UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-14978
Smith & Nephew plc
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
15 Adam Street, London WC2N 6LA
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class |
Name on each exchange on which registered |
|
American Depositary Shares Ordinary Shares of 20¢ each |
New York Stock Exchange New York Stock Exchange* |
* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report: 963,580,098 Ordinary Shares of 20¢ each
Indicate by check mark if the registrant is a well seasoned issuer, as defined in Rule 405 of the Securities Act x Yes ¨ No
If this Report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:
Large Accelerated Filer x Accelerated Filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP ¨ |
International Financial Reporting Standards as issued by the International Accounting Standards Board x |
Other ¨ |
If Other has been checked to the previous question indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Smith & Nephew Annual Report 2012 |
Section 1 Overview 1
Reshaping Smith & Nephew
Smith & Nephew delivered good underlying revenue and profit growth and a strong trading profit margin in 2012.
There is no doubt that we are benefiting from implementing our Strategic Priorities. Our choices to invest in higher growth products, franchises and geographies are enabling us to drive greater value for our Company and stakeholders.
Olivier Bohuon Chief Executive Officer
|
2 Smith & Nephew Annual Report 2012 |
Smith & Nephew is a global medical
technology business dedicated to
helping improve peoples lives.
Group |
||||||||||||||
Revenue 2 |
Average number of employees 3 |
|||||||||||||
$4.1bn | +2% | 10,477 | ||||||||||||
Revenue by geography $m |
Employees by geography 3 |
|||||||||||||
A United States |
1,651 |
A United States |
4,000 | |||||||||||
B Other Established markets |
2,003 |
B Continental Europe |
2,098 | |||||||||||
C Emerging and International markets |
483 |
C UK D China |
1,706 801 |
|||||||||||
E Other |
1,872 | |||||||||||||
Section 1 Overview |
3 |
We have leadership positions in Orthopaedic Reconstruction, Advanced Wound Management, Sports Medicine and Trauma. We group these product franchise areas into two global divisions; Advanced Surgical Devices and Advanced Wound Management. |
Revenue by business division $bn |
|||||||||||
A | Advanced Surgical Devices | 3.1 | ||||||||||
B | Advanced Wound Management | 1.0 | ||||||||||
Operating profit 2 | Trading profit 1,2 | Operating profit 2 | Trading profit 1,2 | |||||||||||||||||||
$0.6bn | +7% | $0.7bn | +8% | $0.2bn | nil% | $0.2bn | -1% | |||||||||||||||
2011: $0.6bn | 2011: $0.7bn | 2011: $0.2bn | 2011: $0.2bn | |||||||||||||||||||
Employees | Employees 3 | |||||||||||||||||||||
7,194 | -5% | 3,283 | +5% | |||||||||||||||||||
2011: 7,611 | 2011: 3,132 |
1 Explanations of these non-GAAP financial measures are provided on pages 44 to 46.
2 Underlying growth percentage after adjusting for the effect of currency translation and disposals.
3 Healthpoint was acquired in December 2012. The average employee number does not include the 460 Healthpoint employees who joined us through this acquisition.
4 Smith & Nephew Annual Report 2012 |
1 Explanations of these non-GAAP financial measures are provided on pages 44 to 46.
2 Underlying growth percentage after adjusting for the effect of currency translation and disposals.
Section 1 Overview |
5 |
Our financial strength and confidence in continued
strategic progress enabled the Board to review the
dividend policy during the year.
Dear shareholder,
Smith & Nephew made good progress in 2012, both financially and strategically, as we delivered on our commitments to reshape the Company.
Our underlying revenues were up 2% to $4,137m, with reported revenue reflecting the successful transaction to create Bioventus. Trading profit was up 6% underlying at $965m, giving an 80 basis points increase in trading profit margin, which was up at 23.3%. Free cash flow, at $637m, was again healthy, demonstrating the vitality of our business.
This performance shows the effects of the major strategic programme announced last year to make Smith & Nephew fit and effective for the future. Throughout the year we made great progress driving efficiencies and liberating resources. This has allowed us to invest to realise the opportunities we see in our higher growth markets and sectors.
We have achieved all this and maintained our commitment to health and safety, ethics and the environment.
Enhanced returns for shareholders
Our financial strength and confidence in continued strategic progress enabled the Board to review the dividend policy during the year.
As a result, we increased the level of the Interim Dividend payment by 50% to 9.9¢ per share. The Board is pleased to propose a Final Dividend for the year of 16.2¢ per share, also up 50% on 2011. We intend to pursue a progressive dividend policy going forward.
Board changes
We were very pleased that Julie Brown joined us as Chief Financial Officer in February 2013. She brings top-level financial expertise, commercial experience and a deep knowledge of the healthcare sector. Julie replaces Adrian Hennah who left with our very best wishes and thanks for his significant contribution to Smith & Nephew.
We have also welcomed two new Non-Executive Directors during 2012. Ajay Piramal is one of Indias most impressive businessmen and Baroness Bottomley brings a wealth of experience from her successful career across both private and public sectors. We said farewell to Rolf Stomberg and Geneviève Berger, who we also thank for their valuable input.
In April, we shall welcome Michael Friedman to our Board who is renowned for his US healthcare expertise, in particular gained leading the prestigious City of Hope cancer institution in California.
Thank you
My Board colleagues and I visited a number of our global sites during the year. We welcome these opportunities to meet our employees, and would like to thank everyone at Smith & Nephew for their continued dedication to serving our customers.
We are also fortunate to meet and hear from shareholders regularly, both institutional and private. Your support and feedback are both appreciated, and continue to inform our thinking.
Smith & Nephew is evolving. We are already seeing the material benefits of our choices and actions. There is much more to come and we look forward to continuing to build ever more value for you into the future.
Sir John Buchanan
Chairman
6 Smith & Nephew Annual Report 2012 |
2
|
Strategy and performance |
|||||
|
||||||
This section outlines the Groups growth strategy, and what has been done to deliver against this strategy. |
||||||
|
||
Creating sustainable value | 7 | |
|
||
Chief Executive Officers review of strategy | 8 | |
|
||
How the Group measures its strategic performance | 16 | |
|
Section 2 Strategy and performance |
7 |
8 Smith & Nephew Annual Report 2012 |
Chief Executive Officers review of strategy
Section 2 Strategy and performance |
9 |
We are investing in higher-growth products, franchises and geographies
and adapting our commercial models and cost structure.
In August 2011, we announced an ambitious set of Strategic Priorities to make Smith & Nephew stronger, faster growing, better balanced and fit and effective for the future. Across the Group we are implementing this programme. We are investing in higher-growth products, franchises and geographies and adapting our commercial models and cost structure.
Emerging markets
In the Emerging markets we are delivering strong revenue growth, benefitting from our investments to strengthen the management team and sales force, and the successful registration of more of our existing products for sale.
Our strategy is to build upon this platform by expanding our distribution capability and delivering portfolios for the mid-tier segments. We will develop these through our own R&D, and by acquisition, and we expect to bring our first products to market in 2013.
We are also investing to ensure that all employees and third party representatives follow our Code of Conduct and local requirements. We have, what I believe to be, a world-class compliance programme. Sharing this expertise is integral to building a sustainable business everywhere we operate.
Investing for growth
In the Established markets we continue to successfully deliver a high rate of innovation. In 2012 we launched new hip, knee and trauma systems and more than 30 advanced wound management products. We increased our R&D budget, and expect to do so again in 2013.
We are also putting more resources into our higher-growth franchises and geographies. In trauma and extremities our actions to refine the commercial model and build the sales force is delivering good results. In Japan we are strengthening our leadership position in advanced wound management following the launch of Negative Pressure Wound Therapy.
These, and other investments like them, are possible because we are making Smith & Nephew more efficient. We generated annualised savings of around $100 million by the end of 2012 and are continuing to implement further improvements.
Healthpoint Biotherapeutics
The acquisition of Healthpoint Biotherapeutics expands our platform by giving us a strong position in bioactives, the fastest growing area of advanced wound
management. This perfectly complements our exudate and infection management and negative pressure expertise. The integration is proceeding to plan.
Corporate social responsibility
Whilst working to transform Smith & Nephew, we have not lost sight of the importance of our social, ethical and environmental obligations. Our commitment to customers, patients, employees, shareholders and communities remains strong. In 2012 we again earned the distinction of being featured in both the FTSE4Good Index and the Dow Jones Sustainability Index.
Delivering value
In 2013 we are continuing to build, delivering efficiency improvements and accelerating investment in our higher-growth portfolios, in geographic expansion, in more R&D and in further acquisitions. I am pleased at the progress we have made, excited about the opportunities that we see, and confident we will continue to deliver greater value for our company and stakeholders.
Olivier Bohuon
Chief Executive Officer
12 Smith & Nephew Annual Report 2012 |
Chief Executive Officers review of strategy continued
Section 2 Strategy and performance 13 |
14 Smith & Nephew Annual Report 2012 |
Chief Executive Officers review of strategy continued
Section 2 Strategy and performance 15 |
16 Smith & Nephew Annual Report 2012 |
Section 2 Strategy and performance |
17 |
Performance
|
Global outlook | Why we measure | ||||
Smith & Nephew businesses in the Established markets grew by 2% in the US and 1% in the Other Established markets, where a weak macro environment in Europe partially offset strong results in Japan and Australia. By franchise, our performance relative to estimated global market growth was below in hip reconstruction, at market in knee reconstruction, sports medicine and trauma and above in advanced wound management For more detail on the market and competition (see pages 19 to 33)
|
Established markets for Smith & Nephew are the US, Europe, Japan, Australia, New Zealand and Canada. In these markets we expect the challenging economic conditions to continue, requiring realigned business models and focused investment. |
Track the relative strength of our market positions |
||||
Emerging/International markets grew at 11%, exceeding Established markets rates and contributing over 40% of annual revenue growth for the Group. These geographies now represent 12% of the Groups overall revenue. During 2012: China, successful model, revenues above $120m Significant infrastructure, operational and talent investment Refined new R&D model to develop mid-tier product portfolio
|
Emerging/International markets represent those outside of the Established markets including Brazil, China, India and Russia. The healthcare environment in these markets is rapidly expanding and with the right investments offers significant opportunities for the Group. |
Track underlying growth of Emerging markets to global growth
Monitor progress in key market segments |
||||
R&D investment now represents 4.1% of revenue, an increase in spending of 2%. We have maintained our momentum of introducing new products: Over 30 new AWM products launched In ASD, extensions to our established LEGION knee and PERI-LOC plate ranges, a new Hip revision system and further innovation in sports medicine Over 230 existing products now available for Emerging/International markets Innovation Centre opened in Memphis
|
Innovation offers the key to meeting the realities of healthcare and economic paradigm in both Established and Emerging markets. New products, technologies and surgical techniques hold the promise and potential of reducing the overall cost of healthcare. |
Monitor the impact from innovation
Monitor the underlying investment in R&D |
||||
Trading profit grew by 6%, aided by targeted efficiency and cost initiatives, which offset market pressures and enabled continued targeted organic investments. Trading profit margin was 23.3%, an 80bps improvement. Key initiatives included: On track to deliver $150m efficiency savings by end of 2014 Reorganisation of ASD and realignment of AWM Refining our manufacturing footprint (expansion of the Suzhou facility; move and closure of Linhe plant, both in China) Reduction in cost of goods Reduction in energy use and increased waste recycling
|
By simplifying and improving our operating model we can liberate resources to invest in growth opportunities and meet the persistent price pressure. A simpler and more efficient organisation allows us to make faster and better decisions. |
Track our underlying trading profit growth and trading profitability
Reduce the amount of energy and waste for the Group, our customers and the environment |
||||
2012 has been an active year from a business development perspective. We have invested in talent and capability, which has delivered several exciting opportunities including: Acquisition of Healthpoint Biotherapeutics Acquisition of complementary technology businesses (LifeModeler Inc, Kalypto Medical Inc, Aderma range of Dermal Pads) Bioventus venture formed and divestment of Biologics and Clinical Therapies business
|
Acquisition and partnerships are important elements which supplement the organic investment and provide increased opportunity for high growth and value. |
Monitor value created for shareholders |
18 Smith & Nephew Annual Report 2012 |
3
|
Marketplace and Business segment review |
|||||
|
||||||
We look at our business in relation to issues in the wider marketplace in which we operate.
|
||||||
Our marketplace | 19 | |
|
||
Business segment review | 22 | |
|
||
Advanced Surgical Devices | 22 | |
|
||
Advanced Wound Management | 28 | |
|
Section 3 Marketplace and Business segment review |
19 |
Smith & Nephew operates in a complex marketplace. Spending is heavily influenced by governments, who are seeking to balance the demands placed upon healthcare systems from long-term trends, such as ageing populations and obesity, with requirements to restrain budgets. Patients are becoming more discerning and demanding, and healthcare providers are increasingly making choices based on both clinical outcomes and cost.
Smith & Nephews sales and marketing models reflect these factors. The Group invests in developing innovative products and services and in marketing these through the most appropriate direct or in-direct channels. Sales trends reveal a number of longer-term forces at work within our markets. The importance of government funding to our business remains and there is a need to meet ever more stringent regulation. Global manufacturing, supply and distribution operations seek to maximise their efficiency whilst supporting the sales and marketing process. Innovative new products are brought to market through highly focused research and development, and there is a robust policy of protecting intellectual property. The Group seeks to minimise the impact of currency on its business.
Sales and marketing
Smith & Nephews customers are the providers of medical and surgical services worldwide.
Competition exists among healthcare providers to gain patients on the basis of quality, service and price. Providers are under pressure to reduce the total cost of healthcare delivery. There has been some consolidation in the Groups customer base, as well as amongst the Groups competitors, and these trends are expected to continue in the long term. Smith & Nephew competes against both local and multinational corporations, including some with greater financial, marketing and other resources.
The Groups business reflects a wide range of distribution channels, purchasing agents and buying entities in over 90 countries worldwide. The largest single customer worldwide is a purchasing group based in the UK that represented 6% of the Groups worldwide revenue in 2012.
In certain parts of the world, including the UK, much of Continental Europe, Canada and Japan, the healthcare providers are largely government organisations funded by tax revenues. In the US, the Groups major customers are public and private hospitals, which receive revenue from private health insurance and government reimbursement programmes. Medicare is the major source of reimbursement in the US, for knee and hip reconstruction procedures and for wound healing treatment regimes.
In the US, the Groups products are marketed directly to healthcare providers, hospitals and other healthcare facilities with each business segment operating dedicated sales forces. The US sales forces consist of a mixture of independent contract workers and employees. Sales agents are contractually prohibited from selling products that compete with Smith & Nephew products. Our Advanced Surgical devices are principally shipped and invoiced to healthcare providers, hospitals and other healthcare facilities. Certain Advanced Wound Management products are shipped and invoiced to wholesale distributors and others are consigned to distributors that lease the devices to healthcare providers, hospitals and other healthcare facilities and end-users. In most other Established markets, each division typically manages employee sales forces directly, and also ships and invoices products both directly to healthcare providers, hospitals and other healthcare facilities and to wholesale distributors.
In Emerging markets and International markets the Group operates through direct selling and marketing operations, and through distributors. In these markets, Orthopaedics and Sports Medicine frequently share sales resources. The Advanced Wound Management sales force may be separate where it calls on different customers.
Sales trends
Smith & Nephews divisions participate in the global medical devices market and share a common focus on the repair of the human body. Smith & Nephews principal geographic markets are in our Established markets healthcare economies of the US, Europe, Japan, Canada, Australia and New Zealand. In addition, we are building our business in the Emerging markets (Brazil, Russia, India and China) and our International markets such as South Africa, Mexico and Turkey.
Global population
1950 | 2000 | 2050 | ||
2.5bn | 6.0bn | 9.0bn |
Population by age %
Global obesity %
20 Smith & Nephew Annual Report 2012 |
Our marketplace continued
Smith & Nephews markets are characterised by increased longevity, more active lifestyles, obesity, increased affluence and an increase in the average age of the population caused by the immediate post-World War II baby boomer generation approaching retirement.
Together these factors have created significant demand for more effective healthcare products which deliver improved outcomes through technology advances. Furthermore, pressure to resist increases in overall healthcare spending has led healthcare providers to demand products which minimise the length of hospital stays and use of surgeon and nursing resources.
Increasing patient awareness of available healthcare treatments through the internet and direct-to-customer advertising has led to some increased patient influence over product purchasing decisions.
For a description of the impact on each division refer to the Business Segment reviews on pages 22 to 33.
Dependence on government
and other funding
In most markets throughout the world, expenditure on medical devices is ultimately controlled to a large extent by governments. Funds may be made available or withdrawn from healthcare budgets depending on government policy. The Group is therefore largely dependent on future governments providing increased funds commensurate with the increased demand arising from demographic trends.
Pricing of the Groups products is largely governed in most Established markets by governmental reimbursement authorities. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation, excise taxes and competitive pricing, are ongoing in markets where the Group has operations. This control may be exercised by determining prices for an individual product or for an entire procedure. The Group is exposed to changes in reimbursement policy, tax policy and pricing which may have an adverse impact on sales and operating profit. In particular, changes to the healthcare legislation in the US are due to impose significant taxes on medical device manufacturers from 2013. There may be an increased risk of adverse changes to government funding policies arising from the deterioration in macro-economic conditions in some of the Groups markets.
Regulatory standards and compliance in the healthcare industry
The international medical device industry is highly regulated. Regulatory requirements are a major factor in determining whether substances and materials can be developed into marketable products and the amount of time and expense that should be allotted to such development.
The trend is towards more stringent regulation and higher standards of technical appraisal. Such controls have become increasingly demanding to comply with and management believes that this trend will continue.
National regulatory authorities administer and enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the safety and efficacy of such products. Of particular importance is the requirement in many countries that products be authorised or registered prior to manufacture, marketing or sale and that such authorisation or registration be subsequently maintained. The major regulatory agencies for Smith & Nephews products include the Food and Drug Administration (FDA) in the US, the Medicines and Healthcare products Regulatory Agency in the UK, the Ministry of Health, Labour and Welfare in Japan and the State Food and Drug Administration in China.
Business practices in the healthcare industry are subject to regulation and review by various government authorities. In general, the trend in many countries in which the Group does business is towards higher expectations and increased enforcement activity by governmental authorities.
While the Group is committed to doing business with integrity and welcomes the trend to higher standards in the healthcare industry, the Group and other companies in the industry have been subject to investigations and other enforcement activity that have incurred and may continue to incur significant expense. See Legal proceedings on page 52.
Manufacturing, supply & distribution
The Groups manufacturing production is concentrated at 12 main facilities in Memphis, Mansfield and Oklahoma City in the US, Hull, Warwick and Gilberdyke in the UK, Aarau in Switzerland, Tuttlingen in Germany, Fort Saskatchewan and Calgary in Canada and Suzhou and Beijing in China.
The Group operates a number of central distribution facilities in the key geographical areas in which it operates. Products are shipped to Group companies which hold small amounts of inventory locally for immediate or urgent customer requirements.
The Advanced Surgical Devices division operates a distribution facility in Baar, Switzerland which acts as the main holding and consolidation point for markets in Europe. In the US, the Advanced Surgical Devices distribution hub is located in Memphis.
Advanced Wound Management distribution hubs are located in Neunkirchen, Germany; Derby, UK; and Atlanta, US.
The Group has a central Operations function which continues to implement Lean Manufacturing throughout the factories and the supply chain which is designed to improve and sustain higher levels of service, quality, productivity and efficiency.
Core competencies include: materials technology; high precision machining in Advanced Surgical Devices; and high-volume, automated manufacturing in Advanced Wound Management.
Each business segment purchases raw materials, components, finished products and packaging materials from certain key suppliers. These principally include metal forgings and stampings for orthopaedic products, optical and electronic sub-components and finished goods for Sports Medicine products, active ingredients and finished goods for Advanced Wound Management and packaging materials across all businesses. Suppliers are selected, and contracts negotiated, by a centralised Group procurement team wherever possible, with a view to ensure value for money based on the total spending across the Group.
Section 3 Marketplace and Business segment review |
21 |
The Group outsources manufacturing where necessary to obtain specialised expertise or where it is possible to gain lower cost without undue risk to intellectual property. Suppliers of outsourced products and services are selected based on their ability to deliver products and services to specification, and establish and maintain a quality system. Suppliers are trained and are monitored through on-site assessments and performance audits that include quality, service and delivery. Finished goods purchased for resale include screen displays, optical and electrical devices in the Advanced Surgical Devices division and skincare products in the Advanced Wound Management division.
Research and development
Smith & Nephew manages a portfolio of short and long-term product development projects designed to meet the future needs of customers and continue to provide growth opportunities for the business. The Groups research and development is directed towards each business segment. Expenditure on research and development amounted to $171m in 2012 (2011 $167m, 2010 $151m), representing approximately 4.1% of Group revenue (2011 3.9%, 2010 3.8%).
The Group continues to invest in future technology opportunities for clinical needs identified from across the Smith & Nephew businesses.
