SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2005
Commission file number 0-16211
DENTSPLY International Inc.
(Exact name of registrant as specified in its charter)
Delaware 39-1434669
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
221 West Philadelphia Street, York, Pennsylvania 17405-0872
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (717) 845-7511
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting common stock held by non-affiliates of
the registrant computed by reference to the closing price as of the last
business day of the registrants most recently completed second quarter June 30,
2005, was $3,986,847,108.
The number of shares of the registrant's Common Stock outstanding as of the
close of business on March 10, 2006 was 79,020,253.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of DENTSPLY International
Inc. to be used in connection with the 2006 Annual Meeting of Stockholders (the
"Proxy Statement") are incorporated by reference into Part III of this Annual
Report on Form 10-K to the extent provided herein. Except as specifically
incorporated by reference herein the Proxy Statement is not deemed to be filed
as part of this Annual Report on Form 10-K.
Page 1 of 95
PART I
Item 1. Business
Certain statements made by the Company, including without limitation,
statements containing the words "plans", "anticipates", "believes", "expects",
or words of similar import may be deemed to be forward-looking statements and
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that forward-looking
statements involve risks and uncertainties which may materially affect the
Company's business and prospects, and should be read in conjunction with the
risk factors and uncertainties discussed within Part I of this Annual Report on
Form 10-K.
History and Overview
DENTSPLY International Inc. ("DENTSPLY" or the "Company"), a Delaware
corporation, was created by a merger of Dentsply International Inc. ("Old
Dentsply") and GENDEX Corporation in 1993. Old Dentsply, founded in 1899, was a
manufacturer and distributor of artificial teeth, dental equipment, and dental
consumable products. GENDEX, founded in 1983, was a manufacturer of dental x-ray
equipment and handpieces.
DENTSPLY is the world's largest designer, developer, manufacturer and
marketer of a broad range of products for the dental market. The Company's
worldwide headquarters and executive offices are located in York, Pennsylvania.
Through the year ended December 31, 2005, the Company operated within four
operating segments all of which were primarily engaged in the design,
manufacture and distribution of dental products in three principal categories:
1) Dental consumables, 2) Dental laboratory products, and 3) Specialty dental
products. In January 2006, the Company reorganized its operating group structure
by consolidating into three operating groups. These operating groups do not
align with the three principle product categories which are discussed in the
principle product section. Reporting under the new group structure will begin in
the first quarter of 2006. Sales of the Company's dental products accounted for
approximately 97.5% of DENTSPLY's consolidated sales for the year ended December
31, 2005. The remaining 2.5% of consolidated sales are primarily related to
materials sold to the investment casting industry.
The Company conducts its business in over 120 foreign countries,
principally through its foreign subsidiaries. DENTSPLY has a long-established
presence in Canada and in the European market, particularly in Germany,
Switzerland, France, Italy and the United Kingdom. The Company also has a
significant market presence in Central and South America including Brazil,
Mexico, Argentina, Colombia, and Chile; in South Africa; and in the Pacific Rim
including Japan, Australia, New Zealand, China (including Hong Kong), Thailand,
India, Philippines, Taiwan, Korea, Vietnam and Indonesia. DENTSPLY has also
established marketing activities in Moscow, Russia to serve the countries of the
former Soviet Union.
For 2005, 2004, and 2003, the Company's sales to customers outside the
United States, including export sales, accounted for approximately 59%, 60% and
58%, respectively, of consolidated net sales. Reference is made to the
information about the Company's United States and foreign sales by shipment
origin set forth in Note 4 of the Notes to Consolidated Financial Statements in
this Annual Report on Form 10-K.
As a result of the Company's significant international operations, DENTSPLY
is subject to fluctuations in exchange rates of various foreign currencies and
other risks associated with foreign trade. The impact of currency fluctuations
in any given period can be favorable or unfavorable. The impact of foreign
currency fluctuations on operating income are partially offset by sales in the
United States of products sourced from plants and third party suppliers located
overseas, principally in Germany and Switzerland. The Company enters into
forward foreign exchange contracts to selectively hedge assets, liabilities and
purchases denominated in foreign currencies. Reference is made to the
information regarding foreign exchange risk management activities set forth in
Quantitative and Qualitative Disclosure About Market Risk under Item 7A and Note
16 of the Notes to Consolidated Financial Statements in this Annual Report on
Form 10-K.
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The success of the Company is largely dependent upon the continued strength
of dental markets and the general economic environments of the regions in which
it operates. Negative changes to these markets and economies could materially
impact the Company's results of operations and financial condition. In addition,
many of the Company's markets are affected by government reimbursement and
regulatory programs. Changes to these programs could have a positive or negative
impact on the Company's results.
Certain provisions of DENTSPLY's Certificate of Incorporation and By-laws
and of Delaware law could have the effect of making it difficult for a third
party to acquire control of DENTSPLY. Such provisions include the division of
the Board of Directors of DENTSPLY into three classes, with the three-year term
of a class expiring each year, a provision allowing the Board of Directors to
issue preferred stock having rights senior to those of the common stock and
certain procedural requirements which make it difficult for stockholders to
amend DENTSPLY's By-laws and call special meetings of stockholders. In addition,
members of DENTSPLY's management and participants in its Employee Stock
Ownership Plan collectively own approximately 10% of the outstanding common
stock of DENTSPLY.
Principal Products
The worldwide professional dental industry encompasses the diagnosis,
treatment and prevention of disease and ailments of the teeth, gums and
supporting bone. DENTSPLY's principal dental product categories are dental
consumables, dental laboratory products and dental specialty products. These
products are produced by the Company in the United States and internationally
and are distributed throughout the world under some of the most well-established
brand names and trademarks in the industry, including ANKYLOS(R), AQUASIL(TM),
AQUASIL ULTRA(TM), BIOPURE(TM), CAULK(R), CAVITRON(R), CERAMCO(R), CERCON(R),
CITANEST(R), DELTON(R), DENTSPLY(R), DETREY(R), ELEPHANT(R), ESTHET.X(R),
FRIADENT(R), FRIALIT(R), GAC ORTHOWORKS(TM), GOLDEN GATE(R), IN-OVATION(TM),
INTERACTIVE MYSTIQUE(TM), MAILLEFER(R), MIDWEST(R), NUPRO(R), ORAQIX(R), PEPGEN
P-15(TM), POLOCAINE(R), PRIME & BOND(R), PROFILE(R), PROTAPER(TM), RINN(R),
R&R(R), SANI-TIP(R), SEAL&PROTECT(TM), SHADEPILOT(TM), THERMAFIL(R), TRUBYTE(R),
XENO(R) and XYLOCAINE(R).
Dental Consumables. Consumable products consist of dental sundries used in
dental offices in the treatment of patients and small equipment used by the
dental professional. DENTSPLY's products in this category include dental
anesthetics, prophylaxis paste, dental sealants, impression materials,
restorative materials, bone grafting materials, tooth whiteners, and topical
fluoride. The Company manufactures thousands of different consumable products
marketed under more than one hundred brand names. Small equipment products
consist of various durable goods used in dental offices for treatment of
patients. DENTSPLY's small equipment products include high and low speed
handpieces, intraoral curing light systems and ultrasonic scalers and polishers.
Sales of general dental consumables accounted for approximately 36% and 34% of
the Company's consolidated sales for the years ended December 31, 2005 and 2004,
respectively.
Dental Laboratory Products. Laboratory products are used in dental laboratories
in the preparation of dental appliances. DENTSPLY's products in this category
include dental prosthetics, including artificial teeth, precious metal dental
alloys, dental ceramics, and crown and bridge materials. Equipment in this
category includes computer aided machining (CAM) ceramics systems and porcelain
furnaces. Sales of dental laboratory products accounted for approximately 28%
and 33% of the Company's consolidated sales for the years ended December 31,
2005 and 2004, respectively.
Dental Specialty Products. Specialty dental products are used for specific
purposes within the dental office and laboratory settings. DENTSPLY's products
in this category include endodontic (root canal) instruments and materials,
implants, and orthodontic appliances and accessories. Sales of specialty
products accounted for approximately 34% and 31% of the Company's consolidated
sales for the years ended December 31, 2005 and 2004, respectively.
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Markets, Sales and Distribution
DENTSPLY distributes approximately 55% of its dental products through
domestic and foreign distributors, dealers and importers. However, certain
highly technical products such as precious metal dental alloys, dental ceramics,
crown and bridge porcelain products, endodontic instruments and materials,
orthodontic appliances, implants and bone substitute and grafting materials are
sold directly to the dental laboratory or dental professional in some markets.
During 2005, one customer, Henry Schein Incorporated, accounted for 11.1%
percent of DENTSPLY's consolidated net sales. No other single customer
represented ten percent or more of DENTSPLY's consolidated net sales during 2005
and no single customer represented ten percent or more of DENTSPLY's
consolidated net sales during 2004.
Reference is made to the information about the Company's foreign and
domestic operations and export sales set forth in Note 4 of the Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K.
Although much of its sales are made to distributors, dealers, and
importers, DENTSPLY focuses its marketing efforts on the dentists, dental
hygienists, dental assistants, dental laboratories and dental schools who are
the end users of its products. As part of this end-user "pull through" marketing
approach, DENTSPLY employs approximately 1,800 highly trained, product-specific
sales and technical staff to provide comprehensive marketing and service
tailored to the particular sales and technical support requirements of the
dealers and the end users. The Company conducts extensive distributor and
end-user marketing programs and trains laboratory technicians and dentists in
the proper use of its products, introducing them to the latest technological
developments at its educational centers located throughout the world in key
dental markets. The Company also maintains ongoing relationships with various
dental associations and recognized worldwide opinion leaders in the dental
field, although there is no assurance that these influential dental
professionals will continue to support the Company's products.
DENTSPLY believes that demand in a given geographic market for dental
procedures and products, varies according to the stage of social, economic and
technical development of the particular market. Geographic markets for
DENTSPLY's dental products can be categorized into the following two stages of
development:
The United States, Canada, Western Europe, Japan, Australia and certain
other countries are highly developed markets that demand the most advanced
dental procedures and products and have the highest level of expenditures on
dental care. In these markets, the focus of dental care is increasingly upon
preventive care and specialized dentistry. In addition to basic procedures such
as the excavation and filling of cavities and tooth extraction and denture
replacement, dental professionals perform an increasing volume of preventive and
cosmetic procedures. These markets require varied and complex dental products,
utilize sophisticated diagnostic and imaging equipment, and demand high levels
of attention to protection against infection and patient cross-contamination.
In certain countries in Central America, South America, Eastern Europe, the
Pacific Rim, Middle East and Africa, most dental care is often limited to the
excavation and filling of cavities and other restorative techniques, reflecting
more modest per capita expenditures for dental care. These markets demand
diverse products such as high and low speed handpieces, restorative compounds,
finishing devices, custom restorative devices, basic surgical instruments,
bridgework and artificial teeth for dentures.
The Company offers products and equipment for use in markets at each of
these stages of development. The Company believes that as each of these markets
develop, demand for more technically advanced products will increase. The
Company also believes that its recognized brand names, high quality and
innovative products, technical support services and strong international
distribution capabilities position it well to take advantage of any
opportunities for growth in all of the markets that it serves.
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The Company believes that the market for its products will grow based on
the following factors:
o Increasing worldwide population.
o Growth of the population 65 or older - The percentage of the United States,
European, Japanese and other regions population over age 65 is expected to
nearly double by the year 2030. In addition to having significant needs for
dental care, the elderly are well positioned to pay for the required
procedures since they control sizable amounts of discretionary income.
o Natural teeth are being retained longer - Individuals with natural teeth
are much more likely to visit a dentist in a given year than those without
any natural teeth remaining.
o The changing dental practice in the U.S. - Dentistry in North America has
been transformed from a profession primarily dealing with pain, infections
and tooth decay to one with increased emphasis on preventive care and
cosmetic dentistry.
o Per capita and discretionary incomes are increasing in emerging nations -
As personal incomes continue to rise in the emerging nations of the Pacific
Rim and Latin America, healthcare, including dental services, are a growing
priority.
o The Company's business is less susceptible than other industries to general
downturns in the economies in which it operates. Several of the products
the Company offers relate to dental procedures that are considered
necessary by patients regardless of the economic environment.
Product Development
Technological innovation and successful product development are critical to
strengthening the Company's prominent position in worldwide dental markets,
maintaining its leadership positions in product categories where it has a high
market share, and increasing market share in product categories where gains are
possible. While many of DENTSPLY's existing products undergo evolutionary
improvements, the Company also continues to successfully launch innovative
products that represent fundamental change. Its research centers throughout the
world employ approximately 350 scientists, Ph.D.'s, engineers, technicians and
support staff dedicated to research and product development. The Company
directly invested approximately 3% of net sales during the years ended December
31, 2005, 2004 and 2003, or $47.0 million, $44.6 million, and $43.3 million,
respectively, in connection with the development of new products and in the
improvement of existing products. In addition to the direct investment in
product development and improvement, the Company also invests in these
activities through acquisitions, by entering into licensing agreements and by
purchasing technologies developed by other third parties.
The benefits from the Company's advanced technology function, which was
established in 2004 to focus on new and emerging technologies in dentistry, were
evident in 2005 as discussed in the Overview section of Management's Discussion
and Analysis. The continued development of this function is a critical step in
meeting the Company's strategic goal of taking a leadership role in defining the
future of dentistry.
There can be no assurance that DENTSPLY will be able to continue to develop
innovative products or that regulatory approval of any new products will be
obtained, or that if such approvals are obtained, such products will be
favorably accepted in the marketplace. Additionally, there is no assurance that
entirely new technology or approaches to dental treatment will not be introduced
that could render the Company's current products obsolete.
Acquisition Activities
DENTSPLY believes that the dental products industry continues to
experience consolidation with respect to both product manufacturing and
distribution, although it continues to be fragmented creating a number of
acquisition opportunities. As a result, during the past five years, the Company
has made several acquisitions including three significant acquisitions made
during 2001. These acquisitions included the Degussa Dental Group, Friadent GmbH
and the dental injectable anaesthetic assets of AstraZeneca. In addition to
these significant acquisitions, the Company has also continued to make smaller
acquisitions, including a group of three orthodontic companies acquired by the
Company during 2005. The Company continues to view acquisitions as a key part of
its growth strategy. These acquisition activities are intended to supplement the
5
Company's core growth and assure ongoing expansion of its business. In addition,
acquisitions have provided DENTSPLY with new technologies and additional product
and geographic breadth. The Company continues to be active in evaluating
potential acquisitions although there is no assurance that these efforts will
result in completed transactions as there are many factors that affect the
success of such activities. If the Company does succeed in acquiring a business
or product, there can be no assurance that the Company will achieve any of the
benefits that it might anticipate from such an acquisition and the attention and
effort devoted to the integration of an acquired business could divert
management's attention from normal business operations. If the Company makes
acquisitions, it may incur debt, assume contingent liabilities or create
additional expenses, any of which might adversely affect its financial results.
Any financing that the Company might need for acquisitions may only be available
to it on terms that restrict its business or that impose additional costs that
reduce its operating results.
Operating and Technical Expertise
DENTSPLY believes that its manufacturing capabilities are important to its
success. The manufacture of the Company's products requires substantial and
varied technical expertise. Complex materials technology and processes are
necessary to manufacture the Company's products. The Company continues to
automate its global manufacturing operations in order to remain a low cost
producer.
The Company has completed or is in progress of completing a number of key
initiatives around the world that are focused on helping the Company improve its
sales and operating margins.
o The Company formed Dentsply North America, which is a sales organization
that effectively combines the field and sales management functions for the
United States' distributor businesses.
o A Corporate Purchasing office was established to leverage the buying power
of Dentsply around the world and reduce the Company's product costs through
lower prices and reduced related overhead.
o The Company has centralized its warehousing and distribution in North
America and Europe. While the initial gains from this strategy have been
realized, ongoing efforts are in place to maximize additional opportunities
that can be gained through improving the Company's functional expertise in
supply chain management.
o The Company considers the implementation of lean manufacturing techniques
as a fundamental part of its supply chain strategy. With a focus on
reducing non-value added activities, over the last decade, numerous
manufacturing sites have dramatically reduced inventory levels, increased
space utilization and improved labor productivity. This was accomplished
while reducing manufacturing lead times and improving the Company's
delivery performance to dealers and end-users.
o DENTSPLY has seen improved productivity and cost reductions from the
operation of a North American Shared Services group. As a result, the
Company is currently in the process of finalizing the transition of certain
processes in Europe to a Shared Services group in Yverdon, Switzerland
which it expects to be fully implemented in 2006.
o Information technology initiatives are underway to generate enhanced
worldwide financial data; to standardize worldwide telecommunications;
implement improved manufacturing, customer relations management (CRM) and
financial accounting systems; and to train IT users to maximize the
capabilities of global systems.
o DENTSPLY continues to pursue opportunities to leverage its assets by
consolidating business units where appropriate and to optimize its
diversity of worldwide manufacturing capabilities.
o DENTSPLY is in the process of developing a new business system which will
provide a framework of best in class tools to help streamline decision
making, gain efficiencies and accelerate internal growth by setting
standards across all key areas of the business.
6
Financing
DENTSPLY's total long-term debt, including the current portion of long-term
debt, at December 31, 2005 was $680.9 million and the ratio of long-term debt to
total capitalization was 35.4%. This capitalization ratio is down from 54.4% at
December 31, 2001, the quarter in which the Degussa Dental acquisition was
completed. DENTSPLY defines total capitalization as the sum of total long-term
debt, including the current portion, plus total stockholders equity. DENTSPLY
may incur additional debt in the future, including, but not limited to, the
funding of additional acquisitions and capital expenditures. DENTSPLY's ability
to make payments on its indebtedness, and to fund its operations depends on its
future performance and financial results, which, to a certain extent, are
subject to general economic, financial, competitive, regulatory and other
factors and the interest rate environment that are beyond its control. Although
Management believes that the Company has and will continue to have sufficient
liquidity, there can be no assurance that DENTSPLY's business will generate
sufficient cash flow from operations in the future to service its debt and
operate its business.
The Company's cash decreased $71.8 million during the year ended December
31, 2005 to $434.5 million. In 2005, the Company repaid $60.1 million of
maturing long-term borrowings and repurchased $164.8 million in treasury stock.
The Company continued to maintain significant cash balances during 2005 rather
than pre-pay debt, as a result of pre-payment penalties that would be incurred
in retiring both the debt and the related interest rate swap agreements.
Additionally, the Company has not repaid this debt prior to its due date due to
the low cost of the debt, net of earnings on the cash. The Company has $530.7
million of long-term borrowings coming due in 2006. The Company intends to repay
these debt obligations with cash and/or funds available to the Company under the
revolving credit facility. Any portion of the debt that is repaid through the
use of the revolving credit facility will be contractually due in May 2010, upon
the expiration of the facility, thus effectively converting the maturity of the
debt beyond 2006. The Company currently intends to effectively refinance $119.9
million of the long-term borrowings coming due in 2006 through use of the
revolving credit facility.
DENTSPLY's existing borrowing documentation contains a number of covenants
and financial ratios which it is required to satisfy. The most restrictive of
these covenants pertain to asset dispositions, maintenance of certain levels of
net worth, and prescribed ratios of indebtedness to total capital and operating
income plus depreciation and amortization to interest expense. Any breach of any
such covenants or restrictions would result in a default under the existing
borrowing documentation that would permit the lenders to declare all borrowings
under such documentation to be immediately due and payable and, through cross
default provisions, would entitle DENTSPLY's other lenders to accelerate their
loans. DENTSPLY may not be able to meet its obligations under its outstanding
indebtedness in the event that any cross default provision is triggered. At
December 31, 2005, the Company was in compliance with these covenants.
Additional information about DENTSPLY's working capital, liquidity and
capital resources is provided in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Annual Report on Form
10-K.
Competition
The Company conducts its operations, both domestic and foreign, under
highly competitive market conditions. Competition in the dental products
industry is based primarily upon product performance, quality, safety and ease
of use, as well as price, customer service, innovation and acceptance by
professionals and technicians. DENTSPLY believes that its principal strengths
include its well-established brand names, its reputation for high-quality and
innovative products, its leadership in product development and manufacturing,
and its commitment to customer satisfaction.
The size and number of the Company's competitors vary by product line and
from region to region. There are many companies that produce some, but not all,
of the same types of products as those produced by the Company. Certain of
DENTSPLY's competitors may have greater resources than does the Company in
certain of its product offerings.
The worldwide market for dental supplies is highly competitive. There can
be no assurance that the Company will successfully identify new product
opportunities and develop and market new products successfully, or that new
products and technologies introduced by competitors will not render the
Company's products obsolete or noncompetitive.
7
Regulation
The Company's products are subject to regulation by, among other
governmental entities, the United States Food and Drug Administration (the
"FDA"). In general, if a dental "device" is subject to FDA regulation,
compliance with the FDA's requirements constitutes compliance with corresponding
state regulations. In order to ensure that dental products distributed for human
use in the United States are safe and effective, the FDA regulates the
introduction, manufacture, advertising, labeling, packaging, marketing and
distribution of, and record-keeping for such products. The introduction and
sale of dental products of the types produced by the Company are also subject to
government regulation in the various foreign countries in which they are
produced or sold. DENTSPLY believes that it is in substantial compliance with
the foreign regulatory requirements that are applicable to its products and
manufacturing operations.
Dental devices of the types sold by DENTSPLY are generally classified by
the FDA into a category that renders them subject only to general controls that
apply to all medical devices, including regulations regarding alteration,
misbranding, notification, record-keeping and good manufacturing practices.
DENTSPLY's facilities are subject to periodic inspection by the FDA to monitor
DENTSPLY's compliance with these regulations. There can be no assurance that the
FDA will not raise compliance concerns. Failure to satisfy FDA requirements can
result in FDA enforcement actions, including product seizure, injunction and/or
criminal or civil proceedings. In the European Union, DENTSPLY's products are
subject to the medical devices laws of the various member states which are based
on a Directive of the European Commission. Such laws generally regulate the
safety of the products in a similar way to the FDA regulations. DENTSPLY
products in Europe bear the CE sign showing that such products adhere to the
European regulations.
All dental amalgam filling materials, including those manufactured and sold
by DENTSPLY, contain mercury. Various groups have alleged that dental amalgam
containing mercury is harmful to human health and have actively lobbied state
and federal lawmakers and regulators to pass laws or adopt regulatory changes
restricting the use, or requiring a warning against alleged potential risks, of
dental amalgams. The FDA's Dental Devices Classification Panel, the National
Institutes of Health and the United States Public Health Service have each
indicated that no direct hazard to humans from exposure to dental amalgams has
been demonstrated. If the FDA were to reclassify dental mercury and amalgam
filling materials as classes of products requiring FDA pre-market approval,
there can be no assurance that the required approval would be obtained or that
the FDA would permit the continued sale of amalgam filling materials pending its
determination. In Europe, in particular in Scandinavia and Germany, the contents
of mercury in amalgam filling materials has been the subject of public
discussion. As a consequence, in 1994 the German health authorities required
suppliers of dental amalgam to amend the instructions for use for amalgam
filling materials to include a precaution against the use of amalgam for
children under eighteen years of age and to women of childbearing age. DENTSPLY
also manufactures and sells non-amalgam dental filling materials that do not
contain mercury.
Sources and Supply of Raw Materials and Finished Goods
All of the raw materials used by the Company in the manufacture of its
products are purchased from various suppliers and are available from numerous
sources. No single supplier accounts for a significant percentage of DENTSPLY's
raw material requirements.
There are a limited number of suppliers for the dental injectable
anesthetic products sold by the Company. While the Company had some supply
disruptions in 2005 and anticipates some supply disruptions in 2006, the Company
currently has contract manufacturing relationships for the supply of dental
injectable anesthetic product for most of the markets served by the Company.
There can be no assurance that the Company will be able to obtain an adequate
supply of its injectable anesthetic products in the future.
8
Intellectual Property
Products manufactured by DENTSPLY are sold primarily under its own
trademarks and trade names. DENTSPLY also owns and maintains more than 2,000
patents throughout the world and is licensed under a small number of patents
owned by others.
DENTSPLY's policy is to protect its products and technology through patents
and trademark registrations in the United States and in significant
international markets for its products. The Company carefully monitors trademark
use worldwide, and promotes enforcement of its patents and trademarks in a
manner that is designed to balance the cost of such protection against obtaining
the greatest value for the Company. DENTSPLY believes its patents and trademark
properties are important and contribute to the Company's marketing position but
it does not consider its overall business to be materially dependent upon any
individual patent or trademark.
Employees
As of December 31, 2005, the Company and its subsidiaries employed
approximately 8,000 employees. A small percentage of the Company's employees are
represented by labor unions. Hourly workers at the Company's Ransom & Randolph
facility in Maumee, Ohio are represented by Local No. 12 of the International
Union, United Automobile, Aerospace and Agriculture Implement Workers of America
under a collective bargaining agreement that expires on January 31, 2008. Hourly
workers at the Company's Midwest Dental Products facility in Des Plaines,
Illinois are represented by International Association of Machinists and
Aerospace Workers, AFL-CIO in Chicago under a collective bargaining agreement
that expires on May 31, 2006. In addition, approximately 35% of DeguDent
employees and 25% of DeTrey employees, two of the Company's German operating
units, are represented by labor unions. The Company provides pension and
postretirement benefits to many of these employees (see Note 14 to the
consolidated financial statements). The Company believes that its relationship
with its employees is good.
The Company's success is dependent upon its management and employees. The
loss of senior management employees or any failure to recruit and train needed
managerial, sales and technical personnel could have a material adverse effect
on the Company.
Environmental Matters
DENTSPLY believes that its operations comply in all material respects with
applicable environmental laws and regulations. Maintaining this level of
compliance has not had, and is not expected to have, a material effect on the
Company's capital expenditures or on its business.
Securities and Exchange Act Reports
DENTSPLY makes available free of charge through its website at
www.dentsply.com its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after such materials are filed with or furnished
to, the Securities and Exchange Commission.
The public may read and copy any materials the Company files with the SEC
at its Public Reference Room at the following address:
100 F Street, NE
Washington, D.C. 20549
The public may obtain information on the operation of this Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, since the Company is an
electronic filer, the public may access reports, the proxy and information
statements and other information filed or furnished by the Company at the
Internet site maintained by the SEC (http://www.sec.gov).
9
Item 1A. Risk Factors
Following are the significant risk factors that could materially impact
DENTSPLY's business. These risk factors are also discussed in more detail and in
context throughout Part I, Item 1 of this Annual Report on Form 10-K.
The success of the Company is largely dependent upon the continued strength
of dental markets and the general economic environments of the regions in which
it operates. Negative changes to these markets and economies could materially
impact the Company's results of operations and financial condition. In addition,
many of the Company's markets are affected by government reimbursement and
regulatory programs. In certain markets, government and regulatory programs have
a more significant impact than other markets. Changes to these programs could
have a positive or negative impact on the Company's results.
DENTSPLY has identified new products as an important part of its growth
opportunities. There can be no assurance that DENTSPLY will be able to continue
to develop innovative products and that regulatory approval of any new products
will be obtained, or that if such approvals are obtained, such products will be
favorably accepted in the marketplace. Additionally, there is no assurance that
entirely new technology or approaches to dental treatment or competitor's new
products will not be introduced that could render the Company's products
obsolete.
The Company continues to view acquisitions as a key part of its growth
strategy. The Company continues to be active in evaluating potential
acquisitions although there is no assurance that these efforts will result in
completed transactions as there are many factors that affect the success of such
activities. If the Company does succeed in acquiring a business or product,
there can be no assurance that the Company will achieve any of the benefits that
it might anticipate from such an acquisition and the attention and effort
devoted to the integration of an acquired business could divert management's
attention from normal business operations. If the Company makes acquisitions, it
may incur debt, assume contingent liabilities or create additional expenses, any
of which might adversely affect its financial results. Any financing that the
Company might need for acquisitions may only be available to it on terms that
restrict its business or that impose additional costs that reduce its operating
results.
DENTSPLY's ability to make payments on its indebtedness, and to fund its
operations depends on its future performance and financial results, which, to a
certain extent, are subject to general economic, financial, competitive,
regulatory and other factors and the interest rate environment that are beyond
its control. Although Management believes that the Company has and will continue
to have sufficient liquidity, there can be no assurance that DENTSPLY's business
will generate sufficient cash flow from operations in the future to service its
debt and operate its business.
DENTSPLY's existing borrowing documentation contains a number of covenants
and financial ratios which it is required to satisfy. The most restrictive of
these covenants pertain to asset dispositions, maintenance of certain levels of
net worth, and prescribed ratios of indebtedness to total capital and operating
income plus depreciation and amortization to interest expense. Any breach of any
such covenants or restrictions would result in a default under the existing
borrowing documentation that would permit the lenders to declare all borrowings
under such documentation to be immediately due and payable and, through cross
default provisions, would entitle DENTSPLY's other lenders to accelerate their
loans. DENTSPLY may not be able to meet its obligations under its outstanding
indebtedness in the event that any cross default provision is triggered.
DENTSPLY, with its significant international operations, is subject to
fluctuations in exchange rates of various foreign currencies and other risks
associated with foreign trade and the impact of currency fluctuations in any
given period can be favorable or unfavorable.
DENTSPLY's business is subject to periodic review and inspection by the FDA
and similar foreign authorities to monitor DENTSPLY's compliance with the
regulations administered by such authorities. There can be no assurance that
these authorities will not raise compliance concerns. Failure to satisfy any
such requirements can result in governmental enforcement actions, including
possible product seizure, injunction and/or criminal or civil proceedings.
All dental amalgam filling materials, including those manufactured and sold
by DENTSPLY, contain mercury. The FDA's Dental Devices Classification Panel, the
National Institutes of Health and the United States Public Health Service have
each indicated that no direct hazard to humans from exposure to dental amalgams
has been demonstrated. If the FDA were to reclassify dental mercury and amalgam
filling materials as classes of products requiring FDA pre-market approval,
there can be no assurance that the required approval would be obtained or that
the FDA would permit the continued sale of amalgam filling materials pending its
determination.
10
The Company's success is dependent upon its management and employees. The
loss of senior management employees or any failure to recruit and train needed
managerial, sales and technical personnel could have a material adverse effect
on the Company.
Certain provisions of DENTSPLY's Certificate of Incorporation and By-laws
and of Delaware law could have the effect of making it difficult for a third
party to acquire control of DENTSPLY. Such provisions include the division of
the Board of Directors of DENTSPLY into three classes, with the three-year term
of a class expiring each year, a provision allowing the Board of Directors to
issue preferred stock having rights senior to those of the common stock and
certain procedural requirements which make it difficult for stockholders to
amend DENTSPLY's By-laws and call special meetings of stockholders. In addition,
members of DENTSPLY's management and participants in its Employee Stock
Ownership Plan collectively own approximately 10% of the outstanding common
stock of DENTSPLY.
ITEM 1B. Unresolved Staff Comments
None
11
Item 2. Properties
The following is a current list of DENTSPLY's principal manufacturing
and distribution locations as of December 31, 2005:
Leased
Location Function or Owned
United States:
Los Angeles, California (1) Manufacture and distribution of investment Leased
casting products
Yucaipa , California (2) Manufacture and distribution of dental Owned
laboratory products and dental ceramics
Lakewood, Colorado (2) Manufacture and distribution of bone grafting Leased
materials and hydroxylapatite plasma-feed coating
materials and distribution of dental implant poducts
Milford, Delaware (3) Manufacture of consumable dental products Owned
Des Plaines, Illinois (3) Manufacture and assembly of dental handpieces Leased
Elgin, Illinois (3) Manufacture of dental x-ray film holders, film Owned
mounts and accessories
Elgin, Illinois (3) Manufacture of dental x-ray film holders, film Leased
mounts and accessories
Maumee, Ohio (1) Manufacture and distribution of investment Owned
casting products
York, Pennsylvania (2) Manufacture and distribution of artificial teeth Owned
and other dental laboratory products;
York, Pennsylvania (3) Manufacture of small dental equipment and Owned
preventive dental products
Johnson City, Tennessee (1) Manufacture and distribution of endodontic Leased
instruments and materials
Bohemia, New York (2) Manufacture and distribution of orthodontic Leased
products and materials
Middletown, Pennsylvania (5) Distribution of Dental Products Leased
Foreign:
Catanduva, Brazil (1) Manufacture and distribution of dental Owned
anesthetic products
Petropolis, Brazil (1) Manufacture and distribution of artificial teeth Owned
and consumable dental products
Tianjin, China (2) Manufacture and distribution of dental products Leased
Plymouth, England (4) Manufacture of dental hand instruments Leased
Ivry Sur-Seine, France (4) Manufacture and distribution of investment Leased
casting products
Bohmte, Germany (4) Manufacture and distribution of dental Owned
laboratory products
12
Leased
Location Function or Owned
Hanau, Germany (4) Manufacture and distribution of precious metal Owned
dental alloys, dental ceramics and dental
implant products
Konstanz, Germany (4) Manufacture and distribution of consumable Owned
dental products
Mannheim, Germany (2) Manufacture and distribution of dental Owned
implant products
Munich, Germany (1) Manufacture and distribution of endodontic Owned
instruments and materials
Radolfzell, Germany (5) Distribution of dental products Leased
Rosbach, Germany (4) Manufacture and distribution of dental ceramics Owned
Nasu, Japan (2) Manufacture and distribution of precious metal Owned
dental alloys, consumable dental products and
orthodontic products
Hoorn, Netherlands (4) Manufacture and distribution of precious metal Owned
dental alloys and dental ceramics
Las Piedras, Puerto Rico (2) Manufacture of crown and bridge materials Owned
Ballaigues, Switzerland (1) Manufacture and distribution of endodontic Owned
instruments
Ballaigues, Switzerland (1) Manufacture and distribution of endodontic Owned
instruments, plastic components and
packaging material
Le Creux, Switzerland (1) Manufacture and distribution of endodontic Owned
instruments
(1)- These properties are included in the Australia/Latin
America/Endodontics/Non-Dental segment.
(2)- These properties are included in the U.S. Dental Laboratory
Business/Implants/Orthodontics/Japan/Asia segment.
(3)- These properties are included in the U.S. Consumable Business/Canada
segment.
(4)- These properties are included in the Dental Consumables - Europe, CIS,
Middle East, Africa/European Dental Laboratory Business.
(5)- These properties are distribution warehouses not managed by named segments.
In addition, the Company maintains sales and distribution offices at
certain of its foreign and domestic manufacturing facilities, as well as at
various other United States and international locations. Most of the various
sites around the world that are used exclusively for sales and distribution are
leased.
The Company also owns it's corporate headquarters located in York,
Pennsylvania and a facility in Elk Grove Village Illinois that was the
anticipated manufacturing site for the dental pharmaceutical products discussed
in the Pharmaceutical Business section of Management's Discussion and Analysis
(MD&A). As discussed in the MD&A, the Company has made the decision to close
this facility, and as such it is no longer a principle manufacturing or
distribution site.
DENTSPLY believes that its properties and facilities are well maintained
and are generally suitable and adequate for the purposes for which they are
used.
13
Item 3. Legal Proceedings
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is unlikely
that pending litigation to which DENTSPLY is a party will have a material
adverse effect upon its consolidated financial position or results of
operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. On January 5, 1999, the Department of
Justice filed a Complaint against the Company in the U.S. District Court in
Wilmington, Delaware alleging that the Company's tooth distribution practices
violate the antitrust laws and seeking an order for the Company to discontinue
its practices. The trial in the government's case was held in April and May 2002
and subsequently, the Judge entered a decision that the Company's tooth
distribution practices do not violate the antitrust laws. The Department of
Justice appealed this decision to the U.S. Third Circuit Court of Appeals and
the Third Circuit reversed the decision of the District Court. The Company's
petition to the U.S. Supreme Court asking it to review the Third Circuit Court
decision was denied. The effect of this decision will be the issuance of an
injunction requiring DENTSPLY to discontinue its policy of not allowing its
tooth dealers to take on new competitive teeth lines. This decision relates only
to the distribution of artificial teeth sold in the U.S., which affects less
than 2.5% of the Company's net sales. While the Company believes its tooth
distribution practices do not violate the antitrust laws, the Company is
confident that it can continue to develop this business regardless of the final
legal outcome.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar to
those in the Department of Justice case, on behalf of laboratories, and denture
patients in seventeen states who purchased Trubyte teeth or products containing
Trubyte teeth. These cases were transferred to the U.S. District Court in
Wilmington, Delaware. The private party suits seek damages in an unspecified
amount. The Court has granted the Company's Motion on the lack of standing of
the laboratory and patient class actions to pursue damage claims. The Plaintiffs
in the laboratory case appealed this decision to the Third Circuit and the Court
upheld the decision of the District Court in dismissing the Plaintiffs' damages
claims, with the exception of allowing the Plaintiffs to pursue a damage claim
based on a theory of resale price maintenance agreements between the Company and
its tooth dealers. The Plaintiffs have filed a petition with the U.S. Supreme
Court asking it to review this decision of the Third Circuit. Also, private
party class actions on behalf of indirect purchasers were filed in California
and Florida state courts. The California and Florida cases have been dismissed
by the Plaintiffs following the decision by the Federal District Court Judge
issued in August 2003.
On March 27, 2002, a Complaint was filed in Alameda County, California (which
was transferred to Los Angeles County) by Bruce Glover, D.D.S. alleging, inter
alia, breach of express and implied warranties, fraud, unfair trade practices
and negligent misrepresentation in the Company's manufacture and sale of
Advance(R) cement. The Complaint seeks damages in an unspecified amount for
costs incurred in repairing dental work in which the Advance(R) product
allegedly failed. The Judge has entered an Order granting class certification,
as an Opt-in class (this means that after Notice of the class action is sent to
possible class members, a party will have to determine if they meet the class
definition and take affirmative action in order to join the class) on the claims
of breach of warranty and fraud. In general, the Class is defined as California
dentists who purchased and used Advance(R) cement and were required, because of
failures of the cement, to repair or reperform dental procedures for which they
were not paid. The Notice of the class action was sent on February 23, 2005 to
the approximately 29,000 dentists licensed to practice in California during the
relevant period and a total of 166 dentists have opted into the class action. As
the result of a recent decision by a California Appellate Court, the plaintiffs
have filed an appeal to convert the claim to an opt-out claim from its current
status as an opt-in claim. The Advance(R) cement product was sold from 1994
through 2000 and total sales in the United States during that period were
approximately $5.2 million. The Company's primary level insurance carrier has
confirmed coverage for the breach of warranty claims in this matter up to their
policy limits.
14
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company as of March 10, 2006.
Name Age Position
Gerald K. Kunkle Jr. 59 Chairman of the Board and Chief Executive Officer
Bret W. Wise 45 President and Chief Operating Officer
Christopher T. Clark 44 Senior Vice President
William R. Jellison 48 Senior Vice President and Chief Financial Officer
Rudolf Lehner 48 Senior Vice President
Rachel P. McKinney 48 Senior Vice President
James G. Mosch 48 Senior Vice President
J. Henrik Roos 48 Senior Vice President
Brian M. Addison 51 Vice President, Secretary and General Counsel
Gerald K. Kunkle Jr. was elected Chairman of the Board on May 11, 2005 and
Chief Executive Officer of the Company effective January 1, 2004. Prior thereto,
Mr. Kunkle served as Vice Chairman of the Board since January 2004 and President
and Chief Operating Officer since January 1997. Prior to joining DENTSPLY, Mr.
Kunkle served as President of Johnson and Johnson's Vistakon Division, a
manufacturer and marketer of contact lenses, from January 1994 and, from early
1992 until January 1994, was President of Johnson and Johnson Orthopedics,
Inc., a manufacturer of orthopedic implants, fracture management products and
trauma devices.
Bret W. Wise was named President and Chief Operating Officer of the Company
effective January 1, 2006. Prior to that time, Mr. Wise was Executive Vice
President since January 10, 2005 and oversaw the Operating Groups headed by
Christopher Clark and Rudolf Lehner in addition to the Corporate Planning and
Business Development and Corporate Research and Development functions. Prior to
that time, he was Senior Vice President and Chief Financial Officer of the
Company since December 2002. Prior to that time, Mr. Wise was Senior Vice
President and Chief Financial Officer with Ferro Corporation of Cleveland, OH.
Prior to joining Ferro Corporation in 1999, Mr. Wise held the position of Vice
President and Chief Financial Officer at WCI Steel, Inc., of Warren, OH, from
1994 to 1999. Prior to joining WCI Steel, Inc., Mr. Wise was a partner with KPMG
LLP.
Christopher T. Clark was named Senior Vice President effective November 1,
2002 and oversees the following areas: Dentsply North America Sales
Organization; and the DENTSPLY Canada, DENTSPLY Pharmaceutical, DENTSPLY
Professional, Dentsply Rinn and L.D. Caulk operating units. Through December 31,
2004, he was responsible for the following areas: North American Group Marketing
and Administration; Alliance and Government Sales; and the Ransom and Randolph,
DENTSPLY Sankin, L.D. Caulk, and DeDent operating units. Prior to this
appointment, Mr. Clark served as Vice President and General Manager of the
Gendex operating unit since June 1999. Prior to that time, he served as Vice
President and General Manager of the Trubyte operating unit since July of 1996.
Prior to that, Mr. Clark was Director of Marketing of the Trubyte Operating Unit
since September 1992 when he started with the Company.
William R. Jellison was named Senior Vice President and Chief Financial
Officer of the Company effective January 10, 2005. In this position, he is also
responsible for Accounting, Treasury, Tax, Information Technology and Internal
Audit. Prior to that and through December 31, 2004 he was Senior Vice President
since November1, 2002, responsible for the following operating units: DENTSPLY
Asia, DENTSPLY Professional, Dentsply Endodontics, including Tulsa Dental
Products, Maillefer, and Vereinigte Dentalwerke ("VDW"). From the period April
1998 to November 1, 2002, Mr. Jellison served as Senior Vice President and Chief
Financial Officer of the Company. Prior to that time, Mr. Jellison held various
financial management positions including Vice President of Finance, Treasurer
and Corporate Controller for Donnelly Corporation of Holland, Michigan since
1980. Mr. Jellison is a Certified Management Accountant.
15
Rudolf Lehner was named Senior Vice President effective December 12, 2001
and oversees the following operating units: DeDent, DeguDent Germany, DeguDent
Austria, DENTSPLY France, DENTSPLY Italy, DENTSPLY Russia, DENTSPLY United
Kingdom, Elephant Dental and Middle East/Africa. Through December 31, 2004, he
was responsible for the following operating units: DeguDent Germany, DeguDent
Austria, DENTSPLY France, DENTSPLY Italy, DENTSPLY Russia, DENTSPLY United
Kingdom, Elephant Dental and Middle East/Africa. Prior to that time, Mr. Lehner
was Chief Operating Officer of Degussa Dental since mid-2000. From 1999 to mid
2000, he had the overall responsibilities for Sales & Marketing at Degussa
Dental. From 1994 to 1999, Mr. Lehner held the position of Chief Executive
Officer of Elephant Dental. From 1990 to 1994, he had overall responsibility for
international activities at Degussa Dental. Prior to that, Mr. Lehner held
various positions at Degussa Dental and its parent, Degussa AG, since starting
in 1984.
James G. Mosch was named Senior Vice President effective November 1, 2002
and oversees the following operating units: DENTSPLY Australia, DENTSPLY Brazil,
DENTSPLY Latin America, DENTSPLY Mexico, Maillefer, Ransom and Randolph, Tulsa
Dental Products and Vereinigte Dentalwerke ("VDW"). Through December 31, 2004,
he was responsible for the following operating units: DENTSPLY Pharmaceutical,
DENTSPLY Australia, DENTSPLY Brazil, DENTSPLY Canada, DENTSPLY Latin America and
DENTSPLY Mexico. Prior to this appointment, Mr. Mosch served as Vice President
and General Manager of the DENTSPLY Professional operating unit since July 1994
when he started with the Company.
Rachel P. McKinney was named Senior Vice President, Global Human Resources
effective December 25, 2005. Prior to that time, she was Vice President, Human
Resources since March of 2003. Prior to that time, she held leadership positions
in human resources at Compaq Computer Corporation, Burger King Corporation,
Miller Brewing Company, Air Product and Chemical Company and Aetna/Partners
National Health Plans.
J. Henrik Roos was named Senior Vice President effective June 1, 1999 and
oversees the following operating units: CeraMed, Dentsply Asia, Dentsply
Prosthetics, Dentsply Sankin, Friadent, GAC, GAC S.A., Glenroe and Raintree.
Through December 31, 2004, he was responsible for the following operating units:
CeraMed, Dentsply Prosthetics, Friadent and GAC. Prior to his Senior Vice
President appointment, Mr. Roos served as Vice President and General Manager of
the Company's Gendex division from June 1995 to June 1999. Prior to that, he
served as President of Gendex European operations in Frankfurt, Germany since
joining the Company in August 1993.
Brian M. Addison has been Vice President, Secretary and General Counsel of
the Company since January 1, 1998. Prior to that he was Assistant Secretary and
Corporate Counsel since December 1994. Prior to that he was a Partner at the
Harrisburg, Pennsylvania law firm of McNees, Wallace & Nurick, and prior to that
he was Senior Counsel at Hershey Foods Corporation.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under the caption "Supplemental Stock
Information" is filed as part of this Annual Report on Form 10-K.
In December 2004, the Board of Directors approved a stock repurchase
program under which the Company may repurchase shares of Company stock on the
open market in an amount to maintain up to 3,000,000 shares of treasury stock.
In September 2005, the Board of Directors increased the authorization to
repurchase shares under the stock repurchase program in an amount to maintain up
to 5,500,000 shares of treasury stock. The table below contains certain
information with respect to the repurchase of shares of the Company's common
stock during the quarter ended December 31, 2005.
Number Of
Shares That
May be Purchased
Total Number Total Cost Average Price Under The Share
Of Shares Of Shares Paid Per Repurchase
Period Purchased Purchased Share Program
(in thousands, except per share amounts)
October 1-31, 2005 21.7 $ 1,163 $ 53.59 2,670.4
November 1-30, 2005 - - $ - 2,931.0
December 1-31, 2005 - - $ - 2,966.7
----- ------
21.7 $ 1,163 $ 53.59
Item 6. Selected Financial Data
The information set forth under the caption "Selected Financial Data" is
filed as part of this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is filed as part of
this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The information set forth under the caption "Quantitative and Qualitative
Disclosure About Market Risk" is filed as part of this Annual Report on Form
10-K.
Item 8. Financial Statements and Supplementary Data
The information set forth under the captions " Management's Report on
Internal Control Over Financial Reporting," "Report of Independent Registered
Public Accounting Firm," "Consolidated Statements of Income," "Consolidated
Balance Sheets," "Consolidated Statements of Stockholders' Equity and
Comprehensive Income," "Consolidated Statements of Cash Flows," and "Notes to
Consolidated Financial Statements" is filed as part of this Annual Report on
Form 10-K.
17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures as of the end of the period covered by this report were effective.
(b) Management's Report on Internal Control Over Financial Reporting
Management's report on the Company's internal control over financial
reporting is included in this Annual Report on Form 10-K and is incorporated
herein by reference. The Company's independent registered public accounting firm
has issued a report on management's assessment of the Company's internal control
over financial reporting, as stated in their report which is included in this
Annual Report on Form 10-K.
(c) Changes in Internal Controls Over Financial Reporting
There have been no changes in the Company's internal control over
financial reporting that occurred during the quarter ended December 31, 2005
that have materially affected, or are likely to materially affect, its internal
control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information (i) set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and (ii) set forth
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the 2006 Proxy Statement is incorporated
herein by reference.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies
to the Chief Executive Officer and the Chief Financial Officer and substantially
all of the Company's management level employees. This Code of Business Conduct
and Ethics is provided as Exhibit 14 of this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in the
2006 Proxy Statement is incorporated herein by reference.
18
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" and "Securities Authorized for Issuance Under
Equity Compensation Plans" in the 2006 Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
No relationships or transactions are required to be reported.
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Relationship with Independent
Registered Public Accounting Firm" in the 2006 Proxy Statement is incorporated
herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
1 Financial Statements
The following consolidated financial statements of the Company are
filed as part of this Annual Report on Form 10-K and are covered by the
Report of Independent Registered Public Accounting Firm also filed as
part of this report:
Consolidated Statements of Income - Years ended December 31, 2005, 2004
and 2003 Consolidated Balance Sheets - December 31, 2005 and 2004
Consolidated Statements of Stockholders' Equity and Comprehensive
Income - Years ended December 31, 2005, 2004 and 2003 Consolidated
Statements of Cash Flows - Years ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
2 Financial Statement Schedule
The following financial statement schedule is filed as part of this
Annual Report on Form 10-K and is covered by the Report of Independent
Registered Public Accounting Firm:
Schedule II -- Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required to be included herein under the related instructions or
are inapplicable and, therefore, have been omitted.
19
3 Exhibits. The Exhibits listed below are filed or incorporated by reference as
part of this Annual Report on Form 10-K.
Exhibit
Number Description
3.1 Restated Certificate of Incorporation (10)
3.2 By-Laws, as amended (9)
4.1. (a) United States Commercial Paper Issuing and paying Agency
Agreement dated as of August 12,1999 between the Company and the
Chase Manhattan Bank. (7)
(b) United States Commercial Paper Dealer Agreement dated as of March 28,
2002 between the Company and Salomon Smith Barney Inc. (11)
(c) United States Commercial Paper Dealer Agreement dated as of April 30,
2002 between the Company and Credit Suisse First Boston Corporation. (11)
(d) Euro Commercial Paper Note Agreement dated as of July 18, 2002 between
the Company and Citibank International plc. (11) (e) Euro Commercial Paper
Dealer Agreement dated as of July 18, 2002 between the Company and
Citibank International plc and
Credit Suisse First Boston (Europe) Limited. (11)
4.2 (a) Note Agreement (governing Series A, Series B and Series C Notes) dated March 1, 2001 between the Company and Prudential
Insurance Company of America. (8)
(b) First Amendment to Note Agreement dated September 1, 2001 between the
Company and Prudential Insurance Company of America. (9)
4.3 5-Year Competitive Advance, Revolving Credit and Guaranty Agreements dated as of May 9, 2005 among the Company, the
Initial Lenders named therein, the banks named therein, Citibank N.A. as Administrative Agent, JPMorgan Chase Bank, N.A.
as Syndication Agent, Harris Trust and Savings Bank, Manufacturers and Traders Trust Company, and Wachovia Bank, N.A.
as Co-Documentation Agents, and Citigroup Global Markets, Inc. and J.P. Morgan Securities Inc. as Joint Lead Arrangers
and Joint Bookrunners. (9)
4.4 (a) Eurobonds Agency Agreement dated December 13, 2001 between the Company and Citibank, N.A. (9)
(b) Eurobond Subscription Agreement dated December 11, 2001 between the
Company and Credit Suisse First Boston (Europe) Limited, UBS AG, ABN
AMRO Bank N.V., First Union Securities, Inc.; and Tokyo-Mitsubishi
International plc (the Managers). (9)
(c) Pages 4 through 16 of the Company's Eurobond Offering Circular dated
December 11, 2001. (9) 10.1 1993 Stock Option Plan (2)
10.2 1998 Stock Option Plan (1)
10.3 2002 Amended and Restated Equity Incentive Plan
10.4 (a) Trust Agreement for the Company's Employee Stock Ownership Plan between the Company and T. Rowe Price Trust Company
dated as of November 1, 2000. (8)
(b) Plan Recordkeeping Agreement for the Company's Employee Stock
Ownership Plan between the Company and T. Rowe Price Trust Company
dated as of November 1, 2000. (8)
11 Employment Agreement dated January 1, 1996 between the Company and Thomas L. Whiting (4)*
11 Employment Agreement dated October 11,1996 between the Company and Gerald K. Kunkle Jr. (5)*
11 Employment Agreement dated April 20, 1998 between the Company and William R. Jellison (6)*
11 Employment Agreement dated September 10, 1998 between the Company and Brian M. Addison (6)*
11 Employment Agreement dated June 1, 1999 between the Company and J. Henrik Roos (7)*
10.10 Employment Agreement dated October 1, 2001 between the Company and Rudolf Lehner (9)*
10.11 Employment Agreement dated November 1, 2002 between the Company and Christopher T. Clark (11)*
10.12 Employment Agreement dated November 1, 2002 between the Company and James G. Mosch (11)*
10.13 Employment Agreement dated December 1, 2002 between the Company and Bret W. Wise (11)*
10.14 DENTSPLY International Inc. Directors' Deferred Compensation Plan effective January 1, 1997 (5)*
10.15 Board Compensation Arrangement
20
Exhibit
Number Description
10.16 Supplemental Executive Retirement Plan effective January 1, 1999 * (13)
10.17 Written Description of the Amended and Restated Incentive Compensation Plan
10.18 AZ Trade Marks License Agreement, dated January 18, 2001 between AstraZeneca AB and Maillefer Instruments
Holdings, S.A. (8)
10.19 Sale and Purchase Agreement of Gendex Equipment Business between the Company and Danaher Corporation Dated
December 11, 2003. (12)
10.20 (a) Precious metal inventory Purchase and Sale Agreement dated November 30, 2001 between Fleet Precious Metal Inc.
and the Company. (9)
(b) Precious metal inventory Purchase and Sale Agreement dated December
20, 2001 between JPMorgan Chase Bank and the Company. (9)
(c) Precious metal inventory Purchase and Sale Agreement dated December
20, 2001 between Mitsui & Co., Precious Metals Inc. and the Company.
(9)
10.21 Rental Contract between Hesta Beteiligungsgesellschaft GmbH and Dentsply DeTrey GmbH effective January 1, 2004. (13)
14 DENTSPLY International Inc. Code of Business Conduct and Ethics
21 Subsidiaries of the Company
23 Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
31 Section 302 Certification Statements
32 Section 906 Certification Statement
* Management contract or compensatory plan.
(1) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 333-56093).
(2) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 33-71792).
(3) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 33-79094).
(4) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, File No.
0-16211.
(5) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, File No.
0-16211.
(6) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, File No.
0-16211.
(7) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, File No.
0-16211.
(8) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, File No.
0-16211.
(9) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001, File No.
0-16211.
(10) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 333-101548).
(11) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002, File No.
0-16211.
(12) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, File No.
0-16211.
(13) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2004, File No.
0-16211.
21
Loan Documents
The Company and certain of its subsidiaries have entered into various loan
and credit agreements and issued various promissory notes and guaranties of such
notes, listed below, the aggregate principal amount of which is less than 10% of
its assets on a consolidated basis. The Company has not filed copies of such
documents but undertakes to provide copies thereof to the Securities and
Exchange Commission supplementally upon request.
(1) Master Grid Note dated November 4, 1996 executed in favor of The
Chase Manhattan Bank in connection with a line of credit up to
$20,000,000 between the Company and The JPMorganChase Bank.
(2) Form of "comfort letters" to various foreign commercial lending
institutions having a lending relationship with one or more of the
Company's international subsidiaries.
22
SCHEDULE II
DENTSPLY INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2005
Additions
-----------------------------
Charged
Balance at (Credited) Charged to Write-offs Balance
Beginning To Costs Other Net of Translation at End
Description of Period And Expenses Accounts Recoveries Adjustment of Period
(in thousands)
Allowance for doubtful accounts:
For Year Ended December 31,
2003 18,492 569 (29) (4,771) 2,041 16,302
2004 16,302 2,126 (133) (1,997) 926 17,224
2005 17,224 2,063 (581) (2,884) (1,031) 14,791
Allowance for trade discounts:
For Year Ended December 31,
2003 1,091 1,494 19 (1,681) 139 1,062
2004 1,062 1,655 (24) (1,605) 70 1,158
2005 1,158 1,111 - (1,781) (20) 468
Inventory valuation reserves:
For Year Ended December 31,
2003 30,670 2,845 (22) (3,418) 3,037 33,112
2004 33,112 3,173 (2,357) (a) (7,308) 1,278 27,898
2005 27,898 1,994 (682) (2,360) (1,743) 25,107
Deferred tax asset valuation allowance:
For Year Ended December 31,
2003 5,956 5,764 - (2,596) 1,139 10,263
2004 10,263 11,951 - (375) 1,582 23,421
2005 23,421 19,928 - (604) (3,161) 39,584
(a) Related primarily to the sale of Gendex.
23
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year ended December 31,
2005 2004 2003 2002 2001
(dollars in thousands, except per share amounts)
Statement of Income Data:
Net sales $ 1,715,135 $ 1,694,232 $ 1,567,994 $ 1,415,893 $ 1,044,252
Net sales without precious metal content 1,543,916 1,481,872 1,364,346 1,230,371 993,956
Gross profit 869,018 846,518 770,533 703,714 542,281
Restructuring, impairment and
other costs (income) 232,755 7,124 3,700 (2,732) 5,073
Operating income 72,922 295,130 267,983 249,452 170,209
Income before income taxes 71,038 274,155 251,196 214,090 179,522
Net income from continuing operations $ 45,413 $ 210,286 $ 169,853 $ 143,641 $ 117,714
Net income from discontinued operations - 42,879 4,330 4,311 3,782
------ ------- ------- ------- -------
Total net income $ 45,413 $ 253,165 $ 174,183 $ 147,952 $ 121,496
Earnings per common share - basic:
Continuing operations $ 0.57 $ 2.61 $ 2.16 $ 1.84 $ 1.51
Discontinued operations - 0.54 0.05 0.05 0.05
------ ------ ----- ----- -----
Total earnings per common share - basic $ 0.57 $ 3.15 $ 2.21 $ 1.89 $ 1.56
Earnings per common share - diluted
Continuing operations $ 0.56 $ 2.56 $ 2.11 $ 1.80 $ 1.49
Discontinued operations - 0.53 0.05 0.05 0.05
------ ------ ----- ----- -----
Total earnings per common share - diluted $ 0.56 $ 3.09 $ 2.16 $ 1.85 $ 1.54
Cash dividends declared per
common share $ 0.25000 $ 0.21750 $ 0.19700 $ 0.18400 $ 0.18333
Weighted Average Common Shares Outstanding:
Basic 79,595 80,387 78,823 78,180 77,671
Diluted 81,008 82,014 80,647 79,994 78,975
Balance Sheet Data:
Cash and cash equivalents $ 434,525 $ 506,369 $ 163,755 $ 25,652 $ 33,710
Property, plant and equipment, net 316,218 399,880 371,990 313,178 240,890
Goodwill and other intangibles, net 1,001,827 1,261,993 1,213,960 1,134,506 1,012,160
Total assets 2,407,329 2,798,145 2,445,587 2,087,033 1,798,151
Total debt 682,316 852,819 812,175 774,373 731,158
Stockholders' equity 1,241,580 1,443,973 1,122,069 835,928 609,519
Return on average stockholders' equity 3.4% 19.7% 17.8% 20.5% 21.5%
Long-term debt to total capitalization 35.4% 37.1% 42.0% 48.0% 54.4%
Other Data:
Depreciation and amortization $ 50,560 $ 49,296 $ 45,661 $ 41,352 $ 51,512
Capital expenditures 45,293 52,036 73,157 55,476 47,529
Interest expense, net 8,768 19,629 24,205 27,389 18,256
Cash flows from operating activities 232,769 306,259 257,992 172,983 211,068
Inventory days 90 92 93 100 93
Receivable days 53 47 50 49 46
Income tax rate 36.1% 23.3% 32.4% 32.9% 34.4%
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements made by the Company, including without limitation,
statements in the Overview section below and other statements containing the
words "plans", "anticipates", "believes", "expects", or words of similar import
may be deemed to be forward-looking statements and are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that forward-looking statements involve risks and
uncertainties which may materially affect the Company's business and prospects,
and should be read in conjunction with the risk factors and uncertainties
discussed within Item I, Part I of this Annual Report on Form 10-K.
OVERVIEW
Dentsply International Inc. is the world's largest manufacturer of
professional dental products. The Company is headquartered in the United States,
and operates in more than 120 other countries, principally through its foreign
subsidiaries. While the United States and Europe are the Company's largest
markets, the Company serves all of the major professional dental markets
worldwide.
The principal benchmarks used by the Company in evaluating its business
are: (1) internal growth in the United States, Europe and all other regions; (2)
operating margins of each segment, (3) the development, introduction and
contribution of innovative new products; (4) growth through acquisition; and (5)
continued focus on controlling costs and enhancing efficiency. The Company
defines "internal growth" as the increase in net sales from period to period,
excluding precious metal content, the impact of changes in currency exchange
rates, and the net sales, for a period of twelve months following the
transaction date, of businesses that have been acquired or divested.
Management believes that an average overall internal growth rate of 4-6% is
a long-term sustainable rate for the Company. This annualized growth rate
expectation typically includes approximately 1-2% of price increases. The
Company typically implements most of its price changes in the third or fourth
quarters of the year. These price changes and other marketing and promotional
programs, which are offered to customers from time to time, in the ordinary
course of business, may impact customer purchasing activity. During 2005, the
Company's overall internal growth was approximately 2.0% compared to 4.0% in
2004. Internal growth rates in the United States (43.9% of sales) and Europe
(36.5% of sales), the largest dental markets in the world, were 5.2% and
negative 2.7%, respectively during 2005 compared to 3.4% and 4.1%, respectively
for 2004. As discussed further within the Results of Continuing Operations, the
lower sales in Europe were primarily due to issues related to a new dental
reimbursement program effective in 2005 in Germany, the Company's most
significant market in this region. The internal growth rate in all other regions
during 2005, which represents approximately 19.6% of sales, was 4.0%, compared
to 5.2% in 2004. Among the other regions, the Asian region, excluding Japan, has
historically been one of our highest growth markets and management believes it
represents a long-term growth opportunity for the industry and the Company. Also
within the other region is the Japanese market, which represents the third
largest dental market in the world behind the United States and Germany.
Although Japan's dental market growth has been weak in the past few years, as it
closely parallels its economic growth, the Company also views this market as an
important long-term growth opportunity, both in terms of a recovery in the
Japanese economy and the opportunity to increase market share. There can be no
assurance that the Company's assumptions concerning the growth rates in its
markets or the dental market generally will be correct and if such rates are
less than expected, the Company's projected growth rates and results of
operations may be adversely effected.
Product innovation is a key component of the Company's overall growth
strategy. Historically, the Company has introduced in excess of twenty new
products each year. During 2005, over 30 new products were introduced around the
world and the Company expects over 25 new products to be introduced in 2006. Of
specific note, in late 2004, the Company introduced Oraqix(R), a new
non-injectable anesthetic gel for use in scaling and root planing procedures and
BioPure MTAD, a new irrigant used in root canal procedures. In the first quarter
of 2005, the Company introduced Calamus, a unique obturation delivery system
used in root canal procedures and Xeno IV, the Company's first introduction of
single component self etching adhesive technology to the U.S. market. In
addition, during the second quarter of 2005, the Company introduced Interactive
Mystique, the world's first low friction translucent ceramic orthodontic
bracket. It has a clear interactive clip called Neoclip, which can be rapidly
placed and removed from the Mystique bracket. During the third quarter of 2005,
the Company introduced Cercon Arts, a software system for the Company's Cercon
product that allows the technician to develop copings from a stone model, and
provides better utilization of the Cercon materials. During the fourth quarter
of 2005, the Company introduced BioForce, a Nickel Titanium arch wire that
uniquely addresses the current trends in orthodontic treatment of low force,
25
reduced friction and shorter treatment time, all within one wire. The Company
also introduced Aquasil Ultra Digit during the fourth quarter of 2005, which is
a new delivery system for the Company's Aquasil impression material products
that is extremely user friendly, comes in a unit dose, and provides easier and
better placement of impression materials. Additionally, during the fourth
quarter of 2005, the Company introduced Cercon implant abutments that provide
superior cosmetics for implant users compared to traditional abutments.
