock at $17.15 per share (the fair value of the Company's common stock on the date of grant). Simultaneously, an entity controlled by the Company's chief executive officer also received a warrant to purchase 385 shares of the Company's common stock. The Company determined that the entity controlled by the Company's chief executive officer and the chief executive officer himself should be viewed as one in the same as 1) this entity's participation in the financing was on the same basis and terms as all other investors, 2) only the Company's chief executive officer and this entity were required to enter into lockup agreements with the bank, and 3) only the Company's chief executive officer and his family are owners of this entity. Accordingly, the Company accounted for these warrants issued in accordance with APB Opinion No. 25. As a result, no compensation expense was recorded as these options had no intrinsic value.
Upon the split-off and merger in November 2001, each outstanding IMT stock option (the "IMT Options") was exchanged for an option to purchase shares of the Company's common stock (the "Company Options") at an exchange ratio of 0.20 and an option to purchase shares of Johnson & Johnson common stock at an exchange ratio of 0.5395. The new exercise prices of the Company Options and the Johnson and Johnson options were determined based on the relative fair values of the Johnson & Johnson common stock and the Company's common stock on the first trading day immediately after the split-off and merger, taking into consideration the relative exchange ratios. The per share numbers and exercise prices of stock options granted prior to the split-off and merger date in the following tables have been restated to reflect the exchange of the IMT Options for the Company Options, as if each exchange occurred on the grant date of the applicable IMT Option.
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The following summarizes all stock option activity during each of the years ended December 31:
The following represents additional information related to stock options outstanding and exercisable at December 31, 2003:
2003
2002
2001
Options
Weighted Average Exercise
Price
Options
Weighted Average Exercise
Price
Options
Weighted Average Exercise
Price
Outstanding at January 1 2,754 $ 14.84 1,955 $ 12.77 886 $ 2.06 Granted 1,090 18.71 1,116 17.72 2,335 12.68
Exercised (271 ) 11.49 (140 ) 4.97 (1,121 ) 12.04
Terminated (175 ) 24.62 (177 ) 17.95 (145 ) 6.55 Outstanding at December 31 3,398 $ 15.85 2,754 $ 14.84 1,955 $ 12.77 Exercisable at December 31 1,591 $ 14.10 1,134 $ 12.25 775 $ 7.55
Outstanding
Exercisable
Weighted Average
Remaining
Number of Weighted Average Number of
Weighted Average
(d) Warrants
Upon the split-off from IMT in November 2001, each outstanding IMT warrant (the "IMT Warrants") was exchanged for a warrant to purchase shares of the Company's common stock (the "Company Warrants") at an exchange ratio of 0.20 and a warrant to purchase shares of Johnson and Johnson common stock at an exchange ratio of 0.5935. The new exercise prices of the Company Warrants and the Johnson and Johnson warrants were determined based on the relative fair values of
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the Johnson & Johnson common stock and the Company's common stock on the first trading day immediately after the split-off and merger, taking into consideration the relative exchange ratios. The per share numbers and exercise prices of warrants issued prior to the split-off and merger date in the following tables have been restated to reflect the exchange of the IMT Warrants for the Company Warrants, as if each exchange occurred on the issuance date of the applicable IMT Warrant.
The following is a summary of all warrant activity during the three years ended December 31, 2003:
The following represents additional information related to warrants outstanding and exercisable at December 31, 2003:
Exercise Price
Shares
Contract Life
Exercise Price
Shares
Exercise Price
$0.75 10 1.79 $ 0.75 10 $ 0.75 1.24-1.80 160 3.32 1.46 160 1.46 1.88-2.68 108 5.42 2.42 108 2.42 2.89-4.32 14 4.23 3.96 14 3.96 4.38-6.48 37 3.82 4.82 37 4.82 6.67-9.60 148 8.44 9.34 50 8.88 10.85-16.20 1,585 8.32 15.15 671 15.03 16.32-24.20 1,254 7.78 19.93 502 19.07 25.40-35.47 65 7.87 27.47 22 28.72 39.59-48.94 11 3.43 42.60 11 42.60 59.58-70.93 3 5.02 65.47 3 65.47 106.39-139.72 2 3.76 117.88 2 117.88 165.96 1 3.91 165.96 1 165.98 3,398 7.69 $ 15.85 1,591 $ 14.10
Number of Shares
Exercise Price
Weighted Average Exercise Price
Warrants outstanding and exercisable, December 31, 2000 140 $ 0.75-7.55 $ 3.18 Granted 525 0.001-21.28 15.06 Exercised (44 ) 3.02-7.55 5.06 Warrants outstanding and exercisable, December 31, 2001 621 0.75-21.28 13.09 Granted 238 10.90-13.54 13.10 Exercised (58 ) 0.75-7.50 0.94 Cancelled (1 ) 6.23 6.23 Warrants outstanding and exercisable, December 31, 2002 800 0.001-21.28 13.98 Granted 10 9.89-23.76 19.01 Exercised (97 ) 0.001-22.57 2.46 Cancelled (1 ) 15.84 15.84 Warrants outstanding and exercisable, December 31, 2003 712 $ 3.81-23.76 $ 15.62
Outstanding and Exercisable
Exercise Price
Number of Shares
Weighted Average
Remaining Contract Life
Weighted Average
Exercise Price
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The majority of the warrants included in the table above were issued in connection with debt and equity financings, or amendments thereto, of which warrants to purchase an aggregate of 428 shares of the Company's common stock were issued to officers and directors of the Company or entities controlled by these officers and directors and were outstanding at December 31, 2003. The value of warrants issued in connection with debt financings have yielded original issue discounts and additional interest expense of $206 in 2003, $492 in 2002 and $103 for the period from the split-off and merger date through December 31, 2001. The Company believes that its equity classification is appropriate for all outstanding warrants, pursuant to the provisions of EITF Issue No. 00-19, Determination of Whether Share Settlement Is within the Control of the Issuer for Purposes of Applying EITF Issue No. 96-13, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock .
(e) Employee Stock Purchase Plan
In 2001, the Company adopted the 2001 Employee Stock Purchase Plan under which eligible employees are allowed to purchase shares of the Company's common stock at a discount through periodic payroll deductions. Purchases may occur at the end of every six month offering period at a purchase price equal to 85% of the market value of the Company's common stock at either the beginning or end of the offering period, whichever is lower. The Company may issue up to 500 shares of common stock under this plan. At December 31, 2003, 92 shares had been issued under this plan.
(f) Executive Bonus Plan
In 2001, the Company adopted a stockholder approved executive bonus plan (the "Executive Bonus Plan") which was amended in February 2002. Pursuant to the Executive Bonus Plan, as amended, certain key executives of the Company are entitled to receive, on an annual basis, option grants to be awarded at fair value on date of grants if shares of the Company's common stock attain certain targeted prices per share. Performance determinations are to be made at the end of each calendar year, starting with December 31, 2002 and ending with December 31, 2005. The maximum number of shares for which options may be granted under the Executive Bonus Plan, as amended, is 713. No performance targets have been achieved as of December 31, 2003.
(13) Other Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income , establishes standards for the reporting and display of comprehensive income. In general, comprehensive income combines net income and other changes in equity during the year from non-owner sources. Accumulated other comprehensive income is recorded as a component of stockholders' equity. The following is a summary of the components of and
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changes in accumulated other comprehensive income as of December 31, 2003 and in each of the three years then ended:
$3.81-5.57 10 6.54 $ 4.77 7.37-10.90 44 8.43 10.70 11.55-17.15 597 4.83 15.87 17.98-23.76 61 7.31 18.51 712 5.29 $ 15.62
Cumulative Translation Adjustment (Note 2(b))
Pension Liability
Adjustment (Note 8(b))
Other(i)
Accumulated Other Comprehensive
Income(ii)
Balance at December 31, 2000 $ 766 $ — $ — $ 766 Period change 901 — — 901 Balance at December 31, 2001 1,667 — — 1,667 Period change 2,224 — — 2,224 Balance at December 31, 2002 3,891 — — 3,891 Period change 5,627 (434 ) 136 5,329
(i)
Balance at December 31, 2003 $ 9,518 $ (434 ) $ 136 $ 9,220
The balance of $136, included in other comprehensive income, represents unrealized gains on available-for-sales securities. The aggregate fair value of such securities was insignificant and was included in prepaid expenses and other current assets in the accompanying consolidated balance sheet at December 31, 2003.
(ii) All of the components of accumulated other comprehensive income relate to the Company's foreign subsidiaries. No adjustments for income taxes were recorded against other comprehensive income as the Company intends to permanently invest in its foreign subsidiaries in the foreseeable future.
(14) Income Taxes
The Company's income tax provision in 2003 and 2002 mainly represents those recorded by its foreign subsidiaries Unipath Limited in England and Inverness Medical Switzerland GmbH in Switzerland and its U.S. subsidiary, Wampole. In 2001, the income tax provision represented mainly those recorded by Inverness Medical, Inc. ("IMI"). Income or (loss) from continuing operations before income taxes consists of the following:
For federal and some state income tax filing purposes, the results of IMI's operations were consolidated with IMT's through the date of the split-off and merger (November 21, 2001). IMI has stand-alone tax filing responsibilities in some states. Prior to the split-off from IMT, the tax accounts maintained by IMI and the Company's other subsidiaries were computed using the separate return method. IMT had been in a net loss position and, accordingly, paid virtually no income taxes in any jurisdiction. Prior to the split-off from IMT, IMI had a tax sharing agreement with IMT, under which
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IMT agreed to pay all of IMI's tax liabilities (or offset these liabilities via IMT's net operating loss carryforwards) until IMI's cumulative taxable income (beginning January 1, 1998) exceeded $15,500. Once IMI's cumulative taxable income passed this threshold, IMI was required to pay a dividend to IMT equal to 40% of the amount that exceeded the threshold. Pursuant to this agreement, IMI recorded a capital contribution from IMT for taxes paid by IMT or offset via IMT's net operating loss carryforward. Upon the split-off from IMT, this agreement was cancelled.
The Company's primary temporary differences that give rise to the deferred tax asset and liability are nondeductible reserves and accruals and differences in bases of the tangible and intangible assets. The income tax effects of these temporary differences are as follows:
2003
2002
2001
United States $ (16 ) $ (24,377 ) $ (13,686 ) Foreign 13,159 8,073 (8,969 ) $ 13,143 $ (16,304 ) $ (22,655 )
December 31,
2003
2002
Deferred tax assets: Net operating loss (NOL) and capital loss carryforwards $ 34,107 $ 13,791
Tax credit carryforwards 833 —
Nondeductible reserves 7,020 4,419
Nondeductible accruals 9,132 6,106
Nondeductible stock-based compensation — 192
Difference between book and tax bases of tangible assets 595 1,160
Difference between book and tax bases of intangible assets 20,313 29,171 Gross deferred tax asset 72,000 54,839
Valuation allowance (66,747 ) (48,405 )
As of December 31, 2003, the Company had approximately $73,762 of domestic operating loss carryforwards and $20,556 of foreign net operating loss and foreign capital loss carryforwards, which either expire on various dates through 2023 or can be carried forward indefinitely. These loss carryforwards are available to reduce future federal and foreign taxable income, if any. These loss carryforwards are subject to review and possible adjustment by the appropriate taxing authorities. The valuation allowance relates to the Company's U.S. net operating losses and deferred tax assets and certain other foreign deferred tax assets and is recorded based upon the uncertainty surrounding their realizability, as these assets can only be realized via profitable operations in the respective tax jurisdictions.
In accordance with SFAS No. 109, the accounting for the tax benefits of acquired deductible temporary differences, which are not recognized at the acquisition date because a valuation allowance is established and which are recognized subsequent to the acquisitions, will be applied first to reduce to
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zero any goodwill and other noncurrent intangible assets related to the acquisitions. Any remaining benefits would be recognized as a reduction of income tax expense. As of December 31, 2003, $22,525 of the Company's deferred tax asset pertains to acquired companies, the future benefits of which will be applied first to reduce to zero any goodwill and other noncurrent intangible assets related to the acquisitions, prior to reducing the Company's income tax expense. Included in the valuation allowance, is approximately $1,612 related to certain operating loss carryforwards resulting from the exercise of employee stock options, the tax benefit of which, when recognized, will be accounted for as a credit to additional paid-in capital rather than a reduction of income tax.
No amount for U.S. income tax has been provided on undistributed earnings of the Company's foreign subsidiaries because the Company considers such earnings to be indefinitely reinvested. In the event of distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes, subject to an adjustment, if any, for foreign tax credits, and foreign withholding taxes payable to certain foreign tax authorities. Determination of the amount of U.S. income tax liability that would be incurred is not practicable because of the complexities associated with this hypothetical calculation; however, unrecognized foreign tax credit carryforwards may be available to reduce some portion of the U.S. tax liability, if any.
The following table presents the components of the Company's provision for income taxes:
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Deferred tax asset $ 5,253 $ 6,434 Deferred tax liabilities: Difference between book and tax bases of tangible assets $ 6,116 $ 4,110
Difference between book and tax bases of intangible assets 3,002 5,255
Deferred tax liability $ 9,118 $ 9,365
Net deferred tax liability $ 3,865 $ 2,931
2003
2002
2001
Current— Federal $ — $ — $ 1,062
State 419 322 620
Foreign 1,465 2,357 33 1,884 2,679 1,715 Deferred— Federal — — 320
State — — 99
Foreign (715 ) 4 — (715 ) 4 419 Total tax provision $ 1,169 $ 2,683 $ 2,134
The following table presents a reconciliation from the U.S. statutory tax rate to the Company's effective tax rate from continuing operations:
(15) Financial Information by Segment
Under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group is composed of the chief executive officer and members of senior management. The Company's reportable segments are Consumer Products (comprised of the operating segments, consumer diagnostic products and vitamins and nutritional supplements), Professional Diagnostic Products, and Corporate and Other.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on EBITDA. EBITDA is presented below because the Company believes that it is a useful indicator of its performance and ability to meet debt service and capital expenditure requirements. It allows investors and management to evaluate and compare the Company's operating results from continuing operations from period to period in a meaningful and consistent manner in addition to standard financial measurements under generally accepted accounting principles ("GAAP"). Management internally evaluates the performance of its businesses using EBITDA measures. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to cash flow from operating activities or net income, as a measure of liquidity or as an indicator of operating performance or any measure of performance derived in accordance with GAAP. The Company's calculation of EBITDA may be different from the calculation used by other companies and, accordingly, comparability may be limited.
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Revenues are attributed to geographic areas based on where the customer is located. Segment information for 2003, 2002, and 2001 are as follows:
2003
2002
2001
Statutory rate 35 % (34 )% (34 )% Effect of losses and expenses not benefited 1 17 5 Rate differential on foreign earnings (22 ) (12 ) 2 Research and development benefit (6 ) — — State income taxes, net of federal benefit 3 2 2 Change in valuation allowance (2 ) 44 34 Effective tax rate 9 % 17 % 9 %
2003
Consumer Products
Professional Diagnostic Products
Corporate and Other
Total
Net revenue to external customers $ 206,219 $ 90,198 $ — $ 296,417 EBITDA 26,706 14,507 (3,817 ) 37,396 Depreciation and amortization 10,944 4,495 146 15,585 Interest income 220 58 765 1,043 Interest expense 1,280 2,628 5,803 9,711 Provision for income taxes 1,333 857 (1,021 ) 1,169 Income (loss) from continuing operations 13,369 6,585 (7,980 ) 11,974 Stock-based compensation 92 12 343 447 Assets 286,166 253,207 4,095 543,468 Expenditures for property, plant and equipment 7,408 3,166 561 11,135
2002
Consumer Products
Professional Diagnostic Products
Corporate and Other
Total
Net revenue to external customers $ 173,741 $ 34,305 $ — $ 208,046 EBITDA 9,085 6,166 (7,601 ) 7,650 Depreciation and amortization 7,771 2,090 447 10,308 Interest income 287 29 1,107 1,423 Interest expense 5,249 1,702 8,118 15,069
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Income (loss) from continuing operations includes the following non-cash or unusual items. No adjustments to EBITDA have been made for these items.
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Provision for income taxes 2,024 823 (164 ) 2,683 Loss (income) from continuing operations (5,672 ) 1,580 (14,895 ) (18,987 ) Charge related to asset impairment 12,682 — — 12,682 Stock-based compensation — — 10,625 10,625 Assets 220,714 107,698 29,334 357,746 Expenditures for property, plant and equipment 4,420 1,475 182 6,077
2001
Consumer Products
Professional Diagnostic Products
Corporate and Other
Total
Net revenue to external customers $ 36,677 $ 10,591 $ — $ 47,268 EBITDA 5,537 (1,475 ) (21,567 ) (17,505 ) Depreciation and amortization 2,083 431 727 3,241 Interest income 89 11 285 385 Interest expense— External 1,117 205 703 2,025 To IMT 115 — 154 269
Total interest expense 1,232 205 857 2,294 Provision for income taxes 1,966 18 150 2,134 Income (loss) from continuing operations 345 (2,118 ) (23,016 ) (24,789 ) Charge for in-process research and development 6,980 — — 6,980 Stock-based compensation — — 10,441 10,441 Income from discontinued operations — — 58 58 Assets 194,322 42,024 42,175 278,521 Expenditures for property, plant and equipment 2,372 394 828 3,594
2003
2002
2001
Reconciliation of EBITDA to Income (Loss) from Continuing Operations EBITDA $ 37,396 $ 7,650 $ (17,505 ) Depreciation and amortization expense (15,585 ) (10,308 ) (3,241 ) Interest expense, net of interest income (8,668 ) (13,646 ) (1,909 ) Income taxes (1,169 ) (2,683 ) (2,134 ) Income (loss) from continuing operations $ 11,974 $ (18,987 ) $ (24,789 )
2003
2002
2001
Non-cash stock-based compensation $ 447 $ 10,625 $ 10,441 Settlement with Unilever (3,803 ) — —Impairment of intangible assets — 12,682 —Gain from repurchase of beneficial conversion feature — (9,600 ) —Purchased in-process research and development charge — — 6,980 Total $ (3,356 ) $ 13,707 $ 17,421
2003
2002
2001
Revenue by Geographic Area United States $ 189,263 $ 111,774 $ 33,269 Europe 71,099 69,373 6,800 Other 36,055 26,899 7,199
(16) Transactions with Inverness Medical Technology, Inc. and Affiliates
(a) Management services
For the periods prior to the split-off from IMT, the results of the Company's subsidiary, IMI, include expenses that represent cross-charges to it by IMT. Such cross-charges include, among other things, support services such as financial, computer, legal, sales, marketing, customer support and accounting, as well as rent and administrative costs. IMI recorded cross-charges from IMT of approximately $3,033 during 2001, through November 21, 2001, the date of split-off and merger, which it believes approximates arm's-length costs.
The charges by IMT to IMI, which are included in the respective captions in the accompanying consolidated statement of operations for 2001, are made up of the following:
(b) Loans from IMT
In February 1997, in connection with IMI's purchase of the nutritional supplement product line from American Home Products (now known as Wyeth), IMI borrowed $2,000 from IMT. Interest was accruing at an annual rate of 6.5%. Interest expense on this note, which is included in the accompanying statements of operations, was $115 during 2001.
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At December 31, 2000, the Company's Irish subsidiary, CDIL, had a note payable balance plus accrued interest totaling approximately $2,208 due to IMT under a loan agreement originally dated July 1, 1997, as amended. Interest was accruing at an annual rate of 9%. Interest expense on this note, which is included in the accompanying statements of operations, was $183 during 2001.
As discussed in Note 1, upon the split-off and merger in November 2001, IMT and its affiliates forgave all outstanding balances due from the Company and the Company's affiliates. The forgiveness of this indebtedness, or $10,369, was recorded as a component of the capital contribution from IMT.
(c) Transition Services Agreement with IMT
Prior to the split-off from IMT, the Company entered into transition services agreements, whereby it would provide certain transition services to IMT and IMT affiliates for an agreed-upon period of time and service fee. Transition services primarily included management services provided by IMI and product packaging services provided by CDIL related to certain diabetes businesses and products. Since the split-off from IMT, IMI has charged approximately $152, $1,910 and $181 during 2003, 2002 and 2001, respectively, in transition service fees to IMT, which it believes to approximate arm's-length costs. These fees reduced the Company's general and administrative expenses during the respective periods. Since the split-off from IMT, CDIL has generated $5,108 and $1,059 during 2002 and 2001, respectively, in net product sales under its packaging service contract with an affiliate of IMT. The transition services provided by IMI and CDIL terminated in February 2003 and July 2002, respectively.
$ 296,417 $ 208,046 $ 47,268
December 31,
2003
2002
Long-lived Tangible Assets by Geographic Area United States $ 28,458 $ 23,272 United Kingdom 22,981 18,333 Ireland 3,557 3,194 Other 2,003 1,230 $ 56,999 $ 46,029
Cost of sales $ 208 Research and development 23 Sales and marketing 1,365 General and administrative 1,437 $ 3,033
(d) Discontinued Operations
Pursuant to the Merger Agreement and related agreements in connection with the split-off from IMT, the Company transferred to IMT those entities or businesses that conduct business in the diabetes segment, principally the Can-Am subsidiary of IMI and the diabetes business of IMB. As discussed in Note 1, the accompanying consolidated financial statements reflect the transfer of the diabetes businesses by the Company as discontinued operations.
The accompanying consolidated statement of operations for 2001 include income from discontinued operations, through November 21, 2001, the date of the split-off and merger, as follows:
F-66
(17) Valuation and Qualifying Accounts
The Company has established reserves against accounts receivable for doubtful accounts, product returns, discounts and other allowances. The activity in the table below includes all accounts receivable reserves. Provisions for doubtful accounts are recorded as a component of general and administrative expenses. Provisions for returns, discounts and other allowances are charged against net product sales. The following table sets forth activities in the Company's accounts receivable reserve accounts:
In connection with its acquisitions of the Unipath business, IMN and Ostex, the Company recorded restructuring costs as part of the respective aggregate purchase prices in accordance with EITF Issue No. 95-3. The following table sets forth the aggregate restructuring costs and balances recorded in connection with the restructuring activities of the acquired businesses:
(18) Guarantor Financial Information
The Company issued $150,000 in Bonds to qualified institutional investors in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") and outside the United States in compliance with Regulation S of the Securities Act (Note 6(h)). The Company's payment obligations under the Bonds are guaranteed by certain of the Company's domestic subsidiaries (the "Guarantor Subsidiaries"). The guarantee is full and unconditional. Separate financial statements of the Guarantor Subsidiaries are not presented because the Company's management has determined that they would not be material to investors in the Bonds. The following supplemental financial
Net product sales $ 30,749 Cost of sales 22,606
Gross profit 8,143 Operating expenses 6,634
Operating income 1,509 Other expenses, net (689 )
Income before income taxes 820 Provision for income taxes 762
Net income from discontinued operations $ 58
Balance at Beginning of
Period
Provision
Amounts Charged Against Reserves
Balance at End of Period
Year ended December 31, 2001 $ 1,742 $ 10,590 $ (9,737 ) $ 2,595 Year ended December 31, 2002 2,595 19,979 (15,527 ) 7,047 Year ended December 31, 2003 7,047 20,108 (16,545 ) 10,610
Balance at Beginning of
Period
Costs Included in Purchase
Price
Amounts Paid
Balance at End of Period
Year ended December 31, 2001 $ — $ 2,340 $ — $ 2,340 Year ended December 31, 2002 2,340 3,406 (3,474 ) 2,272 Year ended December 31, 2003 2,272 3,632 (1,952 ) 3,952
information sets forth, on a consolidating basis, the statements of operations and cash flows for each of the three years in the period ended December 31, 2003 and the balance sheets as of December 31, 2003 and 2002 for the Company (the "Issuer"), the Guarantor Subsidiaries and the Company's other subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial information reflects the investments of the Company and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting.
The Company has extensive transactions and relationships between various members of the consolidated group. These transactions and relationships include inter-company pricing agreements, intellectual property royalty agreements and general and administrative and research and development cost sharing agreements. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
F-67
The Company's 2001 financial statements were audited by Arthur Andersen LLP who has ceased operations. Accordingly, the 2001 condensed consolidating financial information that follows is presented as unaudited upon the reliance of the SEC staff's guidance given in staff speech during the American Institute of Certified Public Accountants' Annual National Conference on Current SEC Developments in December 2003.
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003
F-68
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2002
Issuer
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
Net product sales $ 22,717 $ 111,264 $ 195,973 $ (43,265 ) $ 286,689 License revenue — 401 9,327 — 9,728
Net Revenue 22,717 111,665 205,300 (43,265 ) 296,417 Cost of sales 19,964 70,158 119,996 (41,998 ) 168,120
Gross profit 2,753 41,507 85,304 (1,267 ) 128,297 Operating expenses: Research and development 486 1,652 22,142 — 24,280 Sales and marketing 2,062 22,141 27,502 — 51,705 General and administrative 7,397 6,906 21,149 — 35,452 Stock-based compensation 447 — — — 447
Total operating expenses 10,392 30,699 70,793 — 111,884
Operating (loss) income (7,639 ) 10,808 14,511 (1,267 ) 16,413 Equity in earnings (losses) of subsidiaries, net of tax 18,136 — — (18,136 ) —Interest expense, including amortization of discounts (Note 6) (3,711 ) (2,518 ) (4,560 ) 1,078 (9,711 Other income (expense), net 5,239 202 2,078 (1,078 ) 6,441
Income (loss) before income taxes 12,025 8,492 12,029 (19,403 ) 13,143 Provision for income taxes 51 777 185 156 1,169 Net income (loss) $ 11,974 $ 7,715 $ 11,844 $ (19,559 ) $ 11,974
Guarantor Non-Guarantor
F-69
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001 (unaudited)
Issuer
Subsidiaries
Subsidiaries
Eliminations
Consolidated
Net product sales $ 22,755 $ 47,823 $ 165,576 $ (34,513 ) $ 201,641 License revenue — — 6,405 — 6,405
Net Revenue 22,755 47,823 171,981 (34,513 ) 208,046 Cost of sales 18,732 28,593 100,053 (31,778 ) 115,600
Gross profit 4,023 19,230 71,928 (2,735 ) 92,446 Operating expenses: Research and development 1,074 116 13,281 — 14,471 Sales and marketing 2,229 13,586 23,729 — 39,544 General and administrative 6,269 2,921 18,876 — 28,066
Charge related to asset impairment (Noted 5) — 12,682 — — 12,682
Stock-based compensation (Note 12(c)) 10,625 — — — 10,625
Total operating expenses 20,197 29,305 55,886 — 105,388
Operating (loss) income (16,174 ) (10,075 ) 16,042 (2,735 ) (12,942 Equity in (losses) earnings of subsidiaries, net of tax (18,174 ) — — 18,174 —Interest expense, including amortization of discounts (Note 6) (8,039 ) (194 ) (7,244 ) 408 (15,069 Other income (expense), net 11,088 120 907 (408 ) 11,707
(Loss) income before income taxes (31,299 ) (10,149 ) 9,705 15,439 (16,304 (Benefit) provision for income taxes (164 ) 325 2,551 (29 ) 2,683
(Loss) income before cumulative effect of a change in accounting principle (31,135 ) (10,474 ) 7,154 15,468 (18,987
Cumulative effect of a change in accounting principle (Note 5) — (12,148 ) — — (12,148
Net (loss) income $ (31,135 ) $ (22,622 ) $ 7,154 $ 15,468 $ (31,135
Issuer
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
Net product sales $ 1,836 $ 31,390 $ 23,332 $ (9,290 ) $ 47,268 License revenue — — — — —
Net Revenue 1,836 31,390 23,332 (9,290 ) 47,268 Cost of sales 1,752 20,463 13,317 (8,870 ) 26,662
Gross profit 84 10,927 10,015 (420 ) 20,606 Operating expenses:
Purchased in-process research and development (Note 4(f)) — — 6,980 — 6,980
Research and development 12 — 1,798 — 1,810 Sales and marketing 362 3,920 3,736 — 8,018
F-70
CONSOLIDATING BALANCE SHEET December 31, 2003
General and administrative 4,675 3,900 3,127 — 11,702
Stock-based compensation (Notes 1 and 12(c)) 10,441 — — — 10,441
Total operating expenses 15,490 7,820 15,641 — 38,951
Operating (loss) income (15,406 ) 3,107 (5,626 ) (420 ) (18,345 Equity in (losses) earnings of subsidiaries, net of tax (8,896 ) — — 8,896 —Interest expense, including amortization of discounts (Note 6) (565 ) (1,187 ) (543 ) 1 (2,294 Other income (expense), net 286 79 (2,380 ) (1 ) (2,016
(Loss) income from continuing operations before income taxes (24,581 ) 1,999 (8,549 ) 8,476 (22,655
Provision for income taxes 150 1,951 33 — 2,134
(Loss) income from continuing operations (24,731 ) 48 (8,582 ) 8,476 (24,789
Income (loss) from discontinued operations, net of taxes (Note 16(d)) — 310 (252 ) — 58
Net (loss) income $ (24,731 ) $ 358 $ (8,834 ) $ 8,476 $ (24,731
Issuer
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
ASSETS Current Assets: Cash and cash equivalents $ 1,708 $ 11,058 $ 11,856 $ — $ 24,622 Accounts receivable, net of allowances 3,915 29,505 21,998 — 55,418 Inventory 4,463 19,737 28,980 (6,137 ) 47,043 Deferred tax assets — — 1,178 — 1,178
Prepaid expenses and other current assets 1,365 1,507 7,727 — 10,599
Intercompany receivables 6,073 5,114 8,911 (20,098 ) —
Total current assets 17,524 66,921 80,650 (26,235 ) 138,860
Property, plant and equipment, net 1,199 9,631 46,169 — 56,999 Goodwill 48,704 81,907 103,181 — 233,792
Trademarks and trade name with indefinite lives — 9,092 29,027 — 38,119
Core technology and patents, net 8,193 293 27,937 — 36,423 Other intangible assets, net 6,437 14,198 7,108 — 27,743
Deferred financing costs, net, and other assets 2,015 4,150 1,292 — 7,457
Deferred tax assets 621 1,132 2,322 — 4,075 Investment in subsidiaries 207,106 — — (207,106 ) — Intercompany notes receivable 120,918 94,208 — (215,126 ) —
Total assets $ 412,717 $ 281,532 $ 297,686 $ (448,467 ) $ 543,468
F-71
CONSOLIDATING BALANCE SHEET December 31, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Current portion of long-term debt $ — $ — $ 14,055 $ — $ 14,055
Current portion of capital lease obligations — 18 439 — 457
Accounts payable 4,448 11,431 22,127 — 38,006
Accrued expenses and other current liabilities 8,641 14,879 17,602 — 41,122
Intercompany payables 6,512 8,036 5,555 (20,103 ) —
Total current liabilities 19,601 34,364 59,778 (20,103 ) 93,640 Long-term liabilities: Long-term debt 34,056 91,974 33,808 — 159,838 Capital lease obligations — 20 1,811 — 1,831 Deferred tax liabilities — 1,752 7,366 — 9,118 Other liabilities — — 3,307 — 3,307 Intercompany notes payable 83,326 57,186 74,611 (215,123 ) —
Total long-term liabilities 117,382 150,932 120,903 (215,123 ) 174,094
Series A redeemable convertible preferred stock 6,185 — — — 6,185
Stockholders' equity 269,549 96,236 117,005 (213,241 ) 269,549
Total liabilities and stockholders' equity $ 412,717 $ 281,532 $ 297,686 $ (448,467 ) $ 543,468
Issuer
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
ASSETS Current assets: Cash and cash equivalents $ 3,004 $ 16,069 $ 11,595 $ — $ 30,668 Accounts receivable, net of allowances 4,277 11,925 21,081 — 37,283 Inventory 4,759 11,285 26,167 (5,056 ) 37,155 Deferred tax assets — — 2,137 — 2,137
Prepaid expenses and other current assets 2,087 1,501 2,868 — 6,456
Intercompany receivables 12,482 20,176 14,368 (47,026 ) —
Total current assets 26,609 60,956 78,216 (52,082 ) 113,699
Property, plant and equipment, net 1,005 2,703 42,321 — 46,029 Goodwill 18,106 35,362 55,447 — 108,915
Trademarks and trade name with indefinite lives — 6,020 25,699 — 31,719
Core technology and patents, net 3,157 — 22,648 — 25,805 Other intangible assets, net — 14,784 7,590 — 22,374
Deferred financing costs, net, and other assets 2,154 787 1,967 — 4,908
Deferred tax assets 223 2,691 1,227 156 4,297
F-72
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2003
Investment in subsidiaries 169,126 — — (169,126 ) — Intercompany notes receivable 13,380 — 43,263 (56,643 ) —
Total assets $ 233,760 $ 123,303 $ 278,378 $ (277,695 ) $ 357,746
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Current portion of long-term debt $ — $ 3,750 $ 13,450 $ — $ 17,200
Current portion of capital lease obligations — — 642 — 642
Accounts payable 3,857 6,111 19,261 — 29,229
Accrued expenses and other current liabilities 5,404 13,173 20,071 — 38,648
Intercompany payables 17,465 8,775 9,009 (35,249 ) —
Total current liabilities 26,726 31,809 62,433 (35,249 ) 85,719 Long-term liabilities: Long-term debt 33,856 16,250 34,427 — 84,533 Capital lease obligations — — 2,238 — 2,238 Deferred tax liabilities — 2,915 6,450 — 9,365 Other liabilities 1,223 — 2,713 — 3,936 Intercompany notes payable — — 68,419 (68,419 ) —
Total long-term liabilities 35,079 19,165 114,247 (68,419 ) 100,072
Series A redeemable convertible preferred stock 9,051 — — — 9,051
Stockholders' equity 162,904 72,329 101,698 (174,027 ) 162,904
Total liabilities and stockholders' equity $ 233,760 $ 123,303 $ 278,378 $ (277,695 ) $ 357,746
Issuer
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
Cash Flows from Operating Activities: Net income (loss) $ 11,974 $ 7,715 $ 11,844 $ (19,559 ) $ 11,974
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) losses of subsidiaries, net of tax (18,136 ) — — 18,136 —
Interest expense related to amortization of noncash original issue discount, noncash beneficial conversion feature and deferred financing costs 454 504 607 — 1,565
Noncash gain related to interest rate swap agreement (528 ) — — — (528 ) Noncash stock-based compensation
F-73
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATING STATEMENT OF CASH FLOWS (continued)
For the Year Ended December 31, 2003
expense 447 — — — 447 Depreciation and amortization 958 3,266 11,361 — 15,585 Deferred income taxes (397 ) (1,534 ) 727 157 (1,047 )
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net 749 (9,462 ) (71 ) (429 ) (9,213 ) Inventory 295 (1,930 ) (1,573 ) 1,266 (1,942 )
Prepaid expenses and other current assets (336 ) 279 (4,045 ) — (4,102 )
Intercompany payable (receivable) 14,251 (39,188 ) 25,435 (498 ) —
Accounts payable (737 ) 3,851 1,667 1,934 6,715
Accrued expenses and other current liabilities 3,885 (6,038 ) (7,500 ) — (9,653 )
Net cash provided by (used in) operating activities 12,879 (42,537 ) 38,452 1,007 9,801
Issuer
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (497 ) (2,355 ) (8,283 ) — (11,135 )
Proceeds from sale of property, plant and equipment — 72 80 — 152
Cash paid to acquire certain assets from Abbott — (26,855 ) (29,092 ) — (55,947 )
Cash paid to acquire ABI, net of cash received (14,043 ) 1 — — (14,042 )
Cash paid to acquire Ostex, Inc, net of cash received (1,530 ) (373 ) — — (1,903 )
Cash paid to acquire Wampole Divison of MedPoint Inc (1,460 ) — — — (1,460 )
Cash paid to acquire IVC Industries, net of cash received (535 ) — — — (535 )
Cash paid to acquire Unipath, net of cash received — — (649 ) — (649 )
Cash paid to acquire other businesses and intellectual property — — (4,007 ) — (4,007 )
Decrease (increase) in other assets 719 (506 ) 183 — 396 Net cash used in investing activities (17,346 ) (30,016 ) (41,768 ) — (89,130 ) Cash Flows from Financing Activities: Cash paid for financing costs (832 ) (3,652 ) (49 ) — (4,533 )
Proceeds from issuance of common stock, net of issuance costs 4,003 — — — 4,003
Net proceeds from line of credit — 16,899 2,432 — 19,331
Net proceeds from borrowings under notes payable — 57,575 46 — 57,621
Repayments of notes payable — (3,271 ) (2,514 ) — (5,785 )
Principal payments of capital lease obligations — (9 ) (642 ) — (651 )
Net cash provided by (used in)
F-74
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2002
financing activities 3,171 67,542 (727 ) — 69,986 Foreign exchange effect on cash and cash equivalents — — 4,304 (1,007 ) 3,297 Net (decrease) increase in cash and cash equivalents (1,296 ) (5,011 ) 261 — (6,046 ) Cash and cash equivalents, beginning of year 3,004 16,069 11,595 — 30,668 Cash and cash equivalents, end of year $ 1,708 $ 11,058 $ 11,856 $ — $ 24,622
Issuer
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
Cash Flows from Operating Activities: Net (loss) income $ (31,135 ) $ (22,622 ) $ 7,154 $ 15,468 $ (31,135 )
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Equity in losses (earnings) of subsidiaries, net of tax 18,174 — — (18,174 ) —
Interest expense related to amortization of noncash original issue discount, noncash beneficial conversion feature and deferred financing costs 4,780 34 2,685 — 7,499
Noncash charge related to interest rate swap agreement 1,223 — — — 1,223
Noncash stock-based compensation expense 10,625 — — — 10,625
Noncash beneficial conversion feature related to early extinguishment of debt (9,600 ) — — — (9,600 )
Noncash charge related to asset impairment and cumulative effect of a change in accounting principle — 24,830 — — 24,830
Depreciation and amortization 570 924 8,814 — 10,308 Deferred income taxes — — 26 — 26 Other noncash items — — 354 — 354
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net (5,232 ) 5,665 415 — 848 Inventory (3,500 ) (807 ) (111 ) 2,216 (2,202 )
Prepaid expenses and other current assets 1,348 (111 ) (769 ) — 468
Intercompany (receivable) payable (2,762 ) (17,564 ) 4,462 15,864 —
Accounts payable 3,185 1,683 3,979 — 8,847
Accrued expenses and other current liabilities (11,489 ) (627 ) 1,265 489 (10,362 )
Net cash (used in) provided by operating activities (23,813 ) (8,595 ) 28,274 15,863 11,729
F-75
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATING STATEMENT OF CASH FLOWS (continued)
For the Year Ended December 31, 2002
F-76
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001 (unaudited)
Issuer
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (189 ) (377 ) (5,511 ) — (6,077 )
Proceeds from sale of property, plant and equipment — 22 1,523 — 1,545
Cash paid for purchase of the Wampole Division of MedPointe Inc. (66,708 ) — (3,900 ) — (70,608 )
Cash paid for purchase of IVC Industries, Inc., net of cash acquired (11,488 ) — 4,376 — (7,112 )
Cash paid for purchase of Unipath business, net of cash acquired (1,979 ) — (853 ) — (2,832 )
Loan to Ostex International, Inc (1,000 ) — — — (1,000 ) (Increase) decrease in other assets (564 ) 4 — — (560 )
Net cash used in investing activities (81,928 ) (351 ) (4,365 ) — (86,644 ) Cash Flows from Financing Activities: Cash paid for financing costs (1,207 ) (814 ) (1,954 ) — (3,975 )
Proceeds from issuance of common stock, net of issuance costs 35,322 — — — 35,322
Proceeds from issuance of preferred stock, net of issuance costs 20,567 — — — 20,567
Net proceeds received under revolving line of credit — — 2,649 — 2,649
Net proceeds from borrowings under notes payable 35,000 16,250 33,171 — 84,421
Repayments of notes payable (20,000 ) 3,750 (65,990 ) — (82,240 )
Principal payments of capital lease obligations — — (494 ) — (494 )
Net cash provided by (used in) financing activities 69,682 19,186 (32,618 ) — 56,250 Foreign exchange effect on cash and cash equivalents — — 13,172 (15,863 ) (2,691 ) Net (decrease) increase in cash and cash equivalents (36,059 ) 10,240 4,463 — (21,356 ) Cash and cash equivalents, beginning of year 39,063 5,829 7,132 — 52,024 Cash and cash equivalents, end of year $ 3,004 $ 16,069 $ 11,595 $ — $ 30,668
Guarantor Non-Guarantor
F-77
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIE S CONSOLIDATING STATEMENT OF CASH FLOWS (continued)
For the Year Ended December 31, 2001 (unaudited)
Issuer
Subsidiaries
Subsidiaries
Eliminations
Consolidated
Cash Flows from Operating Activities: Net (loss) income $ (24,731 ) $ 358 $ (8,834 ) $ 8,476 $ (24,731 )
Net (income) loss from discontinued operations — (310 ) 252 — (58 )
Net (loss) income, excluding discontinued operations (24,731 ) 48 (8,582 ) 8,476 (24,789 )
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Equity in losses (earnings) of subsidiaries, net of tax 8,896 — — (8,896 ) —
Interest expense related to amortization of noncash original issue discount, noncash beneficial conversion feature and deferred financing costs 431 403 5 — 839
Noncash stock-based compensation expense 10,441 — — — 10,441
Charge for in-process research and development — — 6,980 — 6,980
Depreciation and amortization 634 1,593 1,014 — 3,241 Deferred income taxes — 419 — — 419 Other noncash items — — 546 — 546
Capital contribution from Inverness Medical Technology, Inc related to income taxes for Inverness Medical, Inc — 987 — — 987
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net — 1,942 357 (543 ) 1,756 Inventory — 399 (1,585 ) 963 (223 )
Prepaid expenses and other current assets (2,086 ) (832 ) 1,101 — (1,817 )
Intercompany (receivable) payable (81,453 ) (596 ) 86,167 (4,118 ) —
Accounts payable 80 (116 ) (700 ) — (736 )
Accrued expenses and other current liabilities 13,351 2,372 (628 ) — 15,095
Due to Inverness Medical Technology, Inc. & affililates — — 2,649 — 2,649
Net cash (used in) provided by operating activities (74,437 ) 6,619 87,324 (4,118 ) 15,388 Net cash used in assets of discontinued operations — (506 ) (664 ) — (1,170 )
Issuer
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Consolidated
Cash Flows from Investing Activities:
Purchases of property, plant and
F-78
QuickLinks
PART I
ITEM 1. BUSINESS
ITEM 2. DESCRIPTION OF PROPERTY ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
equipment (780 ) (804 ) (2,010 ) — (3,594 )
Proceeds from sale of property, plant and equipment — — 141 — 141
Cash paid to acquire Unipath, net of cash received (12,895 ) 1,989 (135,248 ) — (146,154 )
(Increase) decrease in other assets (187 ) 341 (25 ) — 129 Net cash (used in) provided by investing activities (13,862 ) 1,526 (137,142 ) — (149,478 ) Cash Flows from Financing Activities: Cash paid for financing costs (33 ) — (2,163 ) — (2,196 )
Proceeds from issuance of common stock, net of issuance costs 568 — — — 568
Net proceeds from borrowings under notes payable 20,000 — 62,552 — 82,552
Repayments of notes payable — (3,513 ) (794 ) — (4,307 )
Net proceeds from sales of preferred stock 59,798 — — — 59,798
Contribution from Inverness Medical Technology, Inc. 47,029 (26 ) 656 — 47,659
Net cash provided by (used in) financing activities 127,362 (3,539 ) 60,251 — 184,074 Foreign exchange effect on cash and cash equivalents — — (3,980 ) 4,118 138 Net increase in cash and cash equivalents 39,063 4,100 5,789 — 48,952 Cash and cash equivalents, beginning of year — 1,729 1,343 — 3,072 Cash and cash equivalents, end of year $ 39,063 $ 5,829 $ 7,132 $ — $ 52,024
ITEM 9A. CONTROLS AND PROCEDURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Table of Contents REPORT OF INDEPENDENT AUDITORS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts)
Exhibit 4.3
INVERNESS MEDICAL INNOVATIONS, INC., as Issuer,
the GUARANTORS named herein, as Guarantors,
and
U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee
INDENTURE
Dated as of February 10, 2004
8 3/4% Senior Subordinated Notes due 2012
CROSS-REFERENCE TABLE
N.A. means Not Applicable
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of this Indenture.
Trust Indenture Act Indenture Section Section ------------------- --------- 310(a)(1).......................................... ...................... 7.10 (a)(2).......................................... ...................... 7.10 (a)(3).......................................... ...................... N.A. (a)(4).......................................... ...................... N.A. (a)(5).......................................... ...................... 7.08; 7.10 (b)............................................. ...................... 7.08; 7.10; 12.02 (c)............................................. ...................... N.A. 311(a)............................................. ...................... 7.11 (b)............................................. ...................... 7.11 (c)............................................. ...................... N.A. 312(a)............................................. ...................... 2.05 (b)............................................. ...................... 12.03 (c)............................................. ...................... 12.03 313(a)............................................. ...................... 7.06 (b)(1).......................................... ...................... N.A. (b)(2).......................................... ...................... 7.06 (c)............................................. ...................... 12.02 (d)............................................. ...................... 7.06 314(a)............................................. ...................... 4.16; 12.02 (b)............................................. ...................... N.A. (c)(1).......................................... ...................... 12.04 (c)(2).......................................... ...................... 12.04 (c)(3).......................................... ...................... N.A. (d)............................................. ...................... N.A. (e)............................................. ...................... 12.05 (f)............................................. ...................... 4.05 315(a)............................................. ...................... 7.01 (b)............................................. ...................... 7.05; 12.02 (c)............................................. ...................... 7.01 (d)............................................. ...................... 7.01 (e)............................................. ...................... 6.11 316(a)(last sentence).............................. ...................... 2.09 (a)(1)(A)....................................... ...................... 6.05 (a)(1)(B)....................................... ...................... 6.04 (a)(2).......................................... ...................... 9.02 (b)............................................. ...................... 6.07 (c)............................................. ...................... 9.05 317(a)(1).......................................... ...................... 6.08 (a)(2).......................................... ...................... 6.09 (b)............................................. ...................... 2.04 318(a)............................................. ...................... 12.01 (c)............................................. ...................... 12.01
TABLE OF CONTENTS
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Page ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions..................... ................................................... ......1 SECTION 1.02. Other Definitions............... ................................................... .....25 SECTION 1.03. Incorporation by Reference of Tr ust Indenture Act.................................. .....26 SECTION 1.04. Rules of Construction........... ................................................... .....27 ARTICLE TWO THE NOTES SECTION 2.01. Form and Dating................. ................................................... .....27 SECTION 2.02. Execution, Authentication and De nomination; Additional Notes; Exchange Notes....... .....28 SECTION 2.03. Registrar and Paying Agent...... ................................................... .....29 SECTION 2.04. Paying Agent To Hold Assets in T rust............................................... .....30 SECTION 2.05. Holder Lists.................... ................................................... .....30 SECTION 2.06. Transfer and Exchange........... ................................................... .....30 SECTION 2.07. Replacement Notes............... ................................................... .....31 SECTION 2.08. Outstanding Notes............... ................................................... .....31 SECTION 2.09. Treasury Notes.................. ................................................... .....31 SECTION 2.10. Temporary Notes................. ................................................... .....32 SECTION 2.11. Cancellation.................... ................................................... .....32 SECTION 2.12. Defaulted Interest.............. ................................................... .....32 SECTION 2.13. CUSIP and ISIN Numbers.......... ................................................... .....32 SECTION 2.14. Deposit of Moneys............... ................................................... .....32 SECTION 2.15. Book-Entry Provisions for Global Notes............................................. .....33 SECTION 2.16. Special Transfer and Exchange Pr ovisions........................................... .....34 ARTICLE THREE REDEMPTION SECTION 3.01. Notices to Trustee.............. ................................................... .....37 SECTION 3.02. Selection of Notes To Be Redeeme d.................................................. .....37 SECTION 3.03. Notice of Redemption............ ................................................... .....37 SECTION 3.04. Effect of Notice of Redemption.. ................................................... .....38 SECTION 3.05. Deposit of Redemption Price..... ................................................... .....39 SECTION 3.06. Notes Redeemed in Part.......... ................................................... .....39 ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Notes................ ................................................... .....39
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Page ---- SECTION 4.02. Maintenance of Office or Agency. ................................................... .....40 SECTION 4.03. Corporate Existence............. ................................................... .....40 SECTION 4.04. Payment of Taxes................ ................................................... .....40 SECTION 4.05. Compliance Certificate; Notice o f Default.......................................... .....40 SECTION 4.06. Waiver of Stay, Extension or Usu ry Laws............................................ .....41 SECTION 4.07. Change of Control............... ................................................... .....41 SECTION 4.08. Limitations on Additional Indebt edness............................................. .....43 SECTION 4.09. Limitations on Restricted Paymen ts................................................. .....45 SECTION 4.10. Limitations on Liens............ ................................................... .....47 SECTION 4.11. Limitations on Asset Sales...... ................................................... .....47 SECTION 4.12. Limitations on Transactions with Affiliates........................................ .....51 SECTION 4.13. Limitations on Dividend and Othe r Restrictions Affecting Restricted Subsidiaries... .....52 SECTION 4.14. Additional Note Guarantees...... ................................................... .....53 SECTION 4.15. Limitation on Layering Indebtedn ess................................................ .....54 SECTION 4.16. Reports to Holders.............. ................................................... .....54 SECTION 4.17. Limitations on Designation of Un restricted Subsidiaries............................ .....54 SECTION 4.18. Limitation on the Issuance or Sa le of Equity Interests of Restricted Subsidiaries.. .....56 SECTION 4.19. Conduct of Business............. ................................................... .....56 SECTION 4.20. Limitations on Sale and Leasebac k Transactions..................................... .....56 ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. Mergers, Consolidations, Etc.... ................................................... .....56 ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default............... ................................................... .....58 SECTION 6.02. Acceleration.................... ................................................... .....60 SECTION 6.03. Other Remedies.................. ................................................... .....60 SECTION 6.04. Waiver of Past Defaults......... ................................................... .....61 SECTION 6.05. Control by Majority............. ................................................... .....61 SECTION 6.06. Limitation on Suits............. ................................................... .....61 SECTION 6.07. Rights of Holders To Receive Pay ment............................................... .....62 SECTION 6.08. Collection Suit by Trustee...... ................................................... .....62 SECTION 6.09. Trustee May File Proofs of Claim ................................................... .....62 SECTION 6.10. Priorities...................... ................................................... .....62 SECTION 6.11. Undertaking for Costs........... ................................................... .....63 ARTICLE SEVEN TRUSTEE SECTION 7.01. Duties of Trustee............... ................................................... .....63 SECTION 7.02. Rights of Trustee............... ................................................... .....64
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Page ---- SECTION 7.03. Individual Rights of Trustee.... ................................................... .....65 SECTION 7.04. Trustee's Disclaimer............ ................................................... .....65 SECTION 7.05. Notice of Default............... ................................................... .....66 SECTION 7.06. Reports by Trustee to Holders... ................................................... .....66 SECTION 7.07. Compensation and Indemnity...... ................................................... .....66 SECTION 7.08. Replacement of Trustee.......... ................................................... .....67 SECTION 7.09. Successor Trustee by Merger, Etc ................................................... .....68 SECTION 7.10. Eligibility; Disqualification... ................................................... .....68 SECTION 7.11. Preferential Collection of Claim s Against the Issuer............................... .....68 ARTICLE EIGHT DISCHARGE OF INDENTURE; DEFE ASANCE SECTION 8.01. Termination of the Issuer's Obli gations............................................ .....68 SECTION 8.02. Legal Defeasance and Covenant De feasance........................................... .....69 SECTION 8.03. Conditions to Legal Defeasance o r Covenant Defeasance.............................. .....70 SECTION 8.04. Application of Trust Money...... ................................................... .....71 SECTION 8.05. Repayment to the Issuer......... ................................................... .....72 SECTION 8.06. Reinstatement................... ................................................... .....72 ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIV ERS SECTION 9.01. Without Consent of Holders...... ................................................... .....72 SECTION 9.02. With Consent of Holders......... ................................................... .....73 SECTION 9.03. Effect on Senior Debt........... ................................................... .....74 SECTION 9.04. Compliance with the Trust Indent ure Act............................................ .....74 SECTION 9.05. Revocation and Effect of Consent s.................................................. .....74 SECTION 9.06. Notation on or Exchange of Notes ................................................... .....75 SECTION 9.07. Trustee To Sign Amendments, Etc. ................................................... .....75 ARTICLE TEN SUBORDINATION OF NOTES SECTION 10.01. Notes Subordinated to Senior Deb t.................................................. .....75 SECTION 10.02. Suspension of Payment When Senio r Debt Is in Default............................... .....76 SECTION 10.03. Notes Subordinated to Prior Paym ent of All Senior Debt on Dissolution, Liquidation or Reorganization of the Issuer...................................... .....77 SECTION 10.04. Payments May Be Made on Notes... ................................................... .....78 SECTION 10.05. Holders To Be Subrogated to Righ ts of Holders of Senior Debt....................... .....78 SECTION 10.06. Obligations of the Issuer Uncond itional............................................ .....79 SECTION 10.07. Notice to Trustee............... ................................................... .....79 SECTION 10.08. Reliance on Judicial Order or Ce rtificate of Liquidating Agent..................... .....79 SECTION 10.09. Trustee's Relation to Senior Deb t.................................................. .....80 SECTION 10.10. Subordination Rights Not Impaire d by Acts or Omissions of the Issuer or Holders of Senior De bt................................................. .....80 SECTION 10.11. Holders Authorize Trustee To Eff ectuate Subordination of Notes..................... .....80
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Page ---- SECTION 10.12. This Article Ten Not To Prevent Events of Default.................................. .....81 SECTION 10.13. Trustee's Compensation Not Preju diced.............................................. .....81 ARTICLE ELEVEN NOTE GUARANTEE SECTION 11.01. Unconditional Guarantee......... ................................................... .....81 SECTION 11.02. Subordination of Note Guarantee. ................................................... .....82 SECTION 11.03. Limitation on Guarantor Liabilit y.................................................. .....82 SECTION 11.04. Execution and Delivery of Note G uarantee........................................... .....83 SECTION 11.05. Release of a Guarantor.......... ................................................... .....83 SECTION 11.06. Waiver of Subrogation........... ................................................... .....84 SECTION 11.07. Immediate Payment............... ................................................... .....84 SECTION 11.08. No Set-Off...................... ................................................... .....84 SECTION 11.09. Guarantee Obligations Absolute.. ................................................... .....84 SECTION 11.10. Guarantee Obligations Continuing ................................................... .....85 SECTION 11.11. Guarantee Obligations Not Reduce d.................................................. .....85 SECTION 11.12. Guarantee Obligations Reinstated ................................................... .....85 SECTION 11.13. Guarantee Obligations Not Affect ed................................................. .....85 SECTION 11.14. Waiver.......................... ................................................... .....86 SECTION 11.15. No Obligation To Take Action Aga inst the Issuer.................................... .....86 SECTION 11.16. Dealing with the Issuer and Othe rs................................................. .....87 SECTION 11.17. Default and Enforcement......... ................................................... .....87 SECTION 11.18. Amendment, Etc.................. ................................................... .....87 SECTION 11.19. Acknowledgment.................. ................................................... .....87 SECTION 11.20. Costs and Expenses.............. ................................................... .....88 SECTION 11.21. No Merger or Waiver; Cumulative Remedies........................................... .....88 SECTION 11.22. Survival of Guarantee Obligation s.................................................. .....88 SECTION 11.23. Guarantee in Addition to Other G uarantee Obligations............................... .....88 ARTICLE TWELVE MISCELLANEOUS SECTION 12.01. Trust Indenture Act Controls.... ................................................... .....88 SECTION 12.02. Notices......................... ................................................... .....88 SECTION 12.03. Communications by Holders with O ther Holders....................................... .....89 SECTION 12.04. Certificate and Opinion as to Co nditions Precedent................................. .....90 SECTION 12.05. Statements Required in Certifica te or Opinion...................................... .....90 SECTION 12.06. Rules by Paying Agent or Registr ar................................................. .....90 SECTION 12.07. Legal Holidays.................. ................................................... .....90 SECTION 12.08. Governing Law................... ................................................... .....90 SECTION 12.09. No Adverse Interpretation of Oth er Agreements...................................... .....91 SECTION 12.10. No Recourse Against Others...... ................................................... .....91 SECTION 12.11. Successors...................... ................................................... .....91 SECTION 12.12. Duplicate Originals............. ................................................... .....91 SECTION 12.13. Severability.................... ................................................... .....91 Signatures......................................... ................................................... ....S-1
Note: This Table of Contents shall not, for any purpose, be deemed to be part of this Indenture.
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EXHIBIT A - Form of Note EXHIBIT B - Form of Legends EXHIBIT C - Form of Certificate To Be Delive red in Connection with Transfers to Non-QIB Institution al Accredited Investors EXHIBIT D - Form of Certificate To Be Delive red in Connection with Transfers Pursuant to Regulation S EXHIBIT E - Form of Note Guarantee
INDENTURE dated as of February 10, 2004 among Inverness Medical Innovations, Inc., a Delaware corporation (the "ISSUER"), and each of the Guarantors named herein, as Guarantors, and U.S. Bank Trust National Association, a national banking corporation organized and existing under the laws of the United States of America, as Trustee (the "TRUSTEE").
The Issuer has duly authorized the creation of an issue of 8 3/4% Senior Subordinated Notes due 2012 and, to provide therefor, the Issuer and the Guarantors have duly authorized the execution and delivery of this Indenture. All things necessary to make the Notes, when duly issued and executed by the Issuer and authenticated and delivered hereunder, the valid and binding obligations of the Issuer and to make this Indenture a valid and binding agreement of the Issuer and the Guarantors has been done.
THIS INDENTURE WITNESSETH
For and in consideration of the premises and the purchase of the Notes by the Holders thereof, the parties hereto covenant and agree, for the equal and proportionate benefit of all Holders, as follows:
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
Set forth below are certain defined terms used in this Indenture.
"3% CONVERTIBLE NOTES" means those Subordinated Convertible Promissory Notes of the Issuer issued on September 20, 2002, bearing interest at the rate of 3% per annum and due on September 20, 2008.
"9% SUBORDINATED NOTES" means those Subordinated Promissory Notes of the Issuer issued on September 20, 2002, bearing interest at the rate of 9% per annum and due on September 20, 2008.
"10% SUBORDINATED NOTES" means those Subordinated Promissory Notes of the Issuer issued on September 20, 2002, bearing interest at the rate of 10% per annum and due on September 20, 2008.
"ACQUIRED INDEBTEDNESS" means (1) with respect to any Person that becomes a Restricted Subsidiary after the Issue Date, Indebtedness of such Person and its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary that was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary and (2) with respect to the Issuer or any Restricted Subsidiary, any Indebtedness of a Person (other than the Issuer or a Restricted Subsidiary) existing at the time such Person is merged with or into the Issuer or a Restricted Subsidiary, or Indebtedness expressly assumed by the Issuer or any Restricted Subsidiary in connection with the acquisition of an asset or assets from another Person, which Indebtedness was not, in any case, incurred by such other Person in connection with, or in contemplation of, such merger or acquisition.
"ADDITIONAL INTEREST" has the meaning set forth in the Registration Rights Agreement.
"AFFILIATE" of any Person means any other Person which directly or indirectly controls or is controlled by, or is under direct or indirect common control with, the referent Person. For purposes of Section 4.12, Affiliates shall be deemed to include, with respect to any Person, any other Person (1) which beneficially owns or holds, directly or indirectly, 10% or more of any class of the Voting Stock of the referent Person, (2) of which 10% or more of the Voting Stock is beneficially owned or held, directly or indirectly, by the referenced Person or (3) with respect to an individual, any immediate family member of such Person. For purposes of this definition, "CONTROL" of a Person shall mean the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.
"AGENT" means any Registrar or Paying Agent.
"AMEND" means to amend, supplement, restate, amend and restate or otherwise modify; and "AMENDMENT" shall have a correlative meaning.
"ASSET" means any asset or property.
"ASSET ACQUISITION" means:
(1) an Investment by the Issuer or any Restricted Subsidiary of the Issuer in any other Person if, as a result of such Investment, such Person shall become a Restricted Subsidiary of the Issuer, or shall be merged with or into the Issuer or any Restricted Subsidiary of the Issuer; or
(2) the acquisition by the Issuer or any Restricted Subsidiary of the Issuer of all or substantially all of the assets of any other Person or any division or line of business of any other Person.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease, assignment, license or other disposition by the Issuer or any Restricted Subsidiary to any Person other than the Issuer or any Restricted Subsidiary (including by means of a Sale and Leaseback Transaction or a merger or consolidation) (collectively, for purposes of this definition, a "TRANSFER"), in one transaction or a series of related transactions, of any assets of the Issuer or any of its Restricted Subsidiaries other than in the ordinary course of business. For purposes of this definition, the term "Asset Sale" shall not include:
(1) transfers of cash or Cash Equivalents;
(2) transfers of assets (including Equity Interests) that are governed by, and made in accordance with, Article Five;
(3) Permitted Investments and Restricted Payments permitted under Section 4.09;
(4) the creation or realization of any Permitted Lien;
(5) transfers of damaged, worn-out or obsolete equipment or assets that, in the Issuer's reasonable judgment, are no longer used or useful in the business of the Issuer or its Restricted Subsidiaries;
(6) any license of intellectual property not otherwise in the ordinary course of business, other than the license of all or substantially all of the rights associated with any intellectual
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property owned or controlled by the Issuer or any of the Restricted Subsidiaries, if (i) such rights are used or could be used in a line of business then being conducted by the Issuer or any of the Restricted Subsidiaries and (ii) such license is for all or substantially all of the remaining contractual or useful life of such intellectual property, whichever is shorter, determined as of the date such license is granted; and
(7) any transfer or series of related transfers that, but for this clause, would be Asset Sales, if after giving effect to such transfers, the aggregate Fair Market Value of the assets transferred in such transaction or any such series of related transactions does not exceed $3.0 million.
"ATTRIBUTABLE INDEBTEDNESS," when used with respect to any Sale and Leaseback Transaction, means, as at the time of determination, the present value (discounted at a rate equivalent to the Issuer's then-current weighted average cost of funds for borrowed money as at the time of determination, compounded on a semi-annual basis) of the total obligations of the lessee for rental payments during the remaining term of the lease included in any such Sale and Leaseback Transaction.
"BANKRUPTCY LAW" means Title 11 of the United States Code, as amended, or any similar federal or state law for the relief of debtors.
"BOARD OF DIRECTORS" shall mean, with respect to any Person, (i) in the case of any corporation, the board of directors of such Person, (ii) in the case of any limited liability company, the board of managers of such Person, (iii) in the case of any partnership, the Board of Directors of the general partner of such Person and (iv) in any other case, the functional equivalent of the foregoing.
"BUSINESS DAY" means a day other than a Saturday, Sunday or other day on which banking institutions in New York are authorized or required by law to close.
"CAPITALIZED LEASE" means a lease required to be capitalized for financial reporting purposes in accordance with GAAP.
