As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/08/06  Dade Behring Holdings Inc         10-K       12/31/05    9:2.6M                                   Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report Pursuant to Section 13 and 15(D)      HTML   1.55M 
 2: EX-10.13    Material Contracts                                  HTML     48K 
 3: EX-10.16    Material Contracts                                  HTML     37K 
 4: EX-21.1     Subsidiaries of the Registrant                      HTML     14K 
 5: EX-23.1     Consents of Experts and Counsel                     HTML      7K 
 6: EX-31.1     302 Certification                                   HTML     14K 
 7: EX-31.2     302 Certification                                   HTML     14K 
 8: EX-32.1     906 Certification                                   HTML     10K 
 9: EX-32.2     906 Certification                                   HTML     10K 

DADE BEHRING HOLDINGS, INC.
2005 FORM 10-K—TABLE OF CONTENTS

 

2

ITEM 1  BUSINESS

General

Dade Behring Holdings, Inc. (also referred to as “we”, “us”, “our” and “Dade Behring”) is a leading manufacturer and distributor of diagnostic products and services to clinical laboratories. We serve approximately $12 billion of the $27 billion annual worldwide market for clinical diagnostic products and sell primarily to the central lab, which are typically hospital based or stand-alone reference laboratories and represent approximately $15 billion of the total market. We manufacture and market a broad offering of diagnostic products and services which include: (1) medical diagnostic instruments, (2) reagents and consumables, and (3) maintenance services. As of December 31, 2005, we had a worldwide installed base of approximately 38,100 diagnostic instruments, an increase of approximately 8.7% from 2004. Within our served markets, we have a strong position in each of our core businesses, which are chemistry, hemostasis, microbiology and infectious disease diagnostics.

In December 1994, Bain Capital, Inc. and the GS Capital Partners, L.P. and certain of their affiliates formed Dade International, Inc., and acquired certain assets of Baxter Diagnostics from Baxter International, Inc. The assets acquired from Baxter International, Inc. included established leadership positions in hemostasis and microbiology, strong routine chemistry/immunoassay market positions and an extensive sales and service organization, especially in the United States (“U.S.”).

In May 1996, we purchased DuPont’s diagnostic business, which had entered into the automated clinical chemistry market in 1968 with the introduction of the first random access automated chemistry analyzer in the world. This acquisition provided us with a strong position in the routine chemistry market, and world-class manufacturing and product development capabilities.

In October 1997, we acquired Behring Diagnostics, the clinical diagnostic business of Hoechst AG, and created Dade Behring Inc. Behring Diagnostics was established in 1904 by Emil von Behring, the recipient of the first Nobel Prize in medicine. This acquisition provided us with complementary products for our hemostasis and routine immunochemistry product lines and significantly broadened the overall product line portfolio by adding leadership positions in plasma protein testing and drugs of abuse testing/therapeutic drug monitoring. It also expanded our capabilities in instrumentation development, specialty assay development and research, and extended the geographic scope of our business.

On August 1, 2002, Dade Behring Holdings, Inc. and certain of its wholly-owned direct and indirect domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code, as amended, with the United States Bankruptcy Court for the Northern District of Illinois. The Bankruptcy Court confirmed the Plan of Reorganization on September 18, 2002 and the Plan of Reorganization became effective on October 3, 2002.

Diagnostic Industry—Overview

Clinical diagnostic tests are used to analyze samples of patients’ bodily fluids such as whole blood, blood plasma, serum or urine in a clinical setting. In a single test, a patient sample may be measured to determine the presence, concentration or absence of a particular substance or condition. In some tests, the fluid sample is combined with a biochemical reagent, which is then observed or measured to detect physical or chemical changes that have a predetermined correlation to diagnostic information. The test result enables physicians to diagnose, treat and monitor patients. The most frequently ordered diagnostic tests are traditional routine clinical chemistry tests that measure substances, such as glucose, cholesterol or sodium, as part of routine blood checks. Other diagnostic tests measure other bodily functions such as blood clotting ability and cardiac function, or measure the presence of infections or drugs.

By providing accurate and timely patient diagnosis and treatment, the wide range and important nature of these tests have established diagnostic testing as an integral part of medical practice.

4

---

Increasingly, diagnostic testing is recognized as making a significant contribution to improving patient care and lowering total patient costs. While diagnostic tests are performed in a number of different settings, including hospitals, reference laboratories, physicians’ offices/ambulatory care centers, criminal justice system specialty labs and homes, the vast majority occur in hospitals and reference laboratories.

Diagnostic testing systems are composed of instruments, reagents, consumables, service and data management components. Instruments, which represent approximately 9% of our revenue, serve to automate repetitive manual tasks, improve test accuracy and speed results reporting. Reagents are biochemical substances that react with the patient sample to produce measurable, objective results. The consumable accessories vary across application segments, but are generally items such as vessels used in generating test results. Reagents and consumables that are exclusive to their related testing systems represent “closed” systems, which generally provide more predictable future revenue to the system supplier. “Open” systems accept reagents and consumables from more than a single manufacturer. Sample handling and preparation devices and data management systems are becoming increasingly important components of the clinical diagnostic system. These additional system components permit laboratories to achieve cost efficiencies and higher test volumes. The global clinical diagnostics market is comprised of approximately 25,000 hospital and reference laboratories. Improving productivity is a primary focus area for many of these labs given the ongoing cost pressures within the healthcare industry and the growing shortage of qualified individuals to work in clinical labs.

The global clinical diagnostics market is estimated at $27 billion annually, with the United States, Western Europe and Japan comprising approximately 49%, 35% and 9%, respectively, of the global market. We primarily serve the clinical laboratory market, which comprises $15 billion of the $27 billion global clinical diagnostics market. We believe that the global clinical diagnostics market will continue to grow due to a number of key favorable industry trends, including:

·                    Demographic shifts resulting from the aging of the population and socioeconomic improvements that are expected to increase the overall level of demand for diagnostic testing;

·                    Increased focus on lowering total healthcare expenditures that will likely increase demand for diagnostic testing as an effective tool to improve patient outcomes and reduce the costs of misdiagnosis through earlier and more accurate diagnosis and patient monitoring;

·                    Emerging markets that will likely provide additional demand as economic growth in these countries lead to increased per capita healthcare expenditures;

·                    Technology improvements in new tests, pathogens and markers that will likely result in the increased use of diagnostics to aid in the diagnosis of diseases; and

·                    Increased automation of diagnostic instruments that is expected to lower the overall cost of diagnostic testing and thereby increase accessibility and demand.

Dade Behring—Served Markets

We derive substantially all of our revenues from manufacturing and marketing clinical diagnostics products and services. We are organized functionally and are comprised of three reporting segments: Global Customer Management (“GCM”)—Americas; GCM—International; and Global Operations. GCM—Americas and GCM—International are our sales, marketing, customer training, technical support and field service organizations. Global Operations primarily includes all manufacturing, distribution and research and development activities, and accordingly does not recognize significant revenue. See Notes 2 and 13 to our consolidated financial statements for information related to risks from our operations outside the U.S. and segment and geographic area financial information, respectively. This and the following sections discuss our served markets whose results are reported in the GCM—Americas and GCM—International segments.

5

---

Chemistry.   Our Chemistry business consists of four product lines: routine chemistry/immunochemistry, cardiac, plasma proteins and drugs of abuse testing/therapeutic drug monitoring. These product lines comprised approximately $1.1 billion or 65% of our revenue during 2005. The clinical laboratory chemistry/immunochemistry testing segment represents approximately $11 billion of the total clinical diagnostics market.

Routine Chemistry/Immunochemistry.   Routine chemistry tests measure substances found in large concentrations in patients’ blood, tissue, urine or other bodily fluids. Some of these substances include chemistry tests, such as for cholesterol, glucose, iron and sodium and their concentration levels, which provide information on a patient’s basic bodily functions. Immunochemistry testing relies on the properties of antibodies and antigens in the immune system as its key detection mechanism to measure relatively low concentrations of these substances found in blood. Historically, analyzers have been developed separately for routine chemistry and immunochemistry testing. Today, high-frequency tests from both categories are rapidly being consolidated on to a single system that significantly improves overall laboratory productivity and costs.

On average, hospital laboratories operate approximately three routine chemistry and/or immunochemistry analyzers. These instruments account for up to 80% of the volume of all diagnostic tests performed in clinical laboratories and are characterized by their high throughput capabilities.

We develop, market and sell Dimension® analyzers, which are the only systems in the market that combine both routine chemistry and immunoassay testing into one analyzer. We have consistently been a leader in chemistry/immunochemistry instrument consolidation and automation, beginning with the 1998 introduction of the heterogeneous immunoassay testing module for our mid-volume Dimension® RxL analyzer. In 2001 we introduced the Dimension® Xpand analyzer, which provides the same testing consolidation capability as the Dimension® RxL analyzer, for smaller labs. The continued consolidation of routine chemistry and immunochemistry testing on to a single analyzer continues to represent a significant growth opportunity for us. We believe that our Dimension® line of products offers customers a broad test menu and cost efficiencies for performing these two categories of tests since the analyzers have the potential to improve test turnaround times and significantly reduce labor requirements. We are continually enhancing our existing menu of over 95 tests, and are currently developing new ones to expand our capabilities in this largest segment of the clinical diagnostics market.

In 2003, we introduced the Dimension® RxLMax® analyzer, the most recent version of our mid-volume chemistry/immunochemistry analyzer, which included several significant system improvements. Similarly, at the end of 2004, we introduced our latest low-volume system, the Dimension® Xpand® Plus analyzer, which included enhancements similar to our mid-volume instrument.

In 2002, we introduced the StreamLAB® workcell, which has the capability to connect multiple Dimension® systems with onboard pre-analytical capabilities of accessioning, centrifugation and aliquotting. The StreamLAB workcell automates steps that are essential to laboratory processes for producing test results. At the end of 2004, we enhanced the StreamLAB workcell by providing connectivity for up to six Dimension® systems and to the Immulite®  immunoassay system manufactured by Diagnostics Products Corporation. This workcell provides our customers in high-volume laboratories with an integrated single platform solution. In 2005, we introduced a mid-volume laboratory automation solution, the Dimension® Lynx System.