New advances in technology are anticipated to have a significant influence
on future products in dentistry. As a result, the Company has pursued several
research and development initiatives to support this development. Specifically,
the Company continues to work on product activities with the Georgia Institute
of Technology's Research Institute and Doxa AB to pursue potential new advances
in dentistry. In addition, the Company licenses and purchases technologies
developed by other third parties. Specifically, in 2004, the Company purchased
the rights to a unique compound called SATIF from Sanofi-Aventi. The Company is
currently working to develop products based on this technology and believes that
this compound will provide such benefits to future products as greater
protection against acid attack, the ability to desensitize exposed dentin and
the ability to retard, or to inhibit the formation of staining on the enamel.
Also, during 2005, the Company entered into a long-term collaborative agreement
with IDMoS Dental Systems Limited, a wholly owned subsidiary of IDMoS, plc for
the commercialization of IDMoS' tooth caries detection and monitoring
technology. Under the agreement, DENTSPLY will have exclusive worldwide rights
to market products based on the technology and IDMoS will be responsible for
further development of the technology. The Company believes that IDMoS
technology will bring unique capabilities to preventive dentistry in the area of
caries detection and monitoring. The Company also believes that this technology
may have clinical benefits significantly beyond other devices and technologies
in the market today, including radiology. Although the Company believe these
activities will lead to new innovative dental products, they involve new
technologies and there can be no assurance that commercialized products will be
developed.
Although the professional dental market in which the Company operates has
experienced consolidation, it is still a fragmented industry. The Company
continues to focus on opportunities to expand the Company's product offerings
through acquisition. Management believes that there will continue to be adequate
opportunities to participate as a consolidator in the industry for the
foreseeable future (see also Acquisition Activity in Part I, Item 1 of this Form
10-K). As further discussed in Note 3 to the Consolidated Financial Statements,
during 2005 the Company purchased GAC SA, Raintree Essix and Glenroe
Technologies. All three of the acquired companies specialize in the orthodontics
products market. These acquisitions increased full year 2005 sales by $24.1
million.
The Company also remains focused on reducing costs and achieving
operational efficiencies. Management expects to continue to consolidate
operations or functions and reduce the cost of those operations and functions
while improving service levels. In addition, the Company remains focused on
enhancing efficiency through expanded use of technology and process improvement
initiatives. The Company believes that the benefits from these opportunities
will improve the cost structure and offset areas of rising costs such as energy,
benefits, regulatory oversight and compliance and financial reporting.
PHARMACEUTICAL BUSINESS
As previously announced in early 2006, the Company made the decision to
close its Chicago based pharmaceutical manufacturing facility and to pursue the
outsourcing of the production of the injectable dental anesthetic products and
the non-injectable Oraqix(R) products that were to be produced at the plant. The
Company expects that the decision to shut down the anesthetics manufacturing
facility will immediately improve short and mid-term cash flows and eliminate
the uncertainty concerning FDA approval of the facility. While the Company had
supply disruptions in 2005 and anticipates some supply disruptions in 2006 in
relation to the supply of the injectable dental anesthetic products, the Company
currently has contract manufacturing relationships for the supply of the
injectable dental anesthetic products for most of the markets served by the
Company. As there are a limited number of suppliers for the injectable dental
anesthetic products sold by the Company, there can be no assurance that the
Company will be able to obtain an adequate supply of its injectable dental
anesthetic products in the future. The Company currently has supply agreements
in place for the supply of the non-injectable Oraqix(R) products and has not
experienced supply disruptions to date, nor does it anticipate supply
disruptions of the Oraqix(R) products in the future.
The following details in this section provide the history and background
related to the pharmaceutical manufacturing facility and DENTSPLY's anesthetics
business.
The Company completed construction of the dental anesthetic manufacturing
facility outside of Chicago in 2004. In early 2005, the plant received the
approval and validation of the manufacturing practices by the Medicines and
Healthcare products Regulatory Agency ("MHRA"), the agency responsible for drug
product approvals in the United Kingdom, and which is accepted by Ireland,
Australia and New Zealand. As a result, the facility began manufacturing and
26
releasing products to the market in the United Kingdom and Australia in the
second quarter of 2005. The Company made a submission to the Food and Drug
Administration ("FDA") in spring 2005 to obtain the necessary facility approval
to sell in the United States the injectable anesthetic products manufactured at
the facility. The FDA conducted a Pre-Approval Inspection in July 2005 and
identified items that needed to be addressed in connection with the U.S.
inspection and submission.
After the Company received the results of the FDA's Pre-Approval Inspection
in the third quarter of 2005, the Company conducted an extensive review of the
items identified by the FDA and developed action plans to address these items.
Included in this review were the expected time-line and costs for responding to
the FDA findings, the expected time required for FDA re-application and
approval, the expected ramp-up costs to achieve anticipated volumes for the
U.S., European and Japanese markets, and the extension of contract manufacturing
agreements to provide a supply of injectable anesthetic product until the
manufacturing facility could achieve full production under the revised timeline.
Based on this review, the Company concluded that the start-up of its
pharmaceutical manufacturing facility would be delayed, and did not expect to
begin producing injectable anesthetics at the facility for the U.S. and Japanese
markets until 2007. As a result of the Company's review and its changed
expectations, the Company concluded that the indefinite-lived injectable
anesthetic intangible asset acquired from AstraZeneca in 2001 became impaired in
the third quarter of 2005, resulting in a $131.3 million pre-tax charge ($111.6
million after tax) (see also Note 15 to the Consolidated Financial Statements).
This impairment did not impact the Company's needle-free Oraqix(R) product.
From the end of the third quarter of 2005 through December of 2005, the
Company continued to evaluate the actions necessary to address the items raised
in the FDA's pre-approval inspection. As of the end of the third quarter of
2005, the Company had anticipated that it would continue to manufacture products
at the plant for the U.K., Australia, and New Zealand markets, for which
regulatory approval had already been obtained. However, upon further evaluation,
the Company decided in December of 2005 to suspend manufacturing at the plant to
allow improvements identified in the Company's corrective action plan to be
made.
In conjunction with the evaluation of the actions necessary to address the
items raised in the FDA's pre-approval inspection, the Company also began to
evaluate strategic alternatives for the facility, including but not limited to a
potential shut-down of the dental anesthetics manufacturing facility and
obtaining long-term third party supply sources for both the injectable
anesthetic products and the Oraqix(R) product. In order to fully evaluate the
potential options at the Company's disposal with regard to a potential closure
and the disposition of the facility, the Company began a comprehensive internal
analysis of the assets that included initiating discussions with potential
buyers, and evaluating the possibility of obtaining extensions for the supply of
products from third party manufacturers.
Based on the outcome of the analyses performed by the Company, as well as
both strategic and financial considerations, in December of 2005 the Company
began to establish a plan for a course of action to shut down the manufacturing
facility, sell the manufacturing facility assets and begin negotiations with
third party manufacturers to obtain a long-term source of supply for the
anesthetic products.
After the Company made the decision to establish a plan for this
alternative course of action with regard to the manufacturing facility, an
extensive review was performed on the activities required to complete the
facility closure and the risk factors associated with those activities. Included
in those activities and risk factors were the activities to wind down operations
at the facility and to prepare the assets for eventual disposition, the pursuit
of a buyer for the assets, the expected time frame for the sale of the assets,
the pursuit of long-term ongoing contract manufacturing agreements to provide a
supply of injectable anesthetic product and the risks associated with being
unable to procure such long-term contracts. The Company also obtained an
independent third party appraisal of the indefinite-lived injectable anesthetic
intangible and the long-lived assets associated with the pharmaceutical
manufacturing facility, due to the sensitivity of the assumptions and the risks
associated with these assets. As a result of the Company's review, its changed
expectations and the review of the third party appraisal of the assets, it was
determined that an additional impairment of the indefinite-lived injectable
anesthetic intangible asset acquired from AstraZeneca in 2001, as well as an
impairment of the long-lived assets related to the manufacturing facility, had
occurred during the fourth quarter of 2005. Additional discussion of the
Company's review and changed expectations is provided in Note 15 to the
Consolidated Financial Statements. The impairment recorded by the Company in the
fourth quarter of 2005 was $99.5 million ($66.5 million after tax). This
impairment did not impact the Company's needle-free Oraqix(R) product.
27
Additionally, as a result of these activities, pre-tax restructuring
charges of $2.3 million ($1.5 million after tax) were also incurred related to
employee severance cost for which the Company was contractually obligated. The
Company also expects pre-tax restructuring charges in the range of $6 million
to $9 million in 2006 associated with the completion of the closure of the
facility. These costs primarily related to additional contract termination
costs, severance costs and utility costs during the shut down period (see also
Note 15 to the Consolidated Financial Statements).
FACTORS IMPACTING COMPARABILITY BETWEEN YEARS
Discontinued Operations
In February 2004, the Company sold its Gendex equipment business to Danaher
Corporation. Additionally, in the first quarter of 2004, the Company
discontinued production of dental needles. The sale of the Gendex business and
discontinuance of dental needle production have been accounted for as
discontinued operations pursuant to Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The
results of operations for all periods presented have been restated to reclassify
the results of operations for both the Gendex equipment and the dental needle
businesses as discontinued operations.
Revisions in Classification
Certain revisions of classification have been made to prior years' data in
order to conform to current year presentation.
The Company has revised its 2004 and 2003 cash flow statement
classifications to present realization of cross-currency swap value of $13.7
million and $10.7 million, respectively, into cash flows from investing
activities from cash flows from financing activities
RESULTS OF CONTINUING OPERATIONS, 2005 COMPARED TO 2004
Net Sales
The discussions below summarize the Company's sales growth, excluding
precious metal content, from internal growth and net acquisition growth and
highlights the impact of foreign currency translation. These disclosures of net
sales growth provide the reader with sales results on a comparable basis between
periods.
Management believes that the presentation of net sales excluding precious
metal content provides useful information to investors because a significant
portion of DENTSPLY's net sales is comprised of sales of precious metals
generated through sales of the Company's precious metal alloy products, which
are used by third parties to construct crown and bridge materials. Due to the
fluctuations of precious metal prices and because the precious metal content of
the Company's sales is largely a pass-through to customers and has minimal
effect on earnings, DENTSPLY reports sales both with and without precious metal
content to show the Company's performance independent of precious metal price
volatility and to enhance comparability of performance between periods. The
Company uses its cost of precious metal purchased as a proxy for the precious
metal content of sales, as the precious metal content of sales is not separately
tracked and invoiced to customers. The Company believes that it is reasonable to
use the cost of precious metal content purchased in this manner since precious
metal alloy sale prices are typically adjusted when the prices of underlying
precious metals change.
As the presentation of net sales excluding precious metal content could be
considered a measure not calculated in accordance with generally accepted
accounting principles (a non-GAAP measure), the Company provides the following
reconciliation of net sales to net sales excluding precious metal content. Our
definitions and calculations of net sales excluding precious metal content and
other operating measures derived using net sales excluding precious metal
content may not necessarily be the same as those used by other companies.
Year Ended December 31,
2005 2004 2003
(in millions)
Net Sales $ 1,715.1 $ 1,694.2 $ 1,568.0
Precious Metal Content of Sales (171.2) (212.3) (203.7)
------ ------ ------
Net Sales Excluding Precious Metal Content $ 1,543.9 $ 1,481.9 $ 1,364.3
========= ========= =========
28
Net sales in 2005 increased $20.9 million, or 1.2%, to $1,715.1 million.
Net sales, excluding precious metal content, increased $62.0 million, or 4.2%,
to $1,543.9 million. Sales growth excluding precious metal content was comprised
of 2.0% internal growth, 1.6% related to acquisitions and 0.6% due to foreign
currency translation. The 2.0% internal growth was comprised of 5.2% in the
United States, a negative 2.7% in Europe and 4.0% for all other regions
combined.
The 5.2% internal sales growth, excluding precious metal content, in the
United States was driven by strong growth in the dental consumable and dental
specialty product categories, offset somewhat by lower sales in the dental
laboratory product category. In Europe, the negative 2.7% internal growth
resulted from lower sales in the dental laboratory category partially offset by
strong growth in the specialty dental and dental consumables product categories.
The decrease in the laboratory category was primarily related to reimbursement
changes in the German dental market prosthetic procedures which became effective
in 2005. The internal growth of 4.0% in all other regions was largely the result
of strong growth in the Asian and Latin American regions, partially offset by
lower sales growth in the Middle East, Australia and Canada.
Gross Profit
Gross profit was $869.0 million in 2005 compared to $846.5 million in 2004,
an increase of $22.5 million, or 2.7%. Gross profit, measured against sales
including precious metal content, represented 50.7% of net sales in 2005
compared to 50.0% in 2004. The gross profit for 2005, measured against sales
excluding precious metal content, represented 56.3% of net sales compared to
57.1% in 2004. This margin decline from 2005 to 2004 was due to the decrease in
the laboratory product sales in Europe as discussed previously and costs related
to the anesthetic manufacturing facility, partially offset by the impact of new
products and manufacturing improvements in many of the Company's businesses.
Operating Expenses
Selling, general and administrative ("SG&A") expenses, which include
research and development costs, increased $19.0 million, or 3.5%, to $563.3
million during 2005 from $544.3 million in 2004. The 3.5% increase in expenses
reflects additional SG&A expenses of $11.6 million from acquired companies and
increases from unfavorable translation impacts of approximately $2.5 million.
The unfavorable translation impacts were caused by higher average foreign
currency exchange rates for the full year of 2005 versus full year 2004 when
translating the expenses from the local currencies in which the Company's
subsidiaries conduct operations, into United States Dollars. SG&A expenses,
measured against sales including precious metal content, increased to 32.8%
compared to 32.1% in 2004. SG&A expenses, as measured against sales excluding
precious metal content, decreased to 36.5% compared to 36.7% in 2004. The higher
expense ratio in 2005 measured against sales including precious metal content is
primarily the result of lower precious metal sales in 2005 versus 2004 due to
the changes in the German reimbursements as previously discussed. The higher
expense level in 2004 measured against sales excluding precious metal content
was primarily related to higher litigation settlement costs, costs related to
the Sarbanes-Oxley compliance and costs related to the launch of the Oraqix(R)
product in 2004. In 2005, the Company continued to efficiently manage expenses,
which served to further reduce SG&A costs. These reductions were partially
offset by increased costs in 2005 related to the initiation of a global
tax project.
During 2005, the Company recorded restructuring and impairment costs of
$233.1 million ($179.6 million net of tax). This amount is primarily
attributable the impairment of the indefinite-lived injectable anesthetic
intangible acquired from AstraZeneca in 2001 as well as the impairment of the
fixed assets associated with the pharmaceutical manufacturing facility. This
impairment charge was recorded as a result of event driven impairment analyses
conducted in accordance with Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets", and Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets" (see also Note 15 to the Consolidated Financial
Statements). Included in the $232.8 million charge are restructuring charges of
$3.1 million that were recorded during 2005 primarily as a result of the
decision to shut down the anesthetics manufacturing facility in Chicago
Illinois. These costs were partially offset by a change in estimate of $1.2
million primarily related to the reversal of severance costs accrued in 2004
associated with the European Shared Services Center that were no longer
necessary. The Company anticipates the remaining costs to complete the shut down
of the pharmaceutical manufacturing facility will be approximately $6 million to
$9 million which will be expensed primarily during the first half of 2006 as the
related costs are incurred. The plans to shut down the pharmaceutical
manufacturing facility and other operational improvements are expected to
improve operating margin rates by 0.5% to 1.0% in 2006.
29
During 2004, the Company recorded restructuring and other costs of $7.1
million ($5.0 million net of tax). These costs were primarily related to the
creation of a European Shared Services Center in Yverdon, Switzerland, and the
consolidation of certain sales/customer service and distribution facilities in
Europe and Japan. The primary objective of these restructuring initiatives is to
improve operational efficiencies and to reduce costs within the related
businesses. These plans are expected to be fully complete during 2006. In
addition, restructuring costs were incurred related to the closure of the
Company's European central warehouse in Nijmegan, The Netherlands, and transfer
of this function to a Company-operated facility in Radolfzell, Germany, which
was substantially completed during the first quarter of 2004. This transfer was
completed in an effort to improve customer service levels and reduce costs. The
Company also incurred additional charges related to the consolidation of its
U.S. laboratory businesses, which was initiated in the fourth quarter of 2003.
The Company made the decision to consolidate the United States laboratory
businesses in order to improve operational efficiencies, to broaden customer
penetration and to strengthen customer service. This plan was substantially
complete at the end of 2004.
The Company anticipates remaining restructuring costs to complete the
European Shared Services Center initiative of $0.5 million, related to employee
termination costs and other restructuring charges, which will be expensed as
incurred during 2006. The projected future annual expense reductions related to
the European Shared Services Center initiative are $1.5 million to $2.0 million
when fully implemented.
Other Income and Expenses
Net interest expense and other expenses were $1.9 million during 2005
compared to $21.0 million in 2004. The 2005 period included $8.8 million of net
interest expense, $6.7 million of currency transaction gains and $0.2 million of
other nonoperating gains. The 2004 period included $19.6 million of net interest
expense, $1.2 million of currency transaction losses and $0.2 million of other
nonoperating costs. The decrease in net interest expense was primarily due to
increased interest income generated from the Company's higher average cash
levels, lower average debt levels and the effectiveness of the cross-currency
interest rate swaps designated as net investment hedges, put into place in the
first and fourth quarters of 2005.
Income Taxes
The Company's effective tax rates for 2005 and 2004 were 36.1% and 23.3%,
respectively. Management believes that the operating tax rate for 2006 will be
in the range of 29.5% to 30%. During 2005, the Company recorded a tax charge of
$4.6 million from the repatriation under the American Jobs Creation Act of 2004,
a tax charge of $7.6 million related to the effects of foreign earnings, and a
tax benefit of $11.0 million from the release of deferred tax liabilities
related to the undistributed earnings of foreign earnings due to the
availability of foreign tax credits.
Earnings
Net income from continuing operations for 2005 of $45.4 million was a
decrease compared to net income from continuing operations of $210.3 million in
2004. The 2005 net income included pretax impairment and restructuring charges
primarily associated with the injectable anesthetic facility and
indefinite-lived intangible assets of $232.8 million ($178.9 million after-tax).
The negative impacts of the impairment and restructuring charges were partially
offset by net non-recurring benefits related to tax reorganization and
repatriation activities of $8.9 million. Income from continuing operations and
diluted earnings per share from continuing operations in 2004 included pretax
charges of $7.1 million ($5.0 million after tax), relating to restructuring
activities, and a net income tax benefit of $19.5 million, primarily related to
adjustments and settling audits of tax returns.
Discontinued Operations
In February 2004, the Company sold its Gendex equipment business to Danaher
Corporation. Also in the first quarter of 2004, the Company discontinued
production of dental needles. Accordingly, the Gendex equipment and needle
businesses have been reported as discontinued operations for all periods
presented.
There was no income from discontinued operations during 2005 and $42.9
million in 2004. Fully diluted earnings per share from discontinued operations
were $0.53 for 2004. The income from discontinued operations in 2004 was almost
entirely related to the gain realized on the sale of Gendex business.
30
Operating Segment Results
In January 2005, the Company reorganized its operating group structure
consolidating into four operating groups from the five groups under the prior
management structure. These four operating groups are managed by four Senior
Vice Presidents and represent the Company's operating segments. Each of these
operating groups covers a wide range of product categories and geographic
regions. The product categories and geographic regions often overlap across the
groups. Further information regarding the details of each group is presented in
Note 4 of the Consolidated Financial Statements. The management of each group is
evaluated for performance and incentive compensation purposes on net third party
sales, excluding precious metal content, and segment operating income. In
January 2006, the Company reorganized its operating group structure
consolidating into three operating groups. Segment information will be disclosed
under this new structure beginning in the first quarter of 2006.
U.S. Consumable Business/Canada
Net sales for this group were $342.3 million during 2005, a 7.1% increase
compared to $319.6 million in 2004. Internal growth was 6.3% and currency
translation added 0.8% to sales in 2005. The 6.3% internal growth rate was
primarily attributable to the chairside consumable products business and the
Oraqix(R) product, which is part of the dental anesthetics business.
Operating profit decreased $2.0 million during 2005 to $95.6 million
compared to $97.6 million in 2004. The decrease was related to non-capitalizable
costs associated with the pharmaceutical plant in Chicago, partially offset by
strong margins on improved sales in the chairside consumable products business.
In addition, operating profit benefited slightly from currency translation.
During 2005, the Company recorded a $233.1 million ($179.6 million after
tax) impairment and restructuring charge against the indefinite-lived injectable
anesthetic assets and the long-lived assets associated with the pharmaceutical
manufacturing facility (see also Pharmaceutical Business section in the MD&A and
Note 15 to the Consolidated Financial Statements). This impairment does not
impact the Company's needle-free Oraqix(R) product.
Dental Consumables--Europe, CIS, Middle East, Africa/European Dental Laboratory
Business
Net sales for this group were $387.5 million during 2005, an 8.2% decrease
compared to $422.2 million in 2004. Internal growth was negative 8.2%. Changes
in German reimbursement programs related to prosthetic procedures, as discussed
earlier, resulted in lower sales in Germany during 2005 which was the primary
driver of the negative 8.2% internal sales growth rate.
Operating profit decreased $25.3 million during 2005 to $49.4 million from
$74.8 million in 2004. The reduction in operating profit was driven primarily by
lower sales and a negative mix shift, particularly in the German businesses.
Australia/Latin America/Endodontics/Non-dental
Net sales for this group increased $20.4 million during 2005, or 6.1%, to
$357.8 million from $337.4 million in 2004. Internal growth was 4.2% with
currency translation adding 1.9%. Solid growth was shown in the endodontic
business, the non-dental business and the Latin American businesses, offset
slightly by decreases in the Australian business.
Operating profit was $146.8 million during 2005, a $3.3 million increase
from $143.5 million in 2004. The increase was primarily related to the continued
strength of the endodontic business, offset slightly by decreases in Australia
and Brazil. Australia was negatively impacted by interruptions in the anesthetic
supply.
31
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
Net sales for this group were $459.5 million during 2005, a 13.2% increase
compared to $406.0 million in 2004. Internal growth was 7.1%, currency
translation added 0.2% to sales in 2005, and 5.9% was added through
acquisitions. Significant growth in the implant, orthodontic, Japanese and Asian
businesses, were partially offset by weakness in the U.S. laboratory markets.
Operating profit increased $23.1 million during 2005 to $77.8 million from
$54.7 million in 2004. Operating profits increased year-over-year for all
businesses primarily due to the sales increases and reduced expenses. In
addition, operating profit benefited from currency translation.
RESULTS OF CONTINUING OPERATIONS, 2004 COMPARED TO 2003
Net Sales
Net sales in 2004 increased $126.2 million, or 8.1%, to $1,694.2 million.
Net sales, excluding precious metal content, increased $117.5 million, or 8.6%,
to $1,481.9 million. Sales growth excluding precious metal content was comprised
of 4.0% internal growth and 4.6% of foreign currency translation. The 4.0%
internal growth was comprised of 3.4% in the United States, 4.1% in Europe and
5.2% for all other regions combined.
The internal sales growth, excluding precious metal content, in the United
States was driven by strong growth in specialty dental products, offset by
negative growth in anesthetic products due to competitive pressures and in
equipment products within the dental laboratory category. In Europe, strong
internal sales growth in specialty dental products was offset by flat growth in
the dental consumable category. The internal growth of 5.2% in all other regions
was largely the result of strong growth in the Asian region, Canada and the
Middle East/Africa, offset by lower sales in Japan.
Gross Profit
Gross profit was $846.5 million in 2004 compared to $770.5 million in 2003,
an increase of $76.0 million, or 9.9%. Gross profit, measured against sales
including precious metal content, represented 50.0% of net sales in 2004
compared to 49.1% in 2003. The gross profit for 2004, measured against sales
excluding precious metal content, represented 57.1% of net sales compared to
56.5% in 2003. This margin improvement from 2003 to 2004 was due primarily to
favorable geographic and product mix shifts in addition to ongoing operational
improvements related to the Company's restructuring and process improvement
initiatives.
Operating Expenses
SG&A expense increased $45.4 million, or 9.1%, to $544.3 million during
2004 from $498.9 million in 2003. The 9.1% increase in expenses reflects
increases for the translation impact from a weaker U.S. dollar of approximately
$25.3 million. The unfavorable translation impacts were caused by higher average
foreign currency exchange rates for the full year of 2004 versus full year 2003
when translating the expenses from the local currencies in which the Company's
subsidiaries conduct operations, into United States Dollars. SG&A expenses,
measured against sales including precious metal content, increased to 32.1%
compared to 31.8% in 2003. SG&A expenses, as measured against sales excluding
precious metal content, increased to 36.7% compared to 36.6% in 2003. The higher
expense level in 2004 was primarily related to litigation settlement costs,
additional costs related to the Sarbanes-Oxley compliance and costs related to
the launch of the Oraqix(R) product. In addition, the Company continued to
efficiently manage expenses during 2005, which served to partially offset these
additional costs. Moving forward, as the Company leverages expenses, it expects
to reinvest a portion of these savings to further strengthen research and
development and selling activities.
During 2004, the Company recorded restructuring and other costs of $7.1
million ($5.0 million net of tax). These costs were primarily related to the
creation of a European Shared Services Center in Yverdon, Switzerland, and the
consolidation of certain sales/customer service and distribution facilities in
Europe and Japan. The primary objective of these restructuring initiatives is to
improve operational efficiencies and to reduce costs within the related
businesses. These plans are expected to be fully complete during 2006. In
32
addition, restructuring costs were incurred related to the closure of the
Company's European central warehouse in Nijmegan, The Netherlands, and transfer
of this function to a Company-operated facility in Radolfzell, Germany, which
was substantially completed during the first quarter of 2004. This transfer was
completed in an effort to improve customer service levels and reduce costs. The
Company also incurred additional charges related to the consolidation of its
U.S. laboratory businesses, which was initiated in the fourth quarter of 2003.
The Company made the decision to consolidate the United States laboratory
businesses in order to improve operational efficiencies, to broaden customer
penetration and to strengthen customer service. This plan was substantially
complete at the end of 2004.
During 2003, the Company recorded restructuring and other costs of $3.7
million ($2.3 million net of tax). The largest portion of this was an impairment
charge related to certain investments made in emerging technologies that the
Company no longer viewed as recoverable. In addition, as noted above, in
December 2003, the Company commenced the consolidation of its U.S. laboratory
businesses and recorded a charge for a portion of the costs to complete the
consolidation (see Note 15 to the Consolidated Financial Statements).
Other Income and Expenses
Net interest expense and other expenses were $21.0 million during 2004
compared to $16.8 million in 2003. The 2004 period included $19.6 million of net
interest expense, $1.2 million of currency transaction losses and $0.2 million
of other nonoperating costs. The 2003 period included $24.2 million of net
interest expense, $0.3 million of currency transaction gains and $7.1 million of
other nonoperating income, which included gains on the PracticeWorks common
stock and warrants sold in the fourth quarter of 2003 of $7.4 million ($4.7
million net of tax). The decrease in net interest expense was primarily due to
increased interest income generated from the Company's higher average cash
levels.
Income Taxes
The effective tax rate decreased to 23.3% in 2004 from 32.4% in 2003.
During 2004, the Company recorded a tax benefit of $19.5 million primarily from
the reversal of previously accrued taxes from the settlement of prior years'
domestic and foreign tax audits, benefits of additional R&D credits and other
adjustments. The impact of this benefit on the effective tax rate for 2004 was
7.1%.
Earnings
Income from continuing operations increased $40.4 million, or 23.8%, to
$210.3 million in 2004 from $169.9 million in 2003. Fully diluted earnings per
share from continuing operations were $2.56 in 2004, an increase of 21.3% from
$2.11 in 2003. Income from continuing operations and diluted earnings per share
from continuing operations in 2004 included the benefit of the tax adjustments
($19.5 million or $0.24 per share) and the restructuring and other costs ($5.0
million or $0.06 per share) described above. In addition, income from continuing
operations and diluted earnings per share from continuing operations in 2003
included the gain on the sale of the PracticeWorks securities ($4.7 million or
$0.06 per share) and the restructuring and other costs ($2.3 million or $0.03
per share) described above.
Discontinued Operations
In February 2004, the Company sold its Gendex equipment business to Danaher
Corporation. Also in the first quarter of 2004, the Company discontinued
production of dental needles. Accordingly, the Gendex equipment and needle
businesses have been reported as discontinued operations for all periods
presented.
Income from discontinued operations was $42.9 million during 2004 and $4.3
million in 2003. Fully diluted earnings per share from discontinued operations
were $0.53 and $0.05 for 2004 and 2003, respectively. The income from
discontinued operations in 2004 was almost entirely related to the gain realized
on the sale of Gendex business.
33
Operating Segment Results
In January 2005, the Company reorganized its operating group structure
consolidating into four operating groups from the five groups under the prior
management structure. These four operating groups are managed by four Senior
Vice Presidents and represent the Company's operating segments. Each of these
operating groups covers a wide range of product categories and geographic
regions. The product categories and geographic regions often overlap across the
groups. Further information regarding the details of each group is presented in
Note 4 of the Consolidated Financial Statements. The management of each group is
evaluated for performance and incentive compensation purposes on net third party
sales, excluding precious metal content, and segment operating income. In
January 2006, the Company reorganized its operating group structure
consolidating into three operating groups. Segment information will be disclosed
under this new structure beginning in the first quarter of 2006.
U.S. Consumable Business/Canada
Net sales for this group were $319.6 million in 2004, a 3.5% increase
compared to $308.8 million in 2003. Internal growth was 2.7% and currency
translation added 0.8% to sales in 2004. The U.S. consumables and Canadian
businesses had the highest growth in the group, which was offset by lower sales
in the U.S. Pharmaceutical business.
Operating profit decreased $0.5 million during 2004 to $97.6 million from
$98.1 million in 2003. The operating losses of the U.S. Pharmaceutical business
were partially offset by the growth of the U.S. Consumable and Canadian
businesses. Operating profit also benefited slightly from currency translation.
Dental Consumables--Europe, CIS, Middle East, Africa/European Dental Laboratory
Business
Net sales for this group were $422.2 million in 2004, an increase of $48.4
million, or 13.0%, compared to $373.8 million in 2003. Internal growth was 2.7%
and currency translation added 10.3% to sales in 2004. The sales growth was
driven by the Europe, Middle East, and African consumable businesses, offset by
lower sales in the European Dental Laboratory businesses, primarily in Germany,
and lower sales in the United Kingdom consumables business.
Operating profit increased $18.4 million in 2004 to $74.8 million from
$56.4 million in 2003. The operating profit improvement was primarily related to
the sales growth and lower SG&A expenses as a percentage of sales. In addition,
operating profit benefited from currency translation.
Australia/Latin America/Endodontics/Non-dental
Net sales for this group increased $24.0 million during 2004, or 7.7%, to
$337.4 million compared to $313.4 million in 2003. Internal growth was 4.6% and
currency translation added 3.1%. The higher internal sales growth was primarily
driven by sales growth of the Australian, Endodontic and Non-dental businesses,
offset by lower sales in the Latin American businesses.
Operating profit was $143.5 million in 2004, a $12.9 million increase from
$130.6 million in 2003. This increase was driven by improved sales and higher
margins in the international operations in the group. In addition, operating
profit benefited from currency translation.
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
Net sales for this group was $406.0 million in 2004, a 9.7% increase
compared to $370.1 million in 2003. Internal growth was 6.2% and currency
translation added 3.5% to sales in 2004. The internal growth increase was
primarily due to strong growth in the orthodontics and dental implants
businesses, offset by slower growth in the U.S. dental laboratory business and
negative growth in the Japanese business.
Operating profit increased $9.4 million during 2004, to $54.7 million from
$45.3 million in 2003. This increase was driven by improved sales of the
orthodontics and dental implants businesses and lower SG&A expenses at the U.S.
dental laboratory business. In addition, operating profit benefited from
currency translation.
34
FOREIGN CURRENCY
Since approximately 55% of the Company's 2005 revenues were generated in
currencies other than the U.S. dollar, the value of the U.S. dollar in relation
to those currencies affects the results of operations of the Company. The impact
of currency fluctuations in any given period can be favorable or unfavorable.
The impact of foreign currency fluctuations of European currencies on operating
income is partially offset by sales in the U.S. of products sourced from plants
and third party suppliers located overseas, principally in Germany and
Switzerland. On a net basis, net income benefited from changes in currency
translation in 2005 and 2004 compared to prior years.
CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
The Company has identified below the accounting estimates believed to be
critical to its business and results of operations. These critical estimates
represent those accounting policies that involve the most complex or subjective
decisions or assessments.
Goodwill and Other Long-Lived Assets
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets" which requires that at
least an annual impairment test be applied to goodwill and indefinite-lived
intangible assets. The Company performs impairment tests on at least an annual
basis using a fair value approach rather than an evaluation of the undiscounted
cash flows. If impairment related to goodwill is identified under SFAS 142, the
resulting charge is determined by recalculating goodwill through a hypothetical
purchase price allocation of the fair value and reducing the current carrying
value to the extent it exceeds the recalculated goodwill. If impairment is
identified on indefinite-lived intangibles, the resulting charge reflects the
excess of the asset's carrying cost over its fair value.
Other long-lived assets, such as identifiable intangible assets and fixed
assets, are amortized or depreciated over their estimated useful lives. In
accordance with Statement of Financial Accounting Standards No. 144 ("SFAS
144"), "Accounting for the Impairment or Disposal of Long-Lived Assets", these
assets are reviewed for impairment whenever events or circumstances provide
evidence that suggest that the carrying amount of the asset may not be
recoverable with impairment being based upon an evaluation of the identifiable
undiscounted cash flows. If impaired, the resulting charge reflects the excess
of the asset's carrying cost over its fair value.
Assessment of the potential impairment of goodwill, indefinite-lived
intangible assets and long-lived assets is an integral part of the Company's
normal ongoing review of operations. Testing for potential impairment of these
assets is significantly dependent on numerous assumptions and reflects
management's best estimates at a particular point in time. The dynamic economic
environments in which the Company's businesses operate and key economic and
business assumptions with respect to projected selling prices, increased
competition and introductions of new technologies can significantly affect the
outcome of impairment tests. Estimates based on these assumptions may differ
significantly from actual results. Changes in factors and assumptions used in
assessing potential impairments can have a significant impact on both the
existence and magnitude of impairments, as well as the time at which such
impairments are recognized. If there are unfavorable changes in these
environments or assumptions, future cash flows, the key variable in assessing
the impairment of these assets, may decrease and as a result the Company may be
required to recognize impairment charges. Future changes in the environment and
the economic outlook for the assets being evaluated could also result in
additional impairment charges being recognized. Information with respect to the
Company's significant accounting policies on long-lived assets is included in
Note 1 to the Consolidated Financial Statements.
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories is determined primarily by the first-in, first-out ("FIFO") or
average cost methods, with a small portion being determined by the last-in,
first-out ("LIFO") method. The Company establishes reserves for inventory
estimated to be obsolete or unmarketable equal to the difference between the
cost of inventory and estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those anticipated, additional inventory reserves may be required.
35
Accounts Receivable
The Company sells dental equipment and supplies both through a worldwide
network of distributors and directly to end users. For customers on credit
terms, the Company performs ongoing credit evaluation of those customers'
financial condition and generally does not require collateral from them. The
Company establishes allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, their
ability to make required payments may become impaired, and increases in these
allowances may be required. In addition, a negative impact on sales to those
customers may occur.
Accruals for Product Returns, Customer Rebates and Product Warranties
The Company makes provisions for customer returns, customer rebates and for
product warranties at the time of sale. These accruals are based on past
history, projections of customer purchases and sales and expected product
performance in the future. Because the actual results for product returns,
rebates and warranties are dependent in part on future events, these matters
require the use of estimates. The Company has a long history of product
performance in the dental industry and thus has an extensive knowledge base from
which to draw in measuring these estimates.
Income Taxes
Income taxes are determined using the liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, tax expense
includes US and international income taxes plus the provision for US taxes on
undistributed earnings of international subsidiaries not deemed to be
permanently invested.
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of such temporary
differences is reported as deferred income taxes. Deferred tax assets are
recognized if it is more likely than not that the assets will be realized in
future years. The Company establishes a valuation allowance for deferred tax
assets for which realization is not likely. As of December 31, 2005, the Company
recorded a valuation allowance of $39.5 million against the benefit of certain
net operating loss carryforwards of foreign and domestic subsidiaries.
The Company operates within multiple taxing jurisdictions and in the normal
course of business is examined in various jurisdictions. Tax accruals related to
the estimated outcome of these examinations are recorded in accordance with
Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies"
("SFAS 5"). The reversal of the accruals is recorded when examinations are
completed, statutes of limitation close or tax laws change.
On October 22, 2004, the American Jobs Creation Act of 2004 (the "AJCA")
was signed into law. The AJCA enacted a provision that provides the Company with
the opportunity to repatriate up to $500 million of reinvested earnings and to
claim a deduction equal to 85% of the repatriated amount. During the quarter
ended December 31, 2005, the Company completed its evaluation of the
repatriation provision and will reinvest approximately $345 million of foreign
earnings in the United States. As a result, the Company recognized $4.6 million,
net of available foreign tax credits, of related tax expense for the
repatriation plan.
36
Pension and Other Postretirement Benefits
Substantially all of the employees of the Company and its subsidiaries are
covered by government or Company-sponsored defined benefit or defined
contribution plans. Additionally, certain union and salaried employee groups in
the United States are covered by a postretirement healthcare plan. Costs for
Company-sponsored plans are based on expected return on plan assets, discount
rates, employee compensation increase rates and health care cost trends.
Expected return on plan assets, discount rates, and health care cost trend
assumptions are particularly important when determining the Company's benefit
obligations and net periodic benefit costs associated with postretirement
benefits. Changes in these assumptions can impact the Company's pretax earnings.
In determining the cost of postretirement benefits, certain assumptions are
established annually to reflect market conditions and plan experience to
appropriately reflect the expected costs as actuarially determined. These
assumptions include medical inflation trend rates, discount rates, employee
turnover and mortality rates. The Company predominantly uses liability durations
in establishing its discount rates, which are observed from indices of
high-grade corporate bond yields in the respective economic regions of the
plans. The expected return on plan assets is the weighted average long-term
expected return based upon asset allocations and historic average returns for
the markets where the assets are invested, principally in foreign locations.
Additional information related to the impact of changes in these assumptions is
provided in Note 14 to the Consolidated Financial Statements.
Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", on
January 1, 2001. This standard, as amended by SFAS 138 and 149, requires that
all derivative instruments be recorded on the balance sheet at their fair value
and that changes in fair value be recorded each period in current earnings or
comprehensive income.
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. Additionally, the Company utilizes interest
rate swaps to convert floating rate debt to fixed rate, fixed rate debt to
floating rate, cross-currency basis swaps to convert debt denominated in one
currency to another currency, and commodity swaps to fix its variable raw
materials costs.
Litigation
The Company and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company records liabilities when
a loss is probable and can be reasonably estimated. These estimates made by
management are based on an analysis made by internal and external legal counsel
which considers information known at the time. The Company believes it has
estimated any liabilities for probable losses well in the past; however, the
unpredictability of court decisions could cause liability to be incurred in
excess of estimates. Legal costs related to these lawsuits are expensed as
incurred.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities during the year ended December 31,
2005 were $232.8 million compared to $306.3 million during the year ended
December 31, 2004. The decrease of $73.5 million was primarily the result of an
increase in overall working capital primarily caused by an increase in accounts
receivable of $31.6 million, an increase in inventories of $7.4 million, a
decrease in accounts payable of $6.7 million and a decrease in accrued
liabilities of $14.5 million. The increase in accounts receivable was primarily
caused by the record low accounts receivable levels at the end of 2004 compared
to more normalized levels in 2005. The increase in inventories was mainly
attributable to an increase in the required on hand inventory levels in line
with the increase in sales. The decrease in accounts payable was due primarily
to the timing of payments made in 2005 versus 2004. The decrease in accrued
liabilities was primarily attributable to the payment of certain non-recurring
liabilities in the first quarter of 2005 that were accrued as of December 31,
2004.
Investing activities during 2005 include capital expenditures of $45.3
million. The Company expects that capital expenditures will range from $55
million to $60 million in 2006. Additionally, during 2005, the Company had
expeditures related to the acquisition of identifiable intangible assets of $3.5
million. Acquisition-related activity for the year ended December 31, 2005 was
37
$18.1 million which was primarily due to the acquisitions of GAC SA, Raintree
Essix, L.L.C. and Glenroe Technologies, Inc. (see Note 3 to the Consolidated
Financial Statements).
In December 2004, the Board of Directors approved a stock repurchase
program under which the Company may repurchase shares of Company stock on the
open market in an amount to maintain up to 3,000,000 shares of treasury stock.
In September 2005, the Board of Directors increased the authorization to
repurchase shares under the stock repurchase program in an amount to maintain up
to 5,500,000 shares of treasury stock. Under this program, the Company purchased
approximately 3,002,000 shares during 2005 at an average price of $54.85. As of
December 31, 2005, the Company held 2,533,000 shares of treasury stock. The
Company also received proceeds of $31.8 million as a result of the exercise of
1,226,000 stock options during the year ended December 31, 2005.
The Company's long-term borrowings decreased by a net of $170.5 million
during the year ended December 31, 2005. This net change included a decrease of
$112.4 million due to exchange rate fluctuations on debt denominated in foreign
currencies, changes in the value of interest rate swaps, net repayments of $60.1
million during the year, and an increase of $2.0 million as a result of
long-term debt assumed from acquired companies. During the year ended December
31, 2005, the Company's ratio of long-term debt to total capitalization
decreased to 35.4% compared to 37.1% at December 31, 2004.
Under its multi-currency revolving credit agreement, the Company is able to
borrow up to $500 million through May 2010. This facility is unsecured and
contains certain affirmative and negative covenants relating to its operations
and financial condition. The most restrictive of these covenants pertain to
asset dispositions and prescribed ratios of indebtedness to total capital and
operating income plus depreciation and amortization to interest expense. At
December 31, 2005, the Company was in compliance with these covenants. The
Company also has available an aggregate $250 million under two commercial paper
facilities; a $250 million U.S. facility and a $250 million U.S. dollar
equivalent European facility ("Euro CP facility"). Under the Euro CP facility,
borrowings can be denominated in Swiss francs, Japanese yen, Euros, British
pounds and U.S. dollars. The multi-currency revolving credit facility serves as
a back-up to these commercial paper facilities. The total available credit under
the commercial paper facilities and the multi-currency facility in the aggregate
is $500 million with $106.4 million outstanding under the multi-currency
facility and $6.7 million outstanding under the commercial paper facilities at
December 31, 2005.
The Company also has access to $49.2 million in uncommitted short-term
financing under lines of credit from various financial institutions. The lines
of credit have no major restrictions and are provided under demand notes between
the Company and the lending institutions.
At December 31, 2005, the Company had total unused lines of credit related
to the revolving credit agreement and the uncommitted short-term lines of credit
of $436.2 million.
At December 31, 2005, the Company held $64.8 million of precious metals on
consignment from several financial institutions. These consignment agreements
allow the Company to acquire the precious metal at market rates at a point in
time which is approximately the same time and for the same price as alloys are
sold to the Company's customers. In the event that the financial institutions
would discontinue offering these consignment arrangements, and if the Company
could not obtain other comparable arrangements, the Company may be required to
obtain third party financing to fund an ownership position in the required
precious metal inventory levels.
The Company's cash decreased $71.8 million during the year ended December
31, 2005 to $434.5 million. In 2005, the Company repaid $60.1 million of
maturing long-term borrowings and repurchased $164.8 million of treasury stock.
The Company continued to maintain significant cash balances during 2005 rather
than pre-pay debt, as a result of pre-payment penalties that would be incurred
in retiring both the debt and the related interest rate swap agreements.
Additionally, the Company has not repaid this debt due to the low cost of the
debt, net of earnings on the cash. The Company has $530.7 million of long-term
borrowings coming due in 2006. The Company intends to repay these debt
obligations with cash and/or funds available to the Company under the revolving
credit facility. Any portion of the debt that is repaid through the use of the
revolving credit facility will be contractually due in May 2010, upon the
expiration of the facility, thus effectively converting the maturity of the debt
beyond 2006. The Company currently intends to effectively refinance $119.9
million of the long-term borrowings coming due in 2005 through use of the
revolving credit facility.
38
The following table presents the Company's scheduled contractual cash
obligations at December 31, 2005:
Greater
Less Than 1-3 3-5 Than
Contractual Obligations 1 Year Years Years 5 Years Total
(in thousands)
Long-term borrowings $ 410,779 $ 43,767 $ 226,337 $ - $680,883
Operating leases 20,175 20,383 7,966 5,275 53,799
Interest on long-term borrowings, net
of interest rate swap agreements 2,362 (35,657) (17,924) 12,015 (39,204)
Postretirement obligations 6,673 13,574 14,635 41,817 76,699
Precious metal consignment agreements 64,845 - - 0 64,845
-------- -------- -------- -------- ------
$ 504,834 $ 42,067 $ 231,014 $ 59,107 $837,022
========= ========= ========= ======== ========
The Company expects on an ongoing basis, to be able to finance cash
requirements, including capital expenditures, stock repurchases, debt service,
operating leases and potential future acquisitions, from the current cash
balances, funds generated from operations and amounts available under its
existing credit facilities.
39
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123R ("SFAS 123R"),
"Share-Based Payment". This standard eliminates the guidance of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and amends FASB Statement No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). The standard requires that all public companies
report share-based compensation expense at the grant date fair value of the
related share-based awards and no longer permits companies to account for
options under the intrinsic value approach of APB 25. SFAS 123R is effective
for annual periods beginning after June 15, 2005. As the Company has accounted
for stock option grants under the APB 25 in the past, this statement is expected
to have a material impact on the Company's financial statements once effective
($0.14 to $0.16 per diluted share on an annualized basis). The Company will use
the modified prospective transition method, utilizing the Black-Scholes option
pricing model for the calculation of the fair value of its employee stock
options. Under the modified prospective method, stock option awards that are
granted, modified or settled after January 1, 2006 will be measured and
accounted for in accordance with SFAS 123(R). Compensation cost for stock option
awards granted prior to, but not vested, as of January 1, 2006 would be based
on the grant date attributes originally used to value those awards for pro forma
purposes under SFAS 123.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4"
("SFAS 151"). This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing", to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Under
ARB No. 43, in certain circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs that were considered to
be unusually abnormal were required to be treated as period charges. Under SFAS
151, these charges are required to be treated as period charges regardless of
whether they meet the criterion of unusually abnormal. Additionally, SFAS 151
requires that allocation of fixed production overhead to the cost of conversion
be based on the normal capacity of the production facilities. SFAS 151 is
effective for all fiscal years beginning after June 15, 2005. The Company does
not expect the application of this standard to have a material impact on the
Company's financial statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets an amendment of APB Opinion
No. 29" ("SFAS 153"). This statement amends Opinion 29 to eliminate the
exceptions that allowed for other than fair value measurement when similar
productive assets were exchanged, and replaced the exceptions with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. SFAS 153 is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The application of this statement
did not have a material impact on the Company's financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 requires retroactive application of a
voluntary change in accounting principle to prior period financial statements
unless it is impracticable. SFAS 154 also requires that a change in method of
depreciation, amortization or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate that is affected by a change in
accounting principle. SFAS 154 replaces APB Opinion No. 20, "Accounting Changes"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements".
SFAS 154 is effective for fiscal years beginning after December 15, 2005. The
Company will adopt the provisions of SFAS 154 as of January 1, 2006 and does not
expect that its adoption will have a material impact on its financial
statements.
40
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information below provides information about the Company's market
sensitive financial instruments and includes "forward-looking statements" that
involve risks and uncertainties. Actual results could differ materially from
those expressed in the forward-looking statements. The Company's major market
risk exposures are changing interest rates, movements in foreign currency
exchange rates and potential price volatility of commodities used by the Company
in its manufacturing processes. The Company's policy is to manage interest rates
through the use of floating rate debt and interest rate swaps to adjust interest
rate exposures when appropriate, based upon market conditions. The Company
employs foreign currency denominated debt and currency swaps which serve to
partially offset the Company's exposure on its net investments in subsidiaries
denominated in foreign currencies. The Company's policy generally is to hedge
major foreign currency transaction exposures through foreign exchange forward
contracts. These contracts are entered into with major financial institutions
thereby minimizing the risk of credit loss. In order to limit the unanticipated
earnings fluctuations from volatility in commodity prices, the Company
selectively enters into commodity price swaps to convert variable raw material
costs to fixed costs. The Company does not hold or issue derivative financial
instruments for speculative or trading purposes. The Company is subject to other
foreign exchange market risk exposure in addition to the risks on its financial
instruments, such as possible impacts on its pricing and production costs, which
are difficult to reasonably predict, and have therefore not been included in the
table below. All items described are non-trading and are stated in U.S. dollars.
Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The Company
believes the carrying amounts of cash and cash equivalents, accounts receivable
(net of allowance for doubtful accounts), prepaid expenses and other current
assets, accounts payable, accrued liabilities, income taxes payable and notes
payable approximate fair value due to the short-term nature of these
instruments. The Company estimates the fair value of its total long-term debt
was $682.6 million versus its carrying value of $680.9 million as of December
31, 2005. The fair value approximated the carrying value since much of the
Company's debt is variable rate and reflects current market rates. The fixed
rate Eurobonds are effectively converted to variable rate as a result of an
interest rate swap and the interest rates on revolving debt and commercial paper
are variable and therefore the fair value of these instruments approximates
their carrying values. The Company has fixed rate Swiss franc denominated notes
with estimated fair values that differ from their carrying values. At December
31, 2005, the fair value of these instruments was $147.4 million versus their
carrying values of $145.7 million. The fair values differ from the carrying
values due to lower market interest rates at December 31, 2005 versus the rates
at issuance of the notes.
Derivative Financial Instruments
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. Additionally, the Company utilizes
interest rate swaps to convert floating rate debt to fixed rate, fixed rate
debt to floating rate, cross-currency basis swaps to convert debt
denominated in one currency to another currency and commodity swaps to fix
its variable raw materials.
Foreign Exchange Risk Management The Company enters into forward
foreign exchange contracts to selectively hedge assets and liabilities
denominated in foreign currencies. Market value gains and losses are
recognized in income currently and the resulting gains or losses offset
foreign exchange gains or losses recognized on the foreign currency assets
and liabilities hedged. Determination of hedge activity is based upon
market conditions, the magnitude of the foreign currency assets and
liabilities and perceived risks. The Company's significant contracts
outstanding as of December 31, 2005 are summarized in the table that
follows. These foreign exchange contracts generally have maturities of less
than twelve months and the counterparties to the transactions are typically
large international financial institutions.
The Company has numerous investments in foreign subsidiaries. The net
assets of these subsidiaries are exposed to volatility in currency exchange
rates. Currently, the Company uses both non-derivative financial
instruments, including foreign currency denominated debt held at the parent
company level and long-term intercompany loans, for which settlement is not
planned or anticipated in the foreseeable future and derivative financial
instruments to hedge some of this exposure. Translation gains and losses
related to the net assets of the foreign subsidiaries are offset by gains
and losses in the non-derivative and derivative financial instruments
designated as hedges of net investments, which are included in Accumulated
Other Comprehensive Income.
At December 31, 2005 and 2004, the Company had Euro-denominated, Swiss
franc-denominated, and Japanese yen-denominated debt and cross-currency
interest rate swaps (at the parent company level) to hedge the currency
exposure related to a designated portion of the net assets of its European,
Swiss, and Japanese subsidiaries. At December 31, 2005 and 2004, the
accumulated translation gains on investments in foreign subsidiaries,
primarily denominated in Euros, Swiss francs and Japanese yen, net of these
net investment debt hedges, were $56.2 million and $179.4 million,
respectively, which were included in Accumulated Other Comprehensive
Income.
41
Interest Rate Risk Management The Company uses interest rate swaps to
convert a portion of its variable rate debt to fixed rate debt. As of
December 31, 2005, the Company has two groups of significant variable rate
to fixed rate interest rate swaps. One of the groups of swaps was entered
into in February 2002, has notional amounts totaling 12.6 billion Japanese
yen, and effectively converts the underlying variable interest rates to an
average fixed rate of 1.6% for a term of ten years. The other swap,
effective March, 2005, has a notional amount of 65 million Swiss francs,
and effectively converts the underlying variable interest rates to a fixed
rate of 4.2% for a term of seven years.
The Company uses interest rate swaps to convert a portion of its fixed
rate debt to variable rate debt. In December 2001, the Company issued Euro
350 million in Eurobonds at a fixed rate of 5.75% maturing in December 2006
to partially finance the Degussa Dental acquisition. Coincident with the
issuance of the Eurobonds, the Company entered into two integrated
transactions: (a) an interest rate swap agreement with notional amounts
totaling Euro 350 million which converted the 5.75% fixed rate
Euro-denominated financing to a variable rate (based on the London
Interbank Borrowing Rate) Euro-denominated financing; and (b) a
cross-currency basis swap which converted this variable rate
Euro-denominated financing to variable rate U.S. dollar-denominated
financing.
The Euro 350 million interest rate swap agreement was designated as a
fair value hedge of the Euro 350 million in fixed rate debt pursuant to
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). In accordance with SFAS No. 133, the interest
rate swap and underlying Eurobond have been marked-to-market via the income
statement. As of December 31, 2005 and 2004, the accumulated fair value of
the interest rate swap was $5.3 million and $14.7 million, respectively,
and was recorded in Prepaid Expenses and Other Current Assets and Other
Noncurrent Assets. The notional amount of the underlying Eurobond was
increased by a corresponding amount at December 31, 2005 and 2004.
From inception through the first quarter of 2003, the cross-currency
element of the integrated transaction was not designated as a hedge and
changes in the fair value of the cross-currency element of the integrated
transaction were marked-to-market in the income statement, offsetting the
impact of the change in exchange rates on the Eurobonds that were also
recorded in the income statement. In the first quarter of 2003, the Company
amended the cross-currency element of the integrated transaction to realize
the $ 51.8 million of accumulated value of the cross-currency swap. The
amendment eliminated the final payment (at a fixed rate of $0.90) of $315
million by the Company in exchange for the final payment of Euro 350
million by the counterparty in return for the counterparty paying the
Company 4.29% on $315 million for the remaining term of the agreement, or
approximately $14.0 million on an annual basis. Other cash flows associated
with the cross-currency element of the integrated transaction, included the
Company's obligation to pay on $315 million LIBOR plus approximately 1.34%,
and the counterparty's obligation to pay on Euro 350 million LIBOR plus
approximately 1.47%, remained unchanged by the amendment.
No gain or loss was recognized upon the amendment of the cross-currency
element of the integrated transaction, as the interest rate of 4.29% was
established to ensure that the fair value of the cash flow streams before
and after amendment were equivalent. As a result of the amendment, the
Company became economically exposed to the impact of exchange rates on the
final principal payment on the Euro 350 million Eurobonds and designated
the Euro 350 million Eurobonds as a hedge of net investment, on the date of
the amendment and thus the impact of translation changes related to the
final principal payment are recorded in Accumulated Other Comprehensive
Income.
The cross-currency element of the integrated transaction continued to
be marked-to-market in the income statement (completely offset by the
corresponding change in the Eurobonds) through June of 2005. In June 2005,
the Company terminated the cross-currency element of the integrated
transaction in response to the rapid rise in USD short-term interest rates,
converting the debt back into a euro variable instrument. Upon termination,
the Company realized the remaining $20.1 million of accumulated value of
the swap. At December 31, 2004, the accumulated fair value of the
cross-currency element of the integrated transaction was $14.7 million,
recorded in Prepaid Expenses and Other Current Assets and Other Noncurrent
Assets. The notional amount of the underlying Eurobond was increased by a
corresponding amount at December 31, 2004.
42
In the first quarter of 2005, the Company entered into cross-currency
interest rate swaps with a notional principal value of CHF 457 million
paying 3 month Swiss Franc Libor and receiving 3 month U.S. dollar Libor on
$384.4 million. These cross-currency swaps are designated as a net
investment hedge of the Swiss net assets. Additionally, in the fourth
quarter of 2005, the Company entered into cross-currency interest rate
swaps with a notional principal value of EUR 358 million paying 3 month
Euro Libor and receiving 3 month U.S. dollar Libor on $419.7 million.
These cross-currency swaps are designated as a net investment hedge of
the Euro denominated net assets. The interest rate differential is
recognized in earnings as it is accrued, the foreign currency revaluation
is recorded in Accumulated Other Comprehensive Income, net of tax effects.
The fair value of these swap agreements is the estimated amount the
Company would receive (pay) at the reporting date, taking into account the
effective interest rates and foreign exchange rates. As of December 31,
2005 and 2004, the estimated net fair values of the swap agreements were
$29.2 million and $35.7 million, respectively.
Commodity Price Risk Management The Company selectively enters into
commodity price swaps to effectively fix certain variable raw material
costs. These swaps are used purely to stabilize the cost of components used
in the production of certain of the Company's products. The Company
generally accounts for the commodity swaps as cash flow hedges under SFAS
133. As a result, the Company records the fair value of the swap primarily
through other comprehensive income based on the tested effectiveness of the
commodity swap. Realized gains or losses in Accumulated Other Comprehensive
Income are released and recorded to costs of products sold as the products
associated with the commodity swaps are sold.
Off Balance Sheet Arrangements
Consignment Arrangements
The Company consigns the precious metals used in the production of precious
metal alloy products from various financial institutions. Under these
consignment arrangements, the banks own the precious metal, and, accordingly,
the Company does not report this consigned inventory as part of its inventory on
its consolidated balance sheet. These agreements are cancelable by either party
at the end of each consignment period; however because the Company has access to
numerous financial institutions with excess capacity, consignment needs created
by cancellations can be shifted among the other institutions. The consignment
agreements allow the Company to take ownership of the metal at approximately the
same time customer orders are received and to closely match the price of the
metal acquired to the price charged to the customer (i.e., the price charged to
the customer is largely a pass through).
As precious metal prices fluctuate, the Company evaluates the impact of the
precious metal price fluctuation on its target gross margins for precious metal
alloy products and revises the prices customers are charged for precious metal
alloy products accordingly, depending upon the magnitude of the fluctuation.
While the Company does not separately invoice customers for the precious metal
content of precious metal alloy products, the underlying precious metal content
is the primary component of the cost and sales price of the precious metal alloy
products. For practical purposes, if the precious metal prices go up or down by
a small amount, the Company will not immediately modify prices, as long as the
cost of precious metals embedded in the Company's precious metal alloy price
closely approximates the market price of the precious metal. If there is a
significant change in the price of precious metals, the Company adjusts the
price for the precious metal alloys, maintaining its margin on the products.
At December 31, 2005, the Company had 130,026 troy ounces of precious
metal, primarily gold, platinum and palladium, on consignment for periods of
less than one year with a market value of $64.8 million. Under the terms of the
consignment agreements, the Company also makes compensatory payments to the
consignor banks based on a percentage of the value of the consigned precious
metals inventory. At December 31, 2005, the average annual rate charged by the
consignor banks was 1.0%. These compensatory payments are considered to be a
cost of the metals purchased and are recorded as part of the cost of products
sold.
43
EXPECTED MATURITY DATES
(represents notional amounts for derivative financial instruments)
December 31, 2005
2011 and Carrying Fair
2006 2007 2008 2009 2010 beyond Value Value
(dollars in thousands)
Financial Instruments
Notes Payable:
U.S. dollar denominated $ 1,049 $ - $ - $ - $ - $ - $ 1,049 $ 1,049
Average interest rate 2.53% 2.53%
Denmark krone denominated 26 - - - - - 26 26
Average interest rate 6.00% 6.00%
Euro denominated 171 - - - - - 171 171
Average interest rate 2.94% 2.94%
Japanese yen denominated 187 - - - - - 187 187
Average interest rate 1.38% 1.38%
------------------------------------------------------------------------------------
1,433 - - - - - - 1,433 1,433
2.49% 2.49%
Current Portion of
Long-term Debt:
U.S. dollar denominated 439 - - - - - 439 439
Average interest rate 4.29% 4.29%
Swiss franc denominated 103,412 - - - - - 103,412 104,215
Average interest rate 4.77% 4.77%
Euro denominated 306,928 - - - - - 306,928 306,928
Average interest rate 5.74% 5.74%
-----------------------------------------------------------------------------------
410,779 - - - - - 410,779 411,582
5.49% 5.49%
Long Term Debt:
U.S. dollar denominated - 78 53 14 6,700 - 6,844 6,844
Average interest rate 6.79% 7.16% 8.28% 4.35% 4.41%
Swiss franc denominated 42,273 - - - - 42,273 43,146
Average interest rate 4.49% 4.49%
Japanese yen denominated - 1,364 - - 106,359 - 107,723 107,723
Average interest rate 0.03% 0.42% 0.41%
Euro denominated - - - 113,264 - 113,264 113,264
Average interest rate 5.75% 5.75%
-----------------------------------------------------------------------------------
- 43,714 53 14 226,323 - 270,104 270,977
4.35% 7.16% 8.28% 3.20% 3.39%
Derivative Financial Instruments
Foreign Exchange
Forward Contracts:
Forward sale, 5.3 million
Australian dollars 3,886 - - - - - 70 70
Forward purchase, 1.8 million
Canadian dollars (1,542) - - - - - 13 13
Forward sale, 2.2 billion
Japanese yen 18,780 - - - - - 52 52
Forward sale, 14.3 million
Mexican Pesos 1,348 - - - - - (38) (38)
Forward sale, 22.0 million
Canadian dollars 18,900 - - - - - (140) (140)
Forward purchase, 1.2 billion
Japanese yen (10,412) - - - - - (145) (145)
Forward purchase, 1.0 million
Swiss francs (776) - - - - - (16) (16)
Interest Rate Swaps:
Interest rate swaps - Japanese yen - - - - - 106,359 (2,999) (2,999)
Average interest rate 1.6%
Interest rate swaps - Swiss francs - - - - - 49,407 (5,971) (5,971)
Average interest rate 4.2%
Interest rate swaps - Euro 419,348 - - - - - 5,316 5,316
Average interest rate 3.9%
Cross-Currency Basis Swaps:
Swiss franc 457.5 million @ 1.19 - - - - 384,380 - 36,630 36,630
pay CHF 3mo. Libor rec. USD 3mo. Libor -3.38%
Euros 358.0 million @ $1.17 - - - - 419,685 - (3,811) (3,811)
pay EUR 3mo. Libor rec. USD 3mo. Libor -1.87%
44
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. The Company's
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness of internal controls over financial reporting to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005. In making
this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control--Integrated Framework. Based on its assessment management concluded
that, as of December 31, 2005, the Company's internal control over financial
reporting was effective based on those criteria.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
/s/ Gerald K. Kunkle, Jr. /s/William R. Jellison
Gerald K. Kunkle, Jr. William R. Jellison
Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
March 10, 2006 March 10, 2006
45
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of DENTSPLY International Inc.:
We have completed integrated audits of DENTSPLY International Inc.'s
2005 and 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2005 and an audit of its December 31,
2003 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based
on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the
index appearing under Item 15(a)(1) present fairly, in all material respects,
the financial position of DENTSPLY International, Inc. and its subsidiaries at
December 31, 2005 and December 31, 2004, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 15(a)(1) presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (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 of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in
"Management's Report on Internal Control Over Financial Reporting" appearing
under Item 9A, that the Company maintained effective internal control over
financial reporting as of December 31, 2005 based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
46
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 10, 2006
47
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2005 2004 2003
(in thousands, except per share amounts)
Net sales (Note 4) $ 1,715,135 $ 1,694,232 $ 1,567,994
Cost of products sold 846,117 847,714 797,461
------- ------- -------
Gross profit 869,018 846,518 770,533
Selling, general and administrative expenses 563,341 544,264 498,850
Restructuring and impairment costs (Note 15) 232,755 7,124 3,700
------- ----- -----
Operating income 72,922 295,130 267,983
Other income and expenses:
Interest expense 17,773 25,098 26,079
Interest income (9,005) (5,469) (1,874)
Other (income) expense, net (Note 5) (6,884) 1,346 (7,418)
------ ----- ------
Income before income taxes 71,038 274,155 251,196
Provision for income taxes (Note 13) 25,625 63,869 81,343
-- ------ ------ ------
Income from continuing operations 45,413 210,286 169,853
Income from discontinued operations, net of tax (Note 6) - 42,879 4,330
------ ------ -----
Net income $ 45,413 $ 253,165 $ 174,183
========= ========= =========
Earnings per common share - basic (Note 2)
Continuing operations $ 0.57 $ 2.61 $ 2.16
Discontinued operations - 0.54 0.05
---- ---- ----
Total earnings per common share - basic $ 0.57 $ 3.15 $ 2.21
====== ====== ======
Earnings per common share - diluted (Note 2)
Continuing operations $ 0.56 $ 2.56 $ 2.11
Discontinued operations - 0.53 0.05
---- ---- ----
Total earnings per common share - diluted $ 0.56 $ 3.09 $ 2.16
====== ====== ======
Cash dividends declared per common share $ 0.25000 $ 0.21750 $ 0.19700
Weighted average common shares outstanding (Note 2):
Basic 79,595 80,387 78,823
Diluted 81,008 82,014 80,647
The accompanying notes are an integral part of these financial statements.