"CAPITALIZED LEASE OBLIGATIONS" of any Person means the obligations of such Person to pay rent or other amounts under a Capitalized Lease, and the amount of such obligation shall be the capitalized amount thereof determined in accordance with GAAP.
"CASH EQUIVALENTS" means:
(1) marketable obligations with a maturity of 360 days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof; PROVIDED, HOWEVER, that the full faith and credit of the United States of America is pledged in support thereof;
(2) demand and time deposits and certificates of deposit or acceptances with a maturity of 180 days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $500 million and is assigned at least a "B" rating by Thomson Financial BankWatch;
(3) commercial paper maturing no more than 180 days from the date of creation thereof issued by a corporation that is not the Issuer or an Affiliate of the Issuer, and is organized under the laws of any State of the United States of America or the District of Columbia and rated at least A-1 by S&P or at least P-1 by Moody's;
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(4) repurchase obligations with a term of not more than ten days for underlying securities of the types described in clause (1) above entered into with any commercial bank meeting the specifications of clause (2) above; and
(5) investments in money market or other mutual funds substantially all of whose assets comprise securities of the types described in clauses (1) through (4) above.
"CHANGE OF CONTROL" means the occurrence of any of the following events:
(1) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause that person or group shall be deemed to have "beneficial ownership" of all securities that any such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of Voting Stock representing more than 50% of the voting power of the total outstanding Voting Stock of the Issuer;
(2) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Issuer (together with any new directors whose election to such Board of Directors or whose nomination for election by the stockholders of the Issuer was approved by a vote of the majority of the directors of the Issuer then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Issuer;
(3) (a) all or substantially all of the assets of the Issuer and the Restricted Subsidiaries are sold or otherwise transferred to any Person other than a Wholly-Owned Restricted Subsidiary or (b) the Issuer consolidates or merges with or into another Person or any Person consolidates or merges with or into the Issuer, in either case under this clause (3), in one transaction or a series of related transactions in which immediately after the consummation thereof Persons owning Voting Stock representing in the aggregate all of the total voting power of the Voting Stock of the Issuer immediately prior to such consummation do not own Voting Stock representing a majority of the total voting power of the Voting Stock of the Issuer or the surviving or transferee Person; or
(4) the Issuer shall adopt a Plan of Liquidation or dissolution or any such plan shall be approved by the stockholders of the Issuer.
"CONSOLIDATED AMORTIZATION EXPENSE" for any period means the amortization expense of the Issuer and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED CASH FLOW" for any period means, without duplication, the sum of the amounts for such period of:
(1) Consolidated Net Income; PLUS
(2) in each case only to the extent (and in the same proportion) deducted in determining Consolidated Net Income and with respect to the portion of Consolidated Net Income attributable to any Restricted Subsidiary only if a corresponding amount would be permitted at the date
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of determination to be distributed to the Issuer by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders,
(a) Consolidated Income Tax Expense,
(b) Consolidated Amortization Expense (but only to the extent not included in Consolidated Interest Expense),
(c) Consolidated Depreciation Expense,
(d) Consolidated Interest Expense, and
(e) all other non-cash items reducing the Consolidated Net Income for such period,
in each case determined on a consolidated basis in accordance with GAAP; MINUS
(3) the aggregate amount of all non-cash items, determined on a consolidated basis, to the extent such items increased Consolidated Net Income (including the reversal of accruals or reserves for charges that increased Consolidated Net Income at any time during the Four-Quarter Period ending on the Issue Date or thereafter) for such period; MINUS
(4) cash disbursements in respect of previously accrued or reserved items increasing Consolidated Cash Flow in that or prior periods.
"CONSOLIDATED DEPRECIATION EXPENSE" for any period means the depreciation expense of the Issuer and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INCOME TAX EXPENSE" for any period means the provision for taxes of the Issuer and the Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST COVERAGE RATIO" means the ratio of Consolidated Cash Flow during the Four-Quarter Period ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio (the "TRANSACTION DATE") to Consolidated Interest Expense for the Four-Quarter Period. For purposes of this definition, Consolidated Cash Flow and Consolidated Interest Expense shall be calculated after giving effect on a PRO FORMA basis for the period of such calculation to:
(1) the incurrence of any Indebtedness or the issuance of any Preferred Stock of the Issuer or any Restricted Subsidiary (and the application of the proceeds thereof) and any repayment of other Indebtedness or redemption of other Preferred Stock (and the application of the proceeds therefrom) (other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to any revolving credit arrangement) occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date, as if such incurrence, repayment, issuance or redemption, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four-Quarter Period; and
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(2) any Asset Sale or Asset Acquisition (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Issuer or any Restricted Subsidiary (including any Person who becomes a Restricted Subsidiary as a result of such Asset Acquisition) incurring Acquired Indebtedness and also including any Consolidated Cash Flow (including any pro forma expense and cost reductions calculated on a basis consistent with Regulation S-X under the Exchange Act) associated with any such Asset Acquisition) occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition (including the incurrence of, or assumption or liability for, any such Indebtedness or Acquired Indebtedness) occurred on the first day of the Four-Quarter Period.
If the Issuer or any Restricted Subsidiary directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if the Issuer or such Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed Indebtedness.
For purposes of calculating the Consolidated Interest Coverage Ratio prior to the expiration of the first Four-Quarter Period subsequent to the Issue Date, such calculation shall be on the same PRO FORMA basis as the PRO FORMA financial statements that are presented in the Offering Memorandum.
In calculating Consolidated Interest Expense for purposes of determining the denominator (but not the numerator) of this Consolidated Interest Coverage Ratio:
(1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate PER ANNUM equal to the rate of interest on this Indebtedness in effect on the Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four-Quarter Period; and
(3) notwithstanding clause (1) or (2) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Hedging Obligations, shall be deemed to accrue at the rate PER ANNUM resulting after giving effect to the operation of these agreements.
"CONSOLIDATED INTEREST EXPENSE" for any period means the sum, without duplication, of the total interest expense of the Issuer and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP and including without duplication:
(1) imputed interest on Capitalized Lease Obligations and Attributable Indebtedness;
(2) commissions, discounts and other fees and charges owed with respect to letters of credit securing financial obligations, bankers' acceptance financing and receivables financings;
(3) the net costs associated with Hedging Obligations;
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(4) amortization of debt issuance costs, debt discount or premium and other financing fees and expenses (other than the write-off of deferred debt issuance costs resulting from the initial offering of the Notes);
(5) the interest portion of any deferred payment obligations;
(6) all other non-cash interest expense;
(7) capitalized interest;
(8) the product of (a) all dividend payments on any series of Disqualified Equity Interests of the Issuer or any Preferred Stock of any Restricted Subsidiary (other than any such Disqualified Equity Interests or any Preferred Stock held by the Issuer or a Wholly-Owned Restricted Subsidiary or to the extent paid in Qualified Equity Interests), MULTIPLIED BY (b) a fraction, the numerator of which is one and the denominator of which is one MINUS the then current combined federal, state and local statutory tax rate of the Issuer and the Restricted Subsidiaries, expressed as a decimal;
(9) all interest payable with respect to discontinued operations; and
(10) all interest on any Indebtedness of any other Person guaranteed by the Issuer or any Restricted Subsidiary.
Consolidated Interest Expense shall be calculated after giving effect to Hedging Obligations (including associated costs) described in clause (1) of the definition of "Hedging Obligations," but excluding unrealized gains and losses with respect to Hedging Obligations.
"CONSOLIDATED NET INCOME" for any period means the net income (or loss) of the Issuer and the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; PROVIDED, HOWEVER, that there shall be excluded from such net income (to the extent otherwise included therein), without duplication:
(1) the net income (or loss) of any Person (other than a Restricted Subsidiary) in which any Person other than the Issuer and the Restricted Subsidiaries has an ownership interest, except to the extent that cash in an amount equal to any such income has actually been received by the Issuer or any of its Wholly-Owned Restricted Subsidiaries during such period;
(2) except to the extent includible in the consolidated net income of the Issuer pursuant to the foregoing clause (1), the net income (or loss) of any Person that accrued prior to the date that (a) such Person becomes a Restricted Subsidiary or is merged into or consolidated with the Issuer or any Restricted Subsidiary or (b) the assets of such Person are acquired by the Issuer or any Restricted Subsidiary;
(3) the net income of any Restricted Subsidiary during such period to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of that income is not permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary during such period, except that the Issuer's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining Consolidated Net Income;
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(4) for the purposes of calculating the Restricted Payments Basket only, in the case of a successor to the Issuer by consolidation, merger or transfer of its assets, any income (or loss) of the successor prior to such merger, consolidation or transfer of assets;
(5) other than for purposes of calculating the Restricted Payments Basket, any gain (or loss), together with any related provisions for taxes on any such gain (or the tax effect of any such loss), realized during such period by the Issuer or any Restricted Subsidiary upon (a) the acquisition of any securities, or the extinguishment of any Indebtedness, of the Issuer or any Restricted Subsidiary or (b) any Asset Sale by the Issuer or any Restricted Subsidiary;
(6) gains and losses due solely to fluctuations in currency values and the related tax effects according to GAAP;
(7) unrealized gains and losses with respect to Hedging Obligations; and
(8) any extraordinary or nonrecurring gain (or extraordinary or nonrecurring loss), together with any related provision for taxes on any such extraordinary or nonrecurring gain (or the tax effect of any such extraordinary or nonrecurring loss), realized by the Issuer or any Restricted Subsidiary during such period.
In addition, any return of capital with respect to an Investment that increased the Restricted Payments Basket pursuant to Section 4.09(a)(3)(v) or decreased the amount of Investments outstanding pursuant to clause (13) of the definition of "Permitted Investments" shall be excluded from Consolidated Net Income for purposes of calculating the Restricted Payments Basket.
For purposes of this definition of "Consolidated Net Income," "NONRECURRING" means any gain or loss as of any date that is not reasonably likely (as determined as of such date) to recur within the two years following such date; PROVIDED, HOWEVER, that if there was a gain or loss similar to such gain or loss within the two years preceding such date, such gain or loss shall not be deemed nonrecurring.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date, the consolidated stockholders' equity of such Person, determined on a consolidated basis in accordance with GAAP, less (without duplication) (1) any amounts thereof attributable to Disqualified Equity Interests of such Person or its Subsidiaries or any amount attributable to Unrestricted Subsidiaries and (2) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within twelve months after the acquisition of such business) subsequent to the Issue Date in the book value of any asset owned by such Person or a Subsidiary of such Person.
"CONSOLIDATED TOTAL ASSETS" means the consolidated total assets of the Issuer and the Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP as of the most recent date for which financial statements of the Issuer are available.
"CORPORATE TRUST OFFICE" means the corporate trust office of the Trustee located at 100 Wall Street, Suite 1600, New York, New York 10005, Attention: Corporate Trust Department, or such other office, designated by the Trustee by written notice to the Issuer, at which at any particular time its corporate trust business shall be administered.
"CREDIT AGREEMENT" means the Second Amended and Restated Credit Agreement dated as of September 30, 2003 by and among the Issuer, Wampole Laboratories, LLC, Inverness Medical (UK) Holdings Limited, the other Subsidiaries signatory thereto, the lenders signatory thereto, General Electric
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Capital Corporation, as administrative agent, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as documentation agent and co-syndication agent, UBS Securities LLC, as co-syndication agent, and GECC Capital Markets Group, Inc. and Merrill Lynch Capital, as co-lead arrangers, including any notes, guarantees, collateral any security documents, instruments and agreements executed in connection therewith (including Hedging Obligations related to the Indebtedness incurred thereunder), and in each case as amended or refinanced from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of borrowings or other Indebtedness outstanding or available to be borrowed thereunder) all or any portion of the Indebtedness under such agreement, and any successor or replacement agreement or agreements with the same or any other agents, creditor, lender or group of creditors or lenders.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.
"DEFAULT" means (1) any Event of Default or (2) any event, act or condition that, after notice or the passage of time or both, would be an Event of Default.
"DESIGNATED SENIOR DEBT" means (1) Senior Debt Indebtedness under or in respect of the Credit Agreement and (2) any other Indebtedness constituting Senior Debt which, in the case of clause (2), at the time of determination, (x) has an aggregate principal amount of at least $25.0 million and (y) is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt."
"DESIGNATION AMOUNT" has the meaning given to this term in Section 4.17(a)(2).
"DEPOSITORY" means The Depository Trust Company, New York, New York, or a successor thereto registered under the Exchange Act or other applicable statute or regulation.
"DISQUALIFIED EQUITY INTERESTS" of any Person means any class of Equity Interests of such Person that, by its terms, or by the terms of any related agreement or of any security into which it is convertible, puttable or exchangeable, is, or upon the happening of any event or the passage of time would be, required to be redeemed by such Person, whether or not at the option of the holder thereof, or matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, in whole or in part, on or prior to the date which is 91 days after the final maturity date of the Notes; PROVIDED, HOWEVER, that any class of Equity Interests of such Person that, by its terms, authorizes such Person to satisfy in full its obligations with respect to the payment of dividends or upon maturity, redemption (pursuant to a sinking fund or otherwise) or repurchase thereof or otherwise by the delivery of Equity Interests that are not Disqualified Equity Interests, and that is not convertible, puttable or exchangeable for Disqualified Equity Interests or Indebtedness, will not be deemed to be Disqualified Equity Interests so long as such Person satisfies its obligations with respect thereto solely by the delivery of Equity Interests that are not Disqualified Equity Interests; PROVIDED FURTHER, HOWEVER, that any Equity Interests that would not constitute Disqualified Equity Interests but for provisions thereof giving holders thereof (or the holders of any security into or for which such Equity Interests is convertible, exchangeable or exercisable) the right to require the Issuer to redeem such Equity Interests upon the occurrence of a Change of Control or an asset disposition occurring prior to the final maturity date of the Notes shall not constitute Disqualified Equity Interests if the change in control or an asset disposition provisions applicable to such Equity Interests are no more favorable to such holders than the provisions set forth in Section 4.07 and Section 4.11, respectively, and such Equity Interests specifically provide that the Issuer will not redeem any such Equity Interests pursuant to such provisions prior to the Issuer's purchase of the Notes as required pursuant to the provisions set forth in Section 4.07 and Section 4.11, respectively.
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"DOMESTIC SUBSIDIARY" means any Subsidiary of the Issuer that is not a Foreign Subsidiary; PROVIDED, HOWEVER, that Morpheus Acquisition LLC shall not be a Domestic Subsidiary for so long as it is a Subsidiary of a Foreign Subsidiary.
"EQUITY INTERESTS" of any Person means (1) any and all shares or other equity interests (including common stock, preferred stock, limited liability company interests and partnership interests) in such Person and (2) all rights to purchase, warrants or options (whether or not currently exercisable), participations or other equivalents of or interests in (however designated) such shares or other interests in such Person.
"EXCHANGE ACT" means the U.S. Securities Exchange Act of 1934, as amended.
"EXCHANGE NOTES" has the meaning set forth in the Registration Rights Agreement.
"EXCHANGE OFFER" means the offer that may be made by the Issuer pursuant to the Registration Rights Agreement to exchange Notes bearing the Private Placement Legend for the Exchange Notes.
"FAIR MARKET VALUE" means, with respect to any asset, the price (after taking into account any liabilities relating to such assets) that would be negotiated in an arm's-length transaction for cash between a willing seller and a willing and able buyer, neither of which is under any compulsion to complete the transaction, as such price is determined in good faith by the Board of Directors of the Issuer or a duly authorized committee thereof, as evidenced by a resolution of such Board of Directors or committee.
"FOREIGN RESTRICTED SUBSIDIARY" means any Foreign Subsidiary that is a Restricted Subsidiary.
"FOREIGN SUBSIDIARY" means any Subsidiary of the Issuer which (i) is not organized under the laws of (x) the United States or any state thereof or (y) the District of Columbia and (ii) conducts substantially all of its business operations outside the United States of America.
"FOUR-QUARTER PERIOD" means the most recent four consecutive full fiscal quarters of the Issuer for which financial statements are available.
"GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, as in effect on the Issue Date.
"GUARANTEE" means a direct or indirect guarantee by any Person of any Indebtedness of any other Person and includes any obligation, direct or indirect, contingent or otherwise, of such Person: (1) to purchase or pay (or advance or supply funds for the purchase or payment of) Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm's-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise); or (2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect
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thereof (in whole or in part). "GUARANTEE," when used as a verb, and "GUARANTEED" have correlative meanings.
"GUARANTOR SENIOR DEBT" means, with respect to any Guarantor, the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of such Guarantor, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes.
Without limiting the generality of the foregoing, "Guarantor Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing in respect of:
(1) all obligations of every nature of such Guarantor under, or with respect to, the Credit Agreement, including obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities (and guarantees thereof); and
(2) all Hedging Obligations in respect of the Credit Agreement;
in each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include:
(1) any Indebtedness of such Guarantor to the Issuer or any of its Subsidiaries;
(2) Indebtedness to, or guaranteed on behalf of, any director, officer or employee of the Issuer or any of its Subsidiaries (including amounts owed for compensation);
(3) obligations to trade creditors and other amounts incurred (but not under the Credit Agreement) in connection with obtaining goods, materials or services;
(4) Indebtedness represented by Disqualified Equity Interests;
(5) any liability for taxes owed or owing by such Guarantor;
(6) that portion of any Indebtedness incurred in violation of this Indenture (but, as to any such obligation, no such violation shall be deemed to exist for purposes of this clause (6) if the holder(s) of such obligation or their representative shall have received an Officers' Certificate (and/or representation or warranty) of such Guarantor to the effect that the incurrence of such Indebtedness does not (or, in the case of revolving credit indebtedness, the incurrence of the entire committed amount thereof at the date on which the initial borrowing thereunder is made would not) violate the provisions of this Indenture);
(7) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to such Guarantor; and
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(8) any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of such Guarantor.
"GUARANTORS" means each Domestic Subsidiary on the Issue Date that guarantees any Indebtedness or other Obligation under the Credit Agreement, and each other Person that is required to, or at the election of the Issuer does, become a Guarantor by the terms of the Indenture after the Issue Date, in each case, until such Person is released from its Note Guarantee in accordance with the terms of the Indenture.
"HEDGING OBLIGATIONS" of any Person means the obligations of such Person pursuant to (1) any interest rate swap agreement, interest rate collar agreement or other similar agreement or arrangement designed to alter the risks to that Person arising from fluctuations in interest rates, (2) agreements or arrangements designed to alter the risks to that Person arising from fluctuations in foreign currency exchange rates in the conduct of its operations, or (3) any forward contract, commodity swap agreement, commodity option agreement or other similar agreement or arrangement designed to protect such Person against fluctuations in commodity prices, in each case entered into in the ordinary course of business for bona fide hedging purposes and not for the purpose of speculation.
"HOLDER" means any registered holder, from time to time, of the Notes.
"INCUR" means, with respect to any Indebtedness or Obligation, incur, create, issue, assume, guarantee or otherwise become directly or, indirectly liable, contingently or otherwise, with respect to such Indebtedness or Obligation; PROVIDED, HOWEVER, that (1) the Indebtedness of a Person existing at the time such Person became a Restricted Subsidiary shall be deemed to have been incurred by such Restricted Subsidiary and (2) neither the accrual of interest nor the accretion of original issue discount shall be deemed to be an incurrence of Indebtedness.
"INDEBTEDNESS" of any Person at any date means, without duplication:
(1) all liabilities, contingent or otherwise, of such Person for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof);
(2) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;
(3) all reimbursement obligations of such Person in respect of letters of credit, letters of guaranty, bankers' acceptances and similar credit transactions;
(4) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, except trade payables and accrued expenses incurred by such Person in the ordinary course of business in connection with obtaining goods, materials or services;
(5) the maximum fixed redemption or repurchase price of all Disqualified Equity Interests of such Person;
(6) all Capitalized Lease Obligations of such Person;
(7) all Indebtedness of others secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person;
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(8) all Indebtedness of others guaranteed by such Person to the extent of such guarantee; PROVIDED, HOWEVER, that Indebtedness of the Issuer or its Subsidiaries that is guaranteed by the Issuer or the Issuer's Subsidiaries shall only be counted once in the calculation of the amount of Indebtedness of the Issuer and its Subsidiaries on a consolidated basis;
(9) all Attributable Indebtedness;
(10) to the extent not otherwise included in this definition, Hedging Obligations of such Person; and
(11) all obligations of such Person under conditional sale or other title retention agreements relating to assets purchased by such Person.
The amount of any Indebtedness which is incurred at a discount to the principal amount at maturity thereof as of any date shall be deemed to have been incurred at the accreted value thereof as of such date. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above, the maximum liability of such Person for any such contingent obligations at such date and, in the case of clause (7), the lesser of (a) the Fair Market Value of any asset subject to a Lien securing the Indebtedness of others on the date that the Lien attaches and (b) the amount of the Indebtedness secured. For purposes of clause (5), the "maximum fixed redemption or repurchase price" of any Disqualified Equity Interests that do not have a fixed redemption or repurchase price shall be calculated in accordance with the terms of such Disqualified Equity Interests as if such Disqualified Equity Interests were redeemed or repurchased on any date on which an amount of Indebtedness outstanding shall be required to be determined pursuant to the Indenture.
"INDENTURE" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof.
"INDEPENDENT DIRECTOR" means a director of the Issuer who:
(1) is independent with respect to the transaction at issue;
(2) does not have any material financial interest in the Issuer or any of its Affiliates (other than as a result of holding securities of the Issuer); and
(3) has not and whose Affiliates or affiliated firm has not, at any time during the twelve months prior to the taking of any action hereunder, directly or indirectly, received, or entered into any understanding or agreement to receive, any compensation, payment or other benefit, of any type or form, from the Issuer or any of its Affiliates, other than customary directors' fees for serving on the Board of Directors of the Issuer or any Affiliate and reimbursement of out-of-pocket expenses for attendance at the Issuer's or Affiliate's board and board committee meetings.
"INDEPENDENT FINANCIAL ADVISOR" means an accounting, appraisal or investment banking firm of recognized standing that is, in the reasonable judgment of the Issuer's Board of Directors, qualified to perform the task for which it has been engaged and disinterested and independent with respect to the Issuer and its Affiliates.
"INITIAL PURCHASERS" means UBS Securities LLC and Merrill Lynch, Pierce, Fenner & Smith, Incorporated.
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"INSTITUTIONAL ACCREDITED INVESTOR" or "IAI" means an "accredited investor" with the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
"INTEREST" means, with respect to the Notes, interest and Additional Interest, if any, on the Notes.
"INTEREST PAYMENT DATE" means the Stated Maturity of an installment of interest on the Notes.
"INVESTMENTS" of any Person means:
(1) all direct or indirect investments by such Person in any other Person in the form of loans, advances or capital contributions or other credit extensions constituting Indebtedness of such other Person, and any guarantee of Indebtedness of any other Person;
(2) all purchases (or other acquisitions for consideration) by such Person of Indebtedness, Equity Interests or other securities of any other Person (other than any such purchase that constitutes a Restricted Payment of the type described in clause (2) of the definition thereof);
(3) all other items that would be classified as investments (including purchases of assets outside the ordinary course of business) on a balance sheet of such Person prepared in accordance with GAAP; and
(4) the Designation of any Subsidiary as an Unrestricted Subsidiary.
Except as otherwise expressly specified in this definition, the amount of any Investment (other than an Investment made in cash) shall be the Fair Market Value thereof on the date such Investment is made. The amount of Investment pursuant to clause (4) shall be the Designation Amount determined in accordance with Section 4.17. If the Issuer or any Subsidiary sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary, the Issuer shall be deemed to have made an Investment on the date of any such sale or other disposition equal to the Fair Market Value of the Equity Interests of and all other Investments in such Subsidiary not sold or disposed of, which amount shall be determined by the Board of Directors. The acquisition by the Issuer or any Restricted Subsidiary of a Person that holds an Investment in a third Person shall be deemed to be an Investment by the Issuer or such Restricted Subsidiary in the third Person in an amount equal to the Fair Market Value of the Investment held by the acquired Person in the third Person. Notwithstanding the foregoing, neither (a) purchases or redemptions of Equity Interests of the Issuer nor (b) acquisitions of assets by such Person shall be deemed to be Investments.
"ISSUE DATE" means the date on which the Notes are originally issued.
"LIEN" means, with respect to any asset, any mortgage, deed of trust, lien (statutory or other), pledge, lease, easement, restriction, charge, security interest or other encumbrance of any kind or nature in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, and any lease in the nature thereof, and any filing of, or agreement to give, any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction (other than cautionary filings in respect of operating leases).
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"MAJOR FOREIGN EXCHANGE" means an exchange which is the primary non-U.S. trading location for one or more stocks included in the Morgan Stanley Capital International Europe, Australasia and Far East Index.
"MATURITY DATE" means February 15, 2012.
"MOODY'S" means Moody's Investors Service, Inc., and its successors.
"NET AVAILABLE PROCEEDS" means, with respect to any Asset Sale, the proceeds thereof in the form of cash or Cash Equivalents, net of:
(1) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel, accountants and investment banks) of such Asset Sale;
(2) provisions for taxes payable as a result of such Asset Sale (after taking into account any available tax credits or deductions and any tax sharing arrangements);
(3) amounts required to be paid to any Person (other than the Issuer or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale or having a Lien thereon;
(4) payments of unassumed liabilities (not constituting Indebtedness) relating to the assets sold at the time of, or within 90 days after the date of, such Asset Sale; and
(5) appropriate amounts to be provided by the Issuer or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any adjustment in the sale price of such asset or assets or liabilities associated with such Asset Sale and retained by the Issuer or any Restricted Subsidiary, as the case may be, after such Asset Sale, including pensions and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the Trustee; PROVIDED, HOWEVER, that any amounts remaining after adjustments, revaluations or liquidations of such reserves shall constitute Net Available Proceeds.
"NON-RECOURSE DEBT" means Indebtedness of an Unrestricted Subsidiary:
(1) as to which neither the Issuer nor any Restricted Subsidiary (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable as a guarantor or otherwise, or (c) constitutes the lender; PROVIDED, HOWEVER, that an intercompany loan from the Issuer or any Restricted Subsidiary to an Unrestricted Subsidiary shall be deemed Non-Recourse Debt if such loan at the time such Subsidiary is designated an Unrestricted Subsidiary or if made later, at the time such intercompany loan is made, was permitted under and made in compliance with Section 4.09 and
(2) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit upon notice, lapse of time or both any holder of any other Indebtedness (other than the Notes) of the Issuer or any Restricted Subsidiary to declare a default on the other Indebtedness or cause the payment thereof to be accelerated or payable prior to its Stated Maturity.
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"NON-U.S. PERSON" has the meaning assigned to such term in Regulation S.
"NOTE GUARANTEE" means the subordinated guarantee by each Guarantor of the Issuer's payment obligations under this Indenture and the Notes, executed pursuant to this Indenture.
"NOTES" means, collectively, the Issuer's 8 3/4% Senior Subordinated Notes due 2012 issued in accordance with Section 2.02 (whether issued on the Issue Date, issued as Additional Notes, issued as Exchange Notes or Private Exchange Notes, or otherwise issued after the Issue Date) treated as a single class of securities under this Indenture, as amended or supplemented from time to time in accordance with the terms of this Indenture.
"OBLIGATION" means any principal, interest, penalties, fees, indemnification, reimbursements, costs, expenses, damages and other liabilities payable under the documentation governing any Indebtedness.
"OFFERING MEMORANDUM" means the offering memorandum of the Issuer and the Guarantors relating to the Notes dated February 5, 2004.
"OFFICER" means any of the following of the Issuer: the Chairman of the Board of Directors, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Treasurer or the Secretary.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of, or counsel to, the Issuer, a Guarantor or the Trustee.
"PARI PASSU INDEBTEDNESS" means any Indebtedness of the Issuer or any Guarantor that ranks PARI PASSU in right of payment with the Notes or the Note Guarantees, as applicable.
"PERMITTED BUSINESS" means the businesses engaged in by the Issuer and its Subsidiaries on the Issue Date as described in the Offering Memorandum, businesses that are otherwise within the healthcare, life sciences or diagnostic industries and businesses that are reasonably related thereto.
"PERMITTED INVESTMENT" means:
(1) Investments by the Issuer or any Restricted Subsidiary (a) in any Restricted Subsidiary or (b) including the purchase price paid for and reasonable transaction costs related thereto, in any Person that is or will become immediately after or substantially concurrent with such Investment a Restricted Subsidiary or that will merge or consolidate into the Issuer or a Restricted Subsidiary;
(2) Investments in the Issuer by any Restricted Subsidiary;
(3) loans and advances to directors, employees and officers of the Issuer and the Restricted Subsidiaries for BONA FIDE business purposes and to purchase Equity Interests of the Issuer not in excess of $2.0 million at any one time outstanding, in addition to any such loans outstanding on the Issue Date;
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(4) Hedging Obligations incurred pursuant to Section 4.08(b)(4);
(5) cash and Cash Equivalents;
(6) receivables owing to the Issuer or any Restricted Subsidiary and payable or dischargeable in accordance with customary trade terms; PROVIDED, HOWEVER, that such trade terms may include such concessionary trade terms as the Issuer or any such Restricted Subsidiary deems reasonable under the circumstances;
(7) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers;
(8) Investments made by the Issuer or any Restricted Subsidiary as a result of consideration received in connection with an Asset Sale made in compliance with Section 4.11;
(9) lease, utility and other similar deposits in the ordinary course of business;
(10) Investments made by the Issuer or a Restricted Subsidiary for consideration consisting only of Qualified Equity Interests of the Issuer;
(11) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Issuer or any Restricted Subsidiary or in satisfaction of judgments;
(12) Investments existing on the Issue Date; and
(13) other Investments in an aggregate amount not to exceed $15.0 million at any one time outstanding (with each Investment being valued as of the date made and without regard to subsequent changes in value).
The amount of Investments outstanding at any time pursuant to clause (13) above shall be deemed to be reduced:
(a) upon the disposition or repayment of or return on any Investment made pursuant to clause (13) above, by an amount equal to the return of capital with respect to such Investment to the Issuer or any Restricted Subsidiary (to the extent not included in the computation of Consolidated Net Income), less the cost of the disposition of such Investment and net of taxes; and
(b) upon a Redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, by an amount equal to the lesser of (x) the Fair Market Value of the Issuer's proportionate interest in such Subsidiary immediately following such Redesignation, and (y) the aggregate amount of Investments in such Subsidiary that increased (and did not previously decrease) the amount of Investments outstanding pursuant to clause (13) above.
"PERMITTED JUNIOR SECURITIES" means:
(1) Equity Interests in the Issuer or any Guarantor; or
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(2) debt securities that are subordinated to (a) all Senior Debt and Guarantor Senior Debt and (b) any debt securities issued in exchange for Senior Debt, in each case, to substantially the same extent as, or to a greater extent than, the Notes and the Note Guarantees are subordinated to Senior Debt and Guarantor Senior Debt under the Indenture.
"PERMITTED LIENS" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or payable without penalty or (b) contested in good faith by appropriate proceedings and as to which the Issuer or the Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP;
(2) statutory, contractual or common law Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof;
(3) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);
(4) Liens upon specific items of inventory, equipment or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods;
(5) attachment or judgment Liens not giving rise to a Default so long as any appropriate legal proceedings which may have been duly initiated for the review of such judgment have not been finally terminated or the period within which the proceedings may be initiated has not expired;
(6) easements, rights-of-way, zoning restrictions and other similar charges, restrictions or encumbrances in respect of real property or immaterial imperfections of title which are customary or do not, in the aggregate, impair in any material respect the ordinary conduct of the business of the Issuer and the Restricted Subsidiaries taken as a whole;
(7) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents, goods covered thereby, and other assets relating to such letters of credit and products and proceeds thereof;
(8) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Issuer or any Restricted Subsidiary, including rights of offset and setoff;
(9) bankers' Liens, rights of setoff and other similar Liens existing solely with respect to cash and Cash Equivalents on deposit in one or more of accounts maintained by the Issuer or any Restricted Subsidiary, in each case granted in the ordinary course of business in favor
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of the bank or banks with which such accounts are maintained, securing amounts owing to such bank with respect to cash management and operating account arrangements, including those involving pooled accounts and netting arrangements; PROVIDED, HOWEVER, that in no case shall any such Liens secure (either directly or indirectly) the repayment of any Indebtedness;
(10) leases or subleases (or any Liens on the property related thereto) granted to others that do not materially interfere with the ordinary course of business of the Issuer or any Restricted Subsidiary;
(11) Liens arising from filing Uniform Commercial Code financing statements regarding leases;
(12) Liens securing all of the Notes and Exchange Notes and Liens securing any Note Guarantee;
(13) Liens securing Senior Debt or Guarantor Senior Debt;
(14) Liens existing on the Issue Date securing Indebtedness outstanding on the Issue Date;
(15) Liens in favor of the Issuer or a Restricted Subsidiary;
(16) Liens securing Purchase Money Indebtedness;
(17) Liens securing Acquired Indebtedness permitted to be incurred under this Indenture; PROVIDED, HOWEVER, that the Liens do not extend to assets not subject to such Lien at the time of acquisition (other than improvements thereon) and are no more favorable to the lienholders than those securing such Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by the Issuer or a Restricted Subsidiary;
(18) Liens on assets of a Person existing at the time such Person is acquired or merged with or into or consolidated with the Issuer or any such Restricted Subsidiary (and not created in anticipation or contemplation thereof);
(19) Liens to secure Refinancing Indebtedness of Indebtedness secured by Liens referred to in the foregoing clauses (14), (17) and (18); PROVIDED, HOWEVER, that in each case such Liens do not extend to any additional assets (other than improvements thereon and replacements thereof) and such Refinancing Indebtedness so secured shall not be subordinated in right of payment to any other Indebtedness;
(20) Liens to secure Attributable Indebtedness and/or that are incurred pursuant to Section 4.20; PROVIDED, HOWEVER, that any such Lien shall not extend to or cover any assets of the Issuer or any Restricted Subsidiary other than the assets which are the subject of the Sale and Leaseback Transaction in which the Attributable Indebtedness is incurred;
(21) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; and
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(22) Liens incurred in the ordinary course of business of the Issuer or any Guarantor with respect to obligations (other than Indebtedness) that do not in the aggregate exceed $2.0 million at any one time outstanding.
"PERSON" means any individual, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind.
"PLAN OF LIQUIDATION" with respect to any Person, means a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise): (1) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such Person otherwise than as an entirety or substantially as an entirety; and (2) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition of all or substantially all of the remaining assets of such Person to holders of Equity Interests of such Person.
"PREFERRED STOCK" means, with respect to any Person, any and all preferred or preference stock or other equity interests (however designated) of such Person whether now outstanding or issued after the Issue Date.
"PRINCIPAL" means, with respect to the Notes, the principal of, and premium, if any, on the Notes.
"PRIVATE EXCHANGE" has the meaning given to it in the Registration Rights Agreement.
"PRIVATE EXCHANGE NOTES" has the meaning given to it in the Registration Rights Agreement.
"PRIVATE PLACEMENT LEGEND" means the legends initially set forth on the Notes in the form set forth in EXHIBIT B.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness, including Capitalized Lease Obligations, of the Issuer or any Restricted Subsidiary incurred for the purpose of financing all or any part of the purchase price of property, plant or equipment used in the business of the Issuer or any Restricted Subsidiary or the cost of installation, construction or improvement thereof; PROVIDED, HOWEVER, that (1) the amount of such Indebtedness shall not exceed such purchase price or cost, (2) such Indebtedness shall not be secured by any asset other than the specified asset being financed or, in the case of real property or fixtures, including additions and improvements, the real property to which such asset is attached and (3) such Indebtedness shall be incurred within 90 days after such acquisition of such asset by the Issuer or such Restricted Subsidiary or such installation, construction or improvement.
"QUALIFIED EQUITY INTERESTS" means Equity Interests of the Issuer other than Disqualified Equity Interests; PROVIDED, HOWEVER, that such Equity Interests shall not be deemed Qualified Equity Interests to the extent sold or owed to a Subsidiary of the Issuer or financed, directly or indirectly, using funds (1) borrowed from the Issuer or any Subsidiary of the Issuer until and to the extent such borrowing is repaid or (2) contributed, extended, guaranteed or advanced by the Issuer or any Subsidiary of the Issuer (including in respect of any employee stock ownership or benefit plan).
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"QUALIFIED EQUITY OFFERING" means the issuance and sale of Qualified Equity Interests of the Issuer to Persons other than any other Person who is not, prior to such issuance and sale, an Affiliate of the Issuer.
"QUALIFIED INSTITUTIONAL BUYER" or "QIB" shall have the meaning specified in Rule 144A under the Securities Act.
"RECORD DATE" means the applicable Record Date specified in the Notes; PROVIDED, HOWEVER, that if any such date is not a Business Day, the Record Date shall be the first day immediately succeeding such specified day that is a Business Day.
"REDEEM" means to redeem, repurchase, purchase, defease, retire, discharge or otherwise acquire or retire for value; and "REDEMPTION" shall have a correlative meaning; PROVIDED, HOWEVER, that this definition shall not apply for purposes of Section 5 or Section 6 of the Notes or Article Three.
"REDEMPTION DATE," when used with respect to any Note to be redeemed, means the date fixed for such redemption pursuant to this Indenture and the Notes.
"REDEMPTION PRICE," when used with respect to any Note to be redeemed, means the price fixed for such redemption, payable in immediately available funds, pursuant to this Indenture and the Notes.
"REFINANCE" means to refinance, repay, prepay, replace, renew or refund.
"REFINANCING INDEBTEDNESS" means Indebtedness of the Issuer or a Restricted Subsidiary issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used substantially concurrently to redeem or refinance in whole or in part, or constituting an amendment of, any Indebtedness of the Issuer or any Restricted Subsidiary (the "REFINANCED INDEBTEDNESS"); PROVIDED, HOWEVER, that:
(1) the principal amount (or accreted value, in the case of Indebtedness issued at a discount) of the Refinancing Indebtedness does not exceed the principal amount (or accreted value, as the case may be) of the Refinanced Indebtedness plus the amount of accrued and unpaid interest on the Refinanced Indebtedness, any premium paid to the holders of the Refinanced Indebtedness and reasonable expenses incurred in connection with the incurrence of the Refinancing Indebtedness;
(2) the Refinancing Indebtedness is the obligation of the same Person as that of the Refinanced Indebtedness;
(3) if the Refinanced Indebtedness was subordinated to the Notes or the Note Guarantees, as the case may be, then such Refinancing Indebtedness, by its terms, is subordinate in right of payment to the Notes or the Note Guarantees, as the case may be, at least to the same extent as the Refinanced Indebtedness, and if the Refinanced Indebtedness was PARI PASSU with the Notes or the Note Guarantees, as the case may be, then the Refinancing Indebtedness ranks PARI PASSU with, or is subordinated to, the Notes or the Note Guarantees, as the case may be;
(4) the Refinancing Indebtedness is scheduled to mature either (a) no earlier than the Refinanced Indebtedness being repaid or amended or (b) after the maturity date of the Notes;
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(5) the portion, if any, of the Refinancing Indebtedness that is scheduled to mature on or prior to the maturity date of the Notes has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is incurred that is equal to or greater than the Weighted Average Life to Maturity of the portion of the Refinanced Indebtedness being repaid that is scheduled to mature on or prior to the maturity date of the Notes; and
(6) the Refinancing Indebtedness is secured only to the extent, if at all, and by the assets, that the Refinanced Indebtedness being repaid or amended is secured.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement dated as of February 10, 2004 among the Issuer, the Guarantors and the Initial Purchasers, as amended, supplemented or modified from time to time, and any similar agreement entered into in connection with the issuance of any Additional Notes.
"REGULATION S" means Regulation S under the Securities Act.
"REPRESENTATIVE" means any agent or representative in respect of any Designated Senior Debt; PROVIDED, HOWEVER, that if, and for so long as, any Designated Senior Debt lacks such representative, then the Representative for such Designated Senior Debt shall at all times constitute the holders of a majority in outstanding principal amount of such Designated Senior Debt.
"RESPONSIBLE OFFICER" means, when used with respect to the Trustee, any officer in the Corporate Trust Office of the Trustee to whom any corporate trust matter is referred because of such officer's knowledge of and familiarity with the particular subject and shall also mean any officer who shall have direct responsibility for the administration of this Indenture.
"RESTRICTED PAYMENT" means any of the following:
(1) the declaration or payment of any dividend or any other distribution on Equity Interests of the Issuer or any Restricted Subsidiary or any payment made to the direct or indirect holders (in their capacities as such) of Equity Interests of the Issuer or any Restricted Subsidiary by the Issuer or any Restricted Subsidiary, including any payment in connection with any merger or consolidation involving the Issuer but excluding (a) dividends or distributions payable solely in Qualified Equity Interests and (b) in the case of Restricted Subsidiaries, dividends or distributions payable to the Issuer or to a Restricted Subsidiary and PRO RATA dividends or distributions payable to minority stockholders of any Restricted Subsidiary;
(2) the redemption of any Equity Interests of the Issuer or any Restricted Subsidiary, including any payment by the Issuer or any Restricted Subsidiary in connection with any merger or consolidation involving the Issuer but excluding any such Equity Interests held by the Issuer or any Restricted Subsidiary and any redemptions to the extent payable in Equity Interests of the Issuer or of an acquiror of the Issuer, in either case other than Disqualified Equity Interests;
(3) any Investment other than a Permitted Investment; or
(4) any redemption prior to the scheduled maturity or prior to any scheduled repayment of principal or sinking fund payment, as the case may be, in respect of Subordinated Indebtedness, other than the prepayment of the 9% Subordinated Notes.
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"RESTRICTED SECURITY" means a Note that constitutes a "restricted security" within the meaning of Rule 144(a)(3) under the Securities Act; PROVIDED, HOWEVER, that the Trustee shall be entitled to request and conclusively rely on an Opinion of Counsel with respect to whether any Note constitutes a Restricted Security.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Issuer other than an Unrestricted Subsidiary.
"RULE 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors.
"SALE AND LEASEBACK TRANSACTIONS" means with respect to any Person an arrangement with any bank, insurance company or other lender or investor or to which such lender or investor is a party, providing for the leasing by such Person of any asset of such Person which has been or is being sold or transferred by such Person to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such asset.
"SEC" means the U.S. Securities and Exchange Commission.
"SECRETARY'S CERTIFICATE" means a certificate signed by the Secretary of the Issuer.
"SECURITIES ACT" means the U.S. Securities Act of 1933, as amended.
"SENIOR DEBT" means the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of the Issuer, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes.
Without limiting the generality of the foregoing, "Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing in respect of:
(1) all obligations of every nature under, or with respect to, the Credit Agreement, including obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities (and guarantees thereof); and
(2) all Hedging Obligations in respect of the Credit Agreement;
in each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include:
(1) any Indebtedness of the Issuer to any of its Subsidiaries;
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(2) Indebtedness to, or guaranteed on behalf of, any director, officer or employee of the Issuer or any of its Subsidiaries (including amounts owed for compensation);
(3) obligations to trade creditors and other amounts incurred (but not under the Credit Agreement) in connection with obtaining goods, materials or services;
(4) Indebtedness represented by Disqualified Equity Interests;
(5) any liability for taxes owed or owing by the Issuer;
(6) that portion of any Indebtedness incurred in violation of this Indenture (but, as to any such obligation, no such violation shall be deemed to exist for purposes of this clause (6) if the holder(s) of such obligation or their representative shall have received an Officers' Certificate (and/or representation or warranty) of the Issuer to the effect that the incurrence of such Indebtedness does not (or, in the case of revolving credit indebtedness, the incurrence of the entire committed amount thereof at the date on which the initial borrowing thereunder is made would not) violate the provisions of this Indenture);
(7) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Issuer; and
(8) any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of the Issuer.
"SIGNIFICANT SUBSIDIARY" means (1) any Restricted Subsidiary that would be a "significant subsidiary" as defined in Regulation S-X promulgated pursuant to the Securities Act as such Regulation is in effect on the Issue Date and (2) any Restricted Subsidiary that, when aggregated with all other Restricted Subsidiaries that are not otherwise Significant Subsidiaries and as to which any event described in clause (7) or (8) under Section 6.01 has occurred and is continuing, would constitute a Significant Subsidiary under clause (1) of this definition.
"STATED MATURITY" means, with respect to any installment of interest or principal on any Indebtedness, the date on which such payment of interest or principal is scheduled to be paid in the documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Issuer or any Restricted Subsidiary that is subordinated in right of payment to the Notes or the Note Guarantees, respectively.
"SUBSIDIARY" means, with respect to any Person:
(1) any corporation, limited liability company, association or other business entity of which more than 50% of the total voting power of the Equity Interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Board of Directors thereof are at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and
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(2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof).
Unless otherwise specified, "Subsidiary" refers to a Subsidiary of the Issuer.
"TRANSACTION DATE" has the meaning assigned to such term in the definition of Consolidated Interest Coverage Ratio.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939, as amended.
"TRUSTEE" means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor.
"UNRESTRICTED SUBSIDIARY" means, (1) on the Issue Date, each of IVC Industries, Inc. and Orgenics, Ltd. and each of their respective Subsidiaries, (2) any other Subsidiary that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors of the Issuer in accordance with Section 4.17 and (3) any Subsidiary of an Unrestricted Subsidiary.
"U.S. GOVERNMENT OBLIGATIONS" means direct non-callable obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged.
"U.S. LEGAL TENDER" means such coin or currency of the United States of America that at the time of payment shall be legal tender for the payment of public and private debts.
"VOTING STOCK" with respect to any Person, means securities of any class of Equity Interests of such Person entitling the holders thereof (whether at all times or only so long as no senior class of stock or other relevant equity interest has voting power by reason of any contingency) to vote in the election of members of the Board of Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" when applied to any Indebtedness at any date, means the number of years obtained by dividing (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment by (2) the then outstanding principal amount of such Indebtedness.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" means a Restricted Subsidiary of which 100% of the Equity Interests (except for directors' qualifying shares or certain minority interests owned by other Persons solely due to local law requirements that there be more than one stockholder, but which interest is not in excess of what is required for such purpose) are owned directly by the Issuer or through one or more Wholly-Owned Restricted Subsidiaries.
SECTION 1.02. OTHER DEFINITIONS.
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Term Defined in Section ---------- ---------------------- "Additional Notes"................................. ......................... 2.02 "Affiliate Transaction"............................ ......................... 4.12 "Authentication Order"............................. ......................... 2.02
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the Trust Indenture Act, such provision is incorporated by reference in, and made a part of, this Indenture. The following Trust Indenture Act terms used in this Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
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Term Defined in Section ---------- ---------------------- "Change of Control Offer".......................... ......................... 4.07 "Change of Control Payment Date"................... ......................... 4.07 "Change of Control Purchase Price"................. ......................... 4.07 "Covenant Defeasance".............................. ......................... 8.02 "Coverage Ratio Exception"......................... ......................... 4.08 "Designated Non-Cash Consideration"................ ......................... 4.11 "Designation"...................................... ......................... 4.17 "Designation Amount"............................... ......................... 4.17 "Event of Default"................................. ......................... 6.01 "Excess Proceeds".................................. ......................... 4.11 "Global Notes"..................................... ......................... 2.01 "Guarantee Obligations"............................ ......................... 11.01 "IAI Global Note".................................. ......................... 2.01 "Initial Global Notes"............................. ......................... 2.01 "Initial Notes".................................... ......................... 2.02 "Issuer" .......................................... ......................... Preamble "Legal Defeasance"................................. ......................... 8.02 "Net Proceeds Deficiency".......................... ......................... 4.11 "Net Proceeds Offer"............................... ......................... 4.11 "Net Proceeds Payment Date"........................ ......................... 4.11 "Non-Payment Default".............................. ......................... 10.02 "Offered Price".................................... ......................... 4.11 "144A Global Note"................................. ......................... 2.01 "Pari Passu Indebtedness Price".................... ......................... 4.11 "Participants"..................................... ......................... 2.15 "Paying Agent"..................................... ......................... 2.03 "Payment Amount"................................... ......................... 4.11 "Payment Blockage Notice".......................... ......................... 10.02 "Payment Blockage Period".......................... ......................... 10.02 "Payment Default".................................. ......................... 10.02 "Permitted Indebtedness"........................... ......................... 4.08 "Physical Notes"................................... ......................... 2.01 "Redesignation".................................... ......................... 4.17 "Registrar"........................................ ......................... 2.03 "Regulation S Global Note"......................... ......................... 2.01 "Restricted Payments Basket"....................... ......................... 4.09 "Successor"........................................ ......................... 5.01
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Issuer, any Guarantor or any other obligor on the Notes.
All other Trust Indenture Act terms used in this Indenture that are defined by the Trust Indenture Act, defined by Trust Indenture Act reference to another statute or defined by SEC rule and not otherwise defined herein have the meanings assigned to them therein.
SECTION 1.04. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the plural include the singular;
(5) provisions apply to successive events and transactions;
(6) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and
(7) the words "including," "includes" and similar words shall be deemed to be followed by "without limitation."
ARTICLE TWO
THE NOTES
SECTION 2.01. FORM AND DATING.
The Notes and the Trustee's certificate of authentication shall be substantially in the form of EXHIBIT A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The Issuer shall approve the form of the Notes and any notation, legend or endorsement on them. Each Note shall be dated the date of its issuance and show the date of its authentication. Each Note shall have an executed Note Guarantee from each of the Guarantors endorsed thereon substantially in the form of EXHIBIT E.
The terms and provisions contained in the Notes and the Note Guarantees shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Issuer, the Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby.
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Notes offered and sold in reliance on Rule 144A shall be issued initially in the form of a single permanent global Note in registered form, substantially in the form set forth in EXHIBIT A (the "144A GLOBAL NOTE"), deposited with the Trustee, as custodian for the Depository, duly executed by the Issuer (and having an executed Note Guarantee from each of the Guarantors endorsed thereon) and authenticated by the Trustee as hereinafter provided and shall bear the legends set forth in EXHIBIT B.
Notes offered and sold in offshore transactions in reliance on Regulation S shall be issued initially in the form of a single permanent global Note in registered form, substantially in the form of EXHIBIT A (the "REGULATION S GLOBAL NOTE"), deposited with the Trustee, as custodian for the Depository, duly executed by the Issuer (and having an executed Note Guarantee from each of the Guarantors endorsed thereon) and authenticated by the Trustee as hereinafter provided and shall bear the legends set forth in EXHIBIT B.
The initial offer and resale of the Notes shall not be to an Institutional Accredited Investor. The Notes resold to Institutional Accredited Investors in connection with the first transfer made pursuant to Section 2.16(a) shall be issued initially in the form of a single permanent Global Note in registered form, substantially in the form set forth in EXHIBIT A (the "IAI GLOBAL NOTE," and, together with the 144A Global Note and the Regulation S Global Note, the "INITIAL GLOBAL NOTES"), deposited with the Trustee, as custodian for the Depository, duly executed by the Issuer (and having an executed Note Guarantee from each of the Guarantors endorsed thereon) and authenticated by the Trustee as hereinafter provided and shall bear the legends set forth in EXHIBIT B.
Notes issued after the Issue Date shall be issued initially in the form of one or more global Notes in registered form, substantially in the form set forth in EXHIBIT A, deposited with the Trustee, as custodian for the Depository, duly executed by the Issuer (and having an executed Note Guarantee from each of the Guarantors endorsed thereon) and authenticated by the Trustee as hereinafter provided and shall bear any legends required by applicable law (together with the Initial Global Notes, the "GLOBAL NOTES").
The aggregate principal amount of the Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depository, as hereinafter provided. Notes issued in exchange for interests in a Global Note pursuant to Section 2.16 may be issued in the form of permanent certificated Notes in registered form in substantially the form set forth in EXHIBIT A and bearing the applicable legends, if any, (the "PHYSICAL NOTES").
SECTION 2.02. EXECUTION, AUTHENTICATION AND DENOMINATION; ADDITIONAL NOTES; EXCHANGE NOTES
One Officer of the Issuer (who shall have been duly authorized by all requisite corporate actions) shall sign the Notes for such Issuer by manual or facsimile signature. One Officer of each Guarantor (who shall have been duly authorized by all requisite corporate actions) shall sign the Note Guarantee for such Guarantor by manual or facsimile signature.
If an Officer whose signature is on a Note or Note Guarantee, as the case may be, was an Officer at the time of such execution but no longer holds that office at the time the Trustee authenticates the Note, the Note shall nevertheless be valid.
A Note (and the Guarantees in respect thereof) shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Note. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture.
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The Trustee shall authenticate (i) on the Issue Date, Notes for original issue in an unlimited amount (so long as not otherwise prohibited by the terms of this Indenture, including, without limitation, Section 4.08) not to exceed $150,000,000 (the "INITIAL NOTES"), (ii) additional Notes (the "ADDITIONAL NOTES") and (iii) Exchange Notes or Private Exchange Notes (x) in exchange for a like principal amount of Initial Notes or (y) in exchange for a like principal amount of Additional Notes in each case upon a written order of the Issuer in the form of a certificate of an Officer of the Issuer (an "AUTHENTICATION ORDER"). Each such Authentication Order shall specify the amount of Notes to be authenticated and the date on which the Notes are to be authenticated, whether the Notes are to be Initial Notes, Exchange Notes, Private Exchange Notes or Additional Notes and whether the Notes are to be issued as certificated Notes or Global Notes or such other information as the Trustee may reasonably request. In addition, with respect to authentication pursuant to clause (ii) or (iii) of the first sentence of this paragraph, such Authentication Order from the Issuer shall be accompanied by an Opinion of Counsel of the Issuer in a form reasonably satisfactory to the Trustee.
All Notes issued under this Indenture shall be treated as a single class for all purposes under this Indenture. The Additional Notes and the Private Exchange Notes shall bear any legend required by applicable law.
The Trustee may appoint an authenticating agent reasonably acceptable to the Issuer to authenticate Notes. Unless otherwise provided in the appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Issuer and Affiliates of the Issuer. The Trustee shall have the right to decline to authenticate and deliver any Notes under this Indenture if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if the Trustee in good faith shall determine that such action would expose the Trustee to personal liability.
The Notes shall be issuable only in registered form without coupons in denominations of $1,000 and integral multiples thereof.
SECTION 2.03. REGISTRAR AND PAYING AGENT.
The Issuer shall maintain or cause to be maintained an office or agency in the Borough of Manhattan, The City of New York, where (a) Notes may be presented or surrendered for registration of transfer or for exchange ("REGISTRAR"), (b) Notes may, subject to Section 2 of the Notes, be presented or surrendered for payment ("PAYING AGENT") and (c) notices and demands to or upon the Issuer in respect of the Notes and this Indenture may be served. The Issuer may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain or cause to be maintained an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Issuer may act as Registrar or Paying Agent, except that for the purposes of Articles Three and Eight and Sections 4.07 and 4.11, neither the Issuer nor any Affiliate of the Issuer shall act as Paying Agent. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Issuer, upon notice to the Trustee, may have one or more co-registrars and one or more additional paying agents reasonably acceptable to the Trustee. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Issuer initially appoints the Trustee as Registrar and Paying Agent until such time as the Trustee has resigned or a successor has been appointed and the Trustee hereby agrees to so initially act.
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The Issuer shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which agreement shall implement the provisions of this Indenture that relate to such Agent. The Issuer shall notify the Trustee, in advance, of the name and address of any such Agent. If the Issuer fails to maintain a Registrar or Paying Agent, the Trustee shall act as such.
SECTION 2.04. PAYING AGENT TO HOLD ASSETS IN TRUST.
The Issuer shall require each Paying Agent other than the Trustee or the Issuer or any Subsidiary to agree in writing that, subject to Article Ten and Section 11.02, each Paying Agent shall hold in trust for the benefit of Holders or the Trustee all assets held by the Paying Agent for the payment of principal of, or interest on, the Notes (whether such assets have been distributed to it by the Issuer or any other obligor on the Notes), and shall notify the Trustee of any Default by the Issuer (or any other obligor on the Notes) in making any such payment. The Issuer at any time may require a Paying Agent to distribute all assets held by it to the Trustee and account for any assets disbursed and the Trustee may at any time during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets held by it to the Trustee and to account for any assets distributed. Upon distribution to the Trustee of all assets that shall have been delivered by the Issuer to the Paying Agent, the Paying Agent shall have no further liability for such assets.
SECTION 2.05. HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee at least two Business Days prior to each Interest Payment Date and at such other times as the Trustee may request in writing a list, in such form and as of such date as the Trustee may reasonably require, of the names and addresses of Holders, which list may be conclusively relied upon by the Trustee.
SECTION 2.06. TRANSFER AND EXCHANGE.
Subject to Sections 2.15 and 2.16, when Notes are presented to the Registrar with a request to register the transfer of such Notes or to exchange such Notes for an equal principal amount of Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transaction are met; PROVIDED, HOWEVER, that the Notes surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Registrar, duly executed by the Holder thereof or his or her attorney duly authorized in writing. To permit registrations of transfers and exchanges, the Issuer shall execute and the Trustee shall authenticate Notes at the Registrar's request. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith.
Without the prior written consent of the Issuer, the Registrar shall not be required to register the transfer of or exchange of any Note (i) during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Notes and ending at the close of business on the day of such mailing, (ii) selected for redemption in whole or in part pursuant to Article Three, except the unredeemed portion of any Note being redeemed in part, and (iii) beginning at the opening of business on any Record Date and ending on the close of business on the related Interest Payment Date.
Any Holder of a beneficial interest in a Global Note shall, by acceptance of such beneficial interest, agree that transfers of beneficial interests in such Global Notes may be effected only through
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a book-entry system maintained by the Holder of such Global Note (or its agent) in accordance with the applicable legends thereon, and that ownership of a beneficial interest in the Note shall be required to be reflected in a book-entry system.
SECTION 2.07. REPLACEMENT NOTES.
If a mutilated Note is surrendered to the Trustee or if the Holder of a Note claims that the Note has been lost, destroyed or wrongfully taken, the Issuer shall issue and the Trustee shall authenticate a replacement Note if the Trustee's requirements are met. Such Holder must provide an indemnity bond or other indemnity, sufficient in the judgment of both the Issuer and the Trustee, to protect the Issuer, the Trustee or any Agent from any loss which any of them may suffer if a Note is replaced. The Issuer may charge such Holder for its reasonable out-of-pocket expenses in replacing a Note pursuant to this Section 2.07, including reasonable fees and expenses of counsel and of the Trustee.
Every replacement Note is an additional obligation of the Issuer and every replacement Note Guarantee shall constitute an additional obligation of the Guarantor thereof.
The provisions of this Section 2.07 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of lost, destroyed or wrongfully taken Notes.
SECTION 2.08. OUTSTANDING NOTES.
Notes outstanding at any time are all the Notes that have been authenticated by the Trustee except those cancelled by it, those delivered to it for cancellation and those described in this Section 2.08 as not outstanding. A Note does not cease to be outstanding because the Issuer, the Guarantors or any of their respective Affiliates hold the Note (subject to the provisions of Section 2.09).
If a Note is replaced pursuant to Section 2.07 (other than a mutilated Note surrendered for replacement), it ceases to be outstanding unless a Responsible Officer of the Trustee receives proof satisfactory to it that the replaced Note is held by a BONA FIDE purchaser. A mutilated Note ceases to be outstanding upon surrender of such Note and replacement thereof pursuant to Section 2.07.
If the principal amount of any Note is considered paid under Section 4.01, it ceases to be outstanding and interest ceases to accrue. If on a Redemption Date or the Maturity Date the Trustee or Paying Agent (other than the Issuer or an Affiliate thereof) holds U.S. Legal Tender or U.S. Government Obligations sufficient to pay all of the principal and interest due on the Notes payable on that date, then on and after that date such Notes cease to be outstanding and interest on them ceases to accrue.
SECTION 2.09. TREASURY NOTES.
In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuer or any of its Affiliates shall be disregarded, except that, for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that a Responsible Officer of the Trustee actually knows are so owned shall be disregarded.
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SECTION 2.10. TEMPORARY NOTES.
Until definitive Notes are ready for delivery, the Issuer may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have variations that the Issuer considers appropriate for temporary Notes. Without unreasonable delay, the Issuer shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes. Until such exchange, temporary Notes shall be entitled to the same rights, benefits and privileges as definitive Notes. Notwithstanding the foregoing, so long as the Notes are represented by a Global Note, such Global Note may be in typewritten form.
SECTION 2.11. CANCELLATION.
The Issuer at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent (other than the Issuer or a Subsidiary), and no one else, shall cancel and, at the written direction of the Issuer, shall dispose of all Notes surrendered for transfer, exchange, payment or cancellation in accordance with its customary procedures. Certification of the destruction of all cancelled Notes shall be delivered to the Issuer upon request by the Issuer. Subject to Section 2.07, the Issuer may not issue new Notes to replace Notes that it has paid or delivered to the Trustee for cancellation. If the Issuer or any Guarantor shall acquire any of the Notes, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Notes unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.11.
SECTION 2.12. DEFAULTED INTEREST.
If the Issuer defaults in a payment of interest on the Notes, it shall pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, in any lawful manner. The Issuer may pay the defaulted interest to the persons who are Holders on a subsequent special record date, which date shall be the fifteenth day next preceding the date fixed by the Issuer for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. At least 15 days before any such subsequent special record date, the Issuer (or, upon the written request of the Issuer, the Trustee in the name and at the expense of the Issuer) shall mail to each Holder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid.
SECTION 2.13. CUSIP AND ISIN NUMBERS.
The Issuer in issuing the Notes may use "CUSIP" or "ISIN" numbers, and if so, the Trustee shall use the "CUSIP" or "ISIN" numbers in notices of redemption or exchange as a convenience to Holders; PROVIDED, HOWEVER, that any such notice may state that no representation is made as to the correctness or accuracy of the "CUSIP" or "ISIN" numbers printed in the notice or on the Notes, and that reliance may be placed only on the other identification numbers printed on the Notes. The Issuer will promptly notify the Trustee of any change in the "CUSIP" or "ISIN" numbers.
SECTION 2.14. DEPOSIT OF MONEYS.
Subject to Section 2 of the Notes, prior to 10:00 a.m. New York City time on each Interest Payment Date, Maturity Date, Redemption Date, Change of Control Payment Date and Net Proceeds Payment Date, the Issuer shall have deposited with the Paying Agent in immediately available funds
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money sufficient to make cash payments, if any, due on such Interest Payment Date, Maturity Date, Redemption Date, Change of Control Payment Date and Net Proceeds Payment Date, as the case may be, in a timely manner which permits the Paying Agent to remit payment to the Holders on such Interest Payment Date, Maturity Date, Redemption Date, Change of Control Payment Date and Net Proceeds Payment Date, as the case may be.
SECTION 2.15. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES.
(a) The Global Notes initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends as set forth in EXHIBIT B, as applicable.
Members of, or participants in, the Depository ("PARTICIPANTS") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Note, and the Depository may be treated by the Issuer, the Trustee and any agent of the Issuer or the Trustee as the absolute owner of the Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the Trustee or any agent of the Issuer or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and Participants, the operation of customary practices governing the exercise of the rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Notes may be transferred or exchanged for Physical Notes in accordance with the rules and procedures of the Depository and the provisions of Section 2.16. In addition, Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in Global Notes if (i) the Depository notifies the Issuer that it is unwilling or unable to act as Depository for any Global Note, the Issuer so notifies the Trustee in writing and a successor Depository is not appointed by the Issuer within 90 days of such notice, (ii) the Issuer, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Notes in the form of Physical Notes under this Indenture, or (iii) a Default or Event of Default has occurred and is continuing and the Registrar has received a written request from any owner of a beneficial interest in a Global Note to issue Physical Notes. Upon any issuance of a Physical Note in accordance with this Section 2.15(b) the Trustee is required to register such Physical Note in the name of, and cause the same to be delivered to, such person or persons (or the nominee of any thereof). All such Physical Notes shall bear the applicable legends, if any.