Our approach to workstation consolidation is unique. We integrate the immunoassay detection capability into the chemistry analyzer itself rather than simply connecting separate chemistry and immunochemistry instruments with a common patient sample/test tube handling system. Integration of testing into one analyzer provides greater asset productivity, lower labor costs and faster turnaround times. Our strong reputation for servicing our instruments and our commitment to improving operating efficiency are among the reasons why the Dimension® product line remains attractive to clinical laboratories. Staffing

6

---

and budget concerns in clinical laboratories worldwide suggest that laboratory process integration and instrument consolidation will become even more compelling to our customers over time.

Building on our success in workstation consolidation, we are currently developing a next-generation system for high-volume laboratories, the Dimension Vista™ System. The initial version of the system will serve the high-volume testing segment, which represents nearly half of the $11 billion chemistry/immunochemistry testing market, and the system architecture will provide the basic building blocks for new consolidated instruments designed to serve mid- and low-volume laboratories. With the exception of StreamLAB, we currently do not have a product offering that specifically serves the high-volume chemistry/immunochemistry market. In addition to targeting further labor efficiencies in the lab, the Dimension Vista™ System will also have the unique capability of consolidating a currently independent testing discipline, nephelometric plasma protein testing, by integrating a nephelometer into the system. We anticipate commercialization of the Dimension Vista™ System in the second half of 2006. As with all new products we introduce, the rollout will be controlled. Thus, we expect little to no revenue impact in 2006, with market penetration and revenue increasing over the course of 2007. See “Item 1A. Risk Factors” for a discussion of risk factors related to the release of new products.

Cardiac.   Cardiac tests are used for both risk assessment and diagnosis of cardiovascular disease (“CVD”). The cardiac market is one of the highest growth segments of the broader immunochemistry market, growing at approximately 12% annually. We have a leading share in the market for cardiac tests and were one of the first to introduce a widely adopted testing system for the cardiac proteins Troponin I, CK-MB and Myoglobin. In 2004 we introduced the NT-proBNP test, a rapidly growing cardiac marker used to assist physicians in the diagnosis of congestive heart failure (“CHF”). The combination of rapid and accurate tests for these CVD markers has allowed for rapid diagnosis of cardiac disease and has enhanced the physician’s ability for triage and diagnosis of chest pain in patients.

We offer a unique combination of platforms for performing cardiac tests. In the central lab, the Dimension® analyzers, BN™II, and BN Prospec® analyzers offer tests for cardiac risk assessment such as cholesterol, HDL, LDL, apolipoprotein, and high sensitivity CRP. We have been the market leader in the development of high sensitivity CRP testing for cardiac application. In addition to cardiac risk assessment tests, the Dimension® analyzers’ menu also includes the four major cardiac disease tests: Troponin I, CK-MB, Myoglobin for cardiac necrosis, and NT-proBNP for helping in the diagnosis of CHF. In the acute care/near patient setting, we offer cardiac testing on our Stratus® CS Acute Care™ Diagnostic System. Being able to standardize cardiac testing between our laboratory and acute care platforms provides us with a unique position in the market, because it is important that physicians be confident that the results from the acute care platform will clinically match those that come from the laboratory.

Plasma Protein.   Plasma protein systems test serum, plasma, urine or cerebral spinal fluid to help diagnose diseases, such as coronary heart diseases and rheumatic diseases, as well as to detect disorders, such as tumors, renal failure, inflammation, anemia, gammopathies and malnutrition. In 2005, we introduced outside the United States the first automated nephelometric test to diagnose chronic alcohol abuse. Plasma protein tests are conducted on two types of instrument platforms: (1) routine chemistry/immunochemistry analyzers such as our Dimension® instrument line, and (2) dedicated nephelometers such as our BN™II and BN Prospec® instruments. While a higher proportion of protein tests are run on routine chemistry/immunochemistry systems, the high sensitivity and broad test menu make nephelometers a practical option for customers who need this utility. We are the market leader in the worldwide nephelometric plasma protein testing.

Drugs of Abuse Testing (“DAT”)/Therapeutic Drug Monitoring (“TDM”).   Drug tests are used to measure the level of therapeutic drugs or presence of drugs of abuse, usually in either blood or urine. TDM tests assist physicians in ensuring that the level of therapeutic drugs patients receive reach

7

---

appropriate levels to treat a condition, but do not exceed safe ranges in the bloodstream. An example of a TDM application is testing performed on transplant patients to monitor the level of immunosuppressive drugs that they are given. Drugs of abuse tests screen for the presence of illicit substances such as cocaine and marijuana. Because of their range of application, drugs tests are used at a variety of sites, from clinical laboratories to employers’ offices. We are a worldwide market leader in drug testing with a comprehensive menu of tests.

We offer drug tests on our Dimension® analyzers. In 2003, we also began marketing the mid- to high-volume V-Twin™ analyzer for the Syva® product line, and in 2004 we began marketing the mid-volume Viva™E analyzer. Vital Scientific N.V. manufactures these systems and we distribute them worldwide. Both are configured to run our Emit®-branded drugs of abuse, therapeutic drugs and serum toxicology assays, as well as specimen validity tests. Vital Scientific is currently developing the Viva-Jr, an easy to use, compact benchtop analyzer dedicated to drug testing, which we expect to begin marketing in the first half of 2006. We also have ready-to-use liquid DAT and TDM reagents for a broad range of other commercially available instrument platforms, which makes Syva an attractive choice for DAT assays among open-system providers.

Hemostasis.   Hemostasis testing measures a patient’s ability to form and dissolve blood clots, a critical factor in the stabilization of the cardiovascular system. Hemostasis testing can be segmented into routine screening and specialty tests. Routine hemostasis tests are typically performed before and during surgical procedures. Hemostasis testing is essential in post-surgical monitoring of anticoagulant treatments that “thin” the blood to prevent clotting. Specialty tests are performed to further characterize patients with coagulation disorders such as hemophilia, or other congenital or acquired disease states.

We offer a broad range of instruments that perform both routine and specialty tests to meet the needs of customers from small hospitals to large reference labs. With revenue of approximately $299 million during 2005, we continued to maintain a global leadership position in hemostasis testing through our commitment to the innovation of new and improved products and services. The hemostasis product line continues to lead competitors in number of new systems placed and in overall reagent usage and market share. We offer our BCS analyzer to high-volume and specialty laboratories and distribute instruments manufactured by Sysmex Corporation to the high-volume routine assay reference lab market and to mid- and low-volume laboratories, such as community hospitals.

The PFA 100 analyzer is a fully automated system which determines platelet function by mimicking how platelets adhere, aggregate, and form a plug in the presence of an agonist, either collagen ADP or collagen epinephrine. The result is known as closure time, and has utility as an excellent screen for the bleeding disorder von Willebrand’s disease, as well as new cardiac utility in measuring the functional response of platelets to aspirin. We believe this will be a high-growth market as new anti-platelet therapies are developed and introduced.

We expect market growth to come from continued growth in the aging population, the increasing number of surgeries performed, and from new hemostasis tests, that more accurately measure blood clotting and allow for improved patient treatment.

Microbiology.   We serve the automated and manual Identification/Antibiotic Susceptibility Testing (“ID/AST”) microbiology market with our MicroScan® products. Microbiology laboratories use MicroScan® products to identify infection-causing bacteria such as streptococci and staphylococci, and to determine the minimum concentration of antibiotic, such as erythromycin and ampicillin, necessary to inhibit or kill the bacteria. This information is critical to the optimum management of patient therapy. MicroScan revenues were approximately $165 million during 2005, and were derived almost entirely from the automated portion of the ID/AST market. The market for automated ID/AST testing is approximately $400 million within an overall microbiology market of $1.5 billion.

8

---

At the core of our product line is a patented dry reagent panel. Available as individual testing components, our combination panels provide both organism identification and the susceptibility information using a broad selection of antibiotics to meet formulary needs and streamlined workflow for operator efficiency. Our MicroScan WalkAway® 40SI analyzer and WalkAway® 96SI analyzer are fully automated systems that utilize a dual technology optic system to process colorimetric and fluorogenic panel types simultaneously. The autoSCAN®-4 analyzer provides semi-automated processing solutions for low-volume testing needs of conventional laboratories. All of our analyzers are supported by our MicroScan Microbiology Systems - LabPro Information Management System and our optional Alert System. Designed by microbiologists, these informatics tools provide customizable functionality to enhance the management of test results.

We are a leader in the automated ID/AST microbiology market. We have maintained this position by focusing on higher-growth non-U.S. markets and developing improved capabilities for our instrumentation, software and panels to help laboratories reduce their overall costs. In the United States, we continue to secure business by promoting our conventional technology, which utilizes direct susceptibility testing methods and results in optimal detection of emerging antimicrobial resistance. MicroScan® systems were the first automated systems to detect both vancomycin-intermediate and vancomycin-resistant Staphylococcus aureus during routine testing, demonstrating our leadership in providing highly accurate susceptibility test results. In 2004, we introduced our Synergies plus™ panels, which offer two-hour organism identification and “read when ready” antibiotic susceptibility test results. This new line of panels and software will provide more rapid test results on organisms that are slow to express resistance and will enhance patient outcomes without compromising our reputation for accuracy.

Continued evolutions in the microbiology testing market have been driven primarily by advances in automation, new antibiotics, the complexity of various microbes, and the increasing resistance of microbes to antibiotics.

Infectious Disease Diagnostics.   Infectious disease diagnostic systems test for the presence of infectious microorganisms. This market consists of bacteriology, parasitology and virology testing, including HIV and hepatitis testing. These tests are used not only to diagnose disease, but also as screening tests in order to insure a safe blood supply.

We have a niche position in infectious disease diagnostics. Infectious disease testing is one of the largest segments of the diagnostics testing market, but accounted for approximately $86 million or 5% of our revenue during 2005. The microtitre plate (“MTP”) subsegment, manual, semi-automated and fully-automated, makes up approximately one-third of the immunoassay testing in this segment. MTP is a high-throughput, low cost testing method that is ideal for blood banks, large hospitals and commercial laboratories. In the European MTP segment, our BEP systems are used by more laboratories than any other batch analyzer. In addition, we possess a strong intellectual property position for HIV-O, a variant of HIV. Due to the prevalence of HIV-O, any future HIV testing platform will need to include HIV-O to offer comprehensive HIV testing capability. We continue to invest in expanded test menu capabilities for our existing instrument line to allow us to better serve the high-volume blood bank market. These instruments have met with positive acceptance by a number of European and Asian blood banks.