48
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2005 2004
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 434,525 $ 506,369
Accounts and notes receivable-trade, net (Note 1) 254,822 238,873
Inventories, net (Notes 1 and 7) 208,179 213,709
Prepaid expenses and other current assets (Notes 13 and 16) 132,517 97,458
------- ------
Total Current Assets 1,030,043 1,056,409
Property, plant and equipment, net (Notes 1 and 8) 316,218 399,880
Identifiable intangible assets, net (Notes 1 and 9) 68,600 265,731
Goodwill, net (Notes 1 and 9) 933,227 996,262
Other noncurrent assets (Notes 13, 14 and 16) 59,240 79,863
------ ------
Total Assets $2,407,329 $ 2,798,145
========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 82,317 $ 91,576
Accrued liabilities (Note 10) 159,846 179,765
Income taxes payable 86,859 60,387
Notes payable and current portion
of long-term debt (Note 11) 412,212 72,879
------- ------
Total Current Liabilities 741,234 404,607
Long-term debt (Note 11) 270,104 779,940
Deferred income taxes 42,912 58,196
Other noncurrent liabilities (Note 14) 111,311 110,829
------- -------
Total Liabilities 1,165,561 1,353,572
Minority interests in consolidated subsidiaries 188 600
--- ---
Commitments and contingencies (Note 17)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued - -
Common stock, $.01 par value; 200 million shares authorized;
81.4 million shares issued at December 31, 2005 and December 31, 2004 814 814
Capital in excess of par value 170,607 189,277
Retained earnings 1,151,856 1,126,262
Accumulated other comprehensive income 56,454 164,100
Treasury stock, at cost, 2.5 million shares at December 31, 2005
and 0.8 million shares at December 31, 2004 (138,151) (36,480)
-------- -------
Total Stockholders' Equity 1,241,580 1,443,973
--------- ---------
Total Liabilities and Stockholders' Equity $ 2,407,329 $ 2,798,145
=========== ===========
The accompanying notes are an integral part of these financial statements.
49
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated
Capital in Other Unearned Total
Common Excess of Retained Comprehensive ESOP Treasury Stockholders'
Stock Par Value Earnings Income Compensation Stock Equity
(in thousands)
Balance at December 31, 2002 $ 814 $156,898 $ 730,971 $ 1,624 $ (1,899) $ (52,480) $ 835,928
Comprehensive Income:
Net income - - 174,183 - - - 174,183
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - 95,984 - - 95,984
Unrealized gain on available-for-sale
securities - - - 5,005 - - 5,005
Net gain on derivative financial
instruments - - - 2,430 - - 2,430
Minimum pension liability adjustment - - - (123) - - (123)
Comprehensive Income 277,479
Exercise of stock options - 4,229 - - - 12,642 16,871
Tax benefit from stock options exercised - 5,825 - - - - 5,825
Cash dividends ($0.197 per share) - - (15,553) - - - (15,553)
Decrease in unearned ESOP compensation - - - - 1,519 - 1,519
---- ------- ------- ------- ----- ------- -----
Balance at December 31, 2003 814 166,952 889,601 104,920 (380) (39,838) 1,122,069
Comprehensive Income:
Net income - - 253,165 - - - 253,165
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - 69,884 - - 69,884
Unrealized gain on available-for-sale
securities - - - 191 - - 191
Net loss on derivative financial
instruments - - - (9,086) - - (9,086)
Minimum pension liability adjustment - - - (1,809) - - (1,809)
Comprehensive Income 312,345
Exercise of stock options - 4,257 - - - 41,061 45,318
Tax benefit from stock options exercised - 18,068 - - - - 18,068
Treasury shares purchased - - - - - (37,703) (37,703)
Cash dividends ($0.2175 per share) - - (16,504) - - - (16,504)
Decrease in unearned ESOP compensation - - - - 380 - 380
---- ------- ------- ------- ----- ------- -----
Balance at December 31, 2004 814 189,277 1,126,262 164,100 - (36,480) 1,443,973
Comprehensive Income:
Net income - - 45,413 - - - 45,413
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - - (123,202) - - (123,202)
Unrealized gain on available-for-sale
securities - - - 22 - - 22
Net gain on derivative financial
instruments - - - 27,951 - - 27,951
Minimum pension liability adjustment - - - (12,417) - - (12,417)
Comprehensive Income (Loss) (62,233)
Exercise of stock options - (31,313) - - - 63,089 31,776
Tax benefit from stock options exercised - 12,643 - - - - 12,643
Treasury shares purchased - - - - - (164,760) 164,760)
Cash dividends ($0.250 per share) - - (19,819) - - - (19,819)
---- ------- ------- ------- ----- -------- ----------
Balance at December 31, 2005 $ 814 $ 170,607 $1,151,856 $ 56,454 $ - $(138,151) $ 1,241,580
===== ========= ========== ======== ====== ========= ===========
The accompanying notes are an integral part of these financial statements.
50
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
2005 2004 2003
(in thousands)
Cash flows from operating activities:
Net income from continuing operations $ 45,413 $ 210,286 $ 169,853
-------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 42,031 40,841 36,897
Amortization 8,529 8,455 8,764
Deferred income taxes (91,777) 7,058 32,411
Restructuring and impairment costs 232,755 7,124 3,700
Other non-cash income (2,017) (394) (1,173)
Loss on disposal of property, plant and equipment 1,506 958 459
Gain on sale of PracticeWorks securities - - (5,806)
Non-cash ESOP compensation - 380 1,519
Changes in operating assets and liabilities, net of
acquisitions and divestitures:
Accounts and notes receivable-trade, net (31,589) 16,061 (4,899)
Inventories, net (7,460) 4,103 15,197
Prepaid expenses and other current assets (4,230) (765) 4,894
Other noncurrent assets (854) 1,643 (2,803)
Accounts payable (6,784) (1,386) 16,538
Accrued liabilities (14,465) 5,756 (26,561)
Income taxes 54,045 27,584 (271)
Other noncurrent liabilities 7,666 2,828 2,146
Cash flows (used in) provided by
discontinued operating activities - (24,273) 7,127
------- ------- -----
Net cash provided by operating activities 232,769 306,259 257,992
------- ------- -------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (18,097) (17,165) (15,038)
Expenditures for identifiable intangible assets (3,473) (7,573) (5,836)
Proceeds from sale of Gendex - 102,500 -
Proceeds from sale of PracticeWorks securities - - 23,506
Proceeds from sale of property, plant and equipment 555 1,788 2,959
Capital expenditures (45,293) (52,036) (73,157)
Other - (1,756) -
Realization of cross-currency swap value 23,836 13,664 10,736
Cash flows used in discontinued
operations' investing activities - (148) (1,811)
------- ------ ------
Net cash (used in) provided by investing activities (42,472) 39,274 (58,641)
------- ------ -------
Cash flows from financing activities:
Proceeds from long-term borrowings, net
of deferred financing costs - - 634
Payments on long-term borrowings (60,105) (22,151) (70,738)
(Decrease) increase in short-term borrowings (141) 624 (3,277)
Proceeds from exercise of stock options 31,776 45,318 16,871
Cash paid for treasury stock (164,760) (37,703) -
Cash dividends paid (19,141) (15,823) (14,999)
------- ------- -------
Net cash used in financing activities (212,371) (29,735) (71,509)
-------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (49,770) 26,816 10,261
------- ------ ------
Net (decrease) increase in cash and cash equivalents (71,844) 342,614 138,103
Cash and cash equivalents at beginning of period 506,369 163,755 25,652
------- ------- ------
Cash and cash equivalents at end of period $ 434,525 $ 506,369 $ 163,755
========= ========= =========
The accompanying notes are an integral part of these financial statements.
51
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2005 2004 2003
(in thousands)
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized $ 19,864 $ 24,836 $ 25,796
Income taxes paid $ 62,291 $ 44,952 $ 57,733
The accompanying notes are an integral part of these financial statements.
52
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DENTSPLY designs, develops, manufactures and markets a broad range of
products for the dental market. The Company believes that it is the world's
leading manufacturer and distributor of dental prosthetics, precious metal
dental alloys, dental ceramics, endodontic instruments and materials,
prophylaxis paste, dental sealants, ultrasonic scalers and crown and bridge
materials; the leading United States manufacturer and distributor of dental
handpieces, dental x-ray film holders, film mounts and bone substitute/grafting
materials; and a leading worldwide manufacturer or distributor of dental
injectable anesthetics, impression materials, orthodontic appliances, dental
cutting instruments and dental implants. The Company distributes its dental
products in over 120 countries under some of the most well established brand
names in the industry.
DENTSPLY is committed to the development of innovative, high-quality, cost
effective products for the dental market.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. Intercompany accounts and transactions are
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates,
if different assumptions are made or if different conditions exist.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Accounts and Notes Receivable-Trade
The Company sells dental equipment and supplies both through a worldwide
network of distributors and directly to end users. For customers on credit
terms, the Company performs ongoing credit evaluation of those customers'
financial condition and generally does not require collateral from them. The
Company establishes allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Accounts and notes receivable-trade are stated net of these allowances which
were $14.8 million and $17.2 million at December 31, 2005 and 2004,
respectively. The Company recorded provisions for doubtful accounts, included in
"Selling, general and administrative expenses", of approximately $2.1 million,
$2.1 million and $0.6 million for 2005, 2004 and 2003, respectively.
Certain of the Company's customers are offered cash rebates based on
targeted sales increases. In accounting for these rebate programs, the Company
records an accrual as a reduction of net sales for the estimated rebate as sales
take place throughout the year in accordance with EITF 01-09, " Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)".
53
Inventories
Inventories are stated at the lower of cost or market. At December 31, 2005
and 2004, the cost of $10.3 million, or 5%, and $10.8 million, or 5%,
respectively, of inventories was determined by the last-in, first-out ("LIFO")
method. The cost of other inventories was determined by the first-in, first-out
("FIFO") or average cost methods. The Company establishes reserves for inventory
estimated to be obsolete or unmarketable equal to the difference between the
cost of inventory and estimated market value based upon assumptions about future
demand and market conditions.
If the FIFO method had been used to determine the cost of LIFO inventories,
the amounts at which net inventories are stated would be higher than reported at
December 31, 2005 and December 31, 2004 by $2.6 million and $1.4 million,
respectively.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived
Assets
Assessment of the potential impairment of goodwill, indefinite-lived
intangible assets and other long-lived assets is an integral part of the
Company's normal ongoing review of operations. Testing for potential impairment
of these assets is significantly dependent on numerous assumptions and reflects
management's best estimates at a particular point in time. The dynamic economic
environments in which the Company's businesses operate and key economic and
business assumptions with respect to projected selling prices, increased
competition and introductions of new technologies can significantly affect the
outcome of impairment tests. Estimates based on these assumptions may differ
significantly from actual results. Changes in factors and assumptions used in
assessing potential impairments can have a significant impact on both the
existence and magnitude of impairments, as well as the time at which such
impairments are recognized. If there are unfavorable changes in these
environments or assumptions, future cash flows, the key variable in assessing
the impairment of these assets, may decrease and as a result the Company may be
required to recognize impairment charges. Future changes in the environment and
the economic outlook for the assets being evaluated could also result in
additional impairment charges being recognized. Information with respect to the
Company's significant accounting policies on long-lived assets for each category
of long-lived asset is discussed below.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Except for leasehold improvements, depreciation for financial
reporting purposes is computed by the straight-line method over the
following estimated useful lives: buildings - generally 40 years and
machinery and equipment - 4 to 15 years. The cost of leasehold improvements
is amortized over the shorter of the estimated useful life or the term of
the lease. Maintenance and repairs are charged to operations; replacements
and major improvements are capitalized. These assets are reviewed for
impairment whenever events or circumstances suggest that the carrying
amount of the asset may not be recoverable in accordance with Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets". Impairment is based upon an
evaluation of the identifiable undiscounted cash flows. If impaired, the
resulting charge reflects the excess of the asset's carrying cost over its
fair value.
As a result of changes in events and circumstances surrounding the
indefinite-lived injectable anesthetic intangible asset acquired from
AstraZeneca in 2001 and the assets associated with the pharmaceutical
manufacturing facility, additional impairment analyses were conducted
during the third and fourth quarters of 2005, resulting in impairment
charges being recorded in both quarters (see Note 15 - RESTRUCTURING AND
IMPAIRMENT COSTS (INCOME)).
Identifiable Finite-Lived Intangible Assets
Identifiable finite-lived intangible assets, which primarily consist of
patents, trademarks and licensing agreements, are amortized on a
straight-line basis over their estimated useful lives. These assets are
reviewed for impairment whenever events or circumstances suggest that the
carrying amount of the asset may not be recoverable in accordance with SFAS
144. The Company closely monitors intangible assets related to new
technology for indicators of impairment as these assets have more risk of
becoming impaired. Impairment is based upon an evaluation of the
identifiable undiscounted cash flows. If impaired, the resulting charge
reflects the excess of the asset's carrying cost over its fair value.
54
Goodwill and Indefinite-Lived Intangible Assets
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets" which requires that at
least an annual impairment test be applied to goodwill and indefinite-lived
intangible assets. The Company performs impairment tests on at least an
annual basis using a fair value approach rather than an evaluation of the
undiscounted cash flows. If impairment is identified on goodwill under SFAS
142, the resulting charge is determined by recalculating goodwill through a
hypothetical purchase price allocation of the fair value and reducing the
current carrying value to the extent it exceeds the recalculated goodwill.
If impairment is identified on indefinite-lived intangibles, the resulting
charge reflects the excess of the asset's carrying cost over its fair
value.
The Company performed the required annual impairment tests in the
second quarter of 2005 and no impairment was identified. This impairment
assessment included an evaluation of approximately 20 reporting units. In
addition to the annual impairment test, SFAS 142 also requires that
impairment assessments be made more frequently if events or changes in
circumstances indicate that the goodwill or indefinite-lived intangible
assets might be impaired. As the Company learns of such changes in
circumstances through periodic analysis of actual events or through the
annual development of operating unit business plans in the fourth quarter
of each year or otherwise, impairment assessments are performed as
necessary.
As a result of changes in events and circumstances surrounding the
indefinite-lived injectable anesthetic intangible asset acquired from
AstraZeneca in 2001 and the assets associated with the pharmaceutical
manufacturing facility, additional impairment analyses were conducted
during the third and fourth quarters of 2005, resulting in impairment
charges being recorded in both quarters (see Note 15 - RESTRUCTURING
AND IMPAIRMENT COSTS (INCOME)).
Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", on
January 1, 2001. This standard, as amended by SFAS 138 and 149, requires that
all derivative instruments be recorded on the balance sheet at their fair value
and that changes in fair value be recorded each period in current earnings or
Accumulated Other Comprehensive Income.
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. Additionally, the Company utilizes interest
rate swaps to convert floating rate debt to fixed rate, fixed rate debt to
floating rate, cross-currency basis swaps to convert debt denominated in one
currency to another currency, and commodity swaps to fix its variable raw
materials costs.
Pension and Other Postretirement Benefits
Substantially all of the employees of the Company and its subsidiaries are
covered by government or Company-sponsored defined benefit or defined
contribution plans. Additionally, certain union and salaried employee groups in
the United States are covered by a postretirement healthcare plan. Costs for
Company-sponsored plans are based on expected return on plan assets, discount
rates, employee compensation increase rates and health care cost trends.
Expected return on plan assets, discount rates, and health care cost trend
assumptions are particularly important when determining the Company's benefit
obligations and net periodic benefit costs associated with postretirement
benefits. Changes in these assumptions can impact the Company's pretax earnings.
In determining the cost of postretirement benefits, certain assumptions are
established annually to reflect market conditions and plan experience to
appropriately reflect the expected costs as actuarially determined. These
assumptions include medical inflation trend rates, discount rates, employee
turnover and mortality rates. The Company predominantly uses liability durations
in establishing its discount rates, which are observed from indices of
high-grade corporate bond yields in the respective economic regions of the
plans. The expected return on plan assets is the weighted average long-term
expected return based upon asset allocations and historic average returns for
the markets where the assets are invested, principally in foreign locations.
Additional information related to the impact of changes in these assumptions is
provided in Note 14 to the Consolidated Financial Statements.
55
Litigation
The Company and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company records liabilities when
a loss is probable and can be reasonably estimated. These estimates are made by
management based on an analysis made by internal and external legal counsel
which considers information known at the time. Legal costs related to these
lawsuits are expensed as incurred.
Foreign Currency Translation
The functional currency for foreign operations, except for those in highly
inflationary economies, has been determined to be the local currency.
Assets and liabilities of foreign subsidiaries are translated at exchange
rates on the balance sheet date; revenue and expenses are translated at the
average year-to-date rates of exchange. The effects of these translation
adjustments are reported in stockholders' equity within "Accumulated other
comprehensive income". During the year ended December 31, 2005, the Company had
translation losses of $172.3 million, partially offset by gains of $49.1 million
on its loans designated as hedges of net investments. During the years ended
December 31, 2004 and 2003, the Company had translation gains of $104.9 million
and $153.0 million, respectively, partially offset by losses of $35.0 million
and $57.0 million, respectively, on its loans designated as hedges of net
investments.
Exchange gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved and
translation adjustments in countries with highly inflationary economies are
included in income. Exchange gains of $6.7 million and $0.3 million in 2005 and
2003, respectively, and exchange losses of $1.2 million in 2004 are included in
"Other expense (income), net".
Revenue Recognition
Revenue, net of related discounts and allowances, is recognized when the
earnings process is complete. This occurs when products are shipped to or
received by the customer in accordance with the terms of the agreement, title
and risk of loss have been transferred, collectibility is probable and pricing
is fixed or determinable. Net sales include shipping and handling costs
collected from customers in connection with the sale.
A significant portion of the Company's net sales is comprised of sales of
precious metals generated through its precious metal alloy product offerings. As
the precious metal content of the Company's sales is largely a pass-through to
customers, the Company uses its cost of precious metal purchased as a proxy for
the precious metal content of sales, as the precious metal content of sales is
not separately tracked and invoiced to customers. The Company believes that it
is reasonable to use the cost of precious metal content purchased in this manner
since precious metal alloy sale prices are typically adjusted when the prices of
underlying precious metals change. The precious metals content of sales was
$171.2 million, $212.3 million and $203.7 million for 2005, 2004 and 2003,
respectively.
Warranties
The Company provides warranties on certain equipment products. Estimated
warranty costs are accrued when sales are made to customers. Estimates for
warranty costs are based primarily on historical warranty claim experience.
Research and Development Costs
Research and development ("R&D") costs relate primarily to internal costs
for salaries and direct overhead costs. In addition, the Company contracts with
outside vendors to conduct R&D activities. All such R&D costs are charged to
expense when incurred. The Company capitalizes the costs of equipment that have
general R&D uses and expenses such equipment that is solely for specific R&D
projects. The depreciation related to this capitalized equipment is included in
the Company's R&D costs. R&D costs are included in "Selling, general and
administrative expenses" and amounted to approximately $47.0 million, $44.6
million and $43.3 million for 2005, 2004 and 2003, respectively.
56
Income Taxes
Income taxes are determined using the liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standards No.
109 ("SFAS 109"). Under SFAS 109, tax expense includes US and international
income taxes plus the provision for US taxes on undistributed earnings of
international subsidiaries not deemed to be permanently invested. Tax credits
and other incentives reduce tax expense in the year the credits are claimed.
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of such temporary
differences is reported as deferred income taxes. Deferred tax assets are
recognized if it is more likely than not that the assets will be realized in
future years. The Company establishes a valuation allowance for deferred tax
assets for which realization is not likely.
The Company accounts for income tax contingencies in accordance with the
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies".
Earnings Per Share
Basic earnings per share is calculated by dividing net earnings by the
weighted average number of shares outstanding for the period. Diluted earnings
per share is calculated by dividing net earnings by the weighted average number
of shares outstanding for the period, adjusted for the effect of an assumed
exercise of all dilutive options outstanding at the end of the period.
Stock Compensation
The Company has stock-based employee compensation plans which are described
more fully in Note 12 - STOCKHOLDERS' EQUITY . The Company applies the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees", and related interpretations in
accounting for stock compensation plans. Under this method, no compensation
expense is recognized for fixed stock option plans, provided that the exercise
price is greater than or equal to the price of the stock at the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation (see also discussion of SFAS
123R in New Accounting Pronouncements).
Year Ended December 31,
2005 2004 2003
(in thousands, except per share amounts)
Net income as reported $ 45,413 $ 253,165 $ 174,183
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax (13,784) (11,668) (11,062)
------- ------- -------
Pro forma net income $ 31,629 $ 241,497 $ 163,121
======== ========= =========
Basic earnings per common share
As reported $ 0.57 $ 3.15 $ 2.21
Pro forma under fair value based method $ 0.40 $ 3.00 $ 2.07
Diluted earnings per common share
As reported $ 0.56 $ 3.09 $ 2.16
Pro forma under fair value based method $ 0.39 $ 2.95 $ 2.02
APB 25
Basic 79,595 80,387 78,823
Diluted 81,008 82,014 80,647
SFAS 123
Basic 79,595 80,387 78,823
Diluted 81,115 81,994 80,705
57
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign currency translation
adjustments related to the Company's foreign subsidiaries, net of the related
changes in certain financial instruments hedging these foreign currency
investments. In addition, changes in the fair value of the Company's
available-for-sale investment securities and certain derivative financial
instruments and changes in its minimum pension liability are recorded in other
comprehensive income (loss). These changes are recorded in other comprehensive
income (loss) net of any related tax effects. For the years ended December 31,
2005, 2004 and 2003, these adjustments were net of tax effects of $48.1 million,
$32.0 million and $29.1 million, respectively, primarily related to foreign
currency translation adjustments.
The balances included in accumulated other comprehensive income in the
consolidated balance sheets are as follows:
December 31,
2005 2004
(in thousands)
Foreign currency translation adjustments $ 56,214 $ 179,416
Net gain/(loss) on derivative financial
instruments 15,312 (12,639)
Unrealized gain (loss) on available-for-sale securities 364 342
Minimum pension liability (15,436) (3,019)
------- ------
$ 56,454 $ 164,100
======== =========
The cumulative foreign currency translation adjustments included
translation gains of $129.0 million and $297.9 million as of December 31, 2005
and 2004, respectively, offset by losses of $72.8 million and $118.5 million,
respectively, on loans designated as hedges of net investments.
Revisions in Classification
Certain revisions in classification have been made to prior years' data in
order to conform to the current year presentation.
The Company has revised its 2004 and 2003 cash flow statement
classifications to present realization of cross-currency swap value of $13.7
million and $10.7 million, respectively, into cash flows from investing
activities from cash flows from financing activities
New Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R ("SFAS 123R"), "Share-Based Payment". This standard
eliminates the guidance of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and amends FASB Statement
No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). The standard
requires that all public companies report share-based compensation expense at
the grant date fair value of the related share-based awards and no longer
permits companies to account for options under the intrinsic value approach of
APB 25. SFAS 123R is effective for annual periods beginning after June 15, 2005.
As the Company has accounted for stock option grants under the APB 25 in the
past, this statement is expected to have a material impact on the Company's
financial statements once effective ($0.14 to $0.16 per diluted share on an
annualized basis). The Company will use the modified prospective transition
method, utilizing the Black-Scholes option pricing model for the calculation of
the fair value of its employee stock options. Under the modified prospective
method, stock option awards that are granted, modified or settled after January
1, 2006 will be measured and accounted for in accordance with SFAS 123(R).
Compensation cost for stock option awards granted prior to, but not vested, as
of January 1, 2006 would be based on the grant date attributes originally used
to value those awards for pro forma purposes under SFAS 123.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4"
("SFAS 151"). This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing", to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Under
ARB No. 43, in certain circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs that were considered to
be unusually abnormal were required to be treated as period charges. Under SFAS
151, these charges are required to be treated as period charges regardless of
whether they meet the criterion of unusually abnormal. Additionally, SFAS 151
requires that allocation of fixed production overhead to the cost of conversion
be based on the normal capacity of the production facilities. SFAS 151 is
effective for all fiscal years beginning after June 15, 2005. The Company does
not expect the application of this standard to have a material impact on the
Company's financial statements.
58
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets an amendment of APB Opinion
No. 29" ("SFAS 153"). This statement amends APB Opinion No. 29 to eliminate the
exceptions that allowed for other than fair value measurement when similar
productive assets were exchanged, and replaced the exceptions with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. SFAS 153 is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The application of this statement
did not have a material impact on the Company's financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 requires retroactive application of a
voluntary change in accounting principle to prior period financial statements
unless it is impracticable. SFAS 154 also requires that a change in method of
depreciation, amortization or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate that is affected by a change in
accounting principle. SFAS 154 replaces APB Opinion No. 20, "Accounting Changes"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements".
SFAS 154 is effective for fiscal years beginning after December 15, 2005. The
Company will adopt the provisions of SFAS 154 as of January 1, 2006 and does not
expect that its adoption will have a material impact on its financial
statements.
NOTE 2 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Earnings per common share
-----------------------------------
Income From Income From
Continuing Discontinued Net Continuing Discontinued
Operations Operations Income Shares Operations Operations Total
(in thousands, except per share amounts)
Year Ended December 31, 2005
Basic $ 45,413 $ - $ 45,413 79,595 $ 0.57 $ - $ 0.57
Incremental shares from
assumed exercise of
dilutive options - - - 1,413
-------- ------- ------- ------
Diluted $ 45,413 $ - $ 45,413 81,008 $ 0.56 $ - $ 0.56
======== ======= ======== ======
Year Ended December 31, 2004
Basic $ 210,286 $ 42,879 $ 253,165 80,387 $ 2.61 $ 0.54 $ 3.15
Incremental shares from
assumed exercise of
dilutive options - - - 1,627
-------- ------- -------- ------
Diluted $ 210,286 $ 42,879 $ 253,165 82,014 $ 2.56 $ 0.53 $ 3.09
========= ======= ======== ======
Year Ended December 31, 2003
Basic $ 169,853 $ 4,330 $ 174,183 78,823 $ 2.16 $ 0.05 $ 2.21
Incremental shares from
assumed exercise of
dilutive options - - - 1,824
-------- ------- -------- ------
Diluted $ 169,853 $ 4,330 $ 174,183 80,647 $ 2.11 $ 0.05 $ 2.16
======== ====== ======== ======
Options to purchase 2.2 million, 1.0 million and 1.4 million shares of
common stock that were outstanding during the years ended 2005, 2004 and 2003,
respectively, were not included in the computation of diluted earnings per share
since the options' exercise prices were greater than the average market price of
the common shares and, therefore, the effect would be antidilutive.
59
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
Acquisitions
The Company accounts for all acquisitions under the purchase method of
accounting; accordingly, the results of the operations acquired are included in
the accompanying financial statements for the periods subsequent to the
respective dates of the acquisitions. The purchase prices are allocated on the
basis of estimates of the fair values of assets acquired and liabilities
assumed.
In March 2001, the Company acquired the know-how, patent and trademark
rights to the non-injectable anesthetic product known as Oraqix(R) with a
purchase price composed of the following: a $2.0 million payment upon submission
of a New Drug Application ("NDA") in the U.S. and a Marketing Authorization
Application ("MAA") in Europe for the Oraqix(R) product under development;
payments of $6.0 million and $2.0 million upon the approval of the NDA and MAA,
respectively, for licensing rights; and a $10.0 million prepaid royalty payment
upon approval of both applications. The $2.0 million payment related to the
application filings was accrued and classified within the restructuring and
other costs line item during the fourth quarter of 2001 and was paid during the
first quarter of 2002. The MAA was approved in Sweden, the European Union member
reference state, and the Company made the required $2.0 million payment to
AstraZeneca in the second quarter of 2003. The NDA application was approved in
December 2003 and as a result the remaining payments of $16.0 million became due
and were accrued in 2003 and the payments were made in January 2004. These
payments were capitalized and will be amortized over the term of the licensing
agreements.
Effective January 2005, the Company acquired all the outstanding capital
stock of GAC SA from the Gebroulaz Foundation. GAC SA is primarily a distributor
of orthodontic products with subsidiaries in Switzerland, France, Germany and
Norway. The Company purchased GAC SA primarily to further strengthen its
orthodontic business through the acquired company's presence in the orthodontic
market in Europe. In May 2005, the Company acquired the assets of Raintree
Essix, L.L.C. ("Raintree"). Raintree is a brand leader for specialty plastic
sheets used in orthodontic treatment, as well as other accessories for the
orthodontic market. The Company purchased Raintree primarily to further
strengthen its orthodontic product offerings. In May 2005, the Company also
acquired all the outstanding capital stock of Glenroe Technologies, Inc.
("Glenroe"). Glenroe is a manufacturer of orthodontic accessory products
including elastic force materials, specialty plastics, and intricate molded
plastic parts, including NEOCLIPS, a new product used with DENTSPLY's newly
launched Interactive MYSTIQUE bracket (the world's first low friction
translucent ceramic bracket). The Company purchased Glenroe primarily to further
strengthen its orthodontic product offerings. The above described transactions
included aggregate payments at closing of approximately $18.1 million (net of
cash acquired of $2.7 million). Each transaction includes provisions for
possible additional payments based on the performance of the individual
businesses post closing (generally for three years). All of these acquired
companies are included in the "U.S. Dental Laboratory
Business/Implants/Orthodontics/Japan/Asia" operating segment.
The results of operations of the acquired companies are included in the
accompanying financial statements since the effective dates of the transactions.
The purchase price of these acquisitions has been allocated on the basis of
estimates of the fair values of assets acquired and liabilities assumed. The
current aggregate purchase price allocation for these acquisitions is as
follows:
(in thousands)
Current assets $ 6,033
Property, plant and equipment 2,063
Identifiable intangible assets and goodwill 17,094
Other long-term assets 26
------
Total assets 25,216
------
Current liabilities (5,070)
Other long-term liabilities (2,049)
------
Total liabilities (7,119)
------
Net assets $ 18,097
========
60
Divestitures
On February 27, 2004, the Company sold the assets and related liabilities
of the Gendex business to Danaher Corporation for $102.5 million cash, plus the
assumption of certain pension liabilities. This transaction resulted in a
pre-tax gain of $72.9 million ($43.0 million after-tax). Gendex is a
manufacturer of dental x-ray equipment and accessories and intraoral cameras.
The sale of Gendex narrows the Company's product lines to focus primarily on
dental consumables, dental laboratory products, and specialty dental products.
NOTE 4 - SEGMENT AND GEOGRAPHIC INFORMATION
Segment Information
The Company follows Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for disclosing information about
reportable segments in financial statements. The Company has numerous operating
businesses covering a wide range of products and geographic regions, primarily
serving the professional dental market. Professional dental products represented
approximately 98% of sales in 2005, 2004 and 2003.
The operating businesses are combined into operating groups which have
overlapping product offerings, geographical presence, customer bases,
distribution channels, and regulatory oversight. These operating groups are
considered the Company's reportable segments under SFAS 131 as the Company's
chief operating decision-maker regularly reviews financial results at the
operating group level and uses this information to manage the Company's
operations. The accounting policies of the segments are consistent with those
described for the consolidated financial statements in the summary of
significant accounting policies (see Note 1 - SIGNIFICANT ACCOUNTING POLICIES).
The Company measures segment income for reporting purposes as net operating
profit before restructuring, impairment, interest and taxes. A description of
the services provided within each of the Company's four reportable segments is
provided below. The disclosure below reflects the Company's segment reporting
structure through December 31, 2005. In January 2006, the Company reorganized
its operating group structure consolidating into three operating groups. Segment
information will be disclosed under this new structure beginning in the first
quarter of 2006.
A description of the activities of the Company's four reportable segments
follows:
U.S. Consumable Business/Canada
This business group includes responsibility for the design, manufacturing,
sales, and distribution for certain small equipment, chairside consumable
products and dental anesthetics in the U.S. and the sales and distribution of
all such Company products in Canada.
Dental Consumables - Europe, CIS, Middle East, Africa/European Dental Laboratory
Business
This business group includes responsibility for the design and manufacture
of dental laboratory products in Germany and the Netherlands and the sales and
distribution of these products in Europe, Eastern Europe, the Middle East,
Africa and the CIS. In addition, the group has responsibility for the design,
manufacturing, sales, and distribution for certain small equipment and chairside
consumable products and certain specialty products in Europe, the Middle East,
Africa and the CIS.
Australia/Latin America/Endodontics/Non-dental
This business group includes responsibility for the design, manufacture,
and/or sales and distribution of dental anesthetics, chairside consumable and
laboratory products in Brazil. It also has responsibility for the sales and
distribution of all Company dental products sold in Australia and Latin America.
This business group also includes the responsibility for the design and
manufacturing for endodontic products in the U.S., Switzerland and Germany and
is responsible for sales and distribution of all Company endodontic products in
the U.S., Canada, Switzerland, Benelux, Scandinavia, and Eastern Europe, and
certain endodontic products in Germany. This business group is also responsible
for the Company's non-dental business.
61
U.S. Dental Laboratory Business/Implants/Orthodontics/Japan/Asia
This business group includes the responsibility for the design,
manufacture, sales and distribution for laboratory products in the U.S. and the
sales and distribution of U.S. manufactured laboratory products in certain
international markets; the design, manufacture, world-wide sales and
distribution of the Company's dental implant and bone generation products; and
the world-wide sales and distribution of the Company's orthodontic products. The
business is responsible for sales and distribution of all Company products
throughout Asia and Japan.
Significant interdependencies exist among the Company's operations in
certain geographic areas. Inter-group sales are at prices intended to provide a
reasonable profit to the manufacturing unit after recovery of all manufacturing
costs and to provide a reasonable profit for purchasing locations after coverage
of marketing and general and administrative costs.
Generally, the Company evaluates performance of the operating groups based
on the groups' operating income and net third party sales excluding precious
metal content. The Company considers sales excluding precious metal content as
the appropriate sales measurement due to the fluctuations of precious metal
prices and due to the fact that the precious metal content is largely a
pass-through to customers and has minimal effect on earnings.
The following table sets forth information about the Company's operating
groups for 2005, 2004 and 2003.
Third Party Net Sales
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 343,310 $ 319,665 $ 308,827
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 505,675 577,426 520,850
Australia/Latin America/Endodontics/
Non-Dental 359,870 339,130 315,399
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 509,439 461,320 424,659
All Other (a) (3,159) (3,309) (1,741)
--------- --------- ----------
Total $ 1,715,135 $ 1,694,232 $ 1,567,994
============ =========== ===========
Third Party Net Sales, excluding precious metal content
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 342,254 $ 319,647 $ 308,827
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 387,484 422,198 373,822
Australia/Latin America/Endodontics/
Non-Dental 357,848 337,380 313,345
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 459,489 405,956 370,093
All Other (a) (3,159) (3,309) (1,741)
--------- --------- ----------
Total excluding Precious Metal Content 1,543,916 1,481,872 1,364,346
Precious Metal Content 171,219 212,361 203,648
--------- --------- ----------
Total including Precious Metal Content $1,715,135 $ 1,694,233 $ 1,567,994
========== =========== ===========
(a) Includes: operating expenses of two distribution warehouses not managed
by named segments, Corporate and inter-segment eliminations.
62
Intersegment Net Sales
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 314,070 $ 316,462 $ 309,367
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 161,290 164,205 145,791
Australia/Latin America/Endodontics/
Non-Dental 65,076 56,500 54,651
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 40,743 34,609 35,609
All Other (a) 165,497 161,520 161,930
--------- --------- ----------
Total Intersegment Net Sales 746,676 733,296 707,348
Eliminations (746,676) (733,296) (707,348)
--------- --------- ----------
Total $ - $ - $ -
========= ========= ==========
Depreciation and Amortization
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 10,089 $ 7,958 $ 6,956
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 13,949 13,697 12,228
Australia/Latin America/Endodontics/
Non-Dental 11,382 10,635 9,682
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 9,719 11,628 10,910
All Other (a) 5,421 5,378 5,885
--------- --------- ---------
Total $ 50,560 $ 49,296 $ 45,661
========= ========= =========
(a) Includes: operating expenses of two distribution warehouses not managed
by named segments, Corporate and inter-segment eliminations.
63
Segment Operating Income
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 95,598 $ 97,584 $ 98,121
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 49,437 74,756 56,408
Australia/Latin America/Endodontics/
Non-Dental 146,768 143,472 130,618
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 77,797 54,743 45,310
All Other (a) (63,923) (68,301) (58,774)
--------- --------- ---------
Segment Operating Income 305,677 302,254 271,683
Reconciling Items:
Restructuring and impairment costs (b) 232,755 7,124 3,700
Interest Expense 17,773 25,098 26,079
Interest Income (9,005) (5,469) (1,874)
Other (income) expense, net (6,884) 1,346 (7,418)
--------- --------- ---------
Income before income taxes $ 71,038 $ 274,155 $ 251,196
========= ========= =========
Assets
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada (b) $ 179,516 $ 360,977 $ 309,995
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 607,346 713,592 669,876
Australia/Latin America/Endodontics/
Non-Dental 566,281 582,828 573,693
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia (b) 380,691 390,140 411,299
All Other (a) 673,495 750,608 480,724
--------- --------- ---------
Total $ 2,407,329 $ 2,798,145 $ 2,445,587
========= ========= =========
(a) Includes: operating expenses of two distribution warehouses not managed
by named segments, Corporate and inter-segment eliminations.
(b) During 2005, the Company recorded a $233.1 million ($179.6 million
after tax) impairment and restructuring charge against the
indefinite-lived injectable anesthetic asset and the long-lived
pharmaceutical manufacturing facility assets. Of this charge, $209.9
million ($166.1 million after tax) was recorded in the U.S. Consumable
Business/Canada, and the remaining $23.3 million ($13.5 million after
tax) was recorded in the U.S. Dental Laboratory
Business/Implants/Orthodontics/Japan/Asia. This impairment does not
impact the Company's needle-free Oraqix(R) product.
64
Capital Expenditures
2005 2004 2003
(in thousands)
U.S. Consumable Business / Canada $ 18,002 $ 23,581 $ 36,493
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory
Business 5,834 8,327 9,195
Australia/Latin America/Endodontics/
Non-Dental 10,393 10,888 10,819
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 5,747 6,356 7,190
All Other (a) 5,317 2,884 9,460
--------- --------- ----------
Total $ 45,293 $ 52,036 $ 73,157
========= ========= =========
(a) Includes: one operating division not managed by named segments,
operating expenses of two distribution warehouses not managed by named
segments, Corporate and inter-segment eliminations.
Geographic Information
The following table sets forth information about the Company's operations
in different geographic areas for 2005, 2004 and 2003. Net sales reported below
represent revenues for shipments made by operating businesses located in the
country or territory identified, including export sales. Assets reported
represent those held by the operating businesses located in the respective
geographic areas.
United Other
States Germany Foreign Consolidated
(in thousands)
2005
Net sales $ 756,627 $ 365,984 $ 592,524 $ 1,715,135
Long-lived assets 150,085 104,997 136,511 391,593
2004
Net sales $ 727,875 $ 436,047 $ 530,310 $ 1,694,232
Long-lived assets 204,807 125,897 136,511 467,215
2003
Net sales $ 705,309 $ 395,170 $ 467,515 $ 1,567,994
Long-lived assets 213,607 121,481 129,059 464,147
65
Product and Customer Information
Year Ended December 31,
2005 2004 2003
(in thousands)
Dental consumables $ 618,909 $ 578,128 $ 554,172
Dental laboratory products 473,942 559,278 521,079
Specialty dental products 580,509 520,001 459,193
Non-dental 41,775 36,825 33,550
--------- --------- ---------
$ 1,715,135 $ 1,694,232 $1,567,994
Dental consumable products consist of dental sundries and small equipment
products used in dental offices in the treatment of patients. DENTSPLY's
products in this category include dental injectable anesthetics, prophylaxis
paste, dental sealants, impression materials, restorative materials, bone
grafting materials, tooth whiteners and topical fluoride. The Company
manufactures thousands of different consumable products marketed under more than
a hundred brand names. Small equipment products consist of various durable goods
used in dental offices for treatment of patients. DENTSPLY's small equipment
products include high and low speed handpieces, intraoral curing light systems
and ultrasonic scalers and polishers.
Dental laboratory products are used in dental laboratories in the
preparation of dental appliances. DENTSPLY's products in this category include
dental prosthetics, including artificial teeth, precious metal dental alloys,
dental ceramics, and crown and bridge materials and equipment products used in
laboratories consisting of computer aided machining (CAM) ceramics systems and
porcelain furnaces.
Specialty dental products are used for specific purposes within the dental
office and laboratory settings. DENTSPLY's products in this category include
endodontic (root canal) instruments and materials, dental implants, and
orthodontic appliances and accessories.
Non-dental products are comprised primarily of investment casting materials
that are used in the production of jewelry, golf club heads and other casted
products.
One customer, Henry Schein, Incorporated, accounted for more than ten
percent of consolidated net sales in 2005, accounting for 11.1% of all sales. No
customers accounted for more than ten percent of consolidated net sales in 2004
or 2003. Third party export sales from the United States are less than ten
percent of consolidated net sales.
NOTE 5 - OTHER (INCOME) EXPENSE
Other (income) expense, net consists of the following:
Year Ended December 31,
----------------------------------------------
2005 2004 2003
(in thousands)
Foreign exchange transaction (gains) losses $(6,668) $ 1,179 $ (263)
(Gain) loss on PracticeWorks securities - - (7,395)
Minority interests (372) 223 (312)
Other 156 (56) 552
------ ------ ------
$(6,884) $ 1,346 $(7,418)
======= ======= =======
66
NOTE 6 - DISCONTINUED OPERATIONS
On February 27, 2004, the Company sold the assets and related liabilities
of the Gendex business to Danaher Corporation for $102.5 million cash, plus the
assumption of certain pension liabilities. Although the sales agreement
contained a provision for a post-closing adjustment to the purchase price based
on changes in certain balance sheet accounts, no such adjustments were
necessary. This transaction resulted in a pre-tax gain of $72.9 million ($43.0
million after-tax). Gendex is a manufacturer of dental x-ray equipment and
accessories and intraoral cameras. The sale of Gendex narrows the Company's
product lines to focus primarily on dental consumables, dental laboratory
products, and specialty dental products.
During the first quarter of the year 2004, the Company discontinued the
operations of the Company's dental needle business.
The Gendex business and the dental needle business are distinguishable as
separate components of the Company in accordance with Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets". The Gendex business and the needle business were
classified as held for sale at December 31, 2003 in accordance with SFAS 144.
The statements of operations and related financial statement disclosures for all
prior years have been restated to present the Gendex business and needle
business as discontinued operations separate from continuing operations.
Discontinued operations net revenue and income before income taxes for the
periods presented were as follows:
Year Ended December 31,
2005 2004 2003
(in thousands)
Net sales $ - $ 17,519 $ 106,313
Gain on sale of Gendex - 72,943 -
Income before income taxes (including gain on
sale in 2004) - 72,803 7,329
NOTE 7 - INVENTORIES
Inventories consist of the following:
December 31,
2005 2004
(in thousands)
Finished goods $127,569 $130,150
Work-in-process 40,887 42,427
Raw materials and supplies 39,723 41,132
------ ------
$208,179 $213,709
======== ========
67
NOTE 8- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
2005 2004
(in thousands)
Assets, at cost:
Land $ 41,938 $47,355
Buildings and improvements 194,443 197,029
Machinery and equipment 327,708 331,409
Construction in progress 10,402 73,447
------ ------
574,491 649,240
Less: Accumulated depreciation 258,273 249,360
------- -------
$316,218 $399,880
======== ========
NOTE 9 - GOODWILL AND INTANGIBLE ASSETS
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets". This statement requires
that the amortization of goodwill and indefinite-lived intangible assets be
discontinued and instead an annual impairment test approach be applied. The
impairment tests are required to be performed annually (or more often if events
or changes in circumstances indicate that the goodwill or indefinite-lived
intangible assets might be impaired) and are based upon a fair value approach
rather than an evaluation of undiscounted cash flows. If goodwill impairment is
identified, the resulting charge is determined by recalculating goodwill through
a hypothetical purchase price allocation of the fair value and reducing the
current carrying value to the extent it exceeds the recalculated goodwill. If
impairment is identified on indefinite-lived intangibles, the resulting charge
reflects the excess of the asset's carrying cost over its fair value. Other
intangible assets with finite lives will continue to be amortized over their
useful lives.
The Company performed the required annual impairment tests of goodwill and
indefinite-lived intangible assets in the second quarter of 2005 and no
impairment was identified. This impairment assessment included an evaluation of
approximately 20 reporting units. In addition to minimum annual impairment
tests, SFAS 142 also requires that impairment assessments be made more
frequently if events or changes in circumstances indicate that the goodwill or
indefinite-lived intangible assets might be impaired. As the Company learns of
such changes in circumstances through periodic analysis of actual results or
through the annual development of operating unit business plans in the fourth
quarter of each year, for example, impairment assessments are performed as
necessary.
As a result of changes in events and circumstances surrounding the
indefinite-lived injectable intangible asset, an event driven impairment
analysis was performed at the end of the third quarter of 2005 resulting in the
recording of an impairment charge. The Company continued to monitor this asset
in conjunction with the other assets associated with the Company's injectable
anesthetic business throughout the fourth quarter of 2005, and as a result of
additional event driven impairment analyses performed in December of 2005,
additional impairment charges were recorded (see Note 15 - RESTRUCTURING AND
IMPAIRMENT COSTS (INCOME)).
68
The table below presents the net carrying values of goodwill and
identifiable intangible assets.
December 31,
2005 2004
(in thousands)
Goodwill $ 933,227 $ 996,262
========= =========
Indefinite-lived identifiable intangible assets:
Trademarks $ 4,080 $ 4,080
Licensing agreements - 178,610
Finite-lived identifiable intangible assets 64,520 83,041
------ ------
Total identifiable intangible assets $ 68,600 $ 265,731
======== =========
A reconciliation of changes in the Company's goodwill is as follows:
December 31,
2005 2004
(in thousands)
Balance, beginning of the year $ 996,262 $ 963,264
Acquisition activity 16,275 509
Changes to purchase price allocation (9,481) (9,446)
Effects of exchange rate changes (69,829) 41,935
------- ------
Balance, end of the year $ 933,227 $ 996,262
========= =========
The change in the net carrying value of goodwill in 2005 was primarily due
to foreign currency translation adjustments, three acquisitions and changes to
the purchase price allocations of the Degussa Dental, GAC, and Friadent
acquisitions. The purchase price allocation changes were primarily related to
the reversal of preacquisition tax contingencies due to expiring statutes. The
change in the net carrying value of goodwill in 2004 was primarily due to
foreign currency translation adjustments, changes to the purchase price
allocations of the Degussa Dental and Friadent acquisitions and a small
acquisition. The purchase price allocation changes were primarily related to the
reversal of preacquisition tax contingencies due to expiring statutes.
The decrease in indefinite-lived licensing agreements was due to the impairment
of these assets. These intangible assets relate exclusively to the royalty-free
licensing rights to AstraZeneca's anesthetic trademarks and related products
(see Note 15 - RESTRUCTURING AND IMPAIRMENT COSTS (INCOME)). The change in
finite-lived identifiable intangible assets was due primarily to amortization
for the period, the purchase of new technology and foreign currency translation
adjustments.
Goodwill by reportable segment is as follows:
December 31,
2005 2004
(in thousands)
U.S. Consumable Business / Canada $ 86,155 $ 86,155
Dental Consumables - Europe, CIS, Middle
East, Africa/European Dental Laboratory 333,503 381,379
Business
Australia/Latin America/Endodontics/
Non-Dental 173,523 170,730
U.S. Dental Laboratory Business/Implants/
Orthodontics/Japan/Asia 340,046 357,998
------- --------
Total $ 933,227 $ 996,262
========= =========
69
Finite-lived identifiable intangible assets consist of the following:
December 31, 2005 December 31, 2004
--------------------------------------------- ------------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
(in thousands)
Patents $ 54,467 $ (39,643) $ 14,824 $56,330 $ (37,394) $ 18,936
Trademarks 33,913 (9,486) 24,427 36,782 (8,598) 28,184
Licensing agreements 30,158 (10,622) 19,536 31,960 (10,308) 21,652
Other 18,928 (13,195) 5,733 23,643 (9,374) 14,269
------ ------- ----- ------ ------ ------
$ 137,467 $ (72,946) $ 64,520 $ 148,715 $ (65,674) $ 83,041
========= ========= ======== ========= ========= ========
Amortization expense for finite-lived identifiable intangible assets for
2005, 2004 and 2003 was $8.5 million, $8.5 million and $8.8 million,
respectively. The annual estimated amortization expense related to these
intangible assets for each of the five succeeding fiscal years is $6.9 million,
$6.0 million, $5.6 million, $5.4 million and $4.3 million for 2006, 2007, 2008,
2009 and 2010, respectively.
NOTE 10 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
2005 2004
(in thousands)
Payroll, commissions, bonuses, other
cash compensation and employee benefits $ 54,294 $ 57,738
General insurance 17,441 15,844
Sales and marketing programs 17,429 15,757
Professional and legal costs 13,559 21,840
Restructuring and other costs (Note 15) 4,871 6,224
Warranty liabilities 3,536 3,681
Other (a) 48,716 58,681
------ ------
$159,846 $179,765
======== ========
(a) - The decrease in other liabilities was primarily caused by the impact
of translation due to the strengthening of the dollar during 2005 against most
of the local currencies in which the Company's subsidiaries conduct business. As
a result of this strengthening of the dollar, the impact of translation on other
accrued liabilities was approximately $3.1 million. Additionally, due to lower
debt levels, interest rate swaps, and the timing of interest payments, the
accrued interest was approximately $2.1 million lower in 2005 than in 2004.
70
A reconciliation of changes in the Company's warranty liability for 2005
and 2004 is as follows:
December 31,
2005 2004
(in thousands)
Balance, beginning of the year $ 3,681 $ 3,629
Accruals for warranties issued during the year 1,367 2,010
Accruals related to pre-existing warranties 291 (460)
Warranty settlements made during the year (1,551) (1,635)
Effects of exchange rate changes (252) 137
------- ------
Balance, end of the year $ 3,536 $ 3,681
======= =======
NOTE 11 - FINANCING ARRANGEMENTS
Short-Term Borrowings
Short-term bank borrowings amounted to $1.4 million and $1.5 million at
December 31, 2005 and 2004, respectively. The weighted average interest rates of
these borrowings were 2.5% and 3.3% at December 31, 2005 and 2004, respectively.
Unused lines of credit for short-term financing at December 31, 2005 and 2004
were $49.2 million and $52.5 million, respectively. Substantially all other
short-term borrowings were classified as long-term as of December 31, 2005 and
2004, reflecting the Company's intent and ability to refinance these obligations
beyond one year and are included in the table below. The unused lines of credit
have no major restrictions and are provided under demand notes between the
Company and the lending institution. Interest is charged on borrowings under
these lines of credit at various rates, generally below prime or equivalent
money rates.
Long-Term Borrowings
December 31,
2005 2004
(in thousands)
$250 million multi-currency revolving credit agreement expiring May 2006,
Japanese yen 12.6 billion at 0.56% $ - $ 122,463
$500 million multi-currency revolving credit agreement expiring May 2010,
Japanese yen 12.6 billion at 0.42% 106,359 -
Prudential Private Placement Notes, Swiss franc denominated, 56.3 million
(84.4 million at December 2004) at 4.56% and 55.0 million (82.5 million at
December 2004) at 4.42% maturing March 2007, 80.4 million at 4.96% maturing
October 2006 145,662 216,762
ABN Private Placement Note, Japanese yen 6.2 billion at 1.39% maturing December 2005 - 20,285
Euro 350.0 million Eurobonds at 5.75% maturing December 2006 419,348 489,151
$250 million commercial paper facility rated A/2-P/2 U.S. dollar borrowings 6,700 -
Other borrowings, various currencies and rates 2,814 2,625
------- -------
680,883 851,286
Less: Current portion (included in notes payable and current portion of long-term debt) 410,779 71,346
------- -------
$ 270,104 $ 779,940
========= =========
The Company has $530.7 million of long-term borrowings coming due in 2006.
The Company intends to repay these debt obligations with cash and/or funds
available to the Company under the revolving credit facility. Any portion of the
debt that is repaid through the use of the revolving credit facility will be
contractual due in May 2010, upon the expiration of the facility, thus
effectively converting the maturity of the debt beyond 2006. The Company
currently intends to effectively refinance $119.9 million of the long-term
borrowings coming due in 2005 through use of the revolving credit facility.
71
The table below reflects the contractual maturity dates of the various
borrowings at December 31, 2005 (in thousands). The individual borrowings under
the revolving credit agreement are structured to mature on a quarterly basis but
because the Company has the intent and ability to extend them until the
expiration date of the agreement, these borrowings are considered contractually
due in May 2010.
2006 $410,779
2007 $ 43,714
2008 $ 53
2009 $ 14
2010 $226,323
2011 and beyond -
-------
$680,883
========
The Company utilizes interest rate swaps to convert the variable rate
Japanese yen-denominated debt under the revolving facility to fixed rate debt.
In addition, swaps are used to convert the fixed rate Eurobond to variable rate
financing. The Company's use of interest rate swaps is further described in Note
16 - "Financial Instruments and Derivatives".
The Company has a $500 million revolving credit agreement with
participation from thirteen banks. The revolving credit agreements contain a
number of covenants and two financial ratios which the Company is required to
satisfy. The most restrictive of these covenants pertain to asset dispositions
and prescribed ratios of indebtedness to total capital and operating income plus
depreciation and amortization to interest expense. Any breach of any such
covenants or restrictions would result in a default under the existing borrowing
documentation that would permit the lenders to declare all borrowings under such
documentation to be immediately due and payable and, through cross default
provisions, would entitle the Company's other lenders to accelerate their loans.
At December 31, 2005, the Company was in compliance with these covenants. The
Company pays a facility fee of 0.10 % annually on the amount of the commitment
under the $500 million five year facility. The entire $500 million revolving
credit agreement has a usage fee of 0.10 % annually if utilization exceeds 50%
of the total available facility. Interest rates on amounts borrowed under the
facility will depend on the maturity of the borrowing, the currency borrowed,
the interest rate option selected, and the Company's long-term credit rating
from Moody's and Standard and Poors.
The Company has complementary U.S. dollar and Euro multicurrency commercial
paper facilities totaling $250 million which have utilization, dealer, and
annual appraisal fees which on average cost 0.11% annually. The $500 million
revolving credit facility acts as back-up credit to this commercial paper
facility. The total available credit under the commercial paper facilities and
the revolving credit facility is $250 million. Outstanding commercial paper
obligations at December 31, 2005 were $6.7 million.
In March 2001, the Company issued Series A and B private placement notes to
Prudential Capital Group totaling Swiss francs 166.9 million at an average rate
of 4.49% with six year final maturities. The notes were issued to finance the
acquisition of the AZ Assets. In October 2001, the Company issued a Series C
private placement note to Prudential Capital Group for Swiss francs 80.4 million
at a rate of 4.96% with a five year final maturity. The series A and B notes
were also amended in October 2001 to increase the interest rate by 30 basis
points, reflecting the Company's higher leverage. The private placement notes
contain a number of covenants and two financial ratios which the Company is
required to satisfy. The most restrictive of these covenants pertain to asset
dispositions, maintenance of certain levels of net worth, and prescribed ratios
of indebtedness to total capital and operating income plus depreciation and
amortization to interest expense. In December 2001, the Company issued a private
placement note through ABN AMRO for Japanese yen 6.2 billion at a rate of 1.39%
with a four year final maturity. The Series C note and the ABN note were issued
to partially finance the Degussa Dental acquisition. The Company has completely
retired the ABN note and has made the initial mandatory prepayment under series
A and B notes.
In December 2001, the Company issued Euro 350 million Eurobonds with a
coupon of 5.75%, maturing December 2006 at an effective yield of 5.89%. These
bonds were issued to partially finance the Degussa Dental acquisition.
At December 31, 2005, the Company had total unused lines of credit,
including lines available under its short-term arrangements and revolving credit
agreement, of $436.2 million.
72
NOTE 12 - STOCKHOLDERS' EQUITY
In December 2004, the Board of Directors approved a stock repurchase
program under which the Company may repurchase shares of Company stock on the
open market in an amount to maintain up to 3,000,000 shares of treasury stock.
In September 2005, the Board of Directors increased the authorization to
repurchase shares under the stock repurchase program in an amount to maintain up
to 5,500,000 shares of treasury stock. Under this program, the Company purchased
3,002,000 shares during 2005 at an average price of $54.85. As of December 31,
2005 and 2004, the Company held 2,533,000 and 757,000 shares of treasury stock,
respectively. The Company also received proceeds of $31.8 million as a result of
the exercise of 1,226,000 stock options during the year ended December 31, 2005.
The Company has stock options outstanding under three stock option plans
(1993 Plan, 1998 Plan and 2002 Amended and Restated Plan). Further grants can
only be made under the 2002 Plan. Under the 1993 and 1998 Plans, a committee
appointed by the Board of Directors granted to key employees and directors of
the Company options to purchase shares of common stock at an exercise price
determined by such committee, but not less than the fair market value of the
common stock on the date of grant. Options generally expire ten years after the
date of grant under these plans and grants become exercisable over a period of
three years after the date of grant at the rate of one-third per year, except
that they become immediately exercisable upon death, disability or retirement.
The 2002 Plan authorized grants of 7.0 million shares of common stock,
(plus any unexercised portion of canceled or terminated stock options granted
under the DENTSPLY International Inc. 1993 and 1998 Stock Option Plans), subject
to adjustment as follows: each January, if 7% of the outstanding common shares
of the Company exceed 7.0 million, the excess becomes available for grant under
the Plan. The 2002 Plan enables the Company to grant "incentive stock options"
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, to key employees of the Company, and "non-qualified stock options"
("NSOs") which do not constitute ISOs to key employees and non-employee
directors of the Company. The 2002 Plan also enables the Company to grant stock
which is subject to certain forfeiture risks and restrictions ("Restricted
Stock"), stock delivered upon vesting of units ("Restricted Stock Units") and
stock appreciation rights ("SARs"). ISOs and NSOs are collectively referred to
as "Options". Options, Restricted Stock, Restricted Stock Units and Stock
Appreciation Rights are collectively referred to as "Awards". Grants of equity
compensation to key employees are solely discretionary with the Board of
Directors of the Company. Awards generally expire ten years from date of grant
and become exercisable over a period of three years after the date of grant at
the rate of one-third per year, except that they become immediately exercisable
upon death, disability or retirement. Such awards are granted at exercise prices
not less than the fair market value of the common stock on the grant date.
Future option grants may only be made under the 2002 Plan, which will
include the unexercised portion of canceled or terminated options granted under
the 1993 or 1998 Plans. The number of shares available for grant under the 2002
plan as of December 31, 2005 was 4,025,000 shares. Each non-employee director
receives an automatic grant of NSOs to purchase 9,000 shares of common stock on
the date he or she becomes a non-employee director and an additional 9,000
options on the third anniversary of the date on which the non-employee director
was last granted an option.
73
The following is a summary of the status of the Plans as of December 31,
2005, 2004 and 2003 and changes during the years ending on those dates:
Outstanding Exercisable
-------------------- --------------------
Weighted Weighted Available
Average Average for
Exercise Exercise Grant
Shares Price Shares Price Shares
December 31, 2002 7,691,589 $ 24.50 4,649,889 $ 18.99 7,253,405
Authorized (Lapsed) - 177,882
Granted 1,434,300 43.84 (1,434,300)
Exercised (829,155) 19.30 -
Expired/Canceled (119,277) 29.38 119,277
--------- ---------
December 31, 2003 8,177,457 28.35 5,225,300 22.22 6,116,264
Authorized (Lapsed) - 8,100
Granted 1,127,799 53.61 (1,127,799)
Exercised (2,117,484) 21.03 -
Expired/Canceled (252,817) 26.57 252,817
--------- ---------
December 31, 2004 6,934,955 34.76 4,498,889 27.99 5,249,382
Authorized (Lapsed) - 36,900
Granted 1,330,482 55.36 (1,330,482)
Exercised (1,265,760) 25.40 -
Expired/Canceled (69,230) 62.74 69,230
--------- ---------
December 31, 2005 6,930,447 $ 40.14 4,626,109 $ 33.85 4,025,030
========= =========
The following table summarizes information about stock options outstanding
under the Plans at December 31, 2005:
Options Outstanding Options Exercisable
-------------------------------- -----------------------
Weighted
Number Average Number
Outstanding Remaining Weighted Exercisable Weighted
at Contractual Average at Average
Exercise Price December 31 Life Exercise December 31 Exercise
Range 2005 (in years) Price 2005 Price
$10.01 - $15.00 52,300 0.7 $ 14.28 52,300 $ 14.28
15.01 - 20.00 794,635 3.3 16.36 794,635 16.36
20.01 - 25.00 604,950 4.8 24.76 604,950 24.76
25.01 - 30.00 18,345 5.6 28.81 18,345 28.81
30.01 - 35.00 724,162 5.5 31.17 724,162 31.17
35.01 - 40.00 1,095,518 6.4 36.94 1,075,017 36.95
40.01 - 45.00 1,319,178 7.4 44.19 875,189 44.23
45.01 - 50.00 54,600 8.0 48.60 21,638 48.40
50.01 - 60.00 2,266,759 9.1 55.13 459,873 54.95
--------- -------
6,930,447 6.9 $ 40.14 4,626,109 $ 33.85
========= =========
74
The Company uses the Black-Scholes option pricing model to value option
awards. The per share weighted average fair value of stock options and the
weighted average assumptions used to determine these values are as follows:
Year Ended December 31,
2005 2004 2003
---- ---- ----
Per share fair value $ 15.07 $ 13.46 $ 14.85
Expected dividend yield 0.50% 0.44% 0.48%
Risk-free interest rate 4.40% 3.56% 3.36%
Expected volatility 20% 20% 31%
Expected life (years) 5.50 5.50 5.50
The Black-Scholes option pricing model was developed for tradable options
with short exercise periods and is therefore not necessarily an accurate measure
of the fair value of compensatory stock options.