Research and development expenditure $m
|
$171m |
|
The medical devices industry has a rapid rate of new product introduction. In order to remain competitive, each of the Groups business segments must continue to develop innovative products that satisfy customer needs and preferences or provide cost or other advantages. Developing new products is a costly, lengthy and uncertain process. A potential product may not be brought to market or not succeed in the market for any number of reasons, including failure to work optimally, failure to receive regulatory approval, failure to be cost-competitive, infringement of patents or other intellectual property rights and changes in consumer demand. The Groups products and technologies are also subject to marketing attack by competitors. Furthermore, new products that are developed and marketed by the Groups competitors may affect price levels in the various markets in which the Groups business segments operate. If the Groups new products do not remain competitive with those of competitors, the Groups revenue could decline.
Research and development is primarily carried out at the Groups principal locations, notably in Memphis, US (Orthopaedics), Mansfield, US (Endoscopy) and Hull, UK (Advanced Wound Management). There are a number of other smaller research and development units situated at other locations around the Group. In-house research is supplemented by work performed by academic institutions and other external research organisations in Europe, America and Asia.
Following the acquisition of Healthpoint Biotherapeutics the Group has a research and development capability in next-generation bioactive therapies for the treatment of chronic wounds. The principal pipeline product is HP802-247 for the treatment of venous leg ulcers which has entered Phase 3 trials.
Intellectual property
Smith & Nephew has a policy of protecting the results of research and development carried out by the Group. Patents have been obtained in a wide range of fields, including orthopaedic reconstruction and trauma, sports medicine and advanced wound management. Patent protection for Group products is sought routinely in the Groups principal markets. Currently, the Groups patent portfolio stands at approximately 4,700 patents in force and patent applications pending.
Smith & Nephew also has a policy of protecting the Groups products by registering trademarks under local laws of markets in which such products are sold. The Group vigorously protects its trademarks against infringement.
In addition to protecting its market position by filing and enforcing patents and trademarks, Smith & Nephew may oppose third-party patents and trademark filings where appropriate in those areas that might conflict with the Groups business interests.
In the ordinary course of its business, the Group enters into a number of licensing arrangements with respect to its products. None of these arrangements individually is considered material to the current operations and the financial results of the Group.
Smith & Nephew operates across many jurisdictions and therefore the Groups operations are affected by transactional exchange rate movements in that they are subject to exposures arising from revenue in a currency different from the related costs and expenses. The Groups manufacturing cost base is situated principally in the US, the UK, China and Switzerland, from which finished products are exported to the Groups selling operations worldwide. Thus, the Group is exposed to fluctuations in exchange rates between the US Dollar, Sterling and Swiss Franc and the currency of the Groups selling operations, particularly the Euro, Australian Dollar and Japanese Yen. If the US Dollar, Sterling or Swiss Franc should strengthen against the Euro, Australian Dollar and the Japanese Yen, the Groups trading margin could be adversely affected.
The Group manages the impact of exchange rate movements on intra-group sales and cost of goods sold by a policy of transacting forward foreign currency commitments when firm purchase orders are placed. In addition, the Groups policy is for forecast transactions to be covered between 50% and 90% for up to one year.
The Group uses the US Dollar as its reporting currency and the US Dollar is the functional currency of Smith & Nephew plc. The Groups revenues, profits and earnings are also affected by exchange rate movements on the translation of results of operations in foreign subsidiaries for financial reporting purposes. See Financial position, liquidity and capital resources on page 50.
22 Smith & Nephew Annual Report 2012 |
Smith & Nephew has leadership
positions in Orthopaedic Reconstruction,
Sports Medicine and Trauma.
Revenue 2 |
Trading profit 1,2 |
|||||||||
$3,108m | +2% | $728m | +8% | |||||||
Operating profit 2 |
Trading profit margin 1 |
|||||||||
$632m | +7% | 23.4% | +150 bps | |||||||
Revenue by franchise $m |
|
Product franchise growth 2 % | ||||||||||||||||
A | Knee Implants | 874 |
|
|||||||||||||||
B | Hip Implants | 666 | ||||||||||||||||
C | Sports Medicine Joint Repair | 521 | ||||||||||||||||
D |
Arthroscopic Enabling Technologies |
409 | ||||||||||||||||
E | Trauma | 462 | ||||||||||||||||
F | Other ASD | 176 | ||||||||||||||||
1 Explanations of these non-GAAP financial measures are provided on pages 44 to 46.
2 Underlying growth percentage after adjusting for the effect of currency translation and disposals.
Section 3 Marketplace and Business segment review |
23 |
Overview
In 2012, the Advanced Surgical Devices global division (ASD) developed, manufactured and sold products in the following franchise areas:
Knee Implants
Hip Implants
Sports Medicine Joint Repair
Arthroscopic Enabling Technologies
Trauma
Products are manufactured at sites around the world. The main facilities are located in Memphis, TN, Mansfield, MA and Oklahoma City, OK in the US. Products are also manufactured in Aarau, Switzerland, Tuttlingen, Germany, Leamington Spa (Warwick), UK, Beijing, China and Calgary, Canada, as well as by third-party manufacturers. Major service centres are located in the US, UK, Germany, Japan and Australia.
Strategy
ASD was created in 2011 with the merger of the orthopaedic and endoscopy business units. The momentum gained from this merger continued in 2012. The division continues to take a disciplined and objective approach to resource allocation among its core (Hip Implant, Knee Implant and Arthroscopic Enabling Technologies) and growth (Sports Medicine Joint Repair, Trauma and Other, including Gynaecology) franchises. In the core franchise areas, ASD will continue to position itself through innovation and process improvement to grow with the market and deliver earnings. In the growth franchises, the division is investing increasing amounts in innovation, rapid iterations and market development to take both share and leadership positions.
The Emerging and International markets have become an increasingly important opportunity for Advanced Surgical Device products. Significant progress was made in these markets in 2012 with investment in division management, local management, sales teams and products.
In April, ASD, along with the Advanced Wound Management division, announced the start of a major initiative to align and optimise the infrastructure and operational activities across Smith & Nephew in Europe. Known as the European Process Optimisation, this multi-year commitment will deliver a standard and simplified set of processes underpinned by a common enterprise resource planning platform and business intelligence system.
ASD also began phasing out slow and non-moving product components in 2012. The division has plans to address the number of product components further by reducing the number of platforms.
ASD provides medical education through a variety of training and education services tailored to individual surgeon needs. The Group also focuses on knowledge sharing, utilising the worlds top specialists and key opinion leaders. The ASD business supports its medical education strategy with investment in surgeon education programmes, global fellowship support initiatives, partnerships with professional associations and surgeon advisory boards.
In January 2012, the Group announced its intention to sell its Biologics and Clinical Therapies business (CT) to Bioventus LLC (Bioventus). The creation of Bioventus gave CT the resources to address longer term development projects. Smith & Nephew has a 49% shareholding in the new venture, maintaining access to the area of orthobiologics, whilst realising value for reinvestment in nearer term opportunities. This transaction was completed on 4 May 2012 for a total consideration of $367m and resulted in a profit before taxation of $251m. CTs revenue in the four month period to disposal was $69m and profit before taxation was $12m. CT was reported within the Other franchise.
Acquisitions
In 2012, the Group acquired LifeModeler, Inc. (LMI).
LMI is the leading provider of biomechanical human body simulation tools and services and the developer of the groundbreaking software used in creating the JOURNEY BCS knee system. With this new software, orthopaedic innovations can be tested and validated faster and more cost effectively prior to the production of a physical prototype, potentially shortening the time it takes to develop new products and take to market.
Market and competition
In 2012, weaker economic conditions worldwide continued to create several challenges for the overall surgical devices market, including continued deferrals of joint replacement procedures and heightened pricing pressures.
These factors contributed to the lower overall growth of the worldwide surgical devices market versus historic comparables. However, over the medium term, several catalysts are expected to continue to drive sustainable growth in surgical device procedures, including the growing and ageing population with active lifestyles, rising rates of co-morbidities such as obesity and diabetes, patient desire for minimally invasive procedures, technology improvements allowing surgeons to treat younger, more active patients, and the increasing strength of the demand for healthcare in Emerging markets.
Global orthopaedic reconstruction segment
Smith & Nephew estimates that the global orthopaedic reconstruction segment is worth approximately $13.6bn and the segment served by Smith & Nephew grew by approximately 3% in 2012. Competitors in the orthopaedics reconstruction segment include Zimmer, Stryker, Johnson & Johnson and Biomet.
Global orthopaedic trauma segment
Smith & Nephew estimates that the global orthopaedic trauma segment is worth approximately $4.5bn and the segment served by Smith & Nephew grew by approximately 3% in 2012. Competitors in the orthopaedics trauma segment include Zimmer, Stryker and Johnson & Johnson.
24 Smith & Nephew Annual Report 2012
Business segment review continued
Global Sports Medicine segment
Smith & Nephew estimates that the global sports medicine segment (representing access, resection and repair products) is worth approximately $4.1bn and the segment served by Smith & Nephew grew by approximately 7% in 2012. Competitors in the sports medicine segment include Arthrex, Johnson & Johnson and Stryker.
Financial performance
Revenue
2012
Revenue $m | ||||||||
A | Knee Implants | 874 | ||||||
B | Hip Implants | 666 | ||||||
C | Sports Medicine Joint Repair | 521 | ||||||
D | Arthroscopic Enabling Technologies | 409 | ||||||
E | Trauma | 462 | ||||||
F | Other ASD | 176 | ||||||
ASD revenue decreased by -4% to $3,108m from $3,251m in 2011. Of this decrease, underlying growth of 2% is offset by -2% due to unfavourable currency movements and -4% due to the effect of disposal of the Clinical Therapies business.
The underlying increase in ASD revenue reconciles to reported growth, the most directly comparable financial measure calculated in accordance with IFRS, as follows:
|
2012
% |
|
|
2011
% |
|
|||
Reported growth | (4) | 8 | ||||||
Constant currency exchange effect | 2 | (4) | ||||||
Disposals effect | 4 | | ||||||
Underlying growth | 2 | 4 |
In the Established markets, revenue decreased by $163m to $2,747m (-6%).
In the US, revenue decreased by $118m to $1,449m (-8%). This movement is attributable to underlying growth of 1% and -9% due to the effect of the disposal of the Clinical Therapies business. In the Established markets outside of the US revenue decreased by $45m to $1,298m (-3%). Underlying growth was 1% with -4% due to unfavourable currency movements.
In Emerging and International markets, revenue increased by $20m to $361m (6%). Underlying growth was 10% with -4% due to unfavourable currency.
2011
ASD revenue increased by 7% to $3,251m from $3,050m in 2010. Of this increase, 3% was attributable to underlying growth and 4% was due to favourable currency movements.
In the Established markets, revenue was $2,910m. This represented an underlying increase of 2% from 2010.
In the US, revenue was $1,567m, which represents an underlying growth of 2% from 2010. In the Established markets outside of the US, revenue was $1,343m which represented an underlying increase of 1% from 2010.
In the Emerging and International markets revenue was $341m which represents an underlying increase of 21% from 2010.
Trading profit
2012
Trading profit increased by $14m (2%) to $728m from $714m in 2011. Trading profit margin increased from 21.9% to 23.4%. These increases reflect the early benefits of implementing the Strategic Priorities, in particular, restructuring the Group to provide the right commercial models and cost structure.
2011
Trading profit decreased by $22m (8%) to $714m from $736m in 2010. Trading profit margin decreased from 24.1% to 21.9%. This decrease was due to continuing pricing pressure, adverse mix and some delay in the execution of our efficiency programme.
Operating profit
2012
Operating profit increased by $2m from $630m in 2011 to $632m in 2012. This comprises the increase in trading profit of $14m discussed above and the recognition of a legal claim of $23m in 2011, offset by an increase of $10m in the amortisation of acquisition intangibles and a $25m increase in restructuring and rationalisation costs. Operating profit, the most directly comparable financial measure calculated in accordance with IFRS, reconciles to trading profit as follows:
|
2012
$m |
|
|
2011
$m |
|
|||
Operating profit | 632 | 630 | ||||||
Restructuring and rationalisation costs | 57 | 32 | ||||||
Amortisation of acquisition intangibles | 39 | 29 | ||||||
Legal settlement | | 23 | ||||||
Trading profit | 728 | 714 |
Section 3 Marketplace and Business segment review |
25 |
ASD Revenue 2 | Trading profit 1,2 | |||||||||
$3.1bn | +2% | $728m | +8% | |||||||
2011: $3.3bn | 2011: $714m |
Advanced Surgical Devices trading profit and operating profit as a percentage of Group trading profit and operating profit was as follows:
2012 | 2011 | 2010 | ||||||||||
% | % | % | ||||||||||
Trading profit |
75 | 74 | 76 | |||||||||
Operating profit |
75 | 73 | 76 |
2011
Operating profit decreased by $70m to $630m from $700m in 2010. This comprised of a decrease in trading profit of $22m discussed above, an increase of $3m in the amortisation of acquisition intangibles, a $22m increase in restructuring and rationalisation costs and $23m in respect of the legal provision.
Regulatory approvals
In 2012, the Advanced Surgical Devices division obtained regulatory clearances/approvals for several key products and instrumentations.
In the US, 510(k) clearance was obtained for Hip, Knee and Trauma franchise products including POLARCUP with Ti/HA Coating, REDAPT Revision Femoral System, JOURNEY II CR Knee System and JOURNEY II Deep Dished Articular Inserts. In addition, 510(k) clearance was obtained for Twinfix Ultra PK, TI, HA gluteal tendon indications; Footprint Ultra PK gluteal tendon indications; BIORAPTOR, OSTEORAPTOR labral reconstruction indications; and allograft transplant indications.
Several products were approved in Japan including ANTHOLOGY Hip Stems, LEGION VERILAST CR, PS and Revision Knee Systems, BIOLOX Delta Ceramic Femoral Heads, GENESIS II Constrained Articular Inserts and TRIGEN Low Profile Bone Screws.
In Europe, the division renewed approval for JOURNEY BCS Knee System and obtained approval for JOURNEY II BCS Knee System. In Canada, POLARCUP XLPE Acetabular Liners were approved.
Franchises
Underlying revenue growth for key product lines are:
2012 | 2011 | |||||||
% | % | |||||||
Reconstruction |
||||||||
Knee implants |
3 | 5 | ||||||
Hip implants |
(3) | (1) | ||||||
Sports Medicine |
8 | 11 | ||||||
Arthroscopic Enabling Technologies |
(2) | | ||||||
Trauma |
3 | 3 |
Orthopaedic and sports medicine procedures tend to be higher in the winter months (quarter one and quarter four) when accidents and sports related injuries are highest. Conversely, elective procedures tend to slow down in the summer months due to holidays.
Orthopaedic reconstruction
The division offers a range of specialist products for orthopaedic reconstruction through its Hip implant and Knee implant franchises.
Both the knee and hip implant markets continue to experience economic pressure. Knee implant franchise revenue increased by 1% to $874m in 2012 which represented an underlying revenue growth of 3% and unfavourable foreign currency translation of -2%. This compared to a market growth rate of 3%. Growth slowed in the second half of 2012 as a result of a weakening of the overall knee market in Europe and the divisions knee product cycle. Between 2009 and 2011, when the division materially outperformed the knee market, it benefited from the launch of VERILAST Technology and VISIONAIRE Patient Matched Instrumentation. This benefit has now been annualised.
In the global Hip implant franchise revenue decreased by $39m to $666m (-6%) in 2012, representing a -3% underlying revenue decline in the face of the continuing metal-on-metal headwinds and -2% due to unfavourable foreign currency translation. The Hip implant franchise, led by the ANTHOLOGY Hip with VERILAST Technology, has also continued to perform well in its focus product areas.
Sales of our BIRMINGHAM Hip Resurfacing system continued to decline during the year. The BIRMINGHAM HIP Resurfacing System is a clinically proven system for hip resurfacing which preserves bone and is particularly suited for younger, more active male patients.
ASD launched several new products across its Orthopaedic Reconstruction portfolio in 2012.
1 Explanations of these non-GAAP financial measures are provided on pages 44 to 46.
2 Underlying growth percentage after adjusting for the effect of currency translation and disposals.
26 Smith & Nephew Annual Report 2012
Business segment review continued
In the Hip implant franchise, the REDAPT Revision Femoral Hip System was launched, offering surgeons one reproducible system for any type of hip revision. Also, the POLARCUP Dual Mobility Hip System, widely available in Europe, was introduced in the US. In Knee implants, the launch of the LEGION HK Hinge Knee System and the LEGION Narrow Femoral Components continue to expand the versatility of the LEGION Total Knee System. In Japan, the LEGION Revision knee system and VERILAST Technology for primary knee replacements were approved to market.
Implant bearing surfaces such as the proprietary OXINIUM Oxidized Zirconium continue to be a point of differentiation for Smith & Nephew. OXINIUM Technology combines the enhanced wear resistance of a ceramic bearing with the superior toughness of a metallic bearing. When combined with highly cross-linked polyethylene (XLPE) it results in ASDs proprietary VERILAST Technology. In hip implants, the combination of a ceramicised metal head and a polyethylene lined cup have been shown in joint registry data to have superior five-year survivorship (97.9%) compared to implants made from any other material. In knees, the LEGION Primary Knee with VERILAST Technology is the only knee implant with a 30-year wear performance claim more than double the length of wear performance testing of conventional technologies.
Another driver of Knee implant growth has been VISIONAIRE Patient Matched Instrumentation. With VISIONAIRE Instrumentation, a patients MRI and X-rays are used to create customised cutting blocks that allow the surgeon to achieve optimal mechanical axis alignment of the new implant. In addition, VISIONAIRE also helps save time by reducing the number of steps and instruments needed in the operating room.
The LEGION/GENESIS II Total Knee System is a comprehensive system designed to allow surgeons to address a wide range of knee procedures from primary to revision. The JOURNEY Active Knee Solutions is a family of advanced, customised products designed to treat early to mid-stage osteoarthritis patients, and provide more normal feeling and motion through bone ligament preservation and anatomic replication. In 2012, the second iteration of the JOURNEY Knee System, the JOURNEY II BCS, commenced a limited commercial release.
For Hip implants, core systems include the ANTHOLOGY Hip System, SYNERGY Hip System, the SMF Short Modular Femoral Hip System, the R3 Acetabular System, the POLARCUP Dual Mobility Hip System and the SL-PLUS Hip Family System.
Trauma
The divisions Trauma franchise offers both internal and external devices, as well as other products such as orthobiological materials used in the stabilisation of severe fractures and deformity correction procedures.
In the US the division is implementing a refined commercial model that increases the focus and resources needed to address the opportunities in the high-growth trauma and extremities markets.
Global Trauma revenue increased by $5m to $462m (1%), representing underlying revenue growth of 3% and -2% unfavourable foreign currency translation.
In 2012, both the VLP FOOT Percutaneous Calcaneus Plating System and the PERI-LOC Ankle Fusion Plating System were launched as part of the Groups ALL 28 Foot and Ankle Portfolio. Both systems are available to surgeons in North America, Europe and Australia and offer solutions for increasingly popular surgical approaches. The VLP FOOT Percutaneous Calcaneus System is designed for the percutaneous approach and is the only plating system to offer variable-angle locking technology. The PERI-LOC Ankle Fusion Plating System is the only system to offer surgeons options for the posterior approach which minimises soft tissue irritation and preserves the fibula.
For trauma, the principal internal fixation products are the TRIGEN family of IM nails (TRIGEN META-NAIL System, TRIGEN Humeral Nail System, TRIGEN SURESHOT, and TRIGEN INTERTAN). For extremities and limb restoration, the franchise offers the TAYLOR SPATIAL FRAME Circular Fixation System as well as a range of plates, screws, arthroscopes, instrumentation, resection, and suture anchor products for foot & ankle surgeons and hand & wrist surgeons.
Section 3 Marketplace and Business segment review |
27 |
Sports Medicine Joint Repair
The divisions Sports Medicine Joint Repair franchise offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally invasive surgery of the joints, including knee, hip and shoulder repair.
Global revenue from Sports Medicine Joint Repair increased by $30m to $521m (6%), of which 8% was underlying growth and -2% unfavourable foreign currency translation.
The franchise benefited from the launch of several class-leading products during the year. These included The HEALICOIL PK Suture Anchor for both shoulder and hip repair, ENDOBUTTON CL Ultra 10mm Fixation Device, CLANCY Flexible Drill System and ACUFEX PINPOINT Anatomic ACL Guide System. The Group also obtained US FDA clearance for expanding the indications of the HEALICOIL PK Suture Anchor and the OSTEORAPTOR Suture Anchor for use in hip arthroscopy.
The HEALICOIL PK Suture Anchor features a revolutionary open-architecture design that uses less material than traditional, solid-core anchors while still providing significantly more thread engagement and greater pullout strength than its competitors. The ENDOBUTTON CL Ultra 10mm Fixation Device is the franchises shortest continuous loop. It is designed for the growing number of surgeons who want to maximise the interface between the graft and the femoral tunnel, a feature especially important when using the anatomic technique to repair the ACL.
Joining other offerings such as the ACUFEX PINPOINT Anatomic ACL Guide System, CLANCY Anatomic Cruciate Guide, and BIOSURE Interference Screws, the ENDOBUTTON CL Ultra 10mm Fixation Device is part of a complete portfolio of options for surgeons performing a wide variety of anatomic ACL reconstructions.
Arthroscopic Enabling Technologies (AET)
The divisions Arthroscopic Enabling Technologies franchise offers healthcare providers a variety of technologies such as fluid management equipment for surgical access; high definition cameras, digital image capture, scopes, light sources and monitors to assist with visualisation inside the joints; radiofrequency (RF) probes, electromechanical and mechanical blades, and hand instruments for removing damaged tissue.