(c) In connection with any transfer or exchange of a portion of the beneficial interest in a Global Note to beneficial owners pursuant to paragraph (b) of this Section 2.15, the Registrar shall (if one or more Physical Notes are to be issued) reflect on its books and records the date and a decrease in the principal amount of such Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Issuer shall execute, and the Trustee shall authenticate and deliver, one or more Physical Notes of authorized denominations in an aggregate principal amount equal to the principal amount of the beneficial interest in the Global Note so transferred.
(d) In connection with the transfer of a Global Note as an entirety to beneficial owners pursuant to paragraph (b) of this Section 2.15, such Global Note shall be deemed to be surrendered to the Trustee for cancellation, and (i) the Issuer shall execute, (ii) the Guarantors shall execute notations of Note Guarantees on and (iii) the Trustee shall upon written instructions from the Issuer authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in such Global Note, an equal aggregate principal amount of Physical Notes of authorized denominations.
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(e) Any Physical Note constituting a Restricted Security delivered in exchange for an interest in a Global Note pursuant to paragraph (b) or (c) of this Section 2.15 shall, except as otherwise provided by Section 2.16, bear the Private Placement Legend.
(f) The Holder of any Global Note may grant proxies and otherwise authorize any Person, including Participants and Persons that may hold interests through Participants, to take any action which a Holder is entitled to take under this Indenture or the Notes.
SECTION 2.16. SPECIAL TRANSFER AND EXCHANGE PROVISIONS.
(a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVESTORS. The following provisions shall apply with respect to the registration of any proposed transfer of a Restricted Security to any Institutional Accredited Investor which is not a QIB:
(i) the Registrar shall register the transfer of any Restricted Security, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the second anniversary of the Issue Date; PROVIDED, HOWEVER, that neither the Issuer nor any Affiliate of the Issuer has held any beneficial interest in such Note, or portion thereof, at any time on or prior to the second anniversary of the Issue Date or (y) the proposed transferee has delivered to the Registrar a certificate substantially in the form of EXHIBIT C hereto and any legal opinions and certifications as may be reasonably requested by the Trustee and the Issuer;
(ii) if the proposed transferee is a Participant and the Notes to be transferred consist of Physical Notes which after transfer are to be evidenced by an interest in the IAI Global Note, upon receipt by the Registrar of the Physical Note and (x) written instructions given in accordance with the Depository's and the Registrar's procedures and (y) the certificate, if required, referred to in clause (y) of paragraph (i) above (and any legal opinion or other certifications), the Registrar shall register the transfer and reflect on its books and records the date and an increase in the principal amount of the IAI Global Note in an amount equal to the principal amount of Physical Notes to be transferred, and the Registrar shall cancel the Physical Notes so transferred; and
(iii) if the proposed transferor is a Participant seeking to transfer an interest in a Global Note, upon receipt by the Registrar of (x) written instructions given in accordance with the Depository's and the Registrar's procedures and (y) the certificate, if required, referred to in clause (y) of paragraph (i) above, the Registrar shall register the transfer and reflect on its books and records the date and (A) a decrease in the principal amount of the Global Note from which such interests are to be transferred in an amount equal to the principal amount of the Notes to be transferred and (B) an increase in the principal amount of the IAI Global Note in an amount equal to the principal amount of the Notes to be transferred.
(b) TRANSFERS TO QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Restricted Security to a QIB:
(i) the Registrar shall register the transfer of any Restricted Security, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the second anniversary of the Issue Date; PROVIDED, HOWEVER, that neither the Issuer nor any Affiliate of the Issuer has held any beneficial interest in such Note, or portion thereof, at any time on or prior to the second anniversary of the Issue Date or (y) such transfer is being made by a proposed transferor who has checked the box provided for on the applicable Global Note stating, or has otherwise advised the Issuer and the Registrar in writing, that the sale has been made in compliance with the
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provisions of Rule 144A to a transferee who has signed the certification provided for on the applicable Global Note stating, or has otherwise advised the Issuer and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Issuer as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A;
(ii) if the proposed transferee is a Participant and the Notes to be transferred consist of Physical Notes which after transfer are to be evidenced by an interest in the 144A Global Note, upon receipt by the Registrar of the Physical Note and written instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall register the transfer and reflect on its book and records the date and an increase in the principal amount of the 144A Global Note in an amount equal to the principal amount of Physical Notes to be transferred, and the Registrar shall cancel the Physical Notes so transferred; and
(iii) if the proposed transferor is a Participant seeking to transfer an interest in the IAI Global Note or the Regulation S Global Note, upon receipt by the Registrar of written instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall register the transfer and reflect on its books and records the date and (A) a decrease in the principal amount of the IAI Global Note or the Regulation S Global Note, as the case may be, in an amount equal to the principal amount of the Notes to be transferred and (B) an increase in the principal amount of the 144A Global Note in an amount equal to the principal amount of the Notes to be transferred.
(c) TRANSFERS TO NON-U.S. PERSONS. The following provisions shall apply with respect to any transfer of a Restricted Security to a Non-U.S. Person under Regulation S:
(i) the Registrar shall register any proposed transfer of a Restricted Security to a Non-U.S. Person upon receipt of a certificate substantially in the form of EXHIBIT D from the proposed transferor and such certifications, legal opinions and other information as the Trustee or the Issuer may reasonably request; and
(ii) (a) if the proposed transferor is a Participant holding a beneficial interest in the Rule 144A Global Note or the IAI Global Note or the Note to be transferred consists of Physical Notes, upon receipt by the Registrar of (x) the documents required by paragraph (i) and (y) instructions in accordance with the Depository's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Rule 144A Global Note or the IAI Global Note, as the case may be, in an amount equal to the principal amount of the beneficial interest in the Rule 144A Global Note or the IAI Global Note, as the case may be, to be transferred or cancel the Physical Notes to be transferred, and (b) if the proposed transferee is a Participant, upon receipt by the Registrar of instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Regulation S Global Note in an amount equal to the principal amount of the Rule 144A Global Note, the IAI Global Note or the Physical Notes, as the case may be, to be transferred.
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(d) EXCHANGE OFFER. Upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Issuer shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02, the Trustee shall authenticate one or more Global Notes not bearing the Private Placement Legend in an aggregate principal amount equal to the principal amount of the beneficial interests in the Initial Global Notes tendered for acceptance by Persons that certify in the applicable Letters of Transmittal that (x) they are not broker-dealers, (y) they are not participating in a distribution of the Exchange Notes and (z) they are not affiliates (as defined in Rule 144) of the Issuer, and accepted for exchange in the Exchange Offer.
(e) RESTRICTIONS ON TRANSFER AND EXCHANGE OF GLOBAL NOTES. Notwithstanding any other provisions of this Indenture, a Global Note may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository.
(f) PRIVATE PLACEMENT LEGEND. Upon the transfer, exchange or replacement of Notes not bearing the Private Placement Legend unless otherwise required by applicable law, the Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Registrar shall deliver only Notes that bear the Private Placement Legend unless (i) there is delivered to the Trustee an Opinion of Counsel reasonably satisfactory to the Issuer and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act or (ii) such Note has been offered and sold (including pursuant to the Exchange Offer) pursuant to an effective registration statement under the Securities Act.
(g) GENERAL. By its acceptance of any Note bearing the Private Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture.
The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.15 or Section 2.16. The Issuer shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar.
The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among Participants or beneficial owners of interests in any Global Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof.
The Trustee shall have no responsibility for the actions or omissions of the Depository, or the accuracy of the books and records of the Depository.
(h) CANCELLATION AND/OR ADJUSTMENT OF GLOBAL NOTE. At such time as all beneficial interests in a particular Global Note have been exchanged for Physical Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time
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prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Physical Notes, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase.
ARTICLE THREE
REDEMPTION
SECTION 3.01. NOTICES TO TRUSTEE.
If the Issuer elects to redeem Notes pursuant to Section 5 or Section 6 of the Notes, it shall notify the Trustee in writing of the Redemption Date, the Redemption Price and the principal amount of Notes to be redeemed. The Issuer shall give notice of redemption to the Trustee at least 45 days but not more than 60 days before the Redemption Date (unless a shorter notice shall be agreed to by the Trustee in writing), together with such documentation and records as shall enable the Trustee to select the Notes to be redeemed.
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time pursuant to Sections 5 and 6 of the Notes, the Trustee will select Notes for redemption as follows:
(x) if the Notes are listed on a national securities exchange, in compliance with the requirements of the principal national securities exchange on which the Notes are listed; or
(y) if the Notes are not so listed, on a PRO RATA basis, by lot or by such method as the Trustee shall deem fair and appropriate;
PROVIDED, HOWEVER, that, in the case of such redemption pursuant to Section 6 of the Notes, the Trustee will select the Notes on a PRO RATA basis or on as nearly a PRO RATA basis as practicable (subject to the procedures of the Depository) unless that method is otherwise prohibited.
The Trustee shall promptly notify the Issuer in writing of the Notes selected for redemption and, in the case of any Note selected for partial redemption, the principal amount thereof to be redeemed. Notes and portions of Notes selected shall be in the amounts of $1,000 or integral multiples of $1,000, except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of the Notes held by such Holder, even if not an integral multiple of $1,000, shall be redeemed. Except as provided in the preceding sentence, provisions of this Indenture that apply to the Notes called for redemption also apply to portions of Notes called for redemption.
SECTION 3.03. NOTICE OF REDEMPTION.
At least 30 days but not more than 60 days before a Redemption Date, the Issuer shall mail, or cause to be mailed, a notice of redemption by first class mail, postage prepaid, to each Holder
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whose Notes are to be redeemed at its registered address (except that a notice issued in connection with a redemption referred to in Section 8.01 may be more than 60 days before such Redemption Date). At the Issuer's request, the Trustee shall forward the notice of redemption in the Issuer's name and at the Issuer's expense. Each notice for redemption shall identify the Notes (including the CUSIP or ISIN number) to be redeemed and shall state:
(1) the Redemption Date;
(2) the Redemption Price and the amount of accrued interest, if any, to be paid;
(3) the name and address of the Paying Agent;
(4) that Notes called for redemption must be surrendered to the Paying Agent to collect the Redemption Price plus accrued interest, if any;
(5) that, unless the Issuer defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Notes is to receive payment of the Redemption Price upon surrender to the Paying Agent of the Notes redeemed;
(6) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the Redemption Date, and upon surrender and cancellation of such Note, a new Note or Notes in aggregate principal amount equal to the unredeemed portion thereof will be issued;
(7) if fewer than all the Notes are to be redeemed, the identification of the particular Notes (or portion thereof) to be redeemed, as well as the aggregate principal amount of Notes to be redeemed and the aggregate principal amount of Notes to be outstanding after such partial redemption; and
(8) the Section of the Notes or the Indenture, as applicable, pursuant to which the Notes are to be redeemed.
The notice, if mailed in a manner herein provided, shall be conclusively presumed to have been given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Note designated for redemption in whole or in part shall not affect the validity of the proceedings for the redemption of any other Note. Notices of redemption may not be conditional.
At the Issuer's request, the Trustee shall give the notice of redemption in the Issuer's name and at its expense; PROVIDED, HOWEVER, that the Issuer shall have delivered to the Trustee, at least 45 days (or such shorter period allowed by the Trustee) prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice (in the name and at the expense of the Issuer) and setting forth the information to be stated in such notice as provided in this Section 3.03.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.03, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price plus accrued interest, if any. Upon surrender to the Trustee or Paying Agent, such Notes called for redemption shall be
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paid at the Redemption Price (which shall include accrued interest thereon to, but not including, the Redemption Date), but installments of interest, the maturity of which is on or prior to the Redemption Date, shall be payable to Holders of record at the close of business on the relevant Record Dates. On and after the Redemption Date interest shall cease to accrue on Notes or portions thereof called for redemption unless the Issuer shall have not complied with its obligations pursuant to Section 3.05.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE.
On or before 10:00 a.m. New York time on the Redemption Date, the Issuer shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Redemption Price plus accrued and unpaid interest, if any, of all Notes to be redeemed on that date.
If the Issuer complies with the preceding paragraph, then, unless the Issuer defaults in the payment of such Redemption Price plus accrued interest, if any, interest on the Notes to be redeemed will cease to accrue on and after the applicable Redemption Date, whether or not such Notes are presented for payment.
SECTION 3.06. NOTES REDEEMED IN PART.
If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note or Notes in principal amount equal to the unredeemed portion of the original Note or Notes shall be issued in the name of the Holder thereof upon surrender and cancellation of the original Note or Notes.
ARTICLE FOUR
COVENANTS
SECTION 4.01. PAYMENT OF NOTES.
The Issuer shall pay or cause to be paid the principal of (and premium, if any) and interest on the Notes in the manner provided in the Notes, the Registration Rights Agreement and this Indenture. An installment of principal of, or interest on, the Notes shall be considered paid on the date it is due if the Trustee or Paying Agent (other than the Issuer or an Affiliate thereof) holds on that date U.S. Legal Tender designated for and sufficient to pay the installment. The Paying Agent shall return to the Issuer promptly, and in any event, no later than five (5) Business Days following the date of payment, any money (including accrued interest) that exceeds such amount of principal, premium, if any, and interest paid on the Notes. If a payment date is not a Business Day, at a place of payment, payment may be made at that place on the next succeeding day that is a Business Day, and no interest shall accrue on such payment for the intervening period.
The Issuer shall pay interest (including, without limitation, post petition interest in a proceeding under any Bankruptcy Law), on overdue principal and premium, if any, and overdue interest (without regard to applicable grace periods), to the extent lawful, at the same rate PER ANNUM borne by the Notes.
Interest on the Notes will be computed on the basis of a 360-day year comprised of twelve 30-day months.
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SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY.
The Issuer shall maintain in the Borough of Manhattan, The City of New York, the office or agency required under Section 2.03 (which may be an office or drop facility of the Trustee or an affiliate of the Trustee or Registrar). The Issuer shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 12.02 and the Issuer hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands.
The Issuer may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Issuer will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.
The Issuer hereby initially designates U.S. Bank Trust National Association, located at 100 Wall Street, Suite 1600, New York, New York 10005, as such office of the Issuer in accordance with Section 2.03.
SECTION 4.03. CORPORATE EXISTENCE.
Except as otherwise permitted by Article Five, the Issuer shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents (as the same may be amended from time to time) of each such Restricted Subsidiary and the material rights (charter and statutory) and material franchises of the Issuer and each of its Restricted Subsidiaries; PROVIDED, HOWEVER, that the Issuer shall not be required to preserve any such right, franchise or corporate existence with respect to itself or any Restricted Subsidiary if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Issuer and its Restricted Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes.
SECTION 4.04. PAYMENT OF TAXES.
The Issuer and the Guarantors shall, and shall cause each of the Restricted Subsidiaries to, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed upon it or any of the Restricted Subsidiaries or upon the income, profits or property of it or any of the Restricted Subsidiaries and (b) all lawful claims for labor, materials and supplies which, in each case, if unpaid, might by law become a material liability or Lien upon the property of it or any of the Restricted Subsidiaries; PROVIDED, HOWEVER, that the Issuer and the Guarantors shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount the applicability or validity is being contested in good faith by appropriate actions and for which appropriate provision has been made.
SECTION 4.05. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT.
(a) The Issuer shall deliver to the Trustee, within 120 days after the close of each fiscal year, an Officers' Certificate stating that a review of the activities of the Issuer and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view
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to determining whether the Issuer and the Guarantors have kept, observed, performed and fulfilled their obligations under this Indenture and further stating, as to each such Officer signing such certificate, that to the best of such Officer's knowledge, the Issuer and the Guarantors during such preceding fiscal year has kept, observed, performed and fulfilled each and every such covenant contained in this Indenture and no Default occurred during such year and at the date of such certificate there is no Default that has occurred and is continuing or, if such signers do know of such Default, the certificate shall specify such Default and what action, if any, the Issuer is taking or proposes to take with respect thereto. The Officers' Certificate shall also notify the Trustee should the Issuer elect to change the manner in which it fixes the fiscal year end.
(b) The Issuer shall deliver to the Trustee promptly and in any event within five days after the Issuer becomes aware of the occurrence of any Default an Officers' Certificate specifying the Default and what action, if any, the Issuer is taking or proposes to take with respect thereto.
SECTION 4.06. WAIVER OF STAY, EXTENSION OR USURY LAWS.
The Issuer and each Guarantor covenants (to the extent permitted by applicable law) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive such Issuer or such Guarantor from paying all or any portion of the principal of and/or interest on the Notes or the Note Guarantee of any such Guarantor as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture, and (to the extent permitted by applicable law) each hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
SECTION 4.07. CHANGE OF CONTROL.
(a) Upon the occurrence of any Change of Control, each Holder of Notes will have the right to require the Issuer to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of that Holder's Notes pursuant to a Change of Control Offer (the "CHANGE OF CONTROL OFFER"). In the Change of Control Offer, the Issuer will offer to pay an amount in cash (the "CHANGE OF CONTROL PURCHASE PRICE") equal to 101% of the aggregate principal amount of Notes purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase. Within 30 days following any Change of Control, the Issuer will mail, or cause to be mailed, a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to purchase Notes on the date (the "CHANGE OF CONTROL PAYMENT DATE") specified in such notice, which date shall be a Business Day no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures described below. Such notice shall state:
(1) that the Change of Control Offer is being made pursuant to this Section 4.07 and that all Notes tendered and not withdrawn will be accepted for payment;
(2) the Change of Control Purchase Price and the Change of Control Payment Date;
(3) that any Note not tendered will continue to accrue interest;
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(4) that, unless the Issuer defaults in making payment therefor, any Note accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date;
(5) that Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day prior to the Change of Control Payment Date;
(6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the second Business Day prior to the Change of Control Payment Date, a telegram, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Notes the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased;
(7) that Holders whose Notes are purchased only in part will be issued new Notes in a principal amount equal to the unpurchased portion of the Notes surrendered (equal to $1,000 or an integral multiple thereof); and
(8) the circumstances and relevant facts regarding such Change of Control.
(b) On or before the Change of Control Payment Date, the Issuer will, to the extent lawful:
(1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Change of Control Purchase Price in respect of all Notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Issuer.
(c) The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Purchase Price for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; PROVIDED, HOWEVER, that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof.
(d) The Issuer will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date.
(e) The Issuer will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer.
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(f) The Issuer shall cause the Change of Control Offer to remain open for at least 20 Business Days or for such longer period as may be required by law. The Issuer will comply, and will cause any third party making a Change of Control Offer to comply, with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with a Change of Control Offer. To the extent the provisions of any applicable securities laws or regulations conflict with the provisions of this Section 4.07, the Issuer will not be deemed to have breached their obligations under this Section 4.07 by virtue of complying with such laws or regulations.
SECTION 4.08. LIMITATIONS ON ADDITIONAL INDEBTEDNESS.
(a) The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, incur any Indebtedness; PROVIDED, HOWEVER, that the Issuer or any Guarantor may incur additional Indebtedness and any Restricted Subsidiary may incur Acquired Indebtedness if, after giving effect thereto, the Consolidated Interest Coverage Ratio would be at least (a) 2.00 to 1.00 if the incurrence occurs on or prior to the third anniversary of the Issue Date and (b) 2.25 to 1.00 if the incurrence occurs thereafter (the "COVERAGE RATIO EXCEPTION").
(b) Notwithstanding Section 4.08(a), each of the following shall be permitted (the "PERMITTED INDEBTEDNESS"):
(1) Indebtedness of the Issuer and any Restricted Subsidiary under the Credit Agreement in an aggregate amount at any time outstanding not to exceed the greater of (x) $75.0 million, LESS the aggregate amount of Net Available Proceeds applied to repayments under the Credit Agreement in accordance with Section 4.11 and (y) 85% of the book value of the accounts receivable plus 65% of the book value of inventory of the Issuer and the Restricted Subsidiaries, in each case calculated on a consolidated basis and in accordance with GAAP as of the last day of the last full fiscal quarter for which financial statements are available;
(2) the Notes issued on the Issue Date and the Note Guarantees and the Exchange Notes and the Note Guarantees in respect thereof to be issued pursuant to the Registration Rights Agreement;
(3) Indebtedness of the Issuer and the Restricted Subsidiaries to the extent outstanding on the Issue Date (other than Indebtedness referred to in clauses (1) and (2) above, and after giving effect to the intended use of proceeds of the Notes);
(4) Indebtedness under Hedging Obligations entered into in the ordinary course of business for BONA FIDE hedging purposes and not for the purpose of speculation that are designed to protect against fluctuations in interest rates, foreign currency exchange rates and commodity process; PROVIDED, HOWEVER, that if such Hedging Obligations are of the type described in clause (1) of the definition thereof, (a) such Hedging Obligations relate to payment obligations on Indebtedness otherwise permitted to be incurred by this covenant and (b) the notional principal amount of such Hedging Obligations at the time incurred does not exceed the principal amount of the Indebtedness to which such Hedging Obligations relate;
(5) Indebtedness of the Issuer owed to a Guarantor or a Foreign Restricted Subsidiary and Indebtedness of any Restricted Subsidiary owed to the Issuer, any Guarantor or any Foreign Restricted Subsidiary; PROVIDED, HOWEVER, that upon any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or such Indebtedness being owed to any Person other than the Is-
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suer, a Guarantor or a Foreign Restricted Subsidiary, the Issuer or such Restricted Subsidiary, as applicable, shall be deemed to have incurred Indebtedness not permitted by this clause (5);
(6) Indebtedness in respect of bid, performance or surety bonds issued for the account of the Issuer, any Guarantor or any Foreign Restricted Subsidiary in the ordinary course of business, including guarantees or obligations of the Issuer, any Guarantor or any Foreign Restricted Subsidiary with respect to letters of credit supporting such bid, performance or surety obligations (in each case other than for an obligation for money borrowed);
(7) Purchase Money Indebtedness incurred by the Issuer, any Guarantor or any Foreign Restricted Subsidiary, and Refinancing Indebtedness thereof, in an aggregate amount not to exceed at any time outstanding $15.0 million;
(8) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is extinguished within five Business Days of incurrence;
(9) Indebtedness arising in connection with endorsement of instruments for deposit in the ordinary course of business;
(10) Refinancing Indebtedness incurred by the Issuer, any Guarantor or any other Restricted Subsidiary with respect to Indebtedness incurred pursuant to the Coverage Ratio Exception or clause (2) or clause (3) above; PROVIDED, HOWEVER, that in the case of a Restricted Subsidiary other than a Guarantor, such Restricted Subsidiary shall only be allowed to refinance its own Indebtedness or Indebtedness of another Restricted Subsidiary that is not a Guarantor;
(11) Indebtedness of any Foreign Restricted Subsidiary in an aggregate amount at any time outstanding not to exceed 5% of Consolidated Total Assets; and
(12) Indebtedness of the Issuer, any Guarantor or any Foreign Restricted Subsidiary in an aggregate amount not to exceed $20.0 million at any time outstanding.
(c) For purposes of determining compliance with this Section 4.08, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness described in clauses (1) through (12) of Section 4.08(b) or is entitled to be incurred pursuant to the Coverage Ratio Exception, the Issuer shall, in its sole discretion, classify such item of Indebtedness and may divide and classify such Indebtedness in more than one of the types of Indebtedness described, except that Indebtedness incurred under the Credit Agreement on the Issue Date shall be deemed to have been incurred under clause (1) of Section 4.08(b). In addition, for purposes of determining any particular amount of Indebtedness under this Section 4.08, guarantees, Liens or letter of credit obligations supporting Indebtedness otherwise included in the determination of such particular amount shall not be included so long as incurred by a Person that could have incurred such Indebtedness.
(d) The accrual of interest, the accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms and the payment of dividends on Disqualified Equity Interests of the Issuer in the form of additional shares of the same class of Disqualified Equity Interest will not be deemed to be an incurrence of Indebtedness for purposes of this Section 4.08.
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SECTION 4.09. LIMITATIONS ON RESTRICTED PAYMENTS.
(a) The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, make any Restricted Payment if at the time of such Restricted Payment:
(1) a Default shall have occurred and be continuing or shall occur as a consequence thereof;
(2) the Issuer cannot incur $1.00 of additional Indebtedness pursuant to the Coverage Ratio Exception; or
(3) the amount of such Restricted Payment, when added to the aggregate amount of all other Restricted Payments made after the Issue Date (other than Restricted Payments made pursuant to clause (2), (3), (4) or (5) of Section 4.09(b)), exceeds the sum (the "RESTRICTED PAYMENTS BASKET") of (without duplication):
(i) 50% of Consolidated Net Income for the period (taken as one accounting period) commencing on the first day of the first full fiscal quarter commencing after the Issue Date to and including the last day of the fiscal quarter ended immediately prior to the date of such calculation for which consolidated financial statements are available (or, if such Consolidated Net Income shall be a deficit, minus 100% of such aggregate deficit), PLUS
(ii) 100% of the aggregate net proceeds, including cash and the Fair Market Value of the equity of a Person or of assets used in or constituting a line of business, in each case which becomes or becomes owned by a Restricted Subsidiary, received by the Issuer from the issuance and sale of Qualified Equity Interests after the Issue Date, other than any such proceeds which are used to redeem Notes in accordance with Section 6 of the Notes; PROVIDED, HOWEVER, that the Issuer delivers to the Trustee:
(x) with respect to any equity or assets with a Fair Market Value in excess of $5.0 million, an Officers' Certificate setting forth such Fair Market Value and a Secretary's Certificate which sets forth and authenticates a resolution that has been adopted by a majority of the Independent Directors approving such Fair Market Value; and
(y) with respect to any equity or assets with a Fair Market Value in excess of $10.0 million, the certificates described in the preceding clause (x) and a written opinion as to the Fair Market Value of such equity or assets received by the Issuer from the issuance and sale of such Qualified Equity Interests to the Issuer issued by an Independent Financial Advisor (which opinion may be in the form of a fairness opinion with respect to the transaction in which the equity or assets are acquired), PLUS
(iii) 100% of the aggregate net cash proceeds received by the Issuer as contributions to the common equity of the Issuer after the Issue Date, other than any such proceeds which are used to redeem Notes in accordance with Section 6 of the Notes, PLUS
(iv) the aggregate amount by which Indebtedness incurred by the Issuer or any Restricted Subsidiary subsequent to the Issue Date is reduced on the Issuer's balance
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sheet upon the conversion or exchange (other than by a Subsidiary of the Issuer) into Qualified Equity Interests (less the amount of any cash, or the fair value of assets, distributed by the Issuer or any Restricted Subsidiary upon such conversion or exchange), PLUS
(v) in the case of the disposition or repayment of or return on any Investment that was treated as a Restricted Payment made after the Issue Date, an amount (to the extent not included in the computation of Consolidated Net Income) equal to the lesser of (i) the return of capital with respect to such Investment and (ii) the amount of such Investment that was treated as a Restricted Payment, in either case, less the cost of the disposition of such Investment and net of taxes, PLUS
(vi) upon a Redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the lesser of (i) the Fair Market Value of the Issuer's proportionate interest in such Subsidiary immediately following such Redesignation, and (ii) the aggregate amount of the Issuer's Investments in such Subsidiary to the extent such Investments reduced the Restricted Payments Basket and were not previously repaid or otherwise reduced.
(b) The foregoing provisions will not prohibit:
(1) the payment by the Issuer or any Restricted Subsidiary of any dividend within 60 days after the date of declaration thereof, if on the date of declaration the payment would have complied with the provisions of this Indenture;
(2) the redemption of any Equity Interests of the Issuer or any Restricted Subsidiary in exchange for, or out of the proceeds of the substantially concurrent issuance and sale of, Qualified Equity Interests;
(3) the redemption of Subordinated Indebtedness of the Issuer or any Restricted Subsidiary (a) in exchange for, or out of the proceeds of the substantially concurrent issuance and sale of, Qualified Equity Interests or (b) in exchange for, or out of the proceeds of the substantially concurrent incurrence of, Refinancing Indebtedness permitted to be incurred under Section 4.08 and the other terms of this Indenture;
(4) the redemption of Equity Interests of the Issuer held by officers, directors or employees or former officers, directors or employees (or their transferees, estates or beneficiaries under their estates), upon their death, disability, retirement, severance or termination of employment or service; PROVIDED, HOWEVER, that the aggregate cash consideration paid for all such redemptions shall not exceed $2.0 million during any calendar year;
(5) repurchases of Equity Interests deemed to occur upon the exercise of stock options or warrants if the Equity Interests represents a portion of the exercise price thereof;
(6) upon the occurrence of a Change of Control and within 60 days after the completion of the offer to repurchase the Notes pursuant to Section 4.07, any purchase or redemption of Indebtedness of the Issuer required pursuant to the terms thereof; or
(7) Restricted Payments in an amount which, when taken together with all other Restricted Payments made pursuant to this clause (7), does not exceed $20.0 million;
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PROVIDED, HOWEVER, that (a) in the case of any Restricted Payment pursuant to clause (3) or (7) above, no Default shall have occurred and be continuing or occur as a consequence thereof and (b) no issuance and sale of Qualified Equity Interests pursuant to clause (2) or (3) above shall increase the Restricted Payments Basket, except to the extent the proceeds thereof exceed the amounts used to effect the transactions described therein.
SECTION 4.10. LIMITATIONS ON LIENS.
The Issuer shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or permit or suffer to exist any Lien of any nature whatsoever against (other than Permitted Liens) any assets of the Issuer or any Restricted Subsidiary (including Equity Interests of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom (other than Asset Sales permitted under Section 4.11), unless contemporaneously therewith:
(a) in the case of any Lien securing an obligation that ranks PARI PASSU with the Notes or a Note Guarantee, effective provision is made to secure the Notes or such Note Guarantee, as the case may be, at least equally and ratably with or prior to such obligation with a Lien on the same collateral; and
(b) in the case of any Lien securing an obligation that is subordinated in right of payment to the Notes or a Note Guarantee, effective provision is made to secure the Notes or such Note Guarantee, as the case may be, with a Lien on the same collateral that is prior to the Lien securing such subordinated obligation,
in each case, for so long as such obligation is secured by such Lien.
SECTION 4.11. LIMITATIONS ON ASSET SALES.
(a) The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless:
(1) the Issuer or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets included in such Asset Sale; and
(2) at least 75% of the total consideration received in such Asset Sale consists of cash or Cash Equivalents.
(b) For purposes of clause (2) of Section 4.11(a), the following shall be deemed to be cash:
(1) the amount (without duplication) of any Indebtedness of the Issuer or such Restricted Subsidiary that is expressly assumed by the transferee in such Asset Sale and with respect to which the Issuer or such Restricted Subsidiary, as the case may be, is released by the holder of such Indebtedness;
(2) the amount of any obligations received from such transferee that are within 90 days converted by the Issuer or such Restricted Subsidiary to cash (to the extent of the cash actually so received);
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(3) the Fair Market Value of (i) any assets (other than securities) received by the Issuer or any Restricted Subsidiary to be used by it in the Permitted Business, (ii) Equity Interests in a Person that is a Restricted Subsidiary or in a Person engaged in a Permitted Business that shall become a Restricted Subsidiary immediately upon the acquisition of such Person by the Issuer or (iii) a combination of (i) and (ii); and
(4) the Fair Market Value of any Equity Interests for which the Issuer or such Restricted Subsidiary has a contractual right to require the registration of such Equity Interests under the Securities Act or the applicable securities laws of the jurisdiction in which such Securities are listed on a Major Foreign Exchange ("DESIGNATED NON-CASH CONSIDERATION"); PROVIDED, HOWEVER, that no consideration received in an Asset Sale will constitute Designated Non-Cash Consideration if the classification of such consideration as Designated Non-Cash Consideration would cause the aggregate amount of all such Designated Non-Cash Consideration outstanding at that time to exceed 2.5% of Consolidated Total Assets.
(c) If at any time any non-cash consideration received by the Issuer or any Restricted Subsidiary of the Issuer, as the case may be, in connection with any Asset Sale is repaid or converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then the date of such repayment, conversion or disposition shall be deemed to constitute the date of an Asset Sale hereunder and the Net Available Proceeds thereof shall be applied in accordance with this Section 4.11.
(d) If the Issuer or any Restricted Subsidiary engages in an Asset Sale, the Issuer or such Restricted Subsidiary shall, no later than 360 days following the consummation thereof, apply all or any of the Net Available Proceeds therefrom to:
(1) repay Senior Debt or Guarantor Senior Debt, and in the case of any such repayment under any revolving credit facility, effect a permanent reduction in the availability under such revolving credit facility;
(2) repay any Indebtedness which was secured by the assets sold in such Asset Sale; and/or
(3) (A) invest all or any part of the Net Available Proceeds thereof in assets (other than securities), including expenditures for research and development activities, to be used by the Issuer or any Restricted Subsidiary in the Permitted Business, (B) acquire Equity Interests in a Person that is a Restricted Subsidiary or in a Person engaged in a Permitted Business that shall become a Restricted Subsidiary immediately upon the consummation of such acquisition or (C) a combination of (A) and (B).
(e) The amount of Net Available Proceeds not applied or invested as provided in this paragraph will constitute "EXCESS PROCEEDS." The Issuer or such Restricted Subsidiary may repay Senior Debt or Guarantor Senior Debt under a revolving credit facility during the 360 days following the consummation of such Asset Sale without effecting a permanent reduction in the availability under such revolving credit facility, pending application of such proceeds pursuant to clause (1), (2) or (3) of Section 4.11(d) or their use as Excess Proceeds in accordance with the next paragraph, and such repayment shall not be considered an application of Net Available Proceeds for purposes of this paragraph; PROVIDED, HOWEVER, that, if such Net Available Proceeds are not applied after 360 days for any purpose other than the repayment of a revolving credit facility, a permanent reduction in the availability under such revolving credit facility shall then be required.
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(f) When the aggregate amount of Excess Proceeds equals or exceeds $10.0 million, the Issuer will be required to make an offer to purchase from all Holders and, if applicable, redeem (or make an offer to do so) any Pari Passu Indebtedness of the Issuer the provisions of which require the Issuer to redeem such Indebtedness with the proceeds from any Asset Sales (or offer to do so), in an aggregate principal amount of Notes and such Pari Passu Indebtedness equal to the amount of such Excess Proceeds as follows:
(1) the Issuer will (a) make an offer to purchase (a "NET PROCEEDS OFFER") to all Holders in accordance with the procedures set forth in this Indenture, and (b) redeem (or make an offer to do so) any such other Pari Passu Indebtedness, PRO RATA in proportion to the respective principal amounts of the Notes and such other Pari Passu Indebtedness required to be redeemed, the maximum principal amount of Notes and Pari Passu Indebtedness that may be redeemed out of the amount (the "PAYMENT AMOUNT") of such Excess Proceeds;
(2) the offer price for the Notes will be payable in cash in an amount equal to 100% of the principal amount of the Notes tendered pursuant to a Net Proceeds Offer, plus accrued and unpaid interest thereon, if any, to the date such Net Proceeds Offer is consummated (the "OFFERED PRICE"), in accordance with the procedures set forth in this Indenture and the redemption price for such Pari Passu Indebtedness (the "PARI PASSU INDEBTEDNESS PRICE") shall be as set forth in the related documentation governing such Indebtedness;
(3) if the aggregate Offered Price of Notes validly tendered and not withdrawn by Holders thereof exceeds the PRO RATA portion of the Payment Amount allocable to the Notes, Notes to be purchased will be selected on a PRO RATA basis; and
(4) upon completion of such Net Proceeds Offer in accordance with the foregoing provisions, the amount of Excess Proceeds with respect to which such Net Proceeds Offer was made shall be deemed to be zero.
(g) To the extent that the sum of the aggregate Offered Price of Notes tendered pursuant to a Net Proceeds Offer and the aggregate Pari Passu Indebtedness Price paid to the holders of such Pari Passu Indebtedness is less than the Payment Amount relating thereto (such shortfall constituting a "NET PROCEEDS DEFICIENCY"), the Issuer may use the Net Proceeds Deficiency, or a portion thereof, for general corporate purposes, subject to the provisions of this Indenture.
(h) Upon the commencement of a Net Proceeds Offer, the Issuer shall send or cause to be sent, by first class mail, a notice to the Trustee and to each Holder at its registered address. The notice shall contain all instructions and materials necessary to enable such Holder to tender Notes pursuant to the Net Proceeds Offer. Any Net Proceeds Offer shall be made to all Holders. The notice, which shall govern the terms of the Net Proceeds Offer, shall state:
(1) that the Net Proceeds Offer is being made pursuant to this Section 4.11;
(2) the Payment Amount, the Offered Price, and the date on which Notes tendered and accepted for payment shall be purchased, which date shall be at least 30 days and not later than 60 days from the date such notices is mailed (the "NET PROCEEDS PAYMENT DATE");
(3) that any Notes not tendered or accepted for payment shall continue to accrue interest;
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(4) that, unless the Issuer defaults in making such payment, any Notes accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest on and after the Net Proceeds Payment Date;
(5) that Holders electing to have any Notes purchased pursuant to any Net Proceeds Offer shall be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, or transfer by book-entry transfer, to the Issuer, a depository, if appointed by the Issuer, or the Paying Agent at the address specified in the notice at least three days before the Net Proceeds Payment Date;
(6) that Holders shall be entitled to withdraw their election if the Issuer, the Depository or the Paying Agent, as the case may be, receives, not later than the Net Proceeds Payment Date, a notice setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased;
(7) that if the aggregate principal amount of Notes surrendered by Holders exceeds the Payment Amount, the Issuer shall select the Notes to be purchased on a PRO RATA basis (with such adjustments as may be deemed appropriate by the Issuer so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased); and
(8) that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry).
(i) On the Net Proceeds Payment Date, the Issuer shall, to the extent lawful: (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Net Proceeds Offer, subject to pro ration if the aggregate Notes tendered exceed the Payment Amount allocable to the Notes; (2) deposit with the Paying Agent U.S. Legal Tender equal to the lesser of the Payment Amount allocable to the Notes and the amount sufficient to pay the Offered Price in respect of all Notes or portions thereof so tendered; and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being repurchased by the Issuer. The Issuer shall publicly announce the results of the Net Proceeds Offer on or as soon as practicable after the Net Proceeds Payment Date.
(j) The Paying Agent shall promptly mail to each Holder of Notes so tendered the Offered Price for such Notes, and the Trustee shall promptly authenticate pursuant to an Authentication Order and mail (or cause to be transferred by book-entry) to each Holder a new Note equal in principal amount to any unrepurchased portion of the Notes surrendered, if any; PROVIDED, HOWEVER, that each such new Note shall be in principal amount of $1,000 or an integral multiple thereof. However, if the Net Proceeds Payment Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest shall be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender Notes pursuant to the Net Proceeds Offer.
(k) The Issuer will comply with applicable tender offer rules, including the requirements of Rule 14e-1 under the Exchange Act and any other applicable laws and regulations in connection with the purchase of Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 4.11, the Issuer shall comply with
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the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Section 4.11 by virtue of this compliance.
SECTION 4.12. LIMITATIONS ON TRANSACTIONS WITH AFFILIATES.
(a) The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, in one transaction or a series of related transactions, sell, lease, transfer or otherwise dispose of any of its assets to, or purchase any assets from, or enter into any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (an "AFFILIATE TRANSACTION"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to the Issuer or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction at such time on an arm's-length basis by the Issuer or that Restricted Subsidiary from a Person that is not an Affiliate of the Issuer or that Restricted Subsidiary; and
(2) the Issuer delivers to the Trustee:
(i) with respect to any Affiliate Transaction involving aggregate value expended by the Issuer or any Restricted Subsidiary in a consecutive twelve-month period in excess of $5.0 million, an Officers' Certificate certifying that such Affiliate Transaction complies with clause (1) above and a Secretary's Certificate which sets forth and authenticates a resolution that has been adopted by a majority of the Independent Directors approving such Affiliate Transaction; and
(ii) with respect to any Affiliate Transaction involving aggregate value expended by the Issuer or any Restricted Subsidiary in a consecutive twelve-month period of $10.0 million or more, the certificates described in the preceding clause (a) and a written opinion as to the fairness of such Affiliate Transaction to the Issuer or such Restricted Subsidiary from a financial point of view issued by an Independent Financial Advisor.
(b) The foregoing restrictions shall not apply to:
(1) transactions exclusively between or among (i) the Issuer and one or more Restricted Subsidiaries or (ii) Restricted Subsidiaries; PROVIDED, HOWEVER, in each case, that no Affiliate of the Issuer (other than another Restricted Subsidiary) owns Equity Interests of any such Restricted Subsidiary;
(2) director, officer and employee compensation (including bonuses) and other benefits (including retirement, health, stock option and other benefit plans) and indemnification and insurance arrangements;
(3) the entering into of a tax sharing agreement, or payments pursuant thereto, between the Issuer and/or one or more Subsidiaries, on the one hand, and any other Person with which the Issuer or such Subsidiaries are required or permitted to file a consolidated tax return or with which the Issuer or such Subsidiaries are part of a consolidated group for tax purposes, on the other hand, which payments by the Issuer and the Restricted Subsidiaries are not materially in excess of the tax liabilities that would have been payable by them on a stand-alone basis;
(4) loans and advances permitted by clause (3) of the definition of "Permitted Investments";
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(5) Restricted Payments which are made in accordance with Section 4.09 and the purchase, repayment or redemption of the 9% Subordinated Notes, 10% Subordinated Notes and 3% Convertible Notes at or prior to the maturity thereof, in each case in an amount not in excess of the terms of such Indebtedness as in effect on the Issue Date; or
(6) any transaction with an Affiliate where the only consideration paid by the Issuer or any Restricted Subsidiary is Qualified Equity Interests.
(c) The foregoing restrictions in clause (2) of Section 4.12(a) shall not apply to ordinary course transactions between the Issuer or any Restricted Subsidiary and an Unrestricted Subsidiary.
SECTION 4.13. LIMITATIONS ON DIVIDEND AND OTHER RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES.
The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or permit to exist or become effective any consensual encumbrance or consensual restriction on the ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distributions on or in respect of its Equity Interests;
(b) make loans or advances or pay any Indebtedness or other obligation owed to the Issuer or any other Restricted Subsidiary; or
(c) transfer any of its assets to the Issuer or any other Restricted Subsidiary;
except for:
(1) encumbrances or restrictions existing under or by reason of applicable law;
(2) encumbrances or restrictions existing under this Indenture, the Notes, the Exchange Notes and the Note Guarantees;
(3) non-assignment provisions or other restrictions on transfer contained in any lease, license or other contract entered into in the ordinary course of business;
(4) encumbrances or restrictions existing under agreements existing on the date of the Indenture (including, without limitation, the Credit Agreement) as in effect on that date (with similar restrictions under any such agreement applicable to future Restricted Subsidiaries being permitted hereunder);
(5) restrictions on the transfer of assets subject to any Lien permitted under this Indenture imposed by the holder of such Lien;
(6) restrictions on the transfer of assets imposed under any agreement to sell such assets permitted under this Indenture to any Person pending the closing of such sale;
(7) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired;
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(8) any other agreement governing Indebtedness entered into after the Issue Date that contains encumbrances and restrictions that are, in the good faith judgment of the Board of Directors, not materially more restrictive, taken as a whole, with respect to any Restricted Subsidiary than those in effect on the Issue Date with respect to that Restricted Subsidiary (or any future Restricted Subsidiary) pursuant to agreements in effect on the Issue Date;
(9) customary provisions in partnership agreements, limited liability company organizational governance documents, joint venture agreements and other similar agreements entered into in the ordinary course of business that restrict the transfer of ownership interests in such partnership, limited liability company, joint venture or similar Person;
(10) Purchase Money Indebtedness incurred in compliance with Section 4.08 that impose restrictions of the nature described in clause (c) above on the assets acquired; and
(11) any encumbrances or restrictions imposed by any amendments or refinancings of the contracts, instruments or obligations referred to in clauses (1) through (10) above; PROVIDED, HOWEVER, that such amendments or refinancings are, in the good faith judgment of the Issuer's Board of Directors, no more materially restrictive with respect to such encumbrances and restrictions, taken as a whole, than those prior to such amendment or refinancing.
SECTION 4.14. ADDITIONAL NOTE GUARANTEES.
(a) If, after the Issue Date, (a) the Issuer or any Restricted Subsidiary shall acquire or create a Domestic Subsidiary that guarantees any Indebtedness or other Obligation under the Credit Agreement (other than a Subsidiary that has been designated an Unrestricted Subsidiary), (b) any Unrestricted Subsidiary that is a Domestic Subsidiary that guarantees any Indebtedness or other Obligation under the Credit Agreement is redesignated a Restricted Subsidiary or (c) if the proviso in the definition of "Domestic Subsidiary" shall cease to apply whereupon Morpheus Acquisition LLC shall become a Domestic Subsidiary, then, in each such case, the Issuer shall cause such Restricted Subsidiary to:
(1) execute and deliver to the Trustee (a) a supplemental indenture in form and substance satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Issuer's obligations under the Notes and this Indenture and (b) a notation of guarantee in respect of its Note Guarantee; and
(2) deliver to the Trustee one or more opinions of counsel that such supplemental indenture (a) has been duly authorized, executed and delivered by such Restricted Subsidiary and (b) constitutes a valid and legally binding obligation of such Restricted Subsidiary in accordance with its terms.
Thereafter, such Restricted Subsidiary shall be a Guarantor for all purposes of this Indenture.
(b) Notwithstanding Section 4.14(a), a Subsidiary Guarantor will be automatically and unconditionally released and discharged from its obligations under its Note Guarantee, this Indenture and the Registration Rights Agreement under the circumstances set forth in Section 11.05. The form of the Note Guarantee is attached hereto as EXHIBIT E.
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SECTION 4.15. LIMITATION ON LAYERING INDEBTEDNESS.
(a) The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, incur or suffer to exist any Indebtedness that is or purports to be by its terms (or by the terms of any agreement governing such Indebtedness) senior in right of payment to the Notes or the Note Guarantee of such Restricted Subsidiary and subordinated in right of payment to any other Indebtedness of the Issuer or of such Restricted Subsidiary, as the case may be.
(b) For purposes of Section 4.15(a), no Indebtedness will be deemed to be subordinated in right of payment to any other Indebtedness of the Issuer or any Restricted Subsidiary solely by virtue of being unsecured or by virtue of the fact that the holders of such Indebtedness have entered into intercreditor agreements or other arrangements giving one or more of such holders priority over the other holders in the collateral held by them.
SECTION 4.16. REPORTS TO HOLDERS.
(a) Whether or not required by the SEC, so long as any Notes are outstanding, the Issuer will furnish to the Holders of Notes, or file electronically with the SEC through the SEC's Electronic Data Gathering, Analysis and Retrieval System (or any successor system), within the time periods applicable to the Issuer under Section 13(a) or 15(d) of the Exchange Act:
(1) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Issuer were required to file these Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report on the annual financial statements by the Issuer's certified independent accountants; and
(2) all current reports that would be required to be filed with the SEC on Form 8-K if the Issuer were required to file these reports.
(b) In addition, whether or not required by the SEC, the Issuer will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the SEC for public availability within the time periods specified in the SEC's rules and regulations (unless the SEC will not accept the filing) and make the information available to securities analysts and prospective investors upon request. The Issuer and the Guarantors have agreed that, for so long as any Notes remain outstanding, the Issuer will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
SECTION 4.17. LIMITATIONS ON DESIGNATION OF UNRESTRICTED SUBSIDIARIES.
(a) The Issuer may designate any Subsidiary of the Issuer as an "Unrestricted Subsidiary" under this Indenture (a "DESIGNATION") only if:
(1) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; and
(2) the Issuer would be permitted to make, at the time of such Designation, (a) a Permitted Investment or (b) an Investment pursuant to Section 4.09(a), in either case, in an amount (the "DESIGNATION AMOUNT") equal to the Fair Market Value of the Issuer's proportionate interest in such Subsidiary on such date, LESS, for this purpose, the amount of any intercompany
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loan from the Issuer or any Restricted Subsidiary to such Subsidiary that was treated as a Restricted Payment.
(b) No Subsidiary shall be Designated as an "Unrestricted Subsidiary" unless such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding with the Issuer or any Restricted Subsidiary unless the terms of the agreement, contract, arrangement or understanding are no less favorable to the Issuer or the Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates;
(3) is a Person with respect to which neither the Issuer nor any Restricted Subsidiary has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve the Person's financial condition or to cause the Person to achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Issuer or any Restricted Subsidiary in excess of $5.0 million in the aggregate, except for any guarantee given solely to support the pledge by the Issuer or any Restricted Subsidiary of the Equity Interests of such Unrestricted Subsidiary, which guarantee is not recourse to the Issuer or any Restricted Subsidiary, and except to the extent the amount thereof constitutes a Restricted Payment permitted under Section 4.09.
(c) If, at any time, any Unrestricted Subsidiary fails to meet the requirements of Section 4.17(a) and (b) as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of the Subsidiary and any Liens on assets of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary as of the date and, if the Indebtedness is not permitted to be incurred under Section 4.08 or the Lien is not permitted under Section 4.10, the Issuer shall be in default of the applicable covenant. For purposes of clause (1) of Section 4.17(b), with respect to IVC Industries, Inc., "Non-Recourse Debt" shall be deemed to include Preferred Stock of IVC Industries, Inc. outstanding on the Issue Date.
(d) The Issuer may redesignate an Unrestricted Subsidiary as a Restricted Subsidiary (a "REDESIGNATION") only if:
(1) no Default shall have occurred and be continuing at the time of and after giving effect to such Redesignation; and
(2) all Liens, Indebtedness and Investments of such Unrestricted Subsidiary outstanding immediately following such Redesignation would, if incurred or made at such time, have been permitted to be incurred or made for all purposes of this Indenture.
(e) All Designations and Redesignations must be evidenced by resolutions of the Board of Directors of the Issuer, delivered to the Trustee certifying compliance with the foregoing provisions.
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SECTION 4.18. LIMITATION ON THE ISSUANCE OR SALE OF EQUITY INTERESTS OF RESTRICTED SUBSIDIARIES.
The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, sell or issue any shares of Equity Interests of any Restricted Subsidiary except (1) to the Issuer, a Guarantor or the minority stockholders of any Guarantor, on a PRO RATA basis, at Fair Market Value, or (2) to the extent such shares represent directors' qualifying shares or shares required by applicable law to be held by a Person other than the Issuer or a Wholly-Owned Restricted Subsidiary. The sale of all the Equity Interests of any Restricted Subsidiary is permitted by this Section 4.18 but is subject to Section 4.11.
SECTION 4.19. CONDUCT OF BUSINESS.
The Issuer will not, and will not permit any Restricted Subsidiary to, engage in any business other than the Permitted Business.
SECTION 4.20. LIMITATIONS ON SALE AND LEASEBACK TRANSACTIONS.
The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into any Sale and Leaseback Transaction; PROVIDED, HOWEVER, that the Issuer or any Restricted Subsidiary may enter into a Sale and Leaseback Transaction if:
(a) the Issuer or such Restricted Subsidiary could have (1) incurred the Indebtedness attributable to such Sale and Leaseback Transaction pursuant to Section 4.08 and (2) incurred a Lien to secure such Indebtedness without equally and ratably securing the Notes pursuant to Section 4.10;
(b) the gross cash proceeds of such Sale and Leaseback Transaction are at least equal to the Fair Market Value of the asset that is the subject of such Sale and Leaseback Transaction; and
(c) the transfer of assets in such Sale and Leaseback Transaction is permitted by, and the Issuer or the applicable Restricted Subsidiary applies the proceeds of such transaction in accordance with Section 4.11.
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. MERGERS, CONSOLIDATIONS, ETC.
(a) The Issuer will not, directly or indirectly, in a single transaction or a series of related transactions, (1) consolidate or merge with or into (other than a merger with a Wholly-Owned Restricted Subsidiary solely for the purpose of changing the Issuer's jurisdiction of incorporation to another State of the United States), or sell, lease, transfer, convey or otherwise dispose of or assign all or substantially all of the assets of the Issuer or the Issuer and the Restricted Subsidiaries (taken as a whole) or (2) effect a Plan of Liquidation unless, in either case:
(i) either:
(x) the Issuer will be the surviving or continuing Person; or
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(y) the Person formed by or surviving such consolidation or merger or to which such sale, lease, conveyance or other disposition shall be made (or, in the case of a Plan of Liquidation, any Person to which assets are transferred) (collectively, the "SUCCESSOR") is a corporation organized and existing under the laws of any State of the United States of America or the District of Columbia, and the Successor expressly assumes, by supplemental indenture in form and substance satisfactory to the Trustee, all of the obligations of the Issuer under the Notes, this Indenture and the Registration Rights Agreement;
(ii) immediately after giving effect to such transaction and the assumption of the obligations as set forth in clause (i)(y) above and the incurrence of any Indebtedness to be incurred in connection therewith, no Default shall have occurred and be continuing; and
(iii) except in the case of the consolidation or merger of any Restricted Subsidiary with or into the Issuer, immediately after giving effect to such transaction and the assumption of the obligations set forth in clause (i)(y) above and the incurrence of any Indebtedness to be incurred in connection therewith, and the use of any net proceeds therefrom on a pro forma basis, (x) the Consolidated Net Worth of the Issuer or the Successor, as the case may be, would be at least equal to the Consolidated Net Worth of the Issuer immediately prior to such transaction and (y) either (A) the Issuer or the Successor, as the case may be, could incur $1.00 of additional Indebtedness pursuant to the Coverage Ratio Exception or (B) the Consolidated Interest Coverage Ratio of the Issuer or the Successor, as the case may be, would be at least equal to the Consolidated Interest Coverage Ratio of the Issuer immediately prior to such transaction.
For purposes of this Section 5.01(a), any Indebtedness of the Successor which was not Indebtedness of the Issuer immediately prior to the transaction shall be deemed to have been incurred in connection with such transaction.
(b) Except as provided under Article Eleven, no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person) another Person (other than the Issuer or another Guarantor), whether or not affiliated with such Guarantor, unless:
(1) either:
(i) such Guarantor will be the surviving or continuing Person; or
(ii) the Person formed by or surviving any such consolidation or merger assumes, by supplemental indenture in form and substance satisfactory to the Trustee, all of the obligations of such Guarantor under the Note Guarantee of such Guarantor, this Indenture and the Registration Rights Agreement; and
(2) immediately after giving effect to such transaction, no Default shall have occurred and be continuing.
(c) For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries, the Equity Interests of which constitute all or substantially all of the properties and assets of the Issuer, will be deemed to be the transfer of all or substantially all of the properties and assets of the Issuer.
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(d) Except as provided under Article Eleven, upon any consolidation, combination or merger of the Issuer or a Guarantor, or any transfer of all or substantially all of the assets of the Issuer in accordance with the foregoing, in which the Issuer or such Guarantor is not the continuing obligor under the Notes or its Note Guarantee, the surviving entity formed by such consolidation or into which the Issuer or such Guarantor is merged or to which the conveyance, lease or transfer is made will succeed to, and be substituted for, and may exercise every right and power of, the Issuer or such Guarantor under this Indenture, the Notes and the Note Guarantees with the same effect as if such surviving entity had been named therein as the Issuer or such Guarantor and, except in the case of a conveyance, transfer or lease, the Issuer or such Guarantor, as the case may be, will be released from the obligation to pay the principal of and interest on the Notes or in respect of its Note Guarantee, as the case may be, and all of the Issuer's or such Guarantor's other obligations and covenants under the Notes, this Indenture and its Note Guarantee, if applicable.
(e) Notwithstanding the foregoing, any Restricted Subsidiary may merge into the Issuer or another Restricted Subsidiary.
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT.
Each of the following is an "EVENT OF DEFAULT":
(1) failure by the Issuer to pay interest on any of the Notes when it becomes due and payable and the continuance of any such failure for 30 days (whether or not such payment is prohibited by the subordination provisions of this Indenture);
(2) failure by the Issuer to pay the principal on any of the Notes when it becomes due and payable, whether at Stated Maturity, upon redemption, upon purchase, upon acceleration or otherwise (whether or not such payment is prohibited by the subordination provisions of this Indenture);
(3) failure by the Issuer to comply with Article Five or in respect of its obligations to make a Change of Control Offer as described under Section 4.07 (whether or not such payment is prohibited by the subordination provisions of this Indenture);
(4) failure by the Issuer to comply with any other agreement or covenant in this Indenture and the continuance of any such failure for 30 days after notice of such failure has been given to the Issuer by the Trustee or by the Holders of at least 25% of the aggregate principal amount of the Notes then outstanding;
(5) default under any mortgage, indenture or other instrument or agreement under which there may be issued or by which there may be secured or evidenced Indebtedness of the Issuer or any Restricted Subsidiary, whether such Indebtedness now exists or is incurred after the Issue Date, which default:
(i) is caused by a failure to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) principal on such Indebtedness within the applicable express grace period,
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(ii) results in the acceleration of such Indebtedness prior to its express final maturity or
(iii) results in the commencement of judicial proceedings to foreclose upon, or to exercise remedies under applicable law or applicable security documents to take ownership of, the assets securing such Indebtedness, and
in each case, the principal amount of such Indebtedness, together with any other Indebtedness with respect to which an event described in clause (i), (ii) or (iii) has occurred and is continuing, aggregates $10.0 million or more;
(6) one or more final judgments or orders that exceed $10.0 million in the aggregate (net of amounts covered by insurance or bonded) for the payment of money have been entered by a court or courts of competent jurisdiction against the Issuer or any Restricted Subsidiary and such judgment or judgments have not been satisfied, stayed, annulled or rescinded within 60 days of being entered (or such longer period as may be permitted for timely appeal under applicable law);
(7) the Issuer or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it in an involuntary case,
(iii) consents to the appointment of a Custodian of it or for all or substantially all of its assets, or
(iv) makes a general assignment for the benefit of its creditors;
(8) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(i) is for relief against the Issuer or any Significant Subsidiary as debtor in an involuntary case,
(ii) appoints a Custodian of the Issuer or any Significant Subsidiary or a Custodian for all or substantially all of the assets of the Issuer or any Significant Subsidiary, or
(iii) orders the liquidation of the Issuer or any Significant Subsidiary,
and the order or decree remains unstayed and in effect for 60 days; or
(9) (a) any Note Guarantee of any Significant Subsidiary ceases to be in full force and effect (other than in accordance with the terms of such Note Guarantee and this Indenture) or is declared null and void and unenforceable or found to be invalid and such Event of Default remains uncured for a period of 30 days, or (b) any Guarantor denies its liability under its Note
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Guarantee (other than by reason of release of a Guarantor from its Note Guarantee in accordance with the terms of this Indenture and the Note Guarantee).
SECTION 6.02. ACCELERATION.
(a) If an Event of Default specified in clause (7) or (8) of Section 6.01 with respect to the Issuer occurs, all outstanding Notes shall become due and payable without any further action or notice. If an Event of Default (other than an Event of Default specified in clause (7) or (8) of Section 6.01 with respect to the Issuer) shall have occurred and be continuing under this Indenture, the Trustee, by written notice to the Issuer, or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding by written notice to the Issuer and the Trustee, may declare all amounts owing under the Notes to be due and payable immediately. Upon such declaration of acceleration, the aggregate principal of and accrued and unpaid interest on the outstanding Notes shall become due and payable (a) if there is any Designated Senior Debt outstanding at such time, with respect to any acceleration arising out of any event of default other than a payment default, upon the earlier of (x) the date which is five (5) business days after receipt by the Representatives of a notice such acceleration or (y) the date of acceleration of any Designated Senior Debt and (b) if otherwise, immediately; PROVIDED, HOWEVER, that after such acceleration, but before a judgment or decree based on acceleration, the Holders of a majority in aggregate principal amount of such outstanding Notes may rescind and annul such acceleration:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Defaults have been cured or waived except nonpayment of principal and interest that has become due solely because of this acceleration;
(3) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid;
(4) if the Issuer has paid to the Trustee its reasonable compensation and reimbursed the Trustee of its expenses, disbursements and advances; and
(5) in the event of a cure or waiver of a Default of the type set forth in Section 6.01(7) or (8), the Trustee shall have received an Officers' Certificate and an Opinion of Counsel that such Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right consequent thereto.
(b) The Issuer shall provide prompt written notice to the holders of Senior Debt and Guarantor Senior Debt of any acceleration pursuant to Section 6.02(a).
SECTION 6.03. OTHER REMEDIES.
(a) If a Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of, or interest on, the Notes or to enforce the performance of any provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon a Default shall not impair the right or remedy or constitute a
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waiver of or acquiescence in the Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law.
SECTION 6.04. WAIVER OF PAST DEFAULTS.
Subject to Sections 2.09, 6.07 and 9.02, the Holders of a majority in principal amount of the outstanding Notes (which may include consents obtained in connection with a tender offer or exchange offer of Notes) by notice to the Trustee may waive an existing Default and its consequences, except a Default in the payment of principal of, or interest on, any Note as specified in Section 6.01(1) or (2). The Issuer shall deliver to the Trustee an Officers' Certificate stating that the requisite percentage of Holders have consented to such waiver and attaching copies of such consents. When a Default is waived, it is cured and ceases.
SECTION 6.05. CONTROL BY MAJORITY.
(a) The Holders of not less than a majority in principal amount of the outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. Subject to Section 7.01, however, the Trustee may refuse to follow any direction that conflicts with any law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of another Holder, or that may involve the Trustee in personal liability; PROVIDED, HOWEVER, that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.
(b) In the event the Trustee takes any action or follows any direction pursuant to this Indenture, the Trustee shall be entitled to indemnification against any loss or expense caused by taking such action or following such direction.
SECTION 6.06. LIMITATION ON SUITS.
(a) No Holder will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless the Trustee:
(1) has failed to act for a period of 60 days after receiving written notice of a continuing Event of Default by such Holder and a request to act by Holders of at least 25% in aggregate principal amount of Notes outstanding;
(2) has been offered indemnity satisfactory to it in its reasonable judgment; and
(3) has not received from the Holders of a majority in aggregate principal amount of the outstanding Notes a direction inconsistent with such request.
(b) However, such limitations do not apply to a suit instituted by a Holder of any Note for enforcement of payment of the principal of or interest on such Note on or after the due date therefor (after giving effect to the grace period specified in clause (1) of Section 6.01).
(c) A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder.
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SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of, and interest on, a Note, on or after the respective due dates therefor, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE.
If a Default in payment of principal or interest specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Issuer or any other obligor on the Notes for the whole amount of principal and accrued interest and fees remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate PER ANNUM borne by the Notes and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relating to the Issuer, their creditors or their property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceedings is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. The Trustee shall be entitled to participate as a member of any official committee of creditors in the matters as it deems necessary or advisable.
SECTION 6.10. PRIORITIES.