The rollforward of the common shares and the treasury shares outstanding is
as follows:
Common Treasury Outstanding
Shares Shares Shares
(in thousands)
Balance at December 31, 2002 81,388 (2,990) 78,398
Exercise of stock options - 853 853
------ ------ ------
Balance at December 31, 2003 81,388 (2,137) 79,251
Exercise of stock options - 2,165 2,165
Repurchase of common stock at cost - (785) (785)
------ ------ ------
Balance at December 31, 2004 81,388 (757) 80,631
Exercise of stock options - 1,226 1,226
Repurchase of common stock at cost - (3,002) (3,002)
------ ------ ------
Balance at December 31, 2005 81,388 (2,533) 78,855
====== ====== ======
75
NOTE 13 - INCOME TAXES
The components of income before income taxes from continuing operations are
as follows:
Year Ended December 31,
2005 2004 2003
---- ---- ----
(in thousands)
United States ("U.S.") $ 53,473 $111,779 $113,994
Foreign 17,565 162,376 137,202
------ ------- -------
$ 71,038 $274,155 $251,196
======== ======== ========
The components of the provision for income taxes from continuing operations
are as follows:
Year Ended December 31,
2005 2004 2003
---- ---- ----
(in thousands)
Current:
U.S. federal $ 62,892 $ 20,706 $ 28,693
U.S. state 2,717 197 1,941
Foreign 51,793 35,908 18,298
------ ------ ------
Total 117,402 56,811 48,932
Deferred:
U.S. federal (63,821) 2,556 12,077
U.S. state (1,129) 479 2,466
Foreign (26,827) 4,023 17,868
------ ------ ------
Total (91,777) 7,058 32,411
------ ------ ------
$ 25,625 $ 63,869 $ 81,343
======== ======== ========
The reconcilation of the U.S. federal statutory tax rate to the effective
rate is as follows:
Year Ended December 31,
2005 2004 2003
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effect of:
State income taxes, net of federal benefit 2.5 0.2 1.1
Federal benefit of R&D credits (2.4) (1.5) (0.2)
Tax effect of international operations 10.7 (6.3) (5.0)
Net effect of tax audit activity 7.2 (2.0) -
Federal benefit of extraterritorial income
exclusion (2.6) (0.9) (0.9)
Federal tax on unremitted earnings of certain
foreign subsidiaries (15.6) 1.0 2.5
Section 965 Repatriation 6.6 - -
Other (5.3) (2.2) (0.1)
Effective income tax rate on continuing operations 36.1% 23.3% 32.4%
76
The tax effect of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
December 31, 2005 December 31, 2004
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
(in thousands)
Employee benefit accruals $2,142 $10,341 $2,722 $10,230
Product warranty accruals 890 - 860 -
Insurance premium accruals 5,957 - 6,016 -
Commission and bonus accrual 1,993 - (1,361) -
Sales and marketing accrual 1,768 - 1,819 -
Restructuring and other cost accruals 1,047 - 636 738
Differences in financial reporting and tax basis for:
Inventory 14,937 - 6,161 -
Property, plant and equipment - (7,120) - (35,872)
Identifiable intangible assets - (61,373) - (67,925)
Unrealized losses (gains) included in other
comprehensive income 23,857 2,663 9,163 62,795
Miscellaneous Accruals 7,693 - 10,070 -
Other 22,087 15,532 2,401 9,740
Taxes on unremitted earnings of foreign subsidiaries - (7,374) - (18,379)
Discontinued Operations - - 25 (34)
Foreign tax credit carryforward - 15,700 - -
Tax loss carryforwards - 40,974 - 24,107
Valuation allowance for tax loss carryforwards - (39,584) - (23,421)
------- ------- ------- -------
$ 82,371 $ (30,241) $ 38,512 $ (38,021)
======== ========= ======== =========
Current and noncurrent deferred tax assets and liabilities are included in
the following balance sheet captions:
December 31,
2005 2004
(in thousands)
Prepaid expenses and other current assets $ 82,371 $40,369
Income taxes payable - (1,857)
Other noncurrent assets 12,671 20,175
Deferred income taxes (42,912) (58,196)
77
The Company's effective tax rate for 2005 was 36.1%. During 2005, the
Company recorded a tax cost of $4.6 million from the repatriation under the
American Jobs Creation Act of 2004, a tax cost of $7.6 million related to the
effects of foreign earnings, and a tax benefit of $11.0 million from the release
of deferred tax liabilities related to the undistributed earnings of foreign
earnings due to the availability of foreign tax credits.
The Company operates within multiple taxing jurisdictions and in the normal
course of business is examined in various jurisdictions. Tax accruals related to
the estimated outcome of these examinations are recorded in accordance with
Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies"
("SFAS 5"). The reversal of the accruals is recorded when examinations are
completed, statutes of limitation close or tax laws change.
The Company has $15.7 million of foreign tax credit carryforwards which
will expire in 2015.
Certain foreign and domestic subsidiaries of the Company have tax loss
carryforwards of $214.3 million at December 31, 2005, of which $137.7 million
expire through 2025 and $76.6 million may be carried forward indefinitely. The
tax benefit of certain tax loss carryforwards has been offset by a valuation
allowance as of December 31, 2005, because it is uncertain whether the benefits
will be realized in the future. The valuation allowance at December 31, 2005 and
2004 was $39.6 million and $23.4 million, respectively.
The Company has provided federal income taxes on certain undistributed
earnings of its foreign subsidiaries that the Company anticipates will be
repatriated. Deferred federal income taxes have not been provided on $35 million
of cumulative earnings of foreign subsidiaries that the Company has determined
to be permanently reinvested. It is not practicable to estimate the amount of
tax that might be payable on these permanently reinvested earnings.
On October 22, 2004, the American Jobs Creation Act of 2004 (the "AJCA")
was signed into law. The AJCA enacted a provision that provides the Company with
the opportunity to repatriate up to $500 million of reinvested earnings and to
claim a deduction equal to 85% of the repatriated amount. During the quarter
ended December 31, 2005, the Company completed its evaluation of the
repatriation provision and will reinvest approximately $345 million of foreign
earnings in the United States. As a result, the Company recognized $4.6 million,
net of available foreign tax credits, of related tax expense for the
repatriation plan.
There was no pretax income from discontinued operations and no income tax
expense related to discontinued operations for the year ended December 31, 2005.
The pretax income from discontinued operations for the years ended December
31, 2004 and 2003 was $72.8 million and $7.3 million, respectively. The income
tax expense related to discontinued operations for the years ended December 31,
2004 and 2003 was $29.9 million and $3.0 million, respectively.
NOTE 14 - BENEFIT PLANS
Substantially all of the employees of the Company and its subsidiaries are
covered by government or Company-sponsored benefit plans. Total costs for
Company-sponsored defined benefit, defined contribution and employee stock
ownership plans amounted to $17.7 million in 2005, $11.7 million in 2004 and
$13.5 million in 2003.
Defined Contribution Plans
The DENTSPLY Employee Stock Ownership Plan ("ESOP") is a non-contributory
defined contribution plan that covers substantially all of the United States
based non-union employees of the Company. Contributions to the ESOP are expected
to be $4.3 million for 2005 (to be contributed in Q1 2006), and were $0.4
million for 2004 and $2.2 million for 2003. Beginning in 2005, annual
contributions to the ESOP are made in the first quarter of the subsequent
year based upon Covered Compensation at a rate determined annually by the
Board of Directors. Prior to 2005, the Company made annual contributions to the
ESOP of not less than the amounts required to service ESOP debt, which was
extinguished in 2004. In connection with the refinancing of ESOP debt in March
1994, the Company agreed to make additional cash contributions totaling at least
$0.6 million through 2003. Dividends received by the ESOP on allocated shares
are either reinvested in participants' accounts or passed through to Plan
participants, at the participant's election. Most ESOP shares were initially
pledged as collateral for its debt. As the debt was repaid, shares were released
from collateral and allocated to active employees based on the proportion of
debt service paid in the year. At December 31, 2005, the ESOP held 5.0 million
shares, all of which were allocated to plan participants as the ESOP debt was
fully repaid in 2004. Shares acquired prior to December 31, 1992 are accounted
for in accordance with Statement of Position ("SOP") 76-3, "Accounting Practices
for Certain Employee Stock Ownership Plans". Accordingly, all shares held by the
ESOP are considered outstanding and are included in the earnings per common
share computations.
78
The ESOP loan was extinguished on March 31, 2004. All future allocations
will come from a combination of forfeited shares and shares acquired in the open
market. The Company has targeted future ESOP allocations at 6% of Covered
Compensation. The share allocation will be accounted at fair value at the point
of allocation, each year-end, in accordance with SOP 93-6, "Employers'
Accounting for Employee Stock Ownership Plans". The 2005 annual expense, net of
forfeitures, is $4.3 million based on the year-end share price of $53.69.
The Company sponsors an employee 401(k) savings plan for its United States
workforce to which enrolled participants may contribute up to IRS defined
limits.
Defined Benefit Plans
The Company maintains a number of separate contributory and
non-contributory qualified defined benefit pension plans and other
postretirement medical plans for certain union and salaried employee groups in
the United States. Pension benefits for salaried plans are based on salary and
years of service; hourly plans are based on negotiated benefits and years of
service. Annual contributions to the pension plans are sufficient to satisfy
legal funding requirements. Pension plan assets are held in trust and consist
mainly of common stock and fixed income investments.
The Company maintains defined benefit pension plans for its employees in
Germany, Japan, The Netherlands, and Switzerland. These plans provide benefits
based upon age, years of service and remuneration. Substantially all of the
German plans are unfunded book reserve plans. Other foreign plans are not
significant individually or in the aggregate. Most employees and retirees
outside the United States are covered by government health plans.
Postretirement Healthcare
The plans for postretirement healthcare have no plan assets. The
postretirement healthcare plan covers certain union and salaried employee groups
in the United States and is contributory, with retiree contributions adjusted
annually to limit the Company's contribution for participants who retired after
June 1, 1985. The Company also sponsors unfunded non-contributory postretirement
medical plans for a limited number of union employees and their spouses and
retirees of a discontinued operation.
79
Reconciliations of changes in the above plans' benefit obligations, fair
value of assets, and statement of funded status are as follows:
Other Postretirement
Pension Benefits Benefits
--------------------------------- -----------------------------
December 31, December 31,
2005 2004 2005 2004
(in thousands)
Reconciliation of Benefit Obligation
Benefit obligation at beginning of year $ 151,431 $ 122,567 $ 11,611 $ 12,200
Service cost 5,425 4,790 79 130
Interest cost 5,905 5,927 678 685
Participant contributions 1,765 1,583 700 705
Actuarial (gains) losses 12,289 11,688 (1,086) 61
Amendments (138) 238 - -
Divestitures 2,066 (924) - -
Effects of exchange rate changes (19,633) 10,938 - -
Benefits paid (7,263) (5,376) (1,665) (2,170)
------ ------ ------ ------
Benefit obligation at end of year $ 151,847 $ 151,431 $ 10,317 $ 11,611
========= ========= ======== ========
Reconciliation of Plan Assets
Fair value of plan assets at beginning of year $ 70,993 $ 60,108 $ - $ -
Actual return on assets 4,642 2,439 - -
Effects of exchange rate changes (8,732) 5,090 - -
Employer contributions 6,932 7,149 965 1,465
Participant contributions 1,765 1,583 700 705
Benefits paid (7,243) (5,376) (1,665) (2,170)
------ ------ ------ ------
Fair value of plan assets at end of year $ 68,357 $ 70,993 $ - $ -
======== ========= ======== ========
Reconciliation of Funded Status
Actuarial present value of projected
benefit obligations $ 151,847 $ 151,431 $ 10,317 $ 11,611
Plan assets at fair value 68,357 70,993 - -
------- ------ ------- -------
Funded status (83,490) (80,438) (10,317) (11,611)
Unrecognized transition obligation 939 1,336 - -
Unrecognized prior service cost 564 865 (1,071) (1,756)
Unrecognized net actuarial loss (gain) 27,970 20,371 2,376 3,736
-------- -------- ------- -------
Net amount recognized $ (54,017) $ (57,866) $ (9,012) $ (9,631)
========= ========= ======== ========
80
The amounts recognized in the accompanying Consolidated Balance Sheets are
as follows:
Other Postretirement
Pension Benefits Benefits
-------------------------- -------------------------
December 31, December 31,
2005 2004 2005 2004
(in thousands)
Other noncurrent assets $ 1,634 $ 14,269 $ - $ -
Other noncurrent liabilities (77,131) (77,076) (9,012) (9,631)
Accumulated other
comprehensive loss 21,480 4,941 - -
-------- -------- ------- -------
Net amount recognized $ (54,017) $ (57,866) $ (9,012) $ (9,631)
========= ========= ======== ========
December 31,
2005 2004
(in thousands)
Accumulated benefit obligation $ 141,538 $ 141,077
Increase in other
comprehensive loss 16,539 3,118
Information for pension plans with an accumulated benefit obligation in
excess of plan assets:
December 31,
2005 2004
(in thousands)
Projected benefit obligation $ 151,847 $ 99,910
Accumulated benefit obligation 141,538 89,566
Fair value of plan assets 68,357 18,885
Components of the net periodic benefit cost for the plans are as follows:
Other Postretirement
Pension Benefits Benefits
---------------------------------------- ---------------------------------------
2005 2004 2003 2005 2004 2003
(in thousands)
Service cost $ 5,425 $ 4,823 $ 4,137 $ 79 $ 130 $ 235
Interest cost 5,905 5,936 5,358 678 685 726
Expected return on plan assets (3,491) (3,474) (3,018) - - -
Net amortization and deferral 946 549 576 (411) (430) (265)
------ ------ ------ ---- ---- ----
Net periodic benefit cost $ 8,785 $ 7,834 $ 7,053 $ 346 $ 385 $ 696
======= ======= ======= ===== ===== =====
The weighted average assumptions used to determine benefit obligations for
the Company's plans, principally in foreign locations, are as follows:
Other Postretirement
Pension Benefits Benefits
---------------------------------------- ---------------------------------------
2005 2004 2003 2005 2004 2003
Discount rate 3.7% 4.3% 5.0% 5.5% 6.0% 6.0%
Rate of compensation increase 2.0% 2.1% 3.0% n/a n/a n/a
Initial health care cost trend n/a n/a n/a 9.5% 9.5% 9.5%
Ultimate health care cost trend n/a n/a n/a 5.0% 5.0% 5.0%
Years until ultimate trend is reached n/a n/a n/a 8.0 8.0 9.0
81
The weighted average assumptions used to determine net periodic benefit
cost for the Company's plans, principally in foreign locations, are as follows:
Other Postretirement
Pension Benefits Benefits
---------------------------------------- ---------------------------------------
2005 2004 2003 2005 2004 2003
Discount rate 4.3% 5.0% 5.1% 6.0% 6.0% 6.8%
Expected return on plan assets 5.4% 5.6% 5.5% n/a n/a n/a
Rate of compensation increase 2.0% 2.0% 3.0% n/a n/a n/a
Initial health care cost trend n/a n/a n/a 9.5% 9.5% 10.0%
Ultimate health care cost trend n/a n/a n/a 5.0% 5.0% 5.0%
Years until ultimate trend is reached n/a n/a n/a 9.0 9.0 10.0
Measurement Date 12/31/2005 12/31/2004 12/31/2003 12/31/2005 12/31/2004 12/31/2003
Assumed health care cost trend rates have an impact on the amounts
reported for postretirement benefits. A one percentage point change in assumed
healthcare cost trend rates would have the following effects for the year ended
December 31, 2005:
Other Postretirement
Benefits
-------------------------
1% Increase 1% Decrease
(in thousands)
Effect on total of service and interest cost components $ 59 $ (51)
Effect on postretirement benefit obligation $770 $(680)
Plan Assets:
The weighted average asset allocations of the plans at December 31, 2005
and 2004 by asset category are as follows:
Target December 31,
Allocation 2005 2004
---- ----
Equity 30%-65% 32% 31%
Debt 30%-65% 59% 57%
Real estate 0%-15% 3% 6%
Other 0%-15% 6% 6%
---- ----
Total 100% 100%
==== ====
Equity securities do not include Company stock of Dentsply International
Inc. The expected return on plan assets is the weighted average long-term
expected return based upon asset allocations and historic average returns for
the markets where the assets are invested, principally in foreign locations.
Cash Flows:
The Company expects to contribute $0.3 million to its U.S. defined benefit
pension plans, $1.1 million to its postretirement medical plans, and $6.3
million to its other postretirement benefit plans in 2006.
Estimated Future Benefit Payments
Other Postretirement
Pension Benefits Benefits
---------------- -------------------
(in thousands)
2006 $ 5,569 $ 1,104
2007 5,919 1,090
2008 5,517 1,048
2009 5,761 992
2010 6,907 975
------ -----
2011-2015 37,337 4,480
====== =====
82
NOTE 15 - RESTRUCTURING AND IMPAIRMENT COSTS (INCOME)
Restructuring and Impairment Costs (Income)
Restructuring and Impairment costs (income) consists of the following:
Year Ended December 31,
2005 2004 2003
(in thousands)
Restructuring and other costs $ 3,095 $ 7,144 $ 4,497
Reversal of restructuring charges due to
changes in estimates (1,168) (20) (797)
Impairment of Pharmaceutical assets 230,828 - -
--------- ------- -------
Total restructuring and impairment costs $ 232,755 $ 7,124 $ 3,700
========= ======= =======
Impairment of Indefinite-Lived Injectable Anesthetic Intangible Asset and
Long-Lived Pharmaceutical Manufacturing Assets
During the third and fourth quarters of 2005, the Company recorded $233.1
million ($179.6 million after tax) of impairment and restructuring charges
against the injectable anesthetic assets and the pharmaceutical manufacturing
facility outside of Chicago. This charge was a result of the in-depth analysis
performed upon the receipt of the results of the Food and Drug Administration's
(FDA's) Pre-Approval Inspection of the pharmaceutical manufacturing facility
during the third quarter of 2005, and the Company's decision in the fourth
quarter of 2005 to pursue the outsourcing of the manufacturing of the dental
anesthetic products and cease construction of the pharmaceutical manufacturing
facility (see also "Pharmaceutical Business" section in the MD&A). These
impairments did not impact the Company's needle-free Oraqix(R) product.
During the third quarter of 2005, the Company received the results of the
Food and Drug Administration's (FDA's) Pre-Approval Inspection of its
pharmaceutical manufacturing facility located outside of Chicago. This facility
was built to manufacture the Company's injectable anesthetic product, which was
part of the assets acquired from AstraZeneca in 2001. The Company conducted an
extensive review of the items identified by the FDA and developed action plans
to address these items. Included in this review were the expected time-line and
costs for responding to the FDA findings, the expected time required for FDA
re-application and approval, the expected ramp-up costs to achieve anticipated
volumes for the U.S., European and Japanese markets, and the extension of
contract manufacturing agreements to provide a supply of injectable anesthetic
product until the plant could achieve full production under the revised
timeline. As a result of this review, the Company concluded that the start-up of
its pharmaceutical manufacturing facility would be delayed, and did not expect
to begin producing injectable anesthetics at the facility for the U.S. and
Japanese markets until 2007.
The Company also concluded that the receipt of the FDA's Pre-Approval
Inspection Report and the results of the extensive review constituted a
triggering event for performance of an event-driven impairment assessment
conducted in accordance with SFAS 142 for the indefinite-lived injectable
anesthetic intangible asset and in accordance with SFAS 144 for the long-lived
assets related to the Pharmaceutical manufacturing facility outside of Chicago,
and the Oraqix(R) definite-lived intangible asset. In performing the SFAS 142
and SFAS 144 impairment tests, the Company formulated its best estimate of cash
flows from the respective assets taking into consideration (1) the Company's
projected sales and manufacturing cost projections for the injectable anesthetic
products (2) current and projected market share for the injectable anesthetic
products and (3) the costs to complete the production facility. Additionally,
due to the delay in obtaining FDA approval and the market impact, the Company
increased the risk-adjusted discount rate used in the SFAS 142 impairment test
to reflect the increased risk of the business caused by this delay. As a result
of the changes made to the event-driven impairment analysis model in the third
quarter of 2005 to address the results of the FDA's Pre-Approval Inspection and
the Company's extensive review and action plans, the discounted cash flows
associated with the indefinite lived injectable anesthetic intangible asset were
less than the carrying value of approximately $158 million. Thus, the Company
wrote-down the value of the indefinite-lived intangible asset by $131.3 million
($111.6 million after tax) during the third quarter of 2005. The third quarter
analysis did not reflect or cause an impairment of the Pharmaceutical
manufacturing facility or the definite-lived intangible asset associated with
Oraqix(R), which were tested as an asset group under SFAS 144 on an undiscounted
basis, due to the Company's plans at the time to produce the injectable and
Oraqix(R) products in the Chicago based manufacturing facility .
83
From the end of the third quarter of 2005 through December of 2005, the
Company continued to evaluate the actions necessary to address the items raised
in the FDA's pre-approval inspection. As of the end of the third quarter of
2005, the Company had anticipated that it would continue to manufacture products
at the plant for the U.K., Australia, and New Zealand markets, for which
regulatory approval had already been obtained. However, upon further evaluation,
the Company decided in December to suspend manufacturing at the plant to allow
improvements identified in the Company's corrective action plan to be made.
In conjunction with the evaluation of the actions necessary to address the
items raised in the FDA's pre-approval inspection, the Company also began to
evaluate strategic alternatives to obtaining FDA approval, including but not
limited to a potential shut-down of the dental anesthetics manufacturing
facility and obtaining long-term third party supply sources for both the
injectable anesthetic products and the Oraqix(R) product. In order to fully
evaluate the potential options at the Company's disposal with regard to a
potential closure and the disposition of the facility, the Company began a
comprehensive internal analysis of the pharmaceutical assets that included
initiating discussions with potential buyers, and evaluating the possibility of
obtaining extensions for the supply of products.
Based on the outcome of the analyses performed by the Company, as well as
both strategic and financial considerations, in December 2005 the Company began
to establish a plan for a course of action to shut down the manufacturing
facility, sell the manufacturing facility assets and begin negotiations to
obtain a long-term source of supply for the anesthetic products.
The Company concluded that this action constituted another triggering event
for performance of an event-driven impairment assessment conducted in accordance
with SFAS 142 for the remaining indefinite-lived injectable anesthetic
intangible assets and in accordance with SFAS 144 for the long-lived assets
related to the pharmaceutical manufacturing facility, and the Oraqix(R)
definite-lived intangible asset. As part of the event-driven impairment
assessment, the Company reviewed the asset grouping, which had historically
included the indefinite-lived injectable intangible asset, the Oraqix(R)
definite-lived intangible asset and the long-lived assets associated with the
pharmaceutical manufacturing facility. The Company reviewed this asset grouping
to determine if the grouping was still appropriate in light of the Company's
changed expectations in regards to the pharmaceutical manufacturing facility
that was the common link between the assets in the group. As a result of the
Company's review, the Company concluded that due to the change in expectations
with regards to the pharmaceutical manufacturing facility, the Company could no
longer consider the assets as an asset group as defined by SFAS 144, as the
pharmaceutical manufacturing facility was no longer feasible. As a result, the
Company began to evaluate each asset on a stand alone basis in accordance with
SFAS 142 and SFAS 144.
In performing the SFAS 142 and SFAS 144 impairment tests, the Company
formulated its best estimate of cash flows from the respective assets taking
into consideration (1) the Company's projected sales for the injectable
anesthetic products and the Oraqix(R) products, (2) projected costs to purchase
the future supply of the injectable anesthetic products and Oraqix(R) products
from external suppliers (3) current and projected market share for the
injectable anesthetic products and Oraqix(R) products (4) the costs to shut-down
the production facility and (5) projected cash flow associated with the sale of
the assets. Additionally, as a result of risk factors associated with the
procurement of long-term supply contracts for the injectable anesthetic
products, the Company increased the risk-adjusted discount rate used in the SFAS
142 impairment test to reflect the increased risk to the business. The Company
also obtained an independent third party appraisal of the indefinite-lived
injectable anesthetic intangible and the long-lived assets associated with the
pharmaceutical manufacturing facility due to the sensitivity of the assumptions
and the risks associated with these assets. As a result of the Company's review
and its changed expectations, as well as the Company's review of the third party
appraisal of the assets, it was determined that an additional impairment of the
indefinite-lived injectable anesthetic intangible asset acquired from
AstraZeneca in 2001, as well as an impairment of the long-lived assets related
to the manufacturing facility, had occurred during the fourth quarter of 2005.
The impairment recorded by the Company in the fourth quarter of 2005 was $99.5
million ($66.5 million after tax). This impairment did not impact the Company's
needle-free Oraqix(R) product.
Additionally, as a result of the Company's decision to begin the
establishment of a plan to shut down of the manufacturing facility, pre-tax
restructuring charges of $2.3 million ($1.5 million after tax) were also
recorded related to employee severance cost for which the Company was
contractually obligated. The Company also expects pre-tax restructuring charges
in the range of $6 million to $9 million in 2006 associated with the completion
of the closure of the facility. These costs primarily related to additional
contract termination costs, severance costs and utility costs during the shut
down period.
84
The aggregate carrying value of the indefinite-lived intangible asset, the
definite-lived Oraqix(R) intangible asset and the long-lived assets related to
the pharmaceutical manufacturing facility, prior to the impairment charges, was
approximately $253.9 million. After the impairment charge of $157.5 million to
the indefinite-lived injectable anesthetic intangible, the impairment of $71.2
million to the definite-lived assets associated with the manufacturing facility,
negative impact of exchange of $0.8 million, capital expenditures of $8.7
million and depreciation of $1.5 million, the aggregate carrying value of the
assets is $31.6 million. As previously noted, the impairment charges did not
affect the Oraqix(R) definite-lived intangible assets, which are part of the
Company's Pharmaceutical division within the U.S. Consumable/ Canada Business
segment.
Restructuring
During the fourth quarter of 2005, the Company recorded restructuring costs
of $2.4 million. These costs were primarily related to the decision to shut down
the Pharmaceutical manufacturing facility outside of Chicago as discussed
previously. In addition, these costs related to the consolidation of certain
U.S. production facilities in order to better leverage the Company's resources.
The primary objective of these initiatives is to reduce costs and obtain
operational efficiencies. The charges recorded in 2005 were severance costs. The
plans include the elimination of approximately 130 administrative and
manufacturing positions, all within the U.S. These plans are expected to be
substantially completed by the end of 2006. None of these positions had been
eliminated as of December 31, 2005. The major components of these charges and
the remaining outstanding balances at December 31, 2005 are as follows:
Amounts Balance
2005 Applied December 31,
Provisions 2005 2005
(in thousands)
Severance 2,400 - 2,400
------- ---- -------
$ 2,400 $ - $ 2,400
======= ==== =======
During the third and fourth quarters of 2004, the Company recorded
restructuring and other costs of $5.7 million. These costs were primarily
related to the creation of a European Shared Services Center in Yverdon,
Switzerland, which resulted in the identification of redundant personnel in the
Company's European accounting functions. In addition, these costs related to the
consolidation of certain sales/customer service and distribution facilities in
Europe and Japan. The primary objective of these restructuring initiatives is to
improve operational efficiencies and to reduce costs within the related
businesses. Included in this charge were severance costs of $4.9 million and
lease/contract termination costs of $0.9 million. During 2005, the Company
recorded additional charges of $0.5 million related to severance and
lease/contract termination contracts which were required to be expensed as
incurred. Additionally, during 2005, the Company reversed $1.2 million as a
change in estimate, as it determined the costs to complete the plan were lower
than originally estimated. The plans include the elimination of approximately
110 administrative and manufacturing positions primarily in Germany. These plans
are expected to be complete during 2006. As of December 31, 2005, approximately
40 of these positions remained to be eliminated. The major components of these
charges and the remaining outstanding balances at December 31, 2005 are as
follows:
Amounts Change Amounts Balance
2004 Applied 2005 in Estimate Applied December 31,
Provisions 2004 Provisions 2005 2005 2005
(in thousands)
Severance $ 4,877 $ (583) $ 322 $ (1,168) $(1,740) $ 1,708
Lease/contract
terminations 881 - 190 - (435) 636
------ ----- ---- ------- ------- ------
$ 5,758 $ (583) $ 512 $ (1,168) $(2,175) $ 2,344
======= ====== ===== ======== ======= =======
During the fourth quarter of 2003, the Company recorded restructuring and
other costs of $4.5 million. These costs were primarily related to impairment
charges recorded to certain investments in emerging technologies. The products
related to these technologies were abandoned and therefore these assets were no
longer viewed as being recoverable. In addition, certain costs were associated
with the restructuring or consolidation of the Company's operations, primarily
its U.S. laboratory businesses and the closure of its European central warehouse
in Nijmegan, The Netherlands. Included in this charge were severance costs of
$0.9 million, lease/contract termination costs of $0.6 million and intangible
and other asset impairment charges of $3.0 million. In addition, during 2005 and
2004, the Company recorded charges of $0.2 million and $1.4 million,
respectively, for additional severance, lease termination and other
restructuring costs incurred during the period related to these plans. These
restructuring plans will result in the elimination of approximately 70
85
administrative and manufacturing positions primarily in the United States, 2 of
which remain to be eliminated as of December 31, 2005. Certain of these
positions will need to be replaced at the consolidated site and therefore the
net reduction in positions is expected to be approximately 25. These plans were
substantially complete by December 31, 2005. The major components of these
charges and the remaining outstanding balances at December 31, 2005 are as
follows:
Amounts Amounts Amounts Balance
2003 Applied 2004 Applied 2005 Applied December 31,
Provisions 2003 Provisions 2004 Provisions 2005 2005
(in thousands)
Severance $ 908 $ (49) $ 451 $ (1,083) $ 17 $ (117) $ 127
Lease/contract
terminations 562 (410) 13 (165) - - -
Other restructuring
costs 27 (27) 922 (852) 104 (174) -
Intangible and other asset
impairment charges 3,000 (3,000) - - 62 (62) -
----- ------ ----- ------ --- ---- ----
$ 4,497 $ (3,486) $ 1,386 $ (2,100) $ 183 $ (353) $ 127
======= ======== ======= ======== ===== ====== =====
As part of combining Austenal with the Company in 2002, $4.4 million of
liabilities were established through purchase accounting for the restructuring
of the acquired company's operations, primarily in the United States and
Germany. Included in this liability were severance costs of $2.9 million,
lease/contract termination costs of $1.4 million and other restructuring costs
of $0.1 million. During 2003 and 2004, the Company reversed a total of $1.3
million, which was recorded to goodwill, as a change in estimate as it
determined the costs to complete the plan were lower than originally estimated.
This restructuring plan included the elimination of approximately 75
administrative and manufacturing positions in the United States and Germany.
This plan was substantially complete at March 31, 2004.
In the fourth quarter of 2001, the Company recorded a charge of $12.3
million for restructuring and other costs. The charge included costs of $6.0
million to restructure the Company's existing operations, primarily in Germany,
Japan and Brazil, as a result of the integration with Degussa Dental. Included
in this charge were severance costs of $2.1 million, lease/contract termination
costs of $1.1 million and other restructuring costs of $0.2 million. In
addition, the Company recorded $2.6 million of impairment charges on fixed
assets that were disposed of as a result of the restructuring plan. The
remaining charge of $6.3 million involves impairment charges on intangible
assets. During 2002 and 2003 the Company reversed a net total of $1.0 million
and $0.8 million, respectively, as a change in estimate as it determined the
costs to complete the plan were lower than originally estimated. This
restructuring plan resulted in the elimination of approximately 160
administrative and manufacturing positions in Germany, Japan and Brazil. As part
of these reorganization activities, some of these positions were replaced with
lower-cost outsourced services. This plan was complete at December 31, 2003.
During the fourth quarter 2003, the Company made the decision to
discontinue the operations of its dental needle business. The business consists
of one manufacturing location which ceased operations on March 31, 2004. As a
result of this decision, the Company recorded a charge in the fourth quarter of
2003 of $1.6 million as a reduction in income from discontinued operations.
Included in this charge were severance costs of $0.4 million, fixed asset
impairment charges of $0.5 million, $0.4 million of impairment charges related
to goodwill and other restructuring costs of $0.3 million. In addition, during
the year ended December 31, 2004, the Company recorded charges of $0.5 million
for additional severance, other restructuring costs and fixed asset impairment
charges incurred during the period related to this closing. This plan resulted
in the elimination of approximately 55 administrative and manufacturing
positions in the United States. This plan was substantially complete at March
31, 2004.
86
NOTE 16 - FINANCIAL INSTRUMENTS AND DERIVATIVES
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The Company
believes the carrying amounts of cash and cash equivalents, accounts receivable
(net of allowance for doubtful accounts), prepaid expenses and other current
assets, accounts payable, accrued liabilities, income taxes payable and notes
payable approximate fair value due to the short-term nature of these
instruments. The Company estimates the fair value of its total long-term debt
was $682.6 million versus its carrying value of $680.9 million as of December
31, 2005. The fair value approximated the carrying value since much of the
Company's debt is variable rate and reflects current market rates. The fixed
rate Eurobonds are effectively converted to variable rate as a result of an
interest rate swap and the interest rates on revolving debt and commercial paper
are variable and therefore the fair value of these instruments approximates
their carrying values. The Company has fixed rate Swiss franc denominated notes
with estimated fair values that differ from their carrying values. At December
31, 2005, the fair value of these instruments was $147.4 million versus their
carrying values of $145.7 million. The fair values differ from the carrying
values due to lower market interest rates at December 31, 2005 versus the rates
at issuance of the notes.
Derivative Instruments and Hedging Activities
The Company's activities expose it to a variety of market risks which
primarily include the risks related to the effects of changes in foreign
currency exchange rates, interest rates and commodity prices. These financial
exposures are monitored and managed by the Company as part of its overall
risk-management program. The objective of this risk management program is to
reduce the potentially adverse effects that these market risks may have on the
Company's operating results.
Certain of the Company's inventory purchases are denominated in foreign
currencies which exposes the Company to market risk associated with exchange
rate movements. The Company's policy generally is to hedge major foreign
currency transaction exposures through foreign exchange forward contracts. These
contracts are entered into with major financial institutions thereby minimizing
the risk of credit loss. In addition, the Company's investments in foreign
subsidiaries are denominated in foreign currencies, which creates exposures to
changes in exchange rates. The Company uses debt denominated in the applicable
foreign currency as a means of hedging a portion of this risk.
With the Company's significant level of long-term debt, changes in the
interest rate environment can have a major impact on the Company's earnings,
depending upon its interest rate exposure. As a result, the Company manages its
interest rate exposure with the use of interest rate swaps, when appropriate,
based upon market conditions.
The manufacturing of some of the Company's products requires the use of
commodities which are subject to market fluctuations. In order to limit the
unanticipated earnings changes from such market fluctuations, the Company
selectively enters into commodity price swaps for certain materials used in the
production of its products. Additionally, the Company uses non-derivative
methods, such as the precious metal consignment agreement to effectively hedge
commodity risks.
Cash Flow Hedges
The Company uses interest rate swaps to convert a portion of its variable
rate debt to fixed rate debt. As of December 31, 2005, the Company has two
groups of significant variable rate to fixed rate interest rate swaps. One of
the groups of swaps was entered into in February 2002, has notional amounts
totaling 12.6 billion Japanese yen, and effectively converts the underlying
variable interest rates to an average fixed rate of 1.6% for a term of ten
years. The other swap, effective March, 2005, has a notional amount of 65
million Swiss francs, and effectively converts the underlying variable interest
rates to a fixed rate of 4.2% for a term of seven years.
The Company selectively enters into commodity price swaps to effectively
fix certain variable raw material costs. While the Company did not have any
swaps in place for the purchase of raw materials at December 31, 2005, the
Company generally hedges up to 80% of its projected annual platinum needs
related to these products.
87
The Company enters into forward exchange contracts to hedge the foreign
currency exposure of its anticipated purchases of certain inventory from Japan.
In addition, exchange contracts are used by certain of the Company's
subsidiaries to hedge intercompany inventory purchases which are denominated in
non-local currencies. The forward contracts that are used in these programs
mature in twelve months or less. The Company generally hedges up to 80% of its
anticipated purchases from the supplying locations.
As of December 31, 2005, $0.1 million of deferred net gains on derivative
instruments recorded in "Accumulated other comprehensive gain (loss)" are
expected to be reclassified to current earnings during the next twelve months.
This reclassification is primarily due to the sale of inventory that includes
previously hedged purchases. The maximum term over which the Company is hedging
exposures to variability of cash flows (for all forecasted transactions,
excluding interest payments on variable-rate debt) is eighteen months. Overall,
the derivatives designated as cash flow hedges are nearly 100% effective.
Fair Value Hedges
The Company uses interest rate swaps to convert a portion of its fixed rate
debt to variable rate debt. In December 2001, the Company issued Euro 350
million in Eurobonds at a fixed rate of 5.75% maturing in December 2006 to
partially finance the Degussa Dental acquisition. Coincident with the issuance
of the Eurobonds, the Company entered into two integrated transactions: (a) an
interest rate swap agreement with notional amounts totaling Euro 350 million
which converted the 5.75% fixed rate Euro-denominated financing to a variable
rate (based on the London Interbank Borrowing Rate) Euro-denominated financing;
and (b) a cross-currency basis swap which converted this variable rate
Euro-denominated financing to variable rate U.S. dollar-denominated financing.
The Euro 350 million interest rate swap agreement was designated as a fair
value hedge of the Euro 350 million in fixed rate debt pursuant to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).
In accordance with SFAS No. 133, the interest rate swap and underlying Eurobond
have been marked-to-market via the income statement. As of December 31, 2005 and
2004, the accumulated fair value of the interest rate swap was $5.3 million and
$14.7 million, respectively, and was recorded in Prepaid Expenses and Other
Current Assets and Other Noncurrent Assets. The notional amount of the
underlying Eurobond was increased by a corresponding amount at December 31, 2005
and 2004.
From inception through the first quarter of 2003, the cross-currency
element of the integrated transaction was not designated as a hedge and changes
in the fair value of the cross-currency element of the integrated transaction
were marked-to-market in the income statement, offsetting the impact of the
change in exchange rates on the Eurobonds that were also recorded in the income
statement. In the first quarter of 2003, the Company amended the cross-currency
element of the integrated transaction to realize the $ 51.8 million of
accumulated value of the cross-currency swap. The amendment eliminated the final
payment (at a fixed rate of $.90) of $315 million by the Company in exchange for
the final payment of Euro 350 million by the counterparty in return for the
counterparty paying the Company 4.29% on $315 million for the remaining term of
the agreement, or approximately $14.0 million on an annual basis. Other cash
flows associated with the cross-currency element of the integrated transaction,
included the Company's obligation to pay on $315 million LIBOR plus
approximately 1.34% and the counterparty's obligation to pay on Euro 350 million
LIBOR plus approximately 1.47%, remained unchanged by the amendment.
No gain or loss was recognized upon the amendment of the cross-currency
element of the integrated transaction, as the interest rate of 4.29% was
established to ensure that the fair value of the cash flow streams before and
after amendment were equivalent. As a result of the amendment, the Company
became economically exposed to the impact of exchange rates on the final
principal payment on the Euro 350 million Eurobonds and designated the Euro 350
million Eurobonds as a hedge of net investment, on the date of the amendment and
thus the impact of translation changes related to the final principal payment
are recorded in Accumulated Other Comprehensive Income.
In June 2005, the Company terminated the cross-currency element of the
integrated transaction in response to the rapid rise in U.S. Dollar short-term
interest rates, converting the debt back into a Euro variable instrument. At
termination in June, 2005 and at December 31, 2004, the accumulated fair value
of the cross-currency element of the integrated transaction was $20.2 million
received in cash and $33.0 million, recorded in Prepaid Expenses and Other
Current Assets and Other Noncurrent Assets, respectively.
88
In the first quarter of 2005, the Company entered into cross-currency
interest rate swaps with a notional principal value of Swiss Franc 457 million
paying 3 month Swiss franc Libor and receiving 3 month U.S. dollar Libor on
$384.4 million. The cross-currency swaps are designated as net investment hedge
of the Swiss net assets. In the fourth quarter of 2005, the Company entered into
cross currency interest rate swaps with a notional principal value of Euro 358
million paying 3 month Euro Libor and receiving 3 month U.S. dollar Libor on
$419.6 million. The cross-currency swaps are designated as net investment hedge
of the Swiss and Euro denominated net assets. The interest rate differential is
recognized in earnings as it is accrued, the foreign currency revaluation is
recorded in Accumulated Other Comprehensive Income, net of tax effects.
The fair value of these swap agreements is the estimated amount the Company
would receive (pay) at the reporting date, taking into account the effective
interest rates and foreign exchange rates. As of December 31, 2005 and 2004, the
estimated net fair values of the swap agreements were $29.2 million and $35.7
million, respectively.
Hedges of Net Investments in Foreign Operations
The Company has numerous investments in foreign subsidiaries. The net
assets of these subsidiaries are exposed to volatility in currency exchange
rates. Currently, the Company uses non-derivative financial instruments,
including foreign currency denominated debt held at the parent company level and
long-term intercompany loans, for which settlement is not planned or anticipated
in the foreseeable future and derivative financial instruments to hedge some of
this exposure. Translation gains and losses related to the net assets of the
foreign subsidiaries are offset by gains and losses in the non-derivative and
derivative financial instruments designated as hedges of net investments.
At December 31, 2005 and 2004, the Company had Euro-denominated, Swiss
franc-denominated, and Japanese yen-denominated debt and cross-currency interest
rate swaps (at the parent company level) to hedge the currency exposure related
to a designated portion of the net assets of its European, Swiss, and Japanese
subsidiaries. At December 31, 2005 and 2004, the accumulated translation gains
on investments in foreign subsidiaries, primarily denominated in Euros, Swiss
francs and Japanese yen, net of these net investment debt hedges, were $58.4
million and $179.4 million, respectively, which was included in Accumulated
Other Comprehensive income.
Other
As of December 31, 2005, the Company had recorded assets representing the
fair value of derivative instruments of $5.3 million in "Prepaid expenses and
other current assets" and $36.6 million in "Other noncurrent assets" and
liabilities representing the fair value of derivative instruments of $3.1
million in "Accrued liabilities" and $9.7 million in "Other noncurrent
liabilities".
In accordance with SFAS 52, "Foreign Currency Translation", the Company
utilizes long-term intercompany loans to eliminate foreign currency transaction
exposures of certain foreign subsidiaries. Net gains or losses related to these
long-term intercompany loans, those for which settlement is not planned or
anticipated in the foreseeable future, are included "Accumulated other
comprehensive income (loss)".
89
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases automobiles and machinery and equipment and certain
office, warehouse, and manufacturing facilities under non-cancelable operating
leases. These leases generally require the Company to pay insurance, taxes and
other expenses related to the leased property. Total rental expense for all
operating leases was $23.0 million for 2005, $22.0 million for 2004 and $20.7
million for 2003.
Rental commitments, principally for real estate (exclusive of taxes,
insurance and maintenance), automobiles and office equipment are as follows (in
thousands):
2006 $ 20,175
2007 11,935
2008 8,448
2009 4,844
2010 3,122
2011 and thereafter 5,275
--------
$ 53,799
========
Litigation
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes it is unlikely
that pending litigation to which DENTSPLY is a party will have a material
adverse effect upon its consolidated financial position or results of
operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. On January 5, 1999, the Department of
Justice filed a Complaint against the Company in the U.S. District Court in
Wilmington, Delaware alleging that the Company's tooth distribution practices
violate the antitrust laws and seeking an order for the Company to discontinue
its practices. The trial in the government's case was held in April and May 2002
and subsequently, the Judge entered a decision that the Company's tooth
distribution practices do not violate the antitrust laws. The Department of
Justice appealed this decision to the U.S. Third Circuit Court of Appeals and
the Third Circuit reversed the decision of the District Court. The Company's
petition to the U.S. Supreme Court asking it to review the Third Circuit Court
decision was denied. The effect of this decision will be the issuance of an
injunction requiring DENTSPLY to discontinue its policy of not allowing its
tooth dealers to take on new competitive teeth lines. This decision relates only
to the distribution of artificial teeth sold in the U.S., which affects less
than 2.5% of the Company's net sales. While the Company believes its tooth
distribution practices do not violate the antitrust laws, the Company is
confident that it can continue to develop this business regardless of the final
legal outcome.
Subsequent to the filing of the Department of Justice Complaint in 1999,
several private party class actions were filed based on allegations similar to
those in the Department of Justice case, on behalf of laboratories, and denture
patients in seventeen states who purchased Trubyte teeth or products containing
Trubyte teeth. These cases were transferred to the U.S. District Court in
Wilmington, Delaware. The private party suits seek damages in an unspecified
amount. The Court has granted the Company's Motion on the lack of standing of
the laboratory and patient class actions to pursue damage claims. The Plaintiffs
in the laboratory case appealed this decision to the Third Circuit and the Court
upheld the decision of the District Court in dismissing the Plaintiffs' damages
claims, with the exception of allowing the Plaintiffs to pursue a damage claim
based on a theory of resale price maintenance agreements between the Company and
its tooth dealers. The Plaintiffs have filed a petition with the U.S. Supreme
Court asking it to review this decision of the Third Circuit. Also, private
party class actions on behalf of indirect purchasers were filed in California
and Florida state courts. The California and Florida cases have been dismissed
by the Plaintiffs following the decision by the Federal District Court Judge
issued in August 2003.
On March 27, 2002, a Complaint was filed in Alameda County, California (which
was transferred to Los Angeles County) by Bruce Glover, D.D.S. alleging, inter
alia, breach of express and implied warranties, fraud, unfair trade practices
and negligent misrepresentation in the Company's manufacture and sale of
Advance(R) cement. The Complaint seeks damages in an unspecified amount for
costs incurred in repairing dental work in which the Advance(R) product
allegedly failed. The Judge has entered an Order granting class certification,
90
as an Opt-in class (this means that after Notice of the class action is sent to
possible class members, a party will have to determine if they meet the class
definition and take affirmative action in order to join the class) on the claims
of breach of warranty and fraud. In general, the Class is defined as California
dentists who purchased and used Advance(R) cement and were required, because of
failures of the cement, to repair or reperform dental procedures for which they
were not paid. The Notice of the class action was sent on February 23, 2005 to
the approximately 29,000 dentists licensed to practice in California during the
relevant period and a total of 166 dentists have opted into the class action. As
the result of a recent decision by a California Appellate Court, the plaintiffs
have filed an appeal to convert the claim to an opt-out claim from its current
status as an opt-in claim. The Advance(R) cement product was sold from 1994
through 2000 and total sales in the United States during that period were
approximately $5.2 million. The Company's primary level insurance carrier has
confirmed coverage for the breach of warranty claims in this matter up to their
policy limits.
Other
The Company has no material non-cancelable purchase commitments.
The Company has employment agreements with its executive officers. These
agreements generally provide for salary continuation for a specified number of
months under certain circumstances. If all of the employees under contract were
to be terminated by the Company without cause (as defined in the agreements),
the Company's liability would be approximately $12.8 million at December 31,
2005.
91
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Dentsply International Inc.
Quarterly Financial Information (Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
(in thousands, except per share amounts)
2005
Net sales from continuing operations $ 406,975 $ 444,834 $ 415,964 $ 447,362 $ 1,715,135
Gross profit from continuing operations 208,941 227,283 209,002 223,792 869,018
Operating income from continuing operations 70,125 81,135 (56,633) (21,705) 72,922
Net income from continuing operations 49,049 57,893 (60,805) (724) 45,413
Net income from discontinued operations - - - - -
------ ------ ------- -------- ----------
Net income $49,049 $57,893 $ (60,805) $ (724) $ 45,413
======= ======= ========= ========= ===========
Earnings per common share - basic
Continuing operations $ 0.61 $ 0.72 $ (0.77) $ (0.01) $ 0.57 (a)
Discontinued operations - - - - -
---- ---- ----- ----- -----
Total earnings per common share $ 0.61 $ 0.72 $ (0.77) $ (0.01) $ 0.57
====== ====== ======= ======= ======
Earnings per common share - diluted
Continuing operations $ 0.60 $ 0.71 $ (0.77) $ (0.01) $ 0.56 (a)
Discontinued operations - - - - -
---- ---- ----- ----- -----
Total earnings per common share $ 0.60 $ 0.71 $ (0.77) $ (0.01) $ 0.56
====== ====== ======= ======= ======
Cash dividends declared per common share $0.0600 $0.0600 $0.0600 $ 0.0700 $ 0.2500
2004
Net sales from continuing operations $ 414,359 $ 424,408 $ 389,965 $ 465,500 $ 1,694,232
Gross profit from continuing operations 203,892 212,056 198,516 232,054 846,518
Operating income from continuing operations 70,106 77,565 68,111 79,348 295,130
Net income from continuing operations 45,768 49,222 46,343 68,953 210,286
Net income from discontinued operations 43,064 (179) 340 (346) 42,879
------ ------- ------- ------- ---------
Net income $88,832 $ 49,043 $ 46,683 $ 68,607 $ 253,165
======= ========= ========= ========= ===========
Earnings per common share - basic
Continuing operations $ 0.57 $ 0.61 $ 0.58 $ 0.85 $ 2.61
Discontinued operations 0.54 - - - 0.54
---- ---- ----- ----- -----
Total earnings per common share $ 1.11 $ 0.61 $ 0.58 $ 0.85 $ 3.15
====== ====== ====== ====== ======
Earnings per common share - diluted
Continuing operations $ 0.56 $ 0.60 $ 0.57 $ 0.83 $ 2.56
Discontinued operations 0.53 - - - 0.53
---- ---- ----- ----- -----
Total earnings per common share $ 1.09 $ 0.60 $ 0.57 $ 0.83 $ 3.09
====== ====== ====== ====== ======
Cash dividends declared per common share $0.0525 $0.0525 $0.0525 $ 0.0600 $ 0.2175
(a) - As a result of the net loss in the third and fourth quarters of 2005,
options to purchase 1,324,000 and 1,299,000 shares of common stock,
respectively, that were outstanding at the end of each quarter were not
included in the computation of diluted income/(loss) per share due to their
antidilutive effects on the income/(loss) per share.
Sales excluding precious metal content were $369.3 million, $400.8 million,
$373.5 million and $400.3 million, respectively, for the first, second, third
and fourth quarters of 2005. Sales excluding precious metal content were $358.6
million, $373.2 million, $345.2 million and $404.9 million, respectively, for
the first, second, third and fourth quarters of 2004. This measurement could be
considered a non-GAAP measure as discussed further in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
92
Supplemental Stock Information
The common stock of the Company is traded on the NASDAQ National Market
under the symbol "XRAY". The following table sets forth high, low and closing
sale prices of the Company's common stock for the periods indicated as reported
on the NASDAQ National Market:
Cash
Dividend
Market Range of Common Stock Period-end Declared
Closing Per Common
High Low Price Share
2005
First Quarter $ 58.40 $ 51.66 $ 54.41 $0.06000
Second Quarter 57.93 52.68 54.00 0.06000
Third Quarter 55.94 50.85 54.02 0.06000
Fourth Quarter 58.44 50.73 53.69 0.07000
2004
First Quarter $ 45.44 $ 41.75 $ 44.33 $0.05250
Second Quarter 52.26 44.09 52.10 0.05250
Third Quarter 52.91 46.30 51.94 0.05250
Fourth Quarter 56.84 50.02 56.20 0.06000
2003
First Quarter $ 37.95 $ 32.10 $ 34.79 $0.04600
Second Quarter 41.10 32.35 40.96 0.04600
Third Quarter 47.05 40.41 44.84 0.05250
Fourth Quarter 47.40 41.85 45.17 0.05250
The Company estimates, based on information supplied by its transfer agent,
that there are approximately 57,516 holders of common stock, including 505
holders of record.
93
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.
DENTSPLY INTERNATIONAL INC.
By:/s/ Gerald K. Kunkle, Jr.
-----------------------------
Gerald K. Kunkle, Jr.
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Gerald K. Kunkle, Jr. March 10, 2006
- ---------------------------- --------------------
Gerald K. Kunkle, Jr. Date
Chairman of the Board, Director, and
Chief Executive Officer
(Principal Executive Officer)
/s/ William R. Jellison March 10, 2006
- ------------------------- --------------------
William R. Jellison Date
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ John C. Miles II March 10, 2006
- ------------------------- --------------------
John C. Miles II Date
Director
/s/ Dr. Michael C. Alfano March 10, 2006
- ------------------------- --------------------
Dr. Michael C. Alfano Date Director
/s/ Eric K. Brandt March 10, 2006
- ------------------------- --------------------
Eric K. Brandt Date
Director
/s/ Paula H. Cholmondeley March 10, 2006
- ------------------------- --------------------
Paula H. Cholmondeley Date
Director
94
/s/ Michael J. Coleman March 10, 2006
- ------------------------- --------------------
Michael J. Coleman Date
Director
/s/ William F. Hecht March 10, 2006
- ------------------------- --------------------
William F. Hecht Date
Director
/s/ Leslie A. Jones March 10, 2006
- ------------------------- --------------------
Leslie A. Jones Date
Director
/s/ Wendy L. Dixon March 10, 2006
- ------------------------- --------------------
Wendy L. Dixon Date
Director
/s/ Francis J. Lunger March 10, 2006
- ------------------------- --------------------
Francis J. Lunger Date
Director
/s/ W. Keith Smith March 10, 2006
- ------------------------- --------------------
W. Keith Smith Date Director Date
95
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-71792, 33-89786, 333-56093, and
333-101548) and Registration Statement on Form S-3 (No. 333-76089) of
DENTSPLY International Inc. of our report dated March 10, 2006 relating
to the financial statements, financial statement schedule, management's
assessment of the effectiveness of internal control over financial
reporting and the effectiveness of internal control over financial
reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, PA
March 14, 2006
FIVE YEAR CREDIT AGREEMENT
Dated as of May 9, 2005
DENTSPLY INTERNATIONAL INC., a Delaware corporation (the
"Company"), the banks, financial institutions and other institutional
lenders (the "Initial Lenders") and issuers of letters of credit ("Initial
Issuing Banks") listed on Schedule I hereto, JPMORGAN CHASE BANK, N.A., as
syndication agent, HARRIS TRUST AND SAVINGS BANK, MANUFACTURERS AND TRADERS
TRUST COMPANY and WACHOVIA BANK, NATIONAL ASSOCIATION, as co-documentation
agents, CITIGROUP GLOBAL MARKETS INC. and J.P. MORGAN SECURITIES INC., as joint
lead arrangers and joint bookrunners, and CITIBANK, N.A. ("Citibank"), as agent
(the "Agent") for the Lenders(as hereinafter defined), agree as follows:
ARTICLE I
FINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. As used in this
Agreement, the following terms shall have the following meanings (such meanings
to be equally applicable to both the singular and plural forms of the terms
defined):
"Advance" means an advance by a Lender to any Borrower as part
of a Borrowing and refers to a Base Rate Advance or a Eurocurrency Rate
Advance (each of which shall be a "Type" of Advance).
"Affiliate" means, as to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common
control with such Person or is a director or officer of such Person.
For purposes of this definition, the term "control" (including the
terms "controlling", "controlled by" and "under common control with")
of a Person means the possession, direct or indirect, of the power to
vote 5% or more of the Voting Stock of such Person or to direct or
cause the direction of the management and policies of such Person,
whether through the ownership of Voting Stock, by contract or
otherwise.
"Agent's Account" means (a) in the case of Advances
denominated in Dollars, the account of the Agent maintained by the
Agent at Citibank at its office at Two Penns Way, New Castle, Delaware
19720, Account No. 36852248, Attention: Bank Loan Syndications, (b) in
the case of Advances denominated in any Committed Currency, the account
of the Sub-Agent designated in writing from time to time by the Agent
to the Company and the Lenders for such purpose and (c) in any such
case, such other account of the Agent as is designated in writing from
time to time by the Agent to the Company and the Lenders for such
purpose.
"Applicable Lending Office" means, with respect to each
Lender, such Lender's Domestic Lending Office in the case of a Base
Rate Advance and such Lender's Eurocurrency Lending Office in the case
of a Eurocurrency Rate Advance.
"Applicable Margin" means as of any date (a) for Base Rate
Advances, 0.00% per annum, and (b) for Eurocurrency Rate Advances, a
percentage per annum determined by reference to the Public Debt Rating
in effect on such date as set forth below:
- ---------------------------- ---------------------------------
Public Debt Rating Applicable Margin for
S&P/Moody's Eurocurrency Rate Advances
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------
Level 1
A or A2 or above 0.230%
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------
Level 2
A- or A3 0.270%
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------
Level 3
BBB+ or Baa1 0.350%
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------
Level 4
BBB or Baa2 0.450%
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------
Level 5
BBB- or Baa3 0.600%
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------
Level 6
Lower than Level 5 1.050%
- ---------------------------- ---------------------------------
"Applicable Percentage" means, as of any date a percentage per
annum determined by reference to the Public Debt Rating in effect on
such date as set forth below:
- -------------------------------- -----------------------------
Public Debt Rating Applicable
S&P/Moody's Percentage
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 1
A or A2 or above 0.070%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 2
A- or A3 0.080%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 3
BBB+ or Baa1 0.100%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 4
BBB or Baa2 0.125%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 5
BBB- or Baa3 0.150%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 6
Lower than Level 5 0.200%
- -------------------------------- -----------------------------
"Applicable Utilization Fee" means, as of any date that the
aggregate principal amount of the Advances plus the aggregate Available
Amount of the Letters of Credit outstanding exceed 50% of the aggregate
Revolving Credit Commitments, a percentage per annum determined by
reference to the Public Debt Rating in effect on such date as set forth
below:
- -------------------------------- -----------------------------
Public Debt Rating Applicable
S&P/Moody's Utilization Fee
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 1
A or A2 or above 0.100%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 2
A- or A3 0.100%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 3
BBB+ or Baa1 0.100%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 4
BBB or Baa2 0.100%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 5
BBB- or Baa3 0.100%
- -------------------------------- -----------------------------
- -------------------------------- -----------------------------
Level 6
Lower than Level 5 0.100%
- -------------------------------- -----------------------------
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Lender and an Eligible Assignee, and accepted by the
Agent, in substantially the form of Exhibit C hereto.
"Assuming Lender" has the meaning specified in Section 2.18(d).
"Assumption Agreement" has the meaning specified in Section
2.18(d)(ii).
"Available Amount" of any Letter of Credit means, at any time,
the maximum amount available to be drawn under such Letter of Credit at
such time (assuming compliance at such time with all conditions to
drawing).
"Bankruptcy Law" means any proceeding of the type referred to
in Section 6.01(e) or Title 11, U.S. Code, or any similar foreign,
federal or state law for the relief of debtors.
"Base Rate" means a fluctuating interest rate per annum in
effect from time to time, which rate per annum shall at all times be
equal to the higher of:
(a) the rate of interest announced publicly by
Citibank in New York, New York, from time to time, as
Citibank's base rate; and
(b) 1/2 of one percent per annum above the Federal
Funds Rate.
"Base Rate Advance" means an Advance denominated in Dollars
that bears interest as provided in Section 2.07(a)(i).
"Borrowers" means, collectively, the Company and the
Designated Subsidiaries from time to time.
"Borrowing" means a borrowing consisting of simultaneous
Advances of the same Type made by each of the Lenders.
"Borrowing Minimum" means, in respect of Advances denominated
in Dollars, $5,000,000, in respect of Advances denominated in Euros,
Euro 5,000,000, in respect of Advances denominated in Swiss Francs,
CHF5,000,000, in respect of Advances denominated in Yen, JPY
500,000,000 and, in respect of Advances denominated in any other
Committed Currency, such amount as the Agent may designate to the
Company, which shall be a whole multiple of 5,000,000 units of such
currency.
"Borrowing Multiple" means, in respect of Advances denominated
in Dollars, $1,000,000, in respect of Advances denominated in Euros,
Euro 1,000,000, in respect of Advances denominated in Swiss Francs,
CHF1,000,000, in respect of Advances denominated in Yen, JPY
100,000,000 and, in respect of Advances denominated in any other
Committed Currency, such amount as the Agent may designate to the
Company, which shall be a whole multiple of 1,000,000 units of such
currency.
"Business Day" means a day of the year on which banks are not
required or authorized by law to close in New York City and, if the
applicable Business Day relates to any Eurocurrency Rate Advances, on
which dealings are carried on in the London interbank market and banks
are open for business in London and in the country of issue of the
currency of such Eurocurrency Rate Advance (or, in the case of an
Advance denominated in Euro, on which the Trans-European Automated
Real-Time Gross Settlement Express Transfer (TARGET) System is open).
"Commitment" means a Revolving Credit Commitment or a Letter of Credit
Commitment.
"Commitment Date" has the meaning specified in Section
2.18(b).
"Commitment Increase" has the meaning specified in Section
2.18(a).
"Committed Currencies" means Euros, lawful currency of The
Swiss Federation, lawful currency of Japan and any other actively
traded currency that is freely convertible and transferable into
Dollars and available from all Lenders.
"Company Information" has the meaning specified in Section
9.08.
"Consolidated" refers to the consolidation of accounts in
accordance with GAAP.
"Convert", "Conversion" and "Converted" each refers to a
conversion of Advances of one Type into Advances of the other Type
pursuant to Section 2.08 or 2.09.
"Debt" of any Person means, without duplication, (a) all
indebtedness of such Person for borrowed money, (b) all obligations of
such Person for the deferred purchase price of property or services
(other than trade payables not overdue by more than 60 days incurred in
the ordinary course of such Person's business), (c) all obligations of
such Person evidenced by notes, bonds, debentures or other similar
instruments, (d) all obligations of such Person created or arising
under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), (e) all
obligations of such Person as lessee under leases that have been or
should be, in accordance with GAAP, recorded as capital leases, (f) all
obligations, contingent or otherwise, of such Person in respect of
acceptances, letters of credit or similar extensions of credit, (g) all
obligations of such Person in respect of Hedge Agreements, (h) all Debt
of others referred to in clauses (a) through (g) above or clause (i)
below and other payment obligations (collectively, "Guaranteed Debt")
guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an
agreement (1) to pay or purchase such Guaranteed Debt or to advance or
supply funds for the payment or purchase of such Guaranteed Debt, (2)
to purchase, sell or lease (as lessee or lessor) property, or to
purchase or sell services, primarily for the purpose of enabling the
debtor to make payment of such Guaranteed Debt or to assure the holder
of such Guaranteed Debt against loss, (3) to supply funds to or in any
other manner invest in the debtor (including any agreement to pay for
property or services irrespective of whether such property is received
or such services are rendered) or (4) otherwise to assure a creditor
against loss, and (i) all Debt referred to in clauses (a) through (h)
above (including Guaranteed Debt) secured by (or for which the holder
of such Debt has an existing right, contingent or otherwise, to be
secured by) any Lien on property (including, without limitation,
accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Debt.
"Debt for Borrowed Money" of any Person means all items that,
in accordance with GAAP, would be classified as indebtedness on a
Consolidated balance sheet of such Person, provided that Debt for
Borrowed Money of the Company and its Subsidiaries shall not include
Debt incurred in connection with the Consignment Agreements relating to
the consignment of precious metals between the Company and certain
counterparties.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
"Designated Subsidiary" means any direct or indirect
wholly-owned Subsidiary of the Company designated for borrowing
privileges under this Agreement pursuant to Section 9.09.
"Designation Agreement" means, with respect to any Designated
Subsidiary, an agreement in the form of Exhibit E hereto signed by such
Designated Subsidiary and the Company.
"Dollars" and the "$" sign each means lawful currency of the
United States of America.
"Domestic Lending Office" means, with respect to any Lender,
the office of such Lender specified as its "Domestic Lending Office"
opposite its name on Schedule I hereto or in the Assumption Agreement
or the Assignment and Acceptance pursuant to which it became a Lender,
or such other office of such Lender as such Lender may from time to
time specify to the Company and the Agent.
"EBITDA" means, for any period, net income (or net loss) plus
the sum of (a) interest expense, (b) income tax expense, (c)
depreciation expense and (d) amortization expense, in each case
determined in accordance with GAAP for such period.
"Effective Date" has the meaning specified in Section 3.01.
"Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a
Lender; and (iii) any other Person approved by the Agent, each Issuing
Bank and, unless an Event of Default has occurred and is continuing at
the time any assignment is effected in accordance with Section 9.07,
the Company, such approval not to be unreasonably withheld or delayed;
provided, however, that neither the Company nor an Affiliate of the
Company shall qualify as an Eligible Assignee.
"Environmental Action" means any action, suit, demand, demand
letter, claim, notice of non-compliance or violation, notice of
liability or potential liability, investigation, proceeding, consent
order or consent agreement relating in any way to any Environmental
Law, Environmental Permit or Hazardous Materials or arising from
alleged injury or threat of injury to health, safety or the
environment, including, without limitation, (a) by any governmental or
regulatory authority for enforcement, cleanup, removal, response,
remedial or other actions or damages and (b) by any governmental or
regulatory authority or any third party for damages, contribution,
indemnification, cost recovery, compensation or injunctive relief.