9

Sales and Marketing

We have a global customer management organization that includes elements beyond traditional sales representatives and marketing personnel, such as healthcare consultants, clinical quality initiatives managers, field service engineers, national accounts/group purchasing organization management, integrated delivery networks management, inside sales, clinical application specialists, customer service representatives, technical assistance, customer operations, pricing analysts and field sales and service management.

Our global customer management executives have long tenure in both the clinical diagnostics industry and with our company. Similarly, the experience profile of our customer contact personnel is generally one of long service in the industry and with our company. We utilize a generalist sales force approach, but all countries with significant sales of specific products have specialists who are trained to service specific product lines. Because of the sales volume and market penetration of our chemistry/immunochemistry, microbiology, hemostasis, cardiac risk assessment, protein and therapeutic drug products, most sales representatives, specialists and generalists are familiar with the features and benefits of these products.

We use a dedicated health systems sales team in the United States that focuses exclusively on serving the larger hospital networks and reference laboratories, which represent an increasingly important portion of our customer base as the healthcare industry continues to consolidate. Our products are presented to customers through most of the larger group purchasing arrangements serving hospital and reference laboratories. Our health systems sales organization provides overlay support for individual sales representatives.

Our key focus is on providing solutions to the challenges our customers face within their laboratories, which are primarily cost pressures, skilled labor shortages and space constraints. We have developed both healthcare solutions and clinical quality initiative organizations to identify and find ways to provide customized solutions for our customers. Among others, areas we focus on include: workflow analysis, improved testing turnaround time, workstation consolidation, patient specimen filing and storage and ways to ensure integrity of patient information. In addition, we provide educational opportunities for our customers through seminars, audio conferences, newsletters and websites.

Our customer management organization has a long history and strong reputation for delivering the highest quality customer satisfaction in the clinical diagnostics industry.

Research and Development

We conduct research and development in the United States and in Germany. Research and development activities are grouped into two primary categories across all product segments: instrument platform development and test menu development.

Our instrument platform development efforts are focused on the design of new instrumentation and software that brings increased automation and functionality to clinical laboratories. Customers value broad test menus, quick turnaround of patient samples, integration of multiple laboratory functions, automation of non-value-added activities, minimal space utilization, ease of use and the opportunity to lower operating costs. Our test menu development efforts seek to improve the efficacy of existing products and to develop new tests that extend our existing product offerings.

Our research and development teams are skilled in a number of engineering and scientific disciplines including focus areas of chemistry/immunochemistry, microbiology, hemostasis, informatics, applying robotics to sample processing and systems engineering. We develop our products internally using a multifunctional team approach which integrates our internal capabilities of engineering and assay development with regulatory and quality systems, marketing, technical support and manufacturing. Although we continue to develop or license all of our hemostasis reagents and controls, we have sourced

10

---

new hemostasis instruments through an external instrumentation partner using a similar multifunction approach in recent years.

Research and development expense was $141.5 million in 2005, as compared to $134.0 million in 2004 and $117.5 million in 2003.

Patents, Trademarks and Licenses

We own or have licensed over 2,500 patents in the United States and other countries that relate to our products and business and have also developed brand names and trademarks for our products. We own numerous United States and non-U.S. registered trademarks and service marks and have applications for the registration of trademarks and service marks pending around the world. We also own several United States copyright registrations. In addition, we own a wide array of unpatented proprietary technology and know-how. Further, we license certain intellectual property rights from third parties. Our ability to compete effectively depends in part on our ability to maintain the proprietary nature of our owned and licensed intellectual property. In each of our business segments, these patents, patent applications, trademarks, copyrights and licenses are, in the aggregate, of significant importance to our business. However, we believe that no single product related patent, trademark or copyright (or related group of patents, trademarks or copyrights) is material in relation to our business as a whole.

Competition

While the clinical diagnostics industry is highly competitive, there are substantial barriers to entry including: the necessity for significant sales, service and distribution infrastructure; research and development infrastructure that requires engineering and informatics skills necessary to design and commercialize complex instruments as well as the life science skills necessary to develop the diagnostic tests; and the highly regulated environment for our products. We encounter competition from U.S and non-U.S. manufacturers who compete in some or all of the markets we serve. Some of our competitors are large, diversified healthcare companies with substantial resources. Our competitors include Abbott Laboratories, Bayer AG, Beckman Coulter, Becton Dickinson, bioMerieux, Johnson & Johnson, Roche and Diagnostica Stago. We believe that in recent years, the key competitive factors for diagnostic testing products have been quality, service, price and ease of use. For automated and consolidated instrument platforms, menu breadth is of increasing importance.

Regulatory Matters

Most aspects of our business are subject to some degree of government regulation in the countries in which we operate. In addition to regulations intended to ensure product safety and effectiveness, our business is subject to environment and occupational health and safety regulations. For some products, and in some countries, government regulation is significant and, in general, there is a trend towards more stringent regulation. Our policy is to comply fully with all regulatory requirements that apply to our products and operations. Failure to comply with government regulations can have significant consequences. Governmental regulatory actions can result in the recall or seizure of products, suspension or revocation of the authority necessary for production or sale and other civil, monetary and criminal sanctions.

In the United States, the medical device and clinical diagnostic industries have long been subject to regulation by various federal, state and local agencies, primarily regarding product manufacturing, safety, efficacy and labeling. Government agencies in the United States as well as other countries have expressed concern about the costs of healthcare and in some cases have focused attention on the use of diagnostic tests. Regulations in these areas already exist in some countries and may be expanded significantly in the United States and other countries in the future.

11

---

We devote significant time, effort and expense to address regulatory requirements applicable to our business. Our quality and regulatory compliance training and well established manufacturing practices have consistently allowed us to successfully introduce and maintain the manufacturing and distribution of instrument and reagent products that satisfy regulatory standards as well as our customers’ requirements for quality.

Although we are unable to predict the extent to which our business may be affected by future regulatory developments, we expect that our own business would not be disproportionately burdened by future regulation. We believe that the integration we have achieved between our engineering and life sciences capabilities and our substantial experience addressing and accommodating regulatory requirements and restrictions on our operations throughout the world will allow us to continue to develop and introduce new and improved products and enable us to compete effectively within this environment.

Raw Materials

We purchase raw materials, which include various biological and chemical products, from a variety of suppliers. While some of our principal raw materials are available from multiple sources, we elect to purchase certain raw materials from sole suppliers for various reasons (e.g., quality assurance, cost effectiveness or regulatory approval requirements). Other raw materials that we use are not available from multiple sources. In some cases where there are regulatory requirements relating to the qualification of suppliers, we may not be able to establish additional or replacement sources on a timely basis. While we work closely with our suppliers to ensure continuity of supply, the termination, reduction or interruption in supply of these sole-sourced raw materials could affect our ability to manufacture and sell certain of our products and to achieve anticipated production and sales levels.

Employees

As of January 31, 2006, we had approximately 6,300 full-time and part-time employees, of which approximately 3,300 were in the United States. The remaining employees were serving at various locations around the world. Our U.S. employees are not represented by collective bargaining groups. We have had no significant difficulty attracting qualified professionals. We consider our relationship with our employees to be very positive.

General and Internet Information

Dade Behring Holdings, Inc. is a corporation organized on September 23, 1994 under the laws of the State of Delaware. Our principal executive offices are located at 1717 Deerfield Road, Deerfield, Illinois 60015-0778 and our telephone number is (847) 267-5300. This annual report on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, Securities and Exchange Commission Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, will be made available free of charge through the Investor Relations section of our Internet website (http://www.dadebehring.com) as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Executive Officers of Dade Behring Holdings, Inc.

The following is a list of the executive officers of Dade Behring Holdings, Inc. as of January 31, 2006, showing their ages, present positions and offices with Dade Behring and their business experience during the past five or more years.

12

---

James W.P. Reid-Anderson, 46, Chairman of the Board, President and Chief Executive Officer

Mr.  Reid-Anderson was elected to the Board of Directors in 2000 and was named Chairman of the Board of Directors in October 2002. Mr. Reid Anderson has served as President and Chief Executive Officer since September 2000. Mr. Reid-Anderson joined us in 1996 as Executive Vice President and Chief Financial Officer for Dade Behring Inc. and became Chief Administrative Officer and Chief Financial Officer in September 1997, responsible for all headquarters functions on the merger of Dade and Behring. In April 1999, Mr. Reid-Anderson was promoted to President and Chief Operating Officer. From 1994 to 1996, Mr. Reid-Anderson worked for Wilson Sporting Goods where he served as Chief Operating Officer and Chief Administrative Officer. In addition, Mr. Reid-Anderson had responsibility for their international unit. He also held financial positions of increasing responsibility at Pepsico, Inc., Grand Metropolitan PLC and Mobil Oil Corporation, with roles based in Europe, Asia and North America. Mr. Reid-Anderson is a fellow of the Association of Chartered Certified Accountants and holds a degree with honors from the University of Birmingham in England.

John M. Duffey, 45, Chief Financial Officer

Mr.  Duffey was appointed Chief Financial Officer of Dade Behring Holdings, Inc. in September 2001 and is responsible for finance, legal and investor relations. Mr. Duffey joined us in 1995 as Dade Behring Inc. Vice President, Tax. In January 1997, Mr. Duffey was promoted to Corporate Vice President, Financial Services, having responsibility for Shared Services, Tax and Internal Audit. In May 1999, he was promoted to Corporate Vice President and Controller and became Senior Vice President and Controller in January 2001. Prior to joining us in 1995, Mr. Duffey worked for the Chicago office of Price Waterhouse. Mr. Duffey’s thirteen years at Price Waterhouse included a tour-of-duty in the firm’s Washington D.C. National Office in the Accounting Methods Group. Mr. Duffey is a Certified Public Accountant and holds a B.A. in Accounting from Michigan State University.

Dominick M. Quinn, 50, Executive Vice President

Mr.  Quinn was appointed Executive Vice President of Dade Behring Holdings, Inc. in December 2002. Mr. Quinn is also President, Global Customer Management, of Dade Behring Inc., a position to which he was appointed in January 2002. Mr. Quinn joined us in July 1998 as Dade Behring Inc. Group President, Biology and became President, EMA in March 1999, responsible for all commercial operations within Europe, the Middle East and Africa. In October 2000, he was promoted to President, International, responsible for all commercial operations outside of the U.S. and Canada. Prior to joining us in 1998, Mr. Quinn worked as Global President, Hospital Business, for Mallinckrodt Medical, based in Hennef (Germany), a medical device company. Prior to joining Mallinckrodt Medical in 1982, Mr. Quinn was Controller for Abbott Laboratories’ operations in Ireland. Mr. Quinn earned a Bachelor of Science degree in economics from Cork University in Ireland in 1976. He continued his studies to become a Chartered Management Accountant, and was subsequently awarded a fellowship of the Institute of Chartered Management Accountants (F.C.M.A.).