If the Trustee collects any money or property pursuant to this Article Six, it shall pay out the money or property in the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to Holders for interest accrued on the Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for interest;
THIRD: to Holders for principal amounts due and unpaid on the Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal; and
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FOURTH: to the Issuer or, if applicable, the Guarantors, as their respective interests may appear.
The Trustee, upon prior notice to the Issuer, may fix a record date and payment date for any payment to Holders pursuant to this Section 6.10.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by a Holder or Holders of more than 10% in principal amount of the outstanding Notes.
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE.
(a) If a Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs.
(b) Except during the continuance of a Default:
(1) The Trustee need perform only those duties as are specifically set forth herein or in the Trust Indenture Act and no duties, covenants, responsibilities or obligations shall be implied in this Indenture against the Trustee.
(2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates (including Officers' Certificates) or opinions (including Opinions of Counsel) furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture.
(c) Notwithstanding anything to the contrary herein, the Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that:
(1) This paragraph does not limit the effect of Section 7.01(b).
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(2) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05.
(d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or to take or omit to take any action under this Indenture or take any action at the request or direction of Holders if it shall have reasonable grounds for believing that repayment of such funds is not assured to it.
(e) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to this Section 7.01.
(f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Issuer. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law.
(g) In the absence of bad faith, negligence or willful misconduct on the part of the Trustee, the Trustee shall not be responsible for the application of any money by any Paying Agent other than the Trustee.
SECTION 7.02. RIGHTS OF TRUSTEE.
Subject to Section 7.01:
(a) The Trustee may rely conclusively on any resolution, certificate (including any Officers' Certificate), statement, instrument, opinion (including any Opinion of Counsel), notice, request, direction, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in such document.
(b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate and an Opinion of Counsel, which shall conform to the provisions of Section 12.05. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officer's Certificate or Opinion of Counsel.
(c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent (other than an agent who is an employee of the Trustee) appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers under this Indenture.
(e) The Trustee may consult with counsel of its selection and the advice or opinion of such counsel as to matters of law shall be full and complete authorization and protection from liability in respect of any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel.
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(f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby.
(g) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate (including any Officers' Certificate), statement, instrument, opinion (including any Opinion of Counsel), notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled, upon reasonable notice to the Issuer, to examine the books, records, and premises of the Issuer, personally or by agent or attorney at the sole cost of the Issuer.
(h) The Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder.
(i) The permissive rights of the Trustee to do things enumerated in this Indenture shall not be construed as duties.
(j) Except with respect to Section 4.01 and 4.05, the Trustee shall have no duty to inquire as to the performance of the Issuer with respect to the covenants contained in Article Four. In addition, the Trustee shall not be deemed to have knowledge of an Event of Default except (i) any Default or Event of Default occurring pursuant to Sections 4.01, 6.01(1) or 6.01(2) or (ii) any Default or Event of Default of which the Trustee shall have received written notification.
(k) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Issuer, its Subsidiaries or its respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11.
SECTION 7.04. TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Issuer's use of the proceeds from the Notes, and it shall not be responsible for any statement of the Issuer in this Indenture or any document issued in connection with the sale of Notes or any statement in the Notes other than the Trustee's certificate of authentication. The Trustee makes no representations with respect to the effectiveness or adequacy of this Indenture.
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SECTION 7.05. NOTICE OF DEFAULT.
If a Default occurs and is continuing and the Trustee receives actual notice of such Default, the Trustee shall mail to each Holder notice of the uncured Default within 30 days after such Default occurs. Except in the case of a Default in payment of principal of, or interest on, any Note, including an accelerated payment and the failure to make a payment on the Change of Control Payment Date pursuant to a Change of Control Offer or the Net Proceeds Payment Date pursuant to a Net Proceeds Offer, or a Default in complying with the provisions of Article Five, the Trustee may withhold the notice if and so long as the Board of Directors, the executive committee, or a trust committee of directors and/or Responsible Officers, of the Trustee in good faith determines that withholding the notice is in the interest of the Holders.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS.
Within 60 days after each January 1, beginning with January 1, 2005, the Trustee shall, to the extent that any of the events described in Trust Indenture Act Section 313(a) occurred within the previous twelve months, but not otherwise, mail to each Holder a brief report dated as of such date that complies with Trust Indenture Act Section 313(a). The Trustee also shall comply with Trust Indenture Act Sections 313(b), 313(c) and 313(d).
A copy of each report at the time of its mailing to Holders shall be mailed to the Issuer and filed with the SEC and each securities exchange, if any, on which the Notes are listed.
The Issuer shall notify the Trustee if the Notes become listed on any securities exchange or of any delisting thereof and the Trustee shall comply with Trust Indenture Act Section 313(d).
SECTION 7.07. COMPENSATION AND INDEMNITY.
The Issuer shall pay to the Trustee from time to time such compensation as the Issuer and the Trustee shall from time to time agree in writing for its services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances (including reasonable fees and expenses of counsel) incurred or made by it in addition to the compensation for its services, except any such disbursements, expenses and advances as may be attributable to the Trustee's negligence, bad faith or willful misconduct. Such expenses shall include the reasonable fees and expenses of the Trustee's agents and counsel.
The Issuer shall indemnify each of the Trustee or any predecessor Trustee and its agents for, and hold them harmless against, any and all loss, damage, claims including taxes (other than taxes based upon, measured by or determined by the income of the Trustee), liability or expense incurred by them except for such actions to the extent caused by any negligence, bad faith or willful misconduct on their part, arising out of or in connection with the acceptance or administration of this trust including the reasonable costs and expenses of defending themselves against or investigating any claim or liability in connection with the exercise or performance of any of the Trustee's rights, powers or duties hereunder. The Trustee shall notify the Issuer promptly of any claim asserted against the Trustee or any of its agents for which it may seek indemnity. The Issuer may, subject to the approval of the Trustee (which approval shall not be unreasonably withheld), defend the claim and the Trustee shall cooperate in the defense. The Trustee and its agents subject to the claim may have separate counsel and the Issuer shall pay the reasonable fees and expenses of such counsel; PROVIDED, HOWEVER, that the Issuer will not be required to pay such fees and expenses if, subject to the approval of the Trustee (which approval shall not be unreasonably
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withheld), it assumes the Trustee's defense and there is no conflict of interest between the Issuer and the Trustee and its agents subject to the claim in connection with such defense as reasonably determined by the Trustee. The Issuer need not pay for any settlement made without its written consent. The Issuer need not reimburse any expense or indemnify against any loss or liability to the extent incurred by the Trustee through its negligence, bad faith or willful misconduct.
To secure the Issuer's payment obligations in this Section 7.07, the Trustee shall have a Lien prior to the Notes against all money or property held or collected by the Trustee, in its capacity as Trustee, except money or property held in trust to pay principal and interest on particular Notes. The obligations of the Issuer and the Guarantors under this Section 7.07 shall not be subordinated to the payment of Senior Debt pursuant to Article Ten or Section 11.02, except assets or money held in trust to pay principal of or interest on particular Notes.
When the Trustee incurs expenses or renders services after a Default specified in Section 6.01(7) or (8) occurs, such expenses and the compensation for such services shall be paid to the extent allowed under any Bankruptcy Law.
Notwithstanding any other provision in this Indenture, the foregoing provisions of this Section 7.07 shall survive the satisfaction and discharge of this Indenture or the appointment of a successor Trustee.
SECTION 7.08. REPLACEMENT OF TRUSTEE.
The Trustee may resign at any time by so notifying the Issuer in writing. The Holders of a majority in principal amount of the outstanding Notes may remove the Trustee by so notifying the Issuer and the Trustee and may appoint a successor Trustee. The Issuer may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of the Trustee or its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Issuer shall notify each Holder of such event and shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Issuer.
A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer. Immediately after that, the retiring Trustee shall transfer, after payment of all sums then owing to the Trustee pursuant to Section 7.07, all property held by it as Trustee to the successor Trustee, subject to the Lien provided in Section 7.07, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder.
If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuer or the Holders of at least 10% in principal amount of
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the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee at the expense of the Issuer.
If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.
Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Issuer's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee; PROVIDED, HOWEVER, that such corporation shall be otherwise qualified and eligible under this Article Seven.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
This Indenture shall always have a Trustee who satisfies the requirement of Trust Indenture Act Sections 310(a)(1), 310(a)(2) and 310(a)(5). The Trustee shall have a combined capital and surplus of at least $150,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with Trust Indenture Act Section 310(b); PROVIDED, HOWEVER, that there shall be excluded from the operation of Trust Indenture Act Section 310(b)(1) any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Issuer are outstanding, if the requirements for such exclusion set forth in Trust Indenture Act Section 310(b)(1) are met. The provisions of Trust Indenture Act Section 310 shall apply to the Issuer and any other obligor of the Notes.
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE ISSUER.
The Trustee, in its capacity as Trustee hereunder, shall comply with Trust Indenture Act Section 311(a), excluding any creditor relationship listed in Trust Indenture Act Section 311(b). A Trustee who has resigned or been removed shall be subject to Trust Indenture Act Section 311(a) to the extent indicated.
ARTICLE EIGHT
DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 8.01. TERMINATION OF THE ISSUER'S OBLIGATIONS.
The Issuer may terminate its obligations under the Notes and this Indenture and the obligations of the Guarantors under the Note Guarantees and the Indenture and this Indenture shall cease to be of further effect, except those obligations referred to in the penultimate paragraph of this Section 8.01, if:
(1) all the Notes that have been authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from this trust) have been delivered to the Trustee for cancellation, or
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(2) (a) all Notes not delivered to the Trustee for cancellation otherwise have become due and payable or have been called for redemption pursuant to Section 5 or Section 6 of the Notes and the Issuer has irrevocably deposited or caused to be deposited with the Trustee funds in trust sufficient to pay and discharge the entire Indebtedness (including all principal and accrued interest) on the Notes not theretofore delivered to the Trustee for cancellation,
(b) the Issuer has paid all sums payable by them under this Indenture,
(c) the Issuer has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity or on the date of redemption, as the case may be, and
(d) Holders have a valid, perfected, exclusive security interest in this trust.
In addition, the Issuer must deliver an Officer's Certificate and an Opinion of Counsel stating that all conditions precedent to satisfaction and discharge have been complied with.
In the case of clause (2) of this Section 8.01, and subject to the next sentence and notwithstanding the foregoing paragraph, the Issuer's obligations in Sections 2.05, 2.06, 2.07, 2.08, 4.01, 4.02, 4.03 (as to legal existence of the Issuer only), 7.07, 8.05 and 8.06 shall survive until the Notes are no longer outstanding pursuant to the last paragraph of Section 2.08. After the Notes are no longer outstanding, the Issuer's obligations in Sections 7.07, 8.05 and 8.06 shall survive.
After such delivery or irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Issuer's obligations under the Notes and this Indenture except for those surviving obligations specified above.
SECTION 8.02. LEGAL DEFEASANCE AND COVENANT DEFEASANCE.
(a) The Issuer may, at its option and at any time, elect to have either paragraph (b) or (c) below be applied to all outstanding Notes upon compliance with the conditions set forth in Section 8.03.
(b) Upon the Issuer's exercise under Section 8.02(a) hereof of the option applicable to this Section 8.02(b), the Issuer and the Guarantors shall, subject to the satisfaction of the conditions set forth in Section 8.03, be deemed to have been discharged from their obligations with respect to all outstanding Notes on the date the conditions set forth below are satisfied (hereinafter, "LEGAL DEFEASANCE"). For this purpose, Legal Defeasance means that the Issuer and the Guarantors shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes and the Note Guarantees, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.04 hereof and the other Sections of this Indenture referred to in (i) and (ii) below, and to have satisfied all its other obligations under such Notes and this Indenture and the Guarantors shall be deemed to have satisfied all of their obligations under the Note Guarantees and this Indenture (and the Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder:
(i) the rights of Holders of outstanding Notes to receive, solely from the trust fund described in Section 8.04 hereof, and as more fully set forth in such Section 8.04, payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due;
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(ii) the Issuer's obligations with respect to such Notes under Article Two and Section 4.02 hereof;
(iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Issuer's obligations in connection therewith; and
(iv) the provisions of this Article Eight applicable to Legal Defeasance.
Subject to compliance with this Article Eight, the Issuer may exercise its option under this Section 8.02(b) notwithstanding the prior exercise of its option under Section 8.02(c) hereof.
(c) Upon the Issuer's exercise under paragraph (a) hereof of the option applicable to this paragraph (c), the Issuer and the Guarantors shall, subject to the satisfaction of the conditions set forth in Section 8.03 hereof, be released from their respective obligations under the covenants contained in Sections 4.03 (other than with respect to the legal existence of the Issuer), 4.04, 4.05, and 4.07 through 4.20, clause (3) of Section 5.01(a) and Article 11 hereof with respect to the outstanding Notes on and after the date the conditions set forth in Section 8.03 are satisfied (hereinafter, "COVENANT DEFEASANCE"), and the Notes shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes, the Issuer and the Guarantors may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. In addition, upon the Issuer's exercise under paragraph (a) hereof of the option applicable to this paragraph (c), subject to the satisfaction of the conditions set forth in Section 8.03 hereof, clauses (3), (4), (5), (6) and (9) of Section 6.01 hereof shall not constitute Events of Default.
SECTION 8.03. CONDITIONS TO LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of either Section 8.02(b) or 8.02(c) hereof to the outstanding Notes:
(1) the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, U.S. Legal Tender, U.S. Government Obligations or a combination thereof, in such amounts as will be sufficient (without reinvestment), in the opinion of a nationally recognized firm of independent public accountants selected by the Issuer, to pay the principal of and interest and premium, if any, on the Notes on the stated date for payment or on the redemption date of the Notes and the holders must have a valid, perfected, exclusive security interest in such trust,
(2) in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that:
(a) the Issuer has received from, or there has been published by the Internal Revenue Service, a ruling, or
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(b) since the date of this Indenture, there has been a change in the applicable U.S. federal income tax law,
in either case to the effect that, and based thereon the Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Legal Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred,
(3) in the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Covenant Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred,
(4) no Default shall have occurred and be continuing on the date of such deposit (other than a Default resulting from the borrowing of funds to be applied to such deposit and the grant of any Lien securing such borrowing),
(5) the Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a Default under any material agreement or instrument to which the Issuer or any of its Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is bound (other than any such Default or default resulting solely from the borrowing of funds to be applied to such deposit and the grant of any Lien on such deposit in favor of the Trustee and/or the Holders),
(6) the Issuer shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by it with the intent of preferring the Holders over any other creditors of the Issuer or with the intent of defeating, hindering, delaying or defrauding any other of its creditors, and
(7) the Issuer shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that the conditions provided for in, in the case of the Officers' Certificate, clauses (1) through (6), as applicable, and, in the case of the Opinion of Counsel, clauses (1) (with respect to the validity and perfection of the security interest), (2), if applicable, and/or (3) and (5) of this Section 8.03 have been complied with.
SECTION 8.04. APPLICATION OF TRUST MONEY.
The Trustee or Paying Agent shall hold in trust U.S. Legal Tender and U.S. Government Obligations deposited with it pursuant to this Article Eight, and shall apply the deposited U.S. Legal Tender and the money from U.S. Government Obligations in accordance with this Indenture to the payment of the principal of and the interest on the Notes. The Trustee shall be under no obligation to invest said U.S. Legal Tender and U.S. Government Obligations, except as it may agree with the Issuer.
The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Legal Tender and U.S. Government Obligations deposited pursuant to Section 8.03 or the principal and interest received in respect thereof, other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes.
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Anything in this Article Eight to the contrary notwithstanding, the Trustee shall promptly deliver or pay to the Issuer from time to time upon the Issuer's request any U.S. Legal Tender and U.S. Government Obligations held by it as provided in Section 8.03 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance.
SECTION 8.05. REPAYMENT TO THE ISSUER.
The Trustee and the Paying Agent shall pay to the Issuer upon request any money held by them for the payment of principal or interest that remains unclaimed for two years; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any payment, may at the expense of the Issuer cause to be published once in a newspaper of general circulation in the City of New York or mail to each Holder entitled to such money notice that such money remains unclaimed and that after a date specified therein which shall be at least 30 days from the date of such publication or mailing any unclaimed balance of such money then remaining will be repaid to the Issuer. After payment to the Issuer, Holders entitled to such money must look to the Issuer for payment as general creditors unless an applicable law designates another Person.
SECTION 8.06. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any U.S. Legal Tender and U.S. Government Obligations in accordance with this Article Eight by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, or if the funds deposited with the Trustee to effect Covenant Defeasance are insufficient to pay the principal of, and interest on, the Notes when due, the Issuer's obligations under this Indenture, and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to this Article Eight until such time as the Trustee or Paying Agent is permitted to apply all such U.S. Legal Tender and U.S. Government Obligations in accordance with this Article Eight; PROVIDED, HOWEVER, that if the Issuer has made any payment of interest on, or principal of, any Notes because of the reinstatement of its obligations, the Issuer shall be subrogated to the rights of the Holders of such Notes to receive such payment from the U.S. Legal Tender and U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS.
Subject to Section 9.03, the Issuer, the Guarantors and the Trustee, together, may amend or supplement this Indenture, the Notes or the Note Guarantees without notice to or consent of any Holder:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or in place of certificated Notes;
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(3) to provide for the assumption of the Issuer's or a Guarantor's obligations to the Holders of the Notes in the case of a merger, consolidation or sale of all or substantially all of the assets, in accordance with Article Five;
(4) to release any Guarantor from any of its obligations under its Note Guarantee or this Indenture (to the extent permitted by this Indenture);
(5) to make any change that would not materially adversely affect the rights of any Holder; or
(6) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act;
PROVIDED, HOWEVER, that the Issuer has delivered to the Trustee an Opinion of Counsel and an Officers' Certificate, each stating that such amendment or supplement complies with the provisions of this Section 9.01.
SECTION 9.02. WITH CONSENT OF HOLDERS.
(a) Subject to Sections 6.07 and 9.03, the Issuer, the Guarantors and the Trustee, together, with the written consent of the Holder or Holders of a majority in aggregate principal amount of the outstanding Notes may amend or supplement this Indenture, the Notes or the Note Guarantees, without notice to any other Holders. Subject to Sections 6.07 and 9.03, the Holder or Holders of a majority in aggregate principal amount of the outstanding Notes may waive compliance with any provision of this Indenture, the Notes or the Note Guarantees without notice to any other Holders; PROVIDED, HOWEVER, that after the occurrence of a Change of Control, no such amendment may, without the consent of the Holders of two-thirds in aggregate principal amount of Notes then outstanding, amend the obligation of the Issuer under Section 4.07 or the related definitions that could adversely affect the rights of any Holder.
(b) Notwithstanding Section 9.02(a), without the consent of each Holder affected, no amendment or waiver may:
(1) reduce, or change the maturity, of the principal of any Note;
(2) reduce the rate of or extend the time for payment of interest on any Note;
(3) reduce any premium payable upon optional redemption of the Notes, change the date on which any Notes are subject to redemption or otherwise alter the provisions with respect to the redemption of the Notes (other than provisions relating to the purchase of Notes set forth in Section 4.07 and Section 4.11);
(4) make any Note payable in money or currency other than that stated in the Notes;
(5) modify or change any provision of this Indenture or the related definitions affecting the subordination of the Notes or any Note Guarantee in a manner that adversely affects the Holders in any material respect;
(6) reduce the percentage of Holders necessary to consent to an amendment or waiver to this Indenture or the Notes;
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(7) waive a default in the payment of principal of or premium or interest on any Notes (except a rescission of acceleration of the Notes by the Holders thereof as provided in this Indenture and a waiver of the payment default that resulted from such acceleration);
(8) impair the rights of Holders to receive payments of principal of or interest on the Notes on or after the due date therefor;
(9) release any Guarantor which is a Significant Subsidiary from any of its obligations under its Note Guarantee or this Indenture, except as permitted by this Indenture; or
(10) make any change in these amendment and waiver provisions.
(c) It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, supplement or waiver but it shall be sufficient if such consent approves the substance thereof.
(d) A consent to any amendment, supplement or waiver under this Indenture by any Holder given in connection with an exchange (in the case of an exchange offer) or a tender (in the case of a tender offer) of such Holder's Notes will not be rendered invalid by such tender or exchange.
(e) After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Issuer shall mail, or cause to be mailed, to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver.
SECTION 9.03. EFFECT ON SENIOR DEBT.
No amendment of, or supplement or waiver to, this Indenture shall adversely affect the rights of any holder of Senior Debt or Guarantor Senior Debt under Article Ten and Section 11.02, without the consent of such holder or its Representative.
SECTION 9.04. COMPLIANCE WITH THE TRUST INDENTURE ACT.
From the date on which this Indenture is qualified under the Trust Indenture Act, every amendment, waiver or supplement of this Indenture, the Notes or the Note Guarantees shall comply with the Trust Indenture Act as then in effect.
SECTION 9.05. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his Note or portion of his Note by notice to the Trustee or the Issuer received before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Notes have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver.
The Issuer may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver, which record date shall
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be at least 30 days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. The Issuer shall inform the Trustee in writing of the fixed record date if applicable.
After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (1) through (10) of Section 9.02(b), in which case, the amendment, supplement or waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note; PROVIDED, HOWEVER, that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of, and interest on, a Note, on or after the respective due dates therefor, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder.
SECTION 9.06. NOTATION ON OR EXCHANGE OF NOTES.
If an amendment, supplement or waiver changes the terms of a Note, the Issuer may require the Holder of the Note to deliver it to the Trustee. The Issuer shall provide the Trustee with an appropriate notation on the Note about the changed terms and cause the Trustee to return it to the Holder at the Issuer's expense. Alternatively, if the Issuer or the Trustee so determines, the Issuer in exchange for the Note shall issue, and the Trustee shall authenticate, a new Note that reflects the changed terms. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.07. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article Nine; PROVIDED, HOWEVER, that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate each stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture and constitutes legal, valid and binding obligations of the Issuer enforceable in accordance with its terms, subject to customary exceptions. Such Opinion of Counsel shall be at the expense of the Issuer.
ARTICLE TEN
SUBORDINATION OF NOTES
SECTION 10.01. NOTES SUBORDINATED TO SENIOR DEBT.
Anything herein to the contrary notwithstanding, each of the Issuer, for itself and its successors, and each Holder, by his or her acceptance of Notes, agrees that the payment of all Obligations owing to the Holders in respect of the Notes is subordinated, to the extent and in the manner provided in this Article Ten, to the prior payment in full of all Senior Debt (including all Obligations under the Credit Agreement) in cash, whether outstanding on the Issue Date or thereafter incurred. Notwithstanding anything in this Article Ten to the contrary, payments and distributions (A) of Permitted Junior Securities and (B) made relating to the Notes from the trust established pursuant to Article Eight shall not be so subordi-
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nated in right of payment, so long as, with respect to (B), (i) the conditions specified in Article Eight are satisfied on the date of any deposit pursuant to said trust and (ii) such payments and distributions did not violate the provisions of this Article Ten when made.
This Article Ten shall constitute a continuing offer to all Persons who become holders of, or continue to hold, Senior Debt, such provisions are made for the benefit of the holders of Senior Debt and such holders are made obligees hereunder and any one or more of them may enforce such provisions.
SECTION 10.02. SUSPENSION OF PAYMENT WHEN SENIOR DEBT IS IN DEFAULT.
(a) If any default occurs and is continuing in the payment when due, whether at maturity, upon any redemption, by declaration or otherwise, of any principal of, interest on, unpaid drawings for letters of credit issued in respect of, or fees with respect to, any Senior Debt (a "PAYMENT DEFAULT"), then the Issuer shall not (x) make any payment or distribution of any kind or character with respect to any Obligations on or relating to the Notes or (y) acquire any of the Notes for cash or assets or otherwise (other than, in either case, Permitted Junior Securities).
(b) If any other event of default (other than a Payment Default) occurs and is continuing with respect to any Designated Senior Debt (as such event of default is defined in the instrument creating or evidencing such Designated Senior Debt) permitting the holders of such Designated Senior Debt then outstanding to accelerate the maturity thereof (a "NON-PAYMENT DEFAULT") and if the Representative for the respective issue of Designated Senior Debt (including, as applicable, the administrative agent under the Credit Agreement) gives written notice of the Non-Payment Default to the Trustee stating that such notice is a payment blockage notice (a "PAYMENT BLOCKAGE NOTICE"), then during the period (the "PAYMENT BLOCKAGE PERIOD") beginning upon the delivery of such Payment Blockage Notice and ending on the earliest of (1) the date on which all such Non-Payment Defaults are cured or waived, (2) 179 days after the date on which the applicable Payment Blockage Notice is received or (3) the date on which the Trustee receives notice from the Representative for such Designated Senior Debt rescinding the Payment Blockage Notice (unless in each case the maturity of any Designated Senior Debt has been accelerated), the Issuer shall not (x) make any payment of any kind or character with respect to any Obligations on or with respect to the Notes or (y) acquire any of the Notes for cash or assets or otherwise (other than, in either case, Permitted Junior Securities). Notwithstanding anything herein to the contrary, (x) in no event will a Payment Blockage Period extend beyond 179 days from the date the applicable Payment Blockage Notice is received by the Trustee and (y) no new Payment Blockage Notice may be delivered unless and until 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice. For all purposes of this Section 10.02(b), no Non-Payment Default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Debt shall be, or be made, the basis for the commencement of a second Payment Blockage Period by the Representative of such Designated Senior Debt whether or not within a period of 360 consecutive days, unless such Non-Payment Default shall have been cured or waived for a period of not less than 90 consecutive days. Any subsequent action, or any breach of any financial covenants for a period ending after the date of commencement of such Payment Blockage Period that, in either case, would give rise to a Non-Payment Default pursuant to any provisions under which a Non-Payment Default previously existed or was continuing shall constitute a new Non-Payment Default for this purpose.
(c) In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee or any Holder when such payment is prohibited by the foregoing provisions of this Section 10.02, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Debt (pro rata to such holders on the basis of the respective amount of Senior Debt held by such holders) or their respective Representatives, as their respective interests may appear. The Trustee
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shall be entitled to rely on information regarding amounts outstanding on the Senior Debt, if any, received from the holders of the Senior Debt (or their Representatives).
Nothing contained in this Article Ten shall limit the right of the Trustee or the Holders of the Notes to take any action to accelerate the maturity of the Notes pursuant to Section 6.02 or to pursue any rights or remedies hereunder; PROVIDED, HOWEVER, that all Senior Debt thereafter due or declared to be due shall first be paid in full in cash or cash equivalents before the Holders are entitled to receive any payment of any kind or character with respect to Obligations on the Notes.
SECTION 10.03. NOTES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR DEBT ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF THE ISSUER.
(a) Upon any payment or distribution of assets of the Issuer or any of its Subsidiaries of any kind or character, whether in cash, assets or securities, to creditors upon any total or partial liquidation, dissolution, winding-up, assignment for the benefit of creditors or marshaling of assets and liabilities of the Issuer or in a bankruptcy, reorganization, insolvency, receivership or other similar proceeding relating to the Issuer or its assets, whether voluntary or involuntary, all Obligations due on all Senior Debt (including interest accruing after the commencement of any bankruptcy or other like proceeding at the rate specified in the Credit Agreement, whether or not such interest is an allowed claim in any such proceeding) shall first be paid in full in cash, or such payment duly provided for to the satisfaction of the holders of Senior Debt, before any payment or distribution of any kind or character is made on account of any Obligations on or relating to the Notes, or for the acquisition of any of the Notes for cash or assets or otherwise. Upon any such dissolution, winding-up, liquidation, reorganization, receivership or similar proceeding, any payment or distribution of assets of the Issuer or any of its Subsidiaries of any kind or character, whether in cash, assets or securities, to which the Holders of the Notes or the Trustee under this Indenture would be entitled, except for the provisions hereof, shall be paid by the Issuer or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Holders or by the Trustee under this Indenture if received by them, directly to the holders of Senior Debt (PRO RATA to such holders on the basis of the respective amounts of Senior Debt held by such holders) or their respective Representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Debt may have been issued, as their respective interests may appear, for application to the payment of Senior Debt remaining unpaid until all such Senior Debt has been paid in full in cash after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of Senior Debt.
(b) To the extent any payment of Senior Debt (whether by or on behalf of the Issuer, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then, if such payment is recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person, the Senior Debt or part thereof originally intended to be satisfied shall be for purpose of this Article Ten deemed to be reinstated and outstanding as if such payment had not occurred.
It is further agreed that any diminution (whether pursuant to court decree or otherwise, including without limitation for any of the reasons described in the preceding sentence) of the Issuer's obligation to make any distribution or payment pursuant to any Senior Debt, except to the extent such diminution occurs by reason of the repayment (which has not been disgorged or returned) of such Senior Debt in cash or cash equivalents, shall have no force or effect for purposes of the subordination provisions
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contained in this Article Ten, with any turnover of payments as otherwise calculated pursuant to this Article Ten to be made as if no such diminution had occurred.
(c) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Issuer of any kind or character, whether in cash, assets or securities, shall be received by any Holder when such payment or distribution is prohibited by this Section 10.03, such payment or distribution shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Debt (PRO RATA to such holders on the basis of the respective amount of Senior Debt held by such holders) or their respective Representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Debt may have been issued, as their respective interests may appear, for application to the payment of Senior Debt remaining unpaid until all such Senior Debt has been paid in full in cash or cash equivalents, after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of such Senior Debt.
(d) The consolidation of the Issuer with, or the merger of the Issuer with or into, another Person or the liquidation or dissolution of the Issuer following the conveyance or transfer of all or substantially all of its assets, to another Person upon the terms and conditions provided in Article Five hereof shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other Person shall, as a part of such consolidation, merger, conveyance or transfer, assume the Issuer's obligations hereunder in accordance with Article Five hereof.
SECTION 10.04. PAYMENTS MAY BE MADE ON NOTES.
Nothing contained in this Article Ten or elsewhere in this Indenture shall prevent (i) the Issuer, except under the conditions described in Sections 10.02 and 10.03, from making payments at any time for the purpose of making payments of principal of, and interest on, the Notes, or from depositing with the Trustee any moneys for such payments, or (ii) in the absence of actual knowledge by the Trustee that a given payment would be prohibited by Section 10.02 or 10.03, the application by the Trustee of any moneys deposited with it for the purpose of making such payments of principal of, and interest on, the Notes to the Holders entitled thereto unless at least two Business Days prior to the date upon which such payment would otherwise become due and payable a Responsible Officer of the Trustee shall have actually received the written notice provided for in the first sentence of Section 10.02(b) or in Section 10.07; PROVIDED, HOWEVER, that, notwithstanding the foregoing, the Holders receiving any payments made in contravention of Section 10.02 and/or 10.03 (and the respective such payments) shall otherwise be subject to the provisions of Section 10.02 and Section 10.03. Notwithstanding anything to the contrary contained in this Article Ten or elsewhere in this Indenture, payments and distributions from the funds deposited pursuant to Article Eight will be permitted to be made and will not be subject to the provisions of this Article Ten so long as such funds were deposited in accordance with the provisions of Article Eight and did not violate the provisions of this Article Ten when such funds were so deposited. The Issuer shall give prompt written notice to the Trustee of any dissolution, winding-up, liquidation or reorganization of the Issuer, although any delay or failure to give any such notice shall have no effect on the subordination provisions contained herein.
SECTION 10.05. HOLDERS TO BE SUBROGATED TO RIGHTS OF HOLDERS OF SENIOR DEBT.
Subject to the payment in full of all Senior Debt in cash or cash equivalents, the Holders of the Notes shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of cash, assets or securities of the Issuer applicable to the Senior Debt until the Notes shall be paid in full; and, for the purposes of such subrogation, no such payments or distributions to the holders of the Senior Debt by or on behalf of the Issuer, or by or on behalf of the Holders by virtue of this Article Ten,
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which otherwise would have been made to the Holders shall, as between the Issuer and the Holders, be deemed to be a payment by the Issuer to or on account of the Senior Debt, it being understood that the provisions of this Article Ten are and are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of Senior Debt, on the other hand.
SECTION 10.06. OBLIGATIONS OF THE ISSUER UNCONDITIONAL.
Nothing contained in this Article Ten or elsewhere in this Indenture or in the Notes is intended to or shall impair, as between the Issuer, and the Holders, the obligation of the Issuer, which is absolute and unconditional, to pay to the Holders the principal of, and any interest on, the Notes as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Issuer other than the holders of the Senior Debt, nor shall anything herein or therein prevent the Holder of any Note or the Trustee on its behalf from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, of the holders of Senior Debt in respect of cash, assets or securities of the Issuer received upon the exercise of any such remedy.
SECTION 10.07. NOTICE TO TRUSTEE.
The Issuer shall give prompt written notice to the Trustee of any fact known to the Issuer which would prohibit the making of any payment to or by the Trustee in respect of the Notes pursuant to the provisions of this Article Ten, although any delay or failure to give any such notice shall have no effect on the subordination provisions contained herein. Regardless of anything to the contrary contained in this Article Ten or elsewhere in this Indenture, the Trustee shall not be charged with knowledge of the existence of any default or event of default with respect to any Senior Debt or of any other facts which would prohibit the making of any payment to or by the Trustee unless and until the Trustee shall have received notice in writing from the Issuer, or from a holder of Senior Debt or a Representative therefor and, prior to the receipt of any such written notice, the Trustee shall be entitled to assume (in the absence of actual knowledge to the contrary) that no such facts exist. The Trustee shall be entitled to rely on the delivery to it of any notice pursuant to this Section 10.07 to establish that such notice has been given by a holder of Senior Debt (or a Representative thereof).
In the event that the Trustee determines in good faith that any evidence is required with respect to the right of any Person as a holder of Senior Debt to participate in any payment or distribution pursuant to this Article Ten, the Trustee may request such Person to furnish evidence to the satisfaction of the Trustee as to the amounts of Senior Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article Ten, and if such evidence is not furnished the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.
SECTION 10.08. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.
Upon any payment or distribution of assets of the Issuer referred to in this Article Ten, the Trustee, subject to the provisions of Article Seven hereof, and the Holders of the Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any insolvency, bankruptcy, receivership, dissolution, winding-up, liquidation, reorganization or similar case or proceeding is pending, or upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or the Holders of the Notes, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of the Senior Debt and other Indebtedness of the Issuer, the
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amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Ten.
SECTION 10.09. TRUSTEE'S RELATION TO SENIOR DEBT.
The Trustee and any agent of the Issuer or the Trustee shall be entitled to all the rights set forth in this Article Ten with respect to any Senior Debt which may at any time be held by it in its individual or any other capacity to the same extent as any other holder of Senior Debt and nothing in this Indenture shall deprive the Trustee or any such agent of any of its rights as such holder.
With respect to the holders of Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article Ten, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt.
Whenever a distribution is to be made or a notice given to holders or owners of Senior Debt, the distribution may be made and the notice may be given to their Representative, if any.
SECTION 10.10. SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF THE ISSUER OR HOLDERS OF SENIOR DEBT.
No right of any present or future holders of any Senior Debt to enforce subordination as provided herein shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Issuer or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Issuer with the terms of this Indenture, regardless of any knowledge thereof, which any such holder may have or otherwise be charged with.
Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt may, at any time and from time to time, without the consent of or notice to the Trustee, without incurring responsibility to the Trustee or the Holders of the Notes and without impairing or releasing the subordination provided in this Article Ten or the obligations hereunder of the Holders of the Notes to the holders of the Senior Debt, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Debt, or otherwise amend or supplement in any manner Senior Debt, or any instrument evidencing the same or any agreement under which Senior Debt is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt; (iii) release any Person liable in any manner for the payment or collection of Senior Debt; and (iv) exercise or refrain from exercising any rights against the Issuer and any other Person.
SECTION 10.11. HOLDERS AUTHORIZE TRUSTEE TO EFFECTUATE SUBORDINATION OF NOTES.
Each Holder of the Notes by its acceptance of them authorizes and expressly directs the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate, as between the holders of Senior Debt and the Holders of the Notes, the subordination provided in this Article Ten, and appoints the Trustee its attorney-in-fact for such purposes, including, in the event of any dissolution, winding-up, liquidation or reorganization of the Issuer (whether in bankruptcy, insolvency, receivership, reorganization or similar proceedings or upon an assignment for the benefit of credits or otherwise) tending towards liquidation of the business and assets of the Issuer, the filing of a claim for the unpaid balance of its Notes and accrued interest in the form required in those proceedings.
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If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holders of the Senior Debt or their Representative are or is hereby authorized to have the right to file and are or is hereby authorized to file an appropriate claim for and on behalf of the Holders of said Notes. Nothing herein contained shall be deemed to authorize the Trustee or the holders of Senior Debt or their Representative to authorize, consent to, accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee or the holders of Senior Debt or their Representative to vote in respect of the claim of any Holder in any such proceeding.
SECTION 10.12. THIS ARTICLE TEN NOT TO PREVENT EVENTS OF DEFAULT.
The failure to make a payment on account of principal of, or interest on, the Notes by reason of any provision of this Article Ten will not be construed as preventing the occurrence of an Event of Default.
SECTION 10.13. TRUSTEE'S COMPENSATION NOT PREJUDICED.
Nothing in this Article Ten will apply to amounts due to the Trustee (other than payments of Obligations owing to Holders in respect of the Notes) pursuant to other Sections of this Indenture.
ARTICLE ELEVEN
NOTE GUARANTEE
SECTION 11.01. UNCONDITIONAL GUARANTEE.
Subject to the provisions of this Article Eleven, each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Notes or the obligations of the Issuer or any other Guarantors to the Holders or the Trustee hereunder or thereunder: (a) (x) the due and punctual payment of the principal of, premium, if any, and interest on the Notes when and as the same shall become due and payable, whether at maturity, upon redemption or repurchase, by acceleration or otherwise, (y) the due and punctual payment of interest on the overdue principal and (to the extent permitted by law) interest, if any, on the Notes and (z) the due and punctual payment and performance of all other obligations of the Issuer and all other obligations of the other Guarantors (including under the Note Guarantees), in each case, to the Holders or the Trustee hereunder or thereunder (including amounts due the Trustee under Section 7.07 hereof), all in accordance with the terms hereof and thereof (collectively, the "GUARANTEE OBLIGATIONS"); and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the due and punctual payment and performance of Guarantee Obligations in accordance with the terms of the extension or renewal, whether at maturity, upon redemption or repurchase, by acceleration or otherwise. Failing payment when due of any amount so guaranteed, or failing performance of any other obligation of the Issuer to the Holders under this Indenture or under the Notes, for whatever reason, each Guarantor shall be obligated to pay, or to perform or cause the performance of, the same immediately. A Default under this Indenture or the Notes shall constitute an event of default under the Note Guarantees, and shall entitle the Holders of Notes to accelerate the obligations of the Guarantors thereunder in the same manner and to the same extent as the obligations of the Issuer.
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Each of the Guarantors hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, any release of any other Guarantor, the recovery of any judgment against the Issuer, any action to enforce the same, whether or not a Note Guarantee is affixed to any particular Note, or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each of the Guarantors hereby waives the benefit of diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest, notice and all demands whatsoever and covenants that its Note Guarantee shall not be discharged except by complete performance of the obligations contained in the Notes, this Indenture and its Note Guarantee. Each Note Guarantee is a guarantee of payment and not of collection. If any Holder or the Trustee is required by any court or otherwise to return to the Issuer or to any Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to the Issuer or such Guarantor, any amount paid by the Issuer or such Guarantor to the Trustee or such Holder, each Note Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor further agrees that, as between it, on the one hand, and the Holders of Notes and the Trustee, on the other hand, (a) subject to this Article Eleven, the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six for the purposes of the Note Guarantees, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (b) in the event of any acceleration of such obligations as provided in Article Six, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of the Note Guarantees.
SECTION 11.02. SUBORDINATION OF NOTE GUARANTEE.
The obligations of each Guarantor under its Note Guarantee pursuant to this Article Eleven shall be junior and subordinated to the prior payment in full of the Guarantor Senior Debt of such Guarantor, whether outstanding on the Issue Date or thereafter incurred, in cash on the same basis as the Notes are junior and subordinated to Senior Debt of the Issuer. For the purposes of the foregoing sentence, the Trustee and the Holders shall have the right to receive and/or retain payments by any of the Guarantors only at such times as they may receive and/or retain payments in respect of the Notes pursuant to this Indenture, including Article Ten. In addition to the foregoing provisions of this Section 11.02, all of the covenants, obligations and agreements contained in Article Ten (together with related definitions) shall be deemed incorporated in this Section 11.02, MUTATIS MUTANDIS, as if references to the Issuer therein are references to each Guarantor herein and references to Senior Debt therein are references to the Guarantor Senior Debt of such Guarantor herein.
SECTION 11.03. LIMITATION ON GUARANTOR LIABILITY.
Each Guarantor, and by its acceptance of Notes, each Holder, hereby confirms that it is the intention of all such parties that the Note Guarantee of such Guarantor not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal, foreign or state law to the extent applicable to any Note Guarantee. To effectuate the foregoing intention, the Trustee, the Holders and the Guarantors hereby irrevocably agree that the obligations of such Guarantor under its Note Guarantee and this Article Eleven shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor (including any guarantee under the Credit Agreement) that are relevant under such laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under this Article Eleven, result in the obligations of such Guarantor under its Note Guarantee not
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constituting a fraudulent transfer or conveyance. Each Guarantor that makes a payment for distribution under its Note Guarantee is entitled to a contribution from each other Guarantor in a PRO RATA amount based on the adjusted net assets of each Guarantor.
SECTION 11.04. EXECUTION AND DELIVERY OF NOTE GUARANTEE.
To further evidence its Note Guarantee set forth in Section 11.01, each Guarantor hereby agrees that a notation of such Note Guarantee, substantially in the form of EXHIBIT E hereto, shall be endorsed on each Note authenticated and delivered by the Trustee. Such Note Guarantee shall be executed on behalf of each Guarantor by either manual or facsimile signature of one Officer or other person duly authorized by all necessary corporate action of each Guarantor who shall have been duly authorized to so execute by all requisite corporate action. The validity and enforceability of any Note Guarantee shall not be affected by the fact that it is not affixed to any particular Note.
Each of the Guarantors hereby agrees that its Note Guarantee set forth in Section 11.01 shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Note Guarantee.
If an Officer of a Guarantor whose signature is on this Indenture or a Note Guarantee no longer holds that office at the time the Trustee authenticates the Note on which such Note Guarantee is endorsed or at any time thereafter, such Guarantor's Note Guarantee of such Note shall nevertheless be valid.
The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Note Guarantee set forth in this Indenture on behalf of each Guarantor.
SECTION 11.05. RELEASE OF A GUARANTOR.
A Guarantor shall be released from its obligations under its Note Guarantee and its obligations under this Indenture and the Registration Rights Agreement:
(1) in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the Equity Interests of such Guarantor then held by the Issuer and the Restricted Subsidiaries;
(2) if such Guarantor is designated as an Unrestricted Subsidiary or otherwise ceases to be a Restricted Subsidiary, in each case in accordance with the provisions of this Indenture, upon effectiveness of such designation or when it first ceases to be a Restricted Subsidiary, respectively; or
(3) if such Guarantor shall not guarantee any Indebtedness or other Obligation under the Credit Agreement (other than if such Guarantor no longer guarantees any Indebtedness or other Obligation under the Credit Agreement as a result of payment under any guarantee of any such Indebtedness or other Obligation by such Guarantor); PROVIDED, HOWEVER, that a Guarantor shall not be permitted to be released from its Note Guarantee if it is an obligor with respect to any Indebtedness or other Obligation that would not, under Section 4.08, be permitted to be incurred by a Restricted Subsidiary that is not a Guarantor.
The Trustee shall execute an appropriate instrument prepared by the Issuer evidencing the release of a Guarantor from its obligations under its Note Guarantee upon receipt of a request by the Is-
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suer or such Guarantor accompanied by an Officers' Certificate and an Opinion of Counsel certifying as to the compliance with this Section 11.05; PROVIDED, HOWEVER, that the legal counsel delivering such Opinion of Counsel may rely as to matters of fact on one or more Officers' Certificates of the Issuer.
Except as set forth in Articles Four and Five and this Section 11.05, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of a Guarantor with or into the Issuer (in which case such Guarantor shall no longer be a Guarantor) or another Guarantor or shall prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety to the Issuer or another Guarantor.
SECTION 11.06. WAIVER OF SUBROGATION.
Until this Indenture is discharged and all of the Notes are discharged and paid in full, each Guarantor hereby irrevocably waives and agrees not to exercise any claim or other rights which it may now or hereafter acquire against the Issuer that arise from the existence, payment, performance or enforcement of the Issuer's obligations under the Notes or this Indenture and such Guarantor's obligations under its Note Guarantee and this Indenture, in any such instance including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, and any right to participate in any claim or remedy of the Holders against the Issuer, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Issuer, directly or indirectly, in cash or other assets or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding sentence and any amounts owing to the Trustee or the Holders of Notes under the Notes, this Indenture, or any other document or instrument delivered under or in connection with such agreements or instruments, shall not have been paid in full, such amount shall have been deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Trustee or the Holders and shall forthwith be paid to the Trustee for the benefit of itself or such Holders to be credited and applied to the obligations in favor of the Trustee or the Holders, as the case may be, whether matured or unmatured, in accordance with the terms of this Indenture. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that the waiver set forth in this Section 11.06 is knowingly made in contemplation of such benefits.
SECTION 11.07. IMMEDIATE PAYMENT.
Each Guarantor agrees to make immediate payment to the Trustee on behalf of the Holders of all Guarantee Obligations owing or payable to the respective Holders upon receipt of a demand for payment therefor by the Trustee to such Guarantor in writing.
SECTION 11.08. NO SET-OFF.
Each payment to be made by a Guarantor hereunder in respect of the Guarantee Obligations shall be payable in the currency or currencies in which such Guarantee Obligations are denominated, and shall be made without set-off, counterclaim, reduction or diminution of any kind or nature.
SECTION 11.09. GUARANTEE OBLIGATIONS ABSOLUTE.
The obligations of each Guarantor hereunder are and shall be absolute and unconditional and any monies or amounts expressed to be owing or payable by each Guarantor hereunder which may
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not be recoverable from such Guarantor on the basis of a Guarantee shall be recoverable from such Guarantor as a primary obligor and principal debtor in respect thereof.
SECTION 11.10. GUARANTEE OBLIGATIONS CONTINUING.
The obligations of each Guarantor hereunder shall be continuing and shall remain in full force and effect until all such obligations have been paid and satisfied in full. Each Guarantor agrees with the Trustee that it will from time to time deliver to the Trustee suitable acknowledgments of this continued liability hereunder and under any other instrument or instruments in such form as counsel to the Trustee may advise and as will prevent any action brought against it in respect of any default hereunder being barred by any statute of limitations now or hereafter in force and, in the event of the failure of a Guarantor so to do, it hereby irrevocably appoints the Trustee the attorney and agent of such Guarantor to make, execute and deliver such written acknowledgment or acknowledgments or other instruments as may from time to time become necessary or advisable, in the judgment of the Trustee on the advice of counsel, to fully maintain and keep in force the liability of such Guarantor hereunder.
SECTION 11.11. GUARANTEE OBLIGATIONS NOT REDUCED.
The obligations of each Guarantor hereunder shall not be satisfied, reduced or discharged solely by the payment of such principal, premium, if any, interest, fees and other monies or amounts as may at any time prior to discharge of this Indenture pursuant to Article Eight be or become owing or payable under or by virtue of or otherwise in connection with the Notes or this Indenture.
SECTION 11.12. GUARANTEE OBLIGATIONS REINSTATED.
The obligations of each Guarantor hereunder shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment which would otherwise have reduced the obligations of any Guarantor hereunder (whether such payment shall have been made by or on behalf of the Issuer or by or on behalf of a Guarantor) is rescinded or reclaimed from any of the Holders upon the insolvency, bankruptcy, liquidation or reorganization of the Issuer or any Guarantor or otherwise, all as though such payment had not been made. If demand for, or acceleration of the time for, payment by the Issuer or any other Guarantor is stayed upon the insolvency, bankruptcy, liquidation or reorganization of the Issuer or such Guarantor, all such Indebtedness otherwise subject to demand for payment or acceleration shall nonetheless be payable by each Guarantor as provided herein.
SECTION 11.13. GUARANTEE OBLIGATIONS NOT AFFECTED.
The obligations of each Guarantor hereunder shall not be affected, impaired or diminished in any way by any act, omission, matter or thing whatsoever, occurring before, upon or after any demand for payment hereunder (and whether or not known or consented to by any Guarantor or any of the Holders) which, but for this provision, might constitute a whole or partial defense to a claim against any Guarantor hereunder or might operate to release or otherwise exonerate any Guarantor from any of its obligations hereunder or otherwise affect such obligations, whether occasioned by default of any of the Holders or otherwise, including, without limitation:
(a) any limitation of status or power, disability, incapacity or other circumstance relating to the Issuer or any other Person, including any insolvency, bankruptcy, liquidation, reorganization, readjustment, composition, dissolution, winding-up or other proceeding involving or affecting the Issuer or any other Person;
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(b) any irregularity, defect, unenforceability or invalidity in respect of any indebtedness or other obligation of the Issuer or any other Person under this Indenture, the Notes or any other document or instrument;
(c) any failure of the Issuer or any other Guarantor, whether or not without fault on its part, to perform or comply with any of the provisions of this Indenture, the Notes or any Note Guarantee, or to give notice thereof to a Guarantor;
(d) the taking or enforcing or exercising or the refusal or neglect to take or enforce or exercise any right or remedy from or against the Issuer or any other Person or their respective assets or the release or discharge of any such right or remedy;
(e) the granting of time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Issuer or any other Person;
(f) any change in the time, manner or place of payment of, or in any other term of, any of the Notes, or any other amendment, variation, supplement, replacement or waiver of, or any consent to departure from, any of the Notes or this Indenture, including, without limitation, any increase or decrease in the principal amount of or premium, if any, or interest on any of the Notes;
(g) any change in the ownership, control, name, objects, businesses, assets, capital structure or constitution of the Issuer or a Guarantor;
(h) any merger or amalgamation of the Issuer or a Guarantor with any Person or Persons;
(i) the occurrence of any change in the laws, rules, regulations or ordinances of any jurisdiction by any present or future action of any governmental authority or court amending, varying, reducing or otherwise affecting, or purporting to amend, vary, reduce or otherwise affect, any of the Guarantee Obligations or the obligations of a Guarantor under its Note Guarantee; and
(j) any other circumstance, including release of a Guarantor pursuant to Section 11.05 (other than by complete, irrevocable payment) that might otherwise constitute a legal or equitable discharge or defense of the Issuer under this Indenture or the Notes or of a Guarantor in respect of its Note Guarantee hereunder.
SECTION 11.14. WAIVER.
Without in any way limiting the provisions of Section 11.01, each Guarantor hereby waives notice of acceptance hereof, notice of any liability of any Guarantor hereunder, notice or proof of reliance by the Holders upon the obligations of any Guarantor hereunder, and diligence, presentment, demand for payment on the Issuer, protest, notice of dishonor or non-payment of any of the Guarantee Obligations, or other notice or formalities to the Issuer or any Guarantor of any kind whatsoever.
SECTION 11.15. NO OBLIGATION TO TAKE ACTION AGAINST THE ISSUER.
Neither the Trustee nor any other Person shall have any obligation to enforce or exhaust any rights or remedies against the Issuer or any other Person or any property of the Issuer or any other
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Person before the Trustee is entitled to demand payment and performance by any or all Guarantors of their liabilities and obligations under their Note Guarantees or under this Indenture.
SECTION 11.16. DEALING WITH THE ISSUER AND OTHERS.
The Holders, without releasing, discharging, limiting or otherwise affecting in whole or in part the obligations and liabilities of any Guarantor hereunder and without the consent of or notice to any Guarantor, may
(a) grant time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Issuer or any other Person;
(b) take or abstain from taking security or collateral from the Issuer or from perfecting security or collateral of the Issuer;
(c) release, discharge, compromise, realize, enforce or otherwise deal with or do any act or thing in respect of (with or without consideration) any and all collateral, mortgages or other security given by the Issuer or any third party with respect to the obligations or matters contemplated by this Indenture or the Notes;
(d) accept compromises or arrangements from the Issuer;
(e) apply all monies at any time received from the Issuer or from any security upon such part of the Guarantee Obligations as the Holders may see fit or change any such application in whole or in part from time to time as the Holders may see fit; and
(f) otherwise deal with, or waive or modify their right to deal with, the Issuer and all other Persons and any security as the Holders or the Trustee may see fit.
SECTION 11.17. DEFAULT AND ENFORCEMENT.
If any Guarantor fails to pay in accordance with Section 11.07 hereof, the Trustee may proceed in its name as trustee hereunder in the enforcement of the Note Guarantee of any such Guarantor and such Guarantor's obligations thereunder and hereunder by any remedy provided by law, whether by legal proceedings or otherwise, and to recover from such Guarantor the obligations.
SECTION 11.18. AMENDMENT, ETC.
Subject to Section 9.03 hereof, no amendment, modification or waiver of any provision of this Indenture relating to any Guarantor or consent to any departure by any Guarantor or any other Person from any such provision will in any event be effective unless it is signed by such Guarantor and the Trustee.
SECTION 11.19. ACKNOWLEDGMENT.
Each Guarantor hereby acknowledges communication of the terms of this Indenture and the Notes and consents to and approves of the same.
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SECTION 11.20. COSTS AND EXPENSES.
Each Guarantor shall pay on demand by the Trustee any and all costs, fees and expenses (including, without limitation, reasonable legal fees on a solicitor and client basis) incurred by the Trustee, its agents, advisors and counsel or any of the Holders in enforcing any of their rights under any Note Guarantee.
SECTION 11.21. NO MERGER OR WAIVER; CUMULATIVE REMEDIES.
No Note Guarantee shall operate by way of merger of any of the obligations of a Guarantor under any other agreement, including, without limitation, this Indenture. No failure to exercise and no delay in exercising, on the part of the Trustee or the Holders, any right, remedy, power or privilege hereunder or under this Indenture or the Notes, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or under this Indenture or the Notes preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges in the Note Guarantee and under this Indenture, the Notes and any other document or instrument between a Guarantor and/or the Issuer and the Trustee are cumulative and not exclusive of any rights, remedies, powers and privilege provided by law.
SECTION 11.22. SURVIVAL OF GUARANTEE OBLIGATIONS.
Without prejudice to the survival of any of the other obligations of each Guarantor hereunder, the obligations of each Guarantor under Section 11.01 shall survive the payment in full of the Guarantee Obligations and shall be enforceable against such Guarantor without regard to and without giving effect to any defense, right of offset or counterclaim available to or which may be asserted by the Issuer or any Guarantor.
SECTION 11.23. GUARANTEE IN ADDITION TO OTHER GUARANTEE OBLIGATIONS.
The obligations of each Guarantor under its Note Guarantee and this Indenture are in addition to and not in substitution for any other obligations to the Trustee or to any of the Holders in relation to this Indenture or the Notes and any guarantees or security at any time held by or for the benefit of any of them.
ARTICLE TWELVE
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required or deemed to be included in this Indenture by the Trust Indenture Act, such required or deemed provision shall control.
SECTION 12.02. NOTICES.
Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by nationally recognized overnight courier service, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows:
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if to the Issuer or a Guarantor:
c/o Inverness Medical Innovations, Inc. 51 Sawyer Road
Waltham, MA 02453
Attention: Chief Financial Officer Telephone: (781) 647-3900 Facsimile: (781) 647-3939
With a copy to:
Goodwin Procter LLP Exchange Place 53 State Street Attention: Martin Carmichael III, PC Telephone: (617) 570-1166 Facsimile: (617) 570-8150
if to the Trustee:
U.S. Bank Trust National Association 100 Wall Street, Suite 1600 New York, New York 10005
Each of the Issuer and the Trustee by written notice to each other such Person may designate additional or different addresses for notices to such Person. Any notice or communication to the Issuer and the Trustee, shall be deemed to have been given or made as of the date so delivered if personally delivered; when replied to; when receipt is acknowledged, if telecopied; five (5) calendar days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee); and next Business Day if by nationally recognized overnight courier service.
Any notice or communication mailed to a Holder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.
SECTION 12.03. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS.
Holders may communicate pursuant to Trust Indenture Act Section 312(b) with other Holders with respect to their rights under this Indenture, the Notes or the Note Guarantees. The Issuer, the Trustee, the Registrar and any other Person shall have the protection of Trust Indenture Act Section 312(c).
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Attention: Corporate Trust Department Telephone: (212) 361-2525 Facsimile: (212) 509-3384
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Issuer to the Trustee to take any action under this Indenture, the Issuer shall furnish to the Trustee at the request of the Trustee:
(1) an Officers' Certificate, in form and substance satisfactory to the Trustee, stating that, in the opinion of the signers, all conditions precedent, if any, to be performed or effected by the Issuer, if any, provided for in this Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent, if any, have been complied with.
SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture, other than the Officers' Certificate required by Section 4.06, shall include:
(1) a statement that the Person making such certificate or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with or satisfied; and
(4) a statement as to whether or not, in the opinion of each such Person, such condition or covenant has been complied with; PROVIDED, HOWEVER, that with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials.
SECTION 12.06. RULES BY PAYING AGENT OR REGISTRAR.
The Paying Agent or Registrar may make reasonable rules and set reasonable requirements for their functions.
SECTION 12.07. LEGAL HOLIDAYS.
If a payment date is not a Business Day, payment may be made on the next succeeding day that is a Business Day.
SECTION 12.08. GOVERNING LAW.
THIS INDENTURE, THE NOTES AND THE NOTE GUARANTEES W ILL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE ST ATE OF NEW YORK.
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SECTION 12.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret another indenture, loan or debt agreement of any of the Issuer or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture.
SECTION 12.10. NO RECOURSE AGAINST OTHERS.
No director, officer, employee, incorporator, stockholder, member or manager of the Issuer or any Guarantor shall have any liability for any obligations of the Issuer under the Notes or this Indenture or of any Guarantor under its Note Guarantee or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. Such waiver and release are part of the consideration for issuance of the Notes.
SECTION 12.11. SUCCESSORS.
All agreements of the Issuer and the Guarantors in this Indenture, the Notes and the Note Guarantees shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successor.
SECTION 12.12. DUPLICATE ORIGINALS.
All parties may sign any number of copies of this Indenture. Each signed copy or counterpart shall be an original, but all of them together shall represent the same agreement.
SECTION 12.13. SEVERABILITY.
To the extent permitted by applicable law, in case any one or more of the provisions in this Indenture, in the Notes or in the Note Guarantees shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law.
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SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed all as of the date first written above.
INVERNESS MEDICAL INNOVATIONS, INC., as Issuer
APPLIED BIOTECH, INC. FOREFRONT DIAGNOSTICS, INC. INNOVATIONS RESEARCH, LLC
INVERNESS MEDICAL INTERNATIONAL HOLDING CORP.
INVERNESS MEDICAL INTERNATIONAL HOLDING CORP. II
INVERNESS MEDICAL, INC. MORPHEUS ACQUISITION CORP.
OSTEX INTERNATIONAL, INC. UNIPATH DIAGNOSTICS, INC.
UNIPATH ONLINE, INC. WAMPOLE LABORATORIES, LLC
as Guarantors
SELFCARE TECHNOLOGY, INC. as a Guarantor
S-1
By: /s/ Christopher Lindop ----------------------------------------------- Name: Christopher Lindop Title: Chief Financial Officer
By: /s/ Anthony J. Bernardo ---------------------------------------------- Name: Anthony J. Bernardo Title: President, Vice President or Manager, President, President, President, President, President, Vice President, President, Vice President, respectively
By: /s/ Duane L. James , ---------------------------------------------- Name: Duane L. James Title: Treasurer
U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee
S-2
By: /s/ Cheryl L. Clarke ---------------------------------------------- Name: Cheryl L. Clarke Title: Assistant Vice President
EXHIBIT A
[INSERT THE GLOBAL NOTE LEGEND, IF APPLICABLE PURSU ANT TO THE PROVISIONS OF THE INDENTURE]
[INSERT THE PRIVATE PLACEMENT LEGEND, IF APPLICABLE PURSUANT TO THE PROVISIONS OF THE INDENTURE]
INVERNESS MEDICAL INNOVATIONS, INC. 8 3/4% Senior Subordinated Notes 2012
CUSIP No.
No. $
INVERNESS MEDICAL INNOVATIONS, INC., a Delaware corporation (the "ISSUER"), for value received promises to pay to _______________ or its registered assigns, the principal sum of [ ] [or such other amount as is provided in a schedule attached hereto](a) on February 15, 2012.
Reference is made to the further provisions of this Note contained herein, which will for all purposes have the same effect as if set forth at this place.
(a) This language should be included only if the Note is issued in global form.
A-1
Interest Payment Dates: February 15 and A ugust 15, commencing August 15, 2004. Record Dates: February 1 and August 1.
IN WITNESS WHEREOF, the Issuer has caused this Note to be signed manually or by facsimile by its duly authorized officer.
Dated:
INVERNESS MEDICAL INNOVATIONS, INC., as Issuer
By: Name:
Title:
By: Name:
Title:
A-2
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This is one of the 8 3/4% Senior Subordinated Notes due 2012 described in the within-mentioned Indenture.
Dated:
U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee
By: Authorized Signatory
A-3
(Reverse of Note)
8 3/4% Senior Subordinated Notes due 2012
Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated.
SECTION 1. INTEREST. Inverness Medical Innovations, Inc., a Delaware corporation (the "ISSUER") promises to pay interest on the principal amount of this Note at 8 3/4% PER ANNUM from February 10, 2004 until maturity. The Issuer will pay interest semi-annually on February 15 and August 15 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an "INTEREST PAYMENT DATE"), commencing August 15, 2004. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. The Issuer shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand to the extent lawful at the interest rate applicable to the Notes; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months.
SECTION 2. METHOD OF PAYMENT. The Issuer will pay interest on the Notes to the Persons who are registered Holders of Notes at the close of business on the February 1 or August 1 next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be issued in denominations of $1,000 and integral multiples thereof. The Issuer shall pay principal, premium, if any, and interest on the Notes in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts ("U.S. LEGAL TENDER"). Principal, premium, if any, and interest on the Notes will be payable at the office or agency of the Issuer maintained for such purpose except that, at the option of the Issuer, the payment of interest may be made by check mailed to the Holders of the Notes at their respective addresses set forth in the register of Holders of Notes; PROVIDED, HOWEVER, that for Holders that have given wire transfer instructions to the Issuer at least ten Business Days prior to the applicable payment date, the Issuer will make all payments of principal, premium and interest by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Until otherwise designated by the Issuer, the Issuer's office or agency in New York will be the office of the Trustee maintained for such purpose.
SECTION 3. PAYING AGENT AND REGISTRAR. Initially, U.S. Bank Trust National Association, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Issuer may change any Paying Agent or Registrar without notice to any Holder. Except as provided in the Indenture, the Issuer or any of their Subsidiaries may act in any such capacity.
A-4
SECTION 4. INDENTURE AND SUBORDINATION. The Issuer issued the Notes under an Indenture dated as of February 10, 2004 ("INDENTURE") by and among the Issuer, the Guarantors and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TRUST INDENTURE ACT"). The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms. The payment of the Notes will, to the extent set forth in the Indenture, be subordinated in right of payment to the prior payment in full in cash or cash equivalents of all Senior Debt.