"Environmental Law" means any federal, state, local or foreign
statute, law, ordinance, rule, regulation, code, order, judgment,
decree or judicial or agency interpretation, policy or guidance
relating to pollution or protection of the environment, health, safety
or natural resources, including, without limitation, those relating to
the use, handling, transportation, treatment, storage, disposal,
release or discharge of Hazardous Materials.
"Environmental Permit" means any permit, approval,
identification number, license or other authorization required under
any Environmental Law.
"Equivalent" in Dollars of any Committed Currency on any date
means the equivalent in Dollars of such Committed Currency determined
by using the quoted spot rate at which the Sub-Agent's principal office
in London offers to exchange Dollars for such Committed Currency in
London prior to 4:00 P.M. (London time) (unless otherwise indicated by
the terms of this Agreement) on such date as is required pursuant to
the terms of this Agreement, and the "Equivalent" in any Committed
Currency of Dollars means the equivalent in such Committed Currency of
Dollars determined by using the quoted spot rate at which the
Sub-Agent's principal office in London offers to exchange such
Committed Currency for Dollars in London prior to 4:00 P.M. (London
time) (unless otherwise indicated by the terms of this Agreement) on
such date as is required pursuant to the terms of this Agreement.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.
"ERISA Affiliate" means any Person that for purposes of Title
IV of ERISA is a member of the Company's controlled group, or under
common control with the Company, within the meaning of Section 414 of
the Internal Revenue Code.
"ERISA Event" means (a) (i) the occurrence of a reportable
event, within the meaning of Section 4043 of ERISA, with respect to any
Plan unless the 30-day notice requirement with respect to such event
has been waived by the PBGC, or (ii) the requirements of subsection (1)
of Section 4043(b) of ERISA (without regard to subsection (2) of such
Section) are met with respect to a contributing sponsor, as defined in
Section 4001(a)(13) of ERISA, of a Plan, and an event described in
paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is
reasonably expected to occur with respect to such Plan within the
following 30 days; (b) the application for a minimum funding waiver
with respect to a Plan; (c) the provision by the administrator of any
Plan of a notice of intent to terminate such Plan pursuant to Section
4041(a)(2) of ERISA (including any such notice with respect to a plan
amendment referred to in Section 4041(e) of ERISA); (d) the cessation
of operations at a facility of the Company or any ERISA Affiliate in
the circumstances described in Section 4062(e) of ERISA; (e) the
withdrawal by the Company or any ERISA Affiliate from a Multiple
Employer Plan during a plan year for which it was a substantial
employer, as defined in Section 4001(a)(2) of ERISA; (f) the conditions
for the imposition of a lien under Section 302(f) of ERISA shall have
been met with respect to any Plan; (g) the adoption of an amendment to
a Plan requiring the provision of security to such Plan pursuant to
Section 307 of ERISA; or (h) the institution by the PBGC of proceedings
to terminate a Plan pursuant to Section 4042 of ERISA, or the
occurrence of any event or condition described in Section 4042 of ERISA
that constitutes grounds for the termination of, or the appointment of
a trustee to administer, a Plan.
"EURIBO Rate" means, for any Interest Period for each
Eurocurrency Rate Advance comprising part of the same Borrowing, the
rate appearing on Page 248 of the Moneyline Telerate Service (or on any
successor or substitute page of such Service, or any successor to or
substitute for such Service, providing rate quotations comparable to
those currently provided on such page of such Service, as determined by
the Agent from time to time for purposes of providing quotations of
interest rates applicable to deposits in Euro by reference to the
Banking Federation of the European Union Settlement Rates for deposits
in Euro) at approximately 10:00 a.m., London time, two Business Days
prior to the commencement of such Interest Period, as the rate for
deposits in Euro with a maturity comparable to such Interest Period or,
if for any reason such rate is not available, the average (rounded
upward to the nearest whole multiple of 1/16 of 1% per annum, if such
average is not such a multiple) of the respective rates per annum at
which deposits in Euros are offered by the principal office of each of
the Reference Banks in London, England to prime banks in the London
interbank market at 11:00 A.M. (London time) two Business Days before
the first day of such Interest Period in an amount substantially equal
to such Reference Bank's Eurocurrency Rate Advance comprising part of
such Borrowing to be outstanding during such Interest Period and for a
period equal to such Interest Period (subject, however, to the
provisions of Section 2.08).
"Euro" means the lawful currency of the European Union as
constituted by the Treaty of Rome which established the European
Community, as such treaty may be amended from time to time and as
referred to in the EMU legislation.
"Eurocurrency Lending Office" means, with respect to any
Lender, the office of such Lender specified as its "Eurocurrency
Lending Office" opposite its name on Schedule I hereto or in the
Assumption Agreement or the Assignment and Acceptance pursuant to which
it became a Lender (or, if no such office is specified, its Domestic
Lending Office), or such other office of such Lender as such Lender may
from time to time specify to the Company and the Agent.
"Eurocurrency Liabilities" has the meaning assigned to that
term in Regulation D of the Board of Governors of the Federal Reserve
System, as in effect from time to time.
"Eurocurrency Rate" means, for any Interest Period for each
Eurocurrency Rate Advance comprising part of the same Borrowing, an
interest rate per annum equal to the rate per annum obtained by
dividing (a)(i) in the case of any Advance denominated in Dollars or
any Committed Currency other than Euro, the rate per annum (rounded
upward to the nearest whole multiple of 1/16 of 1% per annum) appearing
on Moneyline Telerate Markets Page 3750 (or any successor page) as the
London interbank offered rate for deposits in Dollars or the applicable
Committed Currency at approximately 11:00 A.M. (London time) two
Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period or, if for any reason such rate is
not available, the average (rounded upward to the nearest whole
multiple of 1/16 of 1% per annum, if such average is not such a
multiple) of the rate per annum at which deposits in Dollars or the
applicable Committed Currency is offered by the principal office of
each of the Reference Banks in London, England to prime banks in the
London interbank market at 11:00 A.M. (London time) two Business Days
before the first day of such Interest Period in an amount substantially
equal to such Reference Bank's Eurocurrency Rate Advance comprising
part of such Borrowing to be outstanding during such Interest Period
and for a period equal to such Interest Period or, (ii) in the case of
any Advance denominated in Euros, the EURIBO Rate by (b) a percentage
equal to 100% minus the Eurocurrency Rate Reserve Percentage for such
Interest Period. If the Moneyline Telerate Markets Page 3750 (or any
successor page) is unavailable, the Eurocurrency Rate for any Interest
Period for each Eurocurrency Rate Advance comprising part of the same
Borrowing shall be determined by the Agent on the basis of applicable
rates furnished to and received by the Agent from the Reference Banks
two Business Days before the first day of such Interest Period,
subject, however, to the provisions of Section 2.08.
"Eurocurrency Rate Advance" means an Advance denominated in
Dollars or a Committed Currency that bears interest as provided in
Section 2.07(a)(ii).
"Eurocurrency Rate Reserve Percentage" for any Interest Period
for all Eurocurrency Rate Advances comprising part of the same
Borrowing means the reserve percentage applicable two Business Days
before the first day of such Interest Period under regulations issued
from time to time by the Board of Governors of the Federal Reserve
System (or any successor) for determining the maximum reserve
requirement (including, without limitation, any emergency, supplemental
or other marginal reserve requirement) for a member bank of the Federal
Reserve System in New York City with respect to liabilities or assets
consisting of or including Eurocurrency Liabilities (or with respect to
any other category of liabilities that includes deposits by reference
to which the interest rate on Eurocurrency Rate Advances is determined)
having a term equal to such Interest Period.
"Events of Default" has the meaning specified in Section 6.01.
"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds
brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day on such
transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.
"GAAP" has the meaning specified in Section 1.03.
"Guaranteed Obligations" has the meaning specified in Section
7.01.
"Hazardous Materials" means (a) petroleum and petroleum
products, byproducts or breakdown products, radioactive materials,
asbestos-containing materials, polychlorinated biphenyls and radon gas
and (b) any other chemicals, materials or substances designated,
classified or regulated as hazardous or toxic or as a pollutant or
contaminant under any Environmental Law.
"Hedge Agreements" means interest rate swap, cap or collar
agreements, interest rate future or option contracts, currency swap
agreements, currency future or option contracts and other similar
agreements.
"Increase Date" has the meaning specified in Section 2.18(a).
"Increasing Lender" has the meaning specified in Section
2.18(b).
"Information Memorandum" means the information memorandum
dated April 13, 2005 used by the Agent in connection with the
syndication of the Commitments.
"Interest Period" means, for each Eurocurrency Rate Advance
comprising part of the same Borrowing, the period commencing on the
date of such Eurocurrency Rate Advance or the date of the Conversion of
any Base Rate Advance into such Eurocurrency Rate Advance and ending on
the last day of the period selected by the Borrower requesting such
Borrowing pursuant to the provisions below and, thereafter, each
subsequent period commencing on the last day of the immediately
preceding Interest Period and ending on the last day of the period
selected by such Borrower pursuant to the provisions below. The
duration of each such Interest Period shall be one, two, three or six
months, and subject to clause (c) of this definition, nine or twelve
months, as the applicable Borrower may, upon notice received by the
Agent not later than 11:00 A.M. (New York City time) on the third
Business Day prior to the first day of such Interest Period, select;
provided, however, that:
(a) the Borrowers may not select any Interest Period
that ends after the Termination Date;
(b) Interest Periods commencing on the same date for
Eurocurrency Rate Advances comprising part of the same
Borrowing shall be of the same duration;
(c) in the case of any such Borrowing, the Borrowers
shall not be entitled to select an Interest Period having
duration of nine or twelve months unless, by 2:00 P.M. (New
York City time) on the third Business Day prior to the first
day of such Interest Period, each Lender notifies the Agent
that such Lender will be providing funding for such Borrowing
with such Interest Period (the failure of any Lender to so
respond by such time being deemed for all purposes of this
Agreement as an objection by such Lender to the requested
duration of such Interest Period); provided that, if any or
all of the Lenders object to the requested duration of such
Interest Period, the duration of the Interest Period for such
Borrowing shall be one, two, three or six months, as specified
by the Borrower requesting such Borrowing in the applicable
Notice of Borrowing as the desired alternative to an Interest
Period of nine or twelve months;
(d) whenever the last day of any Interest Period
would otherwise occur on a day other than a Business Day, the
last day of such Interest Period shall be extended to occur on
the next succeeding Business Day, provided, however, that, if
such extension would cause the last day of such Interest
Period to occur in the next following calendar month, the last
day of such Interest Period shall occur on the next preceding
Business Day; and
(e) whenever the first day of any Interest Period
occurs on a day of an initial calendar month for which there
is no numerically corresponding day in the calendar month that
succeeds such initial calendar month by the number of months
equal to the number of months in such Interest Period, such
Interest Period shall end on the last Business Day of such
succeeding calendar month.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.
"issuance" with respect to any Letter of Credit means the
issuance, amendment, renewal or extension of such Letter of Credit.
"Issuing Bank" means an Initial Issuing Bank or any Eligible
Assignee to which a portion of the Letter of Credit Commitment
hereunder has been assigned pursuant to Section 9.07 so long as such
Eligible Assignee expressly agrees to perform in accordance with their
terms all of the obligations that by the terms of this Agreement are
required to be performed by it as an Issuing Bank and notifies the
Agent of its Applicable Lending Office (which information shall be
recorded by the Agent in the Register), for so long as such Initial
Issuing Bank or Eligible Assignee, as the case may be, shall have a
Letter of Credit Commitment.
"L/C Cash Deposit Account" means an interest bearing cash
deposit account to be established and maintained by the Agent, over
which the Agent shall have sole dominion and control, upon terms as may
be satisfactory to the Agent.
"L/C Related Documents" has the meaning specified in Section
2.06(b)(i).
"Lenders" means each Initial Lender, each Issuing Bank, each
Assuming Lender that shall become a party hereto pursuant to Section
2.18 and each Person that shall become a party hereto pursuant to
Section 9.07.
"Letter of Credit" has the meaning specified in Section
2.01(b).
"Letter of Credit Agreement" has the meaning specified in
Section 2.03(a).
"Letter of Credit Commitment" means, with respect to each
Issuing Bank, the obligation of such Issuing Bank to issue Letters of
Credit for the account of the Borrowers and their specified
Subsidiaries in (a) the Dollar amount set forth opposite the Issuing
Bank's name on Schedule I hereto under the caption "Letter of Credit
Commitment" or (b) if such Issuing Bank has entered into one or more
Assignment and Acceptances, the Dollar amount set forth for such
Issuing Bank in the Register maintained by the Agent pursuant to
Section 9.07(d) as such Issuing Bank's "Letter of Credit Commitment",
in each case as such amount may be reduced prior to such time pursuant
to Section 2.05.
"Letter of Credit Facility" means, at any time, an amount
equal to the least of (a) the aggregate amount of the Issuing Banks'
Letter of Credit Commitments at such time, (b) $50,000,000 and (c) the
aggregate amount of the Revolving Credit Commitments, as such amount
may be reduced at or prior to such time pursuant to Section 2.05.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance
on title to real property.
"Material Adverse Change" means any material adverse change in
the business, financial condition or operations of the Company or the
Company and its Subsidiaries taken as a whole.
"Material Adverse Effect" means a material adverse effect on
(a) the business, financial condition or operations of the Company or
the Company and its Subsidiaries taken as a whole, (b) the rights and
remedies of the Agent or any Lender under this Agreement or any Note or
(c) the ability of any Borrower to perform its obligations under this
Agreement or any Note.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a multiemployer plan, as defined in
Section 4001(a)(3) of ERISA, to which the Company or any ERISA
Affiliate is making or accruing an obligation to make contributions, or
has within any of the preceding five plan years made or accrued an
obligation to make contributions.
"Multiple Employer Plan" means a single employer plan, as
defined in Section 4001(a)(15) of ERISA, that (a) is maintained for
employees of the Company or any ERISA Affiliate and at least one Person
other than the Company and the ERISA Affiliates or (b) was so
maintained and in respect of which the Company or any ERISA Affiliate
could have liability under Section 4064 or 4069 of ERISA in the event
such plan has been or were to be terminated.
"Note" means a promissory note of a Borrower payable to the
order of any Lender, delivered pursuant to a request made under Section
2.16 in substantially the form of Exhibit A hereto, evidencing the
aggregate indebtedness of such Borrower to such Lender resulting from
the Advances made by such Lender.
"Notice of Borrowing" has the meaning specified in Section
2.02(a).
"Notice of Issuance" has the meaning specified in Section
2.03(a).
"OFAC" means the U.S. Department of the Treasury's Office of
Foreign Assets Control.
"Patriot Act" means the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, Pub. L. 107-56, signed into law October 26,
2001.
"Payment Office" means, for any Committed Currency, such
office of Citibank as shall be from time to time selected by the Agent
and notified by the Agent to the Company and the Lenders.
"PBGC" means the Pension Benefit Guaranty Corporation (or any
successor).
"Permitted Liens" means such of the following as to which no
enforcement, collection, execution, levy or foreclosure proceeding
shall have been commenced: (a) Liens for taxes, assessments and
governmental charges or levies to the extent not required to be paid
under Section 5.01(b) hereof; (b) Liens imposed by law, such as
materialmen's, mechanics', carriers', workmen's and repairmen's Liens
and other similar Liens arising in the ordinary course of business
securing obligations that are not overdue for a period of more than 30
days; (c) pledges or deposits to secure obligations under workers'
compensation laws or similar legislation or to secure public or
statutory obligations; and (d) easements, rights of way and other
encumbrances on title to real property that do not render title to the
property encumbered thereby unmarketable or materially adversely affect
the use of such property for its present purposes.
"Person" means an individual, partnership, corporation
(including a business trust), joint stock company, trust,
unincorporated association, joint venture, limited liability company or
other entity, or a government or any political subdivision or agency
thereof.
"Plan" means a Single Employer Plan or a Multiple Employer Plan.
- ----
"Post-Petition Interest" has the meaning specified in Section
7.05.
"Public Debt Rating" means, as of any date, the rating that
has been most recently announced by either S&P or Moody's, as the case
may be, for any class of non-credit enhanced long-term senior unsecured
debt issued by the Company or, if any such rating agency shall have
issued more than one such rating, the lowest such rating issued by such
rating agency. For purposes of the foregoing, (a) if only one of S&P
and Moody's shall have in effect a Public Debt Rating, the Applicable
Margin, the Applicable Percentage and the Applicable Utilization Fee
shall be determined by reference to the available rating; (b) if
neither S&P nor Moody's shall have in effect a Public Debt Rating, the
Applicable Margin, the Applicable Percentage and the Applicable
Utilization Fee will be set in accordance with Level 6 under the
definition of "Applicable Margin", "Applicable Percentage" or
"Applicable Utilization Fee", as the case may be; (c) if the ratings
established by S&P and Moody's shall fall within different levels, the
Applicable Margin, the Applicable Percentage and the Applicable
Utilization Fee shall be based upon the higher rating unless the such
ratings differ by two or more levels, in which case the applicable
level will be deemed to be one level above the lower of such levels;
(d) if any rating established by S&P or Moody's shall be changed, such
change shall be effective as of the date on which such change is first
announced publicly by the rating agency making such change; and (e) if
S&P or Moody's shall change the basis on which ratings are established,
each reference to the Public Debt Rating announced by S&P or Moody's,
as the case may be, shall refer to the then equivalent rating by S&P or
Moody's, as the case may be.
"Ratable Share" of any amount means, with respect to any
Lender at any time, the product of such amount times a fraction the
numerator of which is the amount of such Lender's Revolving Credit
Commitment at such time (or, if the Revolving Credit Commitments shall
have been terminated pursuant to Section 2.05 or 6.01, such Lender's
Revolving Credit Commitment as in effect immediately prior to such
termination) and the denominator of which is the aggregate amount of
all Revolving Credit Commitments at such time (or, if the Revolving
Credit Commitments shall have been terminated pursuant to Section 2.05
or 6.01, the aggregate amount of all Revolving Credit Commitments as in
effect immediately prior to such termination).
"Reference Banks" means Citibank, JPMorgan Chase Bank, N.A., Bank of America,
N.A. and Wachovia Bank, National Association.
"Register" has the meaning specified in Section 9.07(d).
"Required Lenders" means at any time Lenders owed at least a
majority in interest of the then aggregate unpaid principal amount
(based on the Equivalent in Dollars at such time) of the Advances owing
to Lenders, or, if no such principal amount is then outstanding,
Lenders having at least a majority in interest of the Commitments.
"Revolving Credit Commitment" means as to any Lender (a) the
Dollar amount set forth opposite such Lender's name on Schedule I
hereto as such Lender's "Revolving Credit Commitment", (b) if such
Lender has become a Lender hereunder pursuant to an Assumption
Agreement, the Dollar amount set forth in such Assumption Agreement or
(c) if such Lender has entered into an Assignment and Acceptance, the
Dollar amount set forth for such Lender in the Register maintained by
the Agent pursuant to Section 9.07(d), as such amount may be reduced
pursuant to Section 2.05 or increased pursuant to Section 2.18.
"S&P" means Standard & Poor's, a division of The McGraw-Hill
Companies, Inc.
"Single Employer Plan" means a single employer plan, as
defined in Section 4001(a)(15) of ERISA, that (a) is maintained for
employees of the Company or any ERISA Affiliate and no Person other
than the Company and the ERISA Affiliates or (b) was so maintained and
in respect of which the Company or any ERISA Affiliate could have
liability under Section 4069 of ERISA in the event such plan has been
or were to be terminated.
"Solvent" and "Solvency" mean, with respect to any Person on a
particular date, that on such date (a) the fair value of the property
of such Person is greater than the total amount of liabilities,
including, without limitation, contingent liabilities, of such Person,
(b) the present fair salable value of the assets of such Person is not
less than the amount that will be required to pay the probable
liability of such Person on its debts as they become absolute and
matured, (c) such Person does not intend to, and does not believe that
it will, incur debts or liabilities beyond such Person's ability to pay
such debts and liabilities as they mature and (d) such Person is not
engaged in business or a transaction, and is not about to engage in
business or a transaction, for which such Person's property would
constitute an unreasonably small capital. The amount of contingent
liabilities at any time shall be computed as the amount that, in the
light of all the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an
actual or matured liability.
"Sub-Agent" means Citibank International plc.
"Subordinated Obligations" has the meaning specified in
Section 7.05.
"Subsidiary" of any Person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or
in which) more than 50% of (a) the issued and outstanding capital stock
having ordinary voting power to elect a majority of the Board of
Directors of such corporation (irrespective of whether at the time
capital stock of any other class or classes of such corporation shall
or might have voting power upon the occurrence of any contingency), (b)
the interest in the capital or profits of such limited liability
company, partnership or joint venture or (c) the beneficial interest in
such trust or estate is at the time directly or indirectly owned or
controlled by such Person, by such Person and one or more of its other
Subsidiaries or by one or more of such Person's other Subsidiaries.
"Termination Date" means the earlier of May 9, 2010 and the
date of termination in whole of the Commitments pursuant to Section
2.05 or 6.01.
"Unissued Letter of Credit Commitment" means, with respect to
any Issuing Bank, the obligation of such Issuing Bank to issue Letters
of Credit for the account of the Company or its specified Subsidiaries
in an amount equal to the excess of (a) the amount of its Letter of
Credit Commitment over (b) the aggregate Available Amount of all
Letters of Credit issued by such Issuing Bank.
"Unused Revolving Credit Commitment" means, with respect to
each Lender at any time, (a) such Lender's Revolving Credit Commitment
at such time minus (b) the sum of (i) the aggregate principal amount of
all Advances made by such Lender (in its capacity as a Lender) and
outstanding at such time, plus (ii) such Lender's Ratable Share of (A)
the aggregate Available Amount of all the Letters of Credit outstanding
at such time and (B) the aggregate principal amount of all Advances
made by each Issuing Bank pursuant to Section 2.03(c) that have not
been ratably funded by such Lender and outstanding at such time.
"Voting Stock" means capital stock issued by a corporation, or
equivalent interests in any other Person, the holders of which are
ordinarily, in the absence of contingencies, entitled to vote for the
election of directors (or persons performing similar functions) of such
Person, even if the right so to vote has been suspended by the
happening of such a contingency.
SECTION 1.02. Computation of Time Periods. In this Agreement
in the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding".
SECTION 1.03. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with generally
accepted accounting principles consistent with those applied in the preparation
of the financial statements referred to in Section 4.01(e) ("GAAP").
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES AND LETTERS OF CREDIT
SECTION 2.01. The Advances and Letters of Credit. (a) The
Advances. Each Lender severally agrees, on the terms and conditions hereinafter
set forth, to make Advances to any Borrower from time to time on any Business
Day during the period from the Effective Date until the Termination Date in an
amount (based in respect of any Advances to be denominated in a Committed
Currency by reference to the Equivalent thereof in Dollars determined on the
date of delivery of the applicable Notice of Borrowing) not to exceed such
Lender's Unused Revolving Credit Commitment. Each Borrowing shall be in an
amount not less than the Borrowing Minimum or the Borrowing Multiple in excess
thereof and shall consist of Advances of the same Type and in the same currency
made on the same day by the Lenders ratably according to their respective
Revolving Credit Commitments. Within the limits of each Lender's Revolving
Credit Commitment, any Borrower may borrow under this Section 2.01(a), prepay
pursuant to Section 2.10 and reborrow under this Section 2.01(a).
(b) Letters of Credit. Each Issuing Bank agrees, on the terms
and conditions hereinafter set forth, in reliance upon the agreements of the
other Lenders set forth in this Agreement, to issue letters of credit (each, a
"Letter of Credit") denominated in Dollars for the account of any Borrower and
its specified Subsidiaries from time to time on any Business Day during the
period from the Effective Date until 30 days before the Termination Date in an
aggregate Available Amount (i) for all Letters of Credit issued by each Issuing
Bank not to exceed at any time the lesser of (x) the Letter of Credit Facility
at such time and (y) such Issuing Bank's Letter of Credit Commitment at such
time and (ii) for each such Letter of Credit not to exceed an amount equal to
the Unused Commitments of the Lenders at such time. No Letter of Credit shall
have an expiration date (including all rights of the applicable Borrower or the
beneficiary to require renewal) later than 10 Business Days before the
Termination Date. Within the limits referred to above, the Borrowers may from
time to time request the issuance of Letters of Credit under this Section
2.01(b). Each letter of credit listed on Schedule 2.01(b) shall be deemed to
constitute a Letter of Credit issued hereunder, and each Lender that is an
issuer of such a Letter of Credit shall, for purposes of Section 2.03, be deemed
to be an Issuing Bank for each such letter of credit, provided than any renewal
or replacement of any such letter of credit shall be issued by an Issuing Bank
pursuant to the terms of this Agreement.
SECTION 2.02. Making the Advances. (a) Except as otherwise
provided in Section 2.03(c), each Borrowing shall be made on notice, given not
later than (x) 11:00 A.M. (New York City time) on the third Business Day prior
to the date of the proposed Borrowing in the case of a Borrowing consisting of
Eurocurrency Rate Advances denominated in Dollars, (y) 4:00 P.M. (London time)
on the third Business Day prior to the date of the proposed Borrowing in the
case of a Borrowing consisting of Eurocurrency Rate Advances denominated in any
Committed Currency, or (z) 11:00 A.M. (New York City time) on the date of the
proposed Borrowing in the case of a Borrowing consisting of Base Rate Advances,
by any Borrower to the Agent (and, in the case of a Borrowing consisting of
Eurocurrency Rate Advances, simultaneously to the Sub-Agent), which shall give
to each Lender prompt notice thereof by telecopier. Each such notice of a
Borrowing (a "Notice of Borrowing") shall be by telephone, confirmed immediately
in writing, or telecopier in substantially the form of Exhibit B hereto,
specifying therein the requested (i) date of such Borrowing, (ii) Type of
Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing,
and (iv) in the case of a Borrowing consisting of Eurocurrency Rate Advances,
initial Interest Period and currency for each such Advance. Each Lender shall,
before 1:00 P.M. (New York City time) on the date of such Borrowing, in the case
of a Borrowing consisting of Advances denominated in Dollars, and before 2:00
P.M. (London time) on the date of such Borrowing, in the case of a Borrowing
consisting of Eurocurrency Rate Advances denominated in any Committed Currency,
make available for the account of its Applicable Lending Office to the Agent at
the applicable Agent's Account, in same day funds, such Lender's ratable portion
of such Borrowing. After the Agent's receipt of such funds and upon fulfillment
of the applicable conditions set forth in Article III, the Agent will make such
funds available to the Borrower requesting the Borrowing at the Agent's address
referred to in Section 9.02 or at the applicable Payment Office, as the case may
be.
(b) Anything in subsection (a) above to the contrary
notwithstanding, (i) the Borrowers may not select Eurocurrency Rate Advances for
any Borrowing if the aggregate amount of such Borrowing is less than the
Borrowing Minimum or if the obligation of the Lenders to make Eurocurrency Rate
Advances shall then be suspended pursuant to Section 2.08 or 2.12 and (ii) the
Eurocurrency Rate Advances may not be outstanding as part of more than fifteen
separate Borrowings.
(c) Each Notice of Borrowing shall be irrevocable and binding
on the Borrower requesting the Borrowing. In the case of any Borrowing that the
related Notice of Borrowing specifies is to be comprised of Eurocurrency Rate
Advances, such Borrower shall indemnify each Lender against any loss, cost or
expense incurred by such Lender as a result of any failure to fulfill on or
before the date specified in such Notice of Borrowing for such Borrowing the
applicable conditions set forth in Article III, including, without limitation,
any loss (including loss of anticipated profits), cost or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired by
such Lender to fund the Advance to be made by such Lender as part of such
Borrowing when such Advance, as a result of such failure, is not made on such
date.
(d) Unless the Agent shall have received notice from an Lender
prior to the time of any Borrowing that such Lender will not make available to
the Agent such Lender's ratable portion of such Borrowing, the Agent may assume
that such Lender has made such portion available to the Agent on the date of
such Borrowing in accordance with subsection (a) of this Section 2.02, and the
Agent may, in reliance upon such assumption, make available to the Borrower
requesting the Borrowing on such date a corresponding amount. If and to the
extent that such Lender shall not have so made such ratable portion available to
the Agent, such Lender and such Borrower severally agree to repay to the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to such Borrower until
the date such amount is repaid to the Agent, at (i) in the case of such
Borrower, the higher of (A) the interest rate applicable at the time to the
Advances comprising such Borrowing and (B) the cost of funds incurred by the
Agent in respect of such amount and (ii) in the case of such Lender (A) the
Federal Funds Rate in the case of Advances denominated in Dollars or (B) the
cost of funds incurred by the Agent in respect of such amount in the case of
Advances denominated in Committed Currencies. If such Lender shall repay to the
Agent such corresponding amount, such amount so repaid shall constitute such
Lender's Advance as part of such Borrowing for purposes of this Agreement.
(e) The failure of any Lender to make the Advance to be made
by it as part of any Borrowing shall not relieve any other Lender of its
obligation, if any, hereunder to make its Advance on the date of such Borrowing,
but no Lender shall be responsible for the failure of any other Lender to make
the Advance to be made by such other Lender on the date of any Borrowing.
SECTION 2.03. Issuance of and Drawings and Reimbursement Under
Letters of Credit. (a) Request for Issuance. (i) Each Letter of Credit shall be
issued upon notice, given not later than 11:00 A.M. (New York City time) on the
fifth Business Day prior to the date of the proposed Issuance of such Letter of
Credit (or on such shorter notice as the applicable Issuing Bank may agree), by
any Borrower to any Issuing Bank, and such Issuing Bank shall give the Agent,
prompt notice thereof. Each such notice by a Borrower of Issuance of a Letter of
Credit (a "Notice of Issuance") shall be by telecopier or telephone, confirmed
immediately in writing, specifying therein the requested (A) date of such
Issuance (which shall be a Business Day), (B) Available Amount of such Letter of
Credit, (C) expiration date of such Letter of Credit (which shall not be later
than 10 Business Days before the Termination Date), (D) name and address of the
beneficiary of such Letter of Credit and (E) form of such Letter of Credit, such
Letter of Credit shall be issued pursuant to such application and agreement for
letter of credit as such Issuing Bank and the applicable Borrower shall agree
for use in connection with such requested Letter of Credit (a "Letter of Credit
Agreement"). If the requested form of such Letter of Credit is acceptable to
such Issuing Bank in its reasonable discretion (it being understood that any
such form shall have only explicit documentary conditions to draw and shall not
include discretionary conditions), such Issuing Bank will, if in its reasonable
discretion it elects to do so, and unless any Lender gives prior notice to such
Issuing Bank or the Agent that the applicable conditions of Article III would
not be satisfied at the time of such issuance, upon fulfillment of the
applicable conditions set forth in Section 3.03, make such Letter of Credit
available to the applicable Borrower at its office referred to in Section 9.02
or as otherwise agreed with such Borrower in connection with such Issuance. In
the event and to the extent that the provisions of any Letter of Credit
Agreement shall conflict with this Agreement, the provisions of this Agreement
shall govern.
(b) Participations. By the Issuance of a Letter of Credit (or
an amendment to a Letter of Credit increasing or decreasing the amount thereof)
and without any further action on the part of the applicable Issuing Bank or the
Lenders, such Issuing Bank hereby grants to each Lender, and each Lender hereby
acquires from such Issuing Bank, a participation in such Letter of Credit equal
to such Lender's Ratable Share of the Available Amount of such Letter of Credit.
Each Borrower hereby agrees to each such participation. In consideration and in
furtherance of the foregoing, each Lender hereby absolutely and unconditionally
agrees to pay to the Agent, for the account of such Issuing Bank, in same day
funds, such Lender's Ratable Share of each drawing made under a Letter of Credit
funded by such Issuing Bank and not reimbursed by the applicable Borrower on the
date made, or of any reimbursement payment required to be refunded to such
Borrower for any reason, which amount will be advanced, and deemed to be a
Advance to such Borrower hereunder, regardless of the satisfaction of the
conditions set forth in Section 3.03. Each Lender acknowledges and agrees that
its obligation to acquire participations pursuant to this paragraph in respect
of Letters of Credit is absolute and unconditional and shall not be affected by
any circumstance whatsoever, including any amendment, renewal or extension of
any Letter of Credit or the occurrence and continuance of a Default or reduction
or termination of the Revolving Credit Commitments, and that each such payment
shall be made without any offset, abatement, withholding or reduction
whatsoever. Each Lender further acknowledges and agrees that its participation
in each Letter of Credit will be automatically adjusted to reflect such Lender's
Ratable Share of the Available Amount of such Letter of Credit at each time such
Lender's Revolving Credit Commitment is amended pursuant to an assignment in
accordance with Section 9.07 or otherwise pursuant to this Agreement.
(c) Drawing and Reimbursement. The payment by an Issuing Bank
of a draft drawn under any Letter of Credit which is not reimbursed by the
applicable Borrower on the date made shall constitute for all purposes of this
Agreement the making by any such Issuing Bank of a Advance, which shall be a
Base Rate Advance, in the amount of such draft, without regard to whether the
making of such a Advance would exceed such Issuing Bank's Unused Revolving
Credit Commitment. Each Issuing Bank shall give prompt notice of each drawing
under any Letter of Credit issued by it to the applicable Borrower and the
Agent. Upon written demand by such Issuing Bank, with a copy of such demand to
the Agent and the applicable Borrower, each Lender shall pay to the Agent such
Lender's Ratable Share of such outstanding Advance pursuant to Section 2.03(b).
Each Lender acknowledges and agrees that its obligation to make Advances
pursuant to this paragraph in respect of Letters of Credit is absolute and
unconditional and shall not be affected by any circumstance whatsoever,
including any amendment, renewal or extension of any Letter of Credit or the
occurrence and continuance of a Default or reduction or termination of the
Revolving Credit Commitments, and that each such payment shall be made without
any offset, abatement, withholding or reduction whatsoever. Promptly after
receipt thereof, the Agent shall transfer such funds to such Issuing Bank. Each
Lender agrees to fund its Ratable Share of an outstanding Advance on (i) the
Business Day on which demand therefor is made by such Issuing Bank, provided
that notice of such demand is given not later than 11:00 A.M. (New York City
time) on such Business Day, or (ii) the first Business Day next succeeding such
demand if notice of such demand is given after such time. If and to the extent
that any Lender shall not have so made the amount of such Advance available to
the Agent, such Lender agrees to pay to the Agent forthwith on demand such
amount together with interest thereon, for each day from the date of demand by
any such Issuing Bank until the date such amount is paid to the Agent, at the
Federal Funds Rate for its account or the account of such Issuing Bank, as
applicable. If such Lender shall pay to the Agent such amount for the account of
any such Issuing Bank on any Business Day, such amount so paid in respect of
principal shall constitute a Revolving Credit Advance made by such Lender on
such Business Day for purposes of this Agreement, and the outstanding principal
amount of the Advance made by such Issuing Bank shall be reduced by such amount
on such Business Day.
(d) Letter of Credit Reports. Each Issuing Bank shall furnish
(A) to the Agent and each Lender (with a copy to the Company) on the first
Business Day of each month a written report summarizing Issuance and expiration
dates of Letters of Credit issued by such Issuing Bank during the preceding
month and drawings during such month under all Letters of Credit and (B) to the
Agent and each Lender (with a copy to the Company) on the first Business Day of
each calendar quarter a written report setting forth the average daily aggregate
Available Amount during the preceding calendar quarter of all Letters of Credit
issued by such Issuing Bank.
(e) Failure to Make Advances. The failure of any Lender to
make the Advance to be made by it on the date specified in Section 2.03(c) shall
not relieve any other Lender of its obligation hereunder to make its Advance on
such date, but no Lender shall be responsible for the failure of any other
Lender to make the Advance to be made by such other Lender on such date.
SECTION 2.04. Fees. (a) Facility Fee. The Company agrees to
pay to the Agent for the account of each Lender a facility fee on the aggregate
amount of such Lender's Commitment from the date hereof in the case of each
Initial Lender and from the effective date specified in the Assumption Agreement
or in the Assignment and Acceptance pursuant to which it became a Lender in the
case of each other Lender until the Termination Date at a rate per annum equal
to the Applicable Percentage in effect from time to time, payable in arrears
quarterly on the last day of each March, June, September and December,
commencing June 30, 2005, and on the later of the Termination Date and the date
all Advances to each Lender are paid in full.
(b) Letter of Credit Fees. (i) Each Borrower shall pay to the
Agent for the account of each Lender a commission on such Lender's
Ratable Share of the average daily aggregate Available Amount of all
Letters of Credit issued for the account of such Borrower and
outstanding from time to time at a rate per annum equal to the sum of
(x) the Applicable Margin for Eurocurrency Rate Advances in effect from
time to time during such calendar quarter plus (y) the Applicable
Utilization Fee in effect from time to time, payable in arrears
quarterly on the last day of each March, June, September and December,
commencing with the quarter ended June 30, 2005, and on the later or
the Termination Date and the date that all Letters of Credit have been
fully drawn or terminated; provided that the Applicable Margin shall be
2% above the Applicable Margin in effect upon the occurrence and during
the continuation of an Event of Default if such Borrower is required to
pay default interest pursuant to Section 2.07(b).
(ii) Each Borrower shall pay to each Issuing Bank, for its own
account, a fronting fee and such other commissions, issuance fees,
transfer fees and other fees and charges in connection with the
Issuance or administration of each Letter of Credit as such Borrower
and such Issuing Bank shall agree.
(c) Agent's Fees. The Company shall pay to the Agent for its
own account such fees as may from time to time be agreed between the
Company and the Agent.
SECTION 2.05. Optional Termination or Reduction of the
Commitments. The Company shall have the right, upon at least three Business
Days' notice to the Agent, to terminate in whole or permanently reduce ratably
in part the Unused Revolving Credit Commitments or the Unissued Letter of Credit
Commitments of the Lenders, provided that each partial reduction shall be in the
aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess
thereof.
SECTION 2.06. Repayment. (a) Advances. Each Borrower shall
repay to the Agent for the ratable account of the Lenders on the Termination
Date the aggregate principal amount of the Advances made to it and then
outstanding.
(b) Letter of Credit Drawings. The obligations of each
Borrower under any Letter of Credit Agreement and any other agreement
or instrument relating to any Letter of Credit issued for the account
of such Borrower shall be unconditional and irrevocable, and shall be
paid strictly in accordance with the terms of this Agreement, such
Letter of Credit Agreement and such other agreement or instrument under
all circumstances, including, without limitation, the following
circumstances (it being understood that any such payment by such
Borrower is without prejudice to, and does not constitute a waiver of,
any rights such Borrower might have or might acquire as a result of the
payment by any Lender of any draft or the reimbursement by such
Borrower thereof):
(i) any lack of validity or enforceability of this Agreement,
any Note, any Letter of Credit Agreement, any Letter of Credit or any
other agreement or instrument relating thereto (all of the foregoing
being, collectively, the "L/C Related Documents");
(ii) any change in the time, manner or place of payment of, or
in any other term of, all or any of the obligations of such Borrower in
respect of any L/C Related Document or any other amendment or waiver of
or any consent to departure from all or any of the L/C Related
Documents;
(iii) the existence of any claim, set-off, defense or other
right that such Borrower may have at any time against any beneficiary
or any transferee of a Letter of Credit (or any Persons for which any
such beneficiary or any such transferee may be acting), any Issuing
Bank, the Agent, any Lender or any other Person, whether in connection
with the transactions contemplated by the L/C Related Documents or any
unrelated transaction;
(iv) any statement or any other document presented under a
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(v) payment by any Issuing Bank under a Letter of Credit
against presentation of a draft or certificate that does not strictly
comply with the terms of such Letter of Credit;
(vi) any exchange, release or non-perfection of any
collateral, or any release or amendment or waiver of or consent to
departure from any guarantee, for all or any of the obligations of such
Borrower in respect of the L/C Related Documents; or
(vii) any other circumstance or happening whatsoever, whether
or not similar to any of the foregoing, including, without limitation,
any other circumstance that might otherwise constitute a defense
available to, or a discharge of, such Borrower or a guarantor.
SECTION 2.07. Interest on Advances. (a) Scheduled Interest.
Each Borrower shall pay interest on the unpaid principal amount of each Advance
made to it and owing to each Lender from the date of such Advance until such
principal amount shall be paid in full, at the following rates per annum:
(i) Base Rate Advances. During such periods as such Advance is
a Base Rate Advance, a rate per annum equal at all times to the sum of
(x) the Base Rate in effect from time to time plus (y) the Applicable
Margin in effect from time to time plus (z) the Applicable Utilization
Fee, if applicable, in effect from time to time, payable in arrears
quarterly on the last day of each March, June, September and December
during such periods and on the date such Base Rate Advance shall be
Converted or paid in full.
(ii) Eurocurrency Rate Advances. During such periods as such
Advance is a Eurocurrency Rate Advance, a rate per annum equal at all
times during each Interest Period for such Advance to the sum of (x)
the Eurocurrency Rate for such Interest Period for such Advance plus
(y) the Applicable Margin in effect from time to time plus (z) the
Applicable Utilization Fee, if applicable, in effect from time to time,
payable in arrears on the last day of such Interest Period and, if such
Interest Period has a duration of more than three months, on each day
that occurs during such Interest Period every three months from the
first day of such Interest Period and on the date such Eurocurrency
Rate Advance shall be Converted or paid in full.
(b) Default Interest. Upon the occurrence and during the
continuance of an Event of Default under Section 6.01(a), the Agent
may, and upon the request of the Required Lenders shall, require the
Borrowers to pay interest ("Default Interest") on (i) the unpaid
principal amount of each Advance owing to each Lender, payable in
arrears on the dates referred to in clause (a)(i) or (a)(ii) above, at
a rate per annum equal at all times to 2% per annum above the rate per
annum required to be paid on such Advance pursuant to clause (a)(i) or
(a)(ii) above and (ii) to the fullest extent permitted by law, the
amount of any interest, fee or other amount payable hereunder that is
not paid when due, from the date such amount shall be due until such
amount shall be paid in full, payable in arrears on the date such
amount shall be paid in full and on demand, at a rate per annum equal
at all times to 2% per annum above the rate per annum required to be
paid on Base Rate Advances pursuant to clause (a)(i) above; provided,
however, that following acceleration of the Advances pursuant to
Section 6.01, Default Interest shall accrue and be payable hereunder
whether or not previously required by the Agent.
SECTION 2.08. Interest Rate Determination. (a) Each Reference
Bank agrees, if requested by the Agent, to furnish to the Agent timely
information for the purpose of determining each Eurocurrency Rate. If any one or
more of the Reference Banks shall not furnish such timely information to the
Agent for the purpose of determining any such interest rate, the Agent shall
determine such interest rate on the basis of timely information furnished by the
remaining Reference Banks. The Agent shall give prompt notice to the Company and
the Lenders of the applicable interest rate determined by the Agent for purposes
of Section 2.07(a)(i) or (ii), and the rate, if any, furnished by each Reference
Bank for the purpose of determining the interest rate under Section 2.07(a)(ii).
(b) If, with respect to any Eurocurrency Rate Advances, the
Lenders owed at least 51% of the aggregate principal amount thereof
notify the Agent that (i) they are unable to obtain matching deposits
in the London inter-bank market at or about 11:00 A.M. (London time) on
the second Business Day before the making of a Borrowing in sufficient
amounts to fund their respective Advances as a part of such Borrowing
during its Interest Period or (ii) the Eurocurrency Rate for any
Interest Period for such Advances will not adequately reflect the cost
to such Lenders of making, funding or maintaining their respective
Eurocurrency Rate Advances for such Interest Period, the Agent shall
forthwith so notify the Company and the Lenders, whereupon (A) the
Borrower of such Eurocurrency Rate Advances will, on the last day of
the then existing Interest Period therefor, (1) if such Eurocurrency
Rate Advances are denominated in Dollars, either (x) prepay such
Advances or (y) Convert such Advances into Base Rate Advances and (2)
if such Eurocurrency Rate Advances are denominated in any Committed
Currency, either (x) prepay such Advances or (y) exchange such Advances
into an Equivalent amount of Dollars and Convert such Advances into
Base Rate Advances and (B) the obligation of the Lenders to make, or to
Convert Advances into, Eurocurrency Rate Advances shall be suspended
until the Agent shall notify the Company that such Lenders have
determined that the circumstances causing such suspension no longer
exist.
(c) If any Borrower shall fail to select the duration of any
Interest Period for any Eurocurrency Rate Advances in accordance with
the provisions contained in the definition of "Interest Period" in
Section 1.01, the Agent will forthwith so notify such Borrower and the
Lenders and such Advances will automatically, on the last day of the
then existing Interest Period therefor, (i) if such Eurocurrency Rate
Advances are denominated in Dollars, Convert into Base Rate Advances
and (ii) if such Eurocurrency Rate Advances are denominated in a
Committed Currency, be exchanged for an Equivalent amount of Dollars
and Convert into Base Rate Advances.
(d) On the date on which the aggregate unpaid principal amount
of Eurocurrency Rate Advances comprising any Borrowing shall be
reduced, by payment or prepayment or otherwise, to less than the
Borrowing Minimum, such Advances shall automatically (i) if such
Eurocurrency Rate Advances are denominated in Dollars, Convert into
Base Rate Advances and (ii) if such Eurocurrency Rate Advances are
denominated in a Committed Currency, be exchanged for an Equivalent
amount of Dollars and Convert into Base Rate Advances.
(e) Upon the occurrence and during the continuance of any
Event of Default, (i) each Eurocurrency Rate Advance will
automatically, on the last day of the then existing Interest Period
therefor, (A) if such Eurocurrency Rate Advances are denominated in
Dollars, be Converted into Base Rate Advances and (B) if such
Eurocurrency Rate Advances are denominated in any Committed Currency,
be exchanged for an Equivalent amount of Dollars and be Converted into
Base Rate Advances and (ii) the obligation of the Lenders to make, or
to Convert Advances into, Eurocurrency Rate Advances shall be
suspended.
(f) If Moneyline Telerate Markets Page 3750 is unavailable and
fewer than two Reference Banks furnish timely information to the Agent
for determining the Eurocurrency Rate for any Eurocurrency Rate
Advances after the Agent has requested such information,
(i) the Agent shall forthwith notify the applicable Borrower
and the Lenders that the interest rate cannot be determined for such
Eurocurrency Rate Advances,
(ii) each such Advance will automatically, on the last day of
the then existing Interest Period therefor, (A) if such Eurocurrency
Rate Advance is denominated in Dollars, Convert into a Base Rate
Advance and (B) if such Eurocurrency Rate Advance is denominated in any
Committed Currency, be prepaid by the applicable Borrower or be
automatically exchanged for an Equivalent amount of Dollars and be
Converted into a Base Rate Advance (or if such Advance is then a Base
Rate Advance, will continue as a Base Rate Advance), and
(iii) the obligation of the Lenders to make Eurocurrency Rate
Advances or to Convert Advances into Eurocurrency Rate Advances shall
be suspended until the Agent shall notify the Company and the Lenders
that the circumstances causing such suspension no longer exist.
SECTION 2.09. Optional Conversion of Advances. The Borrower of any Advance
may on any Business Day, upon notice given to the Agent not later than 11:00
A.M. (New York City time) on the third Business Day prior to the date of the
proposed Conversion and subject to the provisions of Sections 2.08 and 2.12,
Convert all or any portion of Advances denominated in Dollars of one Type
comprising the same Borrowing into Advances denominated in Dollars of the other
Type; provided, however, that any Conversion of Eurocurrency Rate Advances into
Base Rate Advances shall be made only on the last day of an Interest Period for
such Eurocurrency Rate Advances, any Conversion of Base Rate Advances into
Eurocurrency Rate Advances shall be in an amount not less than the minimum
amount specified in Section 2.02(b), no Conversion of any Advances shall result
in more separate Borrowings than permitted under Section 2.02(b) and each
Conversion of Advances comprising part of the same Borrowing shall be made
ratably among the Lenders. Each such notice of a Conversion shall, within the
restrictions specified above, specify (i) the date of such Conversion, (ii) the
Dollar denominated Advances to be Converted, and (iii) if such Conversion is
into Eurocurrency Rate Advances, the duration of the initial Interest Period for
each such Advance. Each notice of Conversion shall be irrevocable and binding on
the Borrower giving such notice.
SECTION 2.10. Prepayments of Advances. (a) Optional. Each
Borrower may, upon notice at least two Business Days' prior to the date of such
prepayment, in the case of Eurocurrency Rate Advances, and not later than 11:00
A.M. (New York City time) on the date of such prepayment, in the case of Base
Rate Advances, to the Agent stating the proposed date and aggregate principal
amount of the prepayment, and if such notice is given such Borrower shall,
prepay the outstanding principal amount of the Advances comprising part of the
same Borrowing in whole or ratably in part, together with accrued interest to
the date of such prepayment on the principal amount prepaid; provided, however,
that (x) each partial prepayment of Advances shall be in an aggregate principal
amount of not less than the Borrowing Minimum or a Borrowing Multiple in excess
thereof and (y) in the event of any such prepayment of a Eurocurrency Rate
Advance, such Borrower shall be obligated to reimburse the Lenders in respect
thereof pursuant to Section 9.04(c).
(b) Mandatory. (i) If, on any date, the Agent notifies the
Company that, on any interest payment date, the sum of (A) the aggregate
principal amount of all Advances denominated in Dollars plus the aggregate
Available Amount of all Letters of Credit then outstanding plus (B) the
Equivalent in Dollars (determined on the third Business Day prior to such
interest payment date) of the aggregate principal amount of all Advances
denominated in Committed Currencies then outstanding exceeds 103% of the
aggregate Revolving Credit Commitments of the Lenders on such date, the
Borrowers shall, as soon as practicable and in any event within two Business
Days after receipt of such notice, prepay the outstanding principal amount of
any Advances owing by the Borrowers in an aggregate amount sufficient to reduce
such sum to an amount not to exceed 100% of the aggregate Revolving Credit
Commitments of the Lenders on such date.
(ii) Each prepayment made pursuant to this Section 2.10(b)
shall be made together with any interest accrued to the date of such prepayment
on the principal amounts prepaid and, in the case of any prepayment of a
Eurocurrency Rate Advance on a date other than the last day of an Interest
Period or at its maturity, any additional amounts which the applicable Borrower
shall be obligated to reimburse to the Lenders in respect thereof pursuant to
Section 9.04(c). The Agent shall give prompt notice of any prepayment required
under this Section 2.10(b) to the Company and the Lenders.
SECTION 2.11. Increased Costs. (a) If, due to either (i) the
introduction of or any change in or in the interpretation of any law or
regulation or (ii) the compliance with any guideline or request from any central
bank or other governmental authority including, without limitation, any agency
of the European Union or similar monetary or multinational authority (whether or
not having the force of law), there shall be any increase in the cost to any
Lender of agreeing to make or making, funding or maintaining Eurocurrency Rate
Advances or of agreeing to issue or of issuing or maintaining or participating
in Letters of Credit (excluding for purposes of this Section 2.11 any such
increased costs resulting from (i) Taxes or Other Taxes (as to which Section
2.14 shall govern) and (ii) changes in the basis of taxation of overall net
income or overall gross income by the United States or by the foreign
jurisdiction or state under the laws of which such Lender is organized or has
its Applicable Lending Office or any political subdivision thereof), then the
Company shall from time to time, upon demand by such Lender (with a copy of such
demand to the Agent), pay to the Agent for the account of such Lender additional
amounts sufficient to compensate such Lender for such increased cost; provided,
however, that before making any such demand, each Lender agrees to use
reasonable efforts (consistent with its internal policy and legal and regulatory
restrictions) to designate a different Applicable Lending Office if the making
of such designation would avoid the need for, or reduce the amount of, such
increased cost and would not, in the reasonable judgment of such Lender, be
otherwise disadvantageous to such Lender. A certificate as to the amount of such
increased cost, submitted to the Company and the Agent by such Lender, shall be
conclusive and binding for all purposes, absent manifest error.
(b) If any Lender determines that compliance with any law or
regulation or any guideline or request from any central bank or other
governmental authority (whether or not having the force of law) affects or would
affect the amount of capital required or expected to be maintained by such
Lender or any corporation controlling such Lender and that the amount of such
capital is increased by or based upon the existence of such Lender's commitment
to lend or to issue or participate in Letters of Credit hereunder and other
commitments of such type or the Issuance or maintenance of or participation in
the Letters of Credit (or similar contingent obligations), then, upon demand by
such Lender (with a copy of such demand to the Agent), the Company shall pay to
the Agent for the account of such Lender, from time to time as specified by such
Lender, additional amounts sufficient to compensate such Lender or such
corporation in the light of such circumstances, to the extent that such Lender
reasonably determines such increase in capital to be allocable to the existence
of such Lender's commitment to lend or to issue or participate in Letters of
Credit hereunder or to the Issuance or maintenance of or participation in any
Letters of Credit. A certificate as to such amounts submitted to the Company and
the Agent by such Lender shall be conclusive and binding for all purposes,
absent manifest error.
SECTION 2.12. Illegality. Notwithstanding any other provision
of this Agreement, if any Lender shall notify the Agent that the introduction of
or any change in or in the interpretation of any law or regulation makes it
unlawful, or any central bank or other governmental authority asserts that it is
unlawful, for any Lender or its Eurocurrency Lending Office to perform its
obligations hereunder to make Eurocurrency Rate Advances in Dollars or any
Committed Currency or to fund or maintain Eurocurrency Rate Advances in Dollars
or any Committed Currency hereunder, (a) each Eurocurrency Rate Advance will
automatically, upon such demand (i) if such Eurocurrency Rate Advance is
denominated in Dollars, be Converted into a Base Rate Advance and (ii) if such
Eurocurrency Rate Advance is denominated in any Committed Currency, be exchanged
into an Equivalent amount of Dollars and be Converted into a Base Rate Advance
and (b) the obligation of the Lenders to make Eurocurrency Rate Advances or to
Convert Advances into Eurocurrency Rate Advances shall be suspended until the
Agent shall notify the Company that such Lender has determined that the
circumstances causing such suspension no longer exist.
SECTION 2.13. Payments and Computations. (a) Each Borrower
shall make each payment hereunder (except with respect to principal of, interest
on, and other amounts relating to, Advances denominated in a Committed
Currency), irrespective of any right of counterclaim or set-off, not later than
11:00 A.M. (New York City time) on the day when due in Dollars to the Agent at
the applicable Agent's Account in same day funds. Each Borrower shall make each
payment hereunder with respect to principal of, interest on, and other amounts
relating to, Advances denominated in a Committed Currency, irrespective of any
right of counterclaim or set-off, not later than 11:00 A.M. (at the Payment
Office for such Committed Currency) on the day when due in such Committed
Currency to the Agent, by deposit of such funds to the applicable Agent's
Account in same day funds. The Agent will promptly thereafter cause to be
distributed like funds relating to the payment of principal or interest, fees or
commissions ratably (other than amounts payable pursuant to Section 2.03,
2.04(b), 2.11, 2.14 or 9.04(c)) to the Lenders for the account of their
respective Applicable Lending Offices, and like funds relating to the payment of
any other amount payable to any Lender to such Lender for the account of its
Applicable Lending Office, in each case to be applied in accordance with the
terms of this Agreement. Upon any Assuming Lender becoming a Lender hereunder as
a result of a Commitment Increase pursuant to Section 2.18 and upon the Agent's
receipt of such Lender's Assumption Agreement and recording of the information
contained therein in the Register, from and after the applicable Increase Date,
the Agent shall make all payments hereunder and under any Notes issued in
connection therewith in respect of the interest assumed thereby to the Assuming
Lender. Upon its acceptance of an Assignment and Acceptance and recording of the
information contained therein in the Register pursuant to Section 9.07(c), from
and after the effective date specified in such Assignment and Acceptance, the
Agent shall make all payments hereunder and under the Notes in respect of the
interest assigned thereby to the Lender assignee thereunder, and the parties to
such Assignment and Acceptance shall make all appropriate adjustments in such
payments for periods prior to such effective date directly between themselves.
(b) Each Borrower hereby authorizes each Lender, if and to the
extent payment owed to such Lender is not made when due hereunder or under the
Note held by such Lender, to charge from time to time against any or all of such
Borrower's accounts with such Lender any amount so due.
(c) All computations of interest based on the Base Rate shall
be made by the Agent on the basis of a year of 365 or 366 days, as the case may
be, and all computations of interest based on the Eurocurrency Rate or the
Federal Funds Rate and of fees and Letter of Credit Commissions shall be made by
the Agent on the basis of a year of 360 days (or, in each case of Advances
denominated in Committed Currencies where market practice differs, in accordance
with market practice), in each case for the actual number of days (including the
first day but excluding the last day) occurring in the period for which such
interest, fees or commissions are payable. Each determination by the Agent of an
interest rate hereunder shall be conclusive and binding for all purposes, absent
manifest error.
(d) Whenever any payment hereunder or under the Notes shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest, fee or commission,
as the case may be; provided, however, that, if such extension would cause
payment of interest on or principal of Eurocurrency Rate Advances to be made in
the next following calendar month, such payment shall be made on the next
preceding Business Day.
(e) Unless the Agent shall have received notice from any
Borrower prior to the date on which any payment is due to the Lenders hereunder
that such Borrower will not make such payment in full, the Agent may assume that
such Borrower has made such payment in full to the Agent on such date and the
Agent may, in reliance upon such assumption, cause to be distributed to each
Lender on such due date an amount equal to the amount then due such Lender. If
and to the extent such Borrower shall not have so made such payment in full to
the Agent, each Lender shall repay to the Agent forthwith on demand such amount
distributed to such Lender together with interest thereon, for each day from the
date such amount is distributed to such Lender until the date such Lender repays
such amount to the Agent, at (i) the Federal Funds Rate in the case of Advances
denominated in Dollars or (ii) the cost of funds incurred by the Agent in
respect of such amount in the case of Advances denominated in Committed
Currencies.
(f) To the extent that the Agent receives funds for
application to the amounts owing by any Borrower under or in respect of this
Agreement or any Note in currencies other than the currency or currencies
required to enable the Agent to distribute funds to the Lenders in accordance
with the terms of this Section 2.13, the Agent shall be entitled to convert or
exchange such funds into Dollars or into a Committed Currency or from Dollars to
a Committed Currency or from a Committed Currency to Dollars, as the case may
be, to the extent necessary to enable the Agent to distribute such funds in
accordance with the terms of this Section 2.13; provided that each Borrower and
each of the Lenders hereby agree that the Agent shall not be liable or
responsible for any loss, cost or expense suffered by such Borrower or such
Lender as a result of any conversion or exchange of currencies affected pursuant
to this Section 2.13(f) or as a result of the failure of the Agent to effect any
such conversion or exchange; and provided further that the Borrowers agree to
indemnify the Agent and each Lender, and hold the Agent and each Lender
harmless, for any and all losses, costs and expenses incurred by the Agent or
any Lender for any conversion or exchange of currencies (or the failure to
convert or exchange any currencies) in accordance with this Section 2.13(f).
SECTION 2.14. Taxes. (a) Any and all payments by each Borrower
to or for the account of any Lender or the Agent hereunder or under the Notes or
any other documents to be delivered hereunder shall be made, in accordance with
Section 2.13 or the applicable provisions of such other documents, free and
clear of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, in the case of each Lender and the Agent, taxes imposed on
its overall net income, and franchise taxes imposed on it in lieu of net income
taxes, by the jurisdiction under the laws of which such Lender or the Agent (as
the case may be) is organized or any political subdivision thereof and, in the
case of each Lender, taxes imposed on its overall net income, and franchise
taxes imposed on it in lieu of net income taxes, by the jurisdiction of such
Lender's Applicable Lending Office or any political subdivision thereof (all
such non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities in respect of payments hereunder or under the Notes being
hereinafter referred to as "Taxes"). If any Borrower shall be required by law to
deduct any Taxes from or in respect of any sum payable hereunder or under any
Note or any other documents to be delivered hereunder to any Lender or the
Agent, (i) the sum payable shall be increased as may be necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section 2.14) such Lender or the Agent (as the case may
be) receives an amount equal to the sum it would have received had no such
deductions been made, (ii) such Borrower shall make such deductions and (iii)
such Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law.
(b) In addition, the Company shall pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies that arise from any payment made hereunder or under the Notes any
other documents to be delivered hereunder or from the execution, delivery or
registration of, performing under, or otherwise with respect to, this Agreement
or the Notes or any other documents to be delivered hereunder (hereinafter
referred to as "Other Taxes").
(c) Each Borrower shall indemnify each Lender and the Agent
for and hold it harmless against the full amount of Taxes or Other Taxes
(including, without limitation, taxes of any kind imposed or asserted by any
jurisdiction on amounts payable under this Section 2.14) imposed on or paid by
such Lender or the Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto.
This indemnification shall be made within 30 days from the date such Lender or
the Agent (as the case may be) makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes,
each Borrower shall furnish to the Agent, at its address referred to in Section
9.02, the original or a certified copy of a receipt evidencing such payment to
the extent such a receipt is issued therefor, or other written proof of payment
thereof that is reasonably satisfactory to the Agent. In the case of any payment
hereunder or under the Notes or any other documents to be delivered hereunder by
or on behalf of such Borrower through an account or branch outside the United
States or by or on behalf of such Borrower by a payor that is not a United
States person, if such Borrower determines that no Taxes are payable in respect
thereof, such Borrower shall furnish, or shall cause such payor to furnish, to
the Agent, at such address, an opinion of counsel acceptable to the Agent
stating that such payment is exempt from Taxes. For purposes of this subsection
(d) and subsection (e), the terms "United States" and "United States person"
shall have the meanings specified in Section 7701 of the Internal Revenue Code.
(e) Each Lender organized under the laws of a jurisdiction
outside the United States, on or prior to the date of its execution and delivery
of this Agreement in the case of each Initial Lender and on the date of the
Assumption Agreement or the Assignment and Acceptance pursuant to which it
becomes a Lender in the case of each other Lender, and from time to time
thereafter as reasonably requested in writing by the Company (but only so long
as such Lender remains lawfully able to do so), shall provide each of the Agent
and the Company with two original Internal Revenue Service Forms W-8BEN or
W-8ECI, as appropriate, or any successor or other form prescribed by the
Internal Revenue Service, certifying that such Lender is exempt from or entitled
to a reduced rate of United States withholding tax on payments pursuant to this
Agreement or the Notes. If the form provided by a Lender at the time such Lender
first becomes a party to this Agreement indicates a United States interest
withholding tax rate in excess of zero, withholding tax at such rate shall be
considered excluded from Taxes unless and until such Lender provides the
appropriate forms certifying that a lesser rate applies, whereupon withholding
tax at such lesser rate only shall be considered excluded from Taxes for periods
governed by such form; provided, however, that, if at the date of the Assignment
and Acceptance pursuant to which a Lender assignee becomes a party to this
Agreement, the Lender assignor was entitled to payments under subsection (a) in
respect of United States withholding tax with respect to interest paid at such
date, then, to such extent, the term Taxes shall include (in addition to
withholding taxes that may be imposed in the future or other amounts otherwise
includable in Taxes) United States withholding tax, if any, applicable with
respect to the Lender assignee on such date. If any form or document referred to
in this subsection (e) requires the disclosure of information, other than
information necessary to compute the tax payable and information required on the
date hereof by Internal Revenue Service Form W-8BEN or W-8ECI, that the Lender
reasonably considers to be confidential, the Lender shall give notice thereof to
the Company and shall not be obligated to include in such form or document such
confidential information.
(f) For any period with respect to which a Lender has failed
to provide the Company with the appropriate form, certificate or other document
described in Section 2.14(e) (other than if such failure is due to a change in
law, or in the interpretation or application thereof, occurring subsequent to
the date on which a form, certificate or other document originally was required
to be provided, or if such form, certificate or other document otherwise is not
required under subsection (e) above), such Lender shall not be entitled to
indemnification under Section 2.14(a) or (c) with respect to Taxes imposed by
the United States by reason of such failure; provided, however, that should a
Lender become subject to Taxes because of its failure to deliver a form,
certificate or other document required hereunder, the Company shall take such
steps as the Lender shall reasonably request to assist the Lender to recover
such Taxes.