AET revenue decreased by $16m to $409m (-4%) in 2012, which represented an underlying revenue decline of -2% and -2% of unfavourable foreign currency translation.
Key AET products include the wide range of DYONICS shaver blades, ACUFEX handheld instruments, and a wide range of radiofrequency probes. Launched in 2011, the DYONICS Platinum Series Shaver Blades are single-use blades that provide superior resection due to their unequalled sharpness and virtually eliminate clogging due to their improved debris evacuation capabilities.
In 2012, the AET business obtained regulatory clearance in the United States and Europe for the DYONICS Platinum Blades 4.5/5.5mm.
Other
The divisions Other franchise includes smaller businesses such as Gynaecology, and the Clinical Therapies business, the latter of which was transferred to Bioventus in May 2012.
The revenue in this Other franchise (excluding Clinical Therapies) increased by $2m to $69m (5%), which represented an underlying revenue growth of 7% and -2% of unfavourable foreign currency translation.
The franchises key gynaecology product is the TRUCLEAR System, a first-of-its-kind hysteroscopic morcellator that pairs continuous visualisation capabilities with minimally invasive tissue removal providing safe and efficient removal of endometrial polyps and submucousal fibroids. The Group also sells a hysteroscopic fluid management system, which provides uterine distension and clear visualisation during hysteroscopic procedures.
In 2012, the franchise introduced two additions to the TRUCLEAR System, the smaller-sized TRUCLEAR 5.0 System and the TRUCLEAR ULTRA Reciprocating Morcellator 4.0.
28 Smith & Nephew Annual Report 2012 |
Business segment review continued
Smith & Nephew has leadership
positions in Exudate and Infection
management, Negative Pressure
Wound Therapy and Bioactives
Revenue 2 |
Trading profit 1,2 |
|||||||||
$1,029m | +4% | $237m | -1% | |||||||
Operating profit 2 |
Trading profit margin 1 |
|||||||||
$214m | nil% | 23.1% | -120 bps | |||||||
Revenue by franchise $m |
Product franchise growth 2 % | |||||||||||||
A | Infection management | 127 |
|
|||||||||||
B | Exudate management | 269 | ||||||||||||
C | Other AWM | 633 | ||||||||||||
1 Explanations of these non-GAAP financial measures are provided on pages 44 to 46.
2 Underlying growth percentage after adjusting for the effect of currency translation.
Section 3 Marketplace and Business segment review |
29 |
Overview
Smith & Nephews Advanced Wound Management division (AWM) offers a range of products from initial wound bed preparation through to full wound closure. These products are targeted at chronic wounds associated with the older population, such as pressure sores and venous leg ulcers. There are also products for the treatment of wounds such as burns and invasive surgery that impact the wider population.
The main products within the AWM business are for Exudate management (predominantly the ALLEVYN brand and the recently added DURAFIBER products), Infection management (including the ACTICOAT brand) and Negative Pressure Wound Therapy (NPWT).
At the end of 2012, Smith & Nephew announced the completion of the acquisition of substantially all the assets of Healthpoint Biotherapeutics (Healthpoint). The acquisition gives Smith & Nephew a leading position in bioactives, the fastest growing area of advanced wound management. The purchase price of $782m in cash has been financed from Smith & Nephews existing cash resources and bank facilities.
The AWM business has its global headquarters in Hull, UK and its North American headquarters in St Petersburg, Florida. The products are manufactured at facilities in Hull and Gilberdyke, UK, Suzhou in China, Fort Saskatchewan in Canada and also by third-party manufacturers around the world.
Strategy
AWMs strategy is to be customer-led and invest for growth by focusing on high growth, high value segments, in particular exudate and infection management, through improved wound bed preparation, moist and active healing; further penetration of the NPWT market; and building its bioactives platform.
There has been a continued focus on operational efficiency and excellence. Since 2007, efficiency improvements have been delivered through various projects including support function consolidation, outsourcing of manufacturing to low cost suppliers, distribution rationalisation projects and the start of manufacturing in Suzhou, China.
Our strategic focus builds from an understanding of the increasing tensions between clinical and financial imperatives and looks for the optimistic ground that resolves them. Our commitment is to improve wound outcomes for patients, and at the same time conserve resources for healthcare systems.
An aligned approach across AWM is designed to ensure that our employees are developed and work on common objectives to deliver consistent execution of the Groups plan.
Acquisitions
Healthpoint
In December 2012, Smith & Nephew completed the acquisition of substantially all the assets of Healthpoint for $782m in cash. Healthpoint is a leader in bioactive debridement, dermal repair and regeneration wound care treatments. Its headquarters are in Fort Worth, Texas and it has approximately 460 employees, including an established sales force of 215.
This acquisition had compelling strategic and financial rationale for Smith & Nephew.
It gives the Group a strong position in bioactives, the fastest growing area of advanced wound management. Bioactives offer novel treatments for a range of hard-to-heal wounds, including the large and increasing prevalence of diabetic foot ulcers.
It brought a complementary range of bioactive debridement, dermal repair and regeneration products. Its principal marketed product is Collagenase SANTYL Ointment (SANTYL), an enzymatic debrider for dermal ulcers and burns. Healthpoints offering also includes the OASIS family of leading acellular skin substitutes for venous leg ulcers and diabetic foot ulcers and REGRANEX, a growth factor for treating diabetic foot ulcers. These products generated revenues of around $190m in 2012 (not included in Smith & Nephew revenues for 2012). Its revenues are growing at a double digit percentage rate, driven by SANTYL ointment.
It added an established R&D capability in next-generation bioactive therapies for the treatment of chronic wounds. The principal pipeline product is HP802-247 for the treatment of venous leg ulcers, using cell-based therapy containing keratinocytes and fibroblasts. In August 2011, Healthpoint reported positive data from a Phase 2b clinical trial for HP802-247 in the treatment of venous leg ulcers, demonstrating that the compound met both its primary and secondary endpoints. The compound has recently entered Phase 3 trials for this indication and commercial launch could occur as early as 2017.
The Healthpoint acquisition will double our US AWM sales and strengthen our commercial scale and capabilities.
The combination creates a wound business which is unique having leadership positions across exudate and infection management, negative pressure and bioactive wound care.
The agreement for the acquisition of Healthpoints assets contains customary representations and warranties by the parties.
30 Smith & Nephew Annual Report 2012
Business segment review continued
ADERMA
The purchase of the ADERMA Dermal Pads range in January 2012 gave us a leading position in the market to treat pressure ulcers. Up to one in 10 patients admitted to hospitals in the UK will suffer this debilitative condition, costing approximately £2.1bn per year. Developing skin damage causes great discomfort to the patient and depending on the grade of the ulcer can take many weeks to heal whilst the majority of pressure ulcers can be prevented. ADERMA Dermal Pads are made from a unique polymer gel that redistributes pressure, allowing clinicians to protect bony prominences to help prevent skin damage.
Kalypto
In 2012, the Company acquired Kalypto Medical, securing innovative complementary technology to expand our NPWT platform.
Market and competition
In 2012, weaker economic conditions worldwide continued to create several challenges for the overall advanced wound management market including significant price pressures and increased austerity measures in Europe.
The AWM market is focused on the treatment of chronic wounds of the older population and other hard-to-heal wounds such as burns and certain surgical wounds and is therefore also expected to benefit from demographic trends. Growth is driven by an ageing population and by a steady advance in technology and products that are more clinically efficient and cost effective than their conventional counterparts. The market for advanced wound treatments is relatively unpenetrated and it is estimated that the potential market is significantly larger than the current market. Management believes that the market will continue the trend towards advanced wound products with its ability to accelerate healing rates, reduce hospital stay times and cut the cost of clinician and nursing time as well as aftercare in the home.
Smith & Nephew estimates that the global wound management segment is worth approximately $6.0bn and the segment served by Smith & Nephew grew by 1% in 2012. Global competitors vary across the various product areas and include Kinetic Concepts, Molnlycke, Convatec and Coloplast.
Financial performance
Revenue
2012
AWM continues to outperform the market, with revenue growing at 4% in 2012 on an underlying basis (excluding a -3% unfavourable currency impact) to $1,029m. Management estimates that the overall market grew at 1%.
Underlying growth in Advanced Wound Management revenue reconciles to reported growth, the most directly comparable financial measure calculated in accordance with IFRS, as follows:
2012 | 2011 | |||||||
% | % | |||||||
Reported growth | 1 | 12 | ||||||
Constant currency exchange effect | 3 | (5) | ||||||
Underlying growth | 4 | 7 |
In the Established markets, revenue increased from $906m to $907m in 2012. This represents an underlying growth of 3% which was offset by unfavourable currency movements of -3%.
In the US, revenue increased by 7% from $189m to $202m. In the Established markets outside of the US, revenues decreased -2% from $717m in 2011 to $705m in 2012. This represents an underlying growth of 2% after adjusting for -4% of unfavourable currency movements.
Revenue in the Emerging and International markets increased from $113m in 2011 to $122m in 2012 (8%). The underlying movement was 11% offset by -3% of unfavourable currency movements. Exudate management grew at 1% and Infection management was down -2%, impacted by a distributor consolidation project in Canada.
2011
Revenue increased by $107m, or 12%, to $1,019m from $912m in 2010, comprising 5% favourable currency translation and 7% underlying growth. Exudate management grew in underlying terms by 2% and infection management by 4%, as targeted marketing investments in Europe delivered good returns. The Groups NPWT portfolio has had another good year with excellent feedback since the launch of PICO during 2011. This was launched in the US during January 2012.
In the US, revenue increased by $11m to $189m (6%), all of which is attributable to underlying revenue growth.
Outside the US, revenue increased by $96m to $830m (13%). This is represented by an underlying growth of 7% and 6% of favourable foreign currency translation. European revenue increased by $39m to $493m (9%) of which 4% was underlying growth coupled with 5% of favourable currency translation.
Section 3 Marketplace and Business segment review |
31 |
AWM Revenue 2 | Trading profit 1,2 | |||||||||
$1.0bn | +4% | $237m | -1% | |||||||
2011: $1.0bn | 2011: $247m |
Trading profit
2012
Trading profit reduced by $10m to $237m from $247m and trading profit margin decreased from 24.3% to 23.1%. The decrease in the year is primarily attributable to the additional costs arising from investment in new products throughout the year.
2011
Trading profit increased by $14m (6%) to $247m from $233m in 2010 and trading profit margin decreased from 25.6% to 24.3%. The comparative was assisted by a $25m settlement in respect of BlueSky. Ignoring the impact of this in the comparatives, the equivalent margin for 2010 was 22.8%. The increase in margin in 2011 was driven by the increase in underlying revenues.
Operating profit
2012
Operating profit decreased by $18m to $214m in 2012. This comprises a decrease in trading profit of $10m discussed above and an increase of $11m in connection with the acquisition related costs on the purchase of Healthpoint. These costs were partially offset by a reduction of $3m in the amortisation of acquisition intangibles.
Operating profit, the most directly comparable financial measure calculated in accordance with IFRS, reconciles to trading profit as follows:
2012 | 2011 | |||||||
$m | $m | |||||||
Operating profit |
214 | 232 | ||||||
Acquisition related costs |
11 | | ||||||
Restructuring and rationalisation costs |
8 | 8 | ||||||
Amortisation of acquisition intangibles |
4 | 7 | ||||||
Trading profit |
237 | 247 |
Advanced Wound Management trading profit and operating profit as a percentage of Group trading profit and operating profit was as follows:
2012 | 2011 | 2010 | ||||||||||
% | % | % | ||||||||||
Trading profit |
25 | 26 | 24 | |||||||||
Operating profit |
25 | 27 | 24 |
2011
Operating profit increased by $12m to $232m. This comprises an increase in trading profit of $14m and a reduction of $1m in the amortisation of acquisition intangibles. These were offset by an increase of $3m in restructuring and rationalisation costs.
Regulatory approvals
In 2012 regulatory clearance for sale was obtained for ALLEVYN Life in the EU, US, Canada and Australia and for the introduction of a range of German specific ALLEVYN variants.
DURAFIBER Ag was approved as a Class III medical device in the EU.
VERSAJET and the RENASYS product range were both approved in Japan enabling Smith & Nephew to extend its operations into this important space. The RENASYS Go pump also received regulatory approval in China. In 2012 sterile pump versions of the PICO product launched in 2011 obtained regulatory approval in the US, EU, Canada & Australia.
PICO and VERSAJET II were both certified as compliant with the 3rd Edition of IEC 60601 an important new standard for the safety of electro-medical devices which is now required to comply with regulations in the EU.
Additional AWM products approved in the Emerging markets in 2012 include OPSITE Flexifix and LEUKOSTRIP in China and eight new products in India (ALLEVYN and ALLEVYN Ag variants, DURAFIBER and ACTICOAT Flex).
1 Explanations of these non-GAAP financial measures are provided on pages 44 to 46.
2 Underlying growth percentage after adjusting for the effect of currency translation and disposals.
32 Smith & Nephew Annual Report 2012
Business segment review continued
Franchises
Underlying revenue growth for key product lines are:
2012 | 2011 | |||||||
% | % | |||||||
Exudate management |
1 | 2 | ||||||
Infection management |
(2 | ) | 4 | |||||
Other AWM |
7 | 10 |
Due to the nature of its product range there is little seasonal impact on the Advanced Wound Management business.
Advanced Wound Care
Exudate management
Exudate management revenues decreased by -2% from $275m in 2011 to $269m in 2012. This represents an underlying growth of 1% offset by -3% in unfavourable currency exchange.
Exudate management products focus on efficient fluid management and creating the optimal moist wound environment that helps promote faster healing of the wound and reduces the risk of maceration. The principal technologies in this franchise are foam (ALLEVYN family) and gelling fibre dressings (DURAFIBER).
The ALLEVYN Gentle Border success story has continued with above market growth in 2012, becoming the largest variant of the ALLEVYN family this year. This was possible through focus on market share gains and further expansion of the range through new product development. In particular, the lite and shaped versions have further enhanced our ability to offer customers unique products that meet their clinical and economic needs. DURAFIBER commercialisation has also gained momentum in 2012.
ALLEVYN Life was launched in 2012. This is the latest generation of ALLEVYN products offering unique benefits and a significant advancement in managing wounds that diminish the quality of life of hundreds of thousands of patients every year. The product was born out of extensive international ethnographic research to understand how product design and performance can improve patient wellbeing, leading to improvements in concordance, clinical outcomes and, as a result, improved economic outcomes. Both clinician and patient feedback have been overwhelmingly positive.
Infection management
Infection management revenues have fallen from $133m in 2011 to $127m in 2012 (-5%). This also represents an underlying decline of -2% along with -3% of unfavourable currency exchange.
AWM has two significant technologies in its infection management portfolio, silver (ACTICOAT and ALLEVYN Ag) and iodine (IODOSORB). Market conditions for silver containing products have continued to be difficult in Europe but our focus on appropriate use, evidence based outcomes and cost effectiveness have demonstrated the differentiation within our products and stabilised our business in 2012. The iodine-based IODOSORB product has benefited from new evidence, claims and geography expansion, adding growth to our infection management portfolio.
ACTICOAT Flex continues to perform well following its introduction in 2009 by offering the customer benefits of ease of use, class leading efficacy and patient comfort. The ACTICOAT brand was further expanded in 2012 with ACTICOAT Surgical, delivering the antimicrobial performance of ACTICOAT in a specialist format designed for incision management for use as part of strategies to reduce surgical site infections a significant and costly post-surgical complication.
Other
Advanced Wound Management also offers a wide range of other wound care products, which means we offer one of the most comprehensive ranges of wound care solutions in the industry. These other products include our film and post-operative dressing offerings, skincare products and gels.
IV3000, AWMs specialist IV dressing, utilises REACTIC film technology and a unique patterned adhesive to create a highly breathable product which by keeping the IV site dry helps to reduce the risk of bacterial growth and infection. IV3000 has continued to grow, especially through expansion into our Emerging markets and a continued focus on product training and education in 2012.
OPSITE Post Op visible is an incision management dressing innovation that combines the attributes of the ideal dressing with the ability to see the incision without having to remove the dressing. This unique product has gone from strength to strength since its introduction, bringing it to new customers and countries, significantly contributing to the Advanced Wound Care brands growth in 2012.
Section 3 Marketplace and Business segment review |
33 |
Advanced Wound Devices
Negative Pressure Wound Therapy (NPWT) delivers vacuum-assisted pressure to help promote healing. It consists of a wound dressing, a drainage tube, and a transparent film that is connected to a suction device. Smith & Nephew offers the RENASYS EZ and RENASYS GO pump systems together with a range of foam and gauze dressing kits. The NPWT range was enhanced with the introduction of PICO, the first of its kind a fully disposable NPWT system.
The NPWT strategy is to be customer-led and invest for growth by offering the flexibility and simplicity within the product range to help address both the clinical and cost considerations of the customer. Within the traditional NPWT segment the Group is focusing on gaining share through offering a flexible RENASYS portfolio range of NPWT product offerings including foam, gauze, speciality kits, and portable and institutional pump systems. Within the disposable NPWT segment, the Group offers the simplified PICO portfolio range and is investing in creating this new market segment.
Smith & Nephews NPWT business continued strong growth in 2012, reflecting share gains continuing across North America and Europe, and new product introductions in Japan and Emerging markets. In addition, the recently launched PICO system (disposable NPWT) accelerated sales growth as the product gained awareness and adoption across a range of therapeutic areas (incision sites, chronic indications) and care settings (OR, discharge environment and community care).
The global NPWT market growth for 2012 showed modest decline compared to 2011. The increase in patient therapy and volumes was offset by price declines in most markets.
Within North America, market price declines are a reflection of business model changes to a single purchase transaction and away from the rental revenue model. In addition, unit price pressure continues in various care settings in response to pay or pressure and changing healthcare delivery dynamics. Therapy days increased slightly as a result of new technology offerings to provide greater therapy availability in transition care and discharge environment offset by general trends in reduced hospital stay. For Europe, price pressure is a reflection of increased competition in key markets and the general economic environment across most markets. NPWT therapy was introduced in Japan in 2010 and the market continues to reflect strong growth as the therapy adoption increases across the market.
The Group continues to invest in medical education across the therapy category. Investment in clinical trials, consensus papers and general customer education and training remains a component to the overall value the Group brings to the advanced wound device market space.
During 2012, Smith & Nephew entered into a global settlement agreement with Wake Forest University that resolved all existing NPWT patent litigation between the two parties.
VERSAJET (hydro-surgery debridement) system sales were slightly down for 2012 over 2011. Revenue performance is a reflection of business model changes transitioning customers from a loaner to purchase equipment which positions the product line for better future growth. The transition phasing is effected by capital budget cycles, but allows for improved therapy adoption within facilities and thus providing a better platform for future growth. In addition, the economic conditions within health systems to pay for higher price capital equipment limits the ability to effect the change in business models.
New in 2012, was the introduction of RENASYS and VERSAJET systems to the Japan market. Japan is one of the worlds largest healthcare markets, where the NPWT and hydrosurgery segments are relatively new and growing. The early presence of the Group product offerings in these growing market segments provide a platform from which to sustain future growth.
Throughout 2012, the Group continued to invest and introduce a range of product improvements across the portfolio designed to improve adoption and customer satisfaction. The PICO range was extended to include new incision site shapes and RENASYS system adaptions were introduced, to make the pumps easier to operate in the hospital environment.
34 Smith & Nephew Annual Report 2012 |
4
|
Sustainability review
|
|||||
As a business dedicated to helping improve peoples lives, our approach to sustainability focuses on positively contributing to the needs of stakeholders through improved environmental, social and economic performance. |
||||||
Sustainability strategy | 35 | |||
|
||||
Healthy economic performance | 36 | |||
|
||||
Healthy social performance | 37 | |||
|
||||
Healthy environmental performance | 40 | |||
|
||||
Sustainability progress | 41 |
Section 4 Sustainability review |
35 |
Smith & Nephew continues to make progress
in achieving the objectives in our sustainability strategy,
which seeks to meet stakeholder expectations of a
sustainable business.
Smith & Nephew has been measuring, reporting and improving on its sustainability performance since 2001. During this time, the Group has made good progress and has been looking for ways to align sustainability more closely with our overall strategic priorities.