SECTION 5. OPTIONAL REDEMPTION. Except as set forth in Section 6 hereof, the Notes will not be redeemable at the Issuer's option prior to February 15, 2008. On or after February 15, 2008, the Notes will be subject to redemption at any time at the option of the Issuer, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, to the applicable Redemption Date, if redeemed during the twelve-month period beginning on February 15 of the years indicated below:
SECTION 6. OPTIONAL REDEMPTION WITH PROCEEDS FROM EQUITY OFFERINGS OR UPON A CHANGE OF CONTROL. (a) At any time prior to February 15, 2007, the Issuer may redeem up to 35% of the aggregate principal amount of Notes with the net cash proceeds of one or more Qualified Equity Offerings at a redemption price equal to 108.75% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest thereon, if any, to the Redemption Date; PROVIDED, HOWEVER, that (i) at least 65% of the aggregate principal amount of Notes issued under the Indenture remains outstanding immediately after the occurrence of such redemption and (ii) such redemption shall occur within 90 days of the date of the closing of any such Qualified Equity Offering.
SECTION 7. NOTICE OF REDEMPTION. Notice of redemption will be mailed by first class mail at least 30 days but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption.
SECTION 8. MANDATORY REDEMPTION. For the avoidance of doubt, an offer to purchase pursuant to Section 8 hereof shall not be deemed a redemption. The Issuer shall not be required to make mandatory redemption payments with respect to the Notes.
A-5
YEAR PERCENTAGE --------------------------------------------------- - --------------- 2008............................................. 104.375% 2009............................................. 102.188% 2010 and thereafter.............................. 100.000%
SECTION 9. REPURCHASE AT OPTION OF HOLDER. Upon the occurrence of a Change of Control, and subject to certain conditions set forth in the Indenture, the Issuer will be required to offer to purchase all of the outstanding Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of repurchase.
The Issuer is, subject to certain conditions and exceptions set forth in the Indenture, obligated to make an offer to purchase Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of repurchase, with certain net cash proceeds of certain sales or other dispositions of assets in accordance with the Indenture.
SECTION 10. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Issuer may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Issuer and the Registrar are not required to transfer or exchange any Note selected for redemption. Also, the Issuer and the Registrar are not required to transfer or exchange any Notes for a period of 15 days before a selection of Notes to be redeemed.
SECTION 11. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes.
SECTION 12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture and the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding, and compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture and the Notes to, among other things, cure any ambiguity, defect or inconsistency in the Indenture, provide for uncertificated Notes in addition to or in place of certificated Notes, comply with any requirements of the SEC in connection with the qualification of the Indenture under the Trust Indenture Act, or make any change that does not materially adversely affect the rights of any Holder.
SECTION 13. DEFAULTS AND REMEDIES. If a Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes generally may by written notice to the Issuer and the Trustee declare all the Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of a Default arising from certain events of bankruptcy or insolvency as set forth in the Indenture, with respect to the Issuer or any Significant Subsidiary, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default (except a Default relating to the payment of principal or interest in-
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cluding an accelerated payment or the failure to make a payment on the Change of Control Payment Date or the Net Proceeds Payment Date pursuant to a Net Proceeds Offer) or a Default in complying with the provisions of Article Five of the Indenture if it determines that withholding notice is in their interest. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default and its consequences under the Indenture except a continuing Default in the payment of interest on, or the principal of, or the premium, if any, on, the Notes.
SECTION 14. RESTRICTIVE COVENANTS. The Indenture contains certain covenants that, among other things, limit the ability of the Issuer and its Restricted Subsidiaries to make restricted payments, to incur indebtedness, to create liens, to sell assets, to permit restrictions on dividends and other payments by Restricted Subsidiaries of the Issuer, to consolidate, merge or sell all or substantially all of its assets or to engage in transactions with affiliates. The limitations are subject to a number of important qualifications and exceptions. The Issuer must annually report to the Trustee on compliance with such limitations and other provisions in the Indenture.
SECTION 15. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator, stockholder, member or manager of the Issuer or any Guarantor shall have any liability for any obligations of the Issuer under the Notes or the Indenture, or of any Guarantor under its Note Guarantee or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes.
SECTION 16. NOTE GUARANTEES. This Note will be entitled to the benefits of certain Note Guarantees made for the benefit of the Holders. Reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and obligations thereunder of the Guarantors, the Trustee and the Holders.
SECTION 17. TRUSTEE DEALINGS WITH THE ISSUER. Subject to certain terms, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Issuer, their Subsidiaries or their respective Affiliates as if it were not the Trustee.
SECTION 18. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent.
SECTION 19. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entirety), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
SECTION 20. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND RESTRICTED DEFINITIVE NOTES. Pursuant to, but subject to the exceptions in, the Registration Rights Agree-
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ment, the Issuer and the Guarantors will be obligated to consummate an exchange offer pursuant to which the Holder of this Note shall have the right to exchange this Note for an 8 3/4% Senior Subordinated Note due 2012 of the Issuer which shall have been registered under the Securities Act, in like principal amount and having terms identical in all material respects to this Note (except that such note shall not be entitled to Additional Interest and shall not contain terms with respect to transfer restrictions). The Holders shall be entitled to receive certain Additional Interest in the event such exchange offer is not consummated or the Notes are not offered for resale and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement.(a)
SECTION 21. CUSIP AND ISIN NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuer has caused CUSIP and ISIN numbers to be printed on the Notes and the Trustee may use CUSIP or ISIN numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon.
SECTION 22. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
The Issuer will furnish to any Holder upon written request and without charge a copy of the Indenture.
(a) This Section not to appear on Exchange Notes or Private Exchange Notes or Additional Notes unless required by the terms of such Additional Notes.
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ASSIGNMENT FORM
I or we assign and transfer this Note to:
(Print or type name, address and zip code of assignee or transferee)
(Insert Social Security or other identifying number of assignee or transferee)
and irrevocably appoint _______________________________________ agent to transfer this Note on the books of the Issuer. The agent may substitute another to act for him.
Signature Guarantee: Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee)
In connection with any transfer of this Note occurring prior to the date which is the date following the second anniversary of the original issuance of this Note, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and is making the transfer pursuant to one of the following:
[Check One]
(1) / / to the Issuer or a subsidiary thereof; or
(2) / / to a person who the transferor reasonably believes is a "qualified institutional buyer" pursuant to and in compliance with Rule 144A under the Securities Act of 1933, as amended (the "SECURITIES ACT"); or
(3) / / to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Trustee); or
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Dated: Signed: ----------------- --------- ----------------------------- (Sign ex actly as name appears on the oth er side of this Note)
(4) / / outside the United States to a non-"U.S. person" as defined in Rule 902 of Regulation S under the Securities Act in compliance with Rule 904 of Regulation S under the Securities Act; or
(5) / / pursuant to the exemption from registration provided by Rule 144 under the Securities Act; or
(6) / / pursuant to an effective registration statement under the Securities Act.
and unless the box below is checked, the undersigned confirms that such Note is not being transferred to an "affiliate" of the Issuer as defined in Rule 144 under the Securities Act (an "AFFILIATE"):
/ / The transferee is an Affiliate of the Issuer.
Unless one of the foregoing items (1) through (6) is checked, the Trustee will refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered Holder thereof; PROVIDED, HOWEVER, that if item (3), (4) or (5) is checked, the Issuer or the Trustee may require, prior to registering any such transfer of the Notes, in their sole discretion, such written legal opinions, certifications (including an investment letter in the case of box (3) or (4)) and other information as the Trustee or the Issuer has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.
If none of the foregoing items (1) through (6) are checked, the Trustee or Registrar shall not be obligated to register this Note in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.16 of the Indenture shall have been satisfied.
Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee)
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKE D
The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any
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Dated: Signed: ------------ ----------------------------- (Sign exactl y as name appears on the other side of this Note) Signature Guarantee: ------------ -----------------------------
such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Issuer as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A.
Dated:
NOTICE: To be executed by an executive officer
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OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant to Section 4.07 or Section 4.11 of the Indenture, check the appropriate box:
Section 4.07 [ ] Section 4.11 [ ]
If you want to elect to have only part of this Note purchased by the Issuer pursuant to Section 4.07 or Section 4.11 of the Indenture, state the amount (in denominations of $1,000 and integral multiples thereof): $___________
Signature Guarantee: Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee)
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Dated: Signed: ----------------- --- ----------------------------- (Si gn exactly as name appears on the other side of this Note)
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NO TE(a)
The following exchanges of a part of this Global Note for an interest in another Global Note or for a Physical Note, or exchanges of a part of another Global Note or Physical Note for an interest in this Global Note, have been made:
(a) This schedule should be included only if the Note is issued in global form
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Principal Amount of Si gnature of Amount of decrease in Amou nt of increase in this Global Note author ized officer of Principal Amount of Prin cipal Amount of following such decrease Trus tee or Note Date of Exchange this Global Note th is Global Note (or increase) C ustodian ------------------- ---------------------- ---- ----------------- ----------------------- ------ ----------------
EXHIBIT B
FORM OF LEGENDS
Each Global Note and Physical Note that constitutes a Restricted Security shall bear the following legend (the "PRIVATE PLACEMENT LEGEND") on the face thereof until after the second anniversary of the Issue Date, unless otherwise agreed by the Issuer and the Holder thereof or if such legend is no longer required by Section 2.16(f) of the Indenture:
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED BY THIS CERTIFICATE WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE U.S. SECURITIES ACT OF 1933, AND THE SECURITY EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN APPLICABLE EXEMPTION FROM THE SECURITIES ACT. EACH PURCHASER OF THE SECURITY EVIDENCED BY THIS CERTIFICATE (1) BY ITS ACQUISITION OF THE SECURITY REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE SECURITY EVIDENCED BY THIS CERTIFICATE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, OR (C) IT IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF AN INSTITUTIONAL ACCREDITED INVESTOR AND (2) IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A OR ANOTHER EXEMPTION UNDER THE SECURITIES ACT. THE HOLDER OF THE SECURITY EVIDENCED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE ISSUER THAT (X) THIS SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1)(A) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (B) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE, (C) OUTSIDE THE UNITED STATES TO A PERSON THAT IS NOT A U.S. PERSON (AS DEFINED IN RULE 902 UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT, (D) TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT IS PURCHASING AT LEAST $100,000 OF NOTES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF AN INSTITUTIONAL ACCREDITED INVESTOR (AND BASED UPON AN OPINION OF COUNSEL IF THE ISSUER SO REQUESTS), (2) TO THE ISSUER OR ANY OF ITS SUBSIDIARIES OR (3) UNDER AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN COMPLIANCE WITH ANY
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APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (Y) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED BY THIS CERTIFICATE OF THE RESALE RESTRICTIONS DESCRIBED IN (X) ABOVE. IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY, IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE ISSUER SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
Each Global Note authenticated and delivered hereunder shall also bear the following legend:
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.16 OF THE INDENTURE.
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EXHIBIT C
FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH
TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVES TORS
_________,___
U.S. Bank Trust National Association 100 Wall Street, Suite 1600 New York, NY 10005 T: (212) 361-2525 F: (212) 509-3384 Attention: Corporate Trust Department
Ladies and Gentlemen:
In connection with our proposed purchase of 8 3/4% Senior Subordinated Notes due 2012 (the "NOTES") of INVERNESS MEDICAL INNOVATIONS, INC., a Delaware corporation (the "ISSUER"), we confirm that:
1. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture relating to the Notes (the "INDENTURE") and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "SECURITIES ACT"), and all applicable state securities laws.
2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered, sold, pledged or otherwise transferred except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell, offer, pledge or otherwise transfer any Notes, we will do so only (i) to the Issuer or any of its subsidiaries, (ii) inside the United States in a transaction meeting the requirements of Rule 144A under the Securities Act to a person who we reasonably believe to be a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act), (iii) inside the United States to an institutional "accredited investor" (as defined below) that is purchasing at least $100,000 of Notes for its own account or for the account of an institutional accredited investor and who, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Trustee (as defined in the Indenture) a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Notes (the form of which letter can be obtained from the Trustee), (iv) outside the United States to a person that is not a U.S. person (as defined in Rule 902 under the Securities Act) in accordance with Regulation S promulgated under the Securities Act, (v) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available) or (vi) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein.
3. We are not acquiring the Notes for or on behalf of, and will not transfer the Notes to, any employee benefit plan subject to Title I of the Employee Retirement Income Security Act
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of 1974, as amended ("ERISA"), any plan, individual retirement accounts or other arrangements subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the "CODE"), or provisions under any federal, state, local, or non-U.S. or other laws or regulations that are similar to such provisions of ERISA of the Code or any entity whose underlying assets are considered to include "plan assets" of such plans, accounts or arrangements, except as permitted in the sections entitled "Notice to investors" of the Offering Memorandum.
4. We understand that, on any proposed resale of any Notes, we will be required to furnish to the Trustee and the Issuer such certification, legal opinions and other information as the Trustee and the Issuer may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect.
5. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment, as the case may be.
6. We are acquiring the Notes purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion.
You, as Trustee, the Issuer, counsel for the Issuer and others are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby.
Very truly yours,
[Name of Transferee]
By: Name:
Title:
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EXHIBIT D
FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS
PURSUANT TO REGULATION S
_________,___
U.S. Bank Trust National Association 100 Wall Street, Suite 1600 New York, NY 10005 T: (212) 361-2525 F: (212) 509-3384 Attention: Corporate Trust Department
Re: Inverness Medical Innovations, Inc. (the "ISSUER") 8 3/4% Senior Subordinated Notes Due 2012 (the "NOTES")
Ladies and Gentlemen:
In connection with our proposed sale of $[ ] aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "SECURITIES ACT"), and, accordingly, we represent that:
(1) the offer of the Notes was not made to a person in the United States;
(2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither we nor any person acting on our behalf knows that the transaction has been prearranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and
(5) we have advised the transferee of the transfer restrictions applicable to the Notes.
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You, as Trustee, the Issuer, counsel for the Issuer and others are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
Authorized Signatory
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EXHIBIT E
NOTE GUARANTEE
For value received, each of the undersigned (including any successor Person under the Indenture) hereby unconditionally guarantees, jointly and severally, to the extent set forth in the Indenture (as defined below) to the Holder of this Note the payment of principal, premium, if any, and interest on this Note in the amounts and at the times when due and interest on the overdue principal, premium, if any, and interest, if any, of this Note when due, if lawful, and, to the extent permitted by law, the payment or performance of all other obligations of the Issuer under the Indenture or the Notes, to the Holder of this Note and the Trustee, all in accordance with and subject to the terms and limitations of this Note, the Indenture, including Article Eleven thereof, and this Note Guarantee. This Note Guarantee will become effective in accordance with Article Eleven of the Indenture and its terms shall be evidenced therein. The validity and enforceability of any Note Guarantee shall not be affected by the fact that it is not affixed to any particular Note.
Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Indenture dated as of February 10, 2004, among Inverness Medical Innovations, Inc., a Delaware corporation (the "ISSUER"), the Guarantors named therein and U.S. Bank Trust National Association, as trustee (the "TRUSTEE"), as amended or supplemented (the "INDENTURE").
The obligations of the undersigned to the Holders of Notes and to the Trustee pursuant to this Note Guarantee and the Indenture are expressly set forth in Article Eleven of the Indenture and reference is hereby made to the Indenture for the precise terms of the Note Guarantee and all of the other provisions of the Indenture to which this Note Guarantee relates.
No director, officer, employee, incorporator, stockholder, member or manager of any Guarantor, as such, shall have any liability for any obligations of such Guarantors under such Guarantors' Note Guarantee or the Indenture or for any claim based on, in respect of, or by reason of, such obligation or its creation.
This Note Guarantee is subordinated in right of payment, in the manner and to the extent set forth in Article Eleven of the Indenture, to the prior payment in full in cash or cash equivalents of all Guarantor Senior Debt of the Guarantors, whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or guaranteed.
THIS NOTE GUARANTEE SHALL BE GOVERNED BY, AND CONST RUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
This Note Guarantee is subject to release upon the terms set forth in the Indenture.
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IN WITNESS WHEREOF, each Guarantor has caused its Note Guarantee to be duly executed.
Date:
[ ]
By: Name:
Title:
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Exhibit 4.4
REGISTRATION RIGHTS AGREEMENT
Dated as of February 10, 2004
By and Among
INVERNESS MEDICAL INNOVATIONS, INC.,
the GUARANTORS named herein
and
UBS SECURITIES LLC
and
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED as Initial Purchasers
8 3/4% Senior Subordinated Notes due 2012
TABLE OF CONTENTS
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Page ---- Section 1. Definitions.......................... ............................1 Section 2. Exchange Offer....................... ............................4 Section 3. Shelf Registration................... ............................7 Section 4. Additional Interest.................. ............................8 Section 5. Registration Procedures.............. ...........................10 Section 6. Registration Expenses................ ...........................18 Section 7. Indemnification...................... ...........................19 Section 8. Rules 144 and 144A................... ...........................22 Section 9. Underwritten Registrations........... ...........................22 Section 10. Miscellaneous........................ ...........................22 (a) No Inconsistent Agreements........... ...........................22 (b) Adjustments Affecting Registrable Not es.........................22 (c) Amendments and Waivers............... ...........................23 (d) Notices.............................. ...........................23 (e) Guarantors........................... ...........................24 (f) Successors and Assigns............... ...........................24 (g) Counterparts......................... ...........................24 (h) Headings............................. ...........................24 (i) GOVERNING LAW........................ ...........................24 (j) Severability......................... ...........................25 (k) Securities Held by the Issuers or the ir Affiliates..............25 (l) Third-Party Beneficiaries............ ...........................25 (m) Attorneys' Fees...................... ...........................25 (n) Entire Agreement..................... ...........................25 SIGNATURES......................................... ...........................S-1
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is dated as of February 10, 2004, by and among INVERNESS MEDICAL INNOVATIONS, INC., a Delaware corporation (the "COMPANY"), and each of the Guarantors (as defined herein) (the Company, and the Guarantors are referred to collectively herein as the "ISSUERS"), on the one hand, and UBS WARBURG LLC and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, the "INITIAL PURCHASERS"), on the other hand.
This Agreement is entered into in connection with the Purchase Agreement, dated as of February 5, 2004, by and among the Issuers and the Initial Purchasers (the "PURCHASE AGREEMENT"), relating to the offering of $150,000,000 aggregate principal amount of 8 3/4% Senior Subordinated Notes due 2012 of the Company (including the guarantees thereof by the Guarantors, the "NOTES"). The execution and delivery of this Agreement is a condition to the Initial Purchasers' obligation to purchase the Notes under the Purchase Agreement.
The parties hereby agree as follows:
Section 1. DEFINITIONS
As used in this Agreement, the following terms shall have the following meanings:
"ACTION" shall have the meaning set forth in Section 7(c) hereof.
"ADDITIONAL INTEREST" shall have the meaning set forth in Section 4(a) hereof.
"ADVICE" shall have the meaning set forth in Section 5 hereof.
"ADDITIONAL INTEREST PAYMENT DATE" shall have the meaning set forth in Section 4(b) hereof.
"AGREEMENT" shall have the meaning set forth in the first introductory paragraph hereto.
"APPLICABLE PERIOD" shall have the meaning set forth in Section 2(b) hereof.
"BOARD OF DIRECTORS" shall have the meaning set forth in Section 5 hereof.
"BUSINESS DAY" shall mean a day that is not a Legal Holiday.
"COMPANY" shall have the meaning set forth in the introductory paragraph hereto and shall also include the Company's permitted successors and assigns.
"COMMISSION" shall mean the Securities and Exchange Commission.
"DAY" shall mean a calendar day.
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"DELAY PERIOD" shall have the meaning set forth in Section 5 hereof.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in the second paragraph of Section 3(b) hereof.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder.
"EXCHANGE NOTES" shall have the meaning set forth in Section 2(a) hereof.
"EXCHANGE OFFER" shall have the meaning set forth in Section 2(a) hereof.
"EXCHANGE OFFER REGISTRATION STATEMENT" shall have the meaning set forth in Section 2(a) hereof.
"GUARANTORS" means each signatory to this Agreement on the date hereof, and each Person who executes and delivers a counterpart of this Agreement hereafter pursuant to Section 10(e) hereof.
"HOLDER" shall mean any holder of a Registrable Note or Registrable Notes.
"INDENTURE" shall mean the Indenture, dated as of February 10, 2004, by and among the Issuers and U.S. Bank Trust National Association, as trustee, pursuant to which the Notes are being issued, as amended or supplemented from time to time in accordance with the terms thereof.
"INITIAL PURCHASERS" shall have the meaning set forth in the first introductory paragraph hereof.
"INSPECTORS" shall have the meaning set forth in Section 5(n) hereof.
"ISSUE DATE" shall mean February 10, 2004, the date of original issuance of the Notes.
"ISSUERS" shall have the meaning set forth in the first introductory paragraph hereto.
"LEGAL HOLIDAY" shall mean a Saturday, a Sunday or a day on which banking institutions in New York, New York are required by law, regulation or executive order to remain closed.
"LOSSES" shall have the meaning set forth in Section 7(a) hereof.
"NASD" shall have the meaning set forth on Section 5(s) hereof.
"NOTES" shall have the meaning set forth in the second introductory paragraph hereto.
"PARTICIPANT" shall have the meaning set forth in Section 7(a) hereof.
"PARTICIPATING BROKER-DEALER" shall have the meaning set forth in Section 2(b) hereof.
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"PERSON" shall mean an individual, corporation, partnership, joint venture association, joint stock company, trust, unincorporated limited liability company, government or any agency or political subdivision thereof or any other entity.
"PRIVATE EXCHANGE" shall have the meaning set forth in Section 2(b) hereof.
"PRIVATE EXCHANGE NOTES" shall have the meaning set forth in Section 2(b) hereof.
"PROSPECTUS" shall mean the prospectus included in any Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.
"PURCHASE AGREEMENT" shall have the meaning set forth in the second introductory paragraph hereof.
"RECORDS" shall have the meaning set forth in Section 5(n) hereof.
"REGISTRABLE NOTES" shall mean each Note upon its original issuance and at all times subsequent thereto, each Exchange Note as to which Section 2(c)(iii) hereof is applicable upon original issuance and at all times subsequent thereto and each Private Exchange Note upon original issuance thereof and at all times subsequent thereto, in each case until (i) a Registration Statement (other than, with respect to any Exchange Note as to which Section 2(c)(iii) hereof is applicable, the Exchange Offer Registration Statement) covering such Note, Exchange Note or Private Exchange Note has been declared effective by the Commission and such Note, Exchange Note or such Private Exchange Note, as the case may be, has been disposed of in accordance with such effective Registration Statement, (ii) such Note has been exchanged pursuant to the Exchange Offer for an Exchange Note or Exchange Notes that may be resold without restriction under state and federal securities laws, (iii) such Note, Exchange Note or Private Exchange Note, as the case may be, ceases to be outstanding for purposes of the Indenture or (iv) such Note, Exchange Note or Private Exchange Note has been sold in compliance with Rule 144 or is salable pursuant to Rule 144(k).
"REGISTRATION DEFAULT" shall have the meaning set forth in Section 4(a) hereof.
"REGISTRATION STATEMENT" shall mean any appropriate registration statement of the Issuers covering any of the Registrable Notes filed with the Commission under the Securities Act, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.
"REQUESTING PARTICIPATING BROKER-DEALER" shall have the meaning set forth in Section 2(b) hereof.
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"RULE 144" shall mean Rule 144 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the Commission providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act.
"RULE 144A" shall mean Rule 144A promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the Commission.
"RULE 415" shall mean Rule 415 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder.
"SHELF FILING EVENT" shall have the meaning set forth in Section 2(c) hereof.
"SHELF REGISTRATION" shall have the meaning set forth in Section 3(a) hereof.
"SHELF REGISTRATION STATEMENT" shall mean a Registration Statement filed in connection with a Shelf Registration.
"TIA" shall mean the Trust Indenture Act of 1939, as amended.
"TRUSTEE" shall mean the trustee under the Indenture and the trustee (if any) under any indenture governing the Exchange Notes and Private Exchange Notes.
"UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" shall mean a registration in which securities of the Issuers are sold to an underwriter for reoffering to the public.
Section 2. EXCHANGE OFFER
(a) The Issuers shall (i) file a Registration Statement (the "EXCHANGE OFFER REGISTRATION STATEMENT") within 150 days after the Issue Date with the Commission on an appropriate registration form with respect to a registered offer (the "EXCHANGE OFFER") to exchange any and all of the Registrable Notes for a like aggregate principal amount of notes (including the guarantees with respect thereto, the "EXCHANGE NOTES") that are identical in all material respects to the Notes (except that the Exchange Notes shall not contain terms with respect to transfer restrictions or Additional Interest upon a Registration Default), (ii) use their commercially reasonable efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act within 240 days after the Issue Date and (iii) use their commercially reasonable efforts to consummate the Exchange Offer within 270 days after the Issue Date. Upon the Exchange Offer Registration Statement being declared effective by the Commission, the Issuers will offer the Exchange Notes in exchange for sur-
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render of the Notes. The Issuers shall keep the Exchange Offer open for not less than 30 days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to Holders.
Each Holder that participates in the Exchange Offer will be required to represent to the Issuers in writing that (i) any Exchange Notes to be received by it will be acquired in the ordinary course of its business, (ii) it has no arrangement or understanding with any Person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Notes in violation of the provisions of the Securities Act , (iii) it is not an affiliate of the Company or any Guarantor as defined by rule 405 of the Securities Act, or if it is an affiliate, it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such Holder is not a broker-dealer, it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes and (v) if such Holder is a broker-dealer that will receive Exchange Notes for its own account in exchange for Notes that were acquired as a result of market-making or other trading activities, it will deliver a prospectus in connection with any resale of such Exchange Notes.
(b) The Issuers and the Initial Purchasers acknowledge that the staff of the Commission has taken the position that any broker-dealer that elects to exchange Notes that were acquired by such broker-dealer for its own account as a result of market-making or other trading activities for Exchange Notes in the Exchange Offer (a "PARTICIPATING BROKER-DEALER") may be deemed to be an "underwriter" within the meaning of the Securities Act and must deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes (other than a resale of an unsold allotment resulting from the original offering of the Notes).
The Issuers and the Initial Purchasers also acknowledge that the staff of the Commission has taken the position that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Notes, without naming the Participating Broker-Dealers or specifying the amount of Exchange Notes owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligations under the Securities Act in connection with resales of Exchange Notes for their own accounts, so long as the Prospectus otherwise meets the requirements of the Securities Act.
In light of the foregoing, if requested by a Participating Broker-Dealer (a "REQUESTING PARTICIPATING BROKER-DEALER"), the Issuers agree to use their commercially reasonable efforts to keep the Exchange Offer Registration Statement continuously effective for a period of 180 days after the date on which the Exchange Registration Statement is declared effective, or such longer period if extended pursuant to the penultimate paragraph of Section 5 hereof (such period, the "APPLICABLE PERIOD"), or such earlier date as all Requesting Participating Broker-Dealers shall have notified the Company in writing that such Requesting Participating Broker-Dealers have resold all Exchange Notes acquired in the Exchange Offer. The Issuers shall include a plan of distribution in such Exchange Offer Registration Statement that meets the requirements set forth in the preceding paragraph.
If, prior to consummation of the Exchange Offer, an Initial Purchaser or any Holder, as the case may be, holds any Notes acquired by it that have, or that are reasonably likely to be determined to have, the status of an unsold allotment in an initial distribution, or if any Holder is not entitled to participate in the Exchange Offer, the Issuers upon the written request of the Initial Purchasers
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or any such Holder, as the case may be, shall simultaneously with the delivery of the Exchange Notes in the Exchange Offer, issue and deliver to the Initial Purchasers or any such Holder, as the case may be, in exchange (the "PRIVATE EXCHANGE") for such Notes held by the Initial Purchasers or any such Holder, as the case may be, a like principal amount of notes (the "PRIVATE EXCHANGE NOTES") of the Issuers that are identical in all material respects to the Exchange Notes except that the Private Exchange Notes may be subject to restrictions on transfer and, in such a case, will bear a legend to such effect; PROVIDED, HOWEVER, that the Issuers shall not be required to effect a Private Exchange if in the written opinion of counsel for the Issuers or counsel for the Initial Purchasers (copies of which are delivered to the Initial Purchasers or such Holder) such Private Exchange cannot be effected without registration under the Securities Act. The Private Exchange Notes shall be issued pursuant to the same indenture as the Exchange Notes and bear the same CUSIP number as the Exchange Notes.
Upon consummation of the Exchange Offer in accordance with this Section 2, the Issuers shall have no further registration obligations other than the Issuers' continuing registration obligations with respect to (i) Private Exchange Notes, (ii) Exchange Notes held by Participating Broker-Dealers and (iii) Notes or Exchange Notes as to which clause (c)(iii) of this Section 2 applies.
In connection with the Exchange Offer, the Issuers shall:
(1) mail or cause to be mailed to each Holder entitled to participate in the Exchange Offer a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents;
(2) utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, The City of New York;
(3) permit Holders to withdraw tendered Notes at any time prior to the close of business, New York time, on the last Business Day on which the Exchange Offer shall remain open; and
(4) otherwise comply in all material respects with all applicable laws, rules and regulations.
As soon as practicable after the close of the Exchange Offer and the Private Exchange, if any, the Company shall:
(1) accept for exchange all Notes validly tendered and not validly withdrawn by the Holders pursuant to the Exchange Offer and the Private Exchange, if any;
(2) deliver or cause to be delivered to the Trustee for cancellation all Notes so accepted for exchange; and
(3) cause the Trustee to authenticate and deliver promptly to each such Holder of Notes, Exchange Notes or Private Exchange Notes, as the case may be, equal in principal amount to the Notes of such Holder so accepted for exchange.
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The Exchange Offer and the Private Exchange shall not be subject to any conditions, other than that (i) the Exchange Offer or Private Exchange, as the case may be, does not violate applicable law or any applicable interpretation of the staff of the Commission, (ii) no action or proceeding shall have been instituted or threatened in any court or by any governmental agency which might materially impair the ability of the Issuers to proceed with the Exchange Offer or the Private Exchange and (iii) all governmental approvals shall have been obtained, which approvals the Company deems necessary for the consummation of the Exchange Offer or Private Exchange.
The Exchange Notes and the Private Exchange Notes shall be issued under (i) the Indenture or (ii) an indenture identical in all material respects to the Indenture (in either case, with such changes as are necessary to comply with any requirements of the Commission to effect or maintain the qualification thereof under the TIA) and which, in either case, has been qualified under the TIA and shall provide that (a) the Exchange Notes shall not be subject to the transfer restrictions set forth in the Indenture and (b) the Private Exchange Notes shall be subject to the transfer restrictions set forth in the Indenture. The Indenture or such indenture shall provide that the Exchange Notes, the Private Exchange Notes and the Notes shall vote and consent together on all matters as one class and that none of the Exchange Notes, the Private Exchange Notes or the Notes will have the right to vote or consent as a separate class on any matter.
(c) In the event that (i) any changes in law or the applicable interpretations of the staff of the Commission do not permit the Issuers to effect the Exchange Offer, (ii) for any reason the Exchange Offer is not consummated within 270 days of the Issue Date, (iii) any Holder, other than an Initial Purchaser, is prohibited by law or the applicable interpretations of the staff of the Commission from participating in the Exchange Offer and so requests with respect to its Registrable Notes, (iv) in the case of any Holder who participates in the Exchange Offer, such Holder does not receive Exchange Notes on the date of the exchange that may be sold without restriction under state and federal securities laws (other than due solely to the status of such Holder as an affiliate of any Issuer within the meaning of the Securities Act) and such Holder so requests with respect to its Registrable Notes (v) the Initial Purchasers so request with respect to Notes or Private Exchange Notes that have, or that are reasonably likely to be determined to have, the status of unsold allotments in an initial distribution (each such event referred to in clauses (i) through (v) of this sentence, a "SHELF FILING EVENT"), then the Issuers shall file a Shelf Registration pursuant to Section 3 hereof.
Section 3. SHELF REGISTRATION
If at any time a Shelf Filing Event shall occur, then:
(a) The Issuers shall file with the Commission a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Registrable Notes not exchanged in the Exchange Offer, Private Exchange Notes and Exchange Notes as to which Section 2(c)(iii) is applicable (the "SHELF REGISTRATION"). The Issuers shall file the Shelf Registration with the Commission as promptly as practicable prior to the later of (i) 150 days after the Issue Date and (ii) 60 days after the occurrence of a Shelf Registration Event. The Shelf Registration shall be on Form S-1 or another appropriate form permitting registration of such Registrable Notes for resale by Holders in the manner or manners designated
by
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them (including, without limitation, one or more underwritten offerings). The Issuers shall not permit any securities other than the Registrable Notes to be included in the Shelf Registration.
(b) The Issuers shall use their (x) commercially reasonable efforts to cause the Shelf Registration to be declared effective under the Securities Act on or prior to the later of (i) 270 days after the Issue Date and (ii) 90 days after the filing of the Shelf Registration and (y) commercially reasonable efforts to keep the Shelf Registration continuously effective under the Securities Act for the period ending on the date which is two years from the Issue Date, subject to extension pursuant to the penultimate paragraph of Section 5 hereof (the "EFFECTIVENESS PERIOD"), or such shorter period ending when all Registrable Notes covered by the Shelf Registration have been sold in the manner set forth and as contemplated in the Shelf Registration; PROVIDED, HOWEVER, that (i) the Effectiveness Period in respect of the Shelf Registration shall be extended to the extent required to permit dealers to comply with the applicable prospectus delivery requirements of Rule 174 under the Securities Act and as otherwise provided herein and (ii) the Company may suspend the effectiveness of the Shelf Registration Statement by written notice to the Holders solely (x) in accordance with the penultimate paragraph of Section 5 hereof and (y) as a result of the filing of a post-effective amendment to the Shelf Registration Statement to incorporate annual audited financial information with respect to the Company where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related Prospectus.
(c) The Issuers agree to supplement or make amendments to the Shelf Registration Statement as and when required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration Statement or by the Securities Act or rules and regulations thereunder for shelf registration, or if reasonably requested by (i) the Holders of a majority in aggregate principal amount of the Registrable Notes covered by such Registration Statement or (ii) by any underwriter of such Registrable Notes.
Section 4. ADDITIONAL INTEREST
(a) The Issuers and the Initial Purchasers agree that the Holders will suffer damages if the Issuers fails to fulfill their obligations under Section 2 or Section 3 hereof and that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, the Issuers agree that if:
(i) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 150th day following the Issue Date or, if that day is not a Business Day, the next day that is a Business Day,
(ii) the Exchange Offer Registration Statement is not declared effective on or prior to the 240th day following the Issue Date or, if that day is not a Business Day, the next day that is a Business Day,
(iii) the Exchange Offer is not consummated on or prior to the 270th day following the Issue Date, or, if that day is not a Business Day, the next day that is a Business Day, or
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(iv) the Shelf Registration Statement is required to be filed but is not declared effective on or prior to the later of (x) the 270th day following the Issue Date and (y) the 90th day after the filing of the Shelf Registration Statement, or, if any such day is not a Business Day, the next day that is a Business Day, or is declared effective by such date but thereafter ceases to be effective or fails to be usable, except if such Shelf Registration Statement is not declared effective due to a delayed filing or ceases to be effective or fails to be usable as specifically permitted by the penultimate paragraph of Section 5 hereof.
(each such event referred to in clauses (i) through (iv), a "REGISTRATION DEFAULT"), additional interest in the form of additional cash interest ("ADDITIONAL INTEREST") will accrue on the affected Notes and the affected Exchange Notes, as applicable. The rate of Additional Interest will be 0.25% per annum for the first 90-day period immediately following the occurrence of a Registration Default, increasing by an additional 0.25% per annum with respect to each subsequent 90-day period up to a maximum amount of Additional Interest of 1.00% per annum, from and including the date on which any such Registration Default shall occur to, but excluding, the earlier of (1) the date on which all Registration Defaults have been cured or (2) the date on which all the Notes and Exchange Notes otherwise become freely transferable by Holders other than affiliates of the Issuers without further registration under the Securities Act. If, after the cure of all Registration Defaults then in effect, there is a subsequent Registration Default, the rate of Additional Interest for such subsequent Registration Default shall initially be 0.25% regardless of the rate in effect with respect to any prior Registration Default at the time of cure of such Registration Default.
Notwithstanding the foregoing, (1) the amount of Additional Interest payable shall not increase because more than one Registration Default has occurred and is pending and (2) a Holder of Notes, Exchange Notes or Private Exchange Notes who is not entitled to the benefits of the Shelf Registration Statement (I.E., such Holder has not elected to include information) shall not be entitled to Additional Interest with respect to a Registration Default that pertains to the Shelf Registration Statement.
(b) So long as Notes remain outstanding, the Company shall notify the Trustee within five Business Days after each and every date on which a Registration Default occurs in respect of which Additional Interest is required to be paid. Any amounts of Additional Interest due pursuant to clauses (a)(i), (a)(ii), (a)(iii) or (a)(iv) of this Section 4 will be payable in cash semi-annually on each February 15 and August 15 (each a "ADDITIONAL INTEREST PAYMENT DATE"), commencing with the first such date occurring after any such Additional Interest commences to accrue, to Holders to whom regular interest is payable on such Additional Interest Payment Date with respect to Notes that are Registrable Notes (other than Holders not entitled to Additional Interest pursuant to clause (2) of the preceding paragraph). The amount of Additional Interest for Registrable Notes will be determined by multiplying the applicable rate of Additional Interest by the aggregate principal amount of all such Registrable Notes outstanding on the Additional Interest Payment Date following such Registration Default in the case of the first such payment of Additional Interest with respect to a Registration Default (and thereafter at the next succeeding Additional Interest Payment Date until the cure of such Registration Default), multiplied by a fraction, the numerator of which is the number of days such Additional Interest rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed), and the denominator of which is 360.
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Section 5. REGISTRATION PROCEDURES
In connection with the filing of any Registration Statement pursuant to Section 2 or 3 hereof, the Issuers shall effect such registrations to permit the sale of the securities covered thereby in accordance with the intended method or methods of disposition thereof, and pursuant thereto and in connection with any Registration Statement filed by the Issuers hereunder, the Issuers shall:
(a) Prepare and file with the Commission the Registration Statement or Registration Statements prescribed by Section 2 or 3 hereof, and use their commercially reasonable efforts to cause each such Registration Statement to become effective and their commercially reasonable efforts to cause such Registration Statement to remain effective as provided herein; PROVIDED, HOWEVER, that, if (1) such filing is pursuant to Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Issuers shall furnish to and afford the Holders of the Registrable Notes covered by such Registration Statement or each such Participating Broker-Dealer, as the case may be, their counsel (if such counsel is known to the Issuers) and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (in each case at least five Business Days prior to such filing or such later date as is reasonable under the circumstances). The Issuers shall not file any Registration Statement or Prospectus or any amendments or supplements thereto if the Holders of a majority in aggregate principal amount of the Registrable Notes covered by such Registration Statement, or any such Participating Broker-Dealer, as the case may be, or the managing underwriters, if any, shall reasonably object on a timely basis.
(b) Prepare and file with the Commission such amendments and post-effective amendments to each Shelf Registration Statement or Exchange Offer Registration Statement, as the case may be, as may be necessary to keep such Registration Statement continuously effective for the Effectiveness Period or the Applicable Period, as the case may be; cause the related Prospectus to be supplemented by any Prospectus supplement required by applicable law, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the applicable provisions of the Securities Act and the Exchange Act with respect to the disposition of all securities covered by such Registration Statement as so amended or in such Prospectus as so supplemented and with respect to the subsequent resale of any securities being sold by a Participating Broker-Dealer covered by any such Prospectus, in each case, in accordance with the intended methods of distribution set forth in such Registration Statement or Prospectus, as so amended.
(c) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period relating thereto from whom the Company has received written notice that such Bro-
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ker Dealer will be a Participating Broker-Dealer in the applicable Exchange Offer, notify the selling Holders of Registrable Notes, or each such Participating Broker-Dealer, as the case may be, their counsel (if such counsel is known to the Issuers) and the managing underwriters, if any, as promptly as possible, and, if requested by any such Person, confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective under the Securities Act (including in such notice a written statement that any Holder may, upon request, obtain, at the sole expense of the Issuers, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules, documents incorporated or deemed to be incorporated by reference and exhibits), (ii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation of any proceedings for that purpose, (iii) if at any time when a Prospectus is required by the Securities Act to be delivered in connection with sales of the Registrable Notes or resales of Exchange Notes by Participating Broker-Dealers the representations and warranties of the Issuers contained in any agreement contemplated by Section 5(m) hereof cease to be true and correct in all material respects, (iv) of the receipt by any of the Issuers of any notification with respect to the suspension of the qualification or exemption from qualification of a Registration Statement or any of the Registrable Notes or the Exchange Notes for offer or sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, (v) of the happening of any event, the existence of any condition or any information becoming known to any Issuer that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in or amendments or supplements to such Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (vi) of the Company's determination that a post-effective amendment to a Registration Statement would be appropriate.
(d) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, use their commercially reasonable efforts to prevent the issuance of any order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Registrable Notes or the Exchange Notes, as the case may be, for sale in any jurisdiction, and, if any such order is issued, to use their reasonable best efforts to obtain the withdrawal of any such order at the earliest practicable moment.
(e) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2
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hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period and if reasonably requested by the managing underwriter or underwriters (if any), the Holders of a majority in aggregate principal amount of the Registrable Notes covered by such Registration Statement or any Participating Broker-Dealer, as the case may be, (i) promptly incorporate in such Registration Statement or Prospectus a prospectus supplement or post-effective amendment such information as the managing underwriter or underwriters (if any), such Holders or any Participating Broker-Dealer, as the case may be (based upon advice of counsel), determine is reasonably necessary to be included therein and (ii) make all required filings of such prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such prospectus supplement or post-effective amendment; PROVIDED, HOWEVER, that the Issuers shall not be required to take any action hereunder that would, in the written opinion of counsel to the Issuers, violate applicable laws.
(f) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, furnish to each selling Holder of Registrable Notes or each such Participating Broker-Dealer, as the case may be, who so requests, in writing their counsel (if such counsel is known to the Issuers) and each managing underwriter, if any, at the sole expense of the Issuers, one conformed copy of the Registration Statement or Registration Statements and each post-effective amendment thereto, including financial statements and schedules, and, if requested, all documents incorporated therein by reference and all exhibits as soon as reasonably practicable after the filing of such documents with the Commission.
(g) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, deliver to each selling Holder of Registrable Notes or each such Participating Broker-Dealer, as the case may be, their respective counsel (if such counsel is known to the Issuers), and the underwriters, if any, at the sole expense of the Issuers, as many copies of the Prospectus or Prospectuses (including each form of preliminary prospectus) and each amendment or supplement thereto and any documents incorporated by reference therein as such Persons may reasonably request; and, subject to the last paragraph of this Section 5, the Issuers hereby consent to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders of Registrable Notes or each such Participating Broker-Dealer, as the case may be, and the underwriters or agents, if any, and dealers (if any), in connection with the offering and sale of the Registrable Notes covered by, or the sale by Participating Broker-Dealers of the Exchange Notes pursuant to, such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Notes or Exchange Notes or any delivery of a Prospectus contained in the Exchange Offer Registration Statement by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, use their commercially reasonable efforts to register or qualify, and to cooperate with the selling
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Holders of Registrable Notes or each such Participating Broker-Dealer, as the case may be, the managing underwriter or underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Notes or Exchange Notes, as the case may be, for offer and sale under the securities or "blue sky" laws of such jurisdictions within the United States as any selling Holder, Participating Broker-Dealer, or the managing underwriter or underwriters reasonably requests in writing; PROVIDED, HOWEVER, that where Exchange Notes or Registrable Notes are offered other than through an underwritten offering, the Issuers agrees to use their commercially reasonable efforts to cause the Issuers' counsel to perform "blue sky" investigations and file registrations and qualifications required to be filed pursuant to this Section 5(h); keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things reasonably necessary or advisable to enable the disposition in such jurisdictions of such Exchange Notes or Registrable Notes covered by the applicable Registration Statement; PROVIDED, HOWEVER, that no Issuer shall be required to (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) subject itself to taxation in excess of a nominal dollar amount in any such jurisdiction where it is not then so subject.
(i) If a Shelf Registration is filed pursuant to Section 3 hereof, cooperate with the selling Holders of Registrable Notes and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Notes to be sold, which certificates shall not bear any restrictive legends and shall be in a form eligible for deposit with The Depository Trust Company; and enable such Registrable Notes to be in such authorized denominations and registered in such names as the managing underwriter or underwriters, if any, or selling Holders may request at least five Business Days prior to any sale of such Registrable Notes.
(j) Use their commercially reasonable efforts to cause the Registrable Notes or Exchange Notes covered by any Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be reasonably necessary to enable the seller or sellers thereof or the underwriter or underwriters, if any, to consummate the disposition of such Registrable Notes or Exchange Notes, except as may be required solely as a consequence of the nature of such selling Holder's business, in which case the Issuers will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals.
(k) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, upon the occurrence of any event contemplated by Section 5(c)(v) or 5(c)(vi) hereof, as promptly as practicable prepare and (subject to Section 5(a) hereof and the penultimate paragraph of this Section 5) file with the Commission, at the sole expense of the Issuers, a supplement or post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document in-
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corporated or deemed to be incorporated therein by reference, or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Notes being sold thereunder or to the purchasers of the Exchange Notes to whom such Prospectus will be delivered by a Participating Broker-Dealer, any such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(l) Prior to the effective date of the first Registration Statement relating to the Registrable Notes, (i) provide the Trustee with certificates for the Registrable Notes in a form eligible for deposit with The Depository Trust Company and (ii) obtain and provide a CUSIP number for the Registrable Notes.
(m) In connection with any underwritten offering of Registrable Notes pursuant to a Shelf Registration, enter into an underwriting agreement (on not more than one occasion) with terms as are customary in underwritten offerings of debt securities similar to the Notes, and take all such other actions as are reasonably requested by the managing underwriter or underwriters in order to expedite or facilitate the registration or the disposition of such Registrable Notes and, in such connection, (i) make such representations and warranties to, and covenants with, the underwriters with respect to the business of the Issuers and their subsidiaries, as then conducted (including any acquired business, properties or entity, if applicable), and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers to underwriters in underwritten offerings of debt securities similar to the Notes, and confirm the same in writing if and when requested; (ii) use their commercially reasonable efforts to obtain the written opinions of counsel to the Issuers and written updates thereof in form, scope and substance reasonably satisfactory to the managing underwriter or underwriters, addressed to the underwriters covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by the managing underwriter or underwriters; (iii) use their commercially reasonable efforts to obtain "cold comfort" letters and updates thereof in form, scope and substance reasonably satisfactory to the managing underwriter or underwriters from the independent certified public accountants of the Issuers (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included or incorporated by reference in the Registration Statement), addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 7 hereof to the parties to be indemnified pursuant to Section 7 hereof with respect to the parties to be indemnified pursuant to such provisions and procedures (or such other provisions and procedures acceptable to Holders of a majority in aggregate principal amount of Registrable Notes covered by such Registration Statement and the managing underwriter or underwriters or agents) with respect to all parties to be indemnified pursuant to said Section; PROVIDED, HOWEVER, that the Issuers shall not be required to provide indemnification to any underwriter selected in accordance with the provisions of Section 9 hereof with respect to infor-
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mation relating to such underwriter furnished in writing to the Company by or on behalf of such underwriter expressly for inclusion in such Registration Statement. The above shall be done at each closing under such underwriting agreement, or as and to the extent required thereunder. The Issuers shall not be required pursuant to this Section 5(m) to enter into any such underwriting agreement more than once with respect to the Registrable Notes.
(n) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in the Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, make available for inspection by any selling Holder of such Registrable Notes being sold or each such Participating Broker-Dealer, as the case may be, any underwriter participating in any such disposition of Registrable Notes, if any, and any attorney, accountant or other agent retained by any such selling Holder or each such Participating Broker-Dealer, as the case may be, or underwriter (collectively, the "INSPECTORS"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and instruments of the Company and its subsidiaries (collectively, the "RECORDS") as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, directors and employees of the Company and its subsidiaries to supply all information reasonably requested by any such Inspector in connection with such Registration Statement and Prospectus. Each Inspector shall agree in writing with the Company that it will keep the Records and all such information confidential and that it will not disclose, or use for any purposes other than in connection with its due diligence investigation, any Records or any such information that the Company determines, in good faith, to be confidential and that it notifies the Inspectors in writing are or is confidential unless (i) the disclosure of such Records or any such information is necessary to avoid or correct a misstatement or omission in such Registration Statement or Prospectus, (ii) the release of such Records or any such information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, (iii) disclosure of such information is necessary or advisable in the opinion of counsel for an Inspector in connection with any action, claim, suit or proceeding, directly or indirectly, involving such Inspector and arising out of, based upon, relating to, or involving this Agreement or the Purchase Agreement, or any transactions contemplated hereby or thereby or arising hereunder or thereunder, or (iv) the information in such Records or such information has been made generally available to the public other than as a result of a disclosure or failure to safeguard such information by an Inspector; PROVIDED, HOWEVER, that (i) each Inspector shall agree to use reasonable best efforts to provide notice to the Company of the potential disclosure of any information by such Inspector pursuant to clause (i), (ii) or (iii) of this sentence to permit the Issuers to obtain a protective order (or waive the provisions of this paragraph (n)) and (ii) each such Inspector shall take such actions as are reasonably necessary to protect the confidentiality of such information to the extent such action is otherwise not inconsistent with, an impairment of or in derogation of the rights and interests of the Holder or any Inspector.
(o) Provide an indenture trustee for the Registrable Notes or the Exchange Notes, as the case may be, and cause the Indenture or the trust indenture provided for in Section 2(a) hereof to be qualified under the TIA not later than the effective date of the Exchange Offer or the first Registration Statement relating to the Registrable Notes; and in connection therewith,
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cooperate with the trustee under any such indenture and the Holders of the Registrable Notes or Exchange Notes, as applicable, to effect such changes to such indenture as may be required for such indenture to be so qualified in accordance with the terms of the TIA; and execute, and use their commercially reasonable efforts to cause such trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the Commission to enable such indenture to be so qualified in a timely manner.
(p) Comply with all applicable rules and regulations of the Commission and make generally available to the Company's securityholders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Notes or Exchange Notes are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods consistent with the requirements of Rule 158.
(q) Upon the request of a Holder, upon consummation of the Exchange Offer or a Private Exchange, use their commercially reasonable efforts to obtain an opinion of counsel to the Issuers, in a form customary for underwritten transactions, addressed to the Trustee for the benefit of all Holders of Registrable Notes participating in the Exchange Offer or the Private Exchange, as the case may be, that the Exchange Notes or Private Exchange Notes, as the case may be, and the related indenture constitute legal, valid and binding obligations of the Issuers, enforceable against the Issuers in accordance with its respective terms, subject to customary exceptions and qualifications.
(r) If the Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Registrable Notes by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be, mark, or cause to be marked, on such Registrable Notes that such Registrable Notes are being cancelled in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be; PROVIDED, HOWEVER, that in no event shall such Registrable Notes be marked as paid or otherwise satisfied.
(s) Cooperate with each seller of Registrable Notes covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Notes and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD").
(t) Use their commercially reasonable efforts to take all other steps reasonably necessary or advisable to effect the registration of the Exchange Notes and/or Registrable Notes covered by a Registration Statement contemplated hereby.
The Company may require each seller of Registrable Notes or Exchange Notes as to which any registration is being effected to furnish to the Company such information regarding such
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seller and the distribution of such Registrable Notes or Exchange Notes as the Company may, from time to time, reasonably request. The Company may exclude from such registration the Registrable Notes of any seller so long as such seller fails to furnish such information within a reasonable time after receiving such request and in the event of such an exclusion, the Issuers shall have no further obligation under this Agreement (including, without limitation, the obligations under Section 4) with respect to such seller or any subsequent Holder of such Registrable Notes. Each seller as to which any Shelf Registration is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make any information previously furnished to the Company by such seller not materially misleading.
If any such Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company or the Guarantors, then such Holder shall have the right to require (i) the insertion therein of language, in form and substance reasonably satisfactory to such Holder, to the effect that the holding by such Holder of such securities is not to be construed as a recommendation by such Holder of the investment quality of the securities covered thereby and that such holding does not imply that such Holder will assist in meeting any future financial requirements of the Company or the Guarantors, or (ii) in the event that such reference to such Holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force, the deletion of the reference to such Holder in any amendment or supplement to the applicable Registration Statement filed or prepared subsequent to the time that such reference ceases to be required.
Each Holder of Registrable Notes and each Participating Broker-Dealer agrees by acquisition of such Registrable Notes or Exchange Notes that, upon actual receipt of any notice from the Company (x) of the happening of any event of the kind described in Section 5(c)(ii), 5(c)(iii), 5(c)(iv), or 5(c)(v) hereof, or (y) that the Board of Directors of the Company (the "BOARD OF DIRECTORS") has resolved that the Company has a BONA FIDE business purpose for doing so, then the Issuers may delay the filing or the effectiveness of the Exchange Offer Registration Statement or the Shelf Registration Statement (if not then filed or effective, as applicable) and shall not be required to maintain the effectiveness thereof or amend or supplement the Exchange Offer Registration Statement or the Shelf Registration, in all cases, for a period (a "DELAY PERIOD") expiring upon the earlier to occur of (i) in the case of the immediately preceding clause (x), such Holder's or Participating Broker-Dealer's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 5(k) hereof or until it is advised in writing (the "ADVICE") by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto or (ii) in the case of the immediately preceding clause (y), the date which is the earlier of (A) the date on which such business purpose ceases to interfere with the Issuer's obligations to file or maintain the effectiveness of any such Registration Statement pursuant to this Agreement or (B) 90 days after the Company notifies the Holders of such good faith determination. There shall not be more than 90 days of Delay Periods during any 12-month period. Each of the Effectiveness Period and the Applicable Period, if applicable, shall be extended by the number of days during any Delay Period. Any Delay Period will not alter the obligations of the Issuers to pay Additional Interest under the circumstances set forth in Section 4 hereof with respect to any Registration Default. Each Holder of Registrable Notes and each Participating Broker-Dealer agrees by acquisition of such Registrable Notes or Exchange Notes to keep any notice and the existence of any Delay Period confidential.
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In the event of any Delay Period pursuant to clause (y) of the preceding paragraph, notice shall be given as soon as practicable after the Board of Directors makes such a determination of the need for a Delay Period and shall state, to the extent practicable, an estimate of the duration of such Delay Period and shall advise the recipient thereof of the agreement of such Holder provided in the next succeeding sentence. Each Holder and each Participating Broker-Dealer, by his or its acceptance of any Registrable Note or Exchange Note, agrees that during any Delay Period, each Holder or each Participating Broker-Dealer, as the case may be, will discontinue disposition of such Notes or Exchange Notes covered by such Registration Statement or Prospectus or Exchange Notes to be sold by such Holder or Participating Broker-Dealer, as the case may be.
Section 6. REGISTRATION EXPENSES
All fees and expenses incident to the Issuer's performance of or compliance with this Agreement (other than any underwriting discounts or commissions) shall be borne by the Issuers, whether or not the Exchange Offer Registration Statement or the Shelf Registration is filed or becomes effective or the Exchange Offer is consummated, including, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses of compliance with state securities or "blue sky" laws (including, without limitation, fees and disbursements of counsel in connection with "blue sky" qualifications of the Registrable Notes or Exchange Notes and determination of the eligibility of the Registrable Notes or Exchange Notes for investment under the laws of such jurisdictions (x) where the holders of Registrable Notes are located, in the case of an Exchange Offer, or (y) as provided in Section 5(h) hereof, in the case of a Shelf Registration or in the case of Exchange Notes to be sold by a Participating Broker-Dealer during the Applicable Period)), (ii) printing expenses, including, without limitation, expenses of printing certificates for Registrable Notes or Exchange Notes in a form eligible for deposit with The Depository Trust Company and of printing prospectuses if the printing of prospectuses is requested by the managing underwriter or underwriters, if any, or by the Holders of a majority in aggregate principal amount of the Registrable Notes included in any Registration Statement or in respect of Exchange Notes to be sold by any Participating Broker-Dealer during the Applicable Period, as the case may be, (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Issuers and reasonable fees and disbursements of one special counsel for all of the sellers of Registrable Notes, selected by a majority of such sellers of Registrable Notes, incurred in connection with such Registration Statement (exclusive of any counsel retained pursuant to Section 7 hereof), (v) fees and disbursements of all independent certified public accountants referred to in Section 5(m)(iii) hereof (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance), (vi) Securities Act liability insurance, if the Issuers desires such insurance, (vii) fees and expenses of all other Persons retained by any of the Issuers, (viii) internal expenses of the Issuers (including, without limitation, all salaries and expenses of officers and employees of the Company performing legal or accounting duties), (ix) the expense of any annual audit, (x) the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange, and the obtaining of a rating of the securities, in each case, if applicable, (xi) any required fees and expenses incurred in connection with any filing required to be made with the NASD, and (xii) the expenses relating to printing, word processing and distributing all Registration Statements, underwriting agreements, indentures and any other documents necessary in order for the Issuers to comply with their obligations under this Agreement. Notwithstanding the foregoing or anything to the contrary in this Agreement, each Holder shall pay all underwriting
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discounts and commissions of any underwriters with respect to any Registrable Notes sold by or on behalf of it.
Section 7. INDEMNIFICATION
(a) Each Issuer, jointly and severally, agrees to indemnify and hold harmless each Holder of Registrable Notes and each Participating Broker-Dealer selling Exchange Notes during the Applicable Period, each Person, if any, who controls any such Person within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, the agents, employees, officers and directors of each Holder and each such Participating Broker-Dealer and the agents, employees, officers and directors of any such controlling Person (each, a "PARTICIPANT") from and against any and all losses, liabilities, claims, damages and expenses (including, but not limited to, reasonable attorneys' fees and any and all reasonable out-of-pocket expenses actually incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all reasonable amounts paid in settlement of any claim or litigation (in the manner set forth in clause (c) below)) (collectively, "LOSSES") to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise insofar as such Losses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) or Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by, arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the case of the Prospectus, in the light of the circumstances under which they were made, not misleading, PROVIDED, HOWEVER, that (i) the foregoing indemnity shall not be available to any Participant insofar as such Losses are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to such Participant furnished to the Company in writing by or on behalf of such Participant expressly for use therein, and (ii) that the foregoing indemnity with respect to any preliminary prospectus shall not inure to the benefit of any Participant from whom the Person asserting such Losses purchased Registrable Notes if (x) it is established in the related proceeding that such Participant failed to send or give a copy of the Prospectus (as amended or supplemented if such amendment or supplement was furnished to such Participant prior to the written confirmation of such sale) to such Person with or prior to the written confirmation of such sale, if required by applicable law, and (y) the untrue statement or omission or alleged untrue statement or omission was completely corrected in the Prospectus (as amended or supplemented if amended or supplemented as aforesaid) and such Prospectus does not contain any other untrue statement or omission or alleged untrue statement or omission that was the subject matter of the related proceeding. This indemnity agreement will be in addition to, but not in duplication of, any liability that the Issuers may otherwise have to a Participant, including, but not limited to, liability under this Agreement.
(b) Each Participant agrees, severally and not jointly, to indemnify and hold harmless each Issuer, each Person, if any, who controls any Issuer within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, and each of their respective agents, employees, officers and directors and the agents, employees, officers and directors of any such controlling Person from and against any Losses to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise insofar as such Losses (or actions in respect thereof) arise
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out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) or Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by, arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the case of the Prospectus, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that any such Loss arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information relating to such Participant furnished in writing to the Company by or on behalf of such Participant expressly for use therein. This indemnity agreement shall be in addition to, but not in duplication of, any liability that the Participants may otherwise have to an Issuer, including, but not limited to, liability under this Agreement.
(c) Promptly after receipt by an indemnified party under subsection 7(a) or 7(b) above of notice of the commencement of any action, suit or proceeding (collectively, an "ACTION"), such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the commencement of such action (but the failure so to notify an indemnifying party shall not relieve such indemnifying party from any liability that it may have under this Section 7 except to the extent that it has been prejudiced in any material respect by such failure). In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement of such action, the indemnifying party will be entitled to participate in such action, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense of such action with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such action, but the reasonable fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to take charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) the named parties to such action (including any impleaded parties) include such indemnified party and the indemnifying party or parties (or such indemnifying parties have assumed the defense of such action), and such indemnified party or parties shall have reasonably concluded, after consultation with counsel, that there may be defenses available to it or them that are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such reasonable fees and expenses of counsel shall be borne by the indemnifying parties. In no event shall the indemnifying party be liable for the reasonable fees and expenses of more than one counsel (together with appropriate local counsel) at any time for all indemnified parties in connection with any one action or separate but substantially similar or related actions arising in the same jurisdiction out of the same general allegations or circumstances. Any such separate firm for the Participants shall be designated in writing by Participants who sold a majority in interest of Registrable Notes sold by all such Participants and shall be reasonably acceptable to the Company and any such separate firm for the Issuers, their affiliates, officers, directors, representatives, employees and agents and such control Person of such Issuers shall be designated in writing by such Issuers and shall be reasonably acceptable to the Holders. An indemnifying party shall not be liable
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for any settlement of any claim or action effected without its written consent, which consent may not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.
(d) In order to provide for contribution in circumstances in which the indemnification provided for in this Section 7 is for any reason held to be unavailable from the indemnifying party, or is insufficient to hold harmless a party indemnified under this Section 7, each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such aggregate Losses (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party, on the one hand, and each indemnified party, on the other hand, from the sale of the Notes to the Initial Purchasers or the resale of the Registrable Notes by such Holder, as applicable, or (ii) if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnified party, on the one hand, and each indemnifying party, on the other hand, in connection with the statements or omissions that resulted in such Losses, as well as any other relevant equitable considerations. The relative benefits received by the Issuers, on the one hand, and each Participant, on the other hand, shall be deemed to be in the same proportion as (x) the total proceeds from the sale of the Notes to the Initial Purchasers (net of discounts and commissions but before deducting expenses) received by the Issuers are to (y) the total net profit received by such Participant in connection with the sale of the Registrable Notes. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuers or such Participant and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or alleged statement or omission.
(e) The parties agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by PRO RATA allocation or by any other method of allocation that does not take into account the equitable considerations referred to above. Notwithstanding the provisions of this Section 7, (i) in no case shall any Participant be required to contribute any amount in excess of the amount by which the net proceeds received by such Participant in connection with the sale of the Registrable Notes exceeds the amount of any damages that such Participant has otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made against another party or parties under this Section 7, notify such party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 7 or otherwise, except to the extent that it has been prejudiced in any material respect by such failure; PROVIDED, HOWEVER, that no additional notice shall be required with respect to any
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action for which notice has been given under this Section 7 for purposes of indemnification. Anything in this Section to the contrary notwithstanding, no party shall be liable for contribution with respect to any action or claim settled without its written consent; PROVIDED, HOWEVER, that such written consent was not unreasonably withheld.