SECTION 2.15. Sharing of Payments, Etc. If any Lender shall
obtain any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) on account of the Advances owing to it (other
than (x) as payment of an Advance made by an Issuing Bank pursuant to the first
sentence of Section 2.03(c) or (y) pursuant to Section 2.11, 2.14 or 9.04(c)) in
excess of its Ratable Share of payments on account of the Advances obtained by
all the Lenders, such Lender shall forthwith purchase from the other Lenders
such participations in the Advances owing to them as shall be necessary to cause
such purchasing Lender to share the excess payment ratably with each of them;
provided, however, that if all or any portion of such excess payment is
thereafter recovered from such purchasing Lender, such purchase from each Lender
shall be rescinded and such Lender shall repay to the purchasing Lender the
purchase price to the extent of such recovery together with an amount equal to
such Lender's ratable share (according to the proportion of (i) the amount of
such Lender's required repayment to (ii) the total amount so recovered from the
purchasing Lender) of any interest or other amount paid or payable by the
purchasing Lender in respect of the total amount so recovered. Each Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section 2.15 may, to the fullest extent permitted by law,
exercise all its rights of payment (including the right of set-off) with respect
to such participation as fully as if such Lender were the direct creditor of
such Borrower in the amount of such participation.
SECTION 2.16. Evidence of Debt. (a) Each Lender shall maintain
in accordance with its usual practice an account or accounts evidencing the
indebtedness of each Borrower to such Lender resulting from each Advance owing
to such Lender from time to time, including the amounts of principal and
interest payable and paid to such Lender from time to time hereunder in respect
of Advances. Each Borrower agrees that upon notice by any Lender to such
Borrower (with a copy of such notice to the Agent) to the effect that a Note is
required or appropriate in order for such Lender to evidence (whether for
purposes of pledge, enforcement or otherwise) the Advances owing to, or to be
made by, such Lender, such Borrower shall promptly execute and deliver to such
Lender a Note in substantially the form of Exhibit A hereto, payable to the
order of such Lender in a principal amount equal to the Revolving Credit
Commitment of such Lender.
(b) The Register maintained by the Agent pursuant to Section
9.07(d) shall include a control account, and a subsidiary account for each
Lender, in which accounts (taken together) shall be recorded (i) the date and
amount of each Borrowing made hereunder, the Type of Advances comprising such
Borrowing and, if appropriate, the Interest Period applicable thereto, (ii) the
terms of each Assumption Agreement and each Assignment and Acceptance delivered
to and accepted by it, (iii) the amount of any principal or interest due and
payable or to become due and payable from each Borrower to each Lender hereunder
and (iv) the amount of any sum received by the Agent from such Borrower
hereunder and each Lender's share thereof.
(c) Entries made in good faith by the Agent in the Register
pursuant to subsection (b) above, and by each Lender in its account or accounts
pursuant to subsection (a) above, shall be prima facie evidence of the amount of
principal and interest due and payable or to become due and payable from each
Borrower to, in the case of the Register, each Lender and, in the case of such
account or accounts, such Lender, under this Agreement, absent manifest error;
provided, however, that the failure of the Agent or such Lender to make an
entry, or any finding that an entry is incorrect, in the Register or such
account or accounts shall not limit or otherwise affect the obligations of any
Borrower under this Agreement.
SECTION 2.17. Use of Proceeds. The proceeds of the Advances
shall be available (and each Borrower agrees that it shall use such proceeds)
solely for general corporate purposes of such Borrower and its Subsidiaries.
SECTION 2.18. Increase in the Aggregate Revolving Credit
Commitments. (a) The Company may, at any time but in any event not more than
once in any calendar year prior to the Termination Date, by notice to the Agent,
request that the aggregate amount of the Revolving Credit Commitments be
increased by an amount of $25,000,000 or an integral multiple thereof (each a
"Commitment Increase") to be effective as of a date that is at least 90 days
prior to the scheduled Termination Date then in effect (the "Increase Date") as
specified in the related notice to the Agent; provided, however that (i) in no
event shall the aggregate amount of the Revolving Credit Commitments at any time
exceed $650,000,000 and (ii) on the date of any request by the Company for a
Commitment Increase and on the related Increase Date the applicable conditions
set forth in Article III shall be satisfied.
(b) The Agent shall promptly notify the Lenders of a request
by the Company for a Commitment Increase, which notice shall include
(i) the proposed amount of such requested Commitment Increase, (ii) the
proposed Increase Date and (iii) the date by which Lenders wishing to
participate in the Commitment Increase must commit to an increase in
the amount of their respective Revolving Credit Commitments (the
"Commitment Date"). Each Lender that is willing to participate in such
requested Commitment Increase (each an "Increasing Lender") shall, in
its sole discretion, give written notice to the Agent on or prior to
the Commitment Date of the amount by which it is willing to increase
its Revolving Credit Commitment. If the Lenders notify the Agent that
they are willing to increase the amount of their respective Revolving
Credit Commitments by an aggregate amount that exceeds the amount of
the requested Commitment Increase, the requested Commitment Increase
shall be allocated among the Lenders willing to participate therein in
such amounts as are agreed between the Company and the Agent.
(c) Promptly following each Commitment Date, the Agent shall
notify the Company as to the amount, if any, by which the Lenders are
willing to participate in the requested Commitment Increase. If the
aggregate amount by which the Lenders are willing to participate in any
requested Commitment Increase on any such Commitment Date is less than
the requested Commitment Increase, then the Company may extend offers
to one or more Eligible Assignees to participate in any portion of the
requested Commitment Increase that has not been committed to by the
Lenders as of the applicable Commitment Date; provided, however, that
the Revolving Credit Commitment of each such Eligible Assignee shall be
in an amount not less than $10,000,000.
(d) On each Increase Date, each Eligible Assignee that accepts
an offer to participate in a requested Commitment Increase in
accordance with Section 2.18(b) (each such Eligible Assignee, an
"Assuming Lender") shall become a Lender party to this Agreement as of
such Increase Date and the Revolving Credit Commitment of each
Increasing Lender for such requested Commitment Increase shall be so
increased by such amount (or by the amount allocated to such Lender
pursuant to the last sentence of Section 2.18(b)) as of such Increase
Date; provided, however, that the Agent shall have received on or
before such Increase Date the following, each dated such date:
(i) (A) certified copies of resolutions of the Board of
Directors of the Company or the Executive Committee of such Board
approving the Commitment Increase and the corresponding modifications
to this Agreement and (B) an opinion of counsel for the Company (which
may be in-house counsel), in substantially the form of Exhibit E
hereto;
(ii) an assumption agreement from each Assuming Lender, if
any, in form and substance satisfactory to the Company and the Agent
(each an "Assumption Agreement"), duly executed by such Eligible
Assignee, the Agent and the Company; and
(iii) confirmation from each Increasing Lender of the increase
in the amount of its Revolving Credit Commitment in a writing
satisfactory to the Company and the Agent.
On each Increase Date, upon fulfillment of the conditions set forth in the
immediately preceding sentence of this Section 2.18(d), the Agent shall notify
the Lenders (including, without limitation, each Assuming Lender) and the
Company, on or before 1:00 P.M. (New York City time), by telecopier, of the
occurrence of the Commitment Increase to be effected on such Increase Date and
shall record in the Register the relevant information with respect to each
Increasing Lender and each Assuming Lender on such date. Each Increasing Lender
and each Assuming Lender shall, before 2:00 P.M. (New York City time) on the
Increase Date, make available for the account of its Applicable Lending Office
to the Agent at the Agent's Account, in same day funds, in the case of such
Assuming Lender, an amount equal to such Assuming Lender's ratable portion of
the Borrowings then outstanding (calculated based on its Revolving Credit
Commitment as a percentage of the aggregate Revolving Credit Commitments
outstanding after giving effect to the relevant Commitment Increase) and, in the
case of such Increasing Lender, an amount equal to the excess of (i) such
Increasing Lender's ratable portion of the Borrowings then outstanding
(calculated based on its Revolving Credit Commitment as a percentage of the
aggregate Revolving Credit Commitments outstanding after giving effect to the
relevant Commitment Increase) over (ii) such Increasing Lender's ratable portion
of the Borrowings then outstanding (calculated based on its Revolving Credit
Commitment (without giving effect to the relevant Commitment Increase) as a
percentage of the aggregate Revolving Credit Commitments (without giving effect
to the relevant Commitment Increase). After the Agent's receipt of such funds
from each such Increasing Lender and each such Assuming Lender, the Agent will
promptly thereafter cause to be distributed like funds to the other Lenders for
the account of their respective Applicable Lending Offices in an amount to each
other Lender such that the aggregate amount of the outstanding Advances owing to
each Lender after giving effect to such distribution equals such Lender's
ratable portion of the Borrowings then outstanding (calculated based on its
Revolving Credit Commitment as a percentage of the aggregate Revolving Credit
Commitments outstanding after giving effect to the relevant Commitment
Increase).
ARTICLE III
CONDITIONS TO EFFECTIVENESS AND LENDING
SECTION 3.01. Conditions Precedent to Effectiveness of Section
2.01. Section 2.01 of this Agreement shall become effective on and as of the
first date (the "Effective Date") on which the following conditions precedent
have been satisfied:
(a) There shall have occurred no Material Adverse Change since
December 31, 2004.
(b) There shall exist no action, suit, investigation,
litigation or proceeding affecting the Company or any of its
Subsidiaries pending or threatened before any court, governmental
agency or arbitrator that (i) could be reasonably likely to have a
Material Adverse Effect or (ii) purports to affect the legality,
validity or enforceability of this Agreement or any Note or the
consummation of the transactions contemplated hereby.
(c) Nothing shall have come to the attention of the Lenders
during the course of their due diligence investigation to lead them to
believe that the Information Memorandum was or has become misleading,
incorrect or incomplete in any material respect; without limiting the
generality of the foregoing, the Lenders shall have been given such
access to the management, records, books of account, contracts and
properties of the Company and its Subsidiaries as they shall have
requested.
(d) All governmental and third party consents and approvals
necessary in connection with the transactions contemplated hereby shall
have been obtained (without the imposition of any conditions that are
not acceptable to the Lenders) and shall remain in effect, and no law
or regulation shall be applicable in the reasonable judgment of the
Lenders that restrains, prevents or imposes materially adverse
conditions upon the transactions contemplated hereby.
(e) The Company shall have notified each Lender and the Agent
in writing as to the proposed Effective Date.
(f) The Company shall have paid all accrued fees and expenses
of the Agent and the Lenders (including the accrued fees and expenses
of counsel to the Agent).
(g) On the Effective Date, the following statements shall be
true and the Agent shall have received for the account of each Lender a
certificate signed by a duly authorized officer of the Company, dated
the Effective Date, stating that:
(i) The representations and warranties contained in
Section 4.01 are correct on and as of the Effective Date, and
(ii) No event has occurred and is continuing that
constitutes a Default.
(h) The Agent shall have received on or before the Effective
Date the following, each dated such day, in form and substance
satisfactory to the Agent and (except for the Notes) in sufficient
copies for each Lender:
(i) The Notes to the order of the Lenders to the
extent requested by any Lender pursuant to Section 2.16.
(ii) Certified copies of the resolutions of the Board
of Directors of the Company approving this Agreement and the
Notes, and of all documents evidencing other necessary
corporate action and governmental approvals, if any, with
respect to this Agreement and the Notes.
(iii) A certificate of the Secretary or an Assistant
Secretary of the Company certifying the names and true
signatures of the officers of the Company authorized to sign
this Agreement and the Notes and the other documents to be
delivered hereunder.
(iv) A favorable opinion of Brian M. Addison, General
Counsel for the Company, substantially in the form of Exhibit
D hereto and as to such other matters as any Lender through
the Agent may reasonably request.
(v) A favorable opinion of Shearman & Sterling LLP,
counsel for the Agent, in form and substance satisfactory to
the Agent.
(h) The Company shall have terminated the commitments of the
lenders and repaid or prepaid all of the obligations under, the
Facility A 364-Day Competitive Advance, Revolving Credit and Guaranty
Agreement and the Facility B Five-Year Competitive Advance, Revolving
Credit and Guaranty Agreement, each dated as of May 25, 2001 and among
the Company, the guarantors named therein, the lenders parties thereto
and ABN AMRO Bank N.V., as administrative agent., and each of the
Lenders that is a party to such credit facility hereby waives, upon
execution of this Agreement, any notice required by said Credit
Agreement relating to the termination of commitments thereunder.
SECTION 3.02. Initial Advance to Each Designated Subsidiary.
The obligation of each Lender to make an initial Advance to each Designated
Subsidiary is subject to the receipt by the Agent on or before the date that is
ten Business Days prior to such initial Advance of each of the following, in
form and substance reasonably satisfactory to the Agent and dated such date, and
(except for the Notes) in sufficient copies for each Lender:
(a) The Notes of such Designated Subsidiary to the order of
the Lenders to the extent requested by any Lender pursuant to Section
2.16.
(b) Certified copies of the resolutions of the Board of
Directors of such Designated Subsidiary (with a certified English
translation if the original thereof is not in English) approving this
Agreement and the Notes to be delivered by it, and of all documents
evidencing other necessary corporate action and governmental approvals,
if any, with respect to this Agreement.
(c) A certificate of a proper officer of such Designated
Subsidiary certifying the names and true signatures of the officers of
such Designated Subsidiary authorized to sign its Designation Agreement
and the Notes to be delivered by it and the other documents to be
delivered by it hereunder.
(d) A certificate signed by a duly authorized officer of the
Company, certifying that such Designated Subsidiary has obtained all
governmental and third party authorizations, consents, approvals
(including exchange control approvals) and licenses required under
applicable laws and regulations necessary for such Designated
Subsidiary to execute and deliver its Designation Agreement and the
Notes to be delivered by it and to perform its obligations hereunder
and thereunder.
(e) A Designation Agreement duly executed by such Designated
Subsidiary and the Company.
(f) Favorable opinions of counsel (which may be in-house
counsel) to such Designated Subsidiary substantially in the form of
Exhibit D hereto, and as to such other matters as any Lender through
the Agent may request.
(g) Such other approvals, opinions or documents as any Lender,
through the Agent may reasonably request.
SECTION 3.03. Conditions Precedent to Each Borrowing, Issuance
and Commitment Increase. The obligation of each Lender to make an Advance (other
than a Advance made by any Issuing Bank or any Lender pursuant to Section
2.03(c)) on the occasion of each Borrowing, the obligation of each Issuing Bank
to issue a Letter of Credit and each Commitment Increase shall be subject to the
conditions precedent that the Effective Date shall have occurred and on the date
of such Borrowing, such issuance or the applicable Increase Date (as the case
may be) (a) the following statements shall be true (and each of the giving of
the applicable Notice of Borrowing, Notice of Issuance or request for Commitment
Increase and the acceptance by any Borrower of the proceeds of such Borrowing,
such issuance or such Increase Date shall constitute a representation and
warranty by such Borrower that on the date of such Borrowing, such issuance or
such Increase Date such statements are true):
(i) the representations and warranties contained in Section
4.01 (except, in the case of Borrowings and issuances, the
representations set forth in the last sentence of subsection (e)
thereof and in subsection (f)(i) thereof) are correct on and as of such
date, before and after giving effect to such Borrowing, such issuance
or such Commitment Increase and to the application of the proceeds
therefrom, as though made on and as of such date, and additionally, if
such Borrowing or issuance shall have been requested by a Designated
Subsidiary, the representations and warranties of such Designated
Subsidiary contained in its Designation Agreement are correct on and as
of the date of such Borrowing or such issuance, before and after giving
effect to such Borrowing, such issuance or such Commitment Increase and
to the application of the proceeds therefrom, as though made on and as
of such date, and
(ii) no event has occurred and is continuing, or would result
from such Borrowing, such issuance or such Commitment Increase or from
the application of the proceeds therefrom, that constitutes a Default;
and (b) the Agent shall have received such other approvals, opinions or
documents as any Lender through the Agent may reasonably request.
SECTION 3.04. Determinations Under Section 3.01. For purposes
of determining compliance with the conditions specified in Section 3.01, each
Lender shall be deemed to have consented to, approved or accepted or to be
satisfied with each document or other matter required thereunder to be consented
to or approved by or acceptable or satisfactory to the Lenders unless an officer
of the Agent responsible for the transactions contemplated by this Agreement
shall have received notice from such Lender prior to the date that the Company,
by notice to the Lenders, designates as the proposed Effective Date or the date
of the initial Advance to the applicable Designated Subsidiary, as the case may
be, specifying its objection thereto. The Agent shall promptly notify the
Lenders of the occurrence of the Effective Date and each date of initial Advance
to a Designated Subsidiary, as applicable.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Company. The Company
represents and warrants as follows:
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
(b) The execution, delivery and performance by the Company of
this Agreement and the Notes to be delivered by it, and the
consummation of the transactions contemplated hereby, are within the
Company's corporate powers, have been duly authorized by all necessary
corporate action, and do not contravene (i) the Company's charter or
by-laws or (ii) law or any contractual restriction binding on or
affecting the Company.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body
or any other third party is required for the due execution, delivery
and performance by the Company of this Agreement or the Notes to be
delivered by it.
(d) This Agreement has been, and each of the Notes to be
delivered by it when delivered hereunder will have been, duly executed
and delivered by the Company. This Agreement is, and each of the Notes
when delivered hereunder will be, the legal, valid and binding
obligation of the Company enforceable against the Company in accordance
with their respective terms, except as the enforceability thereof may
be limited by the effect of any applicable bankruptcy, insolvency or
similar laws affecting creditors' rights generally and by general
principles of equity.
(e) The Consolidated balance sheet of the Company and its
Subsidiaries as at December 31, 2004, and the related Consolidated
statements of income and cash flows of the Company and its Subsidiaries
for the fiscal year then ended, accompanied by an opinion of
PricewaterhouseCoopers LLC, independent public accountants, and the
Consolidated balance sheet of the Company and its Subsidiaries as at
March 31, 2005, and the related Consolidated statements of income and
cash flows of the Company and its Subsidiaries for the three months
then ended, duly certified by the chief financial officer, treasurer or
controller of the Company, copies of which have been furnished to each
Lender, fairly present, subject, in the case of said balance sheet as
at March 31, 2005, and said statements of income and cash flows for the
three months then ended, to year-end audit adjustments, the
Consolidated financial condition of the Company and its Subsidiaries as
at such dates and the Consolidated results of the operations of the
Company and its Subsidiaries for the periods ended on such dates, all
in accordance with generally accepted accounting principles
consistently applied. Since December 31, 2004, there has been no
Material Adverse Change.
(f) There is no pending or, to the knowledge of the Company,
threatened action, suit, investigation, litigation or proceeding,
including, without limitation, any Environmental Action, affecting the
Company or any of its Subsidiaries before any court, governmental
agency or arbitrator that (i) could be reasonably likely to have a
Material Adverse Effect or (ii) purports to affect the legality,
validity or enforceability of this Agreement or any Note or the
consummation of the transactions contemplated hereby.
(g) No Borrower is engaged in the business of extending credit
for the purpose of purchasing or carrying margin stock (within the
meaning of Regulation U issued by the Board of Governors of the Federal
Reserve System), and no proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any margin stock.
(h) No Borrower is an "investment company", or a company
"controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
(i) Neither the Information Memorandum nor any other
information, exhibit or report furnished by or on behalf of the Company
or any other Borrower to the Agent or any Lender in connection with the
negotiation and syndication of this Agreement or pursuant to the terms
of this Agreement contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements made
therein not misleading.
(j) Each Borrower is, individually and together with its
Subsidiaries, Solvent.
ARTICLE V
COVENANTS OF THE COMPANY
SECTION 5.01. Affirmative Covenants. So long as any Advance shall remain unpaid,
and Letter of Credit isoutstanding or any Lender shall have any Commitment
hereunder, the Company will:
(a) Compliance with Laws, Etc. Comply, and cause each of its
Subsidiaries to comply, in all material respects, with all applicable
laws, rules, regulations and orders, such compliance to include,
without limitation, compliance with ERISA, Environmental Laws and the
Patriot Act.
(b) Payment of Taxes, Etc. Pay and discharge, and cause each
of its Subsidiaries to pay and discharge, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges or
levies imposed upon it or upon its property and (ii) all lawful claims
that, if unpaid, might by law become a Lien upon its property;
provided, however, that neither the Company nor any of its Subsidiaries
shall be required to pay or discharge any such tax, assessment, charge
or claim that is being contested in good faith and by proper
proceedings and as to which appropriate reserves are being maintained,
unless and until any Lien resulting therefrom attaches to its property
and becomes enforceable against its other creditors.
(c) Maintenance of Insurance. Maintain, and cause each of its
Subsidiaries to maintain, insurance with responsible and reputable
insurance companies or associations in such amounts and covering such
risks as is usually carried by companies engaged in similar businesses
and owning similar properties in the same general areas in which the
Company or such Subsidiary operates; provided, however, that the
Company and its Subsidiaries may self-insure to the same extent as
other companies engaged in similar businesses and owning similar
properties in the same general areas in which the Company or such
Subsidiary operates and to the extent consistent with prudent business
practice.
(d) Preservation of Corporate Existence, Etc. Preserve and
maintain, and cause each of its Subsidiaries to preserve and maintain,
its corporate existence, rights (charter and statutory) and franchises;
provided, however, that the Company and its Subsidiaries may consummate
any merger or consolidation permitted under Section 5.02(b) and
provided further that neither the Company nor any of its Subsidiaries
shall be required to maintain corporate existence of any Subsidiary or
preserve any right or franchise if the Board of Directors of the
Company or such Subsidiary shall determine that the maintenance or
preservation thereof is no longer desirable in the conduct of the
business of the Company or such Subsidiary, as the case may be, and
that the loss thereof is not disadvantageous in any material respect to
the Company, such Subsidiary or the Lenders.
(e) Visitation Rights. At any reasonable time and from time to
time, permit the Agent or any of the Lenders or any agents or
representatives thereof, to examine and make copies of and abstracts
from the records and books of account of, and visit the properties of,
the Company and any of its Subsidiaries, and to discuss the affairs,
finances and accounts of the Company and any of its Subsidiaries with
any of their officers or directors and with their independent certified
public accountants.
(f) Keeping of Books. Keep, and cause each of its Subsidiaries
to keep, proper books of record and account, in which full and correct
entries shall be made of all financial transactions and the assets and
business of the Company and each such Subsidiary in accordance with
generally accepted accounting principles in effect from time to time.
(g) Maintenance of Properties, Etc. Maintain and preserve, and
cause each of its Subsidiaries to maintain and preserve, all of its
properties that are used or useful in the conduct of its business in
good working order and condition, ordinary wear and tear excepted.
(h) Transactions with Affiliates. Conduct, and cause each of
its Subsidiaries to conduct, all transactions otherwise permitted under
this Agreement with any of their Affiliates on terms that are fair and
reasonable and no less favorable to the Company or such Subsidiary than
it would obtain in a comparable arm's-length transaction with a Person
not an Affiliate.
(i) Reporting Requirements. Furnish to the Lenders:
(i) as soon as available and in any event within 45
days after the end of each of the first three quarters of each
fiscal year of the Company, the Consolidated balance sheet of
the Company and its Subsidiaries as of the end of such quarter
and Consolidated statements of income and cash flows of the
Company and its Subsidiaries for the period commencing at the
end of the previous fiscal year and ending with the end of
such quarter, duly certified (subject to year-end audit
adjustments) by the chief financial officer, treasurer or
controller of the Company as having been prepared in
accordance with generally accepted accounting principles and
certificates of the chief financial officer, treasurer or
controller of the Company as to compliance with the terms of
this Agreement and setting forth in reasonable detail the
calculations necessary to demonstrate compliance with Section
5.03, provided that in the event of any change in generally
accepted accounting principles used in the preparation of such
financial statements, the Company shall also provide, if
necessary for the determination of compliance with Section
5.03, a statement of reconciliation conforming such financial
statements to GAAP;
(ii) as soon as available and in any event within 90
days after the end of each fiscal year of the Company, a copy
of the annual audit report for such year for the Company and
its Subsidiaries, containing the Consolidated balance sheet of
the Company and its Subsidiaries as of the end of such fiscal
year and Consolidated statements of income and cash flows of
the Company and its Subsidiaries for such fiscal year, in each
case accompanied by an opinion acceptable to the Required
Lenders by PricewaterhouseCoopers LLC or other independent
public accountants acceptable to the Required Lenders and
certificates of the chief financial officer, treasurer or
controller of the Company as to compliance with the terms of
this Agreement and setting forth in reasonable detail the
calculations necessary to demonstrate compliance with Section
5.03, provided that in the event of any change in generally
accepted accounting principles used in the preparation of such
financial statements, the Company shall also provide, if
necessary for the determination of compliance with Section
5.03, a statement of reconciliation conforming such financial
statements to GAAP;
(iii) as soon as possible and in any event within
five days after the occurrence of each Default continuing on
the date of such statement, a statement of the chief financial
officer, treasurer or controller of the Company setting forth
details of such Default and the action that the Company has
taken and proposes to take with respect thereto;
(iv) promptly after the sending or filing thereof,
copies of all reports that the Company sends to any of its
securityholders, and copies of all reports and registration
statements that the Company or any Subsidiary files with the
Securities and Exchange Commission or any national securities
exchange;
(v) promptly after the commencement thereof, notice
of all actions and proceedings before any court, governmental
agency or arbitrator affecting the Company or any of its
Subsidiaries of the type described in Section 4.01(f); and
(vi) such other information respecting the Company or
any of its Subsidiaries as any Lender through the Agent may
from time to time reasonably request.
SECTION 5.02. Negative Covenants. So long as any Advance shall remain unpaid,
and Letter of Credit is outstanding or any Lender shall have any Commitment
hereunder, the Company will not:
(a) Liens, Etc. Create or suffer to exist, or permit any of
its Subsidiaries to create or suffer to exist, any Lien on or with
respect to any of its properties, whether now owned or hereafter
acquired, or assign, or permit any of its Subsidiaries to assign, any
right to receive income, other than:
(i) Permitted Liens,
(ii) purchase money Liens upon or in any real
property or equipment acquired or held by the Company or any
Subsidiary in the ordinary course of business to secure the
purchase price of such property or equipment or to secure Debt
incurred solely for the purpose of financing the acquisition
of such property or equipment, or Liens existing on such
property or equipment at the time of its acquisition (other
than any such Liens created in contemplation of such
acquisition that were not incurred to finance the acquisition
of such property) or extensions, renewals or replacements of
any of the foregoing for the same or a lesser amount,
provided, however, that no such Lien shall extend to or cover
any properties of any character other than the real property
or equipment being acquired, and no such extension, renewal or
replacement shall extend to or cover any properties not
theretofore subject to the Lien being extended, renewed or
replaced, provided further that the aggregate principal amount
of the indebtedness secured by the Liens referred to in this
clause (ii) shall not exceed the amount specified therefor in
Section 5.02(d)(iii) at any time outstanding,
(iii) the Liens existing on the Effective Date and
described on Schedule 5.02(a) hereto,
(iv) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the
Company or any Subsidiary of the Company or becomes a
Subsidiary of the Company; provided that such Liens were not
created in contemplation of such merger, consolidation or
acquisition and do not extend to any assets other than those
of the Person so merged into or consolidated with the Company
or such Subsidiary or acquired by the Company or such
Subsidiary,
(v) other Liens securing Debt in an aggregate
principal amount not to exceed the amount specified therefor
in Section 5.02(d)(iv) at any time outstanding, and
(vi) the replacement, extension or renewal of any
Lien permitted by clause (iii) or (iv) above upon or in the
same property theretofore subject thereto or the replacement,
extension or renewal (without increase in the amount or change
in any direct or contingent obligor) of the Debt secured
thereby.
(b) Mergers, Etc. Merge or consolidate with or into, or
convey, transfer, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of
its assets (whether now owned or hereafter acquired) to, any Person, or
permit any of its Subsidiaries to do so, except that any Subsidiary of
the Company may merge or consolidate with or into, or dispose of assets
to, any other Subsidiary of the Company, and except that any Subsidiary
of the Company may merge into or dispose of assets to the Company,
provided, in each case, that no Default shall have occurred and be
continuing at the time of such proposed transaction or would result
therefrom.
(c) Accounting Changes. Make or permit, or permit any of its
Subsidiaries to make or permit, any change in accounting policies or
reporting practices, except as required or permitted by generally
accepted accounting principles.
(d) Subsidiary Debt. Permit any of its Subsidiaries to create
or suffer to exist, any Debt other than:
(i) Debt owed to the Company or to a wholly owned
Subsidiary of the Company or Debt under this Agreement or the
Notes,
(ii) Debt existing on the Effective Date and
described on Schedule 5.02(d) hereto (the "Existing Debt"),
and any Debt extending the maturity of, or refunding or
refinancing, in whole or in part, the Existing Debt, provided
that the principal amount of such Existing Debt shall not be
increased above the principal amount thereof outstanding
immediately prior to such extension, refunding or refinancing,
and the direct and contingent obligors therefor shall not be
changed, as a result of or in connection with such extension,
refunding or refinancing,
(iii) Debt secured by Liens permitted by Section
5.02(a)(ii) aggregating for all of the Company's Subsidiaries
not more than $50,000,000 at any one time outstanding,
(iv) Debt that, in aggregate with all Debt secured by
Liens permitted by Section 5.02(a)(v), does not exceed an
amount equal to 15% of Consolidated net worth of the Company
and its Subsidiaries at any one time outstanding,
(v) endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course
of business.
(e) Change in Nature of Business. Make, or permit any of its
Subsidiaries to make, any material change in the nature of the business
as carried on by the Company and its Subsidiaries at the date hereof.
SECTION 5.03. Financial Covenants. So long as any Advance
shall remain unpaid, and Letter of Credit is outstanding or any Lender shall
have any Commitment hereunder, the Company will:
(a) Leverage Ratio. Maintain a ratio of Consolidated Debt for
Borrowed Money to the sum of Consolidated Debt for Borrowed Money plus
Consolidated net worth of the Company and its Subsidiaries of not
greater than 0.55 to 1.00.
(b) Interest Coverage Ratio. Maintain a ratio of Consolidated
EBITDA for the period of four fiscal quarters then ended of the Company
and its Subsidiaries to the sum of interest payable on, and
amortization of debt discount in respect of, all Debt during such
period by the Company and its Subsidiaries of not less than 3.5 to 1.0.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following events ("Events of
Default") shall occur and be continuing:
(a) The Company or any other Borrower shall fail to pay any
principal of any Advance when the same becomes due and payable; or the
Company or any other Borrower shall fail to pay any interest on any
Advance or make any other payment of fees or other amounts payable
under this Agreement or any Note within five Business Days after the
same becomes due and payable; or
(b) Any representation or warranty made by any Borrower herein
or by any Borrower (or any of its officers) in connection with this
Agreement or by any Designated Subsidiary in the Designation Agreement
pursuant to which such Designated Subsidiary became a Borrower
hereunder shall prove to have been incorrect in any material respect
when made; or
(c) (i) The Company shall fail to perform or observe any term,
covenant or agreement contained in Section 5.01(d), (e), (h) or (i),
5.02 or 5.03, or (ii) the Company shall fail to perform or observe any
other term, covenant or agreement contained in this Agreement on its
part to be performed or observed if such failure shall remain
unremedied for 10 days after written notice thereof shall have been
given to the Company by the Agent or any Lender; or
(d) The Company or any of its Subsidiaries shall fail to pay
any principal of or premium or interest on any Debt that is outstanding
in a principal or notional amount of at least $25,000,000 in the
aggregate (but excluding Debt outstanding hereunder) of the Company or
such Subsidiary (as the case may be), when the same becomes due and
payable (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise), and such failure shall continue
after the applicable grace period, if any, specified in the agreement
or instrument relating to such Debt; or any other event shall occur or
condition shall exist under any agreement or instrument relating to any
such Debt and shall continue after the applicable grace period, if any,
specified in such agreement or instrument, if the effect of such event
or condition is to accelerate, or to permit the acceleration of, the
maturity of such Debt; or any such Debt shall be declared to be due and
payable, or required to be prepaid or redeemed (other than by a
regularly scheduled required prepayment or redemption), purchased or
defeased, or an offer to prepay, redeem, purchase or defease such Debt
shall be required to be made, in each case prior to the stated maturity
thereof; or
(e) The Company or any of its Subsidiaries shall generally not
pay its debts as such debts become due, or shall admit in writing its
inability to pay its debts generally, or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Company or any of its Subsidiaries seeking
to adjudicate it a bankrupt or insolvent, or seeking liquidation,
winding up, reorganization, arrangement, adjustment, protection,
relief, or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a
receiver, trustee, custodian or other similar official for it or for
any substantial part of its property and, in the case of any such
proceeding instituted against it (but not instituted by it), either
such proceeding shall remain undismissed or unstayed for a period of 30
days, or any of the actions sought in such proceeding (including,
without limitation, the entry of an order for relief against, or the
appointment of a receiver, trustee, custodian or other similar official
for, it or for any substantial part of its property) shall occur; or
the Company or any of its Subsidiaries shall take any corporate action
to authorize any of the actions set forth above in this subsection (e);
or
(f) Judgments or orders for the payment of money in excess of
$25,000,000 in the aggregate shall be rendered against the Company or
any of its Subsidiaries and either (i) enforcement proceedings shall
have been commenced by any creditor upon such judgment or order or (ii)
there shall be any period of 10 consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; or
(g) (i) Any Person or two or more Persons acting in concert
shall have acquired beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934), directly or indirectly, of Voting Stock of the
Company (or other securities convertible into such Voting Stock)
representing 30% or more of the combined voting power of all Voting
Stock of the Company; or (ii) during any period of up to 24 consecutive
months, commencing after the date of this Agreement, individuals who at
the beginning of such 24-month period were directors of the Company
shall cease for any reason (other than due to death or disability) to
constitute a majority of the board of directors of the Company (except
to the extent that individuals who at the beginning of such 24-month
period were replaced by individuals (x) elected by a majority of the
remaining members of the board of directors of the Company or (y)
nominated for election by a majority of the remaining members of the
board of directors of the Company and thereafter elected as directors
by the shareholders of the Company); or
(h) The Company or any of its ERISA Affiliates shall incur, or
shall be reasonably likely to incur liability in excess of $25,000,000
in the aggregate as a result of one or more of the following: (i) the
occurrence of any ERISA Event; (ii) the partial or complete withdrawal
of the Company or any of its ERISA Affiliates from a Multiemployer
Plan; or (iii) the reorganization or termination of a Multiemployer
Plan;
(i) so long as any Subsidiary of the Company is a Designated
Subsidiary, any provision of Article VII shall for any reason cease to
be valid and binding on or enforceable against the Company, or the
Company shall so state in writing;
then, and in any such event, the Agent (i) shall at the request, or may with the
consent, of the Required Lenders, by notice to the Borrowers, declare the
obligation of each Lender to make Advances (other than Advances by an Issuing
Bank or a Lender pursuant to Section 2.03(c)) and of the Issuing Banks to issue
Letters of Credit to be terminated, whereupon the same shall forthwith
terminate, and (ii) shall at the request, or may with the consent, of the
Required Lenders, by notice to the Borrowers, declare the Advances, all interest
thereon and all other amounts payable under this Agreement to be forthwith due
and payable, whereupon the Advances, all such interest and all such amounts
shall become and be forthwith due and payable, without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly waived
by each Borrower; provided, however, that in the event of an actual or deemed
entry of an order for relief with respect to the Company or any other Borrower
under the Federal Bankruptcy Code, (A) the obligation of each Lender to make
Advances (other than Advances by an Issuing Bank or a Lender pursuant to Section
2.03(c)) and of the Issuing Banks to issue Letters of Credit shall automatically
be terminated and (B) the Advances, all such interest and all such amounts shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
each Borrower.
SECTION 6.02. Actions in Respect of the Letters of Credit upon
Default. If any Event of Default shall have occurred and be continuing, the
Agent may with the consent, or shall at the request, of the Required Lenders,
irrespective of whether it is taking any of the actions described in Section
6.01 or otherwise, make demand upon the Borrowers to, and forthwith upon such
demand the Borrowers will, (a) pay to the Agent on behalf of the Lenders in same
day funds at the Agent's office designated in such demand, for deposit in the
L/C Cash Deposit Account, an amount equal to the aggregate Available Amount of
all Letters of Credit then outstanding or (b) make such other arrangements in
respect of the outstanding Letters of Credit as shall be acceptable to the
Revolving Credit Lenders having at least 51% of the Revolving Credit Commitments
and not more disadvantageous to the Borrowers than clause (a); provided,
however, that in the event of an actual or deemed entry of an order for relief
with respect to any Borrower under the Federal Bankruptcy Code, an amount equal
to the aggregate Available Amount of all outstanding Letters of Credit shall be
immediately due and payable to the Agent for the account of the Lenders without
notice to or demand upon the Borrowers, which are expressly waived by each
Borrower, to be held in the L/C Cash Deposit Account. If at any time an Event of
Default is continuing the Agent determines that any funds held in the L/C Cash
Deposit Account are subject to any right or claim of any Person other than the
Agent and the Lenders or that the total amount of such funds is less than the
aggregate Available Amount of all Letters of Credit, the Borrowers will,
forthwith upon demand by the Agent, pay to the Agent, as additional funds to be
deposited and held in the L/C Cash Deposit Account, an amount equal to the
excess of (a) such aggregate Available Amount over (b) the total amount of
funds, if any, then held in the L/C Cash Deposit Account that the Agent
determines to be free and clear of any such right and claim. Upon the drawing of
any Letter of Credit, to the extent funds are on deposit in the L/C Cash Deposit
Account, such funds shall be applied to reimburse the Issuing Banks to the
extent permitted by applicable law. After all such Letters of Credit shall have
expired or been fully drawn upon and all other obligations of the Borrowers
hereunder and under the Notes shall have been paid in full, the balance, if any,
in such LC Cash Deposit Account shall be returned to the Borrowers.
ARTICLE VII
GUARANTY
SECTION 7.01. Unconditional Guaranty. The Company hereby
absolutely, unconditionally and irrevocably guarantees the punctual payment when
due, whether at scheduled maturity or on any date of a required prepayment or by
acceleration, demand or otherwise, of all obligations of each other Borrower now
or hereafter existing under or in respect of this Agreement and the Notes
(including, without limitation, any extensions, modifications, substitutions,
amendments or renewals of any or all of the foregoing obligations), whether
direct or indirect, absolute or contingent, and whether for principal, interest,
premiums, fees, indemnities, contract causes of action, costs, expenses or
otherwise (such obligations being the "Guaranteed Obligations"), and agrees to
pay any and all expenses (including, without limitation, reasonable fees and
expenses of counsel) incurred by the Agent or any Lender in enforcing any rights
under this Agreement. Without limiting the generality of the foregoing, the
Company's liability shall extend to all amounts that constitute part of the
Guaranteed Obligations and would be owed by such Borrower to the Agent or any
Lender under or in respect of this Agreement and the Notes but for the fact that
they are unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving such Borrower.
SECTION 7.02. Guaranty Absolute. (a) The Company guarantees
that the Guaranteed Obligations will be paid strictly in accordance with the
terms of this Agreement and the Notes, regardless of any law, regulation or
order now or hereafter in effect in any jurisdiction affecting any of such terms
or the rights of the Agent or any Lender with respect thereto. The obligations
of the Company under or in respect of this Guaranty are independent of the
Guaranteed Obligations or any other obligations of any other Borrower under or
in respect of this Agreement and the Notes, and a separate action or actions may
be brought and prosecuted against the Company to enforce this Guaranty,
irrespective of whether any action is brought against any Borrower or whether
any Borrower is joined in any such action or actions. The liability of the
Company under this Guaranty shall be irrevocable, absolute and unconditional
irrespective of, and the Company hereby irrevocably waives any defenses it may
now have or hereafter acquire in any way relating to, any or all of the
following:
(a) any lack of validity or enforceability of this Agreement,
any Note or any agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Guaranteed Obligations or any
other obligations of any Borrower under or in respect of this Agreement
and the Notes, or any other amendment or waiver of or any consent to
departure from this Agreement or any Note, including, without
limitation, any increase in the Guaranteed Obligations resulting from
the extension of additional credit to any Borrower or any of its
Subsidiaries or otherwise;
(c) any taking, exchange, release or non-perfection of any
collateral, or any taking, release or amendment or waiver of, or
consent to departure from, any other guaranty, for all or any of the
Guaranteed Obligations;
(d) any manner of application of any collateral, or proceeds
thereof, to all or any of the Guaranteed Obligations, or any manner of
sale or other disposition of any collateral for all or any of the
Guaranteed Obligations or any other obligations of any Borrower under
this Agreement and the Notes or any other assets of any Borrower or any
of its Subsidiaries;
(e) any change, restructuring or termination of the corporate
structure or existence of any Borrower or any of its Subsidiaries;
(f) any failure of the Agent or any Lender to disclose to the
Company any information relating to the business, condition (financial
or otherwise), operations, performance, properties or prospects of any
Borrower now or hereafter known to the Agent or such Lender (the
Company waiving any duty on the part of the Agent and the Lenders to
disclose such information);
(g) the failure of any other Person to execute or deliver this
Guaranty or any other guaranty or agreement or the release or reduction
of liability of the Company or other guarantor or surety with respect
to the Guaranteed Obligations; or
(h) any other circumstance (including, without limitation, any
statute of limitations) or any existence of or reliance on any
representation by the Agent or any Lender that might otherwise
constitute a defense available to, or a discharge of, any Borrower or
any other guarantor or surety.
This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Guaranteed Obligations is rescinded
or must otherwise be returned by the Agent or any Lender or any other Person
upon the insolvency, bankruptcy or reorganization of any Borrower or otherwise,
all as though such payment had not been made.
SECTION 7.03. Waivers and Acknowledgments. (a) The Company
hereby unconditionally and irrevocably waives promptness, diligence, notice of
acceptance, presentment, demand for performance, notice of nonperformance,
default, acceleration, protest or dishonor and any other notice with respect to
any of the Guaranteed Obligations and this Guaranty and any requirement that the
Agent or any Lender protect, secure, perfect or insure any Lien or any property
subject thereto or exhaust any right or take any action against any Borrower or
any other Person or any collateral.
(b) The Company hereby unconditionally and irrevocably waives
any right to revoke this Guaranty and acknowledges that this Guaranty
is continuing in nature and applies to all Guaranteed Obligations,
whether existing now or in the future.
(c) The Company hereby unconditionally and irrevocably waives
(i) any defense arising by reason of any claim or defense based upon an
election of remedies by the Agent or any Lender that in any manner
impairs, reduces, releases or otherwise adversely affects the
subrogation, reimbursement, exoneration, contribution or
indemnification rights of the Company or other rights of the Company to
proceed against any Borrower, any other guarantor or any other Person
or any collateral and (ii) any defense based on any right of set-off or
counterclaim against or in respect of the obligations of the Company
hereunder.
(d) The Company hereby unconditionally and irrevocably waives
any duty on the part of the Agent or any Lender to disclose to the
Company any matter, fact or thing relating to the business, condition
(financial or otherwise), operations, performance, properties or
prospects of any Borrower or any of its Subsidiaries now or hereafter
known by the Agent or such Lender.
(e) The Company acknowledges that it will receive substantial
direct and indirect benefits from the financing arrangements
contemplated by this Agreement and the Notes and that the waivers set
forth in Section 7.02 and this Section 7.03 are knowingly made in
contemplation of such benefits.
SECTION 7.04. Subrogation. The Company hereby unconditionally
and irrevocably agrees not to exercise any rights that it may now have or
hereafter acquire against any Borrower or any other insider guarantor that arise
from the existence, payment, performance or enforcement of the Company's
obligations under or in respect of this Guaranty, including, without limitation,
any right of subrogation, reimbursement, exoneration, contribution or
indemnification and any right to participate in any claim or remedy of the Agent
or any Lender against any Borrower or any other insider guarantor or any
collateral, 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 any Borrower or any other insider guarantor, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right, unless and until
all of the Guaranteed Obligations and all other amounts payable under this
Guaranty shall have been paid in full in cash, all Letters of Credit shall have
expired or been terminated and the Commitments shall have expired or been
terminated. If any amount shall be paid to the Company in violation of the
immediately preceding sentence at any time prior to the latest of (a) the
payment in full in cash of the Guaranteed Obligations and all other amounts
payable under this Guaranty, (b) the Termination Date and (c) the latest date of
expiration or termination of all Letters of Credit, such amount shall be
received and held in trust for the benefit of the Agent and the Lenders, shall
be segregated from other property and funds of the Company and shall forthwith
be paid or delivered to the Agent in the same form as so received (with any
necessary endorsement or assignment) to be credited and applied to the
Guaranteed Obligations and all other amounts payable under this Guaranty,
whether matured or unmatured, in accordance with the terms of this Agreement and
the Notes, or to be held as collateral for any Guaranteed Obligations or other
amounts payable under this Guaranty thereafter arising. If (i) the Company shall
make payment to the Agent or any Lender of all or any part of the Guaranteed
Obligations, (ii) all of the Guaranteed Obligations and all other amounts
payable under this Guaranty shall have been paid in full in cash, (iii) the
Termination Date shall have occurred and (iv) all Letters of Credit shall have
expired or been terminated, the Agent and the Lenders will, at the Company's
request and expense, execute and deliver to the Company appropriate documents,
without recourse and without representation or warranty, necessary to evidence
the transfer by subrogation to the Company of an interest in the Guaranteed
Obligations resulting from such payment made by the Company pursuant to this
Guaranty.
SECTION 7.05. Subordination. The Company hereby subordinates
any and all debts, liabilities and other obligations owed to the Company by any
Borrower (the "Subordinated Obligations") to the Guaranteed Obligations to the
extent and in the manner hereinafter set forth in this Section 7.05:
(a) Prohibited Payments, Etc. Except during the continuance of
an Event of Default under (including the commencement and continuation
of any proceeding under any Bankruptcy Law relating to such Borrower),
the Company may receive regularly scheduled payments from such Borrower
on account of the Subordinated Obligations. After the occurrence and
during the continuance of any Event of Default (including the
commencement and continuation of any proceeding under any Bankruptcy
Law relating to such Borrower), however, unless the Required Lenders
otherwise agree, the Company shall not demand, accept or take any
action to collect any payment on account of the Subordinated
Obligations.
(b) Prior Payment of Guaranteed Obligations. In any proceeding
under any Bankruptcy Law relating to such Borrower, the Company agrees
that the Agent and the Lenders shall be entitled to receive payment in
full in cash of all Guaranteed Obligations (including all interest and
expenses accruing after the commencement of a proceeding under any
Bankruptcy Law, whether or not constituting an allowed claim in such
proceeding ("Post Petition Interest")) before the Company receives
payment of any Subordinated Obligations.
(c) Turn-Over. After the occurrence and during the continuance
of any Event of Default (including the commencement and continuation of
any proceeding under any Bankruptcy Law relating to such Borrower), the
Company shall, if the Agent so requests, collect, enforce and receive
payments on account of the Subordinated Obligations as trustee for the
Agent and the Lenders and deliver such payments to the Agent on account
of the Guaranteed Obligations (including all Post Petition Interest),
together with any necessary endorsements or other instruments of
transfer, but without reducing or affecting in any manner the liability
of the Company under the other provisions of this Guaranty.
(d) Agent Authorization. After the occurrence and during the
continuance of any Event of Default (including the commencement and
continuation of any proceeding under any Bankruptcy Law relating to
such Borrower), the Agent is authorized and empowered (but without any
obligation to so do), in its discretion, (i) in the name of the
Company, to collect and enforce, and to submit claims in respect of,
Subordinated Obligations and to apply any amounts received thereon to
the Guaranteed Obligations (including any and all Post Petition
Interest), and (ii) to require the Company (A) to collect and enforce,
and to submit claims in respect of, Subordinated Obligations and (B) to
pay any amounts received on such obligations to the Agent for
application to the Guaranteed Obligations (including any and all Post
Petition Interest).
SECTION 7.06. Continuing Guaranty; Assignments. This Guaranty
is a continuing guaranty and shall (a) remain in full force and effect until the
latest of (i) the payment in full in cash of the Guaranteed Obligations and all
other amounts payable under this Guaranty, (ii) the Termination Date and (iii)
the latest date of expiration or termination of all Letters of Credit, (b) be
binding upon the Company, its successors and assigns and (c) inure to the
benefit of and be enforceable by the Agent and the Lenders and their successors,
transferees and assigns. Without limiting the generality of clause (c) of the
immediately preceding sentence, the Agent or any Lender may assign or otherwise
transfer all or any portion of its rights and obligations under this Agreement
(including, without limitation, all or any portion of its Commitments, the
Advances owing to it and the Note or Notes held by it) to any other Person, and
such other Person shall thereupon become vested with all the benefits in respect
thereof granted to the Agent or such Lender herein or otherwise, in each case as
and to the extent provided in Section 9.07.
ARTICLE VIII
THE AGENT
SECTION 8.01. Authorization and Action. Each Lender (in its
capacities as a Lender and Issuing Bank, as applicable) hereby appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers and discretion under this Agreement as are delegated to the Agent by
the terms hereof, together with such powers and discretion as are reasonably
incidental thereto. As to any matters not expressly provided for by this
Agreement (including, without limitation, enforcement or collection of the
Notes), the Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Required Lenders, and such instructions shall be binding upon all Lenders
and all holders of Notes; provided, however, that the Agent shall not be
required to take any action that exposes the Agent to personal liability or that
is contrary to this Agreement or applicable law. The Agent agrees to give to
each Lender prompt notice of each notice given to it by the Company or any other
Borrower pursuant to the terms of this Agreement.
SECTION 8.02. Agent's Reliance, Etc. Neither the Agent nor any
of its directors, officers, agents or employees shall be liable for any action
taken or omitted to be taken by it or them under or in connection with this
Agreement, except for its or their own gross negligence or willful misconduct.
Without limitation of the generality of the foregoing, the Agent: (i) may treat
the Lender that made any Advance as the holder of the Debt resulting therefrom
until the Agent receives and accepts an Assumption Agreement entered into by an
Assuming Lender as provided in Section 2.18 or an Assignment and Acceptance
entered into by such Lender, as assignor, and an Eligible Assignee, as assignee,
as provided in Section 9.07; (ii) may consult with legal counsel (including
counsel for the Company), independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, warranties or
representations (whether written or oral) made in or in connection with this
Agreement; (iv) shall not have any duty to ascertain or to inquire as to the
performance, observance or satisfaction of any of the terms, covenants or
conditions of this Agreement on the part of any Borrower or the existence at any
time of any Default or to inspect the property (including the books and records)
of the Company or any other Borrower; (v) shall not be responsible to any Lender
for the due execution, legality, validity, enforceability, genuineness,
sufficiency or value of, or the perfection or priority of any lien or security
interest created or purported to be created under or in connection with, this
Agreement or any other instrument or document furnished pursuant hereto; and
(vi) shall incur no liability under or in respect of this Agreement by acting
upon any notice, consent, certificate or other instrument or writing (which may
be by telecopier or telegram) believed by it to be genuine and signed or sent by
the proper party or parties.
SECTION 8.03. Citibank and Affiliates. With respect to its
Commitments, the Advances made by it and the Note issued to it, Citibank shall
have the same rights and powers under this Agreement as any other Lender and may
exercise the same as though it were not the Agent; and the term "Lender" or
"Lenders" shall, unless otherwise expressly indicated, include Citibank in its
individual capacity. Citibank and its Affiliates may accept deposits from, lend
money to, act as trustee under indentures of, accept investment banking
engagements from and generally engage in any kind of business with, the Company,
any of its Subsidiaries and any Person who may do business with or own
securities of the Company or any such Subsidiary, all as if Citibank were not
the Agent and without any duty to account therefor to the Lenders. The Agent
shall have no duty to disclose any information obtained or received by it or any
of its Affiliates relating to the Company or any of its Subsidiaries to the
extent such information was obtained or received in any capacity other than as
Agent.
SECTION 8.04. Lender Credit Decision. Each Lender acknowledges
that it has, independently and without reliance upon the Agent or any other
Lender and based on the financial statements referred to in Section 4.01 and
such other documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the Agent or
any other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
SECTION 8.05. Indemnification. (a) Each Lender severally
agrees to indemnify the Agent (to the extent not reimbursed by the Company) from
and against such Lender's Ratable Share of any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever that may be imposed on, incurred
by, or asserted against the Agent in its capacity as such, in any way relating
to or arising out of this Agreement or any action taken or omitted by the Agent
under this Agreement (collectively, the "Indemnified Costs"), provided that no
Lender shall be liable for any portion of the Indemnified Costs resulting from
the Agent's gross negligence or willful misconduct. Without limitation of the
foregoing, each Lender agrees to reimburse the Agent promptly upon demand for
its ratable share of any out-of-pocket expenses (including reasonable counsel
fees) incurred by the Agent in connection with the preparation, execution,
delivery, administration, modification, amendment or enforcement (whether
through negotiations, legal proceedings or otherwise) of, or legal advice in
respect of rights or responsibilities under, this Agreement, to the extent that
the Agent is not reimbursed for such expenses by the Company. In the case of any
investigation, litigation or proceeding giving rise to any Indemnified Costs,
this Section 8.05 applies whether any such investigation, litigation or
proceeding is brought by the Agent, any Lender or a third party.
(b) Each Lender severally agrees to indemnify the Issuing
Banks (to the extent not promptly reimbursed by the Company) from and against
such Lender's Ratable Share of any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever that may be imposed on, incurred by, or
asserted against any such Issuing Bank in its capacity as such, in any way
relating to or arising out of the Loan Documents or any action taken or omitted
by such Issuing Bank hereunder or in connection herewith; provided, however,
that no Lender shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from such Issuing Bank's gross negligence or willful
misconduct. Without limitation of the foregoing, each Lender agrees to reimburse
any such Issuing Bank promptly upon demand for its Ratable Share of any costs
and expenses (including, without limitation, reasonable fees and expenses of
counsel) payable by the Company under Section 9.04, to the extent that such
Issuing Bank is not promptly reimbursed for such costs and expenses by the
Company.
(c) The failure of any Lender to reimburse the Agent or any
Issuing Bank promptly upon demand for its ratable share of any amount required
to be paid by the Lenders to the Agent as provided herein shall not relieve any
other Lender of its obligation hereunder to reimburse the Agent or any Issuing
Bank for its ratable share of such amount, but no Lender shall be responsible
for the failure of any other Lender to reimburse the Agent or any Issuing Bank
for such other Lender's ratable share of such amount. Without prejudice to the
survival of any other agreement of any Lender hereunder, the agreement and
obligations of each Lender contained in this Section 8.05 shall survive the
payment in full of principal, interest and all other amounts payable hereunder
and under the Notes. Each of the Agent and each Issuing Bank agrees to return to
the Lenders their respective ratable shares of any amounts paid under this
Section 8.05 that are subsequently reimbursed by the Company.
SECTION 8.06. Successor Agent. The Agent may resign at any
time by giving written notice thereof to the Lenders and the Company and may be
removed at any time with or without cause by the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint a
successor Agent. If no successor Agent shall have been so appointed by the
Required Lenders, and shall have accepted such appointment, within 30 days after
the retiring Agent's giving of notice of resignation or the Required Lenders'
removal of the retiring Agent, then the retiring Agent may, on behalf of the
Lenders, appoint a successor Agent, which shall be a commercial bank organized
under the laws of the United States of America or of any State thereof and
having a combined capital and surplus of at least $500,000,000. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, discretion, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations under this
Agreement. After any retiring Agent's resignation or removal hereunder as Agent,
the provisions of this Article VIII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement.
SECTION 8.07. Sub-Agent. The Sub-Agent has been designated
under this Agreement to carry out duties of the Agent. The Sub-Agent shall be
subject to each of the obligations in this Agreement to be performed by the
Sub-Agent, and each of the Company, each other Borrower and the Lenders agrees
that the Sub-Agent shall be entitled to exercise each of the rights and shall be
entitled to each of the benefits of the Agent under this Agreement as relate to
the performance of its obligations hereunder.
SECTION 8.08. Other Agents. Each Lender hereby acknowledges
that none of the syndication agent, the co-documentation agents nor any other
Lender designated as any "Agent" on the signature pages hereof has any liability
hereunder other than in its capacity as a Lender.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Notes, nor consent to any departure by any
Borrower therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Required Lenders, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided, however, that (a) no amendment, waiver or consent
shall, unless in writing and signed by all the Lenders, do any of the following:
(i) waive any of the conditions specified in Section 3.01, (ii) change the
percentage of the Commitments or of the aggregate unpaid principal amount of the
Advances, or the number of Lenders, that shall be required for the Lenders or
any of them to take any action hereunder, (iii) release the Company from its
obligations under Article VII or (iv) amend this Section 9.01; and (b) no
amendment, waiver or consent shall, unless in writing and signed by the Required
Lenders and each Lender that is directly affected by such amendment, waiver or
consent (i) increase the Commitments of such Lender, (ii) reduce the principal
of, or interest on, the Advances or any fees or other amounts payable hereunder
to such Lender, (iii) postpone any date fixed for any payment of principal of,
or interest on, the Advances or any fees or other amounts payable hereunder to
such Lender or (iv) release the Company from any of its obligations under
Section 7.01; and provided further that (x) no amendment, waiver or consent
shall, unless in writing and signed by the Agent in addition to the Lenders
required above to take such action, affect the rights or duties of the Agent
under this Agreement or any Note and (y) no amendment, waiver or consent shall,
unless in writing and signed by the Issuing Banks in addition to the Lenders
required above to take such action, adversely affect the rights or obligations
of the Issuing Banks in their capacities as such under this Agreement.
SECTION 9.02. Notices, Etc. (a) All notices and other
communications provided for hereunder shall be either (x) in writing (including
telecopier or telegraphic communication) and mailed, telecopied, telegraphed or
delivered or (y) as and to the extent set forth in Section 9.02(b) and in the
proviso to this Section 9.02(a), if to the Company or any other Borrower, at the
Company's address at Susquehanna Commerce Center, 221 West Philadelphia Street,
York, Pennsylvania 17405-0872, Attention: Secretary, with a copy to Attention:
Treasurer; if to any Initial Lender, at its Domestic Lending Office specified
opposite its name on Schedule I hereto; if to any other Lender, at its Domestic
Lending Office specified in the Assumption Agreement or the Assignment and
Acceptance pursuant to which it became a Lender; and if to the Agent, at its
address at Two Penns Way, New Castle, Delaware, 19720, Attention: Bank Loan
Syndications Department; or, as to the Company or the Agent, at such other
address as shall be designated by such party in a written notice to the other
parties and, as to each other party, at such other address as shall be
designated by such party in a written notice to the Company and the Agent,
provided that materials required to be delivered pursuant to Section 5.01(i)(i),
(ii) or (iv) shall be delivered to the Agent as specified in Section 9.02(b) or
as otherwise specified to any Borrower by the Agent. All such notices and
communications shall, when mailed, telecopied, telegraphed or e-mailed, be
effective when deposited in the mails, telecopied, delivered to the telegraph
company or confirmed by e-mail, respectively, except that notices and
communications to the Agent pursuant to Article II, III or VIII shall not be
effective until received by the Agent. Delivery by telecopier of an executed
counterpart of any amendment or waiver of any provision of this Agreement or the
Notes or of any Exhibit hereto to be executed and delivered hereunder shall be
effective as delivery of a manually executed counterpart thereof.
(b) So long as Citibank or any of its Affiliates is the Agent,
materials required to be delivered pursuant to Section 5.01(i)(i), (ii) and (iv)
shall be delivered to the Agent in an electronic medium in a format acceptable
to the Agent and the Lenders by e-mail at oploanswebadmin@citigroup.com. The
Company agrees that the Agent may make such materials, as well as any other
written information, documents, instruments and other material relating to the
Company, any of its Subsidiaries or any other materials or matters relating to
this Agreement, the Notes or any of the transactions contemplated hereby
(collectively, the "Communications") available to the Lenders by posting such
notices on Intralinks or a substantially similar electronic system (the
"Platform"). The Company acknowledges that (i) the distribution of material
through an electronic medium is not necessarily secure and that there are
confidentiality and other risks associated with such distribution, (ii) the
Platform is provided "as is" and "as available" and (iii) neither the Agent nor
any of its Affiliates warrants the accuracy, adequacy or completeness of the
Communications or the Platform and each expressly disclaims liability for errors
or omissions in the Communications or the Platform. No warranty of any kind,
express, implied or statutory, including, without limitation, any warranty of
merchantability, fitness for a particular purpose, non-infringement of third
party rights or freedom from viruses or other code defects, is made by the Agent
or any of its Affiliates in connection with the Platform.
(c) Each Lender agrees that notice to it (as provided in the
next sentence) (a "Notice") specifying that any Communications have been posted
to the Platform shall constitute effective delivery of such information,
documents or other materials to such Lender for purposes of this Agreement;
provided that if requested by any Lender the Agent shall deliver a copy of the
Communications to such Lender by email or telecopier. Each Lender agrees (i) to
notify the Agent in writing of such Lender's e-mail address to which a Notice
may be sent by electronic transmission (including by electronic communication)
on or before the date such Lender becomes a party to this Agreement (and from
time to time thereafter to ensure that the Agent has on record an effective
e-mail address for such Lender) and (ii) that any Notice may be sent to such
e-mail address.
SECTION 9.03. No Waiver; Remedies. No failure on the part of
any Lender or the Agent to exercise, and no delay in exercising, any right
hereunder or under any Note shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
SECTION 9.04. Costs and Expenses. (a) The Company agrees to
pay on demand all costs and expenses of the Agent in connection with the
preparation, execution, delivery, administration, modification and amendment of
this Agreement, the Notes and the other documents to be delivered hereunder,
including, without limitation, (A) all due diligence, syndication (including
printing, distribution and bank meetings), transportation, computer,
duplication, appraisal, consultant, and audit expenses and (B) the reasonable
fees and expenses of counsel for the Agent with respect thereto and with respect
to advising the Agent as to its rights and responsibilities under this
Agreement. The Company further agrees to pay on demand all costs and expenses of
the Agent and the Lenders, if any (including, without limitation, reasonable
counsel fees and expenses), in connection with the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Agreement, the Notes and
the other documents to be delivered hereunder, including, without limitation,
reasonable fees and expenses of counsel for the Agent and each Lender in
connection with the enforcement of rights under this Section 9.04(a).
(b) The Company agrees to indemnify and hold harmless the
Agent and each Lender and each of their Affiliates and their officers,
directors, employees, agents and advisors (each, an "Indemnified Party") from
and against any and all claims, damages, losses, liabilities and expenses
(including, without limitation, reasonable fees and expenses of counsel)
incurred by or asserted or awarded against any Indemnified Party, in each case
arising out of or in connection with or by reason of (including, without
limitation, in connection with any investigation, litigation or proceeding or
preparation of a defense in connection therewith) (i) the Notes, this Agreement,
any of the transactions contemplated herein or the actual or proposed use of the
proceeds of the Advances or Letters of Credit, (ii) the actual or alleged
presence of Hazardous Materials on any property of the Company or any of its
Subsidiaries or any Environmental Action relating in any way to the Company or
any of its Subsidiaries, except to the extent such claim, damage, loss,
liability or expense is found in a final, non-appealable judgment by a court of
competent jurisdiction to have resulted from such Indemnified Party's gross
negligence or willful misconduct or (iii) any civil penalty or fine assessed by
OFAC against, and all reasonable costs and expenses (including counsel fees and
disbursements) incurred in connection with defense thereof, by the Agent or any
Lender as a result of conduct of the Borrower that violates a sanction enforced
by OFAC. In the case of an investigation, litigation or other proceeding to
which the indemnity in this Section 9.04(b) applies, such indemnity shall be
effective whether or not such investigation, litigation or proceeding is brought
by the Company, its directors, equityholders or creditors or an Indemnified
Party or any other Person, whether or not any Indemnified Party is otherwise a
party thereto and whether or not the transactions contemplated hereby are
consummated. The Company also agrees not to assert any claim for special,
indirect, consequential or punitive damages against the Agent, any Lender, any
of their Affiliates, or any of their respective directors, officers, employees,
attorneys and agents, on any theory of liability, arising out of or otherwise
relating to the Notes, this Agreement, any of the transactions contemplated
herein or the actual or proposed use of the proceeds of the Advances.