Hiroshi Uchida, 46, Executive Vice President

Mr.  Uchida was named Executive Vice President of Dade Behring Holdings, Inc. in December 2002. Mr. Uchida is also President, Global Manufacturing Operations, of Dade Behring Inc., a position to which he was appointed in January 2002. Previously, Mr. Uchida held positions as President of North America, President of Asia and Latin America, President of Asia, and Vice President and General Manager for the Asia-Pacific region for Dade Behring Inc., since joining us in 1997. Before that time Mr. Uchida served as a Director with Arthur D. Little, heading the Asia Pacific healthcare practice, and Vice President at Bain Consulting. He holds Ph.D. and M.A. degrees from Harvard University and a B.A. degree from Brown University.

13

---

Mark Wolsey-Paige, 44, Executive Vice President

Mr.  Wolsey-Paige was named Executive Vice President of Dade Behring Holdings, Inc. in December 2002. Mr. Wolsey-Paige is responsible for the global research and development function and is also responsible for business development, strategic planning and market research. Mr. Wolsey-Paige was part of the team that formed Dade Behring Inc. through the acquisition of the diagnostic business of Baxter International Inc. in 1994. After the duPont Diagnostics acquisition, Mr. Wolsey-Paige was responsible for marketing and new product development of all chemistry product lines, including Dimension®. In May 2000, Mr. Wolsey-Paige became Senior Vice President, Strategy and Business Development. In December of that year, he also became responsible for legal and corporate research and development. In 2002 Mr. Wolsey-Paige led Dade Behring’s marketing function. Mr. Wolsey-Paige was appointed Senior Vice President, Strategy and Technology for Dade Behring Inc. on January 1, 2003, and now is responsible for research and development, business development and strategic planning. Prior to joining us, Mr. Wolsey-Paige was a consultant at Bain & Company in Boston. Mr. Wolsey-Paige holds a M.B.A. from Harvard University and a B.S.B.A. from Washington University.

ITEM 1A.   RISK FACTORS.

Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

Our failure to compete with other manufacturers in the highly competitive clinical diagnostics industry, some of which have greater financial resources than we do, could harm our ability to retain existing customers and obtain future business.

The clinical diagnostics industry is highly competitive and we encounter competition from several international manufacturers in both U.S. and non-U.S. markets. Some of our competitors are significantly larger and have greater resources, financial and other, than we do. Moreover, we encounter different competitors in each of our key product lines and we cannot assure you that we will not encounter increased competition in the future that could have a material adverse effect on our business.

Our profit margins and business approach may be adversely affected by potential healthcare reform.

Substantially all of our sales are in the clinical diagnostics industry. Healthcare reform and the growth of managed care organizations have been considerable forces in the diagnostics industry. These forces continue to place constraints on the levels of overall pricing and thus could have a material adverse effect on the profit margins of our products. Such continuing changes in the United States healthcare market could also force us to alter our approach to selling, marketing, distributing and servicing our customer base. In and outside the United States, including Germany and Japan in particular, changes to government reimbursement policies could reduce the funding that healthcare service providers have to spend on diagnostic products, which could have a material adverse impact on our sales and/or profit margin.

We make significant investments in research and development, but there is no guarantee that any of these investments will ultimately result in a commercial product that will generate revenues.

Our products require the integration of many component systems and processes including electromechanical, information systems and biochemical reactions or assays. Each year we expend significant resources in the development of new products that incorporate these systems. For the year ended December 31, 2005, we spent approximately $142 million on research and development expenses. Notwithstanding these investments, we may be unable to successfully design or develop any or all of these components or to integrate them into viable commercial systems. We might also encounter substantial delays in getting products to market in a timely fashion. If our success in introducing such products is less than we anticipate, we may not be able to recover all of our capitalized new product development costs, and the write down of unrecoverable costs could adversely affect our operating results or financial condition.

14

---

Changes in our business strategy or plans may adversely affect our operating results and financial condition.

If our business strategy or plans change, whether in response to changes in economic conditions or developments in the diagnostics industry, or otherwise, we may be required to expend significantly more resources than planned to develop and implement any new business strategy or plans. The expense of any such change could adversely affect our operating results and financial condition.

Because a significant portion of our business is conducted outside the United States, fluctuations in foreign currency exchange rates could adversely affect our results of operations.

Approximately 54% of our sales and a significant portion of our earnings are attributable to operations conducted outside of the United States. The United States dollar value of sales and earnings of these operations varies with currency exchange rate fluctuations. Changes in certain foreign currency exchange rates could have an adverse effect on our ability to meet interest and principal obligations on our United States dollar-denominated debt. Our planned hedging of other currencies against the United States dollar may not adequately reduce exposure to currency exchange fluctuation.

Our ability to compete depends in part on our ability to protect our intellectual property.

We own or license over 2,500 United States and non-U.S. patents and have numerous patent applications pending around the world. We own numerous United States and non-U.S. registered trademarks and service marks and have applications for the registration of trademarks and service marks pending around the world. We also own several United States copyright registrations. In addition, we own a wide array of unpatented proprietary technology and know-how. Further, we license certain intellectual property rights from third parties. Our ability to compete depends in part on our ability to maintain the proprietary nature of our owned and licensed intellectual property. There can be no assurance as to the degree of protection offered by the various patents, the likelihood that patents will be issued on pending patent applications, or, with regard to the licensed intellectual property, that the licenses will not be terminated. Furthermore, there can be no assurance that others will not develop around the patented aspects of any of our current or proposed products, independently develop technology or know-how that is the same as or competitive with our technology and know-how or otherwise obtain access to our intellectual property. If we are unable to maintain the proprietary nature of our intellectual property and our significant current or proposed products, our revenues and results of operations may be adversely affected.

We are subject to regulation by various U.S. federal, state and non-U.S. agencies, which requires us to comply with regulations in the design, manufacture and distribution of most of our products and violation of such regulations could adversely affect us.

Most of our products and operations are subject to regulation by the United States Food and Drug Administration, or FDA, and various other federal and state agencies, as well as by a number of non-U.S. governmental agencies. FDA regulations require that most of our new products have pre-marketing approval by the FDA, or prove substantial equivalence through a 510(k) notification and also require that most of our products be manufactured in accordance with Good Manufacturing Practices.

Some products and operations are also subject to regulation by the United States Drug Enforcement Agency, or DEA, and various other federal and state agencies, including the United States Department of Agriculture, or USDA, as well as by a number of non-U.S. governmental agencies. DEA regulations require that we obtain DEA Registrations for the bulk manufacture and handling of controlled substances, and maintain effective controls against diversion. The USDA regulates the importation of animal-sourced materials and the treatment and handling of animals utilized to derive biological materials used in research or production.

15

Compliance with such regulations substantially increases the time, difficulty and costs incurred in obtaining and maintaining the approval to manufacture and market newly developed and existing products. In addition, government regulatory actions can result in the seizure or recall of products, denial, suspension or revocation of the authority necessary for their production and sale and other civil or criminal sanctions.

We are subject to various environmental and occupational health and safety laws and any violation of these laws could result in liability that could adversely affect us.

We are subject to worldwide federal, state and local environmental, health and safety laws and regulations and are subject to liabilities and compliance costs associated with past and current handling, processing, storing and disposing of hazardous substances and wastes. Our operations are also subject to federal, state and local occupational health and safety laws and regulations in and outside the United States. This requires us to devote significant resources to maintain compliance with applicable environmental and occupational health and safety laws and regulations and to manage environmental risks.

ITEM 2. PROPERTIES.

Our corporate offices are located in Deerfield, Illinois. Our major facilities and their primary operating functions are described in the table below:

 

We anticipate that our existing leases will be renegotiated as they expire or that alternative properties can be leased on acceptable terms. Our owned properties are well maintained. We believe that our owned and leased facilities are adequate to support our business.

ITEM 3. LEGAL PROCEEDINGS.

From time to time we are plaintiff or defendant in various cases arising out of our usual and customary business. We cannot assure you of the results of pending litigation, but we believe it is remote that any potential liability from these matters will have a material adverse affect on our business, financial condition, operating results or cash flow.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of our security holders during the quarter ended December 31, 2005.

16

PART II

ITEM 5.                MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is traded on the NASDAQ National Market under the ticker symbol “DADE.” As of February 14, 2006, there were 29,523 holders of record of our common stock, including Cede & Co., which holds shares on behalf of many beneficial owners. On July 28, 2005, the Board of Directors approved a two-for-one split of our common stock. On August 29, 2005, each shareholder of record at the close of business August 15, 2005, received an additional share of common stock for each outstanding share owned. All share and per share amounts have been restated to reflect the impact of the stock split.

The high and low closing sales prices quoted for our common stock for each quarter during the years ended December 31, 2005 and 2004 are presented in the table below.

 

Until 2005, we had never declared or paid cash dividends on our common stock. During the second quarter of 2005, the Board of Directors approved a $0.03 per common share quarterly cash dividend plan. In February 2006, the Board of Directors increased the quarterly dividend from $0.03 to $0.05 per common share. We expect to continue to pay cash dividends into the near future.

The following table provides information about purchases made by us or on behalf of our company or our affiliated purchasers during the quarter ended December 31, 2005, of shares of equity that we have registered pursuant to Section 12 of the Exchange Act.

(a)           On April 27, 2005, we announced that our Board of Directors approved a stock repurchase program of up to 5 million shares, after adjusting for the August 2005 stock split.

(b)          As of December 31, 2005, the number of shares available for repurchase under the program was 1,974,206. In February 2006, the Board of Directors authorized us to purchase an incremental 5 million shares of common stock under the stock repurchase program.

ITEM 6.                SELECTED FINANCIAL DATA.