Section 8. RULES 144 AND 144A
The Issuers covenant that they will file the reports required, if any, to be filed by them under the Securities Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, if at any time the Issuers are not required to file such reports, they will, upon the request of any Holder or beneficial owner of Registrable Notes, make available such information as required by, and so long as necessary to permit sales of the Registrable Notes pursuant to, Rule 144A under the Securities Act. The Issuers further covenant that for so long as any Registrable Notes remain outstanding they will take such further action as any Holder of Registrable Notes may reasonably request from time to time to enable such Holder to sell Registrable Notes without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144(k) and Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission.
Section 9. UNDERWRITTEN REGISTRATIONS
If any of the Registrable Notes covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the Holders of a majority in aggregate principal amount of such Registrable Notes included in such offering and shall be reasonably acceptable to the Company.
No Holder of Registrable Notes may participate in any underwritten registration hereunder if such Holder does not (a) agree to sell such Holder's Registrable Notes on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements.
Section 10. MISCELLANEOUS
(a) NO INCONSISTENT AGREEMENTS. The Issuers have not, as of the date hereof, and shall not, after the date of this Agreement, enter into any agreement with respect to any of their securities that is inconsistent with the rights granted to the Holders of Registrable Notes in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not conflict with and are not inconsistent with, in any material respect, the rights granted to the holders of any of the Issuers' other issued and outstanding securities under any such agreements. The Issuers have not entered and will not enter into any agreement with respect to any of their securities which will grant to any Person piggy-back registration rights with respect to any Registration Statement.
(b) ADJUSTMENTS AFFECTING REGISTRABLE NOTES. The Issuers shall not, directly or indirectly, take any action with respect to the Registrable Notes as a class that would adversely affect the ability of the Holders of Registrable Notes to include such Registrable Notes in a registration undertaken pursuant to this Agreement.
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(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given except pursuant to a written agreement duly signed and delivered by (i) the Company (on behalf of all Issuers) and (ii)(A) the Holders of not less than a majority in aggregate principal amount of the then outstanding Registrable Notes and (B) in circumstances that would adversely affect the Participating Broker-Dealers, the Participating Broker-Dealers holding not less than a majority in aggregate principal amount of the Exchange Notes held by all Participating Broker-Dealers; PROVIDED, HOWEVER, that Section 7 and this Section 10(c) may not be amended, modified or supplemented except pursuant to a written agreement duly signed and delivered by the Issuers and each Holder and each Participating Broker-Dealer (including any Person who was a Holder or Participating Broker-Dealer of Registrable Notes or Exchange Notes, as the case may be, disposed of pursuant to any Registration Statement) affected by any such amendment, modification, waiver or supplement. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders of Registrable Notes whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders of Registrable Notes may be given by Holders of at least a majority in aggregate principal amount of the Registrable Notes being sold pursuant to such Registration Statement.
(d) NOTICES. All notices and other communications (including, without limitation, any notices or other communications to the Trustee) provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, next-day air courier or telecopier:
(i) if to a Holder of the Registrable Notes or any Participating Broker-Dealer, at the most current address of such Holder or Participating Broker-Dealer, as the case may be, set forth on the records of the registrar under the Indenture.
(ii) if to any Issuer, to it
c/o Inverness Medical Innovations, Inc. 51 Sawyer Road, Suite 200 Waltham, MA 02453 Fax Number: (781) 647-3939 Attention: Chief Financial Officer
(iii) if to the Initial Purchasers, at the address as follows:
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UBS Securities LLC 299 Park Avenue
New York, NY 10171 Fax Number: (203) 719-1075
Attention: Syndicate Department
Merrill Lynch, Pierce, Fenner & Smith Incorporated 4 World Financial Center
New York, New York 10171 Fax Number: (212) 449-7171 Attention: James D. Forbes
All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by the recipient's telecopier machine, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address and in the manner specified in such Indenture.
(e) GUARANTORS. So long as any Registrable Notes remain outstanding, the Issuers shall cause each Person that becomes a guarantor of the Notes under the Indenture to execute and deliver a counterpart to this Agreement which subjects such Person to the provisions of this Agreement as a Guarantor. Each of the Guarantors agrees to join the Issuers in all of their undertakings hereunder to effect the Exchange Offer for the Exchange Notes and the filing of any Shelf Registration Statement required hereunder.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto, the Holders and the Participating Broker-Dealers; PROVIDED, HOWEVER, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign holds Registrable Notes.
(g) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.
(h) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN
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THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
(j) SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
(k) SECURITIES HELD BY THE ISSUERS OR THEIR AFFILIATES. Whenever the consent or approval of Holders of a specified percentage of Registrable Notes is required hereunder, Registrable Notes held by the Issuers or any of their affiliates (as such term is defined in Rule 405 under the Securities Act) shall not be deemed outstanding and shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage.
(l) THIRD-PARTY BENEFICIARIES. Holders and beneficial owners of Registrable Notes and Participating Broker-Dealers are intended third-party beneficiaries of this Agreement, and this Agreement may be enforced by such Persons. No other Person is intended to be, or shall be construed as, a third-party beneficiary of this Agreement.
(m) ATTORNEYS' FEES. As between the parties to this Agreement, in any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees actually incurred in addition to its reasonable costs and expenses and any other available remedy.
(n) ENTIRE AGREEMENT. This Agreement, together with the Purchase Agreement and the Indenture, is intended by the parties as a final and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein and any and all prior oral or written agreements, representations, or warranties, contracts, understandings, correspondence, conversations and memoranda between the Holders on the one hand and the Issuers on the other, or between or among any agents, representatives, parents, subsidiaries, affiliates, predecessors in interest or successors in interest with respect to the subject matter hereof and thereof are merged herein and replaced hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
INVERNESS MEDICAL INNOVATIONS, INC.
APPLIED BIOTECH, INC. FOREFRONT DIAGNOSTICS, INC. INNOVATIONS RESEARCH, LLC
INVERNESS MEDICAL INTERNATIONAL HOLDING CORP.
INVERNESS MEDICAL INTERNATIONAL HOLDING CORP. II
INVERNESS MEDICAL, INC. MORPHEUS ACQUISITION CORP.
OSTEX INTERNATIONAL, INC. UNIPATH DIAGNOSTICS, INC.
UNIPATH ONLINE, INC. WAMPOLE LABORATORIES, LLC
as Guarantors
SELFCARE TECHNOLOGY, INC. as a Guarantor
S-1
By: /s/ Anthony J. Bernardo --------------------------------- Name: Anthony J. Bernardo Title: Vice President
By: /s/ Anthony J. Bernardo -------------------------------------------- Name: Anthony J. Bernardo Title: President, President, Manager, President, President, President, President, President, Vice President, President, Vice President, respectively
By: /s/ Duane L. James -------------------------------------------- Name: Duane L. James Title: Treasurer
Confirmed and Accepted as of the date first above written:
UBS SECURITIES LLC
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
S-2
By: /s/ Aradhana Sarin ------------------------------ Name: Aradhana Sarin, MD Title: Director By: /s/ Anthony Munoz ------------------------------ Name: Anthony Munoz Title: Associate Director
By: /s/ Sarang R. Gadkari ------------------------------ Name: Sarang R. Gadkari Title: Director
Exhibit 10.41
FIRST AMENDMENT AND CONSENT TO SECOND AMENDED AND R ESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT AND CONSENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT, dated as of November 17, 2003 (this "AMENDMENT"), to the Second Amended and Restated Credit Agreement, dated as of September 30, 2003 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), by and among General Electric Capital Corporation, as Agent and Lender ("AGENT"), Inverness Medical Innovations, Inc. ("INNOVATIONS"), Wampole Laboratories, Inc. and Inverness Medical (UK) Holdings Limited, as borrowers ("BORROWERS"), the other Credit Parties signatory thereto, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as documentation agent and co-syndication agent, UBS Securities LLC, as co-syndication agent, and the lenders signatory thereto from time to time (collectively, the "LENDERS").
W I T N E S S E T H
WHEREAS, Borrowers have notified Agent that (i) Inverness Medical Switzerland Ltd Liab. Co ("SWISSCO") plans to acquire one hundred percent (100%) of the issued and outstanding equity interest of Scandinavian Micro Biodevices A/S, a Danish corporation ("SMB"), pursuant to and in accordance with the terms and conditions set forth in that certain Sale and Purchase Agreement, dated as of October 17, 2003, (in effect on the date hereof and with subsequent amendments as approved by Agent in writing, the "PURCHASE AGREEMENT"), by and among Swissco and NKT Holdings A/S ("NKT") and (ii) immediately after the consummation of such purchase SMB will be reorganized as an ApS (collectively, the "SMB PURCHASE");
WHEREAS, Borrowers have notified Agent that Borrowers and Inverness Medical Canada, Inc. ("IMC") desire that IMC become a Credit Party to the Credit Agreement and to cease being an Excluded Subsidiary, (the "IMC TRANSACTION" and together with the SMB Purchase, the "PROPOSED TRANSACTIONS");
WHEREAS, Borrowers have requested that Agent and Requisite Lenders consent to the Proposed Transactions on the terms and conditions set forth herein; and
WHEREAS, Agent and Requisite Lenders have agreed to amend the Credit Agreement, in the manner, and on the terms and conditions, provided for herein;
NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.
2. CONSENT TO SMB PURCHASE. As of the Effective Date, Agent and Requisite Lenders hereby agree that the consummation of the SMB Purchase on the terms and conditions
set forth in the Purchase Agreement shall not create a breach under SECTIONS 6.1 or 6.5 of the Credit Agreement, PROVIDED that:
(a) Agent shall have received evidence satisfactory to Agent that each of the conditions precedent to a Permitted Acquisition set forth in Section 6.1(i) - (xi) of the Credit Agreement (other than the conditions set forth in Section 6.1(v), (vi) and (viii) which are hereby waived, PROVIDED that (i) the Credit Parties do not expend any cash in connection with the SMB Purchase other than for costs and expenses and cash payments to NKT in accordance with the Purchase Agreement, which do not exceed Euro 2,900,000 in the aggregate and (ii) all Indebtedness, Guaranteed Indebtedness, contingent obligations and other liabilities (other than ordinary course trade payables) of SMB incurred, assumed or otherwise reflected on the consolidated balance sheet of Borrowers and SMB after giving effect to such SMB Purchase are paid, and all Liens (other than Permitted Encumbrances) on the assets and Stock of SMB are terminated, concurrently with the consummation of the SMB Purchase) have been satisfied in connection with the SMB Purchase, (iii) SMB shall, at the request of Agent, grant a first priority perfected security interest (subject to Permitted Encumbrances) in all of its assets to secure the Obligations of the European Credit Parties and execute all documents and take all actions (including obtaining landlord waivers in form and substance reasonably satisfactory to Agent) requested by Agent in connection therewith and (iv) within 45 days after the end of any fiscal quarter in which the value of SMB's fixed assets (as reflected in the financial statements delivered in accordance with Annex E of the Credit Agreement) exceed $2,000,000 in the aggregate and promptly upon the acquisition or development of any new intellectual property which is owned by SMB, SMB shall give Agent written notice thereof; the Agent acknowledging that as of the Effective Date, the Credit Parties have satisfied the conditions set forth in Section 6.1(i) and (ix)(1) and (2) of the Credit Agreement;
(b) Agent shall have received (i) a Guaranty and Joinder Agreement, in each case, in form and substance satisfactory to Agent (the "GUARANTY" and the "JOINDER AGREEMENT" respectively), pursuant to which SMB agrees to guarantee the Obligations of the European Credit Parties under the Loan Documents and become a party to the Loan Documents; and (ii) a Pledge Agreement (the "PLEDGE AGREEMENT"), in form and substance satisfactory to Agent, pursuant to which Swissco pledges one hundred percent (100%) of the issued and outstanding equity interest of SMB (the "SMB STOCK") to Agent, in each case duly executed and delivered by an authorized officer of SMB and/or Swissco, as applicable;
(c) Agent shall have received an original certificate representing the SMB Stock pledged by Swissco pursuant to the terms of the Pledge Agreement;
(d) Within thirty (30) days after the consummation of the SMB Purchase, Agent shall have received tri-party blocked account agreements, in form and substance reasonably satisfactory to Agent, duly executed and delivered by SMB and each bank where SMB has established a deposit or disbursement account (other than payroll accounts), in each case in accordance with the requirements set forth in SECTION 1.8 and ANNEX C of the Credit Agreement;
(e) Agent shall have received (x) updated SCHEDULES 3.1, 3.2, 3.6, 3.7, 3.8, 3.15, 3.19 and 5.1 to the Credit Agreement and (y) a revised EXHIBIT A -1 updated to include
Material Contracts, if any, to which SMB is a party, each in form and substance satisfactory to Agent, after giving pro forma effect to the SMB Purchase;
(f) Agent shall have received a copy of SMB's (i) charter documents and all amendments thereto and (ii) good standing certificates or the foreign equivalent and certificates of qualification to conduct business in each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, each dated a recent date and certified by the applicable authorized Governmental Authority;
(g) Agent shall have received a copy of SMB's (i) bylaws and all amendments thereto and (ii) resolutions of SMB's Board of Directors and, to the extent required under applicable law, stockholders, approving and authorizing the execution, delivery and performance of the Loan Documents to which SMB is, or will be, a party and the transactions to be consummated in connection therewith, each certified by an authorized officer of SMB (after giving effect to the SMB Purchase) as being in full force and effect without any modification or amendment;
(h) Agent shall have received a copy of Swissco's (i) bylaws and all amendments thereto and (ii) resolutions of Swissco's Board of Directors and, to the extent required under applicable law, stockholders, approving and authorizing the execution, delivery and performance of the Purchase Agreement and the Loan Documents to which Swissco is, or will be, a party and the transactions to be consummated in connection therewith, each certified by such Swissco's corporate secretary or an assistant secretary (after giving effect to the SMB Purchase) as being in full force and effect without any modification or amendment;
(i) Agent shall have received a signature and incumbency certificate of the officers of SMB, certified by SMB's corporate secretary or an assistant secretary (after giving effect to the SMB Purchase) as being true, accurate, correct and complete in all respects;
(j) Agent shall have received executed copies of the Purchase Agreement, together with all amendments thereto, and all documentation delivered in connection therewith, certified by an authorized Director of Swissco to be true and complete and in full force and effect as of the Effective Date;
(k) Agent shall have received a legal opinion of counsel acceptable to Agent which shall provide (i) that the Loan Documents have been duly authorized, executed and delivered by, and are enforceable against, Swissco and SMB, (ii) that the SMB Purchase was approved by all requisite corporate action by Swissco and (iii) such other opinions as Agent may reasonably request, all in form and substance satisfactory to Agent;
(l) Agent shall have received a copy of the Assignment of Representations and Warranties, duly executed by an authorized officer of Swissco and acknowledged by NKT;
(m) Agent shall have received evidence that CT Corporation has been appointed as agent for service of process for SMB.
(n) The SMB Purchase shall have been consummated on or prior to November 30, 2003.
3. CONSENT TO IMC AS CREDIT PARTY. As of the Effective Date, Agent and Requisite Lenders hereby agree to permit IMC to become a Credit Party to the Credit Agreement and to cease being an Excluded Subsidiary, PROVIDED, that prior to the date IMC ceases to be an Excluded Subsidiary:
(a) Agent shall have received in form and substance satisfactory to Agent, (i) a Joinder Agreement, Guaranty and a Security Agreement, and if applicable an Intellectual Property Security Agreement and Pledge Agreement, in each case duly executed by an authorized officer of IMC and (ii) a Pledge Agreement pursuant to which Inverness Medical Inc. ("IMI") pledges one hundred percent (100%) of the issued and outstanding stock of IMC (the "IMC STOCK"), duly executed by an authorized officer of IMI;
(b) Agent shall have received an original stock certificate representing the IMC Stock, together with stock powers duly executed in blank, pledged by IMI pursuant to the terms of the Pledge Agreement referred to in CLAUSE (a) above;
(c) Agent shall have received evidence satisfactory to Agent that Agent (for the benefit of itself and Lenders) has a valid and perfected first priority security interest in the IMC Stock and all of the Collateral (subject to Permitted Encumbrances) owned by IMC to secure all of the Obligations, including such documents duly executed by IMC as Agent may request in order to perfect its security interests in such Collateral;
(d) Borrowers shall obtain and deliver to Agent landlord waivers, in form and substance reasonably satisfactory to Agent, duly executed and delivered by the lessors of the properties leased by IMC; if any;
(e) Agent shall have received tri-party blocked account agreements, in form and substance reasonably satisfactory to Agent, duly executed and delivered by IMC and each bank where IMC has established a deposit or disbursement account (other than payroll accounts), in accordance with the requirements set forth in SECTION 1.8 and ANNEX C of the Credit Agreement;
(f) Agent shall have received (x) updated SCHEDULES 3.1, 3.2, 3.6, 3.7, 3.8, 3.15, 3.19 and 5.1 to the Credit Agreement and (y) a revised EXHIBIT A-1 updated to include Material Contracts, if any, to which IMC is a party, each in form and substance satisfactory to Agent and Requisite Lenders, after giving pro forma effect to IMC becoming a Credit Party;
(g) Agent shall have received a copy of IMC's (i) charter documents and all amendments thereto, (ii) good standing certificate in its jurisdiction of incorporation and (iii) good standing certificates or the foreign equivalent and certificates of qualification to conduct business in each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, each dated a recent date and certified by the applicable authorized Governmental Authority;
(h) Agent shall have received a copy of IMC's (i) bylaws and all amendments thereto and (ii) resolutions of IMC's Board of Directors and, to the extent required under applicable law, stockholders, approving and authorizing the execution, delivery and performance of the Loan Documents to which IMC is, or will be, a party and the transactions to be consummated in connection therewith, each certified by IMC's corporate secretary or an assistant secretary as being in full force and effect without any modification or amendment;
(i) Agent shall have received a copy of IMI's (i) bylaws and all amendments thereto and (ii) resolutions of IMI's Board of Directors and, to the extent required under applicable law, stockholders, approving and authorizing the execution, delivery and performance of the Loan Documents to which IMI is, or will be, a party and the transactions to be consummated in connection therewith, each certified by IMI's corporate secretary or an assistant secretary as being in full force and effect without any modification or amendment;
(j) Agent shall have received a signature and incumbency certificate of the officers of IMC, certified by IMC's corporate secretary or an assistant secretary as being true, accurate, correct and complete in all respects;
(k) Agent shall have received a legal opinion of counsel acceptable to Agent which shall provide (i) that the Loan Documents have been duly authorized, executed and delivered by, and are enforceable against, IMC and IMI, (ii) that Agent shall have a perfected Lien on the Collateral granted under the Loan Documents referred to in SECTION 3(a) above, and (iii) such other opinions as Agent may reasonably request, all in form and substance satisfactory to Agent;
(l) Agent shall have received evidenced that CT Corporation has been appointed as agent for service of process for IMC.
(m) The IMC Transaction shall have been consummated on or prior to November 30, 2003.
4. AMENDMENT TO CREDIT AGREEMENT. After the Effective Date and upon satisfaction of all the conditions set forth in SECTION 3 above, the definition of "EXCLUDED US SUBSIDIARIES" in Annex A of the Credit Agreement shall be amended by deleting clause (d) thereto and re-lettering clause (e) as clause (d).
5. REPRESENTATIONS AND WARRANTIES. To induce Agent and Requisite Lenders to enter into this Amendment, the Credit Parties hereby, jointly and severally, represent and warrant that:
(a) The execution, delivery and performance by SMB, IMC and each Credit Party of the Purchase Agreement and any Loan Documents to which it is or will be a party and the creation of all Liens provided for therein: (i) are within such Person's corporate, company or partnership power; (ii) have been (or will be prior to execution thereof) duly authorized by all necessary corporate, limited liability company or limited partnership action; (iii) do not contravene any provision of such Person's charter, bylaws or equivalent constitutive documents or partnership or operating agreement, as applicable; (iv) do not violate any law or regulation, or any order or decree of any court or Governmental Authority; (v) do not conflict
with or result in the breach or termination of, constitute a default under or accelerate or permit the acceleration of any performance required by, any indenture, mortgage, deed of trust, lease, agreement or other instrument to which such Person is a party or by which such Person or any of its property is bound; (vi) do not result in the creation or imposition of any Lien upon any of the property of such Person; and (vii) do not require the consent or approval of any Governmental Authority or any other Person except those which will have been duly obtained, made or complied with prior to the Effective Date.
(b) This Amendment has been duly executed and delivered by or on behalf of each of the Credit Parties.
(c) This Amendment constitutes a legal, valid and binding obligation of each of the Credit Parties, enforceable against each of them in accordance with its terms. (d) No Default or Event of Default has occurred and is continuing after giving effect to this Amendment.
(e) No action, claim or proceeding is now pending or, to the knowledge of any Credit Party, threatened against such Credit Party, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any foreign, federal, state, or local government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, which (i) challenges any Credit Party's right or power to enter into or perform any of its obligations under this Amendment, the Purchase Agreement, the Credit Agreement and the other Loan Documents to which it is or will be, a party, or the validity or enforceability of this Amendment, the Purchase Agreement, the Credit Agreement or any Loan Document or any action taken thereunder, or (ii) has a reasonable risk of being determined adversely to any Credit Party and that, if so determined, could reasonably be expected to have a Material Adverse Effect after giving effect to this Amendment.
(f) The representations and warranties of SMB, IMC and the Credit Parties contained in the Purchase Agreement, the Credit Agreement and each other Loan Document shall be true and correct in all material respects on and as of (i) the Effective Date and (ii) the date the SMB Purchase is consummated (both before and after giving effect to the SMB Purchase), and (iii) the date IMC becomes a Credit Party (both before and after giving effect thereto), in each case, with the same effect as if such representations and warranties had been made on and as of such date, except that any such representation or warranty which is expressly made only as of a specified date need be true only as of such date.
(g) No information contained in the Purchase Agreement or any document furnished in connection with the Purchase Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances under which they were made.
6. NO OTHER AMENDMENTS/WAIVERS. Except as expressly provided herein, (a) the Credit Agreement shall be unmodified and shall continue to be in full force and effect in accordance with its terms and (b) this Amendment shall not be deemed a waiver of any term or
condition of any Loan Document and shall not be deemed to prejudice any right or rights which Agent or any Lender may now have or may have in the future under or in connection with any Loan Document or any of the instruments or agreements referred to therein, as the same may be amended from time to time.
7. OUTSTANDING INDEBTEDNESS; WAIVER OF CLAIMS. Each of Borrowers and other Credit Parties hereby acknowledges and agrees that as of November 13, 2003, (a) the aggregate outstanding principal amount of the European Revolving Loan is $ 23,111,203.56, (b) the aggregate outstanding principal amount of US Revolving Loan is $16,898,797.30, (c) the aggregate outstanding principal amount of the US Term A Loan is $35,075,000, (d) the aggregate outstanding principal amount of the US Term B Loan is $40,000,000, and (e) the aggregate outstanding principal amount of the European Term Loan is $9,900,000, and that such principal amount is payable pursuant to the Credit Agreement without defense, offset, withholding, counterclaim or deduction of any kind. Borrowers and each other Credit Party hereby waives, releases, remises and forever discharges Agent, Lenders and each other Indemnified Person from any and all claims, suits, actions, investigations, proceedings or demands arising out of or in connection with the Credit Agreement (collectively, "CLAIMS"), whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute or common law of any kind or character, known or unknown, which any Borrower or any other Credit Party ever had, now has or might hereafter have against Agent or Lenders which relates, directly or indirectly, to any acts or omissions of Agent, Lenders or any other Indemnified Person on or prior to the Effective Date, PROVIDED, that no Borrower nor any other Credit Party waives any Claim solely to the extent such Claim relates to Agent's or any Lender's gross negligence or willful misconduct.
8. EXPENSES. Borrowers hereby reconfirm their obligations pursuant to SECTION 11.3 of the Credit Agreement to pay and reimburse Agent for all reasonable costs and expenses (including, without limitation, reasonable fees of counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment and all other documents and instruments delivered in connection herewith.
9. EFFECTIVENESS. This Amendment shall become effective as of the date hereof (the "EFFECTIVE DATE") only upon satisfaction in full in the judgment of Agent of each of the following conditions:
(a) AMENDMENT. Agent shall have received six (6) original signature pages to this Amendment, duly executed and delivered by Agent, Requisite Lenders and each of the Credit Parties.
(b) PAYMENT OF EXPENSES. Borrowers shall have paid to Agent all costs, fees and expenses owing in connection with this Amendment and the other Loan Documents and due to Agent (including, without limitation, reasonable legal fees and expenses).
(c) REPRESENTATIONS AND WARRANTIES. The representations and warranties of or on behalf of each of the Credit Parties in this Amendment shall be true and correct on and as of the Effective Date.
10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
11. COUNTERPARTS. This Amendment may be executed by the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
12. CONSENT TO AMENDMENT TO SCHEDULES TO CREDIT AGREEMENT. Each of the Requisite Lenders hereby consents to the amendments to the Schedules to the Credit Agreement referred to in SECTION 2(e) and SECTION 3(f) of this Amendment.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date first written above.
BORROWERS
WAMPOLE LABORATORIES, INC. INVERNESS MEDICAL (UK) HOLDINGS
LIMITED
By: /s/ Anthony J. Bernardo ----------------------------------------- Name: Anthony J. Bernardo Title: Duly Authorized Signatory
AGENT AND LENDERS
GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and Lender
MERRILL LYNCH CAPITAL, a division of Merrill Lynch Business Financial Services Inc., as Co-Syndication Agent, Documentation Agent and Lender
UBS SECURITIES LLC, as Co-Syndication Agent
UBS AG, CAYMAN ISLANDS BRANCH, as a Lender
By: /s/ Illegible ----------------------------------------- Duly Authorized Signatory
By: /s/ Illegible ----------------------------------------- Duly Authorized Signatory
By: /s/ Illegible ----------------------------------------- Duly Authorized Signatory By: /s/ Oliver O. Trumbo II, Director ----------------------------------------- Duly Authorized Signatory
By: /s/ Wilfred V. Saint, Associate Director ----------------------------------------- Banking Products Services US --------------------------------------------- Duly Authorized Signatory By: /s/ Thomas R. Salzano, Director Banking ----------------------------------------- Product Services, US --------------------------------------------- Duly Authorized Signatory
The following Persons are signatories to this Amendment in their capacity as Credit Parties and not as Borrowers.
INVERNESS MEDICAL INNOVATIONS, INC. INVERNESS MEDICAL, INC.
UNIPATH DIAGNOSTICS, INC. UNIPATH ONLINE, INC.
OSTEX INTERNATIONAL, INC. INVERNESS MEDICAL INTERNATIONAL
HOLDING CORP. INVERNESS MEDICAL INTERNATIONAL
HOLDING CORP. II UNIPATH LIMITED
APPLIED BIOTECH, INC. FOREFRONT DIAGNOSTICS, INC. MORPHEUS ACQUISITION CORP. MORPHEUS ACQUISITION LLC
ORGENICS INTERNATIONAL HOLDINGS BV INVERNESS MEDICAL SWITZERLAND LTD
LIAB. CO UNIPATH DIAGNOSTICS GMBH
CAMBRIDGE DIAGNOSTICS IRELAND LIMITED
PREGYMED GMBH
SELFCARE TECHNOLOGY, INC.
By: /s/Anthony J. Bernardo ----------------------------------------- Name: Anthony J. Bernardo Title: Duly Authorized Signatory
By: /s/Paul T. Hempel ----------------------------------------- Name: Paul T. Hempel Title: Duly Authorized Signatory
By: /s/Duane L. James ----------------------------------------- Name: Duane L. James Title: Duly Authorized Signatory
Exhibit 10.42
SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CRE DIT AGREEMENT
THIS SECOND AMENDMENT, dated as of December 31, 2003 (this "AMENDMENT"), to the Second Amended and Restated Credit Agreement, dated as of September 30, 2003 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), by and among General Electric Capital Corporation, as Agent and Lender ("AGENT"), Inverness Medical Innovations, Inc. ("Innovations"), Wampole Laboratories, Inc. and Inverness Medical (UK) Holdings Limited, as borrowers ("BORROWERS"), the other Credit Parties signatory thereto, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as documentation agent and co-syndication agent, UBS Securities LLC, as co-syndication agent, and the lenders signatory thereto from time to time (collectively, the "LENDERS").
W I T N E S S E T H
WHEREAS, Borrowers have notified Agent that Borrowers and Inverness Medical Canada Inc. - Medicale Inverness Canada Inc. ("IMC") desire that IMC become an European Credit Party to the Credit Agreement and to cease being an Excluded Subsidiary; and
WHEREAS, Agent and Requisite Lenders have agreed to amend the Credit Agreement, in the manner, and on the terms and conditions, provided for herein;
NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.
2. AMENDMENT TO SECTION 9 OF THE CREDIT AGREEMENT.
(a) SECTION 9.10 of the Credit Agreement is hereby amended as of the Effective Date by adding a new sub-paragraph (b) to read as follows and by re-lettering clauses (b) and (c) accordingly:
"(b) Without limiting the generality of sub-paragraph (a) above, for the purpose of creating a SOLIDARITE ACTIVE in accordance with Article 1541 of the Civil Code of Quebec, between each Lender, taken individually, on the one hand, and the Agent, on the other hand, each Credit Party and each such Lender acknowledge and agree with the Agent that such Lender and the Agent are hereby conferred the legal status of solidary creditors of each Credit Party in respect of all Obligations, present and future, owed by each Credit Party to each such Lender and the Agent (collectively, the "Solidary Claim"). Accordingly, but subject (for the avoidance of doubt) to Article 1542 of the Civil Code of Quebec, each Credit Party is irrevocably bound towards the Agent and each Lender
with respect to the amount of the entire Solidary Claim owed by it. As a Result of the foregoing, the parties hereto acknowledge that the Agent and each Lender shall at all times have a valid and effective right of action for the entire Solidary Claim of the Agent and such Lender and the right to give full acquittance for it. Accordingly, without limiting the generality of the foregoing, the Agent, as solidary creditor with each Lender, shall at all times have a valid and effective right of action in respect of all Obligations, present and future, owed by each Credit Party to the Agent and to the Lender or any of them and the right to give a full acquittance for same. The parties further agree and acknowledge that the Agent's Liens on the Collateral shall be granted to the Agent, for its own benefit and for the benefit of the Lenders."
(b) SECTION 9 of the Credit Agreement is hereby amended as of the Effective Date by adding a new SECTION 9.11 to read as follows:
"9.11 COMPLIANCE WITH FOREIGN LAW. Each Lender hereby authorizes Agent on behalf of itself and Lenders to take a Lien upon all of IMC's right, title and interest in, to and under all personal (movable) property and assets, whether now owned or hereafter acquired under the laws of the Province of Quebec, Canada."
3. AMENDMENT TO ANNEX A OF THE CREDIT AGREEMENT. ANNEX A of the Credit Agreement is hereby amended as of the Effective Date by adding a new paragraph at the end thereof to read as follows:
"The term "security interest" shall include a hypothec."
4. REPRESENTATIONS AND WARRANTIES. To induce Agent and Requisite Lenders to enter into this Amendment, the Credit Parties hereby, jointly and severally (solidarily), represent and warrant that:
(a) The execution, delivery and performance by IMC and each Credit Party of the Loan Documents to which it is or will be a party and the creation of all Liens provided for therein: (i) are within such Person's corporate, company or partnership power; (ii) have been (or will be prior to execution thereof) duly authorized by all necessary corporate, limited liability company or limited partnership action; (iii) do not contravene any provision of such Person's charter, bylaws or equivalent constitutive documents or partnership or operating agreement, as applicable; (iv) do not violate any law or regulation, or any order or decree of any court or Governmental Authority; (v) do not conflict with or result in the breach or termination of, constitute a default under or accelerate or permit the acceleration of any performance required by, any indenture, mortgage, hypothec, deed of trust, lease, agreement or other instrument to which such Person is a party or by which such Person or any of its property is bound; (vi) do not result in the creation or imposition of any Lien upon any of the property of such Person; and (vii) do not require the consent or approval of any Governmental Authority or any other Person except those which will have been duly obtained, made or complied with prior to the Effective Date.
(b) This Amendment has been duly executed and delivered by or on behalf of each of the Credit Parties.
(c) This Amendment constitutes a legal, valid and binding obligation of each of the Credit Parties, enforceable against each of them in accordance with its terms.
(d) No Default or Event of Default has occurred and is continuing after giving effect to this Amendment.
(e) No action, claim or proceeding is now pending or, to the knowledge of any Credit Party, threatened against such Credit Party, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any foreign, federal, state, provincial, municipal or local government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, which (i) challenges any Credit Party's right or power to enter into or perform any of its obligations under this Amendment, the Credit Agreement and the other Loan Documents to which it is or will be, a party, or the validity or enforceability of this Amendment, the Credit Agreement or any Loan Document or any action taken thereunder, or (ii) has a reasonable risk of being determined adversely to any Credit Party and that, if so determined, could reasonably be expected to have a Material Adverse Effect after giving effect to this Amendment.
(f) The representations and warranties of IMC and the Credit Parties contained in the Credit Agreement and each other Loan Document shall be true and correct in all material respects on and as of (i) the Effective Date and (ii) the date IMC becomes a Credit Party (both before and after giving effect thereto), in each case, with the same effect as if such representations and warranties had been made on and as of such date, except that any such representation or warranty which is expressly made only as of a specified date need be true only as of such date.
5. NO OTHER AMENDMENTS/WAIVERS. Except as expressly provided herein, (a) the Credit Agreement shall be unmodified and shall continue to be in full force and effect in accordance with its terms and (b) this Amendment shall not be deemed a waiver of any term or condition of any Loan Document and shall not be deemed to prejudice any right or rights which Agent or any Lender may now have or may have in the future under or in connection with any Loan Document or any of the instruments or agreements referred to therein, as the same may be amended from time to time.
6. OUTSTANDING INDEBTEDNESS; WAIVER OF CLAIMS. Each of the Borrowers and other Credit Parties hereby acknowledges and agrees that as of December 22, 2003, (a) the aggregate outstanding principal amount of the European Revolving Loan is $22,960,000, (b) the aggregate outstanding principal amount of US Revolving Loan is $16,898,797.30, (c) the aggregate outstanding principal amount of the US Term A Loan is $35,075,000, (d) the aggregate outstanding principal amount of the US Term B Loan is $40,000,000, and (e) the aggregate outstanding principal amount of the European Term Loan is $9,900,000, and that such principal amount is payable pursuant to the Credit Agreement without defense, offset, withholding, counterclaim or deduction of any kind. Borrowers and each other Credit Party hereby waives, releases, remises and forever discharges Agent, Lenders and each other
Indemnified Person from any and all claims, suits, actions, investigations, proceedings or demands arising out of or in connection with the Credit Agreement (collectively, "CLAIMS"), whether based in contract, tort, delict, implied or express warranty, strict liability, criminal or civil statute or common law of any kind or character, known or unknown, which any Borrower or any other Credit Party ever had, now has or might hereafter have against Agent or Lenders which relates, directly or indirectly, to any acts or omissions of Agent, Lenders or any other Indemnified Person on or prior to the Effective Date, PROVIDED, that no Borrower nor any other Credit Party waives any Claim solely to the extent such Claim relates to Agent's or any Lender's gross negligence or willful misconduct.
7. EXPENSES. Borrowers hereby reconfirm their obligations pursuant to SECTION 11.3 of the Credit Agreement to pay and reimburse Agent for all reasonable costs and expenses (including, without limitation, reasonable fees of counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment and all other documents and instruments delivered in connection herewith.
8. EFFECTIVENESS. This Amendment shall become effective as of the date hereof (the "EFFECTIVE DATE") only upon satisfaction in full in the judgment of Agent of each of the following conditions:
(a) AMENDMENT. Agent shall have received six (6) original signature pages to this Amendment, duly executed and delivered by Agent, Requisite Lenders and each of the Credit Parties.
(b) JOINDER AGREEMENT. Agent shall have received a joinder agreement, in form and substance satisfactory to Agent, duly executed by IMC pursuant to which, INTER ALIA, IMC joins the Credit Agreement and the other Loan Documents as an European Credit Party thereunder.
(c) PAYMENT OF EXPENSES. Borrowers shall have paid to Agent all costs, fees and expenses owing in connection with this Amendment and the other Loan Documents and due to Agent (including, without limitation, reasonable legal fees and expenses).
(d) REPRESENTATIONS AND WARRANTIES. The representations and warranties of or on behalf of each of the Credit Parties in this Amendment shall be true and correct on and as of the Effective Date.
9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
10. COUNTERPARTS. This Amendment may be executed by the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
11. LANGUAGE CLAUSE. The undersigned have expressly requested that this agreement and all related documents be drawn up in the English language. A la demande
expresse des soussignes, cette convention et tout document y afferent ont ete rediges en langue anglaise.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date first written above.
BORROWERS
WAMPOLE LABORATORIES, INC. INVERNESS MEDICAL (UK) HOLDINGS
LIMITED
By: /s/ Anthony J. Bernardo --------------------------------------- Name: Anthony J. Bernardo Title: Duly Authorized Signatory
AGENT AND LENDERS
GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and Lender
MERRILL LYNCH CAPITAL, a division of Merrill Lynch Business Financial Services Inc., as Co-Syndication Agent, Documentation Agent and Lender
UBS SECURITIES LLC, as Co-Syndication Agent
UBS AG, CAYMAN ISLANDS BRANCH, as a Lender
By: /s/ Illegible ---------------------------------------------- Duly Authorized Signatory
By: /s/ Illegible ---------------------------------------------- Duly Authorized Signatory
By: /s/ Illegible ---------------------------------------------- Duly Authorized Signatory By: /s/ Thomas J.W. Archie, Director ---------------------------------------------- Duly Authorized Signatory
By: /s/ Thomas R. Salzano, Director ---------------------------------------------- Duly Authorized Signatory By: /s/ Joselin Fernandes, Associate Director Banking Products Services, US -------------------------------------------------- Duly Authorized Signatory
The following Persons are signatories to this Amendment in their capacity as Credit Parties and not as Borrowers.
INVERNESS MEDICAL INNOVATIONS, INC. INVERNESS MEDICAL, INC.
UNIPATH DIAGNOSTICS, INC. UNIPATH ONLINE, INC.
OSTEX INTERNATIONAL, INC. INVERNESS MEDICAL INTERNATIONAL
HOLDING CORP. INVERNESS MEDICAL INTERNATIONAL
HOLDING CORP. II UNIPATH LIMITED
APPLIED BIOTECH, INC. FOREFRONT DIAGNOSTICS, INC. MORPHEUS ACQUISITION CORP. MORPHEUS ACQUISITION LLC
INVERNESS MEDICAL CANADA INC. - MEDICALE INVERNESS CANADA INC.
ORGENICS INTERNATIONAL HOLDINGS BV INVERNESS MEDICAL SWITZERLAND LTD
LIAB. CO UNIPATH DIAGNOSTICS GMBH
CAMBRIDGE DIAGNOSTICS IRELAND LIMITED
PREGYMED GMBH
SELFCARE TECHNOLOGY, INC.
By: /s/ Anthony J. Bernardo ---------------------------------------------- Name: Anthony J. Bernardo Title: Duly Authorized Signatory
By: /s/ Paul T. Hempel ---------------------------------------------- Name: Paul T. Hempel Title: Duly Authorized Signatory
By: /s/ Duane L. James ---------------------------------------------- Name: Duane L. James Title: Duly Authorized Signatory
EXHIBIT 10.43
COMMERICAL LEASE
THIS COMMERCIAL LEASE (the "Lease"), is made this 1st day of August, 1998, between the Chang Family Trust ("Lessor"), and Applied Biotech, Inc., a California corporation, with offices at 10237 Flanders Court, San Diego California 92121 ("Lessee").
1. LEASED PREMISES.
Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, upon and subject to the terms and provisions of this Lease, the premises described on Appendix A and located at 10237 Flanders Court, San Diego, California, together with all buildings and other improvements now or hereafter located thereon and all rights appurtenant thereto (the "Premises"). For the purposes of this Agreement, the parties hereby agree that the building on the Premises contains 40,000 square feet.
2. TERM.
Lessor demises the Premises for a term of five (5) years, commencing August 1, 1998, and ending on July 31, 2003 (the "Term"), unless terminated earlier pursuant to the terms of this Lease.
3. OPTION TO EXTEND TERM.
Lessor grants to Lessee an option ("Option") to extend the Term for two (2) additional periods of five (5) years each, the first such extension commencing on August 1, 2003 and the second such extension commencing on August 1, 2008. If the Lessee exercises the Option, the additional term of five (5) years shall constitute part of the Term. To exercise the Option for the first extension, Lessee must give Lessor notice in writing at least sixty (60) days prior to August 1, 2003. To exercise the Option for the second extension, Lessee must give Lessor notice in writing at least sixty (60) days prior to August 1, 2008. All terms and conditions of this Lease shall continue to apply during the term of the Option.
4. RENT.
Commencing on August 1, 1998 and continuing throughout the initial five (5) year Term, Lessee shall pay to Lessor an annual base rent equal to four hundred forty thousand dollars ($440,000) ("Annual Base Rent"), payable in equal monthly installments of thirty six thousand, six hundred sixty-six dollars and sixty-six cents ($36,666.66) in advance on the first business day of each month for that month's rental. If Lessee exercises its Options to extend the Term, (i) the Annual Base Rent for the first five (5) year extension shall be four hundred eighty thousand dollars ($480,000), payable in equal monthly installments of forty thousand dollars ($40,000) in advance on the first business day of each month for that month's rental, and (ii) the Annual Base Rent for the second five (5) year extension shall be five hundred twenty thousand dollars ($520,000), payable in equal monthly installments
of forty three thousand three hundred thirty-three dollars and thirty-three cents ($43,333.33) in advance on the first business day of each month for that month's rental. All Annual Base Rent payments shall be made to Lessor, at the address specified above or any address as specified in writing by Lessor. The amount of monthly installments payable by Lessor shall be prorated for any partial month of the Term.
5. TAXES/ASSESSMENTS/UTILITIES
5.1 As additional rent, the Lessee shall pay when due all real property taxes and other assessments (hereinafter the "Taxes and Assessments"), of every nature and description, whether general or special, (including, without being limited to, taxes and other assessments of water, sewer, fire or other special district) levied or assessed against the Premises during the Term; provided, however, that Lessee shall be entitled to elect to pay by installment payments any Taxes and Assessments and provided further that any Taxes and Assessments which apply for periods not concurrent with the Term shall be prorated so that Lessee pays only that portion which accrues or accrued during the Term.
5.2 Taxes and Assessments payable hereunder for the calendar year in which this Lease commences or terminates will be prorated on the basis of a 365 day year, the Lessee paying the Taxes and Assessments assessed as of the December 31 immediately preceding the calendar year in which this Lease commences or terminates in proportion to that part of the calendar year during which the Lessee has possession of the Premises. If this Lease terminates prior to the time when the amount of the Taxes and Assessments payable for the calendar year in which termination occurs are known, appropriate provision for their adjustment will be made.
5.3 The Lessee will furnish to Lessor evidence of the payment of the Taxes and Assessments within 10 days following the date upon which the payment is due.
5.4 The Lessee shall have the right to contest the amount or validity of any Tax and Assessment by appropriate proceedings but only after payment of such Tax and Assessment unless such payment would bar such contest.
5.5 Lessee shall pay all utilities with respect to the Premises, including but not limited to water, sewer, heat, gas, oil and electricity, and all services with respect to the Premises and the entranceways, exit ways and driveways providing access to the Premises, including, but not limited to, maintenance and cleaning, landscaping and snow removal.
6. CARE AND MAINTENANCE OF PREMISES.
Except as set forth in Section 15 hereof, Lessee shall, at its own expense, keep and maintain the Premises in good and safe condition and repair, reasonable wear and tear excepted, including roof, exterior walls, structural foundations, plate glass, electrical
wiring, plumbing and heating installations and any other system or equipment upon the Premises.
7. ALTERATIONS AND IMPROVEMENTS.
Lessee may make any non-structural alterations and improvements to the Premises which do not (a) materially or adversely affect the improvements on the Premises, (b) injure the structural safety of the buildings on the Premises, or (c) materially impair the value of the Premises or the building on the Premises. Any structural alterations and improvements to the Premises shall be subject to the Lessor's prior approval, which approval shall not be unreasonably withheld, conditioned or delayed.
8. LESSEE'S TRADE FIXTURES.
For the purposes of this Agreement, the term "Lessee's Trade Fixtures" means all machinery, equipment and other items of personal property owned by the Lessee and especially designed or fitted for use in its trade or business which are not affixed or incorporated into the buildings in such a manner that their removal will cause substantial damage to the structure of the building. It is understood that Lessee may install Lessee's Trade Fixtures in the building on the Premises. All Lessee's Trade Fixtures will, notwithstanding the manner of their installation, remain the property of the Lessee and will be removed by the Lessee upon the termination of this Lease. The Lessee will repair any damage to the Premises occasioned by the removal of Lessee's Trade Fixtures.
9. ORDINANCES AND STATUTES.
Lessee shall comply with all statutes, ordinances and requirements of all municipal, state and federal authorities now in force, or which may hereafter be in force, pertaining to the Premises, occasioned by or affecting the use thereof by Lessee.
10. ASSIGNMENT AND SUBLETTING.
Lessee shall not assign this Lease or sublet any portion of the Premises without prior written consent of the Lessor, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Lessee may, without the prior consent of Lessor, assign this Lease or sublet all or a portion of the Premises to a parent, subsidiary, or entity under common control with Lessee, or to any party who acquires all or substantially all of the assets of Lessee, whether by way of merger, consolidation, reorganization or sale.
11. ENTRY AND INSPECTION.
Lessee shall permit Lessor or Lessor's agents to enter upon the Premises at reasonable times and upon reasonable notice, for the purposes of inspecting the same. Lessee will permit Lessor at any time within sixty (60) days prior to the expiration of this Lease to place upon the Premises any usual "To Let" or "For Lease" signs, and permit persons desiring to lease the same to inspect the Premises thereafter.
12. INDEMNIFICATION.
12.1 Lessee shall hold harmless, indemnify and defend Lessor and its employees and agents from all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgments (collectively "Losses") arising by reason of any death, bodily injury, personal injury or property damage to the extent resulting from the negligent act or omission of Lessee, its agents, contractors, or employees, a breach by Lessee of this Lease, or a violation by Lessee of any law.
12.2 Lessor shall hold harmless, indemnify and defend Lessee and its employees and agents from all Losses arising by reason of any death, bodily injury, personal injury or property damage to the extent resulting from the negligent act or omission of Lessor, its agents, contractors, or employees, a breach by Lessor of this Lease, or a violation by Lessor of any law.
13. INSURANCE.
13.1 The Lessee, at its expense, shall maintain public liability insurance in the amount of $1,000,000 for bodily injury or death in any one accident and $1,000,000 per occurrence for property damage relating or claimed to relate to the Premises The Lessee shall maintain insurance on the buildings on the Premises for the benefit of the Lessor, any mortgagee of the Lessor, and the Lessee (as their interests may appear) against loss or damage by fire or other risks now embraced by standard "all risks of loss" coverage, so-called, in an amount not less than one hundred percent (100%) of the then full replacement cost of the buildings. The Lessee shall also purchase boiler and machinery insurance insuring the Lessor and the Lessee.
13.2 Lessee shall provide Lessor with a Certificate of Insurance showing Lessor as Additional Insured - Lessor on the public liability insurance referenced in Section 13.1. The Certificate shall provide for a ten-day written notice to Lessor in the event of cancellation or material change of coverage. To the maximum extent permitted by insurance policies that may be owned by Lessor or Lessee, Lessee and Lessor, for the benefit of each other, waive any and all rights of subrogation that might otherwise exist.
14. EMINENT DOMAIN.
If the Premises or any part thereof are taken in condemnation proceedings or by exercise of any right of eminent domain, (i) the Lessor will be entitled to collect from the condemnor the entire award that may be made in such proceeding without deduction therefrom for any interest of the Lessee under this Lease except that the Lessee shall be entitled to file a claim and/or bring a separate action for the value of that portion of the Lessee's Trade Fixtures and improvements which were taken and the cost of relation of Lessee; and (ii) this Lease will terminate on the date of such taking and the Annual Base Rent and all other
payments required to be made by the Lessee hereunder will be apportioned and paid to the date of such taking.
15. DESTRUCTION OF PREMISES.
In the event that all or a portion of the Premises or the building on the Premises are damaged by fire or other peril or casualty, and such restoration, repair or rehabilitation can be made within thirty (30) days of the date of such damage, then Lessor shall immediately proceed with all due diligence to restore, repair or rehabilitate the Premises and/or building to its condition prior to such loss. Lessor shall have the right to all applicable insurance for the purpose of making any such restoration, repairs or rehabilitation, and the amount recovered from such insurance shall be held in trust by Lessor and solely used to pay the costs for such restoration, repair or rehabilitation. During the period of restoration, repair or rehabilitation, the Annual Base Rent shall be equitably adjusted (based on the square footage area suitable for Lessee's use and occupancy, if any) until the entire Premises and building are suitable, in Lessee's reasonable judgment, for Lessee's use and occupancy. In the event the damage cannot be repaired within thirty (30) days after the date of such damage, either party may, at any time thereafter, elect by written notice to the other to terminate this Lease as of the date of the damage. In case of damage contemplated under this section, the Lessor shall, within ten (10) days of the loss, advise Lessee of the following: (i) estimated cost of restoration, repair and rehabilitation; (ii) proposed commencement date for making the restoration and repairs; and (iii) date by which the restoration, repairs and rehabilitation will be completed. In the event this Lease is not terminated pursuant to the above, all Annual Base Rent shall abate on a daily basis during the period that the Premises are not suitable for Lessee's use and occupancy. Lessor shall complete such repairs as promptly as possible. A total destruction of any of the buildings situated on which the Premises shall terminate this Lease.
16. LESSOR'S REMEDIES ON DEFAULT.
The Lessee will be in default under this Lease upon the occurrence of any of the following events or conditions as to the Lessee; (i) the Lessee's failure to pay the Annual Base Rent or make the other payments at the times and in the manner provided for herein, such failure having continued for a period of 10 days after written notice from Lessor; (ii) the Lessee's failure to perform or fulfill any other term, condition or agreement contained or referred to herein, on the part of the Lessee to be performed or fulfilled, such failure having continued, in the absence of reasonable efforts having been made by Lessee to correct the same, for a period of thirty (30) days after written notice thereof shall have been given by the Lessor to the Lessee, provided that if such failure to perform or fulfills such term, condition or agreement cannot reasonably be remedied within thirty (30) days, within such further time as may be reasonably necessary, with due diligence, to complete such performance; (iii) proceedings in bankruptcy or for liquidation, reorganization, or rearrangement of the Lessee's affairs shall be instituted by or against the Lessee, and such proceedings shall not be dismissed within 60 days of their filing; (iv) a receiver or trustee shall be appointed for all or substantially all of Lessee's business or assets on the grounds of Lessee's insolvency; (v) the Lessee shall make an assignment for the benefit of its creditors.
17. QUIET ENJOYMENT.
Upon paying the rent and all other payments required to be made by the Lessee hereunder, and upon the Lessee performing and fulfilling all terms, conditions or agreements on the Lessee's part to be performed and fulfilled, the Lessee will quietly have and enjoy the Premises during the Term without hindrance by any person claiming by, through or under the Lessor.
18. NOTICES.
Any notice which either party may, or is required to give to the other party under this Lease shall be given by facsimile transmission, overnight courier, or certified or registered mail, postage prepaid, properly addressed to the respective parties as follows:
Attn.:
Or to such other addresses as either party may from time to time by written notice designate as its address for the purposes of this Agreement and shall be deemed to have been received on the day following dispatch of any facsimile transmission sent after 5:00 PM EST, the day of receipt from any courier, and the fourth day following the mailing of any letter.
19. GOVERNING LAW.
This Lease and the performance thereof will be governed, interpreted, construed and regulated in accordance with the laws of the State of California, without regard to any conflicts of laws.
20. SUBORDINATION.
This Lease is and shall be subordinated to all existing and future liens and encumbrances against the property.
21. ENTIRE AGREEMENT.
If to Lessee: Diagnostic Reagents, In c. Attn.: Dr. Yuh-geng Ts ay 601 California Avenue Sunnyvale, California 94086 With a copy to: Sybron Laboratory Produ cts Corporation Attn.: Michael K. Bres son, Esq. 48 Congress Street Portsmouth, New Hampshi re 03801 If to Lessor: Shung-Ho Chang Family T rust
The foregoing supercedes any and all other agreements, either oral or in writing, between the parties, and constitutes the entire agreement between the parties with respect to its subject matter. Each party acknowledges and represents that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or any person acting on behalf of any party, which are not embodied in this Agreement, and that no other agreement or statements of promise not contained in this Agreement shall be valid or binding. This Agreement may not be altered, amended or modified except by written instrument signed by both parties.
22. ORDINANCES AND STATUTES.
Lessee shall copy with all statutes, ordinances and requirements of all municipal, state and federal authorities now in force, or which may hereafter by in force, pertaining to the Premises, occasioned by or affecting the use thereof by Lessee.
IN WITNESS WHEREOF, and intending to be legally bound, the parties have signed this Agreement below.
LESSOR LESSEE
CHANG FAMILY TRUST APPLIED BIOTECH, INC.
By: /s/ Shung-Ho Chang By: /s/ Yuh-geng Tsay ----------------------------------- --------------------------------- Name: Shung-Ho Chang Name: Yuh-geng Tsay --------------------------------- -------------------------------
Title: Trustee Title: Pr esident of DRI -------------------------------- ---- ---------------------------
EXHIBIT 10.44
AMENDMENT TO COMMERCIAL LEASE
THIS AMENDMENT is made and entered into as of April , 2003, by and between The Chang Family Trust ("Lessor") and Applied Biotech, Inc. ("Lessee").
RECITALS
Lessor and Lessee entered into that certain Commercial Lease dated August 1, 1998 (the "Lease"), relating to the lease of premises located at 10237 Flanders Court, San Diego, California (the "Premises").
Lessor and Lessee wish to amend certain provisions of the Lease as provided below. All capitalized terms shall have the meaning given to them in the Lease, unless otherwise defined in this Amendment to Commercial Lease
AGREEMENT
For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee agree as follows:
1. Term of Lease. Paragraph 1 of the Lease is hereby amended to provide that the Term of the Lease is extended to November 30, 2004. All references in the Lease to the "Term" shall mean the period from August 1, 1998 to and including November 30, 2004.
2. Option to Extend Term. Paragraph 2 of the Lease is hereby amended to provide that the first extended term shall commence on December 1, 2004 and the second extended term shall commence on December 1, 2009. To exercise the Option for the first extension the Lessee must give Lessor notice in writing at least sixty (60) days prior to December 1, 2004. To exercise the Option for the first extension the Lessee must give Lessor notice in writing at least sixty (60) days prior to December 1, 2009.
3. Full Force and Effect. Except as amended above, the Lease remains in full force and effect.
IN WITNESS WHEREOF, Lessor and Lessee have respectively signed this Amendment to Lease Agreement as of the day and year first above written.
LESSOR: The Chang Family Trust By: /s/ Illegible ---------------------------- Its: ---------------------------- LESSEE: Applied Biotech, Inc. By: /s/ Jeffrey A. Konecke ---------------------------- Its: President ----------------------------
EXHIBIT 10.45
CONFIDENTIAL TREATMENT REQUESTED AS TO CERTAIN INFO RMATION CONTAINED IN THIS EXHIBIT 10.45 AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE C OMMISSION.
EXECUTION COPY
MANUFACTURING, PACKAGING AND SUPPLY AGREEMENT
AMONG
INVERNESS MEDICAL INNOVATIONS, INC.,
INVERNESS MEDICAL SWITZERLAND GmbH,
UNIPATH, LTD.
AND
WARNER-LAMBERT COMPANY LLC
dated as of
JUNE 6, 2003
1
MANUFACTURING, PACKAGING AND SUPPLY AGREEMENT
This MANUFACTURING, PACKAGING AND SUPPLY AGREEMENT dated as of June 6, 2003, by and among INVERNESS MEDICAL INNOVATIONS, INC., a Delaware corporation having its principal office at 51 Sawyer Road, Suite 200, Waltham, MA 02453, ("Innovations") for purposes of Sections 6.3, 8, 11 and 12 of this Agreement only, INVERNESS MEDICAL SWITZERLAND GMBH, a Swiss corporation, having its principal office at Bundesplatz 10, 6300 Zug, Switzerland ("Inverness") for purposes of Sections 6.2, 11 and 12 of this Agreement only, Unipath, Ltd., a United Kingdom company with its principal office at Priory Business Park, Bedford, MK 44 3UP ("Unipath") and WARNER-LAMBERT COMPANY LLC, a Delaware limited liability company, having its principal office at 201 Tabor Road, Morris Plains, New Jersey 07950 ("Warner-Lambert").
WITNESSETH:
WHEREAS, Warner-Lambert desires to have Unipath manufacture, package and supply to Warner-Lambert, Warner-Lambert's requirements of early pregnancy test kits complying with the Specifications ("EPT Product") for resale in the Territory (defined below) under the terms and conditions hereinafter set forth, and
WHEREAS, Unipath is willing to do so under the terms and conditions hereinafter set forth, and
WHEREAS, each of Innovations and Inverness are direct or indirect parents of Unipath and expect to derive substantial benefit from Unipath's execution of and performance under this Agreement.
NOW, THEREFORE, in consideration of these premises and the mutual covenants, agreements, representations and warranties herein contained, the parties hereby agree as follows:
1. DEFINITIONS
1.1. "AFFILIATE" shall mean, with respect to any Person, any other Person controlling, controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation (or other entity) if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation (or other entity), whether through the ownership of voting securities, by contract or otherwise.
1.2. "AGREEMENT" shall mean this Manufacturing, Packaging and Supply Agreement and all Exhibits and Schedules attached hereto, as the same may be amended or otherwise modified from time to time pursuant to the terms set forth herein.
1.3. "ANNUAL MINIMUM" shall have the meaning set forth in Section 2.13.
1.4. "BUSINESS DAY" shall mean any day other than Saturday, Sunday or any day on which the banks located in New York are authorized or obligated to be closed.
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1.5. "CGMP" shall mean all applicable standards and Laws relating to manufacturing practices for products (including ingredients, intermediates, bulk and finished products) formulated by any Governmental Authority having jurisdiction in the form of Laws, regulations, guidelines, advisory opinions and compliance policy guides and current interpretations of the authority agency, as the same may be updated, supplemented or amended from time to time.
1.6. "CONTRACT YEAR" shall have the meaning set forth in Section 2.13.
1.7. "ENVIRONMENTAL LAWS" shall mean all laws, rules, ordinances, codes, regulations, governmental, administrative or judicial orders or decrees or other legal requirements of any kind, whether currently in existence or hereafter promulgated, enacted, adopted or amended, relating to pollution, contamination of the environment, safety or protection of human health and environment (including ambient air, surface water, groundwater, land or subsurface strata) and the handling, treatment, transportation or disposal of Waste, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 9601 ET SEQ.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. 6901 ET SEQ.; the Federal Water Pollution Control Act, 33 U.S.C. 1251 ET SEQ.; the Clean Air Act, 42 U.S.C. 7401 ET SEQ.; Occupational Safety and Health Act, 29 U.S.C. 651 ET SEQ.; any state counterparts of the foregoing; any rules, regulations, or guidances promulgated under the foregoing; and any other laws and regulations related to emissions, spills, leaks, discharges, releases and threatened releases of substances subject to regulation thereunder.
1.8. "ENVIRONMENTAL LOSSES" shall mean any and all fines, penalties, costs, liabilities, damages, losses or expenses (including sampling, monitoring or remediation costs, liabilities based on a finding of "successor" liability, reasonable attorneys', consultants' or engineering fees and disbursements, costs of defense and interest expense) incurred by Warner-Lambert or an Affiliate of Warner-Lambert or for which Warner-Lambert or an Affiliate of Warner-Lambert is liable or obligated pursuant to any Environmental Law (a) arising out of the operation, ownership or control of Unipath's facilities, the facilities of any Affiliates of Unipath, or the facilities of any subcontractors of Unipath or its Affiliates or (b) arising from the manufacturing, generation, processing, storage, transportation, distribution, treatment, disposal or other handling of Product or materials used in the manufacture and packaging of the Product, or associated by-product, raw materials, intermediates, Wastes, Hazardous Materials, emissions, releases, spills, leaks or discharges, or returned Product, by Unipath, Affiliates of Unipath, or subcontractors of Unipath or its Affiliates, or their officers, directors, employees, agents or contractors.
1.9. "EPT PRODUCT" shall have the meaning set forth in the recitals hereto.
1.10. "FACILITY" shall mean Unipath's manufacturing facility located at Priory Business Park, Bedford, MK 44 3UP, and, subject to Warner-Lambert's prior qualification and written approval, approval not to be unreasonably withheld, such other facilities to be used by Unipath or its Affiliates in the manufacture, packaging and storage of Product or materials utilized in the manufacture and packaging of Product hereunder.
1.11. "FIRM ORDER" shall have the meaning set forth in Section 2.4.3.
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1.12. "FIRM ORDER PERIOD" shall have the meaning set forth in Section 2.4.3.
1.13. "GOVERNMENTAL AUTHORITY" shall mean any duly authorized court, tribunal, arbitrator, agency, commission, official or other instrumentality of any federal, state, province, county, city or other political sub-division, domestic or foreign.
1.14. "HAZARDOUS MATERIALS" shall mean any pollutant, contaminant, hazardous or toxic substance, constituent or material and other wastes or other substances regulated under any Environmental Law and may include Product properly rejected pursuant to Section 4.12 hereof, but shall not include any other returned Product.
1.15. "HAZARDOUS WASTE" shall mean waste arising from the manufacture and packaging of the Product that is defined as "Hazardous" by applicable federal, state, provincial or local laws, rules or regulations and may include Product properly rejected pursuant to Section 4.12 hereof, but shall not include any other returned Product.
1.16. "IMPROVEMENTS" shall mean (a) any new or modified product that performs the same function as the Product in a better or more economical way or (b) any new or modified product that performs the same function as the Product and costs less to manufacture than the Product.
1.17. "INNOVATIONS" shall have the meaning set forth in the preamble hereto.
1.18. "INTELLECTUAL PROPERTY" means the Patents and Know-How.
1.19. "INVERNESS" shall have the meaning set forth in the preamble hereto.
1.20. "KNOW-HOW" means any current or future manufacturing processes and information related thereto (including, without limitation, manufacturing, and inventory ordering lead-times, and procedures and vendor and other records), trade secrets, designs, industrial models, technology, technical information or data, manufacturing, engineering, and technical drawings, know-how, methodologies, formulae, concepts, inventions, improvements, copyrights, clinical data and FDA 510(k) filings related to the registration, supply marketing, use or sale of the Product.
1.21. "LAWS" shall mean any law, statute, rule, regulation, guideline (including cGMP), ordinance or other pronouncement of any Governmental Authority having the effect of law in the United States, any foreign country or territory, or any domestic or foreign state, province, county, city or other political sub-division, including any Environmental Law.