With this objective in mind, and under the leadership of Chief Executive Officer, Oliver Bohuon, Smith & Nephew developed a new sustainability strategy in 2011 as described below. The strategy aims to reinforce a healthy brand and strengthen corporate reputation by focusing on three distinct priorities:
| Healthy economic performance |
| Healthy social performance |
| Healthy environmental performance |
Objectives
Smith & Nephew developed a comprehensive set of 2015 targets across each of these areas. These are outlined below:
Sustainability vision
Smith & Nephew will continue to build a sustainable business based on a global commitment to healthy environmental, social and economic performance. By working with stakeholders and inspiring employees, the vision will create shared value for all people that come into contact with the business by: Reducing risk and cost Building a better place to work Innovating differentiated products and services, and increasing engagement with customers Increasing shareholder value |
Sustainability is a healthy business the journey to 2015
Our sustainability aim
Our sustainability priorities
Healthy economic performance
|
Healthy social performance
|
Healthy environmental performance
|
||||||
Delivering revenue growth and shareholder value through efficiency, performance and innovation. |
Delivering a safe and healthy work environment with strong ethics and values, which embraces diversity and plays a leadership role in the communities where the Group operates.
|
Minimising environmental impact by reducing use of energy, carbon, water and other key resources. |
36 Smith & Nephew Annual Report 2012 |
Sustainability review continued
Research & Development expenditure | Research & Development % of revenue | |||||
$171m | 4.1% | |||||
2011: $167m | 2011: 3.9% |
Our sustainability targets
Achieving Healthy Economic Performance will also yield cost savings and increased revenue |
Deliver a higher return to our shareholders than our peer group over the longer term |
Incorporate sustainability considerations into 100% of new product design by 2015 |
Incorporate sustainability considerations with 100% of our major supply chain partners by 2015 |
Smith & Nephew makes a major contribution to the health and well-being of individuals and communities across the world. Our pioneering technologies enable nurses, surgeons and other medical practitioners to provide effective treatment quickly and affordably. More than this, they help increase accessibility and save and improve the quality of peoples lives all while helping the business thrive.
Product design
Revenue growth through innovation
In order to grow, thrive and combat some of the worlds most widespread health issues Smith & Nephew place a strong emphasis on new product development and innovation.
By designing products, instruments and techniques that provide both clinical and cost benefits, the Groups work in this area has a major impact on improving the efficiency of health services. From reducing the frequency of dressing changes and shortening operating room time, to reducing infection rates and length of time spent in hospital the Groups efforts in this area have a significant impact on the lives of people across more than 90 countries.
In 2012, Smith & Nephew launched an entirely new concept in advanced wound care management with ALLEVYN Life, which focuses on the patients overall quality of life. Patient-centric in design, and considering the entire healthcare chain from provider to patient, ALLEVYN Life allows more healthcare providers the opportunity to help patients with hard to heal or hard to manage wounds. Research has shown that improving patient well-being is fundamental to reducing the economic cost of wound care. ALLEVYN Life offers unique benefits that help deliver this and is a significant advancement in preventing wounds that diminish the quality of life of many patients every year.
Smith & Nephew also introduced the REDAPT Femoral Revision System which was specifically designed to bring the concept of personalised patient treatments to the revision hip market. The REDAPT system allows surgeons to recreate a patients specific functionality effectively while quickly and easily addressing issues such as poor bone quality and proximal/distal mismatch. The REDAPT instruments maximise surgical efficiency and improve accuracy and reproducibility of implant position.
Business continuity
By creating a more sustainable business, Smith & Nephew is building resilience and flexibility to adapt to change. With the demand for medical technology set to increase well into the future, we are applying more sustainable ways of behaving to ensure long-term business continuity.
Product Development is driven by three specific considerations on healthcare systems and patients: Cost, Outcomes and Access. Design teams look at the overall cost of a product and how it impacts healthcare stakeholders, consider the benefits or outcome of new products and question how to enable new patients access to our new products and capabilities.
Supply chain
Our major supply chain partners have clearly spelled out sustainability targets, mostly around reducing carbon footprint. In addition we are working on initiatives that will deliver further improvements by switching distribution freight services where possible to lower carbon emissions such as from air to road and deep sea container service.
We now require sustainability reports to be provided for new suppliers and for each contract renewal and these are weighted in our assessments. There are challenges with small local suppliers in some countries but we are making progress.
Section 4 Sustainability review |
37 |
Lost time injury rate | Corporate citizenship/philanthropy spend | |||||||
-17% | $14m | |||||||
2011: +1% | 2011: $14m |
Our sustainability targets
A safe and healthy work environment. Strive for zero injuries and attain a position in top quartile of industry for safety performance through 2015 |
A healthy workforce. Implement wellness programmes in at least 60% of our major facilities by 2015 |
A diverse workforce. At least 40% of our global talent pool will be women by 2015 |
An ethical work environment. Employees must continue to complete annually assigned compliance training and certify adherence to our Code of Conduct and Business Principles |
A responsible leader in the community. Contribute more than 1% of adjusted pre-tax profits annually towards corporate citizenship/philanthropy through 2015 |
Smith & Nephew touches the lives of millions of customers, communities and people across 90 countries. To deliver our technological innovations, we rely on the commitment and hard work of a network of more than 10,000 employees.
A safe and healthy working environment
Smith & Nephew has a longstanding commitment to the safety and health of employees, visitors and contractors. By reinforcing the responsibility of employees and contractors to work safely and follow our policies, standards and procedures, we are building a safe and healthy place to work.
In 2012 we achieved a 9% improvement in the Occupational Safety and Health Administration Total Recordable Incident Rate (TIR) and a 17% improvement in the Lost Time Injury Frequency Rate (LTIFR). In addition the severity of lost time injuries, as measured by number of days lost reduced by 10%. These improvements were achieved through determined management leadership and engagement of our employees.
Group safety rates
Wellness programmes
By the end of 2012 structured wellness programmes were in place at eight out of 18 of our major facilities covering 46% of our employees. Smith & Nephew defines major facilities as those in which more than 100 people report to work. Wellness programmes typically include lifestyle screenings and health assessments and preventative programmes based on nutrition and fitness advice. In some locations there are on site fitness facilities and classes.
Diversity at Smith & Nephew
Smith & Nephew believes that diversity fuels innovation. We focus on creating an inclusive, engaging environment where employees are valued and drive achievement of our goals. Such an environment fosters strength in our business because the variety of perspectives, experiences and work styles enhance creativity and innovation. We are committed to employment practices based on equality of opportunity, regardless of colour, creed, race, national origin, sex, age, marital status, sexual orientation or mental or physical disability unrelated to the ability of the person to perform the essential functions of the job.
The Board and Executive continue to recognise the importance of diversity and over the last two years have expanded their own diversity profile.
An ethical work environment
We earn trust
Trust is the foundation on which Smith & Nephew is built and it is the hallmark of its interactions with stakeholders both inside and outside the Group. A Code of Conduct and Business Principles defines the standards of behaviour for the Groups employees as well as suppliers, contractors and distributors authorised to do business on the Groups behalf.
Smith & Nephew fosters trust through open communication and a collaborative environment where ideas are encouraged, recognised and rewarded. Communication channels include group-wide newsletters and intranet platforms as well as a variety of forums for open dialogue including quarterly reports from the CEO and quarterly employee meetings on the state of the Group and important initiatives.
38 Smith & Nephew Annual Report 2012 |
Sustainability review continued
Code of Conduct and Business Principles
Smith & Nephew aims to be honest and fair in all aspects of its operations and expects the same from those with whom it does business. Our Code of Conduct and Business Principles governs the way we operate so that we respect stakeholders and seek to build open, honest and constructive relationships.
Smith & Nephew takes account of ethical, social, environmental, legal and financial considerations as part of its operating methods. We have a robust whistle-blowing system in all jurisdictions in which Smith & Nephew operates and where we have the necessary regulatory approvals. Our Code also states that we have a non-retaliation policy against anyone who makes a report in good faith.
New employees receive training on our Code of Conduct and Business Principles. We also assign annual compliance training to employees. In 2012, we created two courses: I earn trust and Data privacy to use for our annual training. The I earn trust module focused on the key elements that make up trust goodwill, ability and integrity and gave employees an opportunity to practice earning trust in different scenarios.
Global Compliance Programme
Smith & Nephew aims to have a world-class, Global Compliance Programme that helps our business mitigate risk and comply with global laws. In 2012, Smith & Nephew continued to strengthen its comprehensive compliance programme which includes global policies and procedures, on-boarding and annual training for its employees and managers around the world, monitoring and auditing processes, and reporting channels. We provide resources and tools to guide employees through a global intranet web site. We require approvals for any significant interactions with healthcare professionals or government officials. New distributors are subject to due diligence, required to commit to compliance with our Code and take training.
In 2012, under the terms of the Companys FCPA settlement (see Legal Proceedings), we retained an independent monitor to review the effectiveness of our compliance programme and make recommendations, as appropriate, for further enhancements to the programme. The monitor completed his initial review in August, and we are now in the process of implementing the recommended enhancements.
A responsible leader in the community
For Smith & Nephew, corporate citizenship and philanthropy play an integral role in the achievement of the Groups strategic objectives of creating commercial value, building a strong reputation and creating deeper engagement for employees.
Smith & Nephew adopts a shared value approach to philanthropy and citizenship which focuses on leveraging the Groups resources to be a force for good. The principal focus is on support for research, prevention, treatment and recovery of joint and bone health and wound care. In 2012, a new philanthropy policy was agreed and will be deployed in 2013. Details of this will be given in the full Sustainability Report to be published later this year.
In 2012, Smith & Nephews support for community charitable causes, grants, sponsorships and medical education was approximately $14m including $2m in product donations. As a matter of policy, Smith & Nephew makes no political contributions.
Smith & Nephew has developed relationships through healthcare professionals around the globe to support medical missions and medical education. In 2012 this charitable outreach included mission work in Vietnam through the Prosthetics Outreach Foundation, in Ecuador and Guatemala and the US through Operation Walk and Canvasback Missions in Majuro, Republic of the Marshall Islands.
Our initiatives into medical education included being the first sole sponsor of an Orthopaedic facility when the KwaZulu-Natal Orthopaedic Training Centre at the Inkosi Albert Luthuli Central Hospital, South Africa opened its doors in June 2012. This Centre provides training and education opportunities for surgeons from across Africa looking to learn minimally-invasive arthroscopic techniques.
Employees help raise community awareness for Child Survival Programme
Our employees participated in many volunteer programmes during 2012 including the Manly-Manado Walk to raise funds for Compassions Child Survival Programme in Manado, Indonesia. Employees from our offices in Sydney, New South Wales, Australia joined others in the community to help raise awareness of why water, sanitation and hygiene matter in a developing community.
|
Section 4 Sustainability review |
39 |
Our people strategy, which outlines our approach to leading our workforce and supports the delivery of our business strategy, is built on three key pillars: attract, recruit and retain talent; develop leaders; and engage employees through value driven strategies.
Smith & Nephews vision is to be the best at improving peoples lives and this vision extends to our employees. Our employees are dedicated to our core values of Performance, Innovation and Trust which represent the foundation of our culture.
Investing in our people and communities will help us ensure the long-term sustainability of our business. In 2012, our workforce included more than 10,000 employees, based in 32 countries. Our employment practices are designed to help us create the right workplace culture in which all employees feel valued, respected, empowered and inspired.
We strive to have the communities in which we work prosper as our business grows. Our community investment strengthens our business by supporting the local economies where we operate, helping us build strong relationships and capitalising on the philanthropic spirit of our workforce.
Attracting the best talent and developing and engaging our employees is critical to achieving and sustaining our business objectives and overall performance. Our appointments are made on merit and in alignment with a core set of competencies and values of which ethics and integrity are central. Our priority lies in the development and promotion of our employees whenever possible.
Each year, Smith & Nephew conducts a comprehensive global development and capability review process to identify high potential employees and ensure they have solid development plans. We continue to work on succession plans for critical positions across our business and have taken proactive steps to recruit specialist and leadership talent to augment our current team. We pride ourselves in maintaining a robust leadership strategy to identify and develop our leaders and offer a wide range of learning opportunities to our employees. Current programmes include the CEO forum designed to develop talent and provide exposure to the broader business and the General Managers Meeting held annually to align these key leaders with the Groups strategy and goals. In addition the Board reviews succession plans for key executive roles.
Our performance management process means employees are set business aligned objectives and behavioural goals that are rewarded on high performance. Reward systems are focused on promoting high performance and helping to attract and retain the best people.
Smith & Nephew strives to create a more engaged and productive workforce and focuses on four measures to drive employee engagement. These include an understanding of the Groups mission and direction, sense of employee involvement, focus and adaptability to customers and market place. We continue to listen to our employees and value their opinions. In 2012, more than 90% of our workforce responded to our Global Survey.
40 Smith & Nephew Annual Report 2012 |
Sustainability review continued
Energy usage | Water consumption | |||||||
-1.5% | +2.6% |
Healthy environmental performance
Our sustainability targets
Reduce non-renewable energy use by 15% by 2015 |
Reduce CO 2 emissions by 15% by 2015 |
Reduce water use by 15% by 2015 |
Reduce packaging materials by 15% by 2015 |
Reduce total waste by 15% by 2015 |
Increase the percentage of total waste recycled by 15% by 2015 (all normalised for growth) |
Smith & Nephew is committed to reducing the impact of its activities on the environment to create a healthier planet. By focusing on energy and waste reduction, the Group is also reducing costs and becoming more efficient.
2012 Key performance compared
to normalised 2011 baseline %*
* | Smith & Nephew uses a normalisation process based on cost of production which is defined as the cost of goods sold adjusted for opening and closing inventory levels. As production efficiencies are realised the cost of goods sold reduces and this can distort the effects of real environmental benefits making them appear less than actually achieved. Smith & Nephew will include a longer commentary on the normalisation process in its full Sustainability Report published later this year. |
Reduction in CO 2 emissions of 100 metric tonnes: by re-routing vehicles for improved efficiency
Our Advanced Surgical Devices facility in Alberta, Canada has reduced the number of miles that materials and products are transported by re-routing some vehicles for improved efficiency. This initiative has reduced the number of journeys and therefore the overall distances driven by 120,000 miles per year. This equates to an approximate reduction in CO 2 emissions of 100 metric tonnes.
|
Energy and carbon reduction
Smith & Nephew recognises that emissions resulting from its global operations represent one of the key environmental impacts arising from the business. In 2012, initiatives to reduce our energy consumption and associated carbon emissions have resulted in a reduction in energy usage of -1.5% and -1.8% reduction in carbon emissions.
There has been tracking of energy savings initiatives at all of the major facilities. These range from lighting to heating and air handling to water cooling.
Lighting upgrades in warehousing and manufacturing centres have contributed to significant energy savings. Improvements to equipment and processes have resulted in reduced power consumption across a number of production facilities.
Water
Water consumption has risen by 2.6% in 2012. Achieving a reduction in water usage is particularly challenging as the majority of the water used wthin the Group is consumed at one individual facility where water is used for many key processes. This will be reviewed in 2013.
Packaging, waste and recycling
Waste reduction, including that related to product packaging, is a priority for Smith & Nephew. Given that a large amount of medical products are shipped and transported it is vital to ensure that these are protected from the point of manufacture through to the point of delivery. Product packaging plays a critical role in ensuring this safe delivery.
Establishing an effective strategy to meet our target for reduction in packaging materials is challenging due to the highly regulated environment and long lead times for change approvals. However by considering design, exploring ways to reduce and using new, more sustainable materials we are making progress in this area.
In 2012, one of our supply chain teams developed a specific process to optimise how our products are shipped and reduce shipping air around the world. By implementing this process for outbound packaging operations, corrugated cardboard usage was reduced by over 6 tonnes and CO 2 emissions reduced by 6,148kg in 2012. These reductions will have a further positive impact in 2013 when the process is fully implemented.
Section 4 Sustainability review |
41 |
Waste recycled | Total waste produced | |||||||
+21.3% | +5.1% |
In 2012, our overall waste rose by 5.1% largely due to equipment and layout changes, inventory adjustments arising from relocations and some building and demolition work. We are not satisfied with this and in 2013 we will increase our focus on the waste hierarchy, in particular prevention at source.
Significant improvements have been made in recycling waste which rose in 2012 by 21.3% and now stands at 58%.
Smith & Nephew retained its membership of the FTSE4Good. The FTSE4Good Index and Ratings have been designed to measure the performance of companies that meet or exceed globally recognised standards.
The Dow Jones Sustainability Index (DJSI World) was established to track the performance of the worlds largest companies that lead the field in terms of corporate sustainability. Smith & Nephews score improved this year and our inclusion in the Index was maintained.
Suzhou: 55% energy saving for facility lighting
|
The lighting in the warehouse at the Advanced Wound Management facility in Suzhou, China has been upgraded by fitting electrodeless lamps resulting in a 55% energy saving. This equates to a reduction in use of over 85,000 kWh per annum and associated annual cost savings. The advantages also include extended lamp life and therefore lower maintenance and replacement costs.
|
Smith & Nephew has been commended by the Carbon Disclosure Project (CDP), which represents 655 institutional investors with $78 trillion in assets, for its approach to the disclosure of climate change information. For the first time in 2012 Smith & Nephew is featured in CDPs Carbon Disclosure Leadership Index. This index, a key component of CDPs annual FTSE 350 report, highlights the constituent companies within the FTSE 350 Index which have displayed a strong approach to information disclosure regarding climate change. Companies are scored on their climate change disclosure and high scores indicate good internal data management and understanding of climate change related issues affecting the Company.
Our Goodlett Farms Innovation Centre in Memphis, TN, USA, achieved the internationally recognised LEED (Leadership in Energy and Environmental Design) Gold Certification from the U.S. Green Building Council. This is the first LEED certified building in the global Smith & Nephew portfolio.
Looking ahead
A more detailed review of Smith & Nephews 2012 sustainability performance will be featured in our 2012 Sustainability Report to be published later this year.
Since 2001, Smith & Nephew has proudly reported on corporate sustainability. You may access our past and current Sustainability Reports through our corporate website www.smith-nephew.com
Contact us directly regarding Sustainability at sustainability@smith-nephew.com |
42 Smith & Nephew Annual Report 2012 |
5 |
Financial review and principal risks
|
|||||
The Group remains in a strong cash generative position, with a healthy balance sheet to fund further growth. |
||||||
Financial review | 43 | |
|
||
Outlook and trend information | 53 | |
|
||
Principal risks and risk management | 54 | |
|
Section 5 Financial review and principal risks |
43 |
Group revenue 2 | Basic earnings per Ordinary Share | |||||||||
$4.1bn | +2% | 81.3c | +24.5% | |||||||
2011: $4.3bn |
2011: 65.3c |
Group revenue was $4,137m for the year ended 31 December 2012, representing a -3% decline compared to 2011. This comprised of underlying revenue growth of 2%, unfavourable currency translation of -2% and the disposal impact from the sale of the Clinical Therapies business totalling -3%.
Attributable profit in 2012 was $729m compared to $582m in 2011. Adjusted attributable profit (calculated as set out in Selected financial data on pages 156 to 157) increased 2% to $679m in 2012, from $664m in 2011.
Basic earnings per Ordinary Share were 81.3¢, compared to 65.3¢ for 2011. EPSA (as set out in Selected financial data) was 75.7¢ in 2012 compared to 74.5¢ for 2011, representing a 2% increase.
2012 | 2011 | 2010 | ||||||||||
$m | $m | $m | ||||||||||
Financial highlights (i) (iii) |
||||||||||||
Revenue |
4,137 | 4,270 | 3,962 | |||||||||
Underlying growth in revenue (%) |
2% | 4% | 4% | |||||||||
Trading profit |
965 | 961 | 969 | |||||||||
Underlying growth in trading profit (%) |
6% | (4)% | 11% | |||||||||
Trading profit margin (%) |
23.3% | 22.5% | 24.5% | |||||||||
Operating profit |
846 | 862 | 920 | |||||||||
Attributable profit for the year |
729 | 582 | 615 | |||||||||
Adjusted attributable profit |
679 | 664 | 654 | |||||||||
Basic earnings per Ordinary Share |
81.3¢ | 65.3¢ | 69.3¢ | |||||||||
EPSA |
75.7¢ | 74.5¢ | 73.6¢ | |||||||||
Growth in EPSA (%) |
2% | 1% | 12% | |||||||||
Dividends per Ordinary Share (ii) |
26.1¢ | 17.40¢ | 15.82¢ | |||||||||
Cash generated from operations |
1,184 | 1,135 | 1,111 | |||||||||
Trading cash flow |
999 | 838 | 825 | |||||||||
Trading profit to cash conversion (%) |
104% | 87% | 85% |
(i) | Items shown in italics are non-GAAP measures. Reconciliations to reported figures are on pages 44 to 46. |
(ii) | The Board has proposed a final dividend of 16.2 US cents per share which together with the first interim dividend of 9.9 US cents makes a total for 2012 of 26.1 US cents. The final dividend is expected to be paid, subject to shareholder approval, on 8 May 2013 to shareholders on the Register of Members at the close of business on 19 April 2013. |
(iii) | All items are $m unless otherwise indicated. |
2 Underlying growth percentage after adjusting for the effect of a currency translation and disposal.
44 Smith & Nephew Annual Report 2012 |
Financial review continued
Measuring performance
Revenue
Underlying growth in revenue is used to compare the revenue in a given year to the previous year on a like-for-like basis. This is achieved by adjusting for the impact of sales of products acquired in material business combinations and for movements in exchange rates. Underlying growth in revenue is not presented in the accounts prepared in accordance with International Financial Reporting Standards (IFRS) and is therefore a measure not in accordance with Generally Accepted Accounting Principles (a non-GAAP measure).
The Group believes that the tabular presentation and reconciliation of reported revenue growth to underlying revenue growth assists investors in their assessment of the Groups performance in each business segment and for the Group as a whole.
Underlying growth in revenue is considered by the Group to be an important measure of performance in terms of local functional currency since it excludes those items considered to be outside the influence of local management. The Groups management uses this non-GAAP measure in its internal financial reporting, budgeting and planning to assess performance on both a business segment and a consolidated Group basis. Revenue growth at constant currency is important in measuring business performance compared to competitors and compared to the growth of the market itself.