The following table presents our selected historical consolidated financial data as of and for the period ended October 1, 2002, and as of and for the year ended December 31, 2001, for the Predecessor Company (as defined below) and as of and for the period ended December 31, 2002, and for each of the

17

---

years in the three-year period ended December 31, 2005, for the Successor Company (as defined below), derived from audited consolidated financial statements. The results of operations for any period less than one year are not necessarily indicative of results of operations for a full year. The selected historical data should be read in conjunction with the financial statements and the related notes and other information contained elsewhere in this report, including the information set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

As discussed previously, the Debtors filed for bankruptcy protection and emerged on October 3, 2002. Although the Plan of Reorganization became effective on October 3, 2002, for financial reporting convenience purposes, we recorded the adjustments necessitated by the American Institute of Certified Public Accountants Statement of Position 90-7: “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”) on October 1, 2002. As a result of our emergence from Chapter 11 bankruptcy and the application of fresh-start reporting, our consolidated financial statements for the periods commencing on October 2, 2002 are referred to as the “Successor Company” and are not comparable with any periods prior to October 1, 2002, which are referred to as the “Predecessor Company.” The effects of fresh-start reporting and new accounting pronouncements resulted in a new basis of accounting for the Predecessor Company on October 2, 2002. All references to the period ended October 1, 2002 (which represents the period from January 1, 2002, through October 1, 2002), and the year ended December 31, 2001, are to the Predecessor Company. All references to the period ended December 31, 2002 (which represents the period from October 2, 2002, through December 31, 2002) and the years ended 2003, 2004 and 2005 are to the Successor Company.

18

---

 

 

19

---

(1)           Pretax income for the period ended October 1, 2002 (which represents the period from January 1, 2002, through October 1, 2002), includes a cumulative effect of change in accounting principle related to the following. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” which, among other things, requires that upon adoption, unamortized negative goodwill be written off as a change in accounting principle. Unamortized negative goodwill at December 31, 2001, aggregated $20.0 million and was recognized as a cumulative effect of change in accounting principle on January 1, 2002.

(2)           Pretax loss for the period ended December 31, 2002 (which represents the period from October 2, 2002, through December 31, 2002), includes $57.3 million of incremental expense associated with the sale of inventory stepped-up due to the application of fresh-start reporting and $5.9 million of costs relating to management stock grants.

(3)           Pretax income for the year ended December 31, 2003, includes $10.5 million of costs relating to stock-based compensation.

(4)           Pretax income for the year ended December 31, 2004, includes $6.4 million of costs relating to stock-based compensation and $5.0 million of costs relating to the early redemption and purchases of a portion of our senior subordinated notes.

(5)           Pretax income for the year ended December 31, 2005, includes $4.7 million of costs relating to stock-based compensation and $24.0 million of costs relating to the early redemption of the $275.0 million outstanding balance of our senior subordinated notes.

(6)           We have recorded all incremental professional and bank fees associated with the reorganization of our balance sheet incurred prior to the bankruptcy filing on August 1, 2002, in this separate line item on our Consolidated Statement of Operations.

(7)           Reorganization items for the period ended October 1, 2002, include the gain on discharge of debt under the Plan of Reorganization ($786.3 million), and the impact of revaluing our assets and liabilities as required by fresh-start reporting ($816.6 million), offset by the two items discussed next in this note. We have recorded all incremental professional fees and other costs associated with the reorganization of our balance sheet incurred after the bankruptcy filing in this separate line item on our Consolidated Statement of Operations. Additionally, on September 6, 2002, Baxter Healthcare Corporation (“Baxter”) filed objections to our Plan of Reorganization. Baxter objected to the adequacy of the disclosure statement filed with the Bankruptcy Court and to confirmation of the Plan of Reorganization on a number of bases. On September 17, 2002, we agreed to settle all matters with Baxter for $19.0 million, such claim to be treated as a general unsecured claim under the Plan of Reorganization. This settlement is included in reorganization items for the period ended October 1, 2002. For the period ended December 31, 2002, reorganization items include only professional fees.

20

---

(8)           In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” With the adoption of SFAS No. 142 on January 1, 2002, goodwill and other intangible assets that have indefinite useful lives will no longer be subject to amortization, but rather be tested at least annually for impairment. As of January 1, 2002, there was no material impact caused by the initial impairment assessment requirements of SFAS No. 142. The table below depicts what our loss before extraordinary item and cumulative effect of change in accounting principle and net loss would have been for the year ended December 31, 2001, had we adjusted for the reduction in net goodwill amortization resulting from the adoption of SFAS No. 142, net of tax effects (in millions).

 

(9)           The Predecessor Company’s computation of earnings per share was based on the “two-class” method described in SFAS No. 128, “Earnings Per Share.” In computing earnings per share, (1) the current year yield on the Class L Common Stock is separately allocated to Class L shareholders (except in years the Company incurs a loss as Class L shareholders are not entitled to a return in such years) and, (2) income available to common shareholders (income less preferred stock dividends, less current year yield on Class L Common Stock) is allocated ratably between Class L Common Stock, Common Stock, and Class B Common Stock. Any Unreturned Original Cost plus Unpaid Yield are not components of the earnings per share computations.

ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Statements contained in this report on Form 10-K and in our future filings with the Securities and Exchange Commission, in our press releases and in oral statements made by, or with the approval of, authorized personnel that relate to our future performance, including, without limitation, statements with respect to our anticipated financial position, results of operations and level of business for 2005 or any other future period, are forward-looking statements. Such statements, which are based on current expectations only, are subject to certain risks uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, projected or estimated. Statements included at the beginning of Part 1 and in Item 1A. Risk Factors describe such risks and uncertainties. We do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

In the discussion below, we make comparisons on a “constant currency” basis, which is not a U.S. Generally Accepted Accounting Principles (“GAAP”) defined measure. We believe this measure provides for a meaningful analysis of the underlying activity since it eliminates the effect of changes in foreign currency exchange rates. When making comparisons on a constant currency basis, we have calculated the change by comparing the applicable reported current year amount to the corresponding amount from the prior year in local currency translated at the foreign currency exchange rates for the current year. “Constant currency” as defined or presented by us may not be comparable to similarly titled measures reported by other companies.

21

---

Results of Operation

We derive substantially all of our revenue from manufacturing and marketing clinical diagnostic products and services. We are organized functionally and have three reporting segments: Global Customer Management (“GCM”)-Americas, GCM-International and Global Operations. GCM-Americas and GCM-International are our sales and service organizations. For reporting purposes, GCM-Americas includes North and South America. GCM-International includes sales and service results from all other continents. The gross profit margin for the two GCM segments are not materially different. Global Operations primarily includes all manufacturing and research and development activities, which occur in the United States and Germany, and accordingly does not recognize significant revenues. Global Operations functions as a cost center. Consequently, a discussion of gross profit for each individual operating segment would not be meaningful. Generally, Global Operations does not incur a material amount of our marketing and administrative expense but is responsible for virtually all of our research and development expense. Certain expenses, such as income taxes, general corporate expenses, and financing costs are not allocated to the operating segments.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Net Sales.   Net sales for the year ended December 31, 2005, totaled $1,658.1 million as compared to $1,559.8 million in the corresponding prior year period.

Sales for each segment were as follows (in millions):

 

Adjusting for the favorable impact of foreign currency rate changes of $6.4 million, 2005 sales increased $91.9 million or 5.9% for the year. On a constant currency basis, sales increased $59.0 million or 7.5% in GCM-Americas and increased $29.5 million or 3.9% across GCM-International locations. On a geographic basis, constant currency sales growth was 6.9% in the U.S. and 5.0% across all non-U.S. locations.

The overall sales increase on a constant currency basis can be attributed in part to a $64.9 million or 6.4% increase in core chemistry sales primarily driven by strong Dimension® product sales globally. The growth can also be attributed in part to a $20.7 million or 7.5% increase in hemostasis product sales and a $12.5 million or 8.2% increase in microbiology sales, with the strongest growth for both product lines in GCM-Americas locations. Partially offsetting this growth is an $8.0 million or 19.4% decrease in sales of mature products/other across all segments. We define mature products as those products and services that we do not consider to be part of our core strategy and, as a result, they are expected to have relatively flat or declining sales over time.

Our worldwide installed base of instruments grew to 38,100, an increase of 8.7% during the year ended December 31, 2005. Growth in the instrument installed base of a product line contributes to the sales growth of the corresponding reagents, consumables and service.

Growth in the installed base of Dimension® RxL Max and Dimension® Xpand® Plus instruments as well as the BN ProSpec® plasma protein instrument continue to drive much of the reagents, consumables and service sales growth seen in our core chemistry products. Gains in the hemostasis installed base have been driven by strong momentum in placing our CA-line of coagulation instruments and our Platelet Function Analyzer (PFA). For microbiology, new installations of our MicroScan® autoSCAN® and WalkAway® series of instruments continue to provide growth.

22

---

Beyond the installed base impact, we believe reagents and consumables sales growth has benefited from improved method penetration, which results from utilizing the existing instrument base for additional tests.

Gross Profit.   Gross profit for the year ended December 31, 2005, increased $61.8 million to $916.8 million as compared to $855.0 million in the prior year. On a constant currency basis, gross profit increased $56.5 million. Gross profit margin for the year ended December 31, 2005, was 55.3% as compared to 54.8% in the corresponding prior year period. The 0.5 percentage point margin improvement is attributable to 0.1 percentage points of favorable foreign currency changes and 0.4 percentage points of favorable product mix and leveraging our manufacturing operations as volume continues to grow.

Marketing and Administrative Expenses.   Marketing and administrative expenses for the year ended December 31, 2005, increased $19.4 million to $548.6 million, or 33.1% of sales, as compared to $529.2 million, or 33.9% of sales, in the prior year. Of the total increase, $1.3 million resulted from changes in foreign currency exchange rates. The remaining $18.1 million increase was primarily due to investments in current resources and processes to support the higher revenues and costs to build our sales and marketing infrastructure for the Dimension VistaTM System.

Research and Development Expenses.   Research and development expenses for the year ended December 31, 2005, totaled $141.5 million (8.5% of sales) and were 5.6% higher than the prior year. The increase in research and development expenses of $7.5 million over the corresponding prior year period is primarily a result of investments in new product development, such as the Dimension VistaTM System for the high-volume testing segment, and new assays for all product lines. We anticipate commercialization of the Dimension VistaTM System in the second half of 2006. As with all new products we introduce, the rollout will be controlled. Thus, we expect little to no revenue impact in 2006, with market penetration and revenue increasing over the course of 2007. Changes in foreign currency exchange rates did not have a significant impact on research and development expenses.