1.22. "PATENTS" means the patents and patent applications (and the related resulting patents) listed on Exhibit B to this Agreement and any addition, continuation, continuation-in-part, division, reissue, extension, or patent term extension of, and any substitute application for, any such patent or patent application and any other current or future patents, patent applications or patent rights related to the Product or the registration, supply, marketing, issue or sale of the Product.
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1.23. "PERSON" shall mean any individual or corporation, company, partnership, trust, incorporated or unincorporated association, joint venture or other entity of any kind.
1.24. "PRICE" shall mean the price to be charged by Unipath for Product supplied hereunder, as set forth on Exhibit C, as the same may be amended or otherwise modified from time to time pursuant to the terms set forth herein.
1.25. "PRODUCT" shall mean the EPT Product in finished and packaged form.
1.26. "PRODUCT SUPPLY DATE" shall have the meaning specified in Section 2.4.1.
1.27. "PRODUCT UNIT" shall mean each e.p.t(R) brand early pregnancy test stick purchased by Warner - Lambert from Unipath.
1.28. "PRODUCT WRITINGS" shall mean text, writings, artwork and documents, including without limitation, text and artwork for the Product, Product packaging and Product inserts, created by or on behalf of Warner-Lambert for the Product.
1.29. "QUALITY AGREEMENT" shall have the meaning set forth in Section 4.14.
1.30. "RECALL", with respect to any Product, shall mean a "recall", "correction" or "market" withdrawal, as those terms are defined in 21 CFR 7.3, as the same may be amended from time to time, and shall include any post-sale warning or mailing of information regarding such Product, including those warnings or mailings described in 21 CFR 200.5.
1.31. "RECEIVING POINT" shall have the meaning set forth in Section 3.2.
1.32. "RELEASE" shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through the ambient air, soil, subsurface water, groundwater, wetlands, lands or subsurface strata.
1.33. "SPECIAL WASTE" shall mean waste arising from the manufacture and packaging of the Product hereunder, including labeling that contains, or has come into contact with, the Product or raw materials, including Product properly rejected pursuant to Section 4.12 of this Agreement, rejected or unusable raw materials, disposable manufacturing equipment (including filters used in manufacturing and packaging), wash rinse and previously used or discarded protective clothing. Special Waste does not include Hazardous Waste or wastewater which is discharged under a National Pollutant Discharge Elimination System Permit or discharged to a publicly owned treatment works or returned Product not properly rejected pursuant to Section 4.12 hereof.
1.34. "SPECIFICATIONS" shall mean the specifications for the raw materials and packaging materials used in the manufacture and/or packaging of the Product and the specifications for the manufacture, processing and packaging of the Product, including all formulae, Know-How, materials requirements, standards of quality control, quality assurance and sanitation, as mutually agreed upon in writing by Warner-Lambert and Unipath. Final
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Specifications for the Product, as mutually agreed upon in writing by Warner-Lambert and Unipath, are referenced in Exhibit D. If Specifications have not yet been finalized as of the date hereof, as noted on such Exhibit, the parties shall finalize such Specifications by written agreement as soon as reasonably practicable after the date hereof.
1.35. "START-UP ACTIVITIES" shall have the meaning set forth in Section 2.1 and Exhibit A hereof.
1.36. "TERM" shall have the meaning set forth in Section 12.1 hereof.
1.37. "TERM MINIMUM" shall have the meaning set forth in Section 2.13.
1.38. "TERRITORY" means the United States, its territories and possessions.
1.39. "UNIPATH" shall have the meaning set forth in the preamble hereto.
1.40. "WARNER-LAMBERT" shall have the meaning set forth in preamble hereto.
1.41. "WASTE" shall mean all wastes which arise from the manufacture and packaging of Product hereunder including Hazardous Waste and Special Waste.
The definitions in this Section 1 shall apply equally to both the singular and plural forms of the terms defined. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Sections and Exhibits shall be deemed references to Sections of this Agreement and Exhibits to this Agreement unless the context shall otherwise require.
2. START-UP ACTIVITIES; SUPPLY OF PRODUCT; FIRM ORDERS AND REPORTS.
2.1. START-UP ACTIVITIES. Unipath hereby represents, warrants and agrees that:
(a) Unipath shall comply with and complete all manufacturing and packaging start-up activities with respect to the Product, including the manufacture or ordering of all Product materials, the Product manufacturing and packaging trials, validation protocols, validation activities, written validation reports, the activities listed in Exhibit A hereto on the dates listed therein and any other activities agreed to be performed by Unipath..
(b) Any protocols and reports prepared by Unipath relating to the Product (including any validation reports) shall be subject to Warner-Lambert's prior review and approval, such approval not to be unreasonably withheld.
(c) Unipath shall permit a reasonable number of Warner-Lambert employees (such number to be mutually agreed by Unipath and Warner-Lambert) to observe and review the Start-Up Activities at the Facility during normal business hours and on reasonable notice subject to Warner-Lambert employees' compliance with Facility rules and regulations regarding security, health and safety. Unipath and Warner-Lambert have jointly developed or shall jointly develop a project plan to determine the timeline for the ordering and receipt of Product packaging materials
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for the Product. The validation reports produced hereunder shall be deemed confidential information of Unipath and Warner-Lambert hereunder and shall not be disclosed by either party to any third party, except as permitted under Section 11 hereof.
(d) The activities described in this Section 2.1 are collectively referred to herein as the "Start-Up Activities".
2.2. PURCHASE AND INSTALLATION OF EQUIPMENT, MOLDS AND TOOLING. Unipath shall be responsible for purchasing, installing, qualifying and maintaining at its Facility any and all new or used equipment, molds, tooling and/or modifications to existing equipment, molds and/or tooling necessary for the manufacturing, packaging, labeling and shipment of Product hereunder. All costs and expenses associated with such purchase, installation, qualification and maintenance shall be borne by Unipath. To the extent Warner-Lambert purchases or otherwise pays for any equipment, molds or tooling for the manufacture or packaging of Product, all such equipment, molds and tooling shall be the property of Warner-Lambert. Unipath shall use such tooling only in connection with the manufacture and packaging of the Product under this Agreement and shall not modify such tooling without the consent of Warner-Lambert. The installation, qualification and maintenance of all equipment, molds and tooling shall be conducted in accordance with all applicable Laws, and any relevant Specifications.
2.3. AGREEMENT TO SUPPLY. During the Term of this Agreement Unipath shall manufacture, package and supply the Product to Warner-Lambert in accordance with terms of this Agreement.
2.4. FORECAST ; FIRM ORDERS; CHANGES TO FIRM ORDERS.
2.4.1 Unipath will first deliver Product to Warner-Lambert, on June 6, 2004 (the "Product Supply Date").
2.4.2 Beginning six (6) months after the date of this Agreement and continuing on each calendar month during the term of this Agreement, Warner-Lambert shall provide Unipath with written forecast of its estimated monthly purchases of the Product for the twelve (12) month period commencing with the calendar month following the month in which such forecast is delivered to Unipath (except that in the case of forecasts delivered prior to May 2004, such forecasts shall be for the twelve (12) month period beginning on the Product Supply Date). Such forecasts shall represent Warner-Lambert's commercially reasonable, good-faith estimate of its Product requirements from Unipath for such twelve (12) month period in light of then existing conditions. Except as provided in Section 2.4.3, such forecasts are for the convenience of Unipath only, shall not constitute firm purchase or shipping orders and shall not be binding upon, or create any obligation or liability with respect to, Warner-Lambert or Unipath.
2.4.3 Beginning with the forecast delivered in May 2004, at the time each written forecast is delivered by Warner-Lambert to Unipath pursuant to Section 2.4.2, the first three (3) months of such forecast (the "Firm Order Period") shall be deemed
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a firm order (a "Firm Order") for the Product, which Firm Order shall specify actual quantities and delivery dates for the Product for the Firm Order Period. Quantities of Product delivered pursuant to a Firm Order shall not vary more than plus or minus five percent (+/- 5%) of such Firm Order. Unipath shall deliver the Product on the delivery date specified by Warner-Lambert in the relevant Firm Order or up to fifteen (15) Business Days prior to such delivery date. Warner-Lambert shall be obligated to pay Unipath in accordance with Section 3.1, for quantities of Product produced and delivered by Unipath in accordance with the instructions contained in Warner-Lambert's Firm Orders, subject to any exceptions to Warner-Lambert's obligation to pay for such Product contained in this Agreement.
2.4.4 Once a Firm Order is submitted to Unipath with respect to any given Firm Order Period, Warner-Lambert may reasonably vary that Firm Order by providing at least five (5) days' written notice to Unipath prior to the beginning of the month for which such Firm Order is to be varied during such Firm Order Period; PROVIDED, HOWEVER, that Unipath shall have thirty (30) days from the day of such variance notice to deliver the amount of Product that is in excess of the amount ordered by Warner-Lambert pursuant to the original Firm Order. Notwithstanding the immediately preceding sentence, in the event Warner-Lambert wishes to increase a Firm Order by greater than twenty-five percent (25%), Unipath is only required to make reasonable commercial efforts to produce such additional volume of Product for Warner-Lambert.
2.4.5 If Warner-Lambert decreases the production volumes set forth in Warner-Lambert's Firm Orders, Warner-Lambert shall be responsible for the reasonable cost of materials for the Product purchased by Unipath and in accordance with Warner-Lambert's Firm Orders; PROVIDED, HOWEVER, that Warner-Lambert shall not be responsible for the reasonable cost of materials for (i) any materials in excess of a ninety (90) day supply unless such excess supply was specifically authorized in writing by Warner-Lambert or (ii) any materials that are or will be subsequently used by Unipath. At Warner-Lambert's option, Warner-Lambert may instruct Unipath to utilize such materials in the future supply of Product. In addition, Unipath shall use reasonable efforts to utilize such materials in the supply of Product so as to minimize the amount of such materials that remain unused.
2.5. STANDARD FORMS. In ordering and delivering Product, Warner-Lambert and Unipath may employ their standard forms, but nothing in those forms shall be construed to modify or amend the terms of this Agreement, and, in the case of any conflict herewith, the terms of this Agreement shall control.
2.6. QUANTITATIVE DEFECTS. Warner-Lambert shall inform Unipath in writing of any claim relating to quantitative defects in shipments of Product within thirty (30) days following actual receipt of such shipments by Warner-Lambert, and Warner-Lambert shall provide to Unipath copies of any appropriate documents relating to such defects that Warner-Lambert may
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have in its possession. Unipath shall, at its own expense, provide Warner-Lambert with any missing quantities of such Product as soon as reasonably possible after receipt of notice from Warner-Lambert. Warner-Lambert shall only be obligated to pay for actual quantities of Product received by Warner-Lambert. Any claim for a quantitative defect which is not made within such thirty (30) day period shall be deemed to have been waived by Warner-Lambert.
2.7. INVENTORY; CARRYING CHARGES. Unipath will keep adequate inventories of Product materials on hand or with suppliers to accommodate variations in quantities and packaging that may be reasonably required by Warner-Lambert hereunder, consistent with Section 2.4 above. In the event Unipath is required, pursuant to this Agreement, to hold inventory of non-active raw materials and/or Product for more than 180 days, Unipath shall have the right to charge Warner-Lambert for reasonable inventory carrying charges (not to exceed 9% of Unipath's cost of non-active raw materials in the held inventory) to compensate Unipath for the carrying cost of such inventory, if the existence of such inventory arose as a result of a change in sales forecast by Warner-Lambert. Such inventory carrying charges shall be periodically invoiced to Warner-Lambert, as incurred, together with suitable back up information evidencing the carrying charges and Warner-Lambert shall pay such invoices within thirty (30) days after receipt.
2.8. NO THIRD PARTY CONFLICTS. Unipath shall not manufacture or process goods for itself or a third party where to do so will, as a consequence, delay delivery of Warner-Lambert's identified requirements of Product (including any reasonable increases in Warner-Lambert's delivery requirements thereof pursuant to the terms of Section 2.4 hereof).
2.9. PRODUCT SAMPLES. Unipath shall provide Warner-Lambert with samples of the Product (other than retention samples) promptly upon request. Such Product samples shall be shipped to Warner-Lambert in accordance with the provisions set forth in Section 3.2 hereof, and Warner-Lambert shall pay the Price for such Product in the manner described in Section 3.3.
2.10. ALTERNATIVE SUPPLY. Notwithstanding the provisions of Section 2.11, if at any time during the Term of this Agreement Unipath does not for a period of thirty (30) days or more, or anticipates that it will not, fill the total monthly Product volume required by Warner-Lambert's forecasts, or the Product supplied by Unipath does not meet or comply with the Specifications for a period of thirty (30) days or more, Unipath must (a) procure from a third party quantities of Product sufficient to replace any quantities of Product which Unipath cannot or will not supply, or (b) otherwise provide for an alternative source of Product. Unipath shall promptly notify Warner-Lambert in the event that it cannot or will not meet forecasted volumes, or in the event Product does not meet or comply with Specifications. Unipath shall use its best efforts with Warner-Lambert to resolve such problems during the thirty (30) day period. Unipath and its Afiliates shall cooperate with, and supply all reasonable technical assistance, including, without limitation, technical personnel, at Unipath's expense, to any alternate supplier, and shall assist in the disclosure of Intellectual Property to such supplier and such supplier shall have complete access to and use of such Intellectual Property during the period Unipath shall be unable or unwilling to supply Product, or the Period during which the Product fails to meet Specifications; PROVIDED THAT any alternate supplier to whom Unipath or its Affiliates must disclose Intellectual Property in accordance with this Section 2.10, shall be required to execute a
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confidentiality agreement prior to disclosure. If Unipath does not provide an acceptable alternative source of supply within 60 days of the first date (x) Unipath was unable or unwilling to supply Product, or (y) the Product failed to meet Specifications, in addition to any other rights it may have hereunder or at law, Warner-Lambert may terminate this agreement in accordance with Section 12.2. Each of Inverness and Unipath shall indemnify Warner-Lambert, its Affiliates and their directors, officers, agents, consultants and employees for the aggregate losses, including an increase in the price paid by Warner-Lambert to a third-party supplier of the substitute product in connection with the exercise of its rights under this SECTION 2.10. The parties agree that the indemnification procedures set forth in Section 8.4 shall be followed by the parties with respect to the foregoing indemnification.
2.11. *****
2.12. UNIPATH RESTRICTION ON MANUFACTURE. Unipath shall, and shall cause its Affiliates to, comply with applicable Law as it applies to manufacturing, marketing, packaging or selling products (i) similar to the Product using all or any portion of Warner-Lambert's customized design format, or (ii) using packaging and/or tradedress materials that make comparisons to or are substantially similar to the Product and/or Warner trademarks, packaging or tradedress materials. Warner-Lambert has reviewed the products and packaging listed on Schedule A attached hereto, in the form provided by Inverness as of the date hereof, and acknowledges that none of such products or packaging infringe the tradedress of the Product or Warner-Lambert's trademarks. Any claim or dispute arising out of or in connection with this Section 2.12 shall be referred to and finally resolved by binding arbitration under the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be three, all of which shall be neutral. The arbitrators shall be selected from the AAA's National roster of Arbitrators through selection procedures administered by the AAA within 15 Business Days from commencement of the arbitration. The place of arbitration shall be New York, New York. The language to be used in the arbitral proceedings shall be English. The tribunal shall apply the substantive law of New York, except that the interpretation and enforcement of this arbitration provision shall be governed by the Federal Arbitration Act. Prior to commencement of arbitration, emergency relief is available from any court to avoid irreparable harm. The award of the arbitration tribunal shall be final and judgment upon such an award may be entered in any competent court for judicial acceptance of such an award and an order of enforcement. Until the judgment of the arbitration tribunal has been rendered, neither party may claim that there has been a breach of this Agreement based on Section 2.12.
2.13. MINIMUM PURCHASE REQUIREMENTS; PRICE REDUCTIONS; VOLUME DISCOUNTS.
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(a) *****
(b) Subject to Section 12, at the end of the Fifth Contract Year, Warner-Lambert shall pay Unipath an amount equal to ****** multiplied by the number that is equal to ****** million less the aggregate number of Product units purchased by Warner-Lambert during the Term (the "Term Minimum").
(c) Any minimum purchase payment due under this Section for a Contract Year shall be calculated by Unipath within sixty (60) days of the end of the relevant Contract Year and invoiced to Warner-Lambert and shall be paid by Warner-Lambert in the same manner as invoices issued pursuant to Section 3.3.
(d) As of the date all Warner-Lambert purchases made pursuant to this Agreement add up to ****** million Product units, the Price of the Product shall be reduced for the remainder of the Term as set forth in Section II of Exhibit C.
(e) If Warner-Lambert purchases Product units from Unipath, an Affiliate of Unipath or any party licensed by Unipath or its Affiliates to manufacture or sell the Product, at or above the volumes set forth below during any Contract Year, the Product Price set forth on Exhibit C shall be reduced for all Product purchased during such Contract Year in accordance with the table below. Warner - Lambert agrees to order only the amount of Product it believes in good faith is
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ANNUAL PERIOD PURCHASE REQUIREMENT --------------------------------------------------- ----------------------------- First Contract Year ****** --------------------------------------------------- ----------------------------- Second Contract Year ****** --------------------------------------------------- ----------------------------- Third Contract Year ****** --------------------------------------------------- ----------------------------- Fourth Contract Year ****** --------------------------------------------------- ----------------------------- Fifth Contract Year ****** --------------------------------------------------- -----------------------------
necessary to meet demand from its customers, and shall not order additional Product in order to qualify for the volume discounts provided for in this Section 2.13(e).
3. PRICE; PAYMENT; SHIPPING INSTRUCTIONS.
3.1. DETERMINATION OF PRICES; COST OF MATERIALS. The Price to be paid to Unipath by Warner-Lambert for the manufacture, packaging and supply of the Product, shall be as set forth in Exhibit C, subject to the adjustments described elsewhere in this Agreement. Such Price includes any costs relating to Unipath's compliance with the quality provisions of this Agreement and the provisions of the Quality Agreement. *****
3.2. SHIPPING INSTRUCTIONS; RISK OF LOSS. Unipath shall deliver Product ordered by Warner-Lambert pursuant to Section 2.4, CIP (named destination) as defined in the Incoterms 2003 to Warner-Lambert's designated facilities (the "Receiving Point"). Unipath shall be responsible for designating the carrier(s) and negotiating terms for shipment of the Product and shall bear the cost of freight, including shipping insurance, relevant custom duties, import and export fees, taxes and all other charges applicable to the Product until it is delivered by Unipath to the Receiving Point. Warner-Lambert shall assume all risk of the loss for the Product upon delivery by a carrier to the Receiving Point. Unipath shall be responsible for and hereby agrees to store and ship Product consistent with the Product's labeling until delivered to the Receiving Point. Warner-Lambert shall be responsible for and hereby agrees to store and ship Product consistent with the Product's labeling after it is delivered to the Receiving Point.
3.3. INVOICES; QUANTITIES. Unipath shall submit invoices to Warner-Lambert for all shipments of Product hereunder upon delivery of such Product to Warner-Lambert's loading dock (which invoices shall be directed by Unipath to Warner-Lambert's Accounts Payable Department at such locations as Warner-Lambert may instruct from time to time), and such invoices shall be payable within thirty (30) days of the date on which the invoice submitted by Unipath is received by Warner-Lambert. Invoices shall be payable in U.S. dollars
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PRODUCT UNITS PURCHASED PRICE REDUCTION --------------------------------------------------- ----------------------------- ****** ****** --------------------------------------------------- ----------------------------- ****** ****** --------------------------------------------------- ----------------------------- ****** ****** --------------------------------------------------- ----------------------------- ****** ****** --------------------------------------------------- -----------------------------
3.4. TAXES. The Prices set forth in Exhibit C shall include sales, use, consumption, or excise taxes of any taxing authority. Unipath and its Affiliates hereby indemnify Warner-Lambert against, and shall reimburse Warner-Lambert for, any expenditure Warner-Lambert may be required to make as a result of Unipath's failure to pay such taxes or other governmental charges to the relevant taxing authorities.
4. QUALITY CONTROL; ACCESS; INSPECTION; SAMPLES.
4.1. SPECIFICATIONS. Unipath shall supply the Product to Warner-Lambert in accordance with the Specifications which may be modified or changed only by the mutual written agreement of the parties. To the extent that such modification or change results in an increase or decrease in the cost of manufacturing any Product, the parties shall jointly examine and mutually agree upon the consequences thereof and shall make an appropriate increase or decrease to the purchase price of such Product arising from such modification or change. At least four (4) weeks prior notice to the other party is required for any requested Specifications change; provided, however, that if any requested Specifications change requires additional regulatory approval(s), the implementation of such requested change shall in no event be required until four (4) weeks after such approval(s) have been obtained. Warner-Lambert shall not withhold consent to Specification changes proposed by Unipath for the primary purpose of terminating this Agreement.
4.2. STORAGE REQUIREMENTS. Unipath shall store all materials and Product in accordance with the Specifications in a clean and dry area, in facilities with insect and rodent pest controls to assure no contamination. Pest control measures by Unipath must include adequate cleaning of the facility, control of food and drink, protection of Product from the environment, monitoring of flying and crawling pest, and logs detailing findings and actions taken. Unipath's pest control program must be described in written procedure. Failure to maintain an adequate pest control program shall constitute a material breach of this Agreement. Storage and handling of all materials and Product shall be in accordance with the provisions of all applicable Laws and the quality control programs and standards set forth in the Specifications. Bulk Product and other materials utilized by Unipath in connection with the manufacturing, processing and packaging of the Product shall be used by Unipath on a first in, first out basis and shall not be used by Unipath beyond the shelf life required under applicable Laws or as designated in the Specifications.
4.3. NONCONFORMING MATERIALS. Unipath shall not use any packaging or other Product materials that do not comply with the Specifications or Laws. Unipath shall promptly contact Warner-Lambert, c/o Warner-Lambert's Quality Assurance Department or such other persons or departments as Warner-Lambert may instruct, in the event that Unipath anticipates making changes to any such material or in the event Unipath considers any such material to be nonconforming or unacceptable. If Unipath uses any non-conforming Product material without prior written approval by Warner-Lambert, Unipath shall be responsible for all losses, costs and expenses suffered or incurred by Warner-Lambert as a result of such use and any expenses incurred by Unipath in the correction thereof regardless of any involvement Warner-Lambert may have had in connection with such material including supplying or purchasing Product materials or designating approved suppliers; PROVIDED THAT, except for visually observable
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defects, Unipath shall have no responsibility for any non-conformity of Product materials at the time received by Unipath.
4.4. QUALITY TESTS AND CHECKS. Unipath shall perform all in-process and finished product tests or checks required by the Specifications or applicable Laws. For purposes of this Agreement, such tests shall be considered routine and shall be performed at Unipath's expense; PROVIDED THAT, in the event that Warner-Lambert requests any tests in addition to the foregoing, Warner-Lambert shall compensate Unipath for the cost of such additional tests in accordance with a method to be mutually determined. All tests and test results shall be performed, documented and summarized by Unipath in accordance with the Specifications and applicable Laws. All costs associated with changes to the Specifications made as a result of changes to applicable Laws after the date hereof which affect the Specifications and which are mutually agreed by the parties shall be pwassed on to Warner-Lambert on a dollar-for-dollar basis.
4.5. PRODUCTION CODES; RECORDS. Unipath shall maintain detailed records on Product material usage and finished Product production, including code dates and shipping information relating to Product, in order that Product can be easily traced in case of a Recall. Such records shall also comply with any additional instructions issued by Warner-Lambert and mutually agreed by the parties. Unipath's Product records shall be sufficient such that Unipath shall be capable of responding to Product inquiries by Warner-Lambert within one (1) Business Day of notification, including providing the code date and the location of the Product in question.
4.6. RECALLS. Unipath must comply and assist with any Recall initiated by Warner-Lambert. Unipath may not initiate a Recall if Warner-Lambert objects to such Recall, except to the extent, in the reasonable opinion of Unipath's counsel, Unipath is required to do so by law. Warner-Lambert shall have sole responsibility for managing any Recall of the Product, PROVIDED THAT, Warner-Lambert shall consult with Unipath prior to initiating any Recall for which it appears that Unipath might bear the expense pursuant to the last sentence of this Section 4.6. All communications with parties other than the United States Food and Drug Administration, in connection with any Recall, shall come solely from Warner-Lambert. Upon receiving from any authority having jurisdiction any direction to Recall any Product from the market, the receiving party shall immediately notify the other party in accordance with the terms hereof. To the extent any Recall results solely from the negligence, willful misconduct or breach of this Agreement by Unipath, the cost of implementing any such Recall shall be borne by Unipath.
4.7. MAINTENANCE OF FACILITY AND EQUIPMENT. Unipath shall maintain all equipment, tooling and molds used in the manufacture, packaging and supply of Product hereunder in good operating condition and shall maintain the Facility and such equipment, tooling and molds in accordance with, or shall exceed, all requirements set forth in the Specifications and all applicable Laws. In the event Unipath fails or anticipates it will fail to meet any of the foregoing requirements relating to Unipath's maintenance of the Facility or such equipment, tooling or molds, or in the event Unipath receives any notice from any Governmental Authority with respect to its maintenance of, or failure to maintain, the Facility or such equipment, tooling or molds, Unipath shall promptly notify Warner-Lambert, c/o Contract Operations Group of Warner-Lambert's Quality Assurance Department (or such other person as Warner-Lambert may
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direct), provide copies of such notice to Warner-Lambert and, if such notice relates specifically to the Product, provide a copy of Unipath's response for Warner-Lambert's review.
4.8. INSPECTIONS AND AUDITS. Warner-Lambert shall have access to Unipath's Facility for the purpose of conducting inspections, performing quality control audits or witnessing the processing, storage or transportation of Product or materials related to or used in the manufacture or packaging of Product, and Warner-Lambert shall have access to the results of any Product tests performed by Unipath or at Unipath's direction. Warner-Lambert shall also be permitted to audit that portion of Unipath's books and records pertaining to the packaging and supply of Product under this Agreement to the extent reasonably necessary to verify Unipath's compliance with its production and packaging obligations under this Agreement; PROVIDED THAT such audit shall not include a review of financial information. Unipath shall use its commercially reasonable best efforts to ensure that Warner-Lambert has similar access to the facilities, data and records of Unipath's suppliers or agents. Such inspections do not relieve Unipath of any of its obligations under this Agreement or create new obligations on the part of Warner-Lambert. Inspections and audits by Warner-Lambert personnel hereunder shall be conducted to the extent reasonably required by Warner-Lambert and upon reasonable notice, during normal business hours and in compliance with the confidentiality provisions set out in Section 11 hereof and Unipath's rules and regulations relating to Facility security, health and safety.
4.9. RETENTION OF SAMPLES AND RECORDS. Unipath shall retain, and upon request by Warner-Lambert make available to Warner-Lambert, (a) copies of the quality control records maintained in accordance with Section 4.5 and otherwise in relation to the Product, (b) copies of testing results of all the tests performed in relation to the Product and (c) samples of the materials used in the processing and packaging of the Product to the extent reasonably requested by Warner-Lambert or required by applicable Laws. All quality control and assurance records will be maintained by Unipath for a minimum of one (1) year following the Product expiration date or such other longer time period as may be required by applicable Laws.
4.10. GOVERNMENT INSPECTIONS, SEIZURES AND RECALLS. If the United States Food and Drug Administration or any other Governmental Authority makes an inspection at Unipath's premises which involves any function performed by Unipath which has application to any Product, or seizes Product or requests a recall of Product, Warner-Lambert's Quality Assurance Department, or such other person or group as Warner-Lambert may designate, shall be notified within twelve (12) hours and Unipath shall take such actions as may be required under the Specifications. Unipath shall promptly send retained samples of Product seized by such authority and duplicate reports relating to such inspections to Warner-Lambert, c/o Warner-Lambert's Quality Assurance Department.
4.11. LEGAL AND REGULATORY FILINGS AND REQUESTS. Unipath and Warner-Lambert shall cooperate and be diligent in responding to all requests for information from, and in making all required filings with, regulatory authorities having jurisdiction to make such requests or require such filings. Unipath shall obtain and comply with all licenses, consents, permits and regulations which may from time to time be required by appropriate legal and regulatory authorities with respect the performance of its obligations hereunder.
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4.12. REJECTION OF PRODUCT/LATENT DEFECTS. Warner-Lambert shall have the right to give Unipath written notice of rejection of any shipment of Product that in whole or in part breaches Unipath's warranties, covenants and obligations under this Agreement; which notice shall be given promptly, and in any event within thirty (30) days, after discovery of such breach. ***** The expense for such testing and for any costs associated with the destruction of such Product shall be borne by Warner-Lambert except to the extent it is determined that Unipath is responsible for such failure or breach. At Warner-Lambert's option, Unipath shall replace Product which does not conform with Unipath's warranties under this Agreement as soon as reasonably possible, taking into account Warner-Lambert's production schedule as communicated pursuant to Section 2 hereof. Warner-Lambert shall have the right to setoff any refund due Warner-Lambert on account of rejected Product against invoices otherwise due or which become due to Unipath. The provisions of this Section 4.12 shall survive termination of this Agreement with respect to Product packaged by Unipath that is received or sold by Warner-Lambert subsequent to the termination or expiration of this Agreement but prior to any last sale date on the Product(s) labels(s), provided, that subsequent to the termination or expiration of this Agreement, Warner-Lambert, in lieu of having Unipath replace such rejected Product, may elect to have Unipath reimburse Warner-Lambert for the purchase price actually paid for such Product.
4.13. COMPLAINTS. In connection with any Product complaints forwarded by Warner-Lambert to Unipath, Unipath shall conduct all necessary reviews of records and testing of such Product and investigate such complaint, at no additional cost to Warner-Lambert, all in accordance with the Quality Agreement (as hereinafter defined).
4.14. QUALITY AGREEMENT. Simultaneously with the execution of this Agreement, Warner-Lambert and Unipath have entered into a Quality Agreement which further details the quality assurance obligations and responsibilities of the parties with respect to the Product ("Quality Agreement").
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4.15. HEALTH AND SAFETY PROCEDURE. Unipath shall be solely responsible for implementing and maintaining health and safety procedures for the manufacture, packaging and handling at the Facility of the raw materials, Hazardous Materials, Waste, packaging components and Product as provided herein. Such procedures shall comply with all applicable Environmental Laws. Warner-Lambert shall have no responsibility for developing, implementing or overseeing Unipath's health and safety program.
4.16. TRAINING. Unipath shall educate and train all affected employees and contractors about the potential hazards associated with the handling of the Hazardous Materials, Waste, and the manufacture, packaging, analyzing and handling of the Product and the raw materials and packaging components, and on the proper use of engineering controls, process equipment and appropriate personal protective equipment. Warner-Lambert shall have no responsibility for educating, training or ensuring knowledge of any Unipath employees and contractors about the potential hazards associated with the handling of any Hazardous Materials, packaging components, Waste and the analyzing, handling, manufacturing and packaging of the Product, and on the proper use of engineering controls, process equipment and appropriate personal protective equipment. Warner-Lambert shall, however, provide Unipath with all material safety data sheets, occupational exposure limits or standards relating to the manufacture of the Product, or other safety-related information to the extent such information is available.
5. ENVIRONMENTAL MATTERS
5.1. WASTE MATERIALS. The generation, collection, storage, handling, disposal, transportation and Release of all Hazardous Materials and Waste shall be the responsibility of Unipath and the cost for providing such services shall be borne exclusively by Unipath. As part of the services, Unipath shall collect, handle, package, label and store, treat or dispose of Hazardous Materials and Waste, in a proper and lawful manner, and shall comply with all Laws governing such activity. All Waste generated as a result of the manufacturing process shall be handled and disposed of by Unipath using onsite environmental systems, or, at Unipath's option, through a responsible waste contractor. Unipath, with Warner-Lambert's cooperation, shall be responsible for developing and implementing all procedures necessary to prevent diversion of Product and any labeling materials from the waste stream, including rendering the Product unsalable. Unipath shall immediately notify Warner-Lambert by telephone at such number as Warner-Lambert may specify by written notice to Unipath and Warner-Lambert's Corporate Security at 212-573-7900 if at any time it believes that the Product or any labeling materials have been lost or stolen.
5.2. ENVIRONMENTAL PERMITS, LICENSES AND AUTHORIZATIONS. Unipath shall be responsible for obtaining and shall obtain all necessary environmental or other licenses, certificates, approvals or permits from Governmental Authorities and any private permissions, whether original documents or modifications to existing documents, which are necessary to perform the services in connection with the manufacture and packaging of the Product and shall provide copies thereof to Warner-Lambert upon request by Warner-Lambert. Unipath shall provide Warner-Lambert with immediate verbal notice, confirmed in writing within two (2) Business Days, in the event of revocation or modifications of any license, certificate, approval or
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permit which in any way materially impacts Unipath's ability to provide services or use the Facility to manufacture the Product as set forth herein.
5.3. HAZARDOUS AND SPECIAL WASTES. In the event any current or future raw materials, packaging components, finished product or wastes resulting from the manufacture of the Product hereunder are deemed Hazardous Waste or Special Waste, Unipath shall be responsible for obtaining all necessary environmental or other licenses, certificates, approvals or permits from Governmental Authorities and any private permissions which are necessary in connection with the proper handling, storage, treatment or disposal of such Hazardous Waste or Special Waste generated as a result of the manufacture and packaging of the Product in the Facility. All costs and expenses relating to the proper handling, storage, treatment or disposal of such Hazardous Waste or Special Waste, including the cost of obtaining any required licenses, certificates, approvals or permits (or permit modifications) shall be borne solely by Unipath; provided, however, in the event that any change in law (including, without limitation, any Environmental Law) after the date of this Agreement results in a requirement for any additional or new license, certificate, approval or permit (or permit modification), the costs of obtaining the same shall be equitably allocated between the parties by mutual agreement. Unipath shall also prepare and execute, as the generator of the Hazardous Waste or Special Waste, all shipping documents and waste manifests required under applicable Environmental Laws and shall maintain all records for the term and in the manner required by all applicable Environmental Laws with respect to the Hazardous Waste or Special Waste.
5.4. HAZARDOUS OR SPECIAL WASTE DISPOSAL. Unipath or a Hazardous Waste or Special Waste contractor contracted by Unipath and authorized to handle, transport and dispose of the Hazardous Waste or Special Waste, as the case may be, shall handle, package and label the Hazardous Waste and Special Waste in a lawful and proper manner, and shall comply with all Laws governing such activity. Both Unipath or the contractor, as the case may be, and the disposal facility shall be duly licensed and authorized to handle the Hazardous Waste or Special Waste, as the case may be. Unipath agrees to make, or cause to be made, periodic and timely pick-ups of the Hazardous Waste and Special Waste and shall not allow such Waste to remain on-site for any period of time in excess of that required by Environmental Laws or as required in order to abate a safety or health hazard arising from the Hazardous Waste or Special Waste.
6. REPRESENTATIONS AND WARRANTIES; ADDITIONAL COVENANTS.
6.1. REPRESENTATIONS AND WARRANTIES OF UNIPATH. Unipath hereby represents, warrants and covenants to Warner-Lambert that:
(a) all corporate action on its part and on the part of each of its officers and directors necessary for the authorization, execution and delivery of this Agreement and the performance of its obligations hereunder has been taken;
(b) this Agreement is the legal, valid and binding obligation of Unipath, enforceable against it in accordance with its terms;
(c) neither the execution and delivery of this Agreement nor the performance of the obligations contemplated hereby will; (i) conflict with or result in any violation of or constitute a
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breach of any of the terms or provisions of or result in the acceleration of any obligation under, or constitute a default under any provision of Unipath's Articles of Incorporation or By-laws or any contract or any other obligation to which Unipath is a party or under which Unipath is subject or bound, or (ii) violate any judgment, order, injunction, decree or award of any Governmental Authority, against, or affecting or binding upon, Unipath or upon the securities, property or business of Unipath, or (iii) constitute a violation by Unipath of any applicable law or regulation of any jurisdiction as such law or regulation relates to Unipath or to the property or business of Unipath;
(d) the Facility is in substantial compliance with all applicable Laws with respect to its obligations under this Agreement, and that there are no circumstances or conditions known to it that would reasonably be expected to prevent such compliance from continuing during the Term, including interference with Seller's ability to manufacture or supply the Product;
(e) the Product furnished by Unipath to Warner-Lambert under this Agreement (i) shall be of the quality specified in, and shall conform with, the Specifications, and (ii) shall be manufactured, processed, packaged, stored and delivered in conformity with the Specifications and all applicable Laws, and (iii) shall not contain any material provided by or on behalf of Unipath, which material has not been used or stored in accordance with the Specifications, any quality assurance standards contained in this Agreement and/or the Quality Agreement as of the date hereof, and any such standards that may be later developed by Warner-Lambert and agreed to by Unipath, agreement by Unipath not to be unreasonably withheld, quality standards instructed by the supplier of such material and all applicable governmental standards;
(f) Unipath has not and will not use any materials that would cause the Product to be adulterated within the meaning of Section 501 of the Food, Drug and Cosmetic Act, as amended (the "Act"); and further, the Product shall not be misbranded within the meaning of the Act; provided, however that with respect to any copy approved by Warner-Lambert, Warner-Lambert shall bear responsibility for such copy.
(g) Unipath is free to enter into this Agreement and it has, and will continue to have, the legal power, authority and right to perform its obligations under this Agreement;
(h) Unipath has, and shall have, sufficient rights to the Intellectual Property to perform its obligations hereunder.
6.2. REPRESENTATIONS AND WARRANTIES OF INVERNESS. Inverness hereby represents, warrants and covenants to Warner-Lambert that:
(a) all corporate action on its part and on the part of each of its officers and directors necessary for the authorization, execution and delivery of this Agreement and the performance of its obligations hereunder has been taken;
(b) this Agreement is the legal, valid and binding obligation of it, enforceable against it in accordance with its terms;
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(c) neither the execution and delivery of this Agreement nor the performance of the obligations contemplated hereby will; (i) conflict with or result in any violation of or constitute a breach of any of the terms or provisions of , or result in the acceleration of any obligation under, or constitute a default under any provision of Inverness's Articles of Incorporation or By-laws or any contract or any other obligation to which Inverness is a party or under which Inverness is subject or bound, or (ii) violate any judgment, order, injunction, decree or award of any Governmental Authority, or affecting or binding upon, Inverness or upon the securities, property or business of Inverness, or (iii) constitute a violation by Inverness of any applicable law or regulation of any jurisdiction as such law or regulation relates to Inverness or to the property or business of Inverness;
(d) it has, and shall have, sufficient rights to the Intellectual Property to perform its obligations hereunder;
(e) it is free to enter into this Agreement and it has, and will continue to have, the legal power, authority and right to perform it obligations under this Agreement;
(f) there are no misuses of the Patents by Inverness or its Affiliates or misappropriation of the Intellectual Property by Inverness or its Affiliates;
(g) the manufacture, sale or use of the Product does not infringe any third-party patents as of the date hereof, and none of the manufacture, sale or use of any Product delivered pursuant to this Agreement will, if presented in a proper proceeding brought before a court of competent jurisdiction, infringe any claim of any patent (i) issued as of the date of this Agreement, and (ii) owned by a third party;
(h) there are no claims or actions, pending or threatened against or affecting Inverness or it Affiliates which would be expected to adversely affect the Product or the Intellectual Property, or prevent Inverness from performing its obligations under this Agreement; and
(i) Inverness or its Affiliates have acquired all third-party licenses, approvals, permissions and authorizations required to manufacture and sell the Product to Warner-Lambert and all such licenses, approvals, permissions and authorizations will remain valid during the Term.
6.3. REPRESENTATIONS AND WARRANTIES OF INNOVATIONS. Innovations hereby represents, warrants and covenants to Warner-Lambert that:
(a) all corporate action on its part and on the part of each of its officers and directors necessary for the authorization, execution and delivery of this Agreement and the performance of its obligations hereunder has been taken;
(b) this Agreement is the legal, valid and binding obligation of Innovations, enforceable against it in accordance with its terms;
(c) neither the execution and delivery of the Agreement nor the performance of the obligations contemplated hereby will: (i) conflict with or result in any violation of or constitute a breach of any of the terms or provisions of or result in the acceleration of any obligation under, or constitute a default under any provision of Innovations Articles of Incorporation or By-laws or any contract or other obligation to which Innovations is a party or under which Innovations is subject or
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bound; (ii) violate any judgment, order, injunction, decree or award of any Governmental Authority, against, or affecting or binding upon, Unipath or upon the securities, property or business of Innovations; or (iii) constitute a violation by Innovations of any applicable Law or regulation of any jurisdiction as such Law or regulation relates to Innovations or to the property or business of Innovations; and
(d) Innovations is free to enter into this Agreement and it has, and will continue to have, the legal power, authority and right to perform its obligations under this Agreement.
6.4. REPRESENTATIONS AND WARRANTIES OF WARNER-LAMBERT. Warner-Lambert hereby represents, warrants and covenants to Unipath that:
(a) all corporate action on its part and on the part of each of its officers and directors necessary for the authorization, execution and delivery of this Agreement and the performance of its obligations hereunder has been taken.
(b) this Agreement is the legal, valid and binding obligation of it, enforceable against it in accordance with its terms.
(c) neither the execution and delivery of this Agreement nor the performance of the obligations contemplated hereby will; (i) conflict with or result in any violation of or constitute a breach of any of the terms or provisions of, or result in the acceleration of any obligation under, or constitute a default under any provision of Warner-Lambert's Articles of Incorporation or By-laws or any contract or any other obligation to which Warner-Lambert is a party or under which Warner-Lambert is subject or bound, or (ii) violate any judgment, order, injunction, decree or award of any Governmental Authority against, or affecting or binding upon, Warner-Lambert or upon the securities, property or business of Warner-Lambert, or (iii) constitute a violation by Warner-Lambert of any applicable law or regulation of any jurisdiction as such law or regulation relates to Unipath or to the property or business of Warner-Lambert.
6.5. COMPLIANCE WITH LAWS. Unipath represents, warrants and covenants that as of the date hereof (a) Unipath is, and during the term of this Agreement Unipath shall continue to be, in full compliance with all applicable Laws including all applicable labor and employment laws and Environmental Laws; and (b) Unipath holds all licenses, permits and similar governmental authorizations necessary or required for Unipath to conduct its operations and business. All references in this Agreement to applicable Laws shall include the proposed United States federal rule for current good manufacturing practices for the manufacture, packing or holding of medical devices.
6.6. NOTICE OF MATERIAL EVENTS. Unipath hereby agrees to notify Warner-Lambert promptly of any actual or anticipated events which are reasonably likely to have, a material adverse effect on the Product or on Unipath's ability to produce Product in accordance with the provisions set forth herein, including any labor difficulties, strikes, shortages in materials, plant closings and other interruptions in activity.
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7. OWNERSHIP; TRADEMARKS; PROPRIETARY INFORMATION.
7.1. OWNERSHIP OF INTELLECTUAL PROPERTY.
Warner-Lambert acknowledges that except for its design patent No. USD 383549 , all of the Intellectual Property currently involved in the manufacturing process and function of the Product, as between Unipath and its Affiliates on the one hand, and Warner-Lambert and its Affiliates on the other hand, is the property of Unipath and its Affiliates.
(b) If any Improvements or modifications to the Product ("Inventions") are developed by Warner-Lambert and are patentable, Warner -Lambert may elect to file applications for patents for such Inventions prior to disclosing them to Unipath, in which event such Inventions ("WL Inventions") shall be the exclusive property of Warner-Lambert and shall treated as Information subject to Section 11 by Unipath and its Affiliates. The parties recognize that Inventions may arise as a result of interactions between the parties, and that there may be uncertainty as to the role of various individuals in conceiving of such inventions. In order to reduce controversy with regard to the ownership of Inventions other than WL Inventions, if and Inventions are disclosed by Warner-Lambert to Unipath prior to the filing for a patent application for such Inventions ("Assigned Inventions"), whether developed jointly by the parties or exclusively by Warner-Lambert, (i) they shall be the exclusive property of Inverness subject to the license in clause (ii) immediately below, (ii) Warner-Lambert shall have a perpetual, fully-paid, royalty-free, non-exclusive license to manufacture, sell and use products incorporating Assigned Inventions, without the right to assign or sublicense; provided that Warner-Lambert may assign or sublicense such license to its Affiliates and parties using products sold by Warner-Lambert shall be licensed for the use of such product and parties manufacturing product for sale by Warner-Lambert shall be licensed for the manufacture of such product, (iii) Inverness shall be entitled to file applications for patents and develop Assigned Inventions, and (iv) Warner-Lambert shall cooperate as reasonably requested by Inverness to protect Inverness' rights in Assigned Inventions. If Unipath or its Affiliates intend to include an Assigned Invention in any pregnancy test kit, it shall offer to include such Assigned Invention in the Product as contemplated by this Agreement, and if Warner-Lambert accepts such offer within thirty (30) days, Unipath and its Affiliates will not use the Assigned Inventions except for Warner-Lambert's sole benefit for a period of one year from the date Product incorporating such Assigned Invention is shipped by Warner-Lambert to its customer. Any trademarks, trade names, brand names, slogans, logos, copyrights, trade dress, and goodwill associated with the Product shall be the sole and exclusive property of Warner-Lambert. None of Unipath and its Affiliates shall have any right or license to use any such rights at any time before, during or after the Term of this Agreement, except as necessary for the manufacture, processing, packaging and supply of Product to Warner-Lambert hereunder. Except as provided above in this subparagraph (b), technology or information owned by Warner-Lambert or provided by Warner-Lambert to Unipath or its Affiliates in connection with this Agreement shall not be (i) used by Unipath or its Affiliates in the manufacture of any product or (ii) disclosed or made available to any customers of Unipath or its Affiliates, or other third parties. All such information shall be deemed confidential information subject to the provisions of Section 11. Any Product Writings and Inventions relating to an ornamental design feature of the Product that are protectable as intellectual property rights (whether protectable under a design patent, copyright, or trademark or as trade dress, trade secret or otherwise), including, without limitation, ornamental design features related to the look and feel
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of the Product and Intellectual Property related thereto ("Warner-Lambert Inventions") developed by Unipath or its Affiliates shall be the sole and exclusive property of Warner-Lambert only as to such ornamental design feature. Unipath shall promptly prepare and file with Warner-Lambert in relation to any Warner-Lambert Invention, any invention records or memoranda requested by Warner-Lambert at Warner-Lambert's expense. For the avoidance of doubt, with respect to any Invention incorporated into a Product, the parties confirm that Warner-Lambert has been granted royalty-free, irrevocable and exclusive right and license to market, promote, sell, offer for sale and import, export Product supplied by Unipath incorporating the foregoing Inventions. All licenses granted pursuant to this paragraph (b) shall survive the expiration and termination of this Agreement.
(c) If Warner-Lambert conducts a study that results in an additional Product claim , none of Unipath and its Affiliates may use a similar claim for other products that they manufacture for themselves or a third party; PROVIDED THAT, if Unipath or its Affiliates already have a similar study in development as of the date Warner-Lambert notifies Unipath (in accordance with Section 14.1) of any additional Product claim, and Unipath notifies Warner-Lambert (in accordance with Section 14.1) of such study within two (2) weeks and documents the existence of the same through Unipath's internal written files, Unipath and its Affiliate may continue to conduct its own study and make similar claims for products it manufactures for itself or a third party, but only to the extent Unipath's or its Affiliate's independent study fully supports such claim . At no time may Unipath or its Affiliates rely on or make reference to any Warner-Lambert study or claim in relation to any product it manufactures for itself or a third party.
(d) Subject to 7.1(a), it is agreed that Warner-Lambert is the sole owner of any and all Specifications supplied or paid for by Warner-Lambert, and none of Unipath and its Affiliates shall use any such Specifications except in connection with performance under this Agreement.
(e) ******.
(f) Each party will assist the other party in the procurement, maintenance, protection, assignment and enforcement of the other party's rights with respect to the Inventions, including without limitation, patents, certificates of invention, copyrights and trademarks. In addition, each party will, upon the other party's reasonable request, promptly deliver to such other party (without charge) executed assignments or other instruments and do such other acts as may reasonably be
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deemed necessary or desirable by other such party to protect such other party's rights with respect to the Inventions and Warner-Lambert's Inventions.
(g) Unipath acknowledges that all Product Writings shall be owned exclusively by Warner-Lambert. Unipath and its Affiliates hereby assign to Warner-Lambert all right, title and interest in perpetuity throughout the world, in and to said Product Writings created by or on behalf of Unipath, including without limitation, the copyrights therein and all renewals and extensions thereof.
(h) The provisions of Sections 7.1(b), (c), (d), (f), and (g) shall survive the termination or expiration of this Agreement.
7.2. OWNERSHIP OF OTHER PROPERTY. Except as otherwise specified herein, it is agreed that Unipath is the sole owner of any and all equipment, tools, dies, printing plates, etc. used by Unipath in connection with the manufacture and packaging of the Product in accordance with this Agreement. Unipath shall maintain the above in good working order and shall ensure that they remain free and clear of all liens and encumbrances that would impair their use under this Agreement.
7.3. REPRODUCTION OF TRADEMARKS, ETC. In connection with Unipath's performance of this Agreement, Warner-Lambert hereby grants Unipath the right to reproduce and print on the Product Warner-Lambert trademarks, trade dress and/or trade names of such Product which Warner-Lambert may designate in writing from time to time, in accordance with trademark usage guidelines set forth in the Specifications or otherwise provided by Warner-Lambert. Samples of all such uses of such trademarks and/or trade names on the Product or Product packaging shall be submitted to Warner-Lambert for its written approval prior to production. The permission granted herein is restricted to the Product supplied under this Agreement and extends only for the Term of this Agreement.
7.4. UNIPATH'S LIMITED RIGHTS TO USE. Nothing set forth in this Agreement shall be construed to grant to Unipath any title, right or interest in or to any trademark, trade name, copyright, patent or other proprietary technology owned by Warner-Lambert, or any of its Affiliates, or to which Warner-Lambert, or any of its Affiliates may have rights. Unipath's use of such trademarks, trade names, copyrights, patents or other proprietary technology shall be limited exclusively to its performance of this Agreement. Any other use of said trademarks, trade names, copyrights, patents or other proprietary technology shall constitute an infringement thereof and/or violation of Warner-Lambert's rights.
7.5. WARNER-LAMBERT'S LIMITED RIGHTS TO USE. Nothing set forth in this Agreement shall be construed to grant to Warner-Lambert any title, right or interest in or to any trademark, trade name, copyright, patent or other proprietary technology owned by Unipath, or any of its Affiliates, or to which Unipath, or any of its Affiliates may have rights. Warner-Lambert's use of such trademarks, trade names, copyrights, patents or other proprietary technology shall be limited exclusively to its performance of this Agreement. Any other use of said trademarks, trade names, copyrights, patents or other proprietary technology shall constitute an infringement thereof and/or violation of Unipath's rights. Notwithstanding the foregoing, with the prior written approval of
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Unipath which shall not be unreasonably withheld, Warner-Lambert shall be permitted to use Unipath's name and trademarks in connection with general advertising and promotional activities.
8. INDEMNIFICATION.
8.1. INNOVATIONS' INDEMNIFICATION OF WARNER-LAMBERT. Except to the extent Warner - Lambert is obligated to indemnify Unipath pursuant to Section 8.2, Innovations shall indemnify, defend and hold Warner-Lambert, each Affiliate of Warner-Lambert and the officers, directors and employees thereof (each a "Warner-Lambert indemnified party") harmless from and against any and all losses, liabilities, damages (including special and/or punitive damages in the case of a claim for intellectual property infringement), claims, expenses, suits, recoveries, judgments and fines (including reasonable attorneys' fees and expenses) (collectively "Losses") that may be incurred by any Warner-Lambert indemnified party arising out of any (a) damage to property or injury or death occurring to any person arising out of possession or use by any person of the Product; (b) injury to person or property or death occurring to any Unipath employees, subcontractors, agents or any other individuals on Unipath's premises; (c) claim, action or proceeding brought by any Governmental Authority arising out of or resulting from any manufacture, packaging or supply of Product by Unipath or its Affiliates; (d) breach by Inverness or Unipath of any of their respective obligations, representations or warranties under this Agreement, including a breach which results in a Recall of Product to the extent that Unipath or its Affiliates is responsible for such Recall under Section 4.6, or (e) any other grossly negligent act or omission on the part of Unipath or its Affiliates; (f) any claim or action alleging unfair competition or infringement of any patent, trademark, copyright or other intellectual property of any third party by the manufacture, sale or use of the Product or the Intellectual Property or; (g) violation of Environmental Laws in connection with the supply of the Product hereunder.
8.2. WARNER-LAMBERT'S INDEMNIFICATION OF UNIPATH. Warner-Lambert shall indemnify, defend and hold Unipath, each Affiliate of Unipath and the officers, directors and employees thereof (each a "Unipath indemnified party") harmless from and against any and all Losses that may be incurred by any Unipath indemnified party arising out of any (a) damage to property or injury or death occurring to any person (i) arising out of possession, use by any person of the Product to the extent that such damage, injury or death was caused by the contamination or adulteration of the Product while in the control of Warner-Lambert or by any defective Specification furnished by Warner-Lambert; (ii) caused by the presence of Warner-Lambert's employees or agents at the Facility; or (iii) caused by any Product claim made by Warner-Lambert other than claims that the Product functions as required by the Specifications, (b) breach by Warner-Lambert of any of its obligations, representations or warranties under this Agreement, including a breach which results in a Recall of Product,(c) any other grossly negligent act or omission on the part of Warner-Lambert, or (d) any claim or action alleging unfair competition or infringement of any patent, trademark, copyright or other intellectual property of any third party by the manufacture, sale or use of the Product based on trade dress, the ornamental product design or product literature or WL-Inventions supplied by Warner Lambert for use in or with the Product.
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8.3. ENVIRONMENTAL INDEMNITY. Innovations shall indemnify, defend and hold Warner-Lambert and each Warner-Lambert indemnified party harmless from and against any and all (a) Environmental Losses incurred by, claimed, or assessed against any of them, (b) violations of Environmental Laws, and (c) Environmental Losses arising from, based upon or caused by Inverness's or any of its Affiliates or subcontractors' breach of any environmental obligation, representation or warranty herein.
8.4. PROCEDURES. Any Person that may be entitled to indemnification under this Agreement (an "Indemnified Party") shall give written notice to the Person obligated to indemnify it (an "Indemnifying Party") with reasonable promptness upon becoming aware of any claim or other facts upon which a claim for indemnification will be based; the notice shall set forth such information with respect thereto as is then reasonably available to the Indemnified Party. The Indemnifying Party shall have the right to undertake the defense of any such claim asserted by a third party with counsel reasonably satisfactory to the Indemnified Party and the Indemnified Party shall cooperate in such defense and make available all records, materials and witnesses reasonably requested by the Indemnifying Party in connection therewith at the Indemnifying Party's expense. If the Indemnifying Party shall have assumed the defense of the claim with counsel reasonably satisfactory to the Indemnified Party, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses (other than for reasonable costs of investigation) subsequently incurred by the Indemnified Party in connection with the defense thereof. The Indemnifying Party shall not be liable for any claim settled without its consent, which consent shall not be unreasonably withheld or delayed. The Indemnifying Party shall obtain the written consent of the Indemnified Party prior to ceasing to defend, settling or otherwise disposing of any claim. In no event shall Inverness institute, settle or otherwise resolve any claim or potential claim, action or proceeding relating to the Product or any trademarks or other intellectual property rights of Warner-Lambert without the prior written consent of Warner-Lambert. In no event shall Warner-Lambert settle or otherwise resolve any claim or potential claim, action or proceeding where such settlement or resolution would negatively impact the intellectual property rights of Inverness without the prior written consent of Inverness.
8.5. SURVIVAL. The indemnification obligations set forth in this Section 8 and Section 3.4 shall survive the expiration or termination of this Agreement.
8.6. LIMITATION OF LIABILITY. Except as otherwise provided herein, no party shall have any liability under this Section 8 or otherwise for any indirect, special, punitive or consequential losses, such as loss of profits or goodwill, which may be incurred by the other party hereto as a result of activities under this Agreement.
9. INSURANCE.
9.1. COVERAGE. Unipath shall acquire and maintain at its sole cost and expense (a) Statutory Worker's Compensation Insurance and Employer's Liability Insurance; (b) all risk coverage for physical loss or damage to materials and Product while at the Facility or under its control; and (c) Product Liability, Bodily Injury and Property Damage Insurance (with a Broad Form Vendor's Endorsement naming Warner-Lambert, its subsidiaries and affiliated companies
26
and the officers, directors, employees and agents thereof, as well as its authorized distributors and customers as additional insureds) with a combined single limit of not less than ******. Unipath shall use its commercially reasonable best efforts to require its subcontractors, to the extent approved hereunder, to provide the aforementioned coverages in an amount equal to the lesser of their respective contract costs or ******.
9.2. CERTIFICATES OF INSURANCE; MAINTENANCE OF COVERAGE. Unipath shall submit certificates of such insurance to Warner-Lambert (which shall include an agreement by the insurer not to cancel such coverage except upon thirty (30) days prior written notice to Warner-Lambert) for its approval before commencing performance of this Agreement. Unipath shall maintain such insurance coverage in effect for Warner-Lambert's benefit throughout the term of this Agreement and for a period of one (1) year from the date of the last delivery of Product to Warner-Lambert hereunder. In case of Unipath's failure to furnish such certificates of insurance or cancellation of any required insurance, Warner-Lambert shall notify Unipath of such failure and shall allow Unipath a period of thirty (30) days to furnish such certificates. If such certificates are not furnished within thirty (30) days of Unipath's receipt of such notice, Warner-Lambert may, at its option, immediately terminate this Agreement.
10. RELATIONSHIP OF THE PARTIES.
10.1. The relationship between Warner-Lambert and Unipath is that of independent contractors and nothing herein shall be deemed to constitute the relationship of partners, joint venturers, nor of principal and agent between Warner-Lambert and Unipath. Neither party shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any contract, agreement or undertaking with any third party. All persons employed by Unipath in connection with the packaging and supply of the Product to Warner-Lambert shall be employees or agents of Unipath and under no circumstances shall Unipath or any of its employees or agents be deemed to be employees or agents of Warner-Lambert.
11. CONFIDENTIAL INFORMATION.
11.1. CONFIDENTIAL INFORMATION.
(a) In performing the obligations and permitted activities under this Agreement, each party shall come in contact with certain confidential and proprietary information of the other party ("Information"). Each party agrees that it will:
(i) use such Information obtained from the other party hereunder only in connection with the activities to be undertaken by each party as contemplated hereunder;
(ii) restrict disclosure of such information within its own organization to those of its employees having a reasonable need to know such Information; and
(iii) not divulge to third parties, without the prior written consent of the other party, any Information obtained from the other party hereunder.
****** REPRESENTS TEXT OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
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Each party will protect such Information from unauthorized use, access or disclosure with the same degree of care, but no less than a reasonable degree of care, as it uses to protect its own Information.
(b) The foregoing confidentiality obligations shall not apply if and to the extent that:
(i) the Information is known to the receiving party prior to obtaining the same from the disclosing party, as properly demonstrated by the receiving party's written records;
(ii) the Information is independently developed by employees of the receiving party and/or by employees of any of its Affiliates, as properly demonstrated by the receiving party's written records; or
(iii) the Information is obtained by the receiving party from a third party who is not obligated to keep the Information confidential.
(c) Upon expiration or termination of this Agreement, each party shall return to the other party all Information received from the other party. The provisions of this Section 11 shall survive the termination or expiration of this Agreement and for a period of eight (8) years thereafter.
(d) Unipath agrees not to use or refer to Warner-Lambert's name or this Agreement in any public statements, whether oral or written, including but not limited to, annual reports or shareholder reports, general advertising and promotional activities, statements to other customers or prospective customers or other communications, without Warner-Lambert's prior written consent, which consent shall not be unreasonably withheld. All requests for Warner-Lambert's consent shall be made in accordance with Section 14.1. Warner-Lambert agrees to review and respond to each request for consent within three (3) Business Days. If Warner-Lambert fails to respond within three (3) Business Days of any request pursuant to this paragraph (d), Warner-Lambert will be deemed to consent to the requested disclosure.
12. TERM; TERMINATION.
12.1 TERM. The term of this Agreement shall commence as of the date of this Agreement and shall terminate on the sixth (6th) anniversary thereof, unless earlier terminated in accordance with Section 12.2 hereof or otherwise pursuant to the terms of this Agreement (the "TERM").
12.2 TERMINATION.
(a) This Agreement may be terminated at any time during the Term by written notice by one party to the other party if:
(i) the other party shall suspend or discontinue its business operations or make any assignment for the benefit of its creditors or commence voluntary proceedings for liquidation
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in bankruptcy, or admit in writing its inability to pay its debts generally as they become due, or consent to the appointment of a receiver, trustee or liquidator of the other party or of all or any part of its property, or if there is an execution sale of a material portion of its assets;
(ii) involuntary bankruptcy or reorganization proceedings are commenced against the other party or any of its properties or if a receiver or trustee is appointed for the other party or any of its properties and such proceedings are not discharged within ninety (90) days;
(iii) the other party files or consents to the filing of a petition for reorganization or arrangement under any applicable Bankruptcy Act or Code; or
(iv) the other party fails to comply with any material term of this Agreement or breaches any representation or warranty herein and such party fails to cure such noncompliance or breach within thirty (30) days (five (5) days in the case of a payment default) after receipt of written notice thereof.
(b) Either party may terminate this Agreement in accordance with Section 13 by providing written notice to the other party.
(c) Warner-Lambert may terminate this Agreement at any time during the Term by written notice to Unipath: (i) if a court (A) makes the findings necessary for a preliminary injunction against the manufacture, sale or use of the Product or (B) determines that the Product infringes the intellectual property rights of a third party; or (ii) pursuant to Section 2.10 hereof; PROVIDED THAT, Warner-Lambert may terminate this Agreement pursuant to clause (i) (B) only in the event Unipath fails to (x) at its own cost, obtain the requisite license(s) which would allow Unipath to legally manufacture, and allow Unipath and Warner-Lambert to legally sell, the Product, with no additional cost to Warner-Lambert, or (y) at its own cost, modify the Product in a manner that results in a non-infringing product acceptable to Warner-Lambert that is available to ship to Warner-Lambert for distribution within 60 days of the court's determination, with no additional cost to Warner-Lambert.
(d) Warner-Lambert may terminate this Agreement at any time during the Term in the event of (i) the direct or indirect change in ownership or control of, or the corporate reorganization of, Innovations, Inverness or Unipath which results in a new party or group assuming control of Innovations, Inverness or Unipath or (ii) the sale of all or substantially all of the assets of Innovations, Inverness or Unipath. For purposes of this subparagraph (d), a change in ownership or control shall be deemed to include Unipath being acquired by or becoming an Affiliate of (x) a competitor of Warner-Lambert, which competitor is a manufacturer, supplier and/or distributor of products that are competitive with the Product or (y) any of the companies listed on Schedule B hereto or any of their Affiliates. The events in clauses (i) and (ii) shall be referred to herein as a "Change of Control". Innovations, Inverness and Unipath each agree that as a condition to affecting any Change of Control, the party taking control of Innovations, Inverness or Unipath or their assets as a result of the Change of Control must agree to assume the obligations of Innovations, Inverness and Unipath under this Agreement. Warner-Lambert's termination right pursuant to this paragraph (d) may be exercised up to six (6) months following consummation of the Change of Control transaction.