(c) If any payment of principal of, or Conversion of, any
Eurocurrency Rate Advance is made by any Borrower to or for the account of a
Lender (i) other than on the last day of the Interest Period for such Advance,
as a result of a payment or Conversion pursuant to Section 2.08, 2.10 or 2.12,
acceleration of the maturity of the Notes pursuant to Section 6.01 or for any
other reason, or by an Eligible Assignee to a Lender other than on the last day
of the Interest Period for such Advance upon an assignment of rights and
obligations under this Agreement pursuant to Section 9.07 as a result of a
demand by the Company pursuant to Section 9.07(a) or (ii) as a result of a
payment or Conversion pursuant to Section 2.08, 2.10 or 2.12, such Borrower
shall, upon demand by such Lender (with a copy of such demand to the Agent), pay
to the Agent for the account of such Lender any amounts required to compensate
such Lender for any additional losses, costs or expenses that it may reasonably
incur as a result of such payment or Conversion, including, without limitation,
any loss (including loss of anticipated profits), cost or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired by
any Lender to fund or maintain such Advance. If the amount of the Committed
Currency purchased by any Lender in the case of a Conversion or exchange of
Advances in the case of Section 2.08 or 2.12 exceeds the sum required to satisfy
such Lender's liability in respect of such Advances, such Lender agrees to remit
to the applicable Borrower such excess.
(d) Without prejudice to the survival of any other agreement
of the Borrowers hereunder, the agreements and obligations of the Borrowers
contained in Sections 2.11, 2.14 and 9.04 shall survive the payment in full of
principal, interest and all other amounts payable hereunder and under the Notes.
SECTION 9.05. Right of Set-off. Upon (i) the occurrence and
during the continuance of any Event of Default and (ii) the making of the
request or the granting of the consent specified by Section 6.01 to authorize
the Agent to declare the Advances due and payable pursuant to the provisions of
Section 6.01, each Lender and each of its Affiliates is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by such
Lender or such Affiliate to or for the credit or the account of the Company or
any Borrower against any and all of the obligations of the Company or any
Borrower now or hereafter existing under this Agreement and the Note held by
such Lender, whether or not such Lender shall have made any demand under this
Agreement or such Note and although such obligations may be unmatured, provided
that the deposits and other indebtedness owing by any Lender to the Company or
any Borrower organized under the laws of any political subdivision of the United
States shall be set-off prior to the set-off of the deposits or other
indebtedness owed to any other Borrower. Each Lender agrees promptly to notify
the Company or the applicable Borrower after any such set-off and application,
provided that the failure to give such notice shall not affect the validity of
such set-off and application. The rights of each Lender and its Affiliates under
this Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) that such Lender and its Affiliates may
have.
SECTION 9.06. Binding Effect. This Agreement shall become
effective (other than Section 2.01, which shall only become effective upon
satisfaction of the conditions precedent set forth in Section 3.01) when it
shall have been executed by the Company and the Agent and when the Agent shall
have been notified by each Initial Lender that such Initial Lender has executed
it and thereafter shall be binding upon and inure to the benefit of the Company,
the Agent and each Lender and their respective successors and assigns, except
that neither the Company nor any other Borrower shall have the right to assign
its rights hereunder or any interest herein without the prior written consent of
the Lenders.
SECTION 9.07. Assignments and Participations. (a) Each Lender
may with the consent of each Issuing Bank (which consent shall not be
unreasonably withheld or delayed) and, if demanded by the Company (so long as no
Default shall have occurred and be continuing and following a demand by such
Lender pursuant to Section 2.11 or 2.14) upon at least five Business Days'
notice to such Lender and the Agent, will assign to one or more Persons all or a
portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Revolving Credit Commitment, its Unissued
Letter of Credit Commitment, the Advances owing to it, its participations in
Letters of Credit and the Note or Notes held by it); provided, however, that (i)
each such assignment shall be of a constant, and not a varying, percentage of
all rights and obligations under and in respect of one or more of the
Facilities, (ii) except in the case of an assignment to a Person that,
immediately prior to such assignment, was a Lender or an assignment of all of a
Lender's rights and obligations under this Agreement, the amount of (x) the
Revolving Credit Commitment of the assigning Lender being assigned pursuant to
each such assignment (determined as of the date of the Assignment and Acceptance
with respect to such assignment) shall in no event be less than $10,000,000 or
an integral multiple of $1,000,000 in excess thereof and (y) the Unissued Letter
of Credit Commitment of the assigning Lender being assigned pursuant to each
such assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall in no event be less than $5,000,000 or an
integral multiple of $1,000,000 in excess thereof, in each case, unless the
Company and the Agent otherwise agree (iii) each such assignment shall be to an
Eligible Assignee, (iv) each such assignment made as a result of a demand by the
Company pursuant to this Section 9.07(a) shall be arranged by the Company after
consultation with the Agent and shall be either an assignment of all of the
rights and obligations of the assigning Lender under this Agreement or an
assignment of a portion of such rights and obligations made concurrently with
another such assignment or other such assignments that together cover all of the
rights and obligations of the assigning Lender under this Agreement, (v) no
Lender shall be obligated to make any such assignment as a result of a demand by
the Company pursuant to this Section 9.07(a) unless and until such Lender shall
have received one or more payments from either the Borrowers or one or more
Eligible Assignees in an aggregate amount at least equal to the aggregate
outstanding principal amount of the Advances owing to such Lender, together with
accrued interest thereon to the date of payment of such principal amount and all
other amounts payable to such Lender under this Agreement, and (vi) the parties
to each such assignment shall execute and deliver to the Agent, for its
acceptance and recording in the Register, an Assignment and Acceptance, together
with any Note subject to such assignment and a processing and recordation fee of
$3,500 payable by the parties to each such assignment, provided, however, that
in the case of each assignment made as a result of a demand by the Company, such
recordation fee shall be payable by the Company except that no such recordation
fee shall be payable in the case of an assignment made at the request of the
Company to an Eligible Assignee that is an existing Lender. Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, (x) the assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, have the rights and
obligations of a Lender hereunder and (y) the Lender assignor thereunder shall,
to the extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment and Acceptance, relinquish its rights (other than
its rights under Sections 2.11, 2.14 and 9.04 to the extent any claim thereunder
relates to an event arising prior to such assignment) and be released from its
obligations (other than its obligations under Section 8.05 to the extent any
claim thereunder relates to an event arising prior to such assignment) under
this Agreement (and, in the case of an Assignment and Acceptance covering all or
the remaining portion of an assigning Lender's rights and obligations under this
Agreement, such Lender shall cease to be a party hereto).
(b) By executing and delivering an Assignment and Acceptance,
the Lender assignor thereunder and the assignee thereunder confirm to and agree
with each other and the other parties hereto as follows: (i) other than as
provided in such Assignment and Acceptance, such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of, or the perfection or priority of any lien or security
interest created or purported to be created under or in connection with, this
Agreement or any other instrument or document furnished pursuant hereto; (ii)
such assigning Lender makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Company or any
other Borrower or the performance or observance by the Company or any other
Borrower of any of its obligations under this Agreement or any other instrument
or document furnished pursuant hereto; (iii) such assignee confirms that it has
received a copy of this Agreement, together with copies of the financial
statements referred to in Section 4.01 and such other documents and information
as it has deemed appropriate to make its own credit analysis and decision to
enter into such Assignment and Acceptance; (iv) such assignee will,
independently and without reliance upon the Agent, such assigning Lender or any
other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement; (v) such assignee confirms that it is an
Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers and discretion
under this Agreement as are delegated to the Agent by the terms hereof, together
with such powers and discretion as are reasonably incidental thereto; and (vii)
such assignee agrees that it will perform in accordance with their terms all of
the obligations that by the terms of this Agreement are required to be performed
by it as a Lender.
(c) Upon its receipt of an Assignment and Acceptance executed
by an assigning Lender and an assignee representing that it is an Eligible
Assignee, together with any Note or Notes subject to such assignment, the Agent
shall, if such Assignment and Acceptance has been completed and is in
substantially the form of Exhibit C hereto, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register and
(iii) give prompt notice thereof to the Company.
(d) The Agent shall maintain at its address referred to in
Section 9.02 a copy of each Assumption Agreement and each Assignment and
Acceptance delivered to and accepted by it and a register for the recordation of
the names and addresses of the Lenders and the Commitment of, and principal
amount of the Advances owing to, each Lender from time to time (the "Register").
The entries in the Register shall be conclusive and binding for all purposes,
absent manifest error, and the Company and the other Borrowers, the Agent and
the Lenders may treat each Person whose name is recorded in the Register as a
Lender hereunder for all purposes of this Agreement. The Register shall be
available for inspection by the Company or any Lender at any reasonable time and
from time to time upon reasonable prior notice.
(e) Each Lender may sell participations to one or more banks
or other entities (other than the Company or any of its Affiliates) in or to all
or a portion of its rights and obligations under this Agreement (including,
without limitation, all or a portion of its Commitment, the Advances owing to it
and any Note or Notes held by it); provided, however, that (i) such Lender's
obligations under this Agreement (including, without limitation, its Commitment
to the Borrowers hereunder) shall remain unchanged, (ii) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations, (iii) such Lender shall remain the holder of any such Note for
all purposes of this Agreement, (iv) the Company , the other Borrowers, the
Agent and the other Lenders shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under this
Agreement and (v) no participant under any such participation shall have any
right to approve any amendment or waiver of any provision of this Agreement or
any Note, or any consent to any departure by the Company or any other Borrower
therefrom, except to the extent that such amendment, waiver or consent would
reduce the principal of, or interest on, the Notes or any fees or other amounts
payable hereunder, in each case to the extent subject to such participation, or
postpone any date fixed for any payment of principal of, or interest on, the
Notes or any fees or other amounts payable hereunder, in each case to the extent
subject to such participation.
(f) Any Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
9.07, disclose to the assignee or participant or proposed assignee or
participant, any information relating to the Company furnished to such Lender by
or on behalf of the Company; provided that, prior to any such disclosure, the
assignee or participant or proposed assignee or participant shall agree to
preserve the confidentiality of any Company Information relating to the Company
received by it from such Lender.
(g) Notwithstanding any other provision set forth in this
Agreement, any Lender may at any time create a security interest in all or any
portion of its rights under this Agreement (including, without limitation, the
Advances owing to it and any Note or Notes held by it) in favor of any Federal
Reserve Bank in accordance with Regulation A of the Board of Governors of the
Federal Reserve System.
SECTION 9.08. Confidentiality. Neither the Agent nor any
Lender may disclose to any Person any confidential, proprietary or non-public
information of the Company furnished to the Agent or the Lenders by the Company
(such information being referred to collectively herein as the "Company
Information"), except that each of the Agent and each of the Lenders may
disclose Company Information (i) to its and its affiliates' employees, officers,
directors, agents and advisors (it being understood that the Persons to whom
such disclosure is made will be informed of the confidential nature of such
Company Information and instructed to keep such Company Information confidential
on substantially the same terms as provided herein), (ii) to the extent
requested by any regulatory authority, (iii) to the extent required by
applicable laws or regulations or by any subpoena or similar legal process, (iv)
to any other party to this Agreement, (v) in connection with the exercise of any
remedies hereunder or any suit, action or proceeding relating to this Agreement
or the enforcement of rights hereunder, (vi) subject to an agreement containing
provisions substantially the same as those of this Section 9.08, to any assignee
or participant or prospective assignee or participant, (vii) to the extent such
Company Information (A) is or becomes generally available to the public on a
non-confidential basis other than as a result of a breach of this Section 9.08
by the Agent or such Lender, or (B) is or becomes available to the Agent or such
Lender on a nonconfidential basis from a source other than the Company and
(viii) with the consent of the Company.
SECTION 9.09. Designated Subsidiaries. (a) Designation. The
Company may at any time, and from time to time, by delivery to the Agent of a
Designation Agreement duly executed by the Company and the respective Subsidiary
and substantially in the form of Exhibit D hereto, designate such Subsidiary as
a "Designated Subsidiary" for purposes of this Agreement and such Subsidiary
shall thereupon become a "Designated Subsidiary" for purposes of this Agreement
and, as such, shall have all of the rights and obligations of a Borrower
hereunder. The Agent shall promptly notify each Lender of each such designation
by the Company and the identity of the respective Subsidiary.
(b) Termination. Upon the indefeasible payment and performance
in full of all of the indebtedness, liabilities and obligations under this
Agreement of any Designated Subsidiary then, so long as at the time no Notice of
Borrowing or Notice of Issuance in respect of such Designated Subsidiary is
outstanding, such Subsidiary's status as a "Designated Subsidiary" shall
terminate upon notice to such effect from the Agent to the Lenders (which notice
the Agent shall give promptly, and only upon its receipt of a request therefor
from the Company). Thereafter, the Lenders shall be under no further obligation
to make any Advance hereunder to such Designated Subsidiary.
SECTION 9.10. Governing Law. This Agreement and the Notes
shall be governed by, and construed in accordance with, the laws of the State of
New York.
SECTION 9.11. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different 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. Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Agreement.
SECTION 9.12. Judgment. (a) If for the purposes of obtaining
judgment in any court it is necessary to convert a sum due hereunder in Dollars
into another currency, the parties hereto agree, to the fullest extent that they
may effectively do so, that the rate of exchange used shall be that at which in
accordance with normal banking procedures the Agent could purchase Dollars with
such other currency at Citibank's principal office in London at 11:00 A.M.
(London time) on the Business Day preceding that on which final judgment is
given.
(b) If for the purposes of obtaining judgment in any court it
is necessary to convert a sum due hereunder in a Committed Currency into
Dollars, the parties agree to the fullest extent that they may effectively do
so, that the rate of exchange used shall be that at which in accordance with
normal banking procedures the Agent could purchase such Committed Currency with
Dollars at Citibank's principal office in London at 11:00 A.M. (London time) on
the Business Day preceding that on which final judgment is given.
(c) The obligation of any Borrower in respect of any sum due
from it in any currency (the "Primary Currency") to any Lender or the Agent
hereunder shall, notwithstanding any judgment in any other currency, be
discharged only to the extent that on the Business Day following receipt by such
Lender or the Agent (as the case may be), of any sum adjudged to be so due in
such other currency, such Lender or the Agent (as the case may be) may in
accordance with normal banking procedures purchase the applicable Primary
Currency with such other currency; if the amount of the applicable Primary
Currency so purchased is less than such sum due to such Lender or the Agent (as
the case may be) in the applicable Primary Currency, each Borrower agrees, as a
separate obligation and notwithstanding any such judgment, to indemnify such
Lender or the Agent (as the case may be) against such loss, and if the amount of
the applicable Primary Currency so purchased exceeds such sum due to any Lender
or the Agent (as the case may be) in the applicable Primary Currency, such
Lender or the Agent (as the case may be) agrees to remit to such Borrower such
excess.
SECTION 9.13. Jurisdiction, Etc. (a) Each of the parties
hereto hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the Notes, or for recognition or enforcement of
any judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such New York State court or, to
the extent permitted by law, in such federal court. Each Designated Subsidiary
hereby agrees that service of process in any such action or proceeding brought
in the any such New York State court or in such federal court may be made upon
the Company and each Designated Subsidiary hereby irrevocably appoints the
Company its authorized agent to accept such service of process, and agrees that
the failure of the Company to give any notice of any such service shall not
impair or affect the validity of such service or of any judgment rendered in any
action or proceeding based thereon. The Company and each Designated Subsidiary
hereby further irrevocably consent to the service of process in any action or
proceeding in such courts by the mailing thereof by any parties hereto by
registered or certified mail, postage prepaid, to the Company at its address
specified pursuant to Section 9.02. Each of the parties hereto agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that any party
may otherwise have to bring any action or proceeding relating to this Agreement
or the Notes in the courts of any jurisdiction. To the extent that each
Designated Subsidiary has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether through service or
notice, attachment prior to judgment, attachment in aid of execution, execution
or otherwise) with respect to itself or its property, each Designated Subsidiary
hereby irrevocably waives such immunity in respect of its obligations under this
Agreement.
(b) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement or the Notes
in any New York State or federal court. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
SECTION 9.14. Substitution of Currency. If a change in any
Committed Currency occurs pursuant to any applicable law, rule or regulation of
any governmental, monetary or multi-national authority, this Agreement
(including, without limitation, the definition of Eurocurrency Rate) will be
amended to the extent determined by the Agent (acting reasonably and in
consultation with the Company) to be necessary to reflect the change in currency
and to put the Lenders and the Borrowers in the same position, so far as
possible, that they would have been in if no change in such Committed Currency
had occurred.
SECTION 9.15. No Liability of the Issuing Banks. The Borrowers
assume all risks of the acts or omissions of any beneficiary or transferee of
any Letter of Credit with respect to its use of such Letter of Credit. Neither
an Issuing Bank nor any of its officers or directors shall be liable or
responsible for: (a) the use that may be made of any Letter of Credit or any
acts or omissions of any beneficiary or transferee in connection therewith; (b)
the validity, sufficiency or genuineness of documents, or of any endorsement
thereon, even if such documents should prove to be in any or all respects
invalid, insufficient, fraudulent or forged; (c) payment by such Issuing Bank
against presentation of documents that do not comply with the terms of a Letter
of Credit, including failure of any documents to bear any reference or adequate
reference to the Letter of Credit; or (d) any other circumstances whatsoever in
making or failing to make payment under any Letter of Credit, except that the
applicable Borrower shall have a claim against such Issuing Bank, and such
Issuing Bank shall be liable to such Borrower, to the extent of any direct, but
not consequential, damages suffered by such Borrower that such Borrower proves
were caused by such Issuing Bank's willful misconduct or gross negligence when
determining whether drafts and other documents presented under a Letter of
Credit comply with the terms thereof. In furtherance and not in limitation of
the foregoing, such Issuing Bank may accept documents that appear on their face
to be in order, without responsibility for further investigation, regardless of
any notice or information to the contrary; provided that nothing herein shall be
deemed to excuse such Issuing Bank if it acts with gross negligence or willful
misconduct in accepting such documents.
SECTION 9.16. Patriot Act Notice. Each Lender and the Agent
(for itself and not on behalf of any Lender) hereby notifies each Borrower that
pursuant to the requirements of the Patriot Act, it is required to obtain,
verify and record information that identifies each Borrower, which information
includes the name and address of each Borrower and other information that will
allow such Lender or the Agent, as applicable, to identify each Borrower in
accordance with the Patriot Act. Each Borrower shall provide such information
and take such actions as are reasonably requested by the Agent or any Lenders in
order to assist the Agent and the Lenders in maintaining compliance with the
Patriot Act or any similar "know your customer" or other similar checks under
all applicable laws and regulations.
SECTION 9.17. Power of Attorney. Each Subsidiary of the
Company may from time to time authorize and appoint the Company as its
attorney-in-fact to execute and deliver (a) any amendment, waiver or consent in
accordance with Section 9.01 on behalf of and in the name of such Subsidiary and
(b) any notice or other communication hereunder, on behalf of and in the name of
such Subsidiary. Such authorization shall become effective as of the date on
which such Subsidiary delivers to the Agent a power of attorney enforceable
under applicable law and any additional information to the Agent as necessary to
make such power of attorney the legal, valid and binding obligation of such
Subsidiary.
SECTION 9.18. Waiver of Jury Trial. Each of the Company, the
other Borrowers, the Agent and the Lenders hereby irrevocably waives all right
to trial by jury in any action, proceeding or counterclaim (whether based on
contract, tort or otherwise) arising out of or relating to this Agreement or the
Notes or the actions of the Agent or any Lender in the negotiation,
administration, performance or enforcement thereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
DENTSPLY INTERNATIONAL INC.
By
- ------------------------
William R. Jellison
Senior Vice President and Chief Financial Officer
By
- ------------------------
William E. Reardon
Treasurer
CITIBANK, N.A.,
as Agent
By
- ------------------------
Title:
Initial Lenders
CITIBANK, N.A.
By
- ------------------------
Title:
JPMORGAN CHASE BANK, N.A.
By
- ------------------------
Title:
HARRIS TRUST AND SAVINGS BANK
By
- ------------------------
Name: Mark Piekos
Title: Director
MANUFACTURERS AND TRADERS TRUST COMPANY
By
- ------------------------
Title:
WACHOVIA BANK, NATIONAL ASSOCIATION
By
- ------------------------
Title:
JPMORGAN CHASE BANK, N.A.
By
- ------------------------
Title:
BANK OF AMERICA, N.A.
By
- ------------------------
Title:
DRESDNER BANK AG, in FRANKFURT AM MAIN
By
- ------------------------
Title:
THE BANK OF TOKYO-MITSUBISHI LTD.
By
- ------------------------
Title:
ABN AMRO BANK, N.V.
By
- ------------------------
Title:
KBC BANK, N.V.
By
- ------------------------
Title:
MIZUHO CORPORATE BANK (USA)
By
- ------------------------
Title:
PNC BANK, NATIONAL ASSOCIATION
By
- ------------------------
Title:
UBS LOAN FINANCE LLC
By
- ------------------------
Title:
By
- ------------------------
Title:
SCHEDULE I
DENTSPLY INTERNATIONAL INC.
FIVE YEAR CREDIT AGREEMENT
APPLICABLE LENDING OFFICES
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
Name of Initial Lender Revolving Credit Letter of Domestic Lending Office Eurocurrency Lending
Commitment Credit Office
Commitment
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
Citibank, N.A $60,000,000 $50,000,000 Two Penns Way Two Penns Way
New Castle, DE 19720 New Castle, DE 19720
Attn: Bank Loan Attn: Bank Loan
Syndications Syndications
T: 302 894-6029 T: 302 894-6029
F: 212 994-0961 F: 212 994-0961
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
JPMorgan Chase Bank, N.A. $60,000,000 $0 695 Rte 46 West 695 Rte 46 West
Fairfield, NJ 07004 Fairfield, NJ 07004
Attn: Alice Shanahan Attn: Alice Shanahan
T: 973 439-5034 T: 973 439-5034
F: 973 439-5013 F: 973 439-5013
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
Harris Trust and Savings $50,000,000 $0 115 S. LaSalle 115 S. LaSalle
Bank 17th Floor 17th Floor
Chicago, IL 60603 Chicago, IL 60603
Attn: N'Gina Armstrong Attn: N'Gina Armstrong
T: 312 461-3158 T: 312 461-3158
F: 312 293-5283 F: 312 293-5283
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
Manufacturers and Traders $50,000,000 $0 1 Fountain Plaza 1 Fountain Plaza
Trust Company 2nd Floor 2nd Floor
Buffalo, NY 14240 Buffalo, NY 14240
Attn: Attn:
T: 716 848-3448 T: 716 848-3448
F: 716 848-7881 F: 716 848-7881
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
Wachovia Bank, National $50,000,000 $0 201 S. College St. 201 S. College St.
Association Charlotte, NC 28288 Charlotte, NC 28288
Attn: Lekeisha Neely Attn: Lekeisha Neely
T: 704 374-6145 T: 704 374-6145
F: 704 715-0095 F: 704 715-0095
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
Bank of America, N.A. $35,000,000 $0 2001 Clayton Rd. 2001 Clayton Rd.
(Mail Code: (Mail Code:
CA4-702-02-25) CA4-702-02-25)
Concord, CA 94520 Concord, CA 94520
Attn: Indiana Arguello Attn: Indiana Arguello
T: 925 675-8075 T: 925 675-8075
F: 888 969-9261 F: 888 969-9261
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
Dresdner Bank AG in $35,000,000 $0 Gallusanlage 2, 3. OG Gallusanlage 2, 3. OG
Frankfurt am Main Frankfurt, Germany Frankfurt, Germany
Attn: Matthias Attn: Matthias
Hopfgarten Hopfgarten
T: 0049-69-263-12874 T: 0049-69-263-12874
F: 0049-69-236-12878 F: 0049-69-236-12878
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
The Bank of $35,000,000 $0
Tokyo-Mitsubishi Ltd.
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
ABN AMRO Bank N.V. $25,000,000 $0 540 West Madison 540 West Madison
Street, Suite 2100 Street, Suite 2100
Chicago, IL 60661 Chicago, IL 60661
Attn: Loan Attn: Loan
Administration Administration
T: 312 992-5150 T: 312 992-5150
F: 312 992-5155 F: 312 992-5155
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
KBC Bank N.V. $25,000,000 $0 125 West 55th Street 125 West 55th Street
10th Floor 10th Floor
New York, NY 10019 New York, NY 10019
Attn: Rose Pagan Attn: Rose Pagan
T: 212 541-0657 T: 212 541-0657
F: 212 956-5581 F: 212 956-5581
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
Mizuho Corporate Bank (USA) $25,000,000 $0 1800 Plaza Ten 1800 Plaza Ten
Jersey City, NJ 07311 Jersey City, NJ 07311
Attn: Nate Spivey Attn: Nate Spivey
T: 201 626-9280 T: 201 626-9280
F: 201 626-9932 F: 201 626-9932
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
PNC Bank, National $25,000,000 $0 500 First Avenue 500 First Avenue
Association Pittsburgh, PA 15219 Pittsburgh, PA 15219
Attn: Bret Stezoski Attn: Bret Stezoski
T: 412 768-7517 T: 412 768-7517
F: 412 768-4586 F: 412 768-4586
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
UBS Loan Finance LLC $25,000,000 $0 677 Washington Blvd 677 Washington Blvd
Stamford, CT Stamford, CT
Attn: Christopher Aitkin Attn: Christopher Aitkin
T: 203 719-3845 T: 203 719-3845
F: 203 719-3888 F: 203 719-3888
- ----------------------------- ------------------ ----------------- ------------------------- -------------------------
EXHIBIT A - FORM OF
REVOLVING CREDIT
PROMISSORY NOTE
U.S.$_______________ Dated: _______________, 200_
FOR VALUE RECEIVED, the undersigned, [NAME OF BORROWER], a
__________ corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of
_________________________ (the "Lender") for the account of its Applicable
Lending Office on the Termination Date (each as defined in the Credit Agreement
referred to below) the principal sum of U.S.$[amount of the Lender's Commitment
in figures] or, if less, the aggregate principal amount of the Advances (as
defined below) made by the Lender to the [Dentsply International Inc.,] pursuant
to the Five Year Credit Agreement dated as of May 9, 2005 among the Borrower,
the Lender and certain other lenders parties thereto, JPMorgan Chase Bank, N.A.,
as syndication agent, Harris Trust and Savings Bank, Manufacturers and Traders
Trust Company and Wachovia Bank, National Association, as co-documentation
agents, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint
lead arrangers and joint bookrunners, and Citibank, N.A. as Agent for the Lender
and such other lenders (as amended or modified from time to time, the "Credit
Agreement"; the terms defined therein being used herein as therein defined)
outstanding on the Termination Date.
The Borrower promises to pay interest on the unpaid principal
amount of each Advance from the date of such Advance until such principal amount
is paid in full, at such interest rates, and payable at such times, as are
specified in the Credit Agreement.
Both principal and interest in respect of each Advance (i) in
Dollars are payable in lawful money of the United States of America to the Agent
at its account maintained at Two Penns Way, New Castle, Delaware 19720, in same
day funds and (ii) in any Committed Currency are payable in such currency at the
applicable Payment Office in same day funds. Each Advance owing to the Lender by
the Borrower pursuant to the Credit Agreement, and all payments made on account
of principal thereof, shall be recorded by the Lender and, prior to any transfer
hereof, endorsed on the grid attached hereto which is part of this Promissory
Note.
This Promissory Note is one of the Notes referred to in, and
is entitled to the benefits of, the Credit Agreement. The Credit Agreement,
among other things, (i) provides for the making of advances (the "Advances") by
the Lender to the Borrower from time to time in an aggregate amount not to
exceed at any time outstanding the U.S. dollar amount first above mentioned, the
indebtedness of the Borrower resulting from each such Advance being evidenced by
this Promissory Note, (ii) contains provisions for determining the Dollar
Equivalent of Advances denominated in Committed Currencies and (iii) contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events and also for prepayments on account of principal hereof prior to
the maturity hereof upon the terms and conditions therein specified.
[NAME OF BORROWER]
By
- ------------------------
Title:
ADVANCES AND PAYMENTS OF PRINCIPAL
- ----------------------------- ------------------ -----------------
Amount of
Date Amount of Principal Paid Unpaid Principal Notation
Advance or Prepaid Balance Made By
EXHIBIT B - FORM OF NOTICE OF
BORROWING
Citibank, N.A., as Agent
for the Lenders parties
to the Credit Agreement
referred to below
Two Penns Way
New Castle, Delaware 19720
[Date]
Attention: Bank Loan Syndications Department
Ladies and Gentlemen:
The undersigned, [NAME OF BORROWER], refers to the Five Year
Credit Agreement, dated as of May 9, 2005 (as amended or modified from time to
time, the "Credit Agreement", the terms defined therein being used herein as
therein defined), among the undersigned, [Dentsply International Inc.,] certain
Lenders parties thereto, JPMorgan Chase Bank, N.A., as syndication agent, Harris
Trust and Savings Bank, Manufacturers and Traders Trust Company and Wachovia
Bank, National Association, as co-documentation agents, Citigroup Global Markets
Inc. and J.P. Morgan Securities Inc., as joint lead arrangers and joint
bookrunners, and Citibank, N.A., as Agent for said Lenders, and hereby gives you
notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the
undersigned hereby requests a Borrowing under the Credit Agreement, and in that
connection sets forth below the information relating to such Borrowing (the
"Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement:
(i) The Business Day of the Proposed Borrowing is
_______________, 200_.
(ii) The Type of Advances comprising the Proposed Borrowing is
[Base Rate Advances] [Eurocurrency Rate Advances].
(iii) The aggregate amount of the Proposed Borrowing is
$_______________][for a Borrowing in a Committed Currency, list
currency and amount of Borrowing].
[(iv) The initial Interest Period for each Eurocurrency Rate
Advance made as part of the Proposed Borrowing is _____ month[s].]
The undersigned hereby certifies that the following statements
are true on the date hereof, and will be true on the date of the Proposed
Borrowing:
(A) the representations and warranties contained in Section
4.01 of the Credit Agreement (except the representations set forth in
the last sentence of subsection (e) thereof and in subsection (f)(i)
thereof) and, in the case of any Borrowing made to a Designated
Subsidiary, in the Designation Agreement for such Designated
Subsidiary, are correct, before and after giving effect to the Proposed
Borrowing and to the application of the proceeds therefrom, as though
made on and as of such date; and
(B) no event has occurred and is continuing, or would result
from such Proposed Borrowing or from the application of the proceeds
therefrom, that constitutes a Default.
Very truly yours,
[NAME OF BORROWER]
By
- ------------------------
Title:
EXHIBIT C - FORM OF
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Five Year Credit Agreement dated as of May 9, 2005
(as amended or modified from time to time, the "Credit Agreement") among
Dentsply International Inc., a Delaware corporation (the "Company"), the Lenders
(as defined in the Credit Agreement), JPMorgan Chase Bank, N.A., as syndication
agent, Harris Trust and Savings Bank, Manufacturers and Traders
Trust Company and Wachovia Bank, National Association, as co-documentation
agents, Citigroup Global Markets Inc. and J.P. Morgan
Securities Inc., as joint lead arrangers and joint bookrunners, and
Citibank, N.A., as agent for the Lenders (the "Agent"). Terms
defined in the Credit Agreement are used herein with the same meaning.
The "Assignor" and the "Assignee" referred to on Schedule I
hereto agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and
the Assignee hereby purchases and assumes from the Assignor, an interest in and
to the Assignor's rights and obligations under the [Credit Agreement as of the
date hereof] [the Letter of Credit Facility] equal to the percentage interest
specified on Schedule 1 hereto of [all outstanding rights and obligations under
the Credit Agreement together with participations in Letters of Credit held by
the Assignor on the date hereof] [such Assignor's Unissued Letter of Credit
Commitment]. After giving effect to such sale and assignment, the Assignee's
[Revolving Credit Commitment and the amount of the Advances owing to the
Assignee] [Letter of Credit Commitment] will be as set forth on Schedule 1
hereto.
2. The Assignor (i) represents and warrants that it is the
legal and beneficial owner of the interest being assigned by it hereunder and
that such interest is free and clear of any adverse claim; (ii) makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Credit Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of, or the perfection or priority of any lien
or security interest created or purported to be created under or in connection
with, the Credit Agreement or any other instrument or document furnished
pursuant thereto; (iii) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Company or any
other Borrower or the performance or observance by the Company or any other
Borrower of any of its obligations under the Credit Agreement or any other
instrument or document furnished pursuant thereto; and (iv) attaches the Note[,
if any,] held by the Assignor [and requests that the Agent exchange such Note
for a new Note payable to the order of [the Assignee in an amount equal to the
Commitments assumed by the Assignee pursuant hereto or new Notes payable to the
order of the Assignee in an amount equal to the Commitments assumed by the
Assignee pursuant hereto and] the Assignor in an amount equal to the Commitments
retained by the Assignor under the Credit Agreement[, respectively,] as
specified on Schedule 1 hereto].
3. The Assignee (i) confirms that it has received a copy of
the Credit Agreement, together with copies of the financial statements referred
to in Section 4.01 thereof and such other documents and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
this Assignment and Acceptance; (ii) agrees that it will, independently and
without reliance upon the Agent, the Assignor or any other Lender and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv)
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers and discretion under the Credit Agreement as are
delegated to the Agent by the terms thereof, together with such powers and
discretion as are reasonably incidental thereto; (v) agrees that it will perform
in accordance with their terms all of the obligations that by the terms of the
Credit Agreement are required to be performed by it as a Lender; and (vi)
attaches any U.S. Internal Revenue Service forms required under Section 2.14 of
the Credit Agreement.
4. Following the execution of this Assignment and Acceptance,
it will be delivered to the Agent for acceptance and recording by the Agent. The
effective date for this Assignment and Acceptance (the "Effective Date") shall
be the date of acceptance hereof by the Agent, unless otherwise specified on
Schedule 1 hereto.
5. Upon such acceptance and recording by the Agent, as of the
Effective Date, (i) the Assignee shall be a party to the Credit Agreement and,
to the extent provided in this Assignment and Acceptance, have the rights and
obligations of a Lender thereunder and (ii) the Assignor shall, to the extent
provided in this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Credit Agreement.
6. Upon such acceptance and recording by the Agent, from and
after the Effective Date, the Agent shall make all payments under the Credit
Agreement and the Notes in respect of the interest assigned hereby (including,
without limitation, all payments of principal, interest and facility fees with
respect thereto) to the Assignee. The Assignor and Assignee shall make all
appropriate adjustments in payments under the Credit Agreement and the Notes for
periods prior to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and
construed in accordance with, the laws of the State of New York.
8. This Assignment and Acceptance may be executed in any
number of counterparts and by different 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. Delivery of an
executed counterpart of Schedule 1 to this Assignment and Acceptance by
telecopier shall be effective as delivery of a manually executed counterpart of
this Assignment and Acceptance.
IN WITNESS WHEREOF, the Assignor and the Assignee have caused
Schedule 1 to this Assignment and Acceptance to be executed by their officers
thereunto duly authorized as of the date specified thereon.
Schedule 1
to
Assignment and Acceptance
Percentage interest assigned: _____%
[Assignee's Revolving Credit Commitment: $______
Aggregate outstanding principal amount of Revolving Credit Advances
assigned: $______
Principal amount of Note payable to Assignee: $______
Principal amount of Note payable to Assignor: $______]
[Assignee's Letter of Credit Commitment: $______]
Effective Date*: _______________, 200_
[NAME OF ASSIGNOR], as Assignor
By
------------------------
Title:
Dated: _______________, 200_
[NAME OF ASSIGNEE], as Assignee
By
------------------------
Title:
Dated: _______________, 200_
Domestic Lending Office:
[Address]
Eurocurrency Lending Office:
Address]
Accepted [and Approved]** this
__________ day of _______________, 200_
CITIBANK, N.A., as Agent
By
------------------------------------------
Title:
[Approved this __________ day
of _______________, 200_
DENTSPLY INTERNATIONAL INC.
By ]*
------------------------------------------
Title:
EXHIBIT D - FORM OF
OPINION OF COUNSEL
FOR THE COMPANY
[Effective Date]
To each of the Lenders parties
to the Five Year Credit Agreement dated
as of May 9, 2005
among Dentsply International Inc.,
said Lenders and Citibank, N.A.,
as Agent for said Lenders, and
to Citibank, N.A., as Agent
Dentsply International Inc.
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 3.01(h)
(iv) of the Five Year Credit Agreement, dated as of May
9, 2005 (the "Credit Agreement"), among Dentsply International Inc.
(the "Borrower"), the Lenders parties thereto, JPMorgan Chase
Bank, N.A., as syndication agent, Harris Trust and Savings Bank,
Manufacturers and Traders Trust Company and Wachovia Bank, National
Association, as co-documentation agents, Citigroup Global Markets Inc.
and J.P. Morgan Securities Inc., as joint lead arrangers and
joint bookrunners, and Citibank, N.A., as Agent for said Lenders. Terms
defined in the Credit Agreement are used herein as therein defined.
We have acted as counsel for the Borrower in connection with the preparation,
execution and delivery of the Credit Agreement.
In that connection, we have examined:
(1) The Credit Agreement.
(2) The documents furnished by the Borrower pursuant to
Article III of the Credit Agreement.
(3) The [Articles] [Certificate] of Incorporation of the
Borrower and all amendments thereto (the "Charter").
(4) The by-laws of the Borrower and all amendments thereto
(the "By-laws").
(5) A certificate of the Secretary of State of __________,
dated _______________, 2005, attesting to the continued corporate
existence and good standing of the Borrower in that State.
We have also examined the originals, or copies certified to our satisfaction, of
the documents listed in a certificate of the chief financial officer of the
Borrower, dated the date hereof (the "Certificate"), certifying that the
documents listed in such certificate are all of the indentures, loan or credit
agreements, leases, guarantees, mortgages, security agreements, bonds, notes and
other agreements or instruments, and all of the orders, writs, judgments,
awards, injunctions and decrees, that affect or purport to affect the Borrower's
right to borrow money or the Borrower's obligations under the Credit Agreement
or the Notes. In addition, we have examined the originals, or copies certified
to our satisfaction, of such other corporate records of the Borrower,
certificates of public officials and of officers of the Borrower, and
agreements, instruments and other documents, as we have deemed necessary as a
basis for the opinions expressed below. As to questions of fact material to such
opinions, we have, when relevant facts were not independently established by us,
relied upon certificates of the Borrower or its officers or of public officials.
We have assumed the due execution and delivery, pursuant to due authorization,
of the Credit Agreement by the Initial Lenders and the Agent.
Our opinions expressed below are limited to the law of the
State of [New York], the General Corporation Law of the State of Delaware and
the Federal law of the United States.
Based upon the foregoing and upon such investigation as we
have deemed necessary, we are of the following opinion:
1. The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
2. The execution, delivery and performance by the Borrower of
the Credit Agreement and the Notes, and the consummation of the
transactions contemplated thereby, are within the Borrower's corporate
powers, have been duly authorized by all necessary corporate action,
and do not contravene (i) the Charter or the By-laws or (ii) any law,
rule or regulation applicable to the Borrower (including, without
limitation, Regulation X of the Board of Governors of the Federal
Reserve System) or (iii) any contractual or legal restriction contained
in any document listed in the Certificate or, to the best of our
knowledge, contained in any other similar document. The Credit
Agreement and the Notes have been duly executed and delivered on behalf
of the Borrower.
3. No authorization, approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body
or any other third party is required for the due execution, delivery
and performance by the Borrower of the Credit Agreement and the Notes.
4. The Credit Agreement is, and after giving effect to the
initial Borrowing, the Notes will be, legal, valid and binding
obligations of the Borrower enforceable against the Borrower in
accordance with their respective terms.
5. To the best of our knowledge, there are no pending or
overtly threatened actions or proceedings against the Borrower or any
of its Subsidiaries before any court, governmental agency or arbitrator
that purport to affect the legality, validity, binding effect or
enforceability of the Credit Agreement or any of the Notes or the
consummation of the transactions contemplated thereby or that are
likely to have a materially adverse effect upon the financial condition
or operations of the Borrower or any of its Subsidiaries.
The opinions set forth above are subject to the following
qualifications:
(a) Our opinion in paragraph 4 above as to enforceability is
subject to the effect of any applicable bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent
transfers), reorganization, moratorium or similar law affecting
creditors' rights generally.
(b) Our opinion in paragraph 4 above as to enforceability is
subject to the effect of general principles of equity, including,
without limitation, concepts of materiality, reasonableness, good faith
and fair dealing (regardless of whether considered in a proceeding in
equity or at law).
(c) We express no opinion as to (i) Section 2.14 of the Credit
Agreement insofar as it provides that any Lender purchasing a
participation from another Lender pursuant thereto may exercise set-off
or similar rights with respect to such participation and (ii) the
effect of the law of any jurisdiction other than the State of [New
York] wherein any Lender may be located or wherein enforcement of the
Credit Agreement or the Notes may be sought that limits the rates of
interest legally chargeable or collectible.
Very truly yours,
EXHIBIT E - FORM OF
DESIGNATION AGREEMENT
[DATE]
To each of the Lenders
parties to the Credit Agreement
(as defined below) and to Citibank, N.A.,
as Agent for such Lenders
Ladies and Gentlemen:
Reference is made to the Five Year Credit Agreement dated as of May 9, 2005
(as amended or modified from time to time, the "Credit Agreement") among
Dentsply International Inc., a Delaware corporation (the "Company"), the
Lenders (as defined in the Credit Agreement), JPMorgan Chase Bank, N.A., as
syndication agent, Harris Trust and Savings Bank, Manufacturers and Traders
Trust Company and Wachovia Bank, National Association, as co-documentation
agents, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint
lead arrangers and joint bookrunners, and Citibank, N.A., as agent for the
Lenders (the "Agent"). Terms defined in the Credit Agreement are used herein
with the same meaning.
Please be advised that the Company hereby designates its
undersigned Subsidiary, ____________ ("Designated Subsidiary"), as a "Designated
Subsidiary" under and for all purposes of the Credit Agreement.
The Designated Subsidiary, in consideration of each Lender's
agreement to extend credit to it under and on the terms and conditions set forth
in the Credit Agreement, does hereby assume each of the obligations imposed upon
a "Designated Subsidiary" and a "Borrower" under the Credit Agreement and agrees
to be bound by the terms and conditions of the Credit Agreement. In furtherance
of the foregoing, the Designated Subsidiary hereby represents and warrants to
each Lender as follows:
(a) The Designated Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of
______________________.
(b) The execution, delivery and performance by the Designated
Subsidiary of this Designation Agreement, the Credit Agreement and the
Notes to be delivered by it are within the Designated Subsidiary's
corporate or other powers, have been duly authorized by all necessary
corporate or other action and do not contravene (i) the Designated
Subsidiary's charter or by-laws or (ii) law or any contractual
restriction binding on or affecting the Designated Subsidiary. The
Designation Agreement and the Notes delivered by it have been duly
executed and delivered on behalf of the Designated Subsidiary.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body
or any third party is required for the due execution, delivery and
performance by the Designated Subsidiary of this Designation Agreement,
the Credit Agreement or the Notes to be delivered by it.
(d) This Designation Agreement is, and the Notes to be
delivered by the Designated Subsidiary when delivered will be, legal,
valid and binding obligations of the Designated Subsidiary enforceable
against the Designated Subsidiary in accordance with their respective
terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in
equity or law).
(e) There is no pending or threatened action, suit,
investigation or proceeding, including, without limitation, any
Environmental Action, affecting the Designated Subsidiary or any of its
Subsidiaries before any court, governmental agency or arbitrator that
purports to affect the legality, validity or enforceability of this
Designation Agreement, the Credit Agreement or any Note of the
Designated Subsidiary.
The Designated Subsidiary hereby agrees that service of
process in any action or proceeding brought in any New York State court or in
federal court may be made upon the Company at its offices at ___________,
Attention: __________ (the "Process Agent") and the Designated Subsidiary hereby
irrevocably appoints the Process Agent to give any notice of any such service of
process, and agrees that the failure of the Process Agent to give any notice of
any such service shall not impair or affect the validity of such service or of
any judgment rendered in any action or proceeding based thereon.
The Company hereby accepts such appointment as Process Agent
and agrees with you that (i) the Company will maintain an office in __________,
New York through the Termination Date and will give the Agent prompt notice of
any change of address of the Company, (ii) the Company will perform its duties
as Process Agent to receive on behalf of the Designated Subsidiary and its
property service of copies of the summons and complaint and any other process
which may be served in any action or proceeding in any New York State or federal
court sitting in New York City arising out of or relating to the Credit
Agreement and (iii) the Company will forward forthwith to the Designated
Subsidiary at its address at ___________________ or, if different, its then
current address, copies of any summons, complaint and other process which the
Company received in connection with its appointment as Process Agent.
This Designation Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York.
Very truly yours,
DENTSPLY INTERNATIONAL INC.
By ________________________
Name:
Title:
[THE DESIGNATED SUBSIDIARY]
By__________________________
Name:
Title:
EXECUTION COPY
U.S. $500,000,000
FIVE YEAR CREDIT AGREEMENT
Dated as of May 9, 2005
Among
DENTSPLY INTERNATIONAL INC.
as Borrower
and
THE INITIAL LENDERS NAMED HEREIN
as Initial Lenders
and
CITIBANK, N.A.
as Administrative Agent
and
JPMORGAN CHASE BANK, N.A.
as Syndication Agent
and
HARRIS TRUST AND SAVINGS BANK
MANUFACTURERS AND TRADERS TRUST COMPANY
and
WACHOVIA BANK, NATIONAL ASSOCIATION
as Co-Documentation Agents
and
CITIGROUP GLOBAL MARKETS INC.
and
J.P. MORGAN SECURITIES INC.
as Joint Lead Arrangers and Joint Bookrunners
iv
TABLE OF CONTENTS
ARTICLE I
SECTION 1.01. Certain Defined Terms 1
- ---------------------
SECTION 1.02. Computation of Time Periods 12
- ---------------------------
SECTION 1.03. Accounting Terms 12
- ----------------
ARTICLE II
SECTION 2.01. The Advances and Letters of Credit 12
- ----------------------------------
SECTION 2.02. Making the Advances 13
- -------------------
SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters of
Credit 14
- ------------------------------------------------------------------
SECTION 2.04. Fees 15
- ----
SECTION 2.05. Termination or Reduction of the Commitments 15
- -------------------------------------------
SECTION 2.06. Repayment of Advances and Letter of Credit Drawings 16
- ---------------------------------------------------
SECTION 2.07. Interest on Revolving Credit Advances 16
- -------------------------------------
SECTION 2.08. Interest Rate Determination 17
- ---------------------------
SECTION 2.09. Optional Conversion of Revolving Credit Advances 18
- ------------------------------------------------
SECTION 2.10. Prepayments of Advances 18
- -----------------------
SECTION 2.11. Increased Costs 19
- ---------------
SECTION 2.12. Illegality 19
- ----------
SECTION 2.13. Payments and Computations 20
- -------------------------
SECTION 2.14. Taxes 21
- -----
SECTION 2.15. Sharing of Payments, Etc. 22
- ------------------------
SECTION 2.16. Evidence of Debt 22
- ----------------
SECTION 2.17. Use of Proceeds 23
- ---------------
SECTION 2.18. Increase in the Aggregate Commitments 23
- -------------------------------------
ARTICLE III
SECTION 3.01. Conditions Precedent to Effectiveness of Section 2.01 24
- -----------------------------------------------------
SECTION 3.02. Initial Advance to Each Designated Subsidiary 26
- ---------------------------------------------
SECTION 3.03. Conditions Precedent to Each Borrowing, Issuance and Commitment
Increase. 26
- ------------------------------------------------------------------------
SECTION 3.04. Determinations Under Section 3.01 27
- ---------------------------------
ARTICLE IV
SECTION 4.01. Representations and Warranties of the Company 27
- ---------------------------------------------
ARTICLE V
SECTION 5.01. Affirmative Covenants 28
- ---------------------
SECTION 5.02. Negative Covenants 30
- ------------------
SECTION 5.03. Financial Covenants 32
- -------------------
ARTICLE VI
SECTION 6.01. Events of Default 32
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SECTION 6.02. Actions in Respect of the Letters of Credit upon Default 34
- --------------------------------------------------------
ARTICLE VII
SECTION 7.01. Unconditional Guaranty 34
- ----------------------
SECTION 7.02. Guaranty Absolute 34
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SECTION 7.03. Waivers and Acknowledgments 35
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SECTION 7.04. Subrogation 36
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SECTION 7.05. Subordination 36
- -------------
SECTION 7.06. Continuing Guaranty; Assignments 37
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ARTICLE VIII
SECTION 8.01. Authorization and Action 37
- ------------------------
SECTION 8.02. Agent's Reliance, Etc. 37
- ---------------------
SECTION 8.03. Citibank and Affiliates 38
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SECTION 8.04. Lender Credit Decision 38
- ----------------------
SECTION 8.05. Indemnification 38
- ---------------
SECTION 8.06. Successor Agent 39
- ---------------
SECTION 8.07. Sub-Agent 39
- ---------
SECTION 8.08. Other Agents. 39
- -------------
ARTICLE IX
SECTION 9.01. Amendments, Etc. 39
- ---------------
SECTION 9.02. Notices, Etc. 40
- ------------
SECTION 9.03. No Waiver; Remedies 40
- -------------------
SECTION 9.04. Costs and Expenses 41
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SECTION 9.05. Right of Set-off 42
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SECTION 9.06. Binding Effect 42
- --------------
SECTION 9.07. Assignments and Participations 42
- ------------------------------
SECTION 9.08. Confidentiality 44
- ---------------
SECTION 9.09. Designated Subsidiaries 44
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SECTION 9.10. Governing Law 45
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SECTION 9.11. Execution in Counterparts 45
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SECTION 9.12. Judgment 45
- --------
SECTION 9.13. Jurisdiction, Etc. 45
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SECTION 9.14. Substitution of Currency 46
- ------------------------
SECTION 9.15. No Liability of the Issuing Banks 46
- ---------------------------------
SECTION 9.16. Patriot Act Notice 46
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SECTION 9.17. Power of Attorney 46
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SECTION 9.18. Waiver of Jury Trial 46
- --------------------
Schedules
Schedule I - List of Applicable Lending Offices
Schedule 2.01(b) - Existing Letters of Credit
Schedule 5.02(a) - Existing Liens
Schedule 5.02(d) - Existing Debt
Exhibits
Exhibit A - Form of Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Assignment and Acceptance
Exhibit D - Form of Opinion of Counsel for the Company
Exhibit E - Form of Designation Letter
* This date should be no earlier than five Business Days after the delivery of
this Assignment and Acceptance to the Agent.
** Required if the Assignee is an Eligible Assignee solely by reason of clause
(viii) of the definition of "Eligible Assignee". * Required if the Assignee is
an Eligible Assignee solely by reason of clause (viii) of the definition of
"Eligible Assignee".
Exhibit 31.1
Section 302 Certifications Statement
I, Gerald K. Kunkle, Jr., certify that:
1. I have reviewed this Form 10-K of DENTSPLY International 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) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal controls over financial reporting, or
caused such internal controls over financial reporting to be
designed under their supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles:
(c) 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 report
based on such evaluation; and
(d) 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 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 controls over
financial reporting, to the registrant's auditors and the audit
committee of the 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 10, 2006
/s/ Gerald K. Kunkle, Jr.
Gerald K. Kunkle, Jr.
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
Section 302 Certifications Statement
I, William R. Jellison, certify that:
1. I have reviewed this Form 10-K of DENTSPLY International 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) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal controls over financial reporting, or
caused such internal controls over financial reporting to be
designed under their supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles:
(c) 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 report
based on such evaluation; and
(d) 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 that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal controls over
financial reporting, to the registrant's auditors and the audit
committee of the 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 10, 2006
/s/ William R. Jellison
William R. Jellison
Senior Vice President
and Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of DENTSPLY International Inc. (the
"Company") on Form 10-K for the year ending December 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), We, Gerald
K. Kunkle, Jr., Chief Executive Officer and Chairman of the Board of
Directors of the Company and William R. Jellison, Senior Vice President and
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of our knowledge and belief:
(1) The Report fully complies with the requirements of Sections 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company as
of the date of the Report.
/s/ Gerald K. Kunkle, Jr.
Gerald K. Kunkle, Jr.
Chief Executive Officer and
Chairman of the Board of Directors
/s/ William R. Jellison
William R. Jellison
Senior Vice President and
Chief Financial Officer
March 10, 2006
Exhibit 10.3
DENTSPLY International Inc.
2002 Amended and Restated Equity Incentive Plan
SECTION 1 PURPOSE
The purpose of the DENTSPLY International Inc. 2002 Amended and
Restated Equity Incentive Plan (originally named the "DENTSPLY International
Inc. 2002 Stock Option Plan") (the "Plan") is to benefit DENTSPLY International
Inc. ("DENTSPLY") and its "Subsidiaries," as defined below (hereinafter referred
to, either individually or collectively, as the "Company") by recognizing the
contributions made to the Company by officers and other key employees,
consultants and advisers, to provide such persons with an additional incentive
to devote themselves to the future success of the Company, and to improve the
ability of the Company to attract, retain and motivate such persons. The Plan is
also intended as an additional incentive to members of the Board of Directors of
DENTSPLY (the "Board") who are not employees of the Company ("Outside
Directors") to serve on the Board and to devote themselves to the future success
of the Company. "Subsidiaries," as used in the Plan, has the definition set
forth in Section 424 (f) of the Internal Revenue Code of 1986, as amended (the
"Code"). The original effective date of the Plan was March 22, 2002 ("Effective
Date"). An amendment and restatement of the Plan was approved by the Board as of
March 22, 2005, to change the name of the Plan to the "2002 Amended and Restated
Equity Incentive Plan", to provide for the grant of restricted stock, restricted
stock units and stock appreciation rights to eligible participants and to make
conforming changes in other provisions.
Stock options which constitute "incentive stock options" within the
meaning of Section 422 of the Code ("ISOs"), stock options which do not
constitute ISOs ("NSOs"), stock which is subject to certain forfeiture risks and
restrictions ("Restricted Stock"), stock delivered upon vesting of units
("Restricted Stock Units") and stock appreciation rights ("Stock Appreciation
Rights") may be awarded under the Plan. ISOs and NSOs are collectively referred
to as "Options." Options, Restricted Stock, Restricted Stock Units and Stock
Appreciation Rights are collectively referred to as "Awards." The persons to
whom Options are granted under the Plan are hereinafter referred to as
"Optionees." The persons to whom Restricted Stock, Restricted Stock Units and/or
Stock Appreciation Rights are granted under the Plan are hereinafter referred as
to "Grantees."
SECTION 2 ELIGIBILITY
Outside Directors shall participate in the Plan only in accordance with
the provisions of Section 5. The Committee (as defined in Section 3) shall
initially, and from time to time thereafter, select those officers and other key
employees of the Company, including members of the Board who are also employees
("Employee Directors"), and consultants and advisers to the Company, to
participate in the Plan on the basis of the importance of their services in the
management, development and operations of the Company. Officers, other key
employees and Employee Directors are collectively referred to as "Key
Employees."
SECTION 3 ADMINISTRATION
3.1 The Committee
The Plan shall be administered by the Human Resources
Committee of the Board or a subcommittee thereof ("Committee"). The
Committee shall be comprised of two (2) or more members of the Board.
All members of the Committee shall qualify as "Non-Employee Directors"
as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), or any successor rule or regulation,
"independent directors" as defined in Section 4200(15) of the
Marketplace Rules of The Nasdaq Stock Market and "outside directors" as
defined in Section 162(m) or any successor provision of the Code and
applicable Treasury regulations thereunder, if such qualification is
deemed necessary in order for the grant or the exercise of Options
under the Plan to qualify for any tax or other material benefit to
Optionees or the Company under applicable law.
3.2 Authority of the Committee
Subject to the express provisions of the Plan, the Committee
shall have sole discretion concerning all matters relating to the Plan
and Awards granted hereunder. The Committee, in its sole discretion,
shall determine the Key Employees, consultants and advisors to whom,
and the time or times at which, Awards will be granted, the number of
shares to be subject to each Award, the expiration date of each Award,
the time or times within which the Option may be exercised or
forfeiture restrictions lapse, the cancellation or termination of the
Award and the other terms and conditions of the grant of the Award. The
terms and conditions of Awards need not be the same with respect to
each Optionee and/or Grantee or with respect to each Award.
The Committee may, subject to the provisions of the Plan,
establish such rules and regulations as it deems necessary or advisable
for the proper administration of the Plan, and may make determinations
and may take such other actions in connection with or in relation to
the Plan as it deems necessary or advisable. Each determination or
other action made or taken pursuant to the Plan, including
interpretation of the Plan and the specific terms and conditions of the
Award granted hereunder by the Committee, shall be final, binding and
conclusive for all purposes and upon all persons.
3.3 Award Agreement
Each Award shall be evidenced by a written agreement or grant
certificate specifying the type of Award granted, the number of shares
of Common Stock, par value $.01 per share ("Common Stock") to be
subject to such Award and, as applicable, the vesting schedule, the
exercise or grant price, the terms for payment of the exercise price,
the expiration date of the Option, the restrictions imposed upon the
Restricted Stock and/or Restricted Stock Units and such other terms and
conditions established by the Committee, in its sole discretion, which
are not inconsistent with the Plan.
SECTION 4 SHARES OF COMMON STOCK SUBJECT TO THE PLAN
4.1 Subject to adjustment as provided in Sections 4.1 and 4.2, Options,
Restricted Stock, Restricted Stock Units and Stock Appreciation Rights
with respect to an aggregate of seven million (7,000,000) shares of
common stock, par value $.01 per share of DENTSPLY (the "Common Stock")
(plus any shares of Common Stock covered by any unexercised portion of
canceled or terminated stock options granted under the DENTSPLY
International Inc. 1993 Stock Option Plan or 1998 Stock Option Plan),
may be granted under the Plan (the "Maximum Number"). The Maximum
Number shall be increased on January 1 of each calendar year during the
term of the Plan (as set forth in Section 16) to equal seven percent
(7%) of the outstanding shares of Common Stock on such date, in the
event that seven million (7,000,000) shares is less than seven percent
(7%) of the outstanding shares of Common Stock on such date, prior to
such increase. Notwithstanding the foregoing, and subject to adjustment
as provided in Section 4.2, (i) Options with respect to no more than
one million (1,000,000) shares of Common Stock may be granted as ISOs
under the Plan, (ii) no more than two million (2,000,000) shares may be
awarded as Restricted Stock or Restricted Stock Units under the Plan,
and (iii) in any calendar year no Key Employee shall be granted Options
or Stock Appreciation Rights with respect to more than five hundred
thousand (500,000) shares of Common Stock or Restricted Stock and
Restricted Stock Units in excess of 150,000 shares of Common Stock. Any
shares of Common Stock reserved for issuance upon exercise of Options
or Stock Appreciation Rights which expire, terminate or are cancelled,
and any shares of Common Stock subject to any grant of Restricted Stock
or Restricted Stock Units which are forfeited, may again be subject to
new Awards under the Plan. For the avoidance of doubt, the amendment
and restatement of the Plan does not increase the Maximum Number and
notwithstanding any adjustment in the Maximum Number, as provided
above, all Awards granted under the Plan on or following the Effective
Date, subject to forfeitures or cancellation, shall be counted towards
the Maximum Number.
4.2 The number of shares of Common Stock subject to the Plan and to Awards
granted under the Plan shall be adjusted as follows: (a) in the event
that the number of outstanding shares of Common Stock is changed by any
stock dividend, stock split or combination of shares, the number of
shares subject to the Plan and to Awards previously granted thereunder
shall be proportionately adjusted, (b) in the event of any merger,
consolidation or reorganization of the Company with any other
corporation or corporations, there shall be substituted on an equitable
basis as determined by the Board of Directors, in its sole discretion,
for each share of Common Stock then subject to the Plan and for each
share of Common Stock then subject to an Award granted under the Plan,
the number and kind of shares of stock, other securities, cash or other
property to which the holders of Common Stock of the Company are
entitled pursuant to the transaction, and (c) in the event of any other
changes in the capitalization of the Company, the Committee, in its
sole discretion, shall provide for an equitable adjustment in the
number of shares of Common Stock then subject to the Plan and to each
share of Common Stock then subject to Award granted under the Plan. In
the event of any such adjustment, the exercise price per share of any
Options or Stock Appreciation Rights shall be proportionately adjusted.
SECTION 5 GRANT OF OPTIONS TO OUTSIDE DIRECTORS
5.1 Grants
All grants of Options to Outside Directors shall be automatic
and non-discretionary. Each individual who becomes an Outside Director
(other than an Outside Director who was previously an Employee
Director) shall be granted a NSO to purchase nine thousand (9,000)
shares of Common Stock on the date he or she becomes an Outside
Director. Each individual who is an Employee Director and who
thereafter becomes an Outside Director shall be granted automatically a
NSO to purchase nine thousand (9,000) shares of Common Stock on the
third anniversary of the date such Employee Director was last granted
an Option. Thereafter, each Outside Director who holds NSOs granted
under this Section 5 and is re-elected to the Board shall be granted an
additional NSO to purchase nine thousand (9,000) shares of Common Stock
on the third anniversary of the date such Outside Director was last
granted an Option.
5.2 Expiration
Except to the extent otherwise provided in or pursuant to
Section 11, each Option shall expire, and all rights to purchase shares
of Common Stock shall expire, on the tenth anniversary of the date on
which the Option was granted.
5.3 Exercise Price
The exercise price of each NSO granted to an Outside Director
shall be the "Fair Market Value," on the date on which the Option is
granted, of the Common Stock subject to the Option. For purposes of the
Plan, "Fair Market Value" shall mean the closing sales price of the
Common Stock on The Nasdaq National Market, or other national
securities exchange which is the principal securities market on which
the Common Stock is traded (as reported in The Wall Street Journal,
Eastern Edition).
5.4 Vesting
Each such NSO shall become exercisable ("vest") with respect
to one-third of the total number of shares of Common Stock subject to
the Option on the first anniversary following the date of its grant,
and with respect to an additional one-third of the total number of
shares of Common Stock subject to the Option, on each anniversary
thereafter during the succeeding two years.
5.5 Restricted Stock, Restricted Stock Units and Stock
Appreciation Rights
Notwithstanding the foregoing, the Board of Directors may
determine that, in lieu of being granted NSOs as described in this
Section 5, an Outside Director shall be granted an Award of shares of
Restricted Stock, Restricted Stock Units and/or Stock Appreciation
Rights as described in Section 8 or 10 hereof which, at the time of
grant, for the same value as 9,000 Options as determined by the method
the Company uses to value Awards. In any such event, the restrictions
as to such Award of Restricted Stock and/or Restricted Stock Units
shall lapse, and any such Award of Stock Appreciation Rights shall
vest, in accordance with the vesting schedule set forth in Section 5.4.
SECTION 6 GRANTS OF OPTIONS TO EMPLOYEES, CONSULTANTS AND ADVISERS
6.1 Grants
Subject to the terms of the Plan, the Committee may from time
to time grant Options which are ISOs to Key Employees and Options which
are NSOs to Key Employees, consultants and advisers of the Company.
Each such grant shall specify whether the Options so granted are ISOs
or NSOs, provided, however, that if, notwithstanding its designation as
an ISO, all or any portion of an Option does not qualify under the Code
as an ISO, the portion which does not so qualify shall be treated for
all purposes as a NSO.
6.2 Expiration
Except to the extent otherwise provided in or pursuant to
Section 11, each Option shall expire, and all rights to purchase shares
of Common Stock shall expire, on the tenth anniversary of the date on
which the Option was granted.