Income from Operations.   Income from operations for the year ended December 31, 2005, increased $34.9 million to $226.7 million compared to $191.8 million in the prior year. The increase in income from operations is due primarily to the impacts of improved gross profit, partially offset by increased marketing and administrative expenses and research and development spending.

Interest Expense.   Interest expense for the year ended December 31, 2005, totaled $43.5 million, a $20.5 million reduction from the prior year. The decrease is primarily due to lower borrowing levels and lower costs of borrowing, partially offset by higher expense for the amortization of debt issuance costs in 2005 compared to 2004. During 2005, we entered into a new $600 million, five-year revolving credit facility which replaced our previously existing term loan and revolving credit facility and reduced our borrowing costs. We also redeemed our 11.91% senior subordinated notes as discussed below, which reduced our interest expense in 2005 compared to 2004. In conjunction with the repayment of the amounts outstanding under the previous term loan and revolving credit facility, the balance of unamortized debt issuance costs were written-off and recorded as interest expense. During the years ended December 31, 2005 and 2004, we recorded debt issuance cost amortization expenses of $10.0 million and $6.0 million, respectively, related to the former credit facility.

Loss on Redemption/Purchase of Senior Subordinated Notes.   During the year ended December 31, 2005, we redeemed the $275.0 million outstanding balance of our senior subordinated notes and paid a premium to bondholders of $24.0 million, as required by certain provisions of the bond indenture. The premium was recorded as a loss in the statement of operations. During the year ended December 31, 2004, we incurred losses of $5.0 million on the early redemption and purchases of a portion of our senior subordinated notes. These losses represent the difference between the carrying value of the notes and either (1) the redemption price (par plus 11.91% of the face value) for notes purchased with stock option or employee stock purchase plan proceeds, or (2) the market price for open market purchases. See “Liquidity and Capital Resources” section below for further discussion.

23

Income Taxes.   Income tax expense of $39.8 million, representing an effective rate of 24.2%, was recorded in the year ended December 31, 2005, as compared to $40.5 million, representing an effective tax rate of 33.6%, in the year ended December 31, 2004. The decrease in the effective tax rate is primarily due to an income tax benefit of $15.1 million recorded in the third quarter of 2005, which is mostly attributable to the reversal of valuation allowances related to pensions and net losses on derivative instruments. These items were originally recognized as part of comprehensive income subsequent to the application of fresh-start reporting in 2002. Also, for certain non-U.S. jurisdictions, a change in judgment regarding permanently reinvested earnings and our ability to utilize foreign tax credits required us to reverse a deferred tax liability related to tax provided on cumulative translation adjustment on the undistributed earnings accumulation in these non-U.S. jurisdictions through 2002. A further income tax benefit was also recorded as we reversed a $6.2 million post-fresh-start deferred tax liability related to taxes provided on undistributed earnings accumulated during 2002 in certain non-U.S. jurisdictions. The initial impact of recording this deferred tax liability was recognized as part of income tax expense.

Net Income.   The net income for the year ended December 31, 2005, was $124.9 million as compared to $79.9 million in the prior year, an increase of $45.0 million or 56.3%. The increase in net income is primarily attributable to higher income from operations and lower interest expense, partially offset by losses on the redemption of our senior subordinated notes.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Net Sales.   Net sales for the year ended December 31, 2004, totaled $1,559.8 million as compared to $1,436.4 million in the corresponding prior year period.

Sales for each segment were as follows (in millions):

 

Adjusting for the favorable impact of foreign currency rate changes of $63.3 million, 2004 sales increased $60.1 million or 4.0% for the year. On a constant currency basis, sales increased $44.6 million or 6.1% in GCM-Americas and increased $14.6 million or 2.0% across GCM-International locations. On a geographic basis, constant currency sales growth was 5.4% in the U.S. and 2.9% across all non-U.S. locations.

The overall sales increase on a constant currency basis can be attributed in part to a $67.5 million or 7.2% increase in core chemistry sales primarily driven by strong Dimension® product sales globally. The growth can also be attributed in part to a $26.3 million or 10.5% increase in hemostasis product sales, with the strongest growth in GCM-Americas locations, offset by a $29.4 million or 41.7% decrease in sales of mature products/other across all segments.

Our worldwide installed base of instruments, an important indicator of future growth potential, grew 8.1% during the year ended December 31, 2004. Growth in the installed base of Dimension® RxL Max and Dimension® Xpand® instruments as well as the BN ProSpec® plasma protein instrument continue to drive much of the reagents, consumables and service sales growth seen in our core chemistry products. Gains in the hemostasis installed base have been driven by successes in CA-1500, CA-560, CA-7000, BCT®, BCS® and PFA-100® instrument placements. For microbiology, new installations of our autoSCAN® and WalkAway® series of instruments continue to provide growth.

24

---

Beyond the installed base impact, reagents and consumables sales growth has benefited from improved method penetration, which results from utilizing the existing instrument base for additional tests.

Gross Profit.   Gross profit for the year ended December 31, 2004, increased $96.8 million to $855.0 million as compared to $758.2 million in the corresponding prior year period. On a constant currency basis, gross profit increased $58.2 million. Gross profit margin for the year ended December 31, 2004, was 54.8% as compared to 52.8% in the corresponding prior year period. The 2.0 percentage point margin improvement is attributable to 0.3 percentage points of favorable foreign currency changes and 1.7 percentage points of manufacturing cost efficiencies and favorable product mix.

Marketing and Administrative Expenses.   Marketing and administrative expenses for the year ended December 31, 2004, increased $35.3 million to $529.2 million, or 33.9% of sales, as compared to $493.9 million, or 34.4% of sales, in the prior year. Of the total increase, $21.1 million resulted from changes in foreign currency exchange rates and $4.3 million was due to incremental costs associated with our compliance efforts surrounding Section 404 of the Sarbanes-Oxley Act of 2002. These costs were partially offset by a reduction in stock-based compensation expense of $4.1 million from 2003 to 2004. The remaining $14.0 million increase was due to costs to build our sales and marketing infrastructure for the Dimension Vista™ System and investments in current resources and processes to support the higher revenues.

Research and Development Expenses.   Research and development expenses for the year ended December 31, 2004, totaled $134.0 million (8.6% of sales) and were 14.0% higher than the prior year. On a constant currency basis, research and development expenses increased $11.7 million or 9.6% over the corresponding prior year period as we make investments in new product development, such as the high volume Dimension Vista™ System and new assays for all product lines.

Income from Operations.   Income from operations for the year ended December 31, 2004, increased $44.1 million to $191.8 million compared to $147.7 million in the prior year. The increase in income from operations is due primarily to the impacts of improved gross profit, partially offset by increased marketing and administrative expenses and research and development spending.

Interest Expense.   Interest expense for the year ended December 31, 2004, totaled $64.0 million, a $13.8 million reduction from the prior year. The decrease is primarily due to lower borrowing levels and lower costs of borrowing. Partially offsetting the decrease is an increase of $3.1 in amortization of debt issuance costs. Early repayments on our bank borrowings resulted in $2.4 million of the increase, with the remainder being primarily attributable to amortization of debt costs paid in the fourth quarter of 2003.

Loss on Redemption/Purchase of Senior Subordinated Notes.   During the year ended December 31, 2004, we incurred losses of $5.0 million on the early redemption and purchases of our senior subordinated notes. These losses represent the difference between the carrying value of the notes and either (1) the redemption price (par plus 11.91% of the face value) for notes purchased with stock option or employee stock purchase plan proceeds, or (2) the market price for open market purchases.

Income Taxes.   Income tax expense of $40.5 million, representing an effective rate of 33.6%, was recorded in the year ended December 31, 2004, as compared to $26.2 million, representing an effective tax rate of 35.3%, in the year ended December 31, 2003. The decrease in the effective tax rate is primarily due to the changes in certain valuation allowances and the mix in income by jurisdiction.

Net Income.   The net income for the year ended December 31, 2004, was $79.9 million as compared to $48.1 million in the prior year, an increase of $31.8 million or 66.1%. The increase in net income is primarily attributable to higher income from operations and lower interest expense, partially offset by higher income tax expense.

25

---

Liquidity and Capital Resources

Cash Flows.   For the year ended December 31, 2005, net cash provided by operating activities was $294.0 million as compared to $249.8 million for the year ended December 31, 2004. An increase in net income was slightly offset by an increase in cash outflows from working capital changes in 2005 as compared to 2004. Changes in accounts receivable negatively impacted cash flows by $21.2 million and $8.9 million during the years ended December 31, 2005 and 2004, respectively. In certain countries where the collection process is lengthy, we utilize factoring facilities under which certain trade accounts receivable are sold on a non-recourse basis to financial institutions at face value. The larger decrease in cash flows from accounts receivable during 2005 compared to 2004 is primarily a result of less accounts receivable factoring. On a constant currency basis, our utilization of factoring facilities decreased by $22.3 million and increased by $8.6 million during the years ended December 31, 2005 and 2004, respectively. As of December 31, 2005, the amount drawn on our factoring facilities was $100.3 million. During the year ended December 31, 2004, changes in inventories positively impacted cash flows by $18.9 million. However, as a result of building inventory to support the higher level of revenues, changes in inventories negatively impacted cash flows by $4.4 million during the year ended December 31, 2005. Changes in accounts payable and accrued liabilities negatively impacted cash flows by $19.1 million during 2005 as compared to $13.0 million during 2004. This unfavorable change in cash flow from 2004 to 2005 is due to timing of cash disbursements.

When selling instruments to customers, we may enter into sales-type lease transactions. In 2004, we began selling certain lease receivables to a financial institution, of which a majority of the sales occurred in the second half of the year. During the years ended December 31, 2005 and 2004, $64.4 million and $44.9 million of lease receivables were sold to a financial institution, respectively. These sales resulted in losses of $1.6 million and $2.5 million, respectively. The losses are included in other expense on the accompanying statement of operations. At December 31, 2005, the short- and long-term portions of lease receivables which were not sold that are included in accounts receivable and other assets total $11.6 million and $14.1 million, respectively. At December 31, 2004, the short- and long-term portions of lease receivables which were not sold that are included in accounts receivable and other assets total $9.9 million and $17.4 million, respectively. We expect the amount of lease receivables we sell in 2006 to be lower than 2005 as changes in customer contract terms are causing a shift away from sales-type leases to operating leases. This shift to operating leases may result in both lower instrument revenue and decreased cash flow in the short term as revenue will be recognized and cash received over the term of the lease instead of at the inception of the lease.