The Group considers that revenue from sales of products acquired in material business combinations results in a step-up in growth in revenue in the year of acquisition that cannot be wholly attributed to local managements efforts with respect to the business in the year of acquisition. Depending on the timing of the acquisition, there will usually be a further step change in the following year. A measure of growth excluding the effects of business combinations also allows senior management to evaluate the performance and relative impact of growth from the existing business and growth from acquisitions. The process of making business acquisitions is directed, approved and funded from the Group corporate centre in line with strategic objectives.
The material limitation of the underlying growth in revenue measure is that it excludes certain factors, described above, which ultimately have a significant impact on total revenues. The Group compensates for this limitation by taking into account relative movements in exchange rates in its investment, strategic planning and resource allocation. In addition, as the evaluation and assessment of business acquisitions is not within the control of local management, performance of acquisitions is monitored centrally until the business is integrated.
The Groups management considers that the non-GAAP measure of underlying growth in revenue and the GAAP measure of growth in revenue are complementary measures, neither of which management uses exclusively.
Underlying growth in revenue reconciles to growth in revenue reported, the most directly comparable financial measure calculated in accordance with IFRS by making two adjustments, the constant currency exchange effect and the acquisitions effect, described below.
The constant currency exchange effect is a measure of the increase/decrease in revenue resulting from currency movements on non-US Dollar sales. This is measured as the difference between the increase in revenue translated into US Dollars on a GAAP basis (ie current year revenue translated at the current year average rate, prior year revenue translated at the prior year average rate) and the increase measured by translating current and prior year revenue into US Dollars using the prior year closing rate.
The acquisitions effect is the measure of the impact on revenue from newly acquired business combinations. This is calculated by excluding the revenue from sales of products acquired as a result of a business combination consummated in the current year, with non-US Dollar sales translated at the prior year average rate. Additionally, prior year revenue is adjusted to include a full year of revenue from the sales of products acquired in those business combinations consummated in the previous year, calculated by adding back revenue from sales of products in the period prior to the Groups ownership. These sales are separately tracked in the Groups internal reporting systems and are readily identifiable.
The disposals effect is the measure of the impact on revenue from the disposal of business operations during the year. This is calculated by excluding the revenue from sales of products the Group no longer sells as a result of the disposal in the current year, with non-US Dollar sales translated at the prior year average rate. Additionally, prior year revenue is adjusted to remove a full year of revenue from the sales of products disposed. These sales are separately tracked in the Groups internal reporting systems and are readily identifiable.
Reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, reconciles to underlying growth in revenue as follows:
2012 | 2011 | 2010 | ||||||||||
% | % | % | ||||||||||
Reported revenue growth |
(3 | ) | 8 | 5 | ||||||||
Constant currency exchange effect |
2 | (4 | ) | (1 | ) | |||||||
Disposals effect |
3 | | | |||||||||
Underlying revenue growth |
2 | 4 | 4 |
Operating profit, the most directly comparable financial measure calculated in accordance with IFRS, reconciles to trading profit as follows:
2012 | 2011 | 2010 | ||||||||||
$m | $m | $m | ||||||||||
Operating profit |
846 | 862 | 920 | |||||||||
Acquisition related costs |
11 | | | |||||||||
Restructuring and rationalisation costs |
65 | 40 | 15 | |||||||||
Amortisation of acquisition intangibles and impairments | 43 | 36 | 34 | |||||||||
Legal claim (see page 53) |
| 23 | | |||||||||
Trading profit |
965 | 961 | 969 |
A reconciliation of reported revenue growth to underlying revenue growth, by business segment, can be found on pages 22 to 33.
Section 5 Financial review and principal risks |
45 |
Trading profit
Trading profit is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affects the Groups short-term profitability. The Group presents this measure to assist investors in their understanding of trends. The Group has identified the following items, where material, as those to be excluded from operating profit when arriving at trading profit: acquisition and disposal related items including amortisation of acquisition intangible assets and impairments; significant restructuring events; acquisition costs; and gains and losses resulting from legal disputes and uninsured losses.
A reconciliation of operating profit to trading profit, by business segment, can be found on pages 22 to 33.
Adjusted earnings per Ordinary Share
Growth in adjusted earnings per Ordinary Share (EPSA) is another measure which presents the trend in the long-term profitability of the Group. EPSA is not a recognised measure under IFRS and is therefore a non-GAAP financial measure. The most directly comparable financial measure calculated in accordance with IFRS is earnings per Ordinary Share.
EPSA excludes the same impact of specific transactions or events that management considers affect the Groups short-term profitability, is used by the Group for similar purposes, and is subject to the same material limitations, as set out and discussed in the above section on trading profit.
Adjusted attributable profit represents the numerator used in the EPSA calculation. Adjusted attributable profit is reconciled to attributable profit, the most directly comparable financial measure in accordance with IFRS, as follows:
Growth in trading profit and trading profit margin (trading profit expressed as a percentage of revenue) are measures which present the growth trend in the long-term profitability of the Group excluding the impact of specific transactions or events that management considers affect the Groups short-term profitability. The Group presents these measures to assist investors in their understanding of the trends. The Groups international financial reporting (budgets, monthly reporting, forecasts, long-term planning and incentive plans) focuses primarily on profit and earnings before these items. Trading profit and trading profit margin are not recognised measures under IFRS and are therefore non-GAAP financial measures.
2012 | 2011 | 2010 | ||||||||||
$m | $m | $m | ||||||||||
Attributable profit for the year |
729 | 582 | 615 | |||||||||
Acquisition related costs |
11 | | | |||||||||
Restructuring and rationalisation expenses |
65 | 40 | 15 | |||||||||
Amortisation of acquisition intangibles and impairments | 43 | 36 | 34 | |||||||||
Profit on disposal of net assets held for sale |
(251 | ) | | | ||||||||
Legal claim (see page 53) |
| 23 | | |||||||||
Taxation on excluded items (see page 104) |
82 | (17 | ) | (10 | ) | |||||||
Adjusted attributable profit |
679 | 664 | 654 |
The material limitation of these measures is that they exclude significant income and costs that have a direct impact on current and prior years profit attributable to shareholders. They do not, therefore, measure the overall performance of the Group presented by the GAAP financial measure of operating profit. The Group considers that no single measure enables it to assess overall performance and therefore it compensates for the limitation of the trading profit measure by considering it in conjunction with its GAAP equivalent. The gains or losses which are identified separately arise from irregular events or transactions. Such events or transactions are authorised centrally and require a strategic assessment which includes consideration of financial returns and generation of shareholder value. Amortisation of acquisition intangibles will occur each year, whilst other excluded items arise irregularly depending on the events that give rise to such items.
Earnings per Ordinary share | 2012 | 2011 | 2010 | |||||||||
Basic |
81.3¢ | 65.3¢ | 69.3¢ | |||||||||
Diluted |
80.9¢ | 65.0¢ | 69.2¢ | |||||||||
Adjusted: Basic |
75.7¢ | 74.5¢ | 73.6¢ | |||||||||
Adjusted: Diluted |
75.4¢ | 74.2¢ | 73.6¢ |
Trading cash flow and trading profit to cash conversion ratio
Growth in trading cash flow and improvement in the trading profit to cash conversion ratio are measures which present the trend growth in the long-term cash generation of the Group excluding the impact of specific transactions or events that management considers affect the Groups short-term performance.
Trading cash flow is defined as cash generated from operations less net capital expenditure but before acquisition related cash flows, restructuring and rationalisation cash flows and cash flows arising from legal disputes and uninsured losses. Trading profit to cash conversion ratio is trading cash flow expressed as a percentage of trading profit. The nature and material limitations of these adjusted items are discussed above.
The Group presents those measures to assist investors in their understanding of trends. The Groups internal financial reporting (budgets, monthly reporting, forecasts, long-term planning and incentive plans) focuses on cash generation before these items. Trading cash flow and trading profit to cash conversion ratio are not recognised measures under IFRS and are therefore considered non-GAAP financial measures.
The material limitation of this measure is that it could exclude significant cash flows that have had a direct impact on the current and prior years financial performance of the Group. It does not, therefore, measure the financial performance of the Group presented by the GAAP measure of cash generated from operations. The Group considers that no single measure enables it to assess financial performance and therefore it compensates for the limitation of the trading cash flow measure by considering it in conjunction with the GAAP equivalents. Cash flows excluded relate to irregular events or transactions including acquisition related costs, restructuring and rationalisation costs and cash flows arising from legal disputes and uninsured losses.
46 Smith & Nephew Annual Report 2012 |
Financial review continued
Trading cash flow reconciles to cash generated from operations, the most directly comparable financial measure calculated in accordance with IFRS, as follows:
2012 | 2011 | 2010 | ||||||||||
$m | $m | $m | ||||||||||
Cash generated from operations |
1,184 | 1,135 | 1,111 | |||||||||
Less: Capital expenditure |
(265 | ) | (321 | ) | (315 | ) | ||||||
Add: Cash received on disposal of fixed assets |
| | 8 | |||||||||
Add: Acquisition related costs |
3 | 1 | | |||||||||
Add: Restructuring and rationalisation related expenditure | 55 | 20 | 16 | |||||||||
Add: Legal settlement |
22 | | | |||||||||
Add: Macrotexture expenditure |
| 3 | 5 | |||||||||
Trading cash flow |
999 | 838 | 825 | |||||||||
Trading profit |
965 | 961 | 969 | |||||||||
Trading profit to cash conversion ratio |
104% | 87% | 85% |
The following table sets out certain income statement data for the periods indicated:
2012 | 2011 | |||||||
$m | $m | |||||||
Revenue (i) |
4,137 | 4,270 | ||||||
Cost of goods sold (ii) |
(1,070 | ) | (1,140 | ) | ||||
Gross profit |
3,067 | 3,130 | ||||||
Marketing, selling and distribution expenses |
(1,440 | ) | (1,526 | ) | ||||
Administrative expenses (iii), (iv), (v) |
(610 | ) | (575 | ) | ||||
Research and development expenses |
(171 | ) | (167 | ) | ||||
Operating profit (i) |
846 | 862 | ||||||
Net interest receivable/(payable) |
2 | (8 | ) | |||||
Other finance costs |
(3 | ) | (6 | ) | ||||
Share of profit from associates |
4 | | ||||||
Profit on disposal of net assets held for sale |
251 | | ||||||
Profit before taxation |
1,100 | 848 | ||||||
Taxation |
(371 | ) | (266 | ) | ||||
Attributable profit for the year |
729 | 582 |
(i) | Group revenue and operating profit are derived wholly from continuing operations and discussed on a segment basis on pages 22 to 33. |
(ii) | In 2012, $3m of restructuring and rationalisation expenses were charged to cost of goods sold (2011 $7m). |
(iii) | 2012 includes $51m of amortisation of other intangible assets (2011 $42m). |
(iv) | 2012 includes $nil relating to legal provision (2011 $23m). |
(v) | 2012 includes $62m of restructuring and rationalisation expenses, $43m relating to amortisation of acquisition intangibles and $11m acquisition related costs (2011 $33m of restructuring and rationalisation expenses and $36m relating to amortisation of acquisition intangibles). |
Revenue
Group revenue decreased by $133m (-3%) from $4,270m in 2011 to $4,137m in 2012. Underlying revenue growth was 2% of which -2% growth was attributable to unfavourable currency translation and -3% was attributable to the effect of disposing of the Clinical Therapies business. Advanced Surgical Devices revenues decreased by $143m (-4%), underlying growth was 2% of which -2% was due to unfavourable currency translation and -4% due to the disposal of the Clinical Therapies business. Advanced Wound Management revenues increased by $10m (1%), underlying growth was 4% with -3% due to unfavourable currency translation.
A more detailed analysis is included within the Revenue sections of the individual business segments that follow on pages 22 and 33.
Cost of goods sold
Cost of goods sold decreased by $70m to $1,070m from $1,140m in 2011 which represents a 6% decrease. Of this movement, 1% is due to favourable currency translation movements. The remaining movement is largely attributable to the continued focus on costs, and partly attributable to the sale of the Clinical Therapies business in May 2012 which impacted both sales and cost of sales.
Further margin analysis is included within the Trading profit sections of the individual business segments that follow on pages 22 to 33.
Marketing, selling and distribution expenses
Marketing, selling and distribution expenses decreased by $86m (-6%) to $1,440m from $1,526m in 2011. The underlying movement of -4% is after adjusting for favourable currency movement of -2%. Increased cost savings in Established markets were partly offset by investment in Emerging and International markets and promotion of new products particularly in Advanced Wound Management.
Administrative expenses
Administrative expenses increased by $35m (6%) to $610m from $575m in 2011. Favourable currency movements offset 2% of this increase. The main factors contributing to the underlying movement of 8% were an increase of $16m in amortisation on acquisition and other intangibles and an increase of $11m in acquisition costs.
Research and development expenses
Expenditure as a percentage of revenue increased by 0.2% to 4.1% in 2012 (2011 3.9%). Actual expenditure was $171m in 2012 compared to $167m in 2011. The Group continues to invest in innovative technologies and products to differentiate it from competitors.
Operating profit
Operating profit decreased by $16m to $846m from $862m in 2011. This comprised an increase of $2m in Advanced Surgical Devices and a decrease of $18m in Advanced Wound Management. Advanced Surgical Devices started to see the benefits of its focus on costs (more than offsetting the additional restructuring expense) whilst Advanced Wound Management has continued to invest in new products throughout the year and also acquired Healthpoint Biotherapeutics in December 2012, both increasing costs.
Net interest receivable/(payable)
Net interest payable reduced by $10m from $8m payable in 2011 to a receivable of $2m in 2012. This is a consequence of the overall reduction of borrowings within the Group, a reduction in the applicable interest rates and the $7m interest receivable on the Bioventus loan note issued following the disposal of the Clinical Therapies business.
Section 5 Financial review and principal risks |
47 |
Other finance cost
Other finance costs in 2012 were $3m compared to $6m in 2011. This decrease is attributable to an increase in the expected return on pension plan assets.
Taxation
The taxation charge increased by $105m to $371m from $266m in 2011. The rate of tax was 33.7%, compared with 31.4% in 2011.
The tax charge increased by $82m in 2012 (2011 $17m reduction) as result of the profit on disposal of the Clinical Therapies business partially offset by an increase in restructuring and rationalisation expenses, amortisation of acquisition intangibles and acquisition related costs. The tax rate was 29.9% (2011 29.9%) after adjusting for these items and the tax thereon.
Group balance sheet
The following table sets out certain balance sheet data as at 31 December of the years indicated:
2012 | 2011 | |||||||
$m | $m | |||||||
Non-current assets |
3,498 | 2,542 | ||||||
Current assets |
2,144 | 2,080 | ||||||
Assets held for sale |
| 125 | ||||||
Total assets |
5,642 | 4,747 | ||||||
Non-current liabilities |
828 | 422 | ||||||
Current liabilities |
930 | 1,119 | ||||||
Liabilities directly associated with assets held for sale | | 19 | ||||||
Total liabilities |
1,758 | 1,560 | ||||||
Total equity |
3,884 | 3,187 | ||||||
Total equity and liabilities |
5,642 | 4,747 |
Non-current assets
Non-current assets increased by $956m to $3,498m in 2012 from $2,542m in 2011. This is principally attributable to the following:
| Goodwill increased by $90m from $1,096m in 2011 to $1,186m in 2012. Of this movement $73m arose on the acquisition of Healthpoint. The balance relates to favourable currency movements totalling $17m. |
| Intangible assets increased by $641m from $423m in 2011 to $1,064m in 2012. Intangible assets totalling $662m arose on the Healthpoint acquisition. Amortisation of $94m was charged during the year and assets with a net book value of $3m were written-off. A total of $68m relates to the cost of intellectual property and software acquired. The balance relates to favourable currency movements totalling $8m. |
| Property, plant and equipment increased by $10m from $783m in 2011 to $793m in 2012. Depreciation of $212m was charged during 2012 and assets with a net book value of $9m were written-off. These movements were largely offset by $197m of additions relating primarily to instruments and other plant & machinery and $27m of additions arising on the Healthpoint acquisition. The balance relates to favourable currency movements totalling $7m. |
| Deferred tax assets decreased by $59m in the year. |
| The total investment in associates has increased from $13m in 2011 to $283m in 2012. This movement predominately relates to the acquisition of Bioventus during the year totalling $114m plus $160m in the form of a loan note to Bioventus. |
Current assets
Current assets increased by $64m to $2,144m from $2,080m in 2011. The movement relates to the following:
| Inventories rose by $42m to $901m in 2012 from $859m in 2011. Of this movement, $46m arose on the Healthpoint acquisition and it includes $9m relating to favourable currency movements. |
| The level of trade and other receivables increased by $28m to $1,065m in 2012 from $1,037m in 2011. This movement includes $31m arising on the Healthpoint acquisition and $8m related to favourable currency movements. |
| Cash and cash equivalents have fallen by $6m to $178m from $184m in 2011. |
Non-current liabilities
Non-current liabilities increased by $406m from $422m in 2011 to $828m in 2012. This movement relates to the following items:
| Long-term borrowings have risen from $16m in 2011 to $430m in 2012. This increase of $414m is attributable to the acqusition of Healthpoint for $782m cash in December 2012. |
| The net retirement benefit obligation decreased by $21m to $266m in 2012 from $287m in 2011. This was largely due to the Groups additional pension contributions which were partialy offset by net actuarial losses for the year. |
| Deferred acquisition consideration remains at $8m at the end of 2012. This relates to the acquisition of Tenet Medical Engineering during 2011. |
| Provisions increased from $45m in 2011 to $63m in 2012. The principal component of this movement is $13m arising on the Healthpoint acquisition. |
| Deferred tax liabilities decreased by $5m in the year. |
Current liabilities
Current liabilities decreased by $189m from $1,119m in 2011 to $930m in 2012. This movement is attributable to:
| Bank overdrafts and current borrowings have decreased by $268m from $306m in 2011 to $38m in 2012. |
| Trade and other payables have increased by $92m to $656m in 2012 from $564m in 2011. The primary cause of this increase is the acqusition of Healthpoint which increased trade and other payables by $49m. |
| Provisions have decreased by $19m from $78m in 2011 to $59m in 2012. The most significant item contributing to this decrease is the payment of $22m to settle the legal provision (see Note 3). |
| Current tax payable is $177m at the end of 2012 compared to $171m in 2011. |
48 Smith & Nephew Annual Report 2012 |
Financial review continued
Total equity
Total equity increased by $697m from $3,187m in 2011 to $3,884m in 2012. The principal movements were:
Total equity | ||||
$m | ||||
1 January 2012 |
3,187 | |||
Attributable profit |
729 | |||
Currency translation gains |
37 | |||
Hedging reserves |
(7 | ) | ||
Actuarial loss on retirement benefit obligations |
(13 | ) | ||
Dividends paid during the year |
(186 | ) | ||
Taxation benefits on Other Comprehensive Income and equity items | 20 | |||
Net share based transactions |
117 | |||
31 December 2012 |
3,884 |
The following table sets out certain income statement data for the periods indicated:
2011 | 2010 | |||||||
$m | $m | |||||||
Revenue (i) |
4,270 | 3,962 | ||||||
Cost of goods sold (ii) |
(1,140 | ) | (1,031 | ) | ||||
Gross profit |
3,130 | 2,931 | ||||||
Marketing, selling and distribution expenses (iii) |
(1,526 | ) | (1,414 | ) | ||||
Administrative expenses (iv, v, vi) |
(575 | ) | (446 | ) | ||||
Research and development expenses |
(167 | ) | (151 | ) | ||||
Operating profit (i) |
862 | 920 | ||||||
Net interest payable |
(8 | ) | (15 | ) | ||||
Other finance costs |
(6 | ) | (10 | ) | ||||
Profit before taxation |
848 | 895 | ||||||
Taxation |
(266 | ) | (280 | ) | ||||
Attributable profit for the year |
582 | 615 |
(i) | Group revenue and operating profit are derived wholly from continuing operations and discussed on a segment basis on pages 22 to 33. |
(ii) | In 2011, $7m of restructuring and rationalisation expenses were charged to cost of goods sold (2010 $nil). |
(iii) | In 2011, no restructuring and rationalisation expenses were charged to marketing, selling and distribution expenses (2010 $3m). |
(iv) | 2011 includes $42m of amortisation of other intangible assets (2010 $34m). |
(v) | 2011 includes $23m relating to legal provision (2010 $nil). |
(vi) | 2011 includes $33m of restructuring and rationalisation expenses and $36m relating to amortisation of acquisition intangibles (2010 $12m of restructuring and rationalisation expenses and $34m relating to amortisation of acquisition intangibles). |
Revenue
Group revenue increased by $308m (8%) from $3,962m in 2010 to $4,270m in 2011. Underlying revenue growth was 4% and 4% growth was attributable to favourable currency translation.
Advanced Surgical Devices revenue increased by $201m (7%) to $3,251m in 2011 from $3,050m in 2010. The underlying revenue growth was 3% with favourable currency movements also contributing 4% to the growth in the year. Advanced Wound Management revenues increased by $107m (12%), of which 7% was attributable to underlying growth and 5% due to favourable currency translation.
A more detailed analysis is included within the Revenue sections of the individual business segments that follow on pages 22 and 33.