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(e) This Agreement may be terminated at any time during the Term by written notice by one party to the other party if: (i) any court of competent jurisdiction or other Governmental Authority shall have issued an order, decree or ruling enjoining or otherwise prohibiting the transactions contemplated by this Agreement or (ii) any litigation or proceeding is pending or has been threatened to be instituted by any person or Governmental Authority, which in the good faith judgment of (x) the Board of Directors of Inverness, if Inverness or Unipath is the party or parties seeking to terminate, or (y) the Consumer Healthcare Leadership Team, if Warner-Lambert is the party seeking to terminate, could in all likelihood result in an order, decree or ruling enjoining, prohibiting, seeking substantial damages in respect of or impairing the benefits of the transactions contemplated by this Agreement; provided that each of Innovations, Inverness and Unipath agree that any transaction that it enters into subsequent to the date of this Agreement that affects the events in clauses (i) or (ii) hereof must be unwound prior to terminating this Agreement pursuant to this paragraph (e).
(f) Termination of this Agreement shall not affect any obligation to pay money, indemnify, reimburse, maintain confidentiality or otherwise which either party hereto may have incurred during the Term hereof.
12.3 EFFECT OF TERMINATION.
(a) Except as otherwise set forth in this Section 12.3, Warner-Lambert shall not pay Unipath the Term Minimum upon a termination by Warner-Lambert or Unipath.
(b) In the event of a termination by Warner-Lambert pursuant to Section 12.2(a), (ii), the Term Minimum shall be paid to Unipath within thirty (30) days of such termination.
(c) In the event Unipath is acquired by another company that is not a competitor of Warner-Lambert and is not listed on Schedule B hereto, and Unipath survives as an operating entity and retains all its material assets, including access to the Intellectual Property, post-acquisition, Warner-Lambert shall pay Unipath the Term Minimum if Warner-Lambert terminates this Agreement pursuant to Section 12.2.(d).
(d) In the event of a termination by Unipath pursuant to Section 12.2(a), the Term Minimum shall be paid to Unipath within thirty (30) days of the effective date of such termination.
(e) In the event of a termination by either party pursuant to Section 12.2(e), the transactions contemplated herein shall be unwound and this contract shall be null and void. Inverness may reinstitute its patent litigation against Warner-Lambert and its Affiliates; provided that Inverness agrees not to affect an injunction of the manufacture, sale or supply of any e.p.t(R) brand pregnancy test for a period not less than one hundred eighty (180) days from the date the termination pursuant to Section 12.2(e) of this Agreement is effective.
(f) This section shall survive termination of this Agreement.
12.4 UNUSED MATERIALS. Within ninety (90) days of the effective date of the expiration or termination of this Agreement for any reason other than Unipath's material uncured breach, Warner-Lambert shall purchase at Unipath's cost any packaging and other raw materials that
30
Unipath has purchased exclusively for Warner-Lambert in accordance with this Agreement for the production of the Product. Warner-Lambert shall not be obligated to purchase any quantities of materials under this Section 12.4 in excess of a one hundred twenty (120) day supply of such materials (such supply amount based upon Warner-Lambert's applicable forecast of its requirements of the foregoing). At its option Warner-Lambert may, in lieu of purchasing such materials at cost, place orders with Unipath for additional Product under the terms of this Agreement in order to extinguish existing stocks of such materials. In the event that the Agreement terminates as a result of a material uncured breach by Unipath, Warner-Lambert shall be under no obligation to purchase any unused materials from Unipath.
12.5 RETURN OF PRODUCT AND MATERIALS SUPPLIED BY WARNER-LAMBERT. Upon the effective date of expiration or termination of this Agreement for any reason whatsoever, Unipath shall immediately deliver to Warner-Lambert or its designee all Product, Specifications, artwork, all premiums and packaging materials purchased by Warner-Lambert and all other materials, supplies or equipment provided by Warner-Lambert. Unipath shall also deliver to Warner-Lambert or its designee all Product produced hereunder, and shall invoice Warner-Lambert in accordance with the terms of Section 3.3. On termination of this Agreement as a result of a breach of this Agreement by Unipath, (i) Unipath shall be responsible for the costs of raw materials ordered by Unipath on behalf of Warner-Lambert in accordance with forecast requirements, and any Product quarantined at the time of expiration or termination of this Agreement shall be disposed of or destroyed at Unipath's expense in accordance with Warner-Lambert's commercially reasonable instructions, in addition to any other rights or remedies available to Warner-Lambert. Subsequent to the expiration or termination of this Agreement, Unipath shall continue to be responsible for rejected Product, in accordance with the terms of this Agreement.
13. FORCE MAJEURE.
Performance under this Agreement (other than payments required to be made by either party) shall be excused to the extent prevented or delayed by fire, flood, explosion, unavoidable widespread product tampering by third parties, governmental acts or regulations, war, shortages or unavailability of materials, any act of God, or by any other similar circumstances of any character reasonably beyond the control of the party so excused. The party affected shall promptly notify in writing the non-affected party of the event of force majeure and the probable duration of the delay. Any delay caused by an event of force majeure shall toll the term of this Agreement which shall be extended by the length thereof. Notwithstanding the foregoing, in the event a force majeure prevents performance by one party for more than sixty (60) days, the other party shall have the right to terminate this Agreement.
14. MISCELLANEOUS.
14.1 NOTICE. All notices, requests, demands or other communications to or upon the respective parties hereto shall be deemed to have been given or made when deposited in the mails, registered mail or certified, return receipt requested, postage prepaid, or overnight courier or by facsimile transmission, the receipt of which is confirmed by telephone, addressed to the respective party at the following address (or to such other person or address as is specified
31
elsewhere in this Agreement for specific purposes).
If to Warner-Lambert:
WARNER-LAMBERT COMPANY LLC 201 Tabor Road
Morris Plains, New Jersey 07950
Attention: e.p.t Brand Manager Telephone: 973-385-2000
With a copy to:
General Counsel, Consumer Healthcare Telephone: 973-385-2394 Facsimile: 973-385-3927
If to Inverness:
INVERNESS MEDICAL SWITZERLAND GmbH.
Bundesplatz 10 6300 Zug Switzerland
Attention: Geschaeftsfuehrer
UNIPATH, Ltd.
Priory Business Park Bedford, MK 44 3UP Attention: Managing Director Telephone: 011 44 1234 835154 Facsimile: 011 44 1234 835002
If to Innovations:
INVERNESS MEDICAL INNOVATIONS, INC. 51 Sawyer Road, Suite 200
Waltham, Massachusetts 02453
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Telephone: 011 41 1 266 29 29 Facsimile: 011 41 1 266 29 00 If to Unipath:
Attention: General Counsel Telephone: 781-647-3900 Facsimile: 781-647-3939
The above addresses for receipt of notice may be changed by either party by notice, given as provided herein.
14.2 ENTIRE AGREEMENT. This Agreement and the Quality Assurance Agreement contain the entire understanding of the parties, superseding in all respects any and all prior oral or written agreements or understandings pertaining to the subject matter hereof. This Agreement can be amended, modified or supplemented only by an agreement in writing which is signed by all the parties hereto.
14.3 INCORPORATION OF EXHIBITS. The Exhibits attached to this Agreement are incorporated herein and made a part hereof.
14.4 SEVERABILITY. If and to the extent that any court of competent jurisdiction holds any provision or part of this Agreement to be invalid, unlawful or unenforceable, such holding shall in no way affect the validity of the remainder of this Agreement.
14.5 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties.
14.6 ASSIGNMENT. Except as provided in the following sentence, neither party shall, without the prior written consent of the other party, delegate, transfer, convey, assign or pledge any of its rights or obligations under this Agreement to any other person, firm or corporation. Subject t o the limitations below in this Section 14.6, Warner-Lambert may assign its rights under this Agreement and delegate its duties under this Agreement to an entity which acquires or purchases its entire pregnancy testing business. Unless the assignee is, at the time of such assignment, at least as creditworthy as the assignor as of the date of this Agreement, Warner-Lambert shall not be released from its obligations under this Agreement except to the extent actually performed by the assignee. Warner-Lambert may not assign its rights or delegate its duties under this Agreement to any of the entities listed in Schedule C or any of their respective Affiliates.
14.7 WAIVER. A waiver by either party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future.
14.8 HEADINGS. Headings in this Agreement are included for ease of reference only and have no legal effect.
14.9 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.
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14.10 APPLICABLE LAW; FORUM. This Agreement is governed by and shall be construed in accordance with the laws of the State of New York other than those provisions governing conflicts of law. All actions and proceedings arising out of or relating to this Agreement will be heard and determined in any New York state or federal court sitting in the City of New York, and each of the parties hereto irrevocably submits to the exclusive jurisdiction of such courts.
14.11 CONDITIONS PRECEDENT. This Agreement is conditional upon (a) the execution by, Inverness, Unipath, Unipath Diagnostics, Inc., a Delaware Corporation with a principal place of business at 51 Sawyer Road, Suite 200, Waltham, MA 02453, Pfizer, Inc., a Delaware corporation with its principal place of business at235 East 42nd Street, New York, New York 10017 and Warner-Lambert of a settlement agreement, substantially in the form attached hereto as Exhibit D, (the "Settlement Agreement") resolving all outstanding issues and litigation relating to the alleged infringement of Inverness patents as described therein, and (b) the execution and subsequent valid entry of certain Consent Orders (as defined therein). In the event that the Settlement Agreement is not executed by all parties thereto or the Consent Orders are not filed and validly entered by the court within thirty (30) days of the date of this Agreement, then this Agreement shall be null and void and of no force and effect. Each party shall use its best efforts to complete all activities in this Section 14.11.
14.12 FIREWALL PROVISION. Inverness shall use its best efforts to ensure that none of its employees, agents or contractors who provide sales and marketing services will have access to Information, Improvements or other commercially sensitive material or documents relating to the Product. All Information, Improvements or other commercially sensitive material or documents of Warner Lambert that Inverness comes into contact with as a result of this Agreement shall be used solely for the purposes of performing its duties and obligations under this Agreement, and shall not be used in the manufacture, supply or other distribution of any product other than the Product. Furthermore, Inverness shall use its best efforts to ensure that no competitor shall have direct or indirect access to any such Information, Improvements or other commercially sensitive material or documents.
14.13 GOVERNMENTAL INQUIRIES. Each party will keep the other party apprised of the status of any inquiries made of such party by the United States Federal Trade Commission or any other Governmental Authority or members of their prospective staffs with respect to this Agreement or the transactions contemplated hereby or thereby. The parties hereto each will cooperate with one another and use all reasonable efforts to prepare all necessary documentation to obtain all necessary permits, consents, approvals, orders and authorizations of or any exemptions by, all third parties and governmental bodies necessary to consummate the transactions contemplated by this Agreement.
14.14 SURVIVAL. The provisions of Sections 3.4, 4.12, 7.1, 8, 11, 12.3, 12.4 and 12.5 shall survive termination of expiration of this Agreement.
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In Witness Whereof, the parties have caused this Agreement to be duly executed in their respective names and on their behalf, as of the date first above written.
WARNER-LAMBERT COMPANY LLC
INVERNESS MEDICAL INNOVATIONS, INC.
INVERNESS MEDICAL SWITZERLAND GmbH
UNIPATH, Ltd.
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By: /s/ Illegible ---------------- Title: President, Pfizer Consumer Healthcare -------------------------------------
By: /s/ Paul T. Hempel -------------------------------- Title: General Counsel and Secretary -----------------------------
By: /s/ Paul T. Hempel --------------------------------- Title: Geschaftsfuhrer ------------------------------
By: /s/ D Scott --------------------------------- Title: Chairman ------------------------------
EXHIBIT A
START UP ACTIVITIES (SECTION 2.1)
******
****** REPRESENTS TEXT OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
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EXHIBIT B
PATENTS
PATENTS COVERING EPT PRODUCT MANUFACTURED
BY UNIPATH FOR U.S. MARKET
******
****** REPRESENTS TEXT OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
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EXHIBIT C
PRICES
SECTION I. PRICE OF PRODUCT PRIOR TO WARNER-LAMBERT PURCHASING ****** MILLION AGGREGATE PRODUCT UNITS FROM INVERNESS. Subject to the provisions of Sections 2.13 and 3, the purchase price for Product sold by Inverness to Warner-Lambert pursuant to this Agreement will be:
FIRST ****** MILLION PRODUCT PURCHASES. Subject to the provisions of Section 3, the first ****** million Product purchases, regardless of how allocated among single, doubles and triples will be:
SECTION II. PRICE OF PRODUCT AFTER WARNER-LAMBERT HAS PURCHASED AN AGGREGATE OF ****** MILLION PRODUCT UNITS FROM INVERNESS.
****** REPRESENTS TEXT OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
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PRICE (U.S.$) TESTS PER PACKAG E ------------- ---------------- - ****** Single ****** Double ****** Triple
PRICE (U.S.$) TESTS PER PACKAG E ------------- ---------------- - ****** Single ****** Double ****** Triple
PRICE (U.S.$) TESTS PER PACKAG E ------------- ---------------- - ****** Single ****** Double ****** Triple
EXHIBIT D
SPECIFICATIONS
THE SPECIFICATIONS HAVE NOT BEEN FINALIZED AS OF THE DATE HEREOF, AND WILL BE FINALIZED AND AGREED BY THE PARTIES AS SOON AS REASONABLY PRACTICAL AFTER THE DATE HEREOF.
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SCHEDULE A
PRODUCT AND PACKAGING OF UNIPATH OR ITS AFFILIATES REVIEWED BY WARNER-LAMBERT IN CONNECTION WITH SECTION 2.12
PRODUCT AND PACKAGING
Walgreens One Step Pregnancy Test -- Expiration Date: May 2004, Lot No. 56268
Clearblue Easy Pregnancy Test - Expiration Date: 2005-01, Lot No. EENO13/3
Accu-Clear Early Pregnancy Test - Expiration Date: October 2004, Lot No. 57542
Eckerd One Step Pregnancy Test - Expiration Date: April 2004, Lot No. 16016A
PROPOSED PACKAGING ONLY
Eckerd One Step Pregnancy Test
Walgreens One Step Pregnancy Test
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SCHEDULE B
******
****** REPRESENTS TEXT OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
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SCHEDULE C
******
****** REPRESENTS TEXT OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
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Exhibit 10.46
FIRST AMENDMENT TO SUBORDINATED PROMISSORY NOTES
This First Amendment to Subordinated Promissory Notes (this "AMENDMENT") is entered into as of November 14, 2003 by and between Inverness Medical Innovations, Inc., a Delaware corporation (the "BORROWER") and the lenders whose names are set forth on the signature pages hereto (the "LENDERS").
RECITALS
WHEREAS, the Borrower, the Lenders and certain other parties entered into that certain Subordinated Note and Warrant Purchase Agreement dated as of September 20, 2002 (the "PURCHASE AGREEMENT").
WHEREAS, pursuant to the Purchase Agreement, the Borrower issued Subordinated Promissory Notes, dated September 20, 2002 (the "NOTES"), in an aggregate principal amount of $20 million to the Lenders.
WHEREAS, the Borrower entered into that certain Credit Agreement, dated as of November 14, 2002, among the Borrower, Wampole Laboratories, Inc., Inverness Medical (UK) Holdings Limited, General Electric Capital Corporation, as administrative agent, Keybank National Association, as documentation agent, GECC Capital Markets Group, Inc., as lead arranger, and certain other credit parties and lenders signatory thereto (the "CREDIT AGREEMENT").
WHEREAS, the Credit Agreement was amended and restated as of August 27, 2003 in connection with the Borrower's acquisition of Applied Biotech, Inc. ("ABI"), and the Borrower incurred an additional $13.4 million of indebtedness under the Credit Agreement, as amended and restated, to finance the Borrower's acquisition of ABI.
WHEREAS, the Credit Agreement, as previously amended and restated, was amended and restated as of September 30, 2003 in connection with the Borrower's acquisition of certain assets relating to several product lines of Abbott Laboratories (the "ABBOTT ASSETS"), and the Borrower incurred an additional $55.0 million of indebtedness under the Credit Agreement, as amended and restated, to finance the Borrower's acquisition of these assets.
WHEREAS, the $68.4 million of indebtedness incurred by the Borrower to finance the acquisitions of ABI and the Abbott Assets constitutes "Senior Obligations" within the meaning of Section 3(a)(iv)(B) of the Notes.
WHEREAS, the Borrower may enter into one or more new debt transactions whereby it would repay some or all of its outstanding indebtedness under the Credit Agreement, as amended and restated, using the net proceeds from the new debt transactions.
WHEREAS, the Borrower and the Lenders desire to amend the Notes in order to reflect their intention that the term "Senior Obligations" under the Notes includes indebtedness incurred to redeem, repay or refinance indebtedness constituting Senior Obligations within the meaning of Section 3(a)(iv)(B) of the Notes.
WHEREAS, all capitalized terms used but not defined in this Amendment shall have the meanings ascribed to such terms in the Notes.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Amendment, and intending to be legally bound, the Borrower and the Lenders hereby agree as follows:
SECTION 1. AMENDMENT
1.1. Clause (B) of the first sentence of Section 2(a)(iv) of each of the Notes that currently reads as follows:
"[The term "Senior Obligations" shall mean]. . . (B) any indebtedness of the Borrower incurred to finance the Borrower's acquisition (by merger, consolidation, stock purchase or otherwise) of a Person or the Borrower's acquisition of all or substantially all of the assets of a Person or all or substantially all of the assets of a division or line of business of a Person."
is amended and restated such that clause (B) of the first sentence of Section 2(a)(iv) of each of the Notes reads as follows:
"[The term "Senior Obligations" shall mean]. . . (B) (i) any indebtedness of the Borrower incurred after September 20, 2002 to finance the Borrower's acquisition (by merger, consolidation, stock purchase or otherwise) of a Person or the Borrower's acquisition of all or substantially all of the assets of a Person or all or substantially all of the assets of a division or line of business of a Person and (ii) any indebtedness of the Borrower incurred to redeem, repay or refinance any indebtedness described in clause (i) above or this clause (ii)."
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1.2. All other terms and conditions of the Notes shall be unchanged and remain in full force and effect.
1.3. Pursuant to Section 8 of the Notes, the Lenders hereby consent to the amendment set forth in Sections 1.1 of this Amendment and, for the avoidance of doubt, acknowledge that such amendment is intended to apply to all of the Notes, not only the Notes held by the Lenders.
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. The Borrower represents and warrants to, and covenants with, the Lenders that (i) the Borrower has full right, power, authority and capacity to enter into this Amendment and has taken all necessary action to authorize the execution, delivery and performance of this Amendment, (ii) the Borrower is duly organized, validly existing and in good standing under the laws of the State of Delaware, and (iii) upon the execution and delivery of this Amendment, this Amendment shall constitute a valid and binding obligation of the Borrower enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
2.2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE LENDERS. Each Lender represents and warrants to, and covenants with, the Borrower that (i) such Lender has full right, power, authority and capacity to enter into this Amendment and has taken all necessary action to authorize the execution, delivery and performance of this Amendment, (ii) if such Lender is an entity, such Lender is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and (iii) upon the execution and delivery of this Amendment, this Amendment shall constitute a valid and binding obligation of such Lender enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
SECTION 3. MISCELLANEOUS
3.1. EFFECTIVENESS. This Amendment is subject to, and will only become effective upon, (i) Lenders holding greater than 50% of the aggregate principal amount outstanding under the Notes signing this Amendment, and (ii) the Borrower obtaining the prior written consent of the Senior Agent, as defined in the Subordination Agreement, to this Amendment. The Borrower will notify the Lenders of the date on which this Amendment becomes effective.
3.2. GOVERNING LAW. This Amendment shall be governed by, and construed and enforced in accordance with, the substantive laws of The Commonwealth of Massachusetts
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without regard to its principles of conflicts of laws. Any dispute arising out of or relating to this Amendment shall be filed and prosecuted in any court of competent subject matter jurisdiction located in Massachusetts. The Borrower and the Lenders hereby consent to the personal jurisdiction of such courts over them, stipulate to the convenience, fairness and efficiency of proceeding in such courts, and covenant not to assert any objection to proceeding in such courts based on any alleged lack of jurisdiction or any alleged inconvenience, unfairness or inefficiency of such courts.
3.3. COUNTERPARTS. This Amendment may be executed in multiple counterparts, each of which shall constitute an original but all of which shall constitute but one and the same instrument. One or more counterparts of this Amendment may be delivered via facsimile transmission, with the intention that they shall have the same effect as an original counterpart hereof.
3.4. COMPLETE AGREEMENT. This Amendment, together with the Notes, as amended by this Amendment, constitutes the entire contract among the parties relating to the subject matter hereof and supersedes any and all previous agreements and understandings, oral or written, relating to the subject matter hereof.
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IN WITNESS WHEREOF, the undersigned executed this Amendment as of the day and year first above written.
BORROWER:
INVERNESS MEDICAL INNOVATIONS, INC.
[BORROWER SIGNATURE PAGE]
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By: /s/ Christopher Lindop ------------------------------------- Name: Christopher J. Lindop Title: Chief Financial Officer
IN WITNESS WHEREOF, the undersigned executed this Amendment as of the day and year first above written.
*See Schedule of Lender Signatories below [Name of Lender] By: Name:
Title:
[LENDER SIGNATURE PAGE]
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Schedule of Lender Signatories
LENDER
Adele Zuckerman
AJAC Partnership
Alan D. Schreiber
Alan S. Fitz
Ambrose Logging Co., Inc.
Anna and Erwin Klingsberg
Anthony J. Bernardo
Arthur Fertman, PSRP/RO
Barry S. Potter
Beth Semel
Brookside Institute for Psychotherapy Employees Retirement Plan, Rhoda L. Marks, Trustee
Bruce Levy, MPPP
Bruce M. Male
Bruce McPherson
Bruce Osterling
Carolyn Ellis
Charles and Judith Huizenga, PSRP, Trustees
Charles C. Orr
Colin M. Peddie
DAC Associates Trust U/A/D 11/21/83 As Amended 7/01/02
David H. Wegman
David Cooper, Defined Ben.
David M. Link
Dean M. Boylan, Jr.
Deborah Larrison and Dennis Larrison Derek C. Polonsky, MD and Cathie S. Ragovin, MD PCPSRP, Derek C. Polonsky and Cathie S. Ragovin, Trustees
Dermatology Associates of Concord, Inc. Profit Sharing Retirement PlanTerry Hadley Trustee
Dinah Bodkin
Dorairaju Thavaseelan
Douglas Alcaide Dwight B. Richardson Testamentary Trust, Gary B. Richardson TTEE
Edward F. Eagan Edward F. Eagan, Trustee Edward F. Eagan Money Purchase Pension Plan
Edward F. Parsons, MD PSRP A/C Edward F. Parsons (RO) Edward F. Parsons, Trustee
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Edwin A. Murray, Jr. 1995 Trust U/A/D 6/27/95, Edwin A. Murray, Jr. and Caroline D. Murray, TTEE
Edwina O. and Charles T. Comiso Trust U/A DTD 1/26/96, Edwina O. and Chalres T. Comiso, Trustees
Ernest A. Carabillo Jr. Everest Properties II, LLC Money Purchase Revision Plan FBO Robert Kohorest
Faye Van Wert First Trust A83Corporation, Trustee FBO John Glode, Jr. IRA+A133
First Trust Corporation Trustee FBO Craig Zuckerman, IRA
First Trust Corporation Trustee FBO Donald Sherman IRA First Trust Corporation Trustee FBO Suzanne Levine Friend IRA
First Trust Corporation, FBO Edward McCall, Jr. - IRA
First Trust Corporation, Trustee FBO Roy E. Kent - IRA
George Howell
George Monter
Gladys I. Dratch
Glode Grandchildren Trust, Willian Glode, Trustee
Guy E. and Andrea G. Fincke
Ira B. Tager
Jagat S. Sisodia
James and Florence Harris
James F. and Diana H. Matthews
Jay Pearlstein
Jeanne-Marie Boylan
Jennifer K. Coplon
John A. Hirst
John B. Glode
John F. Levy
John T. Ridley
Jonathan Adler
John Widly
Joseph W. Odlum, Jr.
Kankere T. Mahesh
Kathleen Eagan
Lawrie W. Okurowski
LeRoy Schecter
Leslie Boden, Money Purchse Pension Plan, Leslie I. Boden and Jidth A. Yanof, Trustees
Lexington Medical Associates, Inc. MPPP/ PSRP Transfer accts., Richard Zangara, Trustee
Linda Fialkoff
Lorraine Woodrow
Lowell Anesthesiology, PSRP
Machelle M. Seibel
Margaret Hixon
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Maria Wood
Marie Michelle McCarthy
Mark and Sandra Parent
Mark Tannenbaum
Mary Picott
Mary Young
Matthews Living Trust UTA dated 03/11/99, Richard N. Matthews and Valerie Matthews, Trustees
Merrill G. Liteplo
Michael A. Ervolini and Carol A. Facella
Michael Pugliese
Michael Singer
Ming C. Lash
Mitchel B. Craner, Esq. Profit Sharing Plan U/A 1/15/85, Mitchell Craner, Trustee
Nicolas J. Kaufman, Productions, Money Purchase Pension
Nicolas Kaufman, Trustee
Patricia Alcaide
Patrick and Linda M. Latcham
Paul S. Van Wallegham
Peter A. Lemay
Peter L. Geller
Ralph Freidin
Raymond L. Page, PSRP Retirement Accounts, Inc., Trustee FBO Allen A. Mitchell IRA Retirement Accounts, Inc., Trustee FBO Arnold R. Soslow IRA Retirement Accounts, Inc., Trustee FBO David S. Thorpe IRA
Retirement Accounts, Inc., Trustee FBO Doris O. Wong IRA
Retirement Accounts, Inc., Trustee FBO Edward Tober IRA Retirement Accounts, Inc., Trustee FBO Kenneth DeMay IRA Retirement Accounts, Inc., Trustee FBO Mary R. Scott IRA Retirement Accounts, Inc., Trustee FBO Michael Wiedman IRA
Retirement Accounts, Inc., Trustee FBO Peter D. Kliem IRA Retirement Accounts, Inc., Trustee FBO Seymour Saltzman IRA Retirement Accounts, Inc., Trustee FBO Thomas Puschak IRA
Retirement Accounts, Inc., Trustee FBO William K. Durr IRA
Retirement Accounts, Inc., Trustee Inc. FBO Charles P. Giersch IRA
Retirement Accounts, Inc., Trustee Inc. FBO Gerald McCue Retirement Accounts, Inc., Trustee Inc. FBO Harry Kaloustian Retirement Accounts, Inc., Trustee Inc. FBO Vincent DeAngelis Retirement Accounts, Inc., Trustee Inc., FBO Allan M. Greenspan IRA
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Richard and Brenda Albright
Richard and Jennifer Russell
Robert G. Ayres Robert G. Stewart, Profit Sharing Trust, Robert G. Stewart, Trustee
Robert Lotz
Robert M. Armstrong
Rolf and Claire Ketelaar
Zwanziger Family Ventures, LLC Roy E. Kent Revocable Trust, DTD 08/08/98, Roy E. Kent Trustee
Samuel D. Osherson Self-Employed Retirement Plan, Samuel Osherson, Trustee
Sara A. Sherman 2002 Trust, Leon Okurowski, Trustee
Sara Sherman
Sharon Seibel
Stephen S. Hilzenrath, Profit Sharing Retirement Plan, Stephen S. Hilzenrath, Trustee Steven Krugman, Money Purchase Pension Plan, Steven Krugman, Trustee
Steven M. Peltzman
Sue Beth Mazer Susan Ham Todd 1998 Revocable Trust DTD 04/24/98, Susan Ham Todd, Trustee
Tallman Eye Associates PC, PSRP, Carter Tallman, TTEE
The Cardiovascular Specialists, LCC MPPP FBO David Urbach, Thomas Sbarra Trustee
The Cardiovascular Specialists, LLC MPPP FBO Thomas Sbarra, Thomas Sbarra Trustee
Thomas C. King
Thomas Winters and Lori Mandler US Boston Corp. PSRP U/A DTD 10/1/84, Leon Okurowski, Trustee A/C Leon Okurowski
Vito R.S.Cardone
Walker Shields, MPPP
Willard L. Umphrey Revocable 1996 Revocable Trust U/A/D 03/26/96, Willard L. Umphrey Trustee
William Pieranunzi, III, Money Purchase Pension Plan, William Pieranunzi, III, Trustee
S-6
Exhibit 10.47
FIRST AMENDMENT TO SUBORDINATED CONVERTIBLE PROMISSORY NOTES
This First Amendment to Subordinated Convertible Promissory Notes (this "AMENDMENT") is entered into as of January 15, 2004 by and between Inverness Medical Innovations, Inc., a Delaware corporation (the "BORROWER") and the lenders whose names are set forth on the signature pages hereto (the "LENDERS").
RECITALS
WHEREAS, the Borrower, the Lenders and certain other parties entered into that certain Subordinated Note and Warrant Purchase Agreement dated as of September 20, 2002 (the "PURCHASE AGREEMENT").
WHEREAS, pursuant to the Purchase Agreement, the Borrower issued Subordinated Convertible Promissory Notes, dated September 20, 2002 (the "NOTES"), in an aggregate principal amount of $6 million to the Lenders.
WHEREAS, the Borrower entered into that certain Credit Agreement, dated as of November 14, 2002, among the Borrower, Wampole Laboratories, Inc., Inverness Medical (UK) Holdings Limited, General Electric Capital Corporation, as administrative agent, Keybank National Association, as documentation agent, GECC Capital Markets Group, Inc., as lead arranger, and certain other credit parties and lenders signatory thereto (the "CREDIT AGREEMENT").
WHEREAS, the Credit Agreement was amended and restated as of August 27, 2003 in connection with the Borrower's acquisition of Applied Biotech, Inc. ("ABI"), and the Borrower incurred an additional $13.4 million of indebtedness under the Credit Agreement, as amended and restated, to finance the Borrower's acquisition of ABI.
WHEREAS, the Credit Agreement, as previously amended and restated, was amended and restated as of September 30, 2003 in connection with the Borrower's acquisition of certain assets relating to several product lines of Abbott Laboratories (the "ABBOTT ASSETS"), and the Borrower incurred an additional $55.0 million of indebtedness under the Credit Agreement, as amended and restated, to finance the Borrower's acquisition of these assets.
WHEREAS, the $68.4 million of indebtedness incurred by the Borrower to finance the acquisitions of ABI and the Abbott Assets constitutes "Senior Obligations" within the meaning of Section 3(a)(iv)(B) of the Notes.
WHEREAS, the Borrower may enter into one or more new debt transactions whereby it would repay some or all of its outstanding indebtedness under the Credit Agreement, as amended and restated, using the net proceeds from the new debt transactions.
WHEREAS, the Lenders together hold at least sixty-six and two-thirds percent (66 2/3%) of the aggregate principal amount outstanding under the Notes.
WHEREAS, the Borrower and the Lenders desire to amend the Notes in order to reflect their intention that the term "Senior Obligations" under the Notes includes indebtedness incurred to redeem, repay or refinance indebtedness constituting Senior Obligations within the meaning of Section 3(a)(iv)(B) of the Notes.
WHEREAS, all capitalized terms used but not defined in this Amendment shall have the meanings ascribed to such terms in the Notes.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Amendment, and intending to be legally bound, the Borrower and the Lenders hereby agree as follows:
SECTION 1. AMENDMENT
1.1. Clause (A) of the first sentence of Section 3(a)(iv) of each of the Notes that currently reads as follows:
"[The term "Senior Obligations" shall mean] (A) all principal of, and premium and interest on, and all other amounts owing or guaranteed by the Borrower or any of its subsidiaries in respect of, any indebtedness incurred or guaranteed by the Borrower or any of its subsidiaries for money borrowed from any bank or other institutional lender now or hereafter outstanding or hereafter incurred (including without limitation all indebtedness incurred or guaranteed by the Borrower or any of its subsidiaries to. . ."
is amended such that clause (A) of the first sentence of Section 3(a)(iv) of each of the Notes reads as follows:
"[The term "Senior Obligations" shall mean] (A) all principal of, and premium and interest on, and all other amounts owing or guaranteed by the Borrower in respect of, any indebtedness incurred or guaranteed by the Borrower for money borrowed from any lender now or hereafter outstanding or hereafter incurred (including without limitation all indebtedness incurred or guaranteed by the Borrower to . . ."
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1.2. Clause (B) of the first sentence of Section 3(a)(iv) of each of the Notes that currently reads as follows:
"[The term "Senior Obligations" shall mean]. . . (B) any indebtedness of the Borrower incurred to finance the Borrower's acquisition (by merger, consolidation, stock purchase or otherwise) of a Person or the Borrower's acquisition of all or substantially all of the assets of a Person or all or substantially all of the assets of a division or line of business of a Person."
is amended and restated such that clause (B) of the first sentence of Section 3(a)(iv) of each of the Notes reads as follows:
"[The term "Senior Obligations" shall mean]. . . (B) (i) any indebtedness of the Borrower incurred after September 20, 2002 to finance the Borrower's acquisition (by merger, consolidation, stock purchase or otherwise) of a Person or the Borrower's acquisition of all or substantially all of the assets of a Person or all or substantially all of the assets of a division or line of business of a Person and (ii) any indebtedness of the Borrower incurred to redeem, repay or refinance any indebtedness described in clause (i) above or this clause (ii)."
1.3. All other terms and conditions of the Notes shall be unchanged and remain in full force and effect.
1.4. Pursuant and subject to the provisions of Section 9 of the Notes, the Lenders hereby consent to the amendments set forth in Sections 1.1 and 1.2 of this Amendment and, for the avoidance of doubt, acknowledge that such amendment is intended to apply to all of the Notes, not only the Notes held by the Lenders.
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. The Borrower represents and warrants to, and covenants with, the Lenders that (i) the Borrower has full right, power, authority and capacity to enter into this Amendment and has taken all necessary action to authorize the execution, delivery and performance of this Amendment, (ii) the Borrower is duly organized, validly existing and in good standing under the laws of the State of Delaware, and (iii) upon the execution and delivery of this Amendment, this Amendment shall constitute a valid and binding obligation of the Borrower enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
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2.2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE LENDERS. Each Lender represents and warrants to, and covenants with, the Borrower that (i) such Lender has full right, power, authority and capacity to enter into this Amendment and has taken all necessary action to authorize the execution, delivery and performance of this Amendment, (ii) if such Lender is an entity, such Lender is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and (iii) upon the execution and delivery of this Amendment, this Amendment shall constitute a valid and binding obligation of such Lender enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
SECTION 3. MISCELLANEOUS
3.1. EFFECTIVENESS. This Amendment is subject to, and will only become effective upon, the Borrower obtaining the prior written consent of the Senior Agent, as defined in the Subordination Agreement, to this Amendment. The Borrower will notify the Lenders of the date on which this Amendment becomes effective.
3.2. GOVERNING LAW. This Amendment shall be governed by, and construed and enforced in accordance with, the substantive laws of The Commonwealth of Massachusetts without regard to its principles of conflicts of laws. Any dispute arising out of or relating to this Amendment shall be filed and prosecuted in any court of competent subject matter jurisdiction located in Massachusetts. The Borrower and the Lenders hereby consent to the personal jurisdiction of such courts over them, stipulate to the convenience, fairness and efficiency of proceeding in such courts, and covenant not to assert any objection to proceeding in such courts based on any alleged lack of jurisdiction or any alleged inconvenience, unfairness or inefficiency of such courts.
3.3. COUNTERPARTS. This Amendment may be executed in multiple counterparts, each of which shall constitute an original but all of which shall constitute but one and the same instrument. One or more counterparts of this Amendment may be delivered via facsimile transmission, with the intention that they shall have the same effect as an original counterpart hereof.
3.4. COMPLETE AGREEMENT. This Amendment, together with the Notes, as amended by this Amendment, constitutes the entire contract among the parties relating to the subject matter hereof and supersedes any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Without limiting and in furtherance of Section 1.3 above, the Notes, as specifically amended by this Amendment, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed.
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IN WITNESS WHEREOF, the undersigned executed this Amendment as of the day and year first above written.
BORROWER:
INVERNESS MEDICAL INNOVATIONS, INC.
LENDERS:
PERRY PARTNERS, L.P.
By: Perry Corp., Managing General Partner
PERRY PARTNERS INTERNATIONAL, INC.
By: Perry Corp., Investment Manager
ZWANZIGER FAMILY VENTURES, LLC
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By: /s/ Ron Zwanziger -------------------------------------- Name: Title:
By: /s/ Randall Borkenstein ---------------------------------------- Name: Randall Borkenstein Title: Managing Director and Chief Financial Officer
By: /s/ Randall Borkenstein -------------------------------------- Name: Randall Borkenstein Title: Managing Director and Chief Financial Officer
By: /s/ Ron Zwanziger -------------------------------------- Name: Title:
Exhibit 14.1
[INVERNESS MEDICAL LOGO]
MEMORANDUM
We have built our business on the basis of trust and confidence. Our reputation for integrity and excellence requires careful observance for the spirit and letter of all applicable laws and regulations as well as a scrupulous regard for the highest standards for conduct and personal integrity.
Those values are at the core of our drive in becoming a world-class provider of women's health and nutritional products and developer of advanced medical device technologies. We intend to continue to be a leader in every aspect of our business--including our business conduct, integrity, and ethics as an integral part of the Company's culture and business strategy.
The Inverness Medical Innovations Business Conduct Guidelines (the "Guidelines") contain principles and standards to guide our business behavior. They therefore apply to the conduct of every Colleague of the Inverness Medical Innovations family.
Codes of conduct such as our Guidelines mean little without personal commitment. By considering and adopting these standards as our minimum guidelines, each of the directors and members of management has personally committed to uphold them and we will expect the same from each employee. Each of us has a responsibility for knowing the criteria for acceptable business behavior and demonstrating that knowledge in our everyday conduct. However, the Guidelines, no matter how comprehensive they may be, cannot anticipate every situation that may arise.
Through all the changes in our business and those that are sure to come in the future as we continue to grow, one basic principle has not and will not ever change--as always, we expect
TO: ALL INVERNESS MEDICAL GROUP EMPLOYEES FROM: RON ZWANZIGER, PRESIDENT, CEO AND CHAIRMA N SUBJECT: INVERNESS MEDICAL INNOVATIONS BUSINESS CO NDUCT GUIDELINES DATE: 7 NOVEMBER 2003 CC: BOARD OF DIRECTORS
all our Colleagues and all who represent us to practice the highest standards of business conduct. It is up to each of us to ensure that our business relationships - with each other, our customers, our suppliers, and our competitors - reflect our integrity, honesty, and respect for others. Our individual actions should convey the spirit and intent of our Guidelines.
Please read the Guidelines carefully, use them as a valued resource, and guide in your daily work. If at any time you need clarification about the Guidelines, please talk with your supervisor. Should you still have questions or concerns, kindly contact the Human Resources or Legal Departments.
With your support, the Company's reputation of integrity and fair dealing will continue to be a source of pride for us all.
INVERNESS MEDICAL INNOVATIONS BUSINESS CONDUCT GUID ELINES
INTRODUCTION
These Business Conduct Guidelines (the "Guidelines") are designed to help you make the right choices/decisions when/if confronted with difficult situations. The intention is to remind us of the legal and ethical obligations which are in many ways good judgment and common sense. They reaffirm our commitment to integrity as the cornerstone of our business behavior. All employees, directors and others who act on behalf of the Company, including all members of management and employees of our non-U.S. subsidiaries are expected to abide by and uphold these guidelines.(1)
We have a firmly established policy of conducting our affairs in compliance with the letter and spirit of the law and adhering to the principles of business ethics. By utilizing the Guidelines, you will help ensure that the Company conducts its business for the benefit of all our stakeholders - our fellow Colleagues, customers, our shareholders, suppliers, and host communities.
However, the Guidelines are only a guide, and cannot answer all legal or ethical questions that may arise. You are always free to consult your supervisor or, if additional guidance is needed, the Human Resources or Legal Departments with such questions. There may be times however, where you are left to depend on your own individual judgment in deciding on the correct course of action. As you consider a particular situation, contemplating the following factors may help you arrive at a satisfactory answer:
- Is my action consistent with approved Company practices? - Does my action give the appearance of impropriety? - Will the action bring discredit to me or the Company if disclosed? - Can I defend my action to my supervisor, other Colleagues and to the public? - Does my action meet my personal code of behavior? - Does my action conform to the spirit of the Guidelines?
The willingness of each of us to raise ethical concerns is important. Any Colleague who becomes aware of acts contrary to the Guidelines should inform their supervisor, the Human Resources or Legal Departments. It is our policy that no person will suffer any adverse effects to their job or career as a result of raising an ethical concern. The section of the Guidelines entitled "Administration" provides instructions on how to act in this situation.
(1) In designing these written Guidelines, the Company has taken into account the Federal Sentencing Guidelines published by the U.S. Department of Justice and the Company Guidelines are intended to fully satisfy the standards set out there.
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ADMINISTRATION
Our goal is to integrate the Guidelines into our daily business activities.
As a Colleague of the Company, you have a responsibility to understand and comply with the Guidelines.
- All Colleagues who become aware of any acts contrary to the Guidelines should give this information to his or her supervisor, the Human Resources or Legal Departments. If for any reason you feel uncomfortable reporting such incidents or issues to your supervisor, the Human Resources or Legal Departments, you may inform any member of Executive Management.
- The Company will investigate all reports made as set forth above. In any such investigation, the Company will respect the rights of all parties concerned and principles of fairness and dignity will be applied.
- If a violation of the expressed terms or spirit of this policy is found, the Company will take appropriate disciplinary action. Such action could include immediate termination and filing of criminal charges. In addition, disciplinary action will be taken against any supervisor or other Colleague who retaliates, directly or indirectly, or encourages others to do so, against a Colleague who reports a violation of the Guidelines. A Colleague has the right to raise concerns or to report misconduct without fear of retribution.
- In the event a Colleague is uncertain about whether or not an action is permitted by this policy, that issue should be raised with the Colleague's supervisor, the Human Resource Department or the Legal Department. The Company encourages inquiries and will make no negative implications because of them.
- In the event that any Colleague, including a member of management or a director, feels that it is appropriate to receive a waiver from one or more of the standards set out in this policy, that Colleague must present a written request for a waiver to the Board of Directors. This policy has been prepared and adopted by the Board of Directors and, except as expressly set out in this policy, only the Board of Directors has authority to waive provisions of it.
OUR STANDARDS
1. COMMITMENT TO EMPLOYEES. Inverness Medical Innovations is committed to maintaining an environment that respects the dignity of each person. Gambling, fighting, assault, disorderly conduct, or behavior that violates common decency or morality will not be tolerated. Discriminatory harassment in any form will not be
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tolerated. This also includes sexual harassment and any other harassment based on an individual's race, color, religion, sex, sexual orientation, national origin, age, physical or mental disability or status as a special veteran, military service, or application for military services or membership in any other category protected under the law. See Freedom from Harassment Policy (hyperlink).
We will maintain a strict policy to deal with offenders. If you feel you are a victim of discriminatory harassment, you should report the incident. Any employee found to have harassed or discriminated against another company employee or an employee of a supplier, contractor, customer, competitor, or regulator will be subject to disciplinary action, including termination. If you suspect or know that another company employee is harassing someone, talk with your supervisor, the Human Resources or Legal Departments, or any member of the Executive Management team immediately. We will ensure that any allegations reported under this policy will be handled with the utmost professionalism and confidentiality. Retaliation is a serious violation of this policy and should be reported immediately. Any employee found to have retaliated against another individual for reporting discriminatory harassment or participating in an investigation of allegations of such conduct would be subject to appropriate disciplinary action.
2. CONFLICTS OF INTEREST. You should avoid situations where the private interests of you, your relatives, or your friends conflict with the interests of the Company. Both the fact and the appearance of a conflict of interest should be avoided. THIS APPLIES IN A BUSINESS SENSE, AS DESCRIBED THROUGHOUT THIS DOCUMENT, AND IS NOT MEANT TO AND DOES NOT APPLY TO WORK/FAMILY ISSUES.
For purposes of this policy, a "relative" is any person who is related by blood or marriage or whose relationship is similar to that of persons who are related by blood or marriage (including but not limited to members of an employee's household). "Members of an employee's household" include an employee's spouse, children, parents, and any other persons who reside with such employee. While certain of the provisions below are made expressly applicable to members of an employee's household, the provisions also apply to relatives or friends where the nature of the relationship is such that divided loyalties are likely to result from the conduct in question.
Note that this policy does not attempt to describe all possible conflicts of interest that could develop, although some of the more common considerations and conflicts from which employees must refrain are set out below:
- You should not have any business or financial relationship with customers, suppliers, contractors, regulators, or competitors that could influence or appear to influence you in carrying out your responsibilities. This would include the ownership of stock in these companies. However, ownership
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of a nominal amount of stock in a publicly owned company would not be considered a conflict unless the amount was large enough to influence you.
- You may not engage in any conduct or activity that is inconsistent with the Company's best interests or that in any manner disrupts, undermines, or impairs the Company's relationships with any person or entity with which the Company has or proposes to enter into an arrangement, agreement, or contractual relationship of any kind.
- While employed by the Company, you may not market products or services that compete with or whose interests may conflict with ours. Nor may you work for a customer, supplier, contractor, regulator, or competitor, or member of its board of directors without approval.
- You must disclose any potential conflict of interest to your supervisor, the Human Resources or Legal Departments so that it may be resolved.
- If you are unsure if your situation or relationship with another organization might conflict with your job performance or our Company's interests, you should discuss it with your supervisor, Human Resources or Legal Departments. Most potential conflict situations are resolved and it is always best for you to raise your concern.
3. COMPLIANCE WITH THE LAW AND THIS POLICY. Inverness Medical Innovations' policy is to comply with all laws and regulations of each state and country in which Inverness Medical Innovations conducts business, whether or not specifically mentioned above. Each of Inverness Medical Innovations' employees, agents or other persons acting on behalf of Inverness Medical Innovations shall comply with such laws and this policy. If you have any questions concerning the legality or propriety of any course of conduct, you must seek guidance from the Human Resources, Legal Department, or Executive Management of Inverness Medical Innovations. If you become aware of any illegal or improper conduct, you must report it to your Supervisor or to the Human Resources, Legal Department, or Executive Management of Inverness Medical Innovations. If the illegal or improper conduct involves Executive Management or if Executive Management fails to respond appropriately to any report of illegal or improper conduct, you must report it to a member of Inverness Medical Innovations' Board of Directors.
(a) EMPLOYMENT LAWS: The employment laws make it unlawful to discriminate in the hiring or discharge of employees, or with respect to their compensation, conditions or privileges of employment, on the basis of race, color, religion, sex, sexual orientation, national origin, age, physical or mental disability or status as a special veteran, military service or application for military services or membership in any other category protected under the law. It is our policy to provide equal employment opportunity for all employees and applicants for employment in
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accordance with the employment laws without regard to race, color, religion, sex, sexual orientation, national origin, age, physical or mental disability or status as a special veteran military service or application for military services or membership in any other category protected under the law.
(b) ANTITRUST/COMPETITION LAWS: The antitrust/competition laws are intended to preserve competition by prohibiting actions that could unreasonably restrain the functioning of a free and competitive marketplace. Violations of these laws (which can result in severe penalties to both the Company and to the persons participating in the violation) can occur:
- If you have communications or agreements with competitors on prices, terms, services, sales policies or customer selection or classification (except for usual credit information);
- If you attempt to suggest or agree with a competitor, supplier or customer on how he or she should deal with others;
- In any arrangements or understandings with particular competitors or customers so as not to deal with a particular customer or supplier;
- In any joint ventures or projects among competitive organizations where discussions are not strictly limited to the joint transactions involved;
- In any participation in trade associations, seminars, or other groups where there is even the appearance of being an occasion for discussion of competitive policies and practices.
(c) DEALING IN SECURITIES AND CONFIDENTIAL INFORMATION: In the course of your employment, you may become aware of sensitive information that is confidential, private, or proprietary and which is valuable and material to the Company and has not been made public. The use of such non-public material information about Inverness Medical Innovations or another company (that you may obtain information about due to a proposed or actual transaction or relationship with Inverness Medical Innovations) for your own financial benefit not only is unethical, but also may be a violation of law. We are all responsible for protecting the confidentiality of all such information. Both U.S. and international laws prohibit insider trading and deceptive practices in stocks and securities. The Company will not tolerate the improper use of inside information. SEE INSIDER TRADING POLICY, ELECTRONIC COMMUNICATION MEDIA USE POLICY AND NONDISCLOSURE, NONCOMPETITION AND DEVELOPMENTS AGREEMENT POLICY (HYPERLINK).
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- Use or disclosure of Company sensitive information will be for company purposes only.
- To preserve confidentiality, the disclosure of such Company information within the Company should be limited to those who have a need to know.
- Your responsibility to keep Company information confidential continues after you discontinue your employment with the Company.
- Giving the Company pass or other Company identification material to any unauthorized person is prohibited.
IF YOU HAVE RECEIVED CONFIDENTIAL INFORMATION FROM THOSE WE DO BUSINESS WITH, YOU MUST PROTECT THE CONFIDENTIALITY OF ANY SUCH INFORMATION IN ACCORDANCE WITH ANY WRITTEN AGREEMENT WHICH MAY APPLY TO SUCH INFORMATION, OR IF NONE EXISTS, IN ACCORDANCE WITH THE PROTECTION GIVEN TO OUR OWN INFORMATION.
(d) COPYRIGHTS AND COMPUTER SOFTWARE: The unlawful duplication or removal or attempting to remove from the Company's premises or restricted areas copyrighted materials, including periodicals, magazines, trade journals, designs, computer software, tools, and equipment is a violation of copyright laws and is strictly prohibited. SEE ELECTRONIC COMMUNICATION MEDIA USE POLICY AND NONDISCLOSURE, NONCOMPETITION AND DEVELOPMENTS AGREEMENT. (HYPERLINK)
(e) UNAUTHORIZED PAYMENTS TO OBTAIN BUSINESS: The policy of the Company is to not, directly or indirectly, offer, solicit or accept any kind of payment, gift, bribe, kickback, or contribution for personal gain of the employee or members of an employee's household for the purposes of:
- Influencing customers, suppliers, or governmental entities including their officials or employees.
- Obtaining, giving, or keeping business.
- Persuading any officials or employees of another company to fail to perform, or to improperly perform their duties.
- Employees and members of an employee's household may not accept money, personal gifts, trips, services, entertainment, or anything of value free or at a discounted rate from any person or entity that is an actual or potential competitor of Inverness Medical Innovations.
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- Employees may not offer, provide or accept money, personal gifts, trips, services, entertainment, or anything of value, free or at a discounted rate to any actual or potential purchaser, actual or potential supplier or actual or potential customer of Inverness Medical Innovations, except as approved by Executive Management. In all instances when an offering is made, the offering, providing or acceptance of such gifts or services must be confirmed by Executive Management to be in compliance with the business policies of the recipient's or donor's employer or the person or entity that the recipient represents and must be within the normal business practices of the industry as a whole. This section does not preclude payment or acceptance of small costs (e.g., taxi fares, reasonable business meals, parking validations, etc.), Company emblem paraphernalia (mugs, shirts, etc.) provided in the ordinary course of business, gifts valued at less than $50 or tickets to sports events, concerts, theatre or similar functions between business persons dealing at arm's length where such items are within the normal business practices of the industry of the party making the gift. If an employee receives a gift from a business partner which is not permitted by this section, the employee must report that gift to the Legal Department and either a) return the gift to the donor or b) donate the gift to a charitable cause and, in either case, advise the donor in writing of the Company's policy.
Violation of this policy will be grounds for immediate dismissal. However, except when dealing with representatives of a government (including government agencies), you may receive or give customary business amenities such as meals, provided they are associated with a business purpose, reasonable in cost, appropriate as to time and place and are such as not to influence or give the appearance of influencing the recipient. If you feel that it would be detrimental to Inverness Medical Innovations to turn down such a gift, you should discuss the matter with Executive Management, who may authorize exceptions to this prohibition. Excessive business related gifts and entertainment are inherently compromising and do not belong in our business relationships, whether giving or receiving. See Dealings with Government Officials and Payments Practice section (hyperlink).
Any employee who is unsure whether a certain transaction, activity, or relationship constitutes a conflict of interest must discuss such issue with the Legal Department or Executive Management to obtain clarification. Exceptions to this policy may only be approved by Legal Counsel or Executive Management. Inverness Medical Innovations reserves the right to determine, in its sole discretion, whether circumstances not listed above
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represent actual or potential conflicts of interest. See Conflicts of Interest Policy (hyperlink).
(f) EXPORT CONTROL LAWS: Export control laws govern all exports of commodities and technical data, including items that are hand-carried as samples. Failure to comply with such laws could result in the loss or restriction of the Company's export privileges. As a result, no Colleague will cause the Company to export or re-export any goods or intellectual property unless the Company has received the appropriate express or implied export license. Colleagues should note that this also applies to Colleagues of the Company's foreign subsidiaries.
(g) ENVIRONMENTAL LAWS: As a good corporate citizen of the communities in which we operate, the Company is committed to a safe environment and sound environmental actions. We will comply fully with all applicable environmental laws and regulations. Intentional violation of environmental laws will be a breach of this policy.
(h) SAFETY AND HEALTH: The Company is committed to maintaining a safe and healthful work environment. We will comply fully with all applicable safety and health laws and regulations.
- Bringing or attempting to bring into Company premises, or into any Company gathering off of Company premises, any firearm, dangerous weapon, explosive material, or instrument designed to inflict bodily injury is forbidden and a violation of this policy.
- Creation of fire, safety or health hazards, failure to use safety devices, or failure to comply with procedures provided for employee and public protection is forbidden and a violation of this policy.
(i) CONTRIBUTIONS TO POLITICAL, RELIGIOUS AND OTHER ORGANIZATIONS: Any financial support, time commitments, and any other contributions and involvements with political, religious or other group or activity should be made on employee's time and at the employee's own expense and must in no way indicate Inverness Medical Innovations' endorsement of such activity.
(j) QUESTIONS ON LAWS: If you have questions on specific laws or regulations, contact the Company's Legal Department.
(k) QUALITY: The Company is committed to providing the highest quality goods and services to our customers to meet and exceed their expectations. We will strive to continuously monitor our progress and improve our
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processes to achieve this goal within the spirit and letter of all applicable laws. The knowing and intentional provision to our customers of goods which are of a material inferior quality to the goods as described in the specifications and/or product literature for those goods is a violation of this policy.
4. DEALINGS WITH GOVERNMENT OFFICIALS AND PAYMENTS PRACTICE. The laws, rules and regulations that govern the professional relationships between Inverness Medical Innovations' employees and government officials are complicated and numerous. Inverness Medical Innovations' employees are obligated to contact the Legal Department or Executive Management with any questions, issues, complaints, or concerns about all matters concerning relationships and interactions with government officials.
With the exception of certain regulatory fees set by governments and lawful "expediting payments" in foreign countries, all payments, promises to pay and offers of payment or anything of value to any government official, political party, or official thereof either from Inverness Medical Innovations or in furtherance of Inverness Medical Innovations' business are strictly prohibited. In some countries outside the U.S., tips and gratuities of a minor nature are customarily required by low-level governmental representatives performing routine governmental action (e.g., processing visas, permits to do business, providing of police protection or phone service). Where payments of this nature are lawful and unavoidable, they are permitted only to facilitate the correct performance of the foreign government representative's routine duties. Such "expediting payments" may not be made to induce foreign officials to fail to perform their duties or perform them in an incorrect manner. Executive Management of Inverness Medical Innovations shall be responsible for determining the propriety, need, and amount of such expediting payments, which may be made only with their prior approval and only after consultation with Legal Counsel of Inverness Medical Innovations.
5. PROTECTING COMPANY ASSETS. Each of us is responsible for protecting Company assets, which include the Company's investment in trade secrets, technology and other proprietary property as well as physical property of guests, visitors, vendors, customers and employee property.
- You should be alert to any situations or incidents that could lead to the loss, misuse, or theft of Company property. In addition, you should report all such situations to your supervisor, the Human Resources or Legal Departments or Executive Management as soon as they come to your attention.
- Each employee is required to enter into an obligation of confidentiality to protect the Company's trade secrets and confidential information. Depending on the particular country and practice, this obligation may be
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fulfilled by a written undertaking, a contract or, in the case of certain executive officers, by a fiduciary duty imposed by law in countries where this may be applicable.
6. MEDIA CONTACT AND PUBLIC DISCUSSION. News media contact, responses, and public discussion of Company business should only be made through authorized spokespersons of the Company.
- COMPLIANCE WITH PUBLIC DISCLOSURE LAWS: The Company will comply with all laws governing the public disclosure of business information. These laws are generally designed to assure that material business information about the Company is disseminated fairly and in clear, accurate and non-misleading terms without material omissions. As a result, all public statements disclosing material Company business information, including to individual investors or analysts, whether oral or written, must be disseminated through a means which assures broad dissemination of the information to the public in a fair manor and in terms that are accurate and clear with no material omissions. Colleagues should consult with the Legal Department before making any such statements. In the event that a Colleague makes such a statement inadvertently, the Colleague should immediately contact the Legal Department to determine how best to comply with the law in such a situation.
- If you are questioned by news reporters, you should refer them to an appropriate Company representative--the CEO, COO, CFO, or General Counsel.
- We must exercise particular care when considering release of information of a sensitive nature.
- Failure to observe this policy can cause tremendous harm to the Company and spread misinformation. We are all responsible for protecting all such information
7. UNAUTHORIZED USE OF COMPANY PROPERTY OR SERVICES. You or your relatives many not use Inverness Medical Innovations assets, services or labor for personal use unless the use has been properly approved.
8. SUPPLIERS. Whenever possible, materials, supplies, equipment, and other services should be procured from qualified suppliers at the lowest cost, keeping in mind the requirements for quality, performance, and the vendor's ability to meet delivery schedules.
9. BUSINESS AND ACCOUNTING PRACTICES.
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Compliance with accepted accounting rules and controls, as established by the FASB, U.S. and other taxing authorities as well as accounting controls established by the Audit Committee, independent auditors and Chief Financial Officer is necessary at all times. The Company has established a separate set of accounting policies and guidelines. Intentional failure to comply with these policies and guidelines is a violation of this policy.
10. FINANCIAL RECORDS. All financial records of the Company must accurately reflect and properly describe the transactions they record. All financial transactions are to be recorded in a timely fashion.
11. DISPARAGEMENT. No one should ever make false, misleading, or disparaging remarks about individuals, organizations or their products or services.
- Do not disparage our competitors or their products or employees. We should sell our products and services on their merits.
- Always check with our General Counsel before you make comparisons between our products and those of a competitor in written materials or advertising. In some countries this is illegal and in many others, including the United States, it may be grounds for a competitor to bring an unfair competition suit against the Company.
12. DRUGS. The use, sale, possession, manufacture, dispensation, or distribution of any unauthorized drugs or controlled substances at any time on Company premises or at Company gatherings is prohibited. Being under the influence of intoxicants or drugs is prohibited by law and by the Company. See our Policy to Maintain a Drug Free Workplace (hyperlink).
13. CERTIFICATIONS. The Company may require Colleagues to certify compliance with the Policy on an annual basis. Failure or Refusal of a Colleague to certify compliance may be grounds for discipline up to and including dismissal.
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EXHIBIT 21.1
LIST OF SUBSIDIARIES AS OF MARCH 15, 2004
(1) Formerly known as Bvba Selfcare Benelux sprl.
(2) Doing business as Inverness Medical Nutritionals and Inverness Medical Nutritionals Group.
(3) Orgenics, Ltd. has eleven (11) wholly owned subsidiaries, and one majority controlled joint venture, operating outside of the United States.
STATE OR JURISDICTION OF % OF NAME OF SUBSIDIARY INCORPORATION OWNERSHIP --------------------------------------------------- ---------------------------------------------- Applied Biotech, Inc. California 100% Cambridge Diagnostics Ireland Limited Ireland 100% Forefront Diagnostics, Inc. California 100% Hall Laboratories, Ltd. Yukon 100% Innovations Research, LLC Delaware 100% Inverness Medical (UK) Holdings, Ltd. United Kingdom 100% Inverness Medical Benelux BVBA(1) Belgium 100% Inverness Medical Canada, Inc. Canada 100% Inverness Medical International Holding Corp. I Delaware 100% Inverness Medical International Holding Corp. II Delaware 100% Inverness Medical Switzerland GmbH Switzerland 100% Inverness Medical, Inc. Delaware 100% IVC Industries, Inc.(2) Delaware 100% Morpheus Acquisition Corp. Delaware 100% Morpheus Acquisition LLC Delaware 100% Orgenics International Holdings BV Netherlands 100% Orgenics Ltd.(3) Israel 100% Ostex International, Inc. Washington 100% Pregymed GmbH Germany 100% Scandanvian Micro Biodevices ApS Denmark 100% Selfcare Technology, Inc. Delaware 100% Unipath Diagnostics GmbH Germany 100% Unipath Diagnostics, Inc. Delaware 100% Unipath Limited United Kingdom 100% Unipath Management Limited United Kingdom 100% Unipath Online, Inc. Massachusetts 100% Unipath Scandinavia AB Sweden 100% Wampole Laboratories, LLC Delaware 100%
EXHIBIT 23.1
INDEPENDENT ACCOUNTANTS' CONSENT
Inverness Medical Innovations, Inc. Waltham, Massachusetts
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-85658, 333-87180, 333-102577, 333-107288, 333-110715 and 333-110716) and Form S-8 (Nos. 333-67392, 333-74032, 333-85402, 333-90530, 333-106996 and 333-106994) of Inverness Medical Innovations, Inc. of our report dated February 17, 2004, relating to the consolidated financial statements of Inverness Medical Innovations, Inc. and subsidiaries, which is incorporated in this Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
/s/ BDO Seidman, LLP BDO Seidman, LLP Boston, Massachusetts March 11, 2004
EXHIBIT 31.1
CERTIFICATION
I, Ron Zwanziger, certify that:
1. I have reviewed this annual report on Form 10-K of Inverness Medical Innovations, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 15, 2004 /s/ Ron Zwanziger ----------------- Ron Zwanziger CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
EXHIBIT 31.2
CERTIFICATION
I, Christopher J. Lindop, certify that:
1. I have reviewed this annual report on Form 10-K of Inverness Medical Innovations, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 15, 2004 /s/ Christopher J. Lindop ------------------------------------------------------ Christopher J. Lindop CHIEF FINANCIAL OFFICER
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned officers of Inverness Medical Innovations, Inc. (the "Company") hereby certifies, to his knowledge, that the Company's annual report on Form 10-K for the fiscal year ended December 31, 2003 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is being furnished as an exhibit to the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language in such filing, except to the extent that the Company specifically incorporates this certification by reference.
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURES THAT APPEAR IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO THE COMPANY AND WILL BE RETAINED BY THE COMPANY AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
End of Filing
© 2005 | EDGAR Online, Inc.
Date: March 15, 2004 /s/ Ron Zwanziger ----------------------------------- Ron Zwanziger Chief Executive Officer Date: March 15, 2004 /s/ Christopher J. Lindop ----------------------------------- Christopher J. Lindop Chief Financial Officer