We made pension plan funding payments in the U.S. of $16.4 million and $25.6 million and outside the U.S. of $2.2 million and $2.1 million during the years ended December 31, 2005 and 2004, respectively. We are currently estimating 2006 funding payments in the U.S. and outside the U.S. to be approximately $20.0 million and $1.9 million, respectively.

Net cash flow used for investing activities totaled $153.0 million and $132.1 million for the years ended December 31, 2005 and 2004, respectively, and was primarily for capital expenditures. The increase in capital expenditures was due primarily to an increase in the placement of instruments at customers in exchange for contractual commitments for ongoing reagent revenues. We expect this trend to continue in 2006.

Financing activities for the year ended December 31, 2005 used net cash of $135.3 million, versus $168.0 million for the year ended December 31, 2004. The decrease in cash used is primarily due to lower debt repayments after giving consideration to the debt refinancing activities during 2005. For the years ended December 31, 2005 and 2004, long-term debt repayments net of new borrowings were $47.3 million and $210.2 million, respectively. This decrease is partially offset by repurchases of common stock, dividend payments and fewer proceeds from the exercise of stock options in 2005 as compared to 2004. We used

26

---

$111.8 million of cash to purchase our common stock and paid $8.0 million in dividends during the year ended December 31, 2005.

Credit Facilities.   On April 27, 2005, we entered into a new five-year multi-currency revolving credit facility (“Revolving Credit Facility”) in the amount of $600 million, which expires on April 27, 2010. Based upon current third party debt ratings, the interest rate on U.S. dollar denominated borrowings under the Revolving Credit Facility is LIBOR plus 62.5 basis points or a Base Rate as defined in the agreement. However, $200 million of our borrowings under this facility has been hedged by using interest rate swap agreements. This has resulted in an effective interest rate of 4.7% on the hedged portion of our borrowings as of December 31, 2005. We paid a commitment fee of 12.5 basis points on the unused portion of the Revolving Credit Facility during 2005. As of December 31, 2005, we had letters of credit outstanding of $4.5 million, which reduced the borrowing capacity under the Revolving Credit Facility. This new facility replaced our previously existing term loan and revolving credit facility. Amounts outstanding at April 27, 2005 under the old facility of $118.3 million were repaid with proceeds from the Revolving Credit Facility. The unamortized balance of deferred financing fees associated with the old facility was written-off in April 2005. Fees for the new facility of $2.7 million were capitalized during the second quarter and are being amortized over its five-year life. Additionally, proceeds from the Revolving Credit Facility were used to redeem the $275.0 million outstanding principal balance of the 11.91% senior subordinated notes, pursuant to the make-whole redemption provision of the bond indenture. We incurred a pre-tax expense of $24 million in the second quarter of 2005 in connection with the redemption, which represented the premium paid to bondholders.

As of December 31, 2005, certain of our subsidiaries in Germany had a revolving credit facility with Dresdner Bank AG that is renewable annually (the “Dresdner Facility”). As a result of Dresdner Bank’s participation in the Revolving Credit Facility effective April 2005, the Dresdner Facility was amended. The borrowing capacity was reduced from €30 million to €10 million, which can be utilized in the form of cash, guarantees, or as credit lines for derivatives trading and settlement risks. Additionally, the Dresdner Facility is no longer secured. We are required to pay a commitment fee of 0.5% on the unused portion of the credit line related to cash or guarantees. Borrowings under the Dresdner Facility are subject to a variable interest rate of the European Overnight Indexed Average plus 1.13%. As of December 31, 2005, the interest rate was 3.55% and $0.1 million was outstanding. An additional $1.1 million was utilized for guarantee purposes, which reduced our available borrowing capacity under this facility. In addition, some of our subsidiary companies operating outside the U.S. have credit facilities available to meet their liquidity requirements. As of December 31, 2005, the borrowing capacity under these facilities totaled $45.2 million. At December 31, 2005, $0.7 million in borrowings and $14.2 million of guarantees were outstanding under these credit facilities and other borrowing arrangements.

Equity.   During the second quarter of 2005, our Board of Directors approved a $0.03 per common share quarterly cash dividend plan. Dividends of $8.0 million, representing $0.09 per share of common stock, were paid during the year ended December 31, 2005. The Board of Directors also approved a stock repurchase program of up to 5 million shares. We repurchased 3,025,794 shares of common stock under this program during the year ended December 31, 2005. On July 28, 2005, the Board of Directors approved a two-for-one split of our common stock. On August 29, 2005, each shareholder of record at the close of business August 15, 2005, received an additional share of common stock for each outstanding share owned. In February 2006, the Board of Directors increased our quarterly dividend from $0.03 to $0.05 per common share and authorized us to purchase an incremental 5 million shares of common stock under the stock repurchase program.

27

---

Contractual Cash Obligations

The following table summarizes our contractual cash obligations as of December 31, 2005:

 

Purchase obligations primarily consist of noncancelable supply agreements with vendors for the purchase of specified levels of goods or services over the respective contract periods. Estimated pension plan contributions for 2006 are based on our funding policy as discussed below in “Critical Accounting Policies.”  We have not determined projected pension contributions for years beyond 2006.

Off-Balance Sheet Arrangements

Except as noted in the table above, we have no material off-balance sheet arrangements.

Critical Accounting Policies

Critical accounting policies are those that, in management’s view, are very important to the portrayal of our financial condition and results of operations and also require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe our most critical accounting policies (Note 2 to our Consolidated Financial Statements, “Summary of Significant Accounting Policies”) relate to:

·       Revenue recognition;

·       Reserves for doubtful accounts;

·       Adjustments for write-down of inventories to net realizable value;

·       Impairment of long-lived assets;

·       Pension plan assumptions; and

·       Tax valuation allowances.

We use a combination of historical results and anticipated future events to estimate and make assumptions relating to our critical accounting policies. Actual results could differ from our estimates. See also Note 2 to our Consolidated Financial Statements, “Summary of Significant Accounting Policies.”

Revenue Recognition.   We manufacture and market a broad offering of clinical diagnostic products and services which include: (1) medical diagnostic instruments, (2) reagents and consumables, and (3) maintenance services. Revenue related to the sale of instruments, reagents and consumables represents the vast majority of our sales. We recognize revenue from the sale of instruments, reagents and consumables upon delivery. Revenue for maintenance services is recognized as the services are provided.

Instruments are sold outright to customers or via sales-type lease arrangements. Instruments are also leased to customers pursuant to operating leases. Under operating lease arrangements, the cost of the

28

---

instruments is carried on our balance sheet and amortized to cost of sales over the useful life of the equipment.

We provide most of our products and services as part of bundled contract arrangements, which contain multiple deliverable elements. Revenues under these bundled arrangements are allocated among the contract’s constituent elements (principally instruments, reagents, consumables and service) based upon the estimated fair value of each element as determined by reference to verifiable objective evidence. Our principal point of reference in making this determination is the amount of revenue realized when products and services are sold separately in stand-alone transactions.

Reserves for Doubtful Accounts.   We perform ongoing credit evaluations of our customers based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. We continuously monitor collections and payments from our customers and payment accommodations made to our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers.

Adjustments for Write-down of Inventories to Net Realizable Value.   Inventories are stated at the lower of cost (based on the first-in, first-out method) or market. Market for raw materials is based on replacement costs and, for other inventory classifications, on net realizable value. We regularly review inventory quantities on hand and record a provision for deterioration, excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next 18 months. Several factors may influence the realizability of our inventories, including technological change and new product development. These factors could result in an increase in the amount of obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we will be required to recognize such costs in cost of goods sold at the time of such determination. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological development could have a significant impact on the value of our inventory and our reported operating results.

Impairment of Long-Lived Assets.   We periodically evaluate long-lived assets other than goodwill and indefinite-lived intangibles for indicators of impairment. Management’s judgments regarding the existence of impairment indicators are based on operational performance and market conditions. Goodwill and indefinite-lived intangible assets, including our tradename, are tested for impairment annually. In assessing the recoverability of long-lived assets, market values and projections regarding estimated future cash flows and other factors are used to determine the fair values of the respective assets. If these estimates or related projections change in the future, we may be required to record impairment charges for these assets.

Pension Plan Assumptions.   We maintain noncontributory defined benefit pension plans covering substantially all employees in the United States and a combination of contributory and noncontributory plans in certain non-U.S. locations. Benefits under the United States plans are based on a cash balance formula. Our funding policy is to make contributions to the trusts of the plans that meet or exceed the minimum requirements of the Employee Retirement Income Security Act of 1974, as amended. In an attempt to anticipate future events, several statistical and other factors are used in calculating the expense, liability and resulting funding requirements related to the plans. These factors include assumptions we make about, among other things, the discount rate, expected return on plan assets, rate of future compensation increases and withdrawal and mortality rates. The actuarial assumptions we use may differ

29

---

materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension expense we have recorded or may record, and our cash funding requirements. In determining pension expense for 2005, our assumption for the discount rate for the U.S. plans was 5.9%. In determining the December 31, 2005 liabilities and 2006 pension expense for the U.S. plans, the discount rate was assumed to be 5.5%. The 2005 discount rates for the non-U.S.plans ranged from 2.0% to 5.25%, and are expected to be between 2.0% and 4.25% for 2006. We generally determine the discount rate assumption by constructing a hypothetical portfolio of investments with maturities that mirror the pension obligation. For the year ended December 31, 2005, our assumptions for the expected long-term rates of return on pension plan assets were 8.5% for the U.S. plans and 3.25% for non-U.S. plans, respectively. These rates are not expected to change for 2006. The expected long-term rate of return on plan assets is reviewed at least annually, taking into account our asset allocation, historical returns on the types of assets in the trust and the current economic environment. Based on these factors, we expect the plan assets will earn an average of 8.5% per year for the U.S. plans and 3.25% per year for the non-U.S. plans over the long-term. These and other assumptions impacting pension expense could change in the future based on various factors, including, but not limited to, market conditions, asset allocations, and workforce composition. For 2005, the net periodic benefit costs for our U.S. and non-U.S. plans were approximately $13 million and $5 million, respectively. These amounts are approximately $2 million higher than 2004 for the U.S. plans and $1 million lower than 2004 for the non-U.S. plans. We expect that the 2006 costs will be approximately $1 million and $2 million higher than 2005 for the U.S. plans and non-U.S. plans, respectively. However, changes in interest rates and market gains or losses could significantly impact post-2006 pension expense and funding requirements.