Cost of goods sold
Cost of goods sold increased by $109m to $1,140m from $1,031m in 2010 which represents an 11% increase. Of this movement, 4% is due to adverse translation movements leaving an underlying movement of 7% compared to an increase in underlying revenue of 4%. The residual movement is largely attributable to continued pricing pressure across all of the Groups markets which Smith & Nephew was not able to pass on to suppliers and an adverse movement in the mix of products sold, towards lower gross margin product.
Further margin analysis is included within the Trading profit sections of the individual business segments on pages 22 to 33.
Marketing, selling and distribution expenses
Marketing, selling and distribution expenses increased by $112m (8%) to $1,526m from $1,414m in 2010. After adjusting for an unfavourable currency movement of 3% the underlying movement of 5% is broadly in line with increased Group revenues.
Administrative expenses
Administrative expenses increased by $129m (29%) to $575m from $446m in 2010. Unfavourable currency movements contributed towards 5% of this increase. The factors contributing to the underlying movement of 24% were; the non-recurrence of the one-off benefit of $25m arising from the BlueSky settlement in 2010, a charge of $23m relating to legal provision, an increase of $21m in restructuring and rationalisation expenses, an increase of $12m in the bad debt expense and an $8m increase in the amortisation charge on intangible assets. Other factors contributing to this increase included the additional investment in China and Emerging markets during 2011.
Research and development expenses
Expenditure as a percentage of revenue increased by 0.1% to 3.9% in 2011 (2010 3.8%). Actual expenditure was $167m in 2011 compared to $151m in 2010. The Group continues to invest in innovative technologies and products to differentiate it from competitors.
Operating profit
Operating profit decreased by $58m to $862m from $920m in 2010 comprising a decrease of $70m in Advanced Surgical Devices, offset by an increase of $12m in Advanced Wound Management.
Net interest payable
Net interest payable reduced by $7m from $15m in 2010 to $8m in 2011. This is a consequence of the overall reduction of borrowings within the Group and a reduction in the applicable interest rates.
Other finance cost
Other finance costs in 2011 were $6m compared to $10m in 2010. This decrease is attributable to an increase in the expected return on pension plan assets.
Section 5 Financial review and principal risks |
49 |
Taxation
The taxation charge decreased by $14m to $266m from $280m in 2010. The effective rate of tax was 31.4%, compared with 31.3% in 2010.
The tax charge was reduced by $17m in 2011 (2010 $10m) as a consequence of restructuring and rationalisation expenses, amortisation of acquisition intangibles and legal provision. The effective tax rate was 29.9% (2010 30.8%) after adjusting for these items and the tax thereon.
Group balance sheet
The following table sets out certain balance sheet data as at 31 December of the years indicated:
2011 | 2010 | |||||||
$m | $m | |||||||
Non-current assets |
2,542 | 2,579 | ||||||
Current assets |
2,080 | 2,154 | ||||||
Assets held for sale |
125 | | ||||||
Total assets |
4,747 | 4,733 | ||||||
Non-current liabilities |
422 | 1,046 | ||||||
Current liabilities |
1,119 | 914 | ||||||
Liabilities directly associated with assets held for sale |
19 | | ||||||
Total liabilities |
1,560 | 1,960 | ||||||
Total equity |
3,187 | 2,773 | ||||||
Total equity and liabilities |
4,747 | 4,733 |
Non-current assets
Non-current assets decreased by $37m to $2,542m in 2011 from $2,579m in 2010. This is attributable to the following:
| Goodwill decreased by $5m from $1,101m in 2010 to $1,096m in 2011. Goodwill totalling $37m was transferred to assets held for sale. Following the acquisition of Tenet Medical Engineering during 2011, an amount of $44m was capitalised as goodwill. The balance relates to unfavourable currency movements totalling $12m. |
| Intangible assets decreased by $3m from $426m in 2010 to $423m in 2011. Intangible assets totalling $14m were transferred to assets held for sale. Amortisation of $78m was charged during the year and assets with a net book value of $2m were written-off. A total of $92m relates to the addition of intellectual property and software. The balance relates to unfavourable currency movements totalling $1m. |
| Property, plant and equipment decreased by $4m from $787m in 2010 to $783m in 2011. Property, plant and equipment totalling $3m were transferred to assets held for sale. Depreciation of $217m was charged during 2011 and assets with a net book value of $7m were written-off. These movements were largely offset by $229m of additions relating primarily to instruments and other plant and machinery. The balance relates to unfavourable currency movements totalling $6m. |
| Trade and other receivables decreased by $22m to $nil in 2011 from $22m in 2010 due to non-current receivables switching to current receivables during the year. |
| Deferred tax assets and other non-current assets decreased by $3m in the year. |
Current assets
Current assets decreased by $74m to $2,080m from $2,154m in 2010.
The movement relates to the following:
| Inventories fell by $64m to $859m in 2011 from $923m in 2010. Inventories totalling $15m were transferred to assets held for sale. Of the remaining movement, $10m related to unfavourable currency movements. |
| The level of trade and other receivables increased by $13m to $1,037m in 2011 from $1,024m in 2010. Trade and other receivables totalling $49m were transferred to assets held for sale. Of the movement in the year, $18m related to unfavourable currency movements. |
| Cash and bank has fallen by $23m to $184m from $207m in 2010. Of the movement, $2m related to unfavourable currency movements. |
Assets held for sale
Assets held for sale totalling $125m relate to the underlying assets of the Clinical Therapies business, the proposed sale of which was announced on 4 January 2012 and completed on 4 May 2012.
Non-current liabilities
Non-current liabilities decreased by $624m from $1,046m in 2010 to $422m in 2011. This movement relates to the following items:
| Long-term borrowings have fallen from $642m in 2010 to $16m in 2011. This decrease of $626m is mainly attributable to the long-term loan repayable in May 2012 switching to a current liability. |
| The net retirement benefit obligation increased by $25m to $287m in 2011 from $262m in 2010. This was largely due to actuarial losses of $70m which were only partly offset by pension contributions. |
| Deferred acquisition consideration was $8m at the end of 2011, an increase of $8m from $nil at the end of 2010 as a result of the acquisition of Tenet Medical Engineering during the year. |
| Provisions decreased from $73m in 2010 to $45m in 2011 which is largely due to a number of settlements during the year. |
| Deferred tax liabilities decreased by $3m in the year. |
Current liabilities
Current liabilities increased by $205m from $914m in 2010 to $1,119m in 2011. This movement is attributable to:
| Bank overdrafts and current borrowings have increased by $249m from $57m in 2010 to $306m in 2011 mainly as a result of the long-term loan repayable in May 2012 switching to a current liability. |
| Trade and other payables have decreased by $53m to $564m in 2011 from $617m in 2010. Trade and other payables totalling $19m were transferred to liabilities directly associated with assets held for sale. An amount of $8m is attributable to favourable currency movements. |
| Provisions have increased by $41m from $37m in 2010 to $78m in 2011. The most significant item contributing to this increase is the $23m legal provision (see Note 3). |
| Current tax payable is $171m at the end of 2011 compared to $203m in 2010. Of the $32m reduction, $1m is attributable to favourable currency movements. |
50 Smith & Nephew Annual Report 2012 |
Financial review continued
Liabilities directly associated with assets held for sale
Liabilities held for sale totalling $19m relate to the underlying liabilities of the Clinical Therapies business, the proposed sale of which was announced on 4 January 2012 and completed on 4 May 2012.
Total equity
Total equity increased by $414m from $2,773m in 2010 to $3,187m in 2011. The principal movements were:
Total equity | ||||
$m | ||||
1 January 2011 |
2,773 | |||
Attributable profit |
582 | |||
Currency translation losses |
(36 | ) | ||
Hedging reserves |
14 | |||
Actuarial loss on retirement benefit obligations |
(70 | ) | ||
Dividends paid during the year |
(146 | ) | ||
Taxation benefits on Other Comprehensive Income and equity items | 22 | |||
Net share based transactions |
48 | |||
31 December 2011 |
3,187 |
Transactional and translational exchange
The Groups principal markets outside the US are, in order of significance, Continental Europe, UK, Australia and Japan. Revenues in these markets fluctuate when translated into US Dollars on consolidation. During the year, the average rates of exchange against the US Dollar used to translate revenues and profits arising in these markets changed compared to the previous year as follows: the Euro strengthened from $1.39 to $1.28 (+8%), Sterling weakened from $1.60 to $1.58 (-1%), the Swiss Franc weakened from $1.13 to $1.07 (-5%), the Australian Dollar strengthened from $1.03 to $1.04 (1%) and the Japanese Yen stayed flat at ¥80.
The Groups principal manufacturing locations are in the US (Advanced Surgical Devices), Switzerland (Advanced Surgical Devices), UK (Advanced Wound Management and Advanced Surgical Devices) and China (Advanced Surgical Devices and Advanced Wound Management). The majority of the Groups selling and distribution subsidiaries around the world purchase finished products from these locations. As a result of currency movements compared with the previous year, sales from the US became relatively less profitable to all of these countries. The Groups policy of purchasing forward a proportion of its currency requirements and the existence of an inventory pipeline reduce the short-term impact of currency movements.
Financial position, liquidity and capital resources
Cash flow and net debt
The main elements of Group cash flow and movements in net debt can be summarised as follows:
2012 | 2011 | 2010 | ||||||||||
$m | $m | $m | ||||||||||
Cash generated from operations |
1,184 | 1,135 | 1,111 | |||||||||
Net interest paid |
(4 | ) | (8 | ) | (17 | ) | ||||||
Income taxes paid |
(278 | ) | (285 | ) | (235 | ) | ||||||
Net cash inflow from operating activities |
902 | 842 | 859 | |||||||||
Capital expenditure (net of disposal of property, plant and equipment) | (265 | ) | (321 | ) | (307 | ) | ||||||
Acquisitions (net of cash acquired) |
(782 | ) | (33 | ) | | |||||||
Equity dividends paid |
(186 | ) | (146 | ) | (132 | ) | ||||||
Proceeds from own shares |
6 | 7 | 8 | |||||||||
Issue of ordinary share capital |
77 | 17 | 15 | |||||||||
Treasury shares purchased |
| (6 | ) | (5 | ) | |||||||
Change in net debt from net cash flow (see |
||||||||||||
Note 21 of the Notes to the Group accounts) |
145 | 360 | 438 | |||||||||
Exchange adjustment |
5 | (6 | ) | 13 | ||||||||
Opening net debt |
(138 | ) | (492 | ) | (943 | ) | ||||||
Closing net debt |
(288 | ) | (138 | ) | (492 | ) |
Net cash inflow from operating activities
Cash generated from operations in 2012 of $1,184m (2011 $1,135m, 2010 $1,111m) is after paying out $nil (2011 $3m, 2010 $5m) of macrotextured claim settlements unreimbursed by insurers, $3m (2011 $1m, 2010 $nil) of acquisition related costs, $55m (2011 $20m, 2010 $16m) of restructuring and rationalisation expenses and $22m (2011 $nil, 2010 $nil) relating to a legal settlement.
Capital expenditure
The Groups ongoing capital expenditure and working capital requirements were financed through cash flow generated by business operations and, where necessary, through short-term committed and uncommitted bank facilities. In recent years, capital expenditure on tangible and intangible fixed assets represented approximately 6% of continuing Group revenue.
In 2012, gross capital expenditure amounted to $265m (2011 $321m, 2010 $315m). The principal areas of investment were the placement of orthopaedic instruments with customers, patents and licences, plant and equipment and information technology.
At 31 December 2012, $4m (2011 $9m, 2010 $15m) of capital expenditure had been contracted but not provided for which will be funded from cash inflows.
Acquisitions and disposals
In the three-year period ended 31 December 2012, $815m was spent on acquisitions, funded from net debt and cash inflows. This comprised, $33m for Tenet Medical Engineering during 2011 and $782m for Healthpoint acquired in December 2012. There were no acquisitions in 2010.
During 2012 the Group completed the transfer of its Biologics and Clinical Therapies business (CT) to Bioventus LCC (Bioventus) for total consideration of $367m. As part of this transaction the Group paid $104m for 49% of Bioventus and subsequently invested a further $10m.
Section 5 Financial review and principal risks |
51 |
Liquidity
The Groups policy is to ensure that it has sufficient funding and facilities in place to meet foreseeable borrowing requirements. In December 2010, the Group entered into a five-year $1bn multi-currency revolving facility with an initial interest of 70 basis points over LIBOR.
At 31 December 2012, the Group held $178m (2011 $184m, 2010 $207m) in cash and balances at bank. The Group has committed and uncommitted facilities of $1.0bn and $0.3bn respectively. The undrawn committed facilities totalling $0.6bn expires after two but within five years (2011 $1.0bn expires after two but within five years). Smith & Nephew intends to repay the amounts due within one year by using available cash and drawing down on the longer-term facilities. In addition, Smith & Nephew has finance lease commitments of $16m (of which $6m extends beyond five years).
The principal variations in the Groups borrowing requirements result from the timing of dividend payments, acquisitions and disposals of businesses, timing of capital expenditure and working capital fluctuations. Smith & Nephew believes that its capital expenditure needs and its working capital funding for 2013, as well as its other known or expected commitments or liabilities, can be met from its existing resources and facilities. The Groups net debt decreased from $943m at the beginning of 2010 to $288m at the end of 2012, representing an overall decrease of $655m.
The Groups planned future contributions are considered adequate to cover the current underfunded position in the Groups defined benefit plans.
Further disclosure regarding borrowings, related covenants and the liquidity risk exposures is set out in Note 15 of the Notes to the Group accounts. The Group believes that its borrowing facilities do not contain restrictions that would have significant impact on its funding or investment policy for the foreseeable future.
Going concern
The Groups business activities, together with the factors likely to affect its future development, performance and position are set out in the Financial review and principal risks section on pages 54 to 55. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described under Financial position, liquidity and capital resources within the Financial review section set out on page 50. In addition, the notes to the financial statements include the Groups objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.
The Group has considerable financial resources and its customers and suppliers are diversified across different geographic areas. As a consequence, the Directors believe that the Group is well placed to manage its business risk successfully despite the ongoing uncertain economic outlook.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis for accounting in preparing the annual financial statements.
Management also believes that the Group has sufficient working capital for its present requirements.
Payment policies
It is the Groups and Companys policy to ensure that suppliers are paid within agreed terms. At the year-end the Company had no trade creditors.
Factors affecting Smith & Nephews results of operations
Government economic, fiscal, monetary and political policies are all factors that materially affect the Groups operation or investments of shareholders. Other factors include sales trends, currency fluctuations and innovation. Each of these factors is discussed further in the Marketplace and Business Segment review on pages 19 to 33 and Taxation information for shareholders on pages 154 to 155.
The Groups significant accounting policies are set out in Notes 1 to 24 of the Notes to the Group accounts. Of those, the policies which require the most use of managements judgment are as follows:
Inventories
A feature of the Advanced Surgical Devices division (whose finished goods inventory makes up approximately 83% of the Group total finished goods inventory) is the high level of product inventory required, some of which is located at customer premises and is available for customers immediate use. Complete sets of product, including large and small sizes, have to be made available in this way. These sizes are used less frequently than standard sizes and towards the end of the product life cycle are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopaedic inventory to anticipate this situation. These adjustments are calculated in accordance with a formula based on levels of inventory compared with historical usage. This formula is applied on an individual product line basis and is first applied when a product group has been on the market for two years. This method of calculation is considered appropriate based on experience, but it does involve management judgments on customer demand, effectiveness of inventory deployment, length of product lives, phase-out of old products and efficiency of manufacturing planning systems.
Impairment
In carrying out impairment reviews of goodwill, intangible assets and property, plant and equipment, a number of significant assumptions have to be made when preparing cash flow projections. These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses or products, levels of reimbursement and success in obtaining regulatory approvals. If actual results should differ or changes in expectations arise, impairment charges may be required which would adversely impact operating results.
52 Smith & Nephew Annual Report 2012 |
Financial review continued
Retirement benefits
A number of key judgments have to be made in calculating the fair value of the Groups defined benefit pension plans. These assumptions impact the Balance Sheet liability, operating profit and other finance income/costs. The most critical assumptions are the discount rate and mortality assumptions to be applied to future pension plan liabilities. For example as of 31 December 2012, a 0.5% increase in discount rate would have reduced the combined UK and US pension plan deficit by $28m whilst a 0.5% decrease would have increased the combined deficit by $33m. A 0.5% increase in discount rate would have decreased profit before taxation by $1m whilst a 0.5% decrease would have increased it by $1m. A one-year increase in the assumed life expectancy of the average 60 year old male pension plan member in both the UK and US would have increased the combined deficit by $23m. In making these judgments, management takes into account the advice of professional external actuaries and benchmarks its assumptions against external data.
The discount rate is determined by reference to market yields on high quality corporate bonds, with currency and term consistent with those of the liabilities. In particular for the UK and US, the discount rate is derived by reference to an AA yield curve derived by the Groups actuarial advisers.
See Note 19 of the Notes to the Group accounts for a summary of how the assumptions selected in the last five years have compared with actual results.
Contingencies and provisions
The recognition of provisions for legal disputes is subject to a significant degree of estimation. Provision is made for loss contingencies when it is considered probable that an adverse outcome will occur and the amount of the loss can be reasonably estimated. In making its estimates, management takes into account the advice of internal and external legal counsel. Provisions are reviewed regularly and amounts updated where necessary to reflect developments in the disputes. The ultimate liability may differ from the amount provided depending on the outcome of court proceedings or settlement negotiations or if new facts come to light.
The group operates in numerous tax jurisdictions around the world. Although it is group policy to submit its tax returns to the relevant tax authorities as promptly as possible, at any given time the group has unagreed years outstanding and is involved in disputes and tax audits. Significant issues may take several years to resolve. In estimating the probability and amount of any tax charge, management takes into account the views of internal and external advisers and updates the amount of provision whenever necessary. The ultimate tax liability may differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation.
Legal proceedings
The Company and its subsidiaries are parties to various legal proceedings, some of which include claims for substantial damages. The outcome of these proceedings cannot readily be foreseen, but management believes none of them are likely to result in a material adverse effect on the financial position of the Group. The Group provides for outcomes that are deemed to be probable and can be reliably estimated. There is no assurance that losses will not exceed the provision or will not have a significant impact on the Groups results of operations or financial condition in the period in which they are realised.
Product liability claims
In August 2003, the Group withdrew voluntarily from all markets the macrotextured versions of its Oxinium femoral knee components.
A number of related claims have been filed, most of which have been settled. The aggregate cost at 31 December 2012 related to this matter is approximately $214m. The Group has sought recovery from its primary and excess insurers for costs of resolving the claims. The primary insurance carrier has paid $60m in full settlement of its policy liability. However, the excess carriers have denied coverage, citing defences relating to the wording of the insurance policies and other matters. In December 2004, the Group brought suit against them in the US district court for the Western District of Tennessee, and trial is expected to commence in 2014. An additional $22m was received in 2007 from a successful settlement with a third party.
A charge of $154m was recorded in 2004 for anticipated expenses in connection with macrotexture claims. Most of that amount has since been applied to settlements of such claims. Management believes that the $17m provision remaining is adequate to cover remaining claims. Given the uncertainty inherent in such matters, there can be no assurance on this point.
The Group faces other claims from time to time for alleged defects in its products and has on occasion recalled or withdrawn products to minimise risk of harm or claims. Such claims are endemic to the orthopaedic device industry. The group maintains product liability insurance subject to limits and deductibles that management believes are reasonable.
Currently, there is heightened concern about possible adverse effects of hip implant products with metal-on-metal bearing surfaces and the Group expects to incur expenses to defend claims in this area. The Group takes care to monitor the clinical evidence relating to its metal hip implant products and ensure that its product offerings and training are designed to serve patients interests.
Business practice investigations
In March 2005 the US attorneys office in Newark, New Jersey issued subpoenas to the five largest sellers of hip and knee implants to US orthopaedic surgeons, including the Groups orthopaedic business, asking for information regarding arrangements with orthopaedic reconstructive surgeons. In September 2007, the Group (and the other four companies involved) settled the charges that could have resulted from this investigation, without admitting any wrongdoing as part of the settlement. At the same time, the Group entered into a Corporate Integrity Agreement (CIA) with the Office of the Inspector General (OIG) of the US Department of Health and Human Services which requires certain compliance efforts. This agreement was for a five-year term.
On 11 December 2012 the OIG notified the group that it had met its CIA requirements and that the five-year term of the CIA had concluded.
In September 2007, the SEC notified the Group that it was conducting an informal investigation of companies in the medical devices industry, including the Group, regarding possible violations of the Foreign Corrupt Practices Act (FCPA) in connection with the sale of products in certain countries outside of the US. The US Department of Justice (DOJ) subsequently joined the SECs request.
Section 5 Financial review and principal risks |
53 |
On 6 February 2012, Smith & Nephew announced that it had reached settlement with the SEC and DOJ in connection with this matter. Smith & Nephew has paid slightly less than $23m in fines and profit disgorgement and committed to maintain an enhanced compliance programme and appoint an independent monitor for at least 18 months to review and report on its compliance programme to both the SEC and DOJ. The settlement agreements impose detailed reporting, compliance and other requirements on Smith & Nephew for a three-year term. Failure to comply with these requirements, or any other violation of law, could have severe consequences for the Group.