6.3 Vesting
Except to the extent otherwise provided in or pursuant to
Section 11, or in the proviso to this sentence, Options shall vest
pursuant to the following schedule: with respect to one-third of the
total number of shares of Common Stock subject to Option on the first
anniversary following the date of its grant, and with respect to an
additional one-third of the total number of shares of Common Stock
subject to the Option, on each anniversary thereafter during the
succeeding two years; provided, however, that the Committee, in its
sole discretion, shall have the authority to shorten or lengthen the
vesting schedule with respect to any or all Options, or any part
thereof, granted under the Plan.
6.4 Required Terms and Conditions of ISOs
ISOs may be granted to Key Employees. Each ISO granted to a
Key Employee shall be in such form and subject to such restrictions and
other terms and conditions as the Committee may determine, in its sole
discretion, at the time of grant, subject to the general provisions of
the Plan, the applicable Option agreement or grant certificate, and the
following specific rules:
(a) Except as provided in Section 6.4(c), the exercise price per
share of each ISO shall be the Fair Market Value of a share of
Common Stock on the date such ISO is granted.
(b) The aggregate Fair Market Value (determined with respect to
each ISO at the time such Option is granted) of the shares of
Common Stock with respect to which ISOs are exercisable for
the first time by an Optionee during any calendar year (under
all incentive stock option plans of the Company) shall not
exceed $200,000.
(c) Notwithstanding anything herein to the contrary, if an ISO is
granted to an individual who owns stock possessing more than
ten percent (10%) of the total combined voting power of all
classes of stock of the Company, (i) the exercise price of
each ISO shall be not less than one hundred ten percent (110%)
of the Fair Market Value of a share of Common Stock on the
date the ISO is granted, and (ii) the ISO shall expire and all
rights to purchase shares thereunder shall cease no later than
the fifth anniversary of the date the ISO was granted.
6.5 Required Terms and Conditions of NSOs
Each NSO granted to Key Employees and consultants and advisers
shall be in such form and subject to such restrictions and other terms
and conditions as the Committee may determine, in its sole discretion,
at the time of grant, subject to the general provisions of the Plan,
the applicable Option agreement or grant certificate, and the following
specific rule: except as otherwise determined by the Committee in its
sole discretion with respect to a specific grant, the exercise price
per share of each NSO shall be not less than the Fair Market Value of a
share of Common Stock on the date the NSO is granted.
SECTION 7 EXERCISE OF OPTIONS
7.1 Notices
A person entitled to exercise an Option may do so by delivery
of a written notice to that effect, in a form specified by the
Committee, specifying the number of shares of Common Stock with respect
to which the Option is being exercised and any other information or
documents the Committee may prescribe. The notice shall be accompanied
by payment as described in Section 7.2. All notices, documents or
requests provided for herein shall be delivered to the Secretary of the
Company.
7.2 Exercise Price
Except as otherwise provided in the Plan or in any Option
agreement or grant certificate, the Optionee shall pay the exercise
price of the number of shares of Common Stock with respect to which the
Option is being exercised upon the date of exercise of such Option (a)
in cash, (b) pursuant to a cashless exercise arrangement with a broker
on such terms as the Committee may determine, (c) by delivering shares
of Common Stock held by the Optionee for at least six (6) months and
having an aggregate Fair Market Value on the date of exercise equal to
the Option exercise price, (d) in the case of a Key Employee, by such
other medium of payment as the Committee, in its sole discretion, shall
authorize, or (e) by any combination of (a), (b), (c), and (d). The
Company shall issue, in the name of the Optionee, stock certificates
representing the total number of shares of Common Stock issuable
pursuant to the exercise of any Option as soon as reasonably
practicable after such exercise, provided that any shares of Common
Stock purchased by an Optionee through a broker pursuant to clause (b)
above shall be delivered to such broker in accordance with applicable
law.
SECTION 8 STOCK APPRECIATION RIGHTS
The Committee may award shares of Common Stock to Outside
Directors, Key Employees and consultants and advisors under a Stock
Appreciation Right Award, upon such terms as the Committee deems
applicable, including the provisions set forth below:
8.1 General Requirements.
Stock Appreciation Rights may be granted in tandem with
another Award, in addition to another Award, or freestanding and
unrelated to another Award. Stock Appreciation Rights granted in tandem
with or in addition to an Award may be granted either at the same time
as the Award or, except in the case of Incentive Stock Options, at a
later time. The Committee shall determine the number of shares of
Common Stock to be issued pursuant to a Stock Appreciation Right Award,
the grant price thereof and the conditions and limitations applicable
to the exercise thereof.
8.2 Payment.
A Stock Appreciation Right shall entitle the Grantee to
receive, upon exercise of the Stock Appreciation Right or any portion
thereof, an amount equal to the product of (a) the excess of the Fair
Market Value of a share of Common Stock on the date of exercise over
the grant price thereof and (b) the number of shares of Common Stock as
to which such Stock Appreciation Right Award is being exercised.
Payment of the amount determined under this Section 8.2 shall be made
solely in shares of Common Stock, provided that, the Stock Appreciation
Rights which are settled shall be counted in full against the number of
shares available for award under the Plan, regardless of the number of
shares of Common Stock issued upon settlement of the Stock Appreciation
Right.
8.3 Exercise.
(a) Except to the extent otherwise provided in Section 11 or 12, or in
the proviso to this sentence, Stock Appreciation Rights shall vest
pursuant to the following schedule: with respect to one-third of
the total number of shares of Common Stock subject to the Stock
Appreciation Right on the first anniversary following the date of
its grant, and with respect to an additional one-third of the
total number of shares of Common Stock subject to the Stock
Appreciation Right, on each anniversary thereafter during the
succeeding two years; provided, however, that the Committee,
in its sole discretion, shall have the authority to shorten or
lengthen the vesting schedule with respect to any or all Stock
Appreciation Rights, or any part thereof, granted under the
Plan. Notwithstanding the foregoing, a tandem stock appreciation
right shall be exercisable at such time or times and only to the extent
that the related Award is exercisable.
(b) A person entitled to exercise a Stock Appreciation Right Award
may do so by delivery of a written notice to that effect, in a
form specified by the Committee, specifying the number of
shares of Common Stock with respect to which the Stock
Appreciation Right Award is being exercised and any other
information or documents the Committee may prescribe. Upon
exercise of a tandem Stock Appreciation Right Award, the
number of shares of Common Stock covered by the related Award
shall be reduced by the number of shares with respect to which
the Stock Appreciation Right has been exercised.
SECTION 9 TRANSFERABILITY OF OPTIONS AND STOCK APPRECIATION RIGHTS
Unless otherwise determined by the Committee, no Option or
Stock Appreciation Right granted pursuant to the Plan shall be
transferable otherwise than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order as
defined by the Code.
SECTION 10 RESTRICTED STOCK AND RESTRICTED STOCK UNITS
The Committee may award shares of Common Stock to Outside
Directors, Key Employees and consultants and advisors under an Award of
Restricted Stock and/or Restricted Stock Units, upon such terms as the
Committee deems applicable, including the provisions set forth below.
10.1
General Requirements.
Shares of Common Stock issued or transferred pursuant to an
Award of Restricted Stock and/or Restricted Stock Units may be issued
or transferred for consideration or for no consideration, and subject
to restrictions or no restrictions, as determined by the Committee. The
Committee may establish conditions under which restrictions on shares
of Restricted Stock and/or Restricted Stock Units shall lapse over a
period of time or according to such other criteria (including
performance-based criteria) as the Committee deems appropriate. The
period of time during which shares of Restricted Stock and/or
Restricted Stock Units remain subject to restrictions will be
designated in the written agreement or grant certificate as the
"Restricted Period."
10.2 Number of Shares.
The Committee shall determine the number of shares of Common
Stock to be issued pursuant to an Award of Restricted Stock and/or
Restricted Stock Units and the restrictions applicable to the shares
subject to such Award.
10.3 Restrictions on Transfer and Legend on Stock Certificate.
During the Restricted Period, subject to such exceptions as
the Committee may deem appropriate, a Grantee may not sell, assign,
transfer, donate, pledge or otherwise dispose of the shares of
Restricted Stock or Restricted Stock Units. Each certificate for a
share of Restricted Stock shall contain a legend giving appropriate
notice of the applicable restrictions. The Grantee shall be entitled to
have the legend removed from the stock certificate covering the shares
of Restricted Stock subject to restrictions when all restrictions on
such shares lapse. The Board may determine that the Company will not
issue certificates for shares of Restricted Stock until all
restrictions on such shares lapse, or that the Company will retain
possession of certificates for shares of Restricted Stock until all
restrictions on such shares lapse.
10.4 Right to Vote and to Receive Dividends.
During the Restricted Period, except as otherwise set forth in
the applicable written agreement or grant certificate, the Grantee
shall have the right to vote shares of Restricted Stock and to receive
any dividends or other distributions paid on such shares of Restricted
Stock, subject to any restrictions deemed appropriate by the Committee.
The Committee may determine in its discretion with respect to any Award
of Restricted Stock Units that, in the event that dividends are paid on
shares of Common Stock, an amount equal to the dividend paid on each
such share shall be credited to the shares subject to Award of
Restricted Stock Units ("Dividend Credits"). Any Dividend Credits shall
be paid to the Grantee if and when the restrictions with respect to
such Restricted Stock Units lapse as set forth in Section 10.5.
10.5 Lapse of Restrictions.
(a) All restrictions imposed on Restricted Stock and/or Restricted
Stock Units shall lapse upon the expiration of the applicable
Restricted Period and the satisfaction of all conditions
imposed by the Committee (the date on which restrictions lapse
as to any shares of Restricted Stock or Restricted Stock
Units, the "Vesting Date"). The Committee may determine, as to
any grant of Restricted Stock and/or Restricted Stock Units,
that the restrictions shall lapse without regard to any
Restricted Period.
(b) Upon the lapse of restrictions with respect to any Restricted
Stock Units, the value of such Restricted Stock Units shall be
paid to the Grantee in shares of Common Stock. For purposes of
the preceding sentence, each Restricted Stock Unit as to which
restrictions have lapsed shall have a value equal to the Fair
Market Value as of the Units Vesting Date. "Units Vesting
Date" means, with respect to any Restricted Stock Units, the
date on which restrictions with respect to such Restricted
Stock Units lapse.
SECTION 11 EFFECT OF TERMINATION OF EMPLOYMENT
11.1 Termination Generally
(a) Except as provided in Section 11.2, 11.3 or 12, or as determined by
the Committee, in its sole discretion, all rights to exercise the
vested portion of any Option held by an Optionee or of any Stock
Appreciation Right Award held by a Grantee whose employment or
relationship (if a non-employee) with the Company or service on the
Board is terminated for any reason other than "Cause," as defined
below, shall terminate ninety (90) days following the date of
termination of employment or the relationship or service on the Board,
as the case may be. All rights to exercise the vested portion of any
Option held by an Optionee or of any Stock Appreciation Right Award
held by a Grantee whose employment or relationship (if a non-employee)
with the Company is terminated for "Cause" shall terminate on the date
of termination of employment or the relationship. For the purposes of
this Plan, "Cause" shall mean a finding by the Committee that the
Optionee has engaged in conduct that is fraudulent, disloyal, criminal
or injurious to the Company, including, without limitation, acts of
dishonesty, embezzlement, theft, felonious conduct or unauthorized
disclosure of trade secrets or confidential information of the
Company. Unless otherwise provided in the Plan or determined by the
Committee, vesting of Options and Stock Appreciation Right Awards
ceases immediately upon termination of employment, or the date of
termination of the relationship with the Company, and any portion of
an Option and/or Stock Appreciation Right Award that has not vested on
or before the date of such termination is forfeited on such date.
(b) If a Grantee who has received an Award of Restricted Stock and/or
Restricted Stock Units ceases to be employed by the Company during the
Restricted Period, or if other specified conditions are not met, the
Award of Restricted Stock and/or Restricted Stock Units shall
terminate as to all shares covered by the Award as to which the
restrictions have not lapsed, and, in the case of Restricted Stock,
those shares of Common Stock shall be canceled in exchange for the
purchase price, if any, paid by the Grantee for such shares. The
Committee may provide, however, for complete or partial exceptions to
this requirement as it deems appropriate.
(c) The transfer of employment from the Company to a Subsidiary, or from a
Subsidiary to the Company, or from a Subsidiary to another Subsidiary,
shall not constitute a termination of employment for purposes of the
Plan. Awards granted under the Plan shall not be affected by any
change of duties in connection with the employment of the Key Employee
or by a leave of absence authorized by the Company.
11.2 Death and Disability
In the event of the death or Disability (as defined below) of
an Optionee or Grantee during employment or such Optionee's or Grantee
relationship with the Company or service on the Board, (a) all Options
held by the Optionee and all Stock Appreciation Right Awards held by
the Grantee shall become fully exercisable on such date of death or
Disability and (b) all restrictions and conditions on all Restricted
Stock and/or Restricted Stock Units held by the Grantee shall lapse on
such date of death or Disability. Each of the Options held by such an
Optionee and each of the Stock Appreciation Right Awards held by such a
Grantee shall expire on the earlier of (i) the first anniversary of the
date of death or Disability and (ii) the date that such Option or Stock
Appreciation Right Award expires in accordance with its terms, provided
that, in any event, NSOs granted under this Plan shall not expire
earlier than one year from the date of death or disability. For
purposes of this Section 11.2, "Disability" shall mean the inability of
an individual to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which is
expected to result in death or which has lasted or can be expected to
last for a continuous period of not less than twelve (12) months. The
Committee, in its sole discretion, shall determine the existence and
date of any Disability.
11.3 Retirement
(a) Key Employees. In the event the employment of a Key Employee with the
Company shall be terminated by reason of "Normal Retirement" or "Early
Retirement," as defined below, all Options and Stock Appreciation
Right Awards held by such Key Employee shall become fully exercisable
on the date of such Employee retirement. Each of the Options and Stock
Appreciation Right Awards held by such a Key Employee shall expire on
the earlier of (i) the fifth anniversary of the date of the Employee
retirement, or (ii) the date that such Option expires in accordance
with its terms. For the purposes hereof, "Normal Retirement" shall
mean retirement of a Key Employee at or after age 65 and "Early
Retirement" shall mean retirement of a Key Employee at or after age 60
with a minimum of 15 years of service with the Company. In the event
the employment of a Key Employee with the Company shall be terminated
by reason of a retirement that is not an Normal Retirement or Early
Retirement, the Committee may, in its sole discretion, determine the
vesting, exercisability and exercise periods applicable to Options and
Stock Appreciation Right Awards held by such Key Employee. In the
event the employment of a Key Employee with the Company shall be
terminated by reason of "Normal Retirement" or "Early Retirement", all
restrictions and conditions on all Restricted Stock and/or Restricted
Stock Units held by such Key Employee shall lapse on the date of such
Normal Retirement or Early Retirement. In the event the employment of
a Key Employee with the Company shall be terminated by reason of a
retirement that is not a Normal Retirement or Early Retirement, the
Committee may, in its sole discretion, determine the restrictions and
conditions, if any, on Restricted Stock and/or Restricted Stock Units
held by such Key Employee that will lapse.
(b) Outside Directors. In the event the service on the Board of an Outside
Director shall be terminated by reason of the retirement of such
Outside Director in accordance with the Company's retirement policy
for members of the Board ("Outside Director Retirement"), all Options
and Stock Appreciation Right Awards held by such Outside Director
shall become fully exercisable on the date of such Outside Director
Retirement. Each of the Options and Stock Appreciation Right Awards
held by such an Outside Director shall expire on the earlier of (i)
the date that such Option or Stock Appreciation Right Award expires in
accordance with its terms or (ii) the five year anniversary date of
such Outside Director Retirement. In the event the service on the
Board of an Outside Director shall be terminated by reason of an
"Outside Director Retirement", all restrictions and conditions on all
Restricted Stock and/or Restricted Stock Units held by such Outside
Director shall lapse on the date of such Outside Director Retirement.
(c) Key Employees Who Are Employee Directors. Section 11.3(a) shall be
applicable to Options, Stock Appreciation Rights, Restricted Stock
and/or Restricted Stock Units held by any Key Employee who is an
Employee Director at the time that such Key Employee's employment with
the Company terminates by reason of Employee Retirement. If such Key
Employee continues to serve on the Board as of the date of such Key
Employee's Employee Retirement, then Section 11.3(b) shall be
applicable to Options, Stock Appreciation Rights Restricted Stock
and/or Restricted Stock Units granted after such date.
SECTION 12 CHANGE IN CONTROL
12.1 Effect of Change in Control
Notwithstanding any of the provisions of the Plan or any
written agreement or grant certificate evidencing Awards granted
hereunder, immediately upon a "Change in Control" (as defined in
Section 12.2), all outstanding Options and Stock Appreciation Rights
granted to Key Employees or Outside Directors, whether or not otherwise
exercisable as of the date of such Change in Control, shall accelerate
and become fully exercisable and all restrictions thereon shall
terminate in order that Optionees and Grantees may fully realize the
benefits thereunder, and all restrictions and conditions on all
Restricted Stock and Restricted Stock Units granted to Key Employees or
Outside Directors shall lapse upon the effective date of the Change of
Control. The Committee may determine in its discretion (but shall not
be obligated to do so) that any or all holders of outstanding Options
and Stock Appreciation Right Awards which are exercisable immediately
prior to a Change of Control (including those that become exercisable
under this Section 12.1) will be required to surrender them in exchange
for a payment, in cash or Common Stock as determined by the Committee,
equal to the value of such Options and Stock Appreciation Right Awards
(as determined by the Committee in its discretion), with such payment
to take place as of the date of the Change in Control or such other
date as the Committee may prescribe.
12.2 Definition of Change in Control
The term "Change in Control" shall mean the occurrence, at any
time during the term of an Award granted under the Plan, of any of the
following events:
(a) The acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act) (a "Person") (other than the Company or any benefit
plan sponsored by the Company) of beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) of 30% or more of either
(i) the then outstanding shares of the Common Stock (the "Outstanding
Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Voting Securities"); or
(b) Individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least
one-third (1/3) of the Board (rounded down to the nearest whole
number), provided that any individual whose election or nomination for
election was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of the
Company; or
(c) Consummation by the Company of a reorganization, merger or
consolidation (a "Business Combination"), in each case, with respect
to which all or substantially all of the individuals and entities who
were the respective beneficial owners of the Outstanding Common Stock
and Voting Securities immediately prior to such Business Combination
do not, following such Business Combination, beneficially own,
directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from such Business Combination in substantially the same
proportion as their ownership immediately prior to such Business
Combination of the Outstanding Common Stock and Voting Securities, as
the case may be; or
(d) Consummation of a complete liquidation or dissolution of the Company,
or sale or other disposition of all or substantially all of the assets
of the Company other than to a corporation with respect to which,
following such sale or disposition, more than 50% of, respectively,
the then outstanding shares of common stock and the combined voting
power of the then outstanding voting securities entitled to vote
generally in the election of directors is then owned beneficially,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Common Stock and Voting Securities immediately prior to
such sale or disposition in substantially the same proportions as
their ownership of the Outstanding Common Stock and Voting Securities,
as the case may be, immediately prior to such sale or disposition.
(e) In addition to the foregoing, with respect to any Key Employee covered
under this provision, consummation by the Company of a Business
Combination, in each case, with respect to which all or substantially
all of the individuals and entities who were the respective beneficial
owners of the Outstanding Common Stock and Voting Securities
immediately prior to such Business Combination do not, following such
Business Combination, beneficially own, directly or indirectly, more
than 55% of, respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business
Combination in substantially the same proportion as their ownership
immediately prior to such Business Combination of the Outstanding
Common Stock and Voting Securities, as the case may be, and any Key
Employees who were employed by the Company and were Optionees or
Grantees under the Plan at the time of such Business Combination is
terminated other than for Cause or voluntarily leaves the employ of
the Company within two (2) years from the date of any such Business
Combination as the result of a voluntary termination of employment by
such Key Employee within sixty (60) days after any one or more of the
following events have occurred:
(i) failure by the Company to maintain
the duties, status, and
responsibilities of the Key Employee
substantially consistent with those
prior to the Business Combination,
or
(ii) a reduction by the Company in the
Key Employee's base salary as in
effect as of the date prior to the
Business Combination, or
(iii) the failure of the Company to
maintain and to continue the Key
Employee's participation in the
Company's benefit plans as in effect
from time to time on a basis
substantially equivalent to the
participation and benefits of
Company employees similarly situated
to the Employee.
SECTION 13 RIGHTS AS STOCKHOLDER
Except as provided in Section 10.4 with respect to an Award of
Restricted Stock or Restricted Stock Units, an Optionee or Grantee (or
a transferee of any such person pursuant to Section 9) shall have no
rights as a stockholder with respect to any Common Stock covered by an
Award or receivable upon the exercise of Award until the Optionee,
Grantee or transferee shall have become the holder of record of such
Common Stock, and no adjustments shall be made for dividends in cash or
other property or other distributions or rights in respect to such
Common Stock for which the applicable record date is prior to the date
on which the Optionee or Grantee shall have become the holder of record
of the shares of Common Stock purchased pursuant to exercise of the
Award.
SECTION 14 POSTPONEMENT OF EXERCISE
The Committee may postpone any exercise of an Option or Stock
Appreciation Right Awards for such time as the Committee in its sole discretion
may deem necessary in order to permit the Company to comply with any applicable
laws or rules, regulations or other requirements of the Securities and Exchange
Commission or any securities exchange or quotation system upon which the Common
Stock is then listed or quoted. Any such postponement shall not extend the term
of an Option or Stock Appreciation Right Award, unless such postponement extends
beyond the expiration date of the Award in which case the expiration date shall
be extended thirty (30) days, and neither the Company nor its directors,
officers, employees or agents shall have any obligation or liability to an
Optionee or Grantee, or to his or her successor or to any other person.
SECTION 15 TAXES
15.1 Taxes Generally
The Company shall have the right to withhold from any Award,
from any payment due or transfer made under any Award or under the Plan
or from any compensation or other amount owing to a participant the
amount (in cash, shares or other property) of any applicable
withholding or other taxes in respect of an Award, its exercise, or any
payment or transfer under an Award or under the Plan and to take such
other action as may be necessary in the opinion of the Committee to
satisfy all obligations for the payment of such taxes.
15.2 Payment of Taxes
A participant, with the approval of the Committee, may satisfy
the obligation set forth in Section 15.1, in whole or in part, by (a)
directing the Company to withhold such number of shares of Common Stock
otherwise issuable upon exercise or vesting of an Award (as the case
may be) having an aggregate Fair Market Value on the date of exercise
equal to the amount of tax required to be withheld, or (b) delivering
shares of Common Stock of the Company having an aggregate Fair Market
Value equal to the amount required to be withheld on any date. The
Committee may, in its sole discretion, require payment by the
participant in cash of any such withholding obligation and may
disapprove any election or delivery or may suspend or terminate the
right to make elections or deliveries under this Section 15.2.
SECTION 16 TERMINATION, AMENDMENT AND TERM OF PLAN
16.1 The Board or the Committee may terminate, suspend, or amend the Plan,
in whole or in part, from time to time, without the approval of the
stockholders of the Company provided, however, that no Plan amendment
shall be effective until approved by the stockholders of the Company if
the effect of the amendment is to lower the exercise price of
previously granted Options or Stock Appreciation Rights or if such
stockholder approval is required in order for the Plan to continue to
satisfy the requirements of Rule 16b-3 under the 1934 Act or applicable
tax or other laws.
16.2 The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any Award granted
hereunder in the manner and to the extent it shall deem desirable, in
its sole discretion, to effectuate the Plan. No amendment or
termination of the Plan shall adversely affect any Award theretofore
granted without the consent of the receipient, except that the
Committee may amend the Plan in a manner that does affect Awards
theretofore granted upon a finding by the Committee that such amendment
is in the best interests of holders of outstanding Options affected
thereby.
16.3 The Plan became effective as of March 22, 2002. An amendment and
restatement of the Plan has been adopted and authorized by the Board of
Directors for submission to the stockholders of the Company for their
approval. If the Plan, as amended and restated, is approved by the
stockholders of the Company, the amendment and restatement shall be
deemed to have become effective as of May 11, 2005. Unless earlier
terminated in accordance herewith, the Plan shall terminate on March
22, 2012. Termination of the Plan shall not affect Awards previously
granted under the Plan.
SECTION 17 GOVERNING LAW
The Plan shall be governed and interpreted in accordance with the laws
of the State of Delaware, without regard to any conflict of law provisions which
would result in the application of the laws of any other jurisdiction.
SECTION 18 NO RIGHT TO AWARD; NO RIGHT TO EMPLOYMENT
No person shall have any claim of right to be granted an Award under
the Plan. Neither the Plan nor any action taken hereunder shall be construed as
giving any employee of the Company any right to be retained in the employ of the
Company or as giving any member of the Board any right to continue to serve in
such capacity.
SECTION 19 AWARDS NOT INCLUDABLE FOR BENEFIT PURPOSES
Income recognized by a participant pursuant to the provisions of the
Plan shall not be included in the determination of benefits under any employee
pension benefit plan (as such term is defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974) or group insurance or other benefit
plans applicable to the participant which are maintained by the Company, except
as may be provided under the terms of such plans or determined by resolution of
the Committee.
SECTION 20 NO STRICT CONSTRUCTION
No rule of strict construction shall be implied against the Company,
the Committee, or any other person in the interpretation of any of the terms of
the Plan, any Award granted under the Plan or any rule or procedure established
by the Board.
SECTION 21 CAPTIONS
All Section headings used in the Plan are for convenience only, do not
constitute a part of the Plan, and shall not be deemed to limit, characterize or
affect in any way any provisions of the Plan, and all provisions of the Plan
shall be construed as if no captions have been used in the Plan.
SECTION 22 SEVERABILITY
Whenever possible, each provision in the Plan and every Award at any
time granted under the Plan shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of the Plan or
any Award at any time granted under the Plan shall be held to be prohibited by
or invalid under applicable law, then such provision shall be deemed amended to
accomplish the objectives of the provision as originally written to the fullest
extent permitted by law, and all other provisions of the Plan and every other
Award at any time granted under the Plan shall remain in full force and effect.
SECTION 23 MODIFICATION FOR GRANTS OUTSIDE THE U.S.
The Board may, without amending the Plan, determine the terms and
conditions applicable to grants of Awards to participants who are foreign
nationals or employed outside the United States in a manner otherwise
inconsistent with the Plan if the Board deems such terms and conditions
necessary in order to recognize differences in local law or regulations, tax
policies or customs.
AMENDMENTS TO THE
DENTSPLY INTERNATIONAL INC.
2002 AMENDED & RESTATED EQUITY INCENTIVE PLAN
(The "Plan")
EFFECTIVE JULY 1, 2005
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Paragraphs 5.1 and 5.5 of the Plan are amended by replacing Paragraphs 5.1 and
5.5 of the Plan with the following paragraphs:
5.1 Grants
All grants of Options to Outside Directors shall be automatic and
non-discretionary. Each individual who becomes an Outside Director (other than
an Outside Director who was previously an Employee Director) shall be granted a
NSO to purchase ten thousand (10,000) shares of Common Stock on the date he or
she becomes an Outside Director. Each individual who is an Employee Director and
who thereafter becomes an Outside Director shall be granted automatically a NSO
to purchase ten thousand (10,000) shares of Common Stock on the third
anniversary of the date such Employee Director was last granted an Option.
Thereafter, each Outside Director who holds NSOs granted under this Section 5
and is re-elected to the Board shall be granted an additional NSO to purchase
ten thousand (10,000) shares of Common Stock on the third anniversary of the
date such Outside Director was last granted an Option.
5.5 Restricted Stock, Restricted Stock Units and Stock Appreciation Rights
Notwithstanding the foregoing, the Board of Directors may determine that, in
lieu of being granted NSOs as described in this Section 5, an Outside Director
shall be granted an Award of shares of Restricted Stock, Restricted Stock Units
and/or Stock Appreciation Rights as described in Section 8 or 10 hereof which,
at the time of grant, for the same value as 10,000 Options as determined by the
method the Company uses to value Awards. In any such event, the restrictions as
to such Award of Restricted Stock and/or Restricted Stock Units shall lapse, and
any such Award of Stock Appreciation Rights shall vest, in accordance with the
vesting schedule set forth in Section 5.4.
Exhibit 10.15
BOARD COMPENSATION ARRANGEMENT
- ---------------------------------------------------------------------------
Annual Retainer Fee $40,000.00
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- ---------------------------------------------------------------------------
Committee Chair Annual Fee $5,000.00
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Audit Committee Chair Annual Fee $10,000.00
(only one Chair fee, including Lead Director Annual Fee)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Lead Director Annual Fee $10,000.00
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
In-Person Board/Committee Meeting Attendance Fee $1,500.00
- ---------------------------------------------------------------------------
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Telephone Board/Committee Meeting Attendance Fee $1,000.00
- ---------------------------------------------------------------------------
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Stock Options 10,000 every 3 years
(beginning when Director becomes
member of Board and on every third
anniversary)
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Exhibit 10.17
Amended and Restated Incentive Compensation Plan
DENTSPLY INTERNATIONAL INC.
AMENDED AND RESTATED INCENTIVE COMPENSATION PLAN
I. PURPOSE
To provide greater incentive for key employees to continually exert
their best efforts on behalf of the Company by rewarding them for
achieving predetermined operating objectives.
To attract and retain in the employ of the Company outstanding results
oriented individuals.
To align the interests of such employees with those of the Company's
stockholders.
To create a management team effort within the various Profit Centers
and operating units of the Company.
II. ADMINISTRATION
The Plan will be administered by, and any question of interpretation
under the Plan determined by, the Human Resources Committee ("Human
Resources Committee") of the Dentsply International Inc. Board of
Directors (the "Board"). The Board or the Human Resources Committee may
appoint an Incentive Compensation Plan Committee ("ICP Committee")
consisting of management employees to assist in the administration of
the Plan.
III. AWARDS
Awards will be determined by the Human Resources Committee, based on
criteria determined by such Committee and described in Section VIII
hereof, for each applicable year (a "Bonus Year"). Cash payments will
be made to participants immediately after the close of corporate books
for the applicable Bonus Year but in no case later than March 1st of
the year succeeding the applicable Bonus Year. Payments will be rounded
up or down to the nearest $100 equivalent.
IV. PARTICIPANT ELIGIBILITY
A. Profit Centers
1. General Managers
2. Individuals who normally report directly to the
General Manager.
3. Individuals' work assignment must have a direct
bearing on the profit-ability of the Profit Center.
4. Individual must be recommended for participation by
both the General Manager of the Profit Center and the
Corporate Officer responsible for the Profit Center
and approved by the ICP Committee.
B. Corporate Staff
1. Individuals whose work assignment must have direct
bearing on the profitability of the corporation.
2. Officers
3. Individuals who normally report directly to a
Corporate Officer.
4. Individual must be recommended for participation by
the responsible Corporate Officer and the President
and approved by the ICP Committee.
V. ENROLLMENT
The Board will designate the officers who will be participants. General
Managers will send their recommendations for participation to the
Corporate Officer responsible for the Profit Center or Corporate Staff
Department.
Corporate Officers will send recommendations to the ICP Committee and
Corporate Human Resources Office who will be charged with monitoring
participants in conjunction with the ICP Committee.
VI. VESTING OF BONUS RIGHTS
A. Those participants who leave the employ of the Company before
the end of the Bonus Year for any reason other than normal
retirement, death or a bona fide physical or mental disability
(as determined by the Human Resources Committee) will receive
no bonus payment for the Bonus Year.
B. Those participants who die or who take normal or early
retirement or resign due to a bona fide disability (as
determined by the Human Resources Committee) before the end of
the Bonus Year will receive a bonus award, to the extent
earned for the year, based upon the pro-rata base pay received
while actually working during the Bonus Year, which shall be
paid when all other awards are paid under the Plan.
VII. PARTICIPANT ADDITIONS OR DELETIONS
Profit Center General Managers or Corporate Officers may remove
participants from the Plan at any time during the Bonus Year by
following the same procedure outlined in Enrollment. Any participants
who are removed from the Plan during a Bonus Year shall have no right
to receive payments under the Plan for any portion of such Bonus Year.
Participants may be added during the Bonus Year if they are a direct
replacement for someone already enrolled in the Plan or, if they are
hired to fill a new position eligible for the Plan, and will be in the
qualifying position for at least six months. In this instance the new
person will only receive his or her bonus award based on the pro-rata
base pay received while enrolled in the Plan.
VIII. PLAN CRITERIA
The Plan centers on each Profit Center's performance as measured
against the relevant budget, submitted by Profit Center Management and
approved by Corporate Management. For corporate level employees,
bonuses will be based on corporate performance measured against the
corporate budget.
The actual operating results will be adjusted for major sales or
dispositions of assets not in the ordinary course of business and
changes in the business or segments of the business which are directed
to be carried out by Corporate Management to the extent they were not
included in the target.
Base salary is defined as the total of 12 times year-end actual monthly
salary received during the Bonus Year or a base salary established by
the ICP Committee. It does not include any other compensation that
might be received.
Separate bonus calculations will be made for Officers, General
Managers, Key Employees and Corporate Staff.
IX. HUMAN RESOURCE COMMITTEE
The Human Resource Committee may adjust the mathematical calculation of
the ICP bonus in their sole discretion by + 2.5% (+ 10% in terms of
payout), based on their evaluation of business performance.
X. AMENDMENTS TO THE PLAN
The Board has the right to modify or repeal this Plan entirely at its
discretion. However, any bonus payments that have been earned in
accordance with, but not yet paid under, this Plan cannot be canceled
without consent of the participant.
EXHIBIT 21.1
Subsidiaries of the Company
I. Direct Subsidiaries of the Company
A. Ceramco Inc. (Delaware)
B. Ceramco Manufacturing Co. (Delaware)
C. CeraMed Dental, L.L.C. (Delaware)
D. GAC International Inc. (New York) a) Orthodental International, Inc.
b) Orthodental S.A. de C.V. (Mexico)
E. DENTSPLY Finance Co. (Delaware) a) Dentsply International, Inc.
(Chile) Limitada
(Chile)
F. DENTSPLY North America LLC (Delaware)
G. Dentsply Argentina S.A.C.e.I. (Argentina)
H. Dentsply Industria e Comercio Ltda. (Brazil)
a) DeTrey do Brasil Industria e Comercio Ltda. (Brazil)
I. Dentsply Mexico S.A. de C.V. (Mexico)
J. Dentsply India Pvt. Ltd. (India)
K. Dentsply (Philippines) Inc. (Philippines)
L. Dentsply (Thailand) Ltd. (Thailand)
M. Dentsply Dental (Tianjin) Co. Ltd. (China)
N. Dentsply Tianjin International Trading Co. Ltd. (China)
O. Dentsply Korea Limited
P. Ceramco Europe Limited (Cayman Islands) a) Ceramco UK Limited
(Dormant)
Q. Dentsply Services (Switzerland) S.a.r.L.
R. Ransom & Randolph Company (Delaware)
S. Dentsply Ransom & Randolph China (China)
T. Tulsa Dental Products Inc. (Delaware)
a) Tulsa Finance Co. (Delaware) b) Tulsa Manufacturing Inc. (Delaware)
U. Raintree Essix Inc. (Delaware)
V. Glenroe Technology (Delaware)
W. Dentsply NA (Delaware)
X. Dentsply SC (Delaware)
Y. Dentsply DR (Delaware)
Z. Dentsply DL (Delaware)
AA. Dentsply Indiana LLC (Indiana)
a) Dentsply Holding Co. (Delaware)
II. Indirect Subsidiaries of the Company
A. Subsidiaries of Dentsply Holding Co.
1. Dentsply EU Holding S.a.r.L. (Luxembourg)
2. Dentsply Canada Ltd. (Canada (Ontario))
3. PT Dentsply Indonesia (Indonesia)
4. The International Tooth Co. Limited (United Kingdom)
5. Dentsply Espana SL (Spain)
6. Dentsply Australia Pty. Ltd. (Australia (Victoria)) a) Dentsply
(NZ) Limited (New Zealand)
7. DENTSPLY-Sankin K.K. (Japan) a) Sankin Laboratories K.K. (Japan)
8. DeguDent Industria e Comercio Ltda. (Brazil) a) DeguDent da
Amazonia Industria e Comercio
Ltda. (Brazil)
b) Degpar Participacoes e Empreendimentos S.A. (Brazil)
c) Probem Laboratorio de Produtos Farmaceuticos e
Odontonlogicos S.A. (Brazil)
B. Subsidiaries Dentsply EU Holding S.a.r.L.
1. Dentsply Europe S.a.r.L. (Luxembourg)
C. Subsidiaries of Dentsply Europe S.a.r.L.
1. Dentsply Germany Holdings GmbH (Germany) a) VDW GmbH (Germany) c)
Dentsply DeTrey GmbH (Germany) d) Friadent GmbH (Germany)
i) Friadent Brasil Ltda. (Brazil) e) DeguDent GmbH
(Germany)
i) Ducera Dental Verwaltungs-ges.m.b.H. (Germany)
f) Elephant Dental GmbH (Germany)
2. Elephant Dental B.V. (Netherlands) a) Cicero Dental Systems B.V.
(Netherlands) b) DeguDent Benelux B.V. (Netherlands) c) Dental
Trust B.V. (Netherlands)
3. DeguDent Austria Handels GmbH (Austria)
4. Dentsply Limited (Cayman Islands) a) Dentsply Holdings Unlimited
(U.K.) b) Dentsply Russia Limited (U.K.) c) Amalco Holdings Ltd
(U.K., Dormant) d) Keith Wilson Limited (U.K., Dormant) e) Oral
Topics Limited (U.K., Dormant) f) AD Engineering Limited
(Dormant)
5. Dentsply Italia SrL (Italy)
6. Dentsply France S.A.S. (France)
7. Dentsply South Africa (Pty) Limited (South Africa)
8. Dentsply Benelux S.a.r.L. (Luxembourg)
9. Friadent Schweiz AG (Switzerland)
10. Friadent N.V. (Belgium)
11. Friadent Scandinavia AB(Sweden)
12. Friadent Denmark ApS (Denmark)
13. Dentsply DeTrey Sarl (Switzerland)
14. Maillefer Instruments Holding S.A. (Switzerland) a) Maillefer
Instruments Trading Sarl
(Switzerland)
b) Maillefer Instruments Consulting Sarl (Switzerland)
c) Maillefer Instruments Manufacturing Sarl (Switzerland)
d) GAC S.A. (Switzerland)
D. Subsidiaries of GAC S.A. 1. GAC GmbH (Germany)
2. GAC Norge A.S. (Norway)
3. SOF S.A. (France)
Note: This is the policy for the Company's United States employees. The
Company has other plans for its foreign employees that are translated in
various languages with substantially the same provisions.
DENTSPLY INTERNATIONAL INC.
CODE OF
BUSINESS CONDUCT AND ETHICS
CONTENTS
o GENERAL CODE OF CONDUCT
1. INTRODUCTION
2. GENERAL STANDARDS OF CONDUCT
3. REPORTING OF VIOLATIONS
4. GOVERNMENT INTERVIEWS OR INVESTIGATION
5. COMPLIANCE PROCEDURES
A. INTRODUCTION
B. MAINTAINING AWARENESS OF THE PROGRAM
C. COMPANY INVESTIGATIONS
D. ONGOING EVALUATION OF PROGRAM
6. INTERNATIONAL MATTERS
A. INTERNATIONAL OPERATIONS
B. SANCTIONS AND TRADE EMBARGOES
C. ANTIBOYCOTT
7. WAIVERS
o SPECIFIC POLICIES
o USE OF COMPANY FUNDS AND RESOURCES
o CONFLICT OF INTEREST
o PERSONAL RESPONSIBILITIES OF EMPLOYEES
o TRADING IN DENTSPLY INTERNATIONAL INC. AND OTHER RELATED SECURITIES
o ACCURACY OF BOOKS, RECORDS POLICY AND PUBLIC STATEMENTS
o DISCRIMINATION AND HARASSMENT
o ANTITRUST LAW
Code of Business Conduct
Dear Fellow Employee:
DENTSPLY International Inc. has been in business since 1899, and we are
proud of the global reputation and trust we have earned. This is a
reputation that we are determined to protect and enhance. Our Code of
Business Conduct sets forth our guiding principles for the conduct of our
business that must be followed by everyone who does business on behalf of
DENTSPLY.
All employees, agents, consultants, independent contractors and
representatives of DENTSPLY have the responsibility to read, understand, and
abide by the principles and standards contained in this Code. It is
difficult to make a policy that applies to every situation, and there will
be times when the Code does not address a particular question. Applying
common sense, good judgment, and integrity to every business issue will help
to ensure that your decisions are consistent with DENTSPLY values and this
Code. If you are an employee and you have questions, please contact your
supervisor, the relevant Senior Management, or the General Counsel. If you
are not an employee, please feel free to ask your DENTSPLY contact, or the
General Counsel's office.
DENTSPLY's success depends upon each of us. Acting with integrity and
the highest ethical standards is not only good policy, it is also good
business. Every DENTSPLY employee and shareowner relies upon you to do the
right thing. We know that our confidence in you is well placed.
Vice Chairman and President and Chief Operating
Officer
Chief Executive Officer
GENERAL CODE OF CONDUCT
1. Introduction
DENTSPLY International Inc. (the "Company") has adopted this Code of
Business Conduct, consisting of the components described below (the
"Program"), to assist the Company and its personnel in conducting business
in an ethical manner and in full compliance with the requirements of all
applicable laws and regulations. It is the policy of the Company to comply
with all applicable laws, including, without limitation, medical device and
similar requirements, employment, discrimination, health, safety, antitrust,
securities and environmental laws. No director, officer, executive or
manager of the Company has authority to violate any law or to direct another
employee or any other person to violate any law on behalf of the Company.
This Program reflects the Company's intent to operate not only in a legal
manner, but in accordance with sound business ethics. The Program applies
to all Company business operations and subsidiaries worldwide and to all
employees, officers and directors of the Company and its subsidiaries
("personnel"), except for legal requirements which are specific to a
jurisdiction. Because the Program documents may not be translated into the
local language in every location where we do business, it shall be the
responsibility of management responsible for those areas to communicate the
general purpose and requirements of the Program.
The Program consists of 1) a Code of Business Conduct ("Code") setting forth
general standards for the conduct of Company business and operations,
including procedures for reporting of concerns about compliance with the
Code and/or legal requirements; 2) a set of more specific policies oriented
toward compliance with specific laws and requirements; and 3) procedures to
help ensure that the Program is effective in preventing, detecting and
taking appropriate action in regard to violations of applicable laws and the
Code, such as periodic monitoring and auditing programs. All Company
personnel must be aware of the contents of the Program and perform their
responsibilities in a manner which is fully consistent with the Program.
Because the principles described in the Code are general, Company personnel
should review the specific applicable policies for specific instructions and
contact their supervisors, the relevant Senior Management and/or the General
Counsel's office regarding proper conduct in a particular situation in which
they have any questions.
The Program will be overseen by a Corporate Compliance Committee consisting
of the Company's Chief Executive Officer, Chief Operating Officer, the Chief
Financial Officer and the General Counsel. The Committee will meet as
necessary to review the Program, the Code and compliance activities within
the Company.
The Code of Business Conduct reflects general principles to guide employees
in making ethical decisions and cannot and is not intended to address every
specific situation. As such, nothing in this Code prohibits or restricts
the Company from taking any disciplinary action on any matters pertaining to
employee conduct, whether or not they are expressly discussed in this
document. The Program, including the Code, is not intended to and shall not
be deemed or construed to provide any rights, contractual or otherwise, to
any third parties or to any personnel of the Company or its subsidiaries.
The provisions of the Program may be revised, changed or amended at any time
as determined appropriate by the Company.
2. General Standards of Conduct
A. One of the Company's strongest assets is a reputation for integrity and
honesty. A fundamental principle on which the Company will
operate its business is full compliance with applicable laws.
The Company will also conduct its business in conformance with
sound ethical standards. Achieving business results by illegal
acts or unethical conduct is not acceptable.
All Company personnel shall act in compliance with the
requirements of applicable law and this Code and in a sound
ethical manner when conducting Company business and operations.
B. Each Company supervisor and manager is responsible for ensuring
compliance by the personnel which he or she supervises or manages
with applicable law and the Code. All personnel are responsible
for acquiring sufficient knowledge to recognize potential
compliance issues applicable to their duties and for
appropriately seeking advice regarding such issues.
C. This Code has been distributed to all applicable Company personnel and
sets forth general standards applicable to the Company's business
and operations. In addition, there are a number of more detailed
and specific policies covering particular business units or
subject matters. The Company will communicate those specific
policies to personnel who are particularly affected by them and
they must be complied with in the course of the Company's
business. These policies may be changed and/or additional
policies may be issued from time to time.
D. All of the Company's business transactions shall be carried out in
accordance with management's general or specific directives.
E. Company personnel shall be honest in all dealings with government
agencies and representatives. No misrepresentations shall be
made, and no false bills or requests for payment or other
documents shall be submitted to government agencies or
representatives.
F. All of the Company books and records shall be kept in accordance with
U.S. generally accepted accounting standards (U.S. GAAP) or other
applicable local or statutory principles with reconciliation to
U.S. GAAP. All transactions, payments, receipts, accounts and
assets shall be completely and accurately recorded on the
Company's books and records on a consistent basis. No payment
shall be approved or made with the intention or understanding
that it will be used for any purpose other than that described in
the supporting documentation for the payment. All internal
financial and other control procedures shall be followed.
3. Reporting of Violations
A. Illegal acts or improper conduct may subject the Company (and its
employees) to severe civil and criminal penalties, including
large fines and being barred from certain types of business. It
is therefore very important that any suspected illegal activity
or violations of the Code be promptly brought to the Company's
attention.
B. Any Company personnel who believes or becomes aware that any violation
of this Code, including violation of applicable accounting,
internal controls or auditing matters, or any suspected illegal
activity has been engaged in by Company personnel or by
non-employees acting on the Company's behalf shall promptly
report the violation or activity in person, by phone or in
writing, to one of the following persons:
1. The personnel's immediate supervisor, business unit or department head
or another senior manager.
2. The General Counsel or another attorney in the Company's Legal
Department.
3. The Chief Financial Officer or Director of Internal Audit.
To the extent an employee is uncomfortable contacting any of the
above people, employees should contact the Chief Executive
Officer, the Chief Operating Officer or a Senior Vice President.
C. Company personnel may report suspected illegal acts or a violation of
this Code anonymously. To the extent practical and appropriate
under the circumstances and as permitted by law, the Company will
take reasonable precautions to maintain the confidentiality of
those individuals who report illegal activity or violations of
this Code and of those individuals involved in the alleged
improper activity, whether or not it turns out that improper acts
occurred. Anonymous reports may be made by phone, web reporting
or letter. Reports by phone can be made to a third party hotline
service at 800-461-9330, reports by letter should be directed to
the General Counsel's office, and web reporting can be made at
the following web addresses: www/dentsply.com/report or
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www/mysafeworkplace.com.
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D. It shall be a violation of this Code if personnel fail to report a
known illegal activity or violation of the Code. If you have a
question about whether particular acts or conduct may be illegal
or violate the Code, you should contact one of the persons listed
above in subsection B. It shall be a violation of this Code if
personnel to whom a suspected illegal act or violation of the
Code is reported fail to ensure that the act or violation of the
Code comes to the attention of the General Counsel's office, the
Director of Internal Audit or a member of the Corporate
Compliance Committee.
If the suspected illegal acts or conduct in violation of the Code
involve a person to whom such acts or violations might otherwise
be reported, the acts or violation should be reported to another
person to whom reporting is appropriate.
E. It is Company policy to promptly and thoroughly investigate reports of
suspected illegal activity or violations of this Code. Company
personnel must cooperate with these investigations. It shall be
a violation of this Code for personnel to prevent, hinder or
delay discovery and full investigation of suspected illegal acts
or violations of this Code.
F. No reprisals or disciplinary action will be taken or permitted against
personnel for good faith reporting of, or cooperating in the
investigation of, suspected illegal acts or violations of this
Code. It shall be a violation of this Code for Company personnel
to punish or conduct reprisals against other personnel for making
a good faith report of, or cooperating in the investigation of,
suspected illegal acts or violations of this Code.
G. Personnel who violate the Code or commit illegal acts are subject to
disciplinary action, up to and including dismissal from the
Company. Personnel who report their own illegal acts or improper
conduct, however, will have such self-reporting taken into
account in determining the appropriate disciplinary action.
4. Government Interviews or Investigation
A. The Company and its personnel shall cooperate fully and promptly with
appropriate government investigations into possible civil and
criminal violations of the law. It is important, however, that
in this process, the Company is able to protect the legal rights
of the Company and its personnel. To accomplish these
objectives, any governmental inquiries or requests for
information, documents or interviews, other than routine
operating inspections (e.g., OSHA, FDA, etc.), should be promptly
referred to the General Counsel's office.
5. Compliance Procedures
A. Introduction. The Purpose of these procedures is to increase awareness
of the Program and Code, facilitate internal reporting of any
suspected violation of the law or the Code and ensure that any
reported violations are fully investigated and that the Company
responds appropriately to any violations.
B. Maintaining Awareness of the Program
1. A copy of the Code, which includes a description of how to report
suspected violations of the law or the Code, will be
provided to employees of the Company.
2. New employees will be provided a copy of the Code upon their employment.
3. Applicable employees will periodically be required to sign a form
stating their awareness of and compliance with the Code and
the Program.
4. A copy of the Code and a description of the violation-reporting
procedure will be available to all Company employees.
5. The Internal Audit Department shall, as it determines appropriate,
include in its audits a review of awareness of and
compliance with the Code, particularly with regard to
management employees or other employees who are in a
position to engage in conduct which may not be easily
observed by other employees, or in a position where there is
frequent involvement in activities which may carry a
significant risk of liability.
6. The General Counsel's office, in cooperation with other relevant
departments, shall create and distribute policies and/or
guides applicable to the Company's business and shall
periodically review compliance of the Company and its
business units with applicable law.
C. Company Investigations
1. If a report of potential illegal acts or conduct in violation of the
Code is made, it shall promptly be brought to the attention
of the General Counsel.
2. The General Counsel shall oversee the investigation of any report of
suspected illegal acts or violation of the Code, utilizing
appropriate legal, internal audit and other department
personnel and shall involve outside legal counsel or the
Company's independent auditors when appropriate.
3. Reports of suspected illegal acts or violations of the Code shall be
promptly investigated; such investigations may include
interviews of employees and external parties and the review
of relevant documents or other materials. The investigation
will be conducted in a manner which, to the degree
reasonable, protects any applicable legal privileges in
regard to the investigation.
4. Once an investigation is completed, if determined appropriate by the
General Counsel, the Corporate Compliance Committee and
appropriate management of the Company shall be apprised and
evaluate the results of the investigation and decide if any
corrective, disciplinary or other action is warranted and
shall direct and oversee implementation of any such action.
5. The Audit Committee of the Board of Directors, Executive Committee of
the Board of Directors or the full Board of Directors shall
be informed, as determined appropriate by the Corporate
Compliance Committee or as required by law, regarding
investigations and any actions taken or to be taken as a
result of investigations under the Code.
D. Ongoing Evaluation of Program
1. The Company will monitor and audit compliance with the Code and
applicable laws.
2. The Corporate Compliance Committee will review the effectiveness and
content of the Program on a regular periodic basis. The
Code and other compliance policies will be updated as
appropriate.
6. International Matters
A. International Operations. Laws and customs vary throughout the world,
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but all employees must uphold the integrity of the Company in
other nations as diligently as they would do so in the United
States. When conducting business in other countries, it is
imperative that employees be sensitive to foreign legal
requirements and United States laws that apply to foreign
operations, including the Foreign Corrupt Practices Act. The
Foreign Corrupt Practices Act generally makes it unlawful to give
anything of value to foreign government officials, foreign
political parties, party officials, or candidates for public
office for the purposes of obtaining, or retaining, business for
the Company. Employees should contact the Internal Audit or
Legal Department if they have any questions concerning a specific
situation.
B. Sanctions and Trade Embargoes. The United States government uses
- --------------------------------------
economic sanctions and trade embargoes to further various foreign
policy and national security objectives. Employees must abide by
all economic sanctions or trade embargoes that the United States
has adopted, whether they apply to foreign countries, political
organizations or particular foreign individuals and entities.
Inquires regarding whether a transaction on behalf of the Company
complies with applicable sanction and trade embargo programs
should be referred to the Legal Department.
C. Antiboycott. Certain countries have adopted boycott laws which are
designed to discourage companies from doing business with
Israel. Laws in the United States make it illegal for companies
to abide by or acknowledge such boycotts.
7. Waivers
It is recognized that a rare circumstance might arise in which the Code
should not apply. No waivers of the provisions of this Code to any Director
or Executive Officer shall be made or granted unless approved by the Board
of Directors (or a designated Committee of the Board) of the Company. Any
such waiver shall be promptly disclosed by the Company.
USE OF COMPANY FUNDS AND RESOURCES
One critical element of the Company's reputation for integrity is its
adherence to both legal and generally accepted ethical standards governing
the use of Company funds and resources. The following directives provide
specific standards of conduct to be followed:
1. No funds shall be used for any purpose which would be in violation of
any applicable law; or to make payments to, or for the benefit of,
domestic or foreign government employees; provided that gratuities in
small amounts may be paid to foreign government employees if such
gratuities merely enable the Company to receive services to which it
would otherwise be entitled.
2. Funds or assets shall not be used, directly or indirectly, to make
gifts to, provide entertainment for, or furnish assistance in the form
of transportation or other services to, government employees or public
officials, if such gifts, entertainment, or assistance would be a
violation of governmental regulations or would adversely reflect on the
Company's or the officials' integrity or reputation.
3. All assets and liabilities must be recorded in the regular books of the
Company and its subsidiaries; no undisclosed or unrecorded funds or
assets shall be established for any purpose; no false or artificial
entries shall be made in the books and records for any reason; and no
payments shall be approved or made with the intention or understanding
that any part of such payments are to be used for any purpose other
than that described by the material supporting the disbursement.
4. No direct or indirect political contributions shall be made with
Company funds without the express approval of the Board of Directors
and subject to review by the Company's General Counsel as to the
legality of such contributions.
5. Any officer or employee who has information or knowledge of any
violation of these directives shall promptly report the matter to the
General Counsel or the appropriate corporate or divisional officer.
6. All officers and managers are obligated to seek advice and guidance
from the Company's Legal Department in order to insure compliance with
all applicable laws, rules and regulations.
7. All managers shall be responsible for the enforcement of, and
compliance with, all policies of the Company, including distribution
and communications to insure employee knowledge thereof and compliance
therewith.
CONFLICT OF INTEREST
Directors and employees of the Company are expected to avoid involvements or
situations which could interfere, or appear to interfere, with the impartial
discharge of their responsibilities. Therefore, these persons shall NOT,
for their own account or for the account of any other person, directly or
indirectly:
1. Seek to profit from information about the business affairs, financial
position, or any transactions of the Company which have not been
publicly disseminated.
2. Divert to themselves or others any business or investment opportunity
in which the Company is or might be interested if aware of the
opportunity.
3. Become a director or officer of any firm or obtain any financial
interest (other than the acquisition of publicly traded securities
which do not exceed 3% of such enterprise or of such person's net
worth) in any firm supplying goods or services to the Company or which
purchases goods or services from the Company, unless authorized by the
Board of Directors.
4. Have a proprietary interest in or participate in any business
enterprise involving the manufacture or sale of any product which is
competitive with or similar to products produced by the Company, or
involving the offering of any type of services competitive with or
similar to services offered by the Company. In addition, any conduct
which might give rise to potential for misuse of the Company's trade
secrets or confidential business information is also prohibited.
However, this policy shall not preclude an investment interest in
publicly held corporations which manufacture and sell such products or
offer such services within the limits described in Paragraph 3 above.
5. Give or accept personal gifts, payments, favors, special
considerations, discounts, etc. which are of more than a normal value,
unless approved by the employee's manager. Common social amenities may
be given or accepted without manager approval only if they are of the
type that are normally associated with accepted business practice
within the industry or relative work discipline. Additional management
approval beyond the employee's manager should be secured if any doubt
exists with respect to a particular item or situation.
6. Enter into personal transactions with suppliers of the Company or with
customers of the Company other than on terms and conditions as are
available to the public, except as disclosed to the Audit Committee of
the Board of Directors.
PERSONAL RESPONSIBLITIES OF EMPLOYEES
All employees are expected to maintain high ethical standards in their
actions and working relationships with customers, fellow employees,
competitors, representatives of government, communication media and others.
All employees of the Company are expected to act in business matters with
dual responsibility to the public interest and the Company's interest, above
their own.
In addition to being in compliance with all Company policies, all employees
must also be in compliance with the following:
o Any employee who has information or knowledge of any violation of any
Company Policies or any violation of a legal obligation or requirement
shall promptly report the matter to their manager/supervisor, to any
corporate or divisional officer, or to the General Counsel.
o All confidential information about the Company, including inventions,
discoveries, formulas, trade secrets, customer lists, employee data,
etc., as well as confidential information acquired by the Company from
another company, individual or entity subject to a secrecy and
proprietary rights agreement, shall be kept confidential during and
subsequent to the period of employment with the Company.
o Information gathered on competitors, customers, suppliers, etc., must
be acquired legally and in a manner consistent with the Company's high
level of ethics and proper business conduct. Employees on the receiving
end of another company's confidential information should alert their
supervisor of the situation, who in turn should seek guidance from the
Legal Department.
It is recognized that in many situations and issues involving ethical or
moral judgment, it may be difficult to determine the right course of action
with certainty. In such instances, employees shall not rely solely on their
own judgment, but shall discuss the matter in full with their respective
manager/supervisor. In such instances, full disclosure of the facts in a
timely fashion and to the proper management level will serve to meet the
employees' responsibilities with respect to this Policy.
TRADING IN DENTSPLY INTERNATIONAL INC.
AND OTHER RELATED SECURITIES
Federal laws and regulations prohibit purchases and sales of the Company's
stock and other related securities by directors, officers and employees on
the basis of material information which is not generally available to the
public. The passing of such inside information - "tipping" - to outsiders
who may then trade on it is also prohibited. To assure compliance with
these laws, the following rules apply to directors, officers and employees
of the Company.
1. They shall not purchase or sell or otherwise trade in securities of the
Company or derivative securities, such as listed stock options, while
in possession of material, non-public information about the Company.
2. For purposes of this policy, the term "material information" means that
information as to which there is a substantial likelihood that the
information would be viewed by a reasonable investor as significantly
altering the "total mix" of information available in making investment
decisions.
3. "Non-public information" is that information which has not become
generally available to the investing public, through such channels as
the Company's publications, e.g., press releases, Annual and Interim
Reports to Stockholders, Proxy Statements and SEC filings; as well as
news articles, stock analysts' reports and like writings about the
Company and subjects relating to its businesses.
4. They shall not divulge confidential - and possibly material -
information about the Company, either to other employees or to
outsiders, except on a "need-to-know" basis.
5. They shall not buy or sell securities of any other company about which
material non-public information has been obtained through the
performance of their position responsibilities at DENTSPLY
International Inc.
Should there be any questions concerning the above with regard to any
particular transaction involving DENTSPLY International Inc. securities or
other related securities, please consult with the Legal Department prior to
taking any action.
ACCURACY OF BOOKS, RECORDS POLICY AND PUBLIC STATEMENTS
The Company's financial records should accurately reflect the nature and
purpose of all transactions.
All of the Company's books, records, accounts and financial statements must
be maintained in reasonable detail, must appropriately reflect the Company's
transactions and must conform both to applicable legal requirements and to
the Company's system of internal controls. Unrecorded or "off the books"
funds or assets should not be maintained unless permitted by applicable law
or regulation.
Business records and communications often become public, and we should avoid
exaggeration, derogatory remarks, or inappropriate characterizations of
people and companies that can be misunderstood. This applies equally to
e-mail, internal memos, and formal reports. Records should always be
retained or destroyed according to the Company's record retention policies.
In accordance with those policies, in the event of litigation or
governmental investigation, you must consult the Legal Department before
taking any action with respect to any such records.
The Company's public statements, including press releases and public
filings, shall not contain any material incorrect information and shall not
omit any information necessary to make the statements contained therein not
misleading. Required filings with the Securities and Exchange Commission
("SEC") shall be complete, timely and in compliance with the requirements of
the SEC.
DISCRIMINATION AND HARASSMENT
The Company provides equal employment opportunities to all employees and
applicants for employment without regard to race, color, religion, sex,
national origin, age, non-job related disability, or status as a Vietnam-era
or special disabled veteran in accordance with all applicable federal, state
and local laws, including executive orders as appropriate for any federal
contracts. This policy applies to all terms and conditions of employment,
including, but not limited to, hiring, placement, promotion, termination,
layoff, recall, transfer, leaves of absence, compensation and training.
The Company expressly prohibits any form of employee harassment. This
policy extends not only to the Company's employees, but also to all persons
with whom the Company's employees deal, such as suppliers and customers.
Sexual harassment is defined as unwelcome sexual advances, requests for
sexual favors, and all other verbal or physical conduct of a sexual or
otherwise offensive nature, and is prohibited especially where (a)
submission to such conduct is made either explicitly or implicitly a term or
condition of employment; (b) submission to or rejection of such conduct is
used as the basis for decisions affecting an individual's employment; or (c)
such conduct has the purpose or effect of creating an intimidating, hostile,
or offensive working environment. Furthermore, offensive comments, jokes,
innuendoes, pictures, cartoons and other sexually oriented documents and
statements are prohibited.
Each member of management is responsible for creating an atmosphere free of
discrimination and harassment, sexual or otherwise. Further, employees are
responsible for respecting the rights of their co-workers and expected to
conduct themselves in a business-like manner at all times.
If an employee experiences any improper job-related harassment or believes
they have been treated in an unlawful, discriminatory manner, they should
first attempt to resolve the problem with the individual exhibiting the
conduct toward them. If attempting to resolve the issue themselves is
inappropriate or not successful, they should promptly report the occurrence
to their supervisor, a member of management, or to a representative of the
Human Resources Department. The Human Resources Department will investigate
all matters related to discrimination and/or harassment and take proper
action.
If the Company determines that an employee has engaged in harassment or
other prohibited conduct, appropriate disciplinary action will be taken, up
to and including termination of employment.
The Company prohibits any form of retaliation against any employee for
filing a legitimate complaint under this policy or for assisting in a
complaint investigation.
ANTITRUST LAW
The antitrust laws generally are intended to promote the free enterprise
system by eliminating artificial restraints on competition. Violations of
the antitrust laws can subject violators to criminal penalties and civil
damages, and individuals to criminal penalties, imprisonment or both. These
laws are often complex and not easily understood. Nevertheless, it has
always been the uncompromising policy of the Company that its employees will
comply strictly with such laws. Certain activities are legally deemed to be
inherently anti-competitive and no defense of any kind will be permitted to
justify or excuse the conduct. Other activities will constitute violations
if they are anti-competitive and cannot otherwise be justified. It is
difficult to provide specific directives governing employee conduct involved
in such "rule of reason" activities because of the fact specific nature of
antitrust analysis. However, based on well-established court decisions, no
director, officer or employee should engage in any of the following conduct
without first discussing the circumstances with the General Counsel.
1. Discuss with competitors past, present or future prices of or marketing
plans for, any of the Company's products; or past, present or future
prices paid or to be paid for products or materials purchased by the
Company, or other business information affecting such prices ("price"
includes all terms of sale, including discounts, allowances,
promotional programs, credit terms and the like).
2. Discuss with competitors the division or allocation of markets,
territories or customers, or discuss with customers the division or
allocation among customers of their markets, territories or customers.
3. Discuss with competitors or customers the boycotting of third parties.
4. Reach an agreement or understanding with a customer on the specific
price at which the customer will resell the Company's products.
Whenever an employee becomes involved in any activity in which a competitive
restraint may be present or that could lead to a problem under the antitrust
laws, he or she should consult with a member of the Legal Department before
taking any action.