Tax Valuation Allowances.   We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances if we believe more likely than not that the net deferred tax asset is not recoverable.

In assessing the realizability of the deferred tax assets, we consider all currently available data, our historical U.S. GAAP and taxable earnings and losses by jurisdiction, current financial condition, forecast of future U.S. GAAP and taxable earnings and losses by jurisdiction and other relevant factors. The data considered in determining the realizability of the U.S. valuation allowance includes the tax deductions that we have received or will receive related to the stock options granted under the 2002 Management Stock Option Plan and the 2004 Incentive Compensation Plan. See Note 9, “Shareholders’ Equity and Redeemable Preferred Stock,” to our consolidated financial statements for further discussion. Under the U.S. Internal Revenue Code of 1986, as amended, a company is allowed a deduction on the date of exercise equal to the difference between the fair market value on date of exercise and the exercise price. Due to the significant increase in our share price since the issuance of certain stock options, we have a significant tax deduction for stock options. However, we expect future taxable income to be sufficient enough to offset the tax deduction on the exercise of certain stock options and to utilize net operating loss (“NOL”) carryforwards subject to the limitation under Internal Revenue Code section 382. Based on the above and other positive evidence, the company has reversed substantially all of its U.S. valuation allowances. If we are unable to generate sufficient future taxable income in a jurisdiction, or if there is a material change in the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against all or a significant portion of our remaining net deferred tax assets resulting in an increase in our effective tax rate and a material adverse impact on our operating results.

30

---

See “Tax Credits and Loss Carryforwards” below and Note 8, “Income Taxes,” to our consolidated financial statements for further discussions.

New Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, “Accounting Changes and Error Corrections-A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement applies to all voluntary changes in accounting principle as well as changes required by accounting pronouncements that do not contain specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 will only impact our consolidated financial statements if we implement accounting changes in the future.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” (“SFAS123(R)”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Generally, the amount of compensation cost will be measured based on the grant-date fair value of the instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. Subsequent to the filing of our 2004 Form 10-K, the Securities and Exchange Commission delayed the required adoption date of the revised statement until January 1, 2006. We will adopt the revised statement at that time using the modified prospective method of application. After adoption of SFAS123(R), we currently estimate that we will recognize approximately $22 to 25 million of total expense during 2006 from stock option grants made during 2005 and an estimate of grants expected to be made in 2006, and other stock-based compensation that will be provided. We have also determined that we will have a sufficient Additional Paid-In-Capital windfall pool to cover future expense.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An Amendment of ARB No. 43, Chapter 4,” to clarify the accounting for abnormal inventory costs. SFAS No. 151 requires that abnormal amounts of idle facility costs, freight, handling costs and spoilage are to be recognized as current-period expenses regardless of whether they meet the “so abnormal” criterion outlined in Accounting Research Bulletin No. 43. In addition, the allocation of fixed production overhead costs to inventory is to be based on the normal capacity of the production facilities. Unallocated overhead costs are to be recognized as expenses in the period incurred. Normal capacity is defined as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a significant impact on our consolidated financial statements.

Tax Credits And Loss Carryforwards

Realization of Cancellation of Indebtedness Income.   Subject to certain exceptions, a debtor generally recognizes an amount of cancellation of debt (“COD”) income upon satisfaction of its outstanding indebtedness equal to the excess of (1) the adjusted issue price of the indebtedness satisfied over (2) the sum of the issue price of any new indebtedness issued, the amount of cash paid and the fair market value of any other consideration, including stock of the debtor, given in satisfaction of the indebtedness. As discussed below, there is a bankruptcy exception to the recognition of COD income which applies to us in connection with the Plan of Reorganization.

A debtor is not required to include COD income in gross income if the debt discharge occurs in a Chapter 11 Title 11 case under the United States Bankruptcy Code. However, under the U.S. Internal Revenue Code of 1986, as amended (the “Tax Code”), the debtor must, as of the first day of the next taxable year, reduce its tax attributes (in general, first its NOL carryovers and then tax credits and capital

31

---

loss carryovers and then the tax basis of its assets) by the amount of COD income excluded from gross income by this exception. As an exception to the order of tax attribute reduction described above, a taxpayer can elect to reduce its tax basis in its depreciable assets first, then its NOL carryovers and then its tax credits and capital loss carryovers.

Since the COD income was realized in a Chapter 11 Title 11 case, we are not required to include the COD income in taxable income, but are required to reduce our U.S. NOL carryovers by the amount of the COD income. Our U.S. NOL carryover as of December 31, 2005 was $509.9 million after the amount of COD income realized as a result of the Plan of Reorganization.

Section 382 Limitation on NOL Carryovers and Other Tax Attributes.   As a result of the consummation of the Plan of Reorganization, we underwent an “ownership change” within the meaning of section 382 of the Tax Code. As a consequence, after the Plan of Reorganization, we are subject to limitation on the use of any U.S. NOL carryover incurred prior to the ownership change. Under special provisions of section 382 of the Tax Code applicable to companies in bankruptcy, the limitation is equal to the product of (1) the lesser of (x) the value of the equity of the reorganized debtors immediately after the ownership change and (y) the value of the consolidated gross assets immediately before such change, with certain adjustments and (2) the “long-term tax-exempt rate” in effect for the month of the effective date of the Plan of Reorganization as published in the Internal Revenue Bulletin of the United States Treasury Department. We elected not to apply the general U.S. NOL limitation applicable to companies in bankruptcy since application of that rule would result in less favorable treatment than that described above.

If a corporation that undergoes an ownership change has a “net unrealized built-in loss,” subject to certain limitations, any “recognized built-in loss” during the five-year period beginning with the date of the ownership change, referred to as the “recognition period,” is generally treated as a pre-change loss and is subject to the section 382 limitation described above. If the corporation has a “net unrealized built-in gain,” subject to certain limitations, the section 382 limitation for any taxable year within the recognition period will be increased by the “recognized built-in gain” for such taxable year. A net unrealized built-in gain or net unrealized built-in loss exists to the extent the fair market value of the corporation’s assets is more or less, respectively, than the aggregate adjusted tax basis of its assets immediately before the ownership change, provided the resulting net unrealized built-in gain or net unrealized built-in loss is greater than the lesser of (1) 15% of the fair market value of the corporation’s assets and (2) $10 million. Under current U.S. Internal Revenue Service administrative policy, the amount of the COD income recognized upon an ownership change is treated as an item of income attributable to the pre-change period under section 382(h)(6) of the Tax Code and such COD income is added to the gross fair market value of the corporation’s assets in determining whether the loss corporation has a net unrealized built-in loss.

Any unused section 382 limitation in a given year may be carried forward, thereby increasing the section 382 limitation in the subsequent taxable year. However, if the corporation or consolidated group does not continue its historic business or use a significant portion of its assets in a new business for two years after the ownership change, the section 382 limitation resulting from the ownership change will be zero.

Alternative Minimum Tax.   A corporation must pay an alternative minimum tax (“AMT”) equal to 20% of its alternative minimum taxable income (“AMTI”), reduced by certain credits allowable for AMT purposes, to the extent that the AMT exceeds the tax of the corporation calculated at the normal progressive income tax rates. In calculating the AMTI, a corporation’s income and losses are subject to various adjustments. For example, in computing AMTI, a corporation’s NOLs are adjusted for the adjustments and preferences under the AMT sections of the Tax Code and such resulting NOLs can be utilized to offset only 90% of the corporation’s AMTI. However, COD income that is excluded from taxable income under the rules discussed above under “Realization of Cancellation of Indebtedness Income” similarly is excluded from AMTI. As a result of limitations on the use of our NOLs and the

32

---

reduced annual amount of depreciation used in calculating AMTI, it is possible that we may be required to pay AMT even though we may not otherwise be required to pay regular federal income tax.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a result of our global operating and financing activities, we are exposed to changes in interest rates and foreign currency exchange rates that may adversely affect our results of operations and financial position. In seeking to minimize the risks and/or costs associated with such activities, we manage exposures to changes in interest rates and foreign currency exchange rates primarily through the use of derivatives. We do not use financial instruments for trading or other speculative purposes, nor do we use leveraged financial instruments. The qualitative and quantitative information presented below summarizes our market risks associated with debt obligations and other significant financial instruments outstanding at December 31, 2005. Fair values included herein have been determined based on quoted market prices. The information presented below should be read in conjunction with Notes 2, 7 and 10 to our consolidated financial statements. No material changes in our market risk have occurred since December 31, 2005.

Interest Rate Risk.   We use interest rate swap agreements to effectively limit exposure to interest rate movements within the parameters of our interest rate hedging policy. These instruments are designated as cash-flow hedges under SFAS No. 133, and as such, as long as the hedge is effective and the underlying transaction is probable, the effective portion of the changes in fair value of these contracts is recorded in accumulated other comprehensive income/loss until earnings are affected by the cash flows being hedged. The fair value of our interest rate derivative agreements is the estimated amount that we would pay or receive to terminate the agreements, assuming prevailing interest rates.

On April 27, 2005, we entered into a new $600 million, multi-currency five-year revolving credit facility. This new facility replaced our previously existing term loan and revolving credit facility. Amounts outstanding at April 27, 2005 under the old facility of $118.3 million were repaid by drawing on the new facility. Additionally, we drew funds under the new facility to redeem the $275.0 million outstanding of our 11.91% senior subordinated notes, using the make-whole provision under the bond indenture.

At December 31, 2005, $200 million of our revolving credit facility was hedged using interest rate swap agreements, which resulted in an average effective borrowing rate of 4.7%. A sensitivity analysis to measure the potential impact that a change in interest rates would have on our net income indicates that a 10% adverse change in interest rates would increase our annual interest expense by approximately $1.0 million based on December 31, 2005 debt positions.

The table below provides information as of December 31, 2005 about our financial instruments that are sensitive to changes in interest rates, including our interest rate swap agreements and long-term debt obligations. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For the interest rate swap agreements, the table presents the notional amounts and weighted-average interest rates by maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted-average variable rates are based on implied forward rates in the yield curve at the reporting date.

 

33