Intellectual property disputes
The Group is engaged, as both plaintiff and defendant, in litigation with various competitors and others over claims of patent infringement and other intellectual property matters. These disputes are being heard in courts in the United States and other jurisdictions and also before agencies that examine patents. Outcomes are rarely certain and costs are often significant.
From the Groups entry into the negative pressure wound therapy business in 2007, Kinetic Concepts, Inc. (KCI) pursued claims of patent infringement against the Group in the US, UK, Germany and other jurisdictions, asserting both its own patents and others exclusively licensed to KCI by Wake Forest University. During the course of 2012, the Group reached agreements with KCI and Wake Forest to resolve all pending claims.
The Group has twice won jury verdicts in the US district court for Oregon against Arthrex Inc. for infringement of the Groups patents relating to suture anchors. Judgement was entered in favour of the Group after the first verdict but reversed on appeal and remanded for a new trial. The verdict in the new trial was overturned by the district court but then (in January 2013) reinstated on appeal.
Other matters
In April 2009, the Group was served with a subpoena by the US Department of Justice in Massachusetts requiring the production of documents from 1995 to 2009 associated with the marketing and sale of the Groups EXOGEN bone growth stimulator. Similar subpoenas have been served on a number of competitors in the bone growth stimulator market. Around the same time a qui tam or whistleblower complaint concerning the industrys sales and marketing of those products, originally filed in 2005 against the primary manufacturers of bone growth stimulation products (including Smith & Nephew), was unsealed in federal court in Boston, Massachusetts. A motion to dismiss that complaint was denied in December 2010.
The Group is subject to country of origin requirements under the US Buy American and Trade Agreements Acts with regard to sales to certain US government customers. The Group has voluntarily disclosed to the US Veterans Administration and the US Department of Defense that a small percentage of the products sold to the US government in the past, primarily from the orthopaedics business, may have originated from countries that are not eligible for such sales except with government consent. Government auditors subsequently conducted an on-site visit at the Groups orthopaedics business. In December 2008, three months after Smith & Nephews initial voluntary disclosure, a whistleblower suit was filed in the US district court for the Western district of Tennessee alleging these violations. Smith & Nephews motion to dismiss the suit was denied in November 2010.
The discussion below contains certain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and trading margins, market trends and our product pipeline are forward-looking statements. Phrases such as aim, plan, intend, anticipate, well placed, believe, estimate, target, consider, and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties and other important factors that could cause actual results to differ materially from those projected in forward-looking statements. For Smith & Nephew, these factors include: economic and financial conditions in the markets we serve, especially those affecting healthcare providers, payors and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals; reimbursement decisions or other government actions; products defects or recalls; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; strategic actions, including acquisitions and depositions and our success in integrating acquired businesses; and numerous other matters which affect us or our markets, including those of a political, economic business or competitive nature.
Additional information on factors that could cause the Groups actual results to differ from estimates reflected in these forward-looking statements, can be found under Principal risks and risk management section on pages 54 to 55.
Information regarding the recent and longer term market growth trends is given for each of the Groups divisions in the relevant Market and competition sections under Business segment reviews on pages 22 to 33.
Smith & Nephew expects the market conditions seen in 2012 broadly to continue in 2013.
During 2013, the Group expects to maintain its excellent record in Advanced Wound Management and again grow at above the market rate.
Trauma and Extremities are expected to continue to build upon recent investments and grow slightly ahead of the market rate.
In Sports Medicine, the Group anticipates growing at around the market rate, with a stronger finish to the year, as new products are introduced in the second half of 2013.
Orthopaedic Reconstruction is likely to grow more slowly than the market, reflecting the Groups position in the product cycle and the metal-on-metal headwinds, albeit with performance improving throughout the year as we realise the benefits of recent and planned product launches.
The Group exceeded its trading profit margin expectation for 2012 and remains focused on creating a business capable of delivering a sustainable 24% margin.
During 2013, the Group expects further benefits will be gained from our efficiency programme and will continue investing for growth. The first effects of the US Medical Device excise tax and the Healthpoint acquisition, which is initially dilutive to the Group margin, will be seen in 2013. Taking all these factors together, our trading profit margin in 2013 is expected to be below the 23.3% achieved in 2012.
Smith & Nephew exited 2012 with a much stronger platform than we entered the year. In 2013 we will continue to focus on our Strategic Priorities to deliver greater value for our Company and stakeholders.
54 Smith & Nephew Annual Report 2012 |
Principal risks and risk management
As an integral part of planning and review, Group and business area management seek to identify the significant risks involved in the business, and to review the risk management action plans for those risks. The Group Risk Committee, which is comprised of the CEO and senior executives, meets twice a year to review the risks identified by the businesses and corporate functions and any risk management actions being taken. As appropriate, the Risk
Committee may re-categorise risks or require further information on the risk management action plans. The Risk Committee reports to the Board on an annual basis detailing all principal risks. In addition, the Board considers risk as part of the development of strategy. Internal audit reviews and reports on the effectiveness of the operation of the risk management process.
Risk | Context | Specific risks we face | ||||
Disruptive technologies | The medical devices industry has a rapid rate of new product introduction. The Group must be adept at monitoring the landscape for technological advances, make good investment/acquisition choices, have an efficient and valuable product development pipeline and secure protection for its intellectual property. |
Competitors may introduce a disruptive technology, or obtain patents or other intellectual property rights, that affect the Groups competitive position
Claims by third parties regarding infringement of their intellectual property rights
Lack of innovation due to low R&D investment, R&D skills gap or poor product development execution for established and emerging markets
Failure to successfully commercialise a pipeline product, or failure to receive regulatory approval
|
||||
Government action, pricing and reimbursement pressure |
In most markets throughout the world, expenditure on medical devices is controlled to a large extent by governments, many of which are facing increasingly intense budgetary constraints. The Group is therefore largely dependent on governments providing increased funds commensurate with the increased demand arising from demographic trends. Reimbursement rates may be set in response to perceived economic value of the devices, based on clinical and other data relating to cost, patient outcomes and comparative effectiveness. Political upheaval in the countries where the Group operates or surrounding regions could adversely affect Group operations or turnover.
Group operations are affected by transactional exchange rate movements. The Groups manufacturing cost base is situated in the US, UK, China and Switzerland and finished products are exported worldwide.
|
Reduced reimbursement levels and increasing pricing pressures
Reduced demand for elective surgery
Increased focus on health economics
Government policies favouring lower priced products
Political upheavals prevent selling of products, receiving remittances of profit from a member of the Group or future investments in that country
The Group is exposed to fluctuations in exchange rates. If the manufacturing country currencies strengthen against the selling currencies, the trading margin may be affected
Economic downturn impacts demand and collections
|
||||
Supply, system and site disruption |
Unexpected events could disrupt the business by affecting either a key facility or system or a large number of employees. The business is also reliant on certain key suppliers of raw materials, components, finished products and packaging materials. |
Catastrophe could render one of the Groups production facilities out of action
A significant event could impact key leadership or a large number of employees
Issues with a single source supplier of a key component and failure to secure critical supply
A severe IT fault could disable critical systems
|
||||
Product safety, regulation, and litigation |
National regulatory authorities enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the safety and efficacy of such products and may also inspect for compliance with appropriate standards, including those relating to Quality Management Systems (QMS) or Good Manufacturing Practice (GMP) regulations. |
Non-compliance with product regulations and standards could result in fines, penalties, and prosecutions
Product defect could result in lost sales and inventory write-offs
Third party liability claims
Damage to reputation
|
||||
Compliance with laws and regulations | Business practices in the healthcare industry are subject to increasing scrutiny by government authorities. The trend in many countries is towards increased enforcement activity. The Group is also subject to increased regulation of personal information. Acquisitions and expansion into Emerging markets could also pose additional compliance risks. |
Violation of healthcare, data privacy or anti-corruption laws could result in fines, loss of reimbursement and impact reputation
Serious breaches could potentially prevent the Group from doing business in a certain market
Failure to conduct adequate due diligence or to integrate appropriate internal controls into acquired businesses could result in fines and impact return on investment
|
Section 5 Financial review and principal risks |
55 |
There are known and unknown risks and uncertainties relating to Smith & Nephews business. The table below provides an overview of what the Board considers the most significant risks that could cause the Groups business, financial position and results of operations to differ materially and adversely from expected and
historical levels, and how these risks relate to the Groups strategic priorities. In addition, other factors not listed here that Smith & Nephew cannot presently identify or does not believe to be equally significant, could also materially adversely affect Smith & Nephews business, financial position or results of operations.
Possible impacts | Risk Management actions | Link to strategic priority | ||||||
Loss of market share, profit and long-term growth |
Increasing productivity, prioritisation and allocation of R&D funds
Increasing R&D investment in order to enhance clinical capability, invest in biomaterials
Strengthen intellectual property rights and support an Emerging Market portfolio
Business development to augment the portfolio
Increasing speed to market of new products
|
Innovate for value
Simplify and improve our operating model
Supplement the organic growth through acquisitions |
||||||
Loss of revenue, profit and cash flows |
Develop innovative economic product and service solutions for both Established and Emerging markets
Incorporate health economic component into design and development of new products
Enhanced expertise supporting reimbursement strategy and guidance
Optimise cost to serve to protect margins and liberate funds for investment
Streamline COGS, SKUs, and inventory management
The Group transacts forward foreign currency commitments when firm purchase orders are placed to reduce exposure to currency fluctuations
|
Simplify and improve our operating model Established markets
Innovate for value |
||||||
Loss of revenue, profit and cash flows |
Ensure crisis response/business continuity plans at all major facilities and for key products
Audit programme for critical suppliers and second sources or increased inventories for critical components
Implement enhanced travel security and protection programme
IT disaster and data recovery plans are in place and support overall business continuity plans
|
Simplify and improve our operating model
Established markets |
||||||
Loss of profit and reduction in share price
Negative impact on brand/reputation |
Enhanced leadership and resources
Standardise the Groups quality management and practice
Maintain auditing programmes to assure compliance
Group-wide practices to drive design, and production line performance and dependability
Post launch review of product safety and complaint data
|
Simplify and improve our operating model
Innovate for value |
||||||
Loss of profit and reduction in share price
Negative impact on brand/reputation |
Strong compliance expertise and infrastructure
Code of Conduct/Global Policies and Procedures (GPPs) providing controls for significant compliance risks
Training and e-resources to guide employees and third parties with compliance responsibilities
Monitoring and auditing programmes to verify implementation
Independent reporting channels for employees and third parties to report concerns with confidentiality
Due diligence reviews and integration plans required for acquisitions
|
Simplify and improve our operating model
Emerging markets
Established markets |
56 Smith & Nephew Annual Report 2012 |
6
|
|
|||||
Ethics and compliance are at the heart of everything we do, and underline our commitment to strong Governance. We believe effective Governance requires both leadership and collaboration. |
||||||
Governance introduction | 57 | |
|
||
Our Board of Directors | 58 | |
|
||
Our Executive Officers | 60 | |
|
||
Corporate Governance Statement | 62 | |
|
||
Directors Remuneration Report | 74 | |
|
Section 6 Corporate Governance |
57 |
Dear Shareholder,
I am pleased to present the Corporate Governance Statement for 2012. Before we get into the technical detail of specific corporate goverance requirements, I wanted to highlight the governance areas we have focused on in 2012.
Board changes
We have continued to make changes to our Board throughout the year. As you will have read elsewhere in this Annual Report, we are delighted that Julie Brown has joined us as Chief Financial Officer on 4 February 2013. She will continue to build on the strong foundations laid by Adrian Hennah who left the Board on 31 December 2012. Adrian has contributed enormously to the success of the Company over the past six years and we are sorry to see him leave but wish him well in his future career.
We have also made a number of changes to our Non-Executive team. On 12 April 2012, Rolf Stomberg left the Board following 14 years service as a Non-Executive Director, during which time he served periods as Senior Independent Director and Chairman of the Remuneration Committee. On 1 November 2012, Geneviève Berger left the Board owing to other time commitments. During the year, we were pleased to welcome Ajay Piramal to the Board on 1 January 2012 and Baroness Bottomley on 12 April 2012. Finally, we shall be appointing Michael Friedman to the Board in April. These three new appointments reflect the changing focus of the Group, as we build a Board that will take us into the future. Ajay brings experience of Emerging markets and Baroness Bottomley brings her knowledge and experience of European public healthcare systems whilst Michael Friedman brings exceptional experience of the US Healthcare market. These are all areas vital to our future growth and prospects.
Ethics and compliance
Ethics and compliance remain at the very heart of our business and everything that we do. The independent monitor appointed to review our efforts recognised and supported the enhancements we have made over the past five years to our ethics and compliance programme, whilst making some very valuable suggestions about further improvements in what is a constantly evolving aspect of our business. We continue to remain vigilant in these areas and the Ethics & Compliance Committee of the Board sets the tone at the top in overseeing our ethics and compliance programme, which pervades the entire organisation.
Nomination & Governance Committee
In recognition of all the external developments in corporate governance, we have expanded the remit of the Nominations Committee to cover governance matters and to rename the committee, the Nomination & Governance Committee. For some time the Committee has considered certain governance matters such as the independence of Non-Executive Directors, diversity and the Board Evaluation process. This change of remit formalises the role of the Committee, which now includes Board succession planning, independence of Non-Executive Directors, diversity, conflicts of interest, oversight of the effective governance of the Board and its committees, the Board Evaluation process, the induction of new directors and directors training in general, as well as keeping abreast of external governance activities.
Review of the Boards Effectiveness
Having conducted our own internal evaluation of the Boards effectiveness in 2010 and 2011, we asked Independent Audit to facilitate the review process in 2012. This took the form of a series of interviews with each member of the Board, the Company Secretary and other members of the senior management team who interact with our Board. Independent Audit also reviewed the Board and Committee papers over the past year and observed our December Board meeting. Their comments and observations gave us a useful perspective into the way we operate as a Board. You can read more about this review in the statement that follows. A key takeaway for us was the need to give even greater focus to succession at Board level.
As ever, whilst we recognise the importance of sound governance, we are continually focused on the Boards responsibility to promote the long-term success of the Company for the benefit of customers, employees and shareholders.
Sir John Buchanan
Chairman
20 February 2013
58 Smith & Nephew Annual Report 2012 |
Our Board has the depth and breadth of experience
necessary to help the business take full advantage
of the opportunities and challenges ahead.
Board Gender |
Board Nationality |
Balance of Non-Executive and Executive Directors |
||||||||||||||||||||||||
A B |
Male Female |
8 3 | A B C D E |
American British French Indian New Zealand |
3 5 1 1 1 |
|
A B
C |
Chairman Executive Director Non-Executive Director |
1
2
8 |
Susan Swabey (51)
Company Secretary
Susan was appointed Company Secretary in May 2009. She has nearly 30 years experience as a company secretary in a wide range of companies including Prudential plc, Amersham plc and RMC Group plc. Her work has covered Board support, corporate governance, corporate transactions, share registration, listing obligations, corporate social responsibility, pensions, insurance and employee and executive share plans. Susan is a member of the GC100 Group Executive Committee and the CBI Companies Committee and is a frequent speaker on corporate governance related matters.
Nationality
British
Section 6 Corporate Governance |
59 |
1 Sir John Buchanan (69)
Chairman
Sir John was appointed Independent Non-Executive Director in 2005 and was appointed Chairman and Chairman of the Nominations Committee in April 2006 (now the Nomination & Governance Committee).
Sir John has broad international experience gained in large and complex international businesses. He has substantial experience in the petroleum industry and knowledge of the international investor community. He has held various leadership roles in strategic, financial, operational and marketing positions, including executive experience in different countries. He is a former Executive Director and Group Financial Officer of BP, serving on the BP Board for six years until 2003.
Other Directorships
| Chairman of ARM Holdings plc |
| Senior Independent Director of BHP Billiton Plc |
| Chairman of International Chamber of Commerce (UK) Limited |
| Chairman of UK Trustees for the Christchurch Earthquake appeal |
Nationality
British/New Zealand
2 Olivier Bohuon (54)
Chief Executive Officer
Olivier joined the Board and was appointed Chief Executive Officer in April 2011. He is a member of the Nomination & Governance Committee.
Olivier has had extensive international and leadership experience within a number of pharmaceutical and healthcare companies. Prior to joining Smith & Nephew, he was President of Abbott Pharmaceuticals, a division of Abbott Laboratories based in the US, where he was responsible for the entire business, including R&D, Global Manufacturing and global support functions.
Other Directorships
| Non-Executive Director of Virbac Group |
Nationality
French
3 Julie Brown (50)
Chief Financial Officer
Julie joined the Board on 4 February 2013 as Chief Financial Officer. Julie is a Chartered Accountant and Fellow of the Institute of Taxation with international experience and a deep understanding of the healthcare sector. She trained with KPMG and then worked for AstraZeneca plc, where she served as Vice President Group Finance, and more recently, as Interim Chief Financial Officer. Prior to that she was Regional Vice President Latin America, Marketing Company President AstraZeneca Portugal and Vice President Corporate Strategy and R&D Chief Financial Officer. She has previously held Vice President Finance positions in all areas of the healthcare value chain including Commercial, Operations, R&D and Business Development.
Nationality
British
4 Ian Barlow (61)
Independent Non-Executive Director Chairman of the Audit Committee
Ian was appointed Non-Executive Director in March 2010 and Chairman of the Audit Committee in May 2010.
Ian is a Chartered Accountant and has had considerable financial experience both internationally and in the UK. Prior to his retirement in 2008, he was a Partner at KPMG, latterly Senior Partner, London. During his career with KPMG, he was Head of their UK tax and legal operations, and he acted as Lead Partner for many large international organisations operating extensively in North America, Europe and Asia.
Other Directorships
| Lead Non-Executive Director chairing the Board of Her Majestys Revenue and Customs |
| Non-Executive Director of The Brunner Investment Trust |
| Chairman of The Racecourse Association |
Nationality
British
5 The Rt Hon Baroness Bottomley of Nettlestone DL (64)
Independent Non-Executive Director
Baroness Bottomley was appointed Non-Executive Director on 12 April 2012.
Baroness Bottomley has extensive experience and understanding of healthcare. She was appointed a Life Peer in 2005 following her career as a Member of Parliament between 1984 and 2005 and served successively as Secretary of State for Health and then National Heritage. She holds a number of positions within the public and private healthcare sector.
Other Directorships
| Director of International Resources Group Limited |
| Member of the International Advisory Board of Chugai Pharmaceutical Company Limited |
| Chancellor of University of Hull |
| Pro Chancellor of the University of Surrey |
| Governor of the London School of Economics |
| Trustee of The Economist |
Nationality
British
6 Richard De Schutter (72)
Senior Independent Non-Executive Director
Richard was appointed Non-Executive Director in January 2001 and Senior Independent Director in April 2011.
Richard has had extensive US corporate experience at Chief Executive and Chairman level in a number of major corporations with primarily a scientific, chemical, engineering or pharmaceutical focus including G.D. Searle & Co., Monsanto Company, Pharmacia Corporation and DuPont Pharmaceuticals Company.
Other Directorships
| Non-Executive Chairman of Incyte Corporation |
| Non-Executive Director of Durata Therapeutics, Inc. |
| Non-Executive Director of Navicure, Inc. |
| Non-Executive Director of Sprout Pharmaceuticals |
| Non-Executive Director of Celtic Therapeutics |
Nationality
American
7 Michael A Friedman (69)
Independent Non-Executive Director
Michael will be appointed Non-Executive Director in April 2013 and will immediately offer himself to shareholders for re-election.
Michael has been Chief Executive Officer of City of Hope, the prestigious cancer research and treatment institution in California. He also serves as director of the institutions comprehensive cancer centre and holds the Irell & Manella Cancer Center Directors Distinguished Chair. He was formerly senior vice president of research, medical and public policy for Pharmacia Corporation and has served as Deputy Commissioner and Acting Commissioner at the US Food and Drug Administration. He has also served on a number of Boards in a Non-Executive capacity, including RiteAid Corporation.
Other Directorships
| Chief Executive Officer of City of Hope |
| Non-Executive Director of Celgene Corporation |
| Non-Executive Director of MannKind Corporation |
Nationality
American
8 Pamela Kirby (59)
Independent Non-Executive Director Chairman of the Ethics & Compliance Committee
Pamela was appointed Non-Executive Director in March 2002 and Chairman of the Ethics & Compliance Committee in April 2011.
Pamela has extensive commercial and product development experience within the international pharmaceutical and healthcare industry. Her last executive position was Chief Executive of Quintiles Transnational Corp. in the US, having previously held senior positions in various pharmaceutical companies including AstraZeneca and F. Hoffmann-La Roche. She is now a Non-Executive Director of a number of international companies.
Other Directorships
| Non-Executive Chairman of Scynexis, Inc. |
| Non-Executive Director of Informa plc |
| Non-Executive Director of Victrex plc |
| Non-Executive Member of the Board of Simmons & Simmons LLP |
Nationality
British
9 Brian Larcombe (59)
Independent Non-Executive Director
Brian was appointed Non-Executive Director in March 2002. Brian spent his career in private equity with 3i Group. After leading the UK investment business for a number of years, he became Finance Director and then Chief Executive of the Group following its flotation. He is well known in the City and has held a number of Non-Executive Directorships.
Other Directorships
| Non-Executive Director of gategroup Holding AG |
| Non-Executive Director of Incisive Media Holdings Limited |
Nationality
British
10 Joseph Papa (57)
Independent Non-Executive Director Chairman of the Remuneration Committee
Joseph was appointed Non-Executive Director in August 2008 and Chairman of the Remuneration Committee in April 2011.
Joseph has had nearly 30 years experience in the pharmaceutical industry working for a number of companies both in the US and Switzerland. He is now Chairman and Chief Executive of Perrigo, one of the largest over the counter pharmaceutical companies in the US, having held senior positions at Novartis, Cardinal Health, Inc. and Pharmacia Corporation.
Other Directorships
| Chairman and Chief Executive of Perrigo Company |
Nationality
American
11 Ajay Piramal (57)
Independent Non-Executive Director
Ajay was appointed Non-Executive Director on 1 January 2012. Ajay is one of Indias most respected businessmen. He enabled the Piramal Group to transform from a textile-centric group to a US$2.0bn conglomerate in diversified areas. He has extensive industry and market knowledge and international experience. He has held a number of global healthcare leadership positions in both India and internationally.
Other Directorships
| Chairman of Piramal Enterprises Limited, Piramal Glass Limited, Allergan India Pvt. Limited, IndiaREIT Fund Advisers Pvt. Limited and Director of DB Corp. Limited |
| Chairman of the Board of Governors of Indian Institute of Technology, Indore |
| Member of the Board of Deans Advisers at Harvard Business School |
| Chairman of Pratham India |
Nationality
Indian
Section 6 Corporate Governance |
61 |
1 Julie Brown (50)
Chief Financial Officer
Julie joined the Board on 4 February 2013 as Chief Financial Officer. Julie is a Chartered Accountant and Fellow of the Institute of Taxation with international experience and a deep understanding of the healthcare sector. She trained with KPMG and then worked for AstraZeneca plc, where she served as Vice President Group Finance, and more recently, as Interim Chief Financial Officer. Prior to that she was Regional Vice President Latin America, Marketing Company President AstraZeneca Portugal and Vice President Corporate Strategy and R&D Chief Financial Officer. She has previously held Vice President Finance positions in all areas of the healthcare value chain including Commercial, Operations, R&D and Business Development.
Nationality
British
2 Jack Campo (58)
Chief Legal Officer
Joined Smith & Nephew in June 2008 and heads up the Global Legal function. Initially based in London, he has been based in Andover, Massachusetts since late 2011.
Previous Experience
Prior to joining Smith & Nephew, Jack held a number of senior legal roles within the General Electric Company, including seven years at GE Healthcare (GE Medical Systems) in the US and Asia. He began his career with Davis Polk & Wardwell.
Nationality
American
3 Francisco Canal Vega (51)
President, Emerging markets
Joined Smith & Nephew in January 2012 and leads the Emerging markets division, focusing particularly on achieving market leading growth in Brazil, Russia, China and India. He is based in Dubai.
Previous Experience
Francisco has held senior management positions in global companies including Gambro AB and Baxter International. He has lived and worked in many countries including Switzerland, Germany, China, Japan, US and Spain. Francisco was also formerly a Board Member of EUCOMED.
Nationality
Spanish
4 Mike Frazzette (50)
President, Advanced Surgical Devices
Joined Smith & Nephew in July 2006 as President of the Endoscopy business. Since July 2011, he has headed up our Advanced Surgical Devices division and is responsible for the Orthopaedic, Trauma and Endoscopy business in Established markets. He is based in Andover, Massachusetts.
Previous Experience
Mike has held a number of senior positions within the US medical devices industry. He was President and Chief Executive Officer of Micro Group, a US manufacturer of medical devices and spent 15 years at Tyco Healthcare becoming President of each of the Patient Care and Health Systems divisions.
Nationality
American
5 Gordon Howe (50)
Senior Vice President, Global Planning and Development
Joined Smith & Nephew in 1998 and, since August 2007, has headed up the Global Planning and Business Development teams. He is based in Memphis, Tennessee.
Previous Experience
Gordon has held a number of senior management positions within the Smith & Nephew Group first in the Orthopaedics division and more recently at Group level. Prior to joining the Company, he held senior roles at United Technologies Corporation.
Nationality
American
6 Kelvin Johnson (61)
President, International markets
Joined Smith & Nephew in 1980 and was appointed to lead the International markets division, covering all countries outside the Established and Emerging markets in 2011. He is based in Dubai.
Previous Experience
Kelvin has held a number of key international roles with Smith & Nephew, firstly in South Africa and then leading the Emerging Market strategy. He has spent some time leading the Groups increased focus in China.
Nationality
South African
7 Helen Maye (53)
Chief Human Resources Officer
Joined Smith & Nephew in July 2011 and leads the Global Human Resources and Internal Communications functions. She is based in London.
Previous Experience
Helen has more than 35 years experience across a variety of international and global roles in medical devices and pharmaceuticals, including manufacturing, supply chain and human resources. Previously, she was Divisional Vice President of Human Resources at Abbott Laboratories.
Nationality
Irish
8 Cyrille Petit (42)
Chief Corporate Development Officer
Joined Smith & Nephew in May 2012 and leads the Corporate Development function. He is based in London.
Previous Experience
Cyrille spent the previous 15 years of his career with General Electric, where he held progressively senior positions beginning with GE Capital, GE Healthcare and more recently as the General Manager, Global Business Development of their Transportation Division. Cyrilles career began in investment banking at BNP Paribas and then Goldman Sachs.
Nationality
French
9 Ros Rivaz (57)
Chief Technology Officer
Joined Smith & Nephew in November 2011. She is responsible for manufacturing, supply chain and procurement, IT systems, Corporate Sustainability and Regulatory and Quality Affairs and is focused on improving efficiency in Smith & Nephew processes. She is based in London.
Previous Experience
Ros has held senior management positions in global companies in the areas of supply chain management, logistics, manufacturing, procurement and systems, including, ExxonMobil, ICI, Tate & Lyle and Diageo. She has 30 years experience across all areas of operational excellence.
Nationality
British
10 Roger Teasdale (45)
President, Advanced Wound Management
Joined Smith & Nephew in 1989 within the Wound Management business. He was appointed President of Advanced Wound Management in May 2009. He is based in Hull, UK.
Previous Experience
Roger has held a number of key roles within the Smith & Nephew Group in both the UK and the US and has been responsible for leading the transformation of the wound business in recent years.
Nationality
British
62 Smith & Nephew Annual Report 2012 |
Corporate Governance Statement
Compliance statement
We are committed to the highest standards of corporate governance and comply with all the provisions of the UK Corporate Governance Code (the Code). The Companys American Depositary Shares are listed on the NYSE and we are therefore subject to the rules of the NYSE as well as to the US securities laws and the rules of the SEC applicable to foreign private issuers. We comply with the requirements of the SEC and NYSE except that the Nomination & Governance Committee is not comprised wholly of independent Directors, as required by the NYSE, but consists of a majority of independent Directors in accordance with the Code. We shall explain in this Corporate Governance Statement and in the Directors Remuneration Report, how we have applied the provisions and principles of the FSAs Listing Rules, Disclosure & Transparency Rules (DTR) and the Code throughout the year.
Board
The Board is responsible for determining the strategy of the Chief Executive Officer and his Executive team implement that strategy. More detail about the structure of the Board, the matters we deal with and the key activities we undertook in 2012 is on page 63.
Roles of Directors
Whilst we all share collective responsibility for the activities of the Board, some of our roles have been defined in greater detail. In particular, the roles and responsibilities of the Chairman and Chief Executive Officer are clearly defined.
Chairman
Building a well balanced Board
Chairing Board meetings and setting Board agenda
Ensuring effectiveness of the Board and ensuring annual review undertaken
Encouraging constructive challenge and facilitating effective communication in the Board
Promoting effective Board relationships
Ensuring appropriate induction and development programmes
Ensuring effective two way communication and debate with shareholders
Setting the tone at the top with regard to compliance and sustainability matters
Promoting high standards of corporate governance
Maintaining appropriate balance between stakeholders |
Chief Executive Officer
Developing and implementing Group strategy
Recommending the annual budget and five-year strategic and financial plan
Ensuring coherent leadership of the Group
Managing the Groups risk profile and establishing effective internal controls
Regularly reviewing organisational structure, developing executive team and planning for succession
Ensuring the Chairman and Board are kept advised and up to date regarding key matters
Maintaining relationships with shareholders and advising the Board accordingly
Setting the tone at the top with regard to compliance and sustainability matters |
The Non-Executive Directors meet regularly prior to each Board meeting without management in attendance. The roles of Non-Executive Directors and, in particular, the Senior Independent Non-Executive Director are defined as follows:
Non-Executive Directors
Providing effective challenge to management
Assisting in development of strategy
Serving on the Board Committees |
Senior Independent Non-Executive Director
Chairing meetings in the absence of the Chairman
Acting as sounding board for the Chairman on Board-related matters
Acting as an intermediary for the other Directors where necessary
Available to shareholders on matters which cannot otherwise be resolved
Leading annual evaluation into the Boards effectiveness
Leading search for a new Chairman, as necessary |
Independence of Non-Executive Directors
We are sensitive to the need for our Non-Executive Directors to remain independent from management in order to exercise our independent oversight and effectively challenge management as necessary. We are mindful that some of our Non-Executive Directors have served on our Board for periods that some might regard as likely to impact their independence. We therefore continually assess the independence of each of our Non-Executive Directors and have determined that all our Non-Executive Directors are independent in accordance with both UK and US requirements. None of our Non-Executive Directors or their immediate families has ever had a material relationship with the Group. None of them receive additional remuneration apart from Directors fees, nor do they participate in the Groups share plans or pension schemes. None of them serve as directors of any companies or affiliates in which any other Director is a director.
However, more importantly, each of our Non-Executive Directors is prepared to question and challenge management, to request more information and to ask the difficult question. They insist on robust responses both within the Board room and sometimes between Board meetings. The Chief Executive Officer is open to challenge from the Non-Executive Directors and uses this positively to provide more detail and to reflect further on issues.
We value the input we receive from our long-serving Directors given their deep understanding of the Group. We are however focused on planning for the future to build a balanced board with the skills and experience fit to face the challenges that lie ahead. We have identified the key skills and experiences we need and have welcomed the specific experience that Ajay Piramal and Baroness Bottomley have brought to the Board since their appointment in 2012. Ajay brings his skills as a successful businessman within the Emerging markets, where growth in Emerging markets is one of our Strategic Priorities. Baroness Bottomley brings her in-depth knowledge of UK governmental healthcare policies and processes, which is also of key importance for us given the pricing pressure we face from European governmental authorities purchasing our products. Following his appointment in April 2013, Michael Friedman will bring his exceptional experience of the US Healthcare market and the challenges we face in Established markets. We continue to search for other suitable Non-Executive Directors, whose experience will align with our strategic objectives and, in due course, our longer serving directors will step down.
Section 6 Corporate Governance |
63 |
Board Membership
Non-Executive Chairman Sir John Buchanan |
Chief Executive Officer Olivier Bohuon |
Chief Financial Officer Adrian Hennah (resigned 31 December 2012) |
Chief Financial Officer Julie Brown (appointed 4 February 2013) |
Eight Independent Non-Executive Directors |
Richard De Schutter (Senior Independent Director)
Ian Barlow
Baroness Bottomley (appointed 12 April 2012)
Geneviève Berger (retired 1 November 2012)
Michael Friedman (to be appointed 11 April 2013)
Pamela Kirby
Brian Larcombe
Joseph Papa
Ajay Piramal (appointed 1 January 2012)
Rolf Stomberg (retired 12 April 2012) |
Role of the Board
Strategy
Approving the Group strategy including major changes to corporate and management structure, acquisitions, mergers, disposals, capital transactions over $10m, annual budget, financial plan, business plan, major borrowings and finance and banking arrangements
Approving changes to the size and structure of the Board, overseeing succession planning and the appointment and removal of Directors and the Company Secretary
Approving Group polices relating to corporate social responsibility, health and safety, Code of Conduct and Code of Share Dealing and other matters |
Performance
Reviewing performance against strategy, budgets and financial and business plans
Overseeing Group operations and maintaining a sound system of internal control
Determining dividend policy and dividend recommendations
Approving the appointment and removal of the auditors and other professional advisers and approving significant changes to accounting policies or practices
Approving the use of the Companys shares in relation to employee and executive incentive plans |
Risk
Determining risk appetite, regularly reviewing risk register and risk management processes |
Shareholder Communications
Approving preliminary announcement of annual results, annual report, half yearly report, quarterly financial announcements, the release of price sensitive announcements and any listing particulars, circulars or prospectuses
Maintaining relationships and continued engagement with shareholders |
Key activities in 2012
(in addition to regular annual activities)
Review and oversight of the implementation of new strategy and organisational structure
Oversight of risk management process and review of strategic risk
Approval of five-year plan
Review of effectiveness of Board
Review of ongoing Board composition and appointment of Ajay Piramal and Baroness Bottomley to the Board
Consideration and approval of the acquisition of Healthpoint, LifeModeller and Kalypto
Approval and oversight of European Process Optimisation programme
Six physical scheduled meetings, three scheduled telephone meetings and two unscheduled telephone meetings.
Four Day Strategy Review and visit to our Emerging and International markets Head Office and Middle Eastern business
Two Day visit to our Memphis operations |
64 Smith & Nephew Annual Report 2012 |
Corporate Governance Statement continued
Board and Committee attendance
The table below details attendance of Directors at Board and Committee meetings held throughout the year:
Board
11 meetings |
Audit
Committee 8 meetings |
Nomination &
Governance Committee 7 meetings |
Ethics &
Compliance Committee 5 meetings |
Remuneration
Committee 7 meetings |
||||||
Sir John Buchanan (i) |
9 | | 7 | | | |||||
Olivier Bohuon |
11 | | 7 | | | |||||
Adrian Hennah (ii) |
11 | | | | | |||||
Ian Barlow (i) |
10 | 8 | | | | |||||
Geneviève Berger (iii) |
7 | | | 3 | | |||||
Baroness Bottomley (iv) |
6 | | | | 2 | |||||
Pamela Kirby |
11 | | | 5 | 7 | |||||
Brian Larcombe (i)(v) |
9 | 7 | 5 | | 7 | |||||
Joseph Papa (i) |
11 | 8 | | 4 | 7 | |||||
Ajay Piramal (vi) |
7 | | | | | |||||
Richard De Schutter (i) (v) |
9 | 7 | 7 | 5 | 7 | |||||
Rolf Stomberg (vii) |
4 | 3 | 2 | | 2 |
(i) | Attended all scheduled meetings, but unable to attend certain unscheduled meetings due to prior commitments. |
(ii) | Retired from Board on 31 December 2012. |
(iii) | Retired from the Board on 1 November 2012. |
(iv) | Appointed to the Board on 12 April 2012 and to the Remuneration Committee on 19 September 2012. |
(v) | Appointed to the Nomination & Governance Committee on 12 April 2012. |
(vi) | Appointed on 1 January 2012 and unable to attend certain meetings due to arrangements agreed prior to his appointment. |
(vii) | Retired from the Board on 12 April 2012. |
In all cases where a director is unable to attend a scheduled or unscheduled meeting they have the opportunity of asking questions, raising issues and making their views known before the meeting.
From time to time Directors also attend Committee meetings at the invitation of the Committee Chairman, even if they are not members of the Committee, in order to gain a better understanding of the activities of that Committee.
Section 6 Corporate Governance |
65 |
Board Development Programme
We continue to focus our Board development programme around the specific needs and interests of our directors. This means that there is a greater focus on facilitating a deeper understanding of our business rather than on formal director training. We value our visits to different Smith & Nephew sites across the world, as we are able to see the daily operation of the business and to meet and talk to the people leading and working in our business about the challenges they face and how they are planning to meet those challenges. We are able to handle our products and hear how our people are innovating and developing the products of the future. This direct contact with our businesses helps us when making investment and strategic decisions and when considering succession planning below Board level.
We receive updates at the Board and Committee meetings on external corporate governance changes likely to affect the Company in the future. In 2012, we reviewed the proposed changes to narrative reporting, as well as changes to the UK Corporate Governance Code and the Audit Committee Guidelines. The Remuneration Committee has been monitoring changes to the way we will report on executive remuneration in the future and the Chairman of the Remuneration Committee met with the holders of 25% of the Company to discuss remuneration issues.
Ajay Piramal and Baroness Bottomley, who joined the Company during the year, took part in tailored induction programmes which included visits to our businesses in Hull in the UK, Andover and Mansfield in the US and to Mumbai in India as well as one-to-one meetings with senior head office executives and briefings on UK company law and corporate governance practices.
Month | Activity | |
February | Presentations from Roger Teasdale, President of Advanced Wound Management and Mike Frazzette, President of Advanced Surgical Devices on their distinct business strategies | |
September |
Visit to our Dubai head office for our Emerging markets and International markets divisions Presentation on our Middle Eastern business Presentations from the entire Executive Team as part of the Boards Strategy Review
|
|
November | Visit to Advanced Surgical Devices offices in Memphis Series of presentations from our Advanced Surgical Devices senior executives on the challenges faced by the business and our strategy and initiatives to meet these challenges |
Board Effectiveness Review
Having conducted internal reviews into the effectiveness of the Board in 2010 and 2011, we carried out an externally facilitated review in 2012. During the year, we evaluated the varying service provided by the different firms of advisers who practise in this area and selected Belinda Hudson and Richard Sheath of Independent Audit Limited to help facilitate our review given their experience conducting similar reviews for other companies of a similar size and complexity. Independent Audit has no other business relationship with the Company or any member of the Board. Following an initial planning meeting with the Chairman, they reviewed the minutes and papers of the Board and Committee meetings held in the past year and then interviewed each member of the Board and the Company Secretary. They also interviewed Helen Maye, Chief Human Resources Officer and Gary Luck of Towers Watson, who support the Remuneration Committee and James Goodwin, Head of Internal Audit and Les Clifford of Ernst & Young who work with the Audit Committee. Finally, they attended and observed our December 2012 Board meeting.
They concluded that the Board was very effective with a strong and professional Chairman, a strong cadre of Non-Executive Directors with a broad range of expertise and experience, and a Chief Executive Officer who takes a very positive and open approach to support the Board.
Independent Audit made some suggestions for further improvement, which we discussed at our February 2013 Board meeting. We have agreed that in 2013, we shall focus on the following areas to improve our effectiveness further:
Succession Planning at Board level will be discussed regularly at full Board Meetings as well as by the Nomination & Governance Committee to ensure that there is a common understanding around the future structure of the Board. |
The activities and strategies of our competitiors will be discussed in greater detail to ensure that the Board better understands our position in the market place and the competitive pressures we face. |
Further opportunities will be explored for ensuring that Non-Executive Directors meet more frequently with senior executives below Board level to aid succession planning and to gain a greater understanding of the business and its challenges. |
Company Secretary and Independent Advice
The Company Secretary, Susan Swabey, is responsible to the Board for ensuring that we comply with all corporate governance requirements and are kept updated on our responsibilities. We all have access to her, individually and collectively.
We may also, from time to time, obtain independent professional advice, at the Companys expense, if we judge it necessary in order to fulfil our responsibilities as Directors. If we are unable to attend a Board meeting or Board Committee meeting, we ensure that we are familiar with the matters to be discussed and make our views known to the Chairman or the Chairman of the relevant Committee prior to the meeting.
Management of Conflicts of Interest
None of us, nor our connected persons, has any family relationship with any other Director or officer, nor has a material interest in any contract to which the Company or any of its subsidiaries are, or were, a party during the year or up to 19 February 2013.
Each of us has a duty under the Companies Act 2006 to avoid a situation in which we have or may have a direct or indirect interest that conflicts or possibly may conflict with the interests of the Company. This duty is in addition to the existing duty that we owe to the Company to disclose to the Board any transaction or arrangement under consideration by the Company. If we become aware of any situation which may give rise to a conflict of interest, we inform the rest of the Board immediately and the Board is then permitted under the Articles of Association to authorise such conflict. The information is recorded in the Companys Register of Conflicts together with the date on which authorisation was given. In addition, we certify, on an annual basis, that the information contained in the Register is correct.
When the Board decides whether or not to authorise a conflict, only the Directors who have no interest in the matter are able to participate in the discussion and a conflict is only authorised if we believe that it would not have an impact on our ability to promote the Companys success in the long term. Additionally, we may, as a Board, determine that certain limits or conditions must be imposed when giving authorisation. We have identified no actual conflicts which have required approval by the Board. We have, however, identified 10 situations which could potentially give rise to a conflict and these have been duly approved by the Board and are reviewed on an annual basis.
Re-appointment of Directors
In accordance with the Code, with effect from the Annual General Meeting held in 2011, all Directors, including Baroness Bottomley who was appointed on 12 April 2012, Julie Brown who was appointed on 4 February 2013 and Michael Friedman who will be appointed on 11 April 2013, offer ourselves to shareholders for re-election annually. Each Director may be removed at any time by the Board or the shareholders.
66 Smith & Nephew Annual Report 2012 |
Corporate Governance Statement continued
Directors Indemnity Arrangements
Each Director is covered by appropriate directors and officers liability insurance and there are also Deeds of Indemnity in place between the Company and each Director. These Deeds of Indemnity mean that the Company indemnifies Directors in respect of any proceedings brought by third parties against them personally in their capacity as Directors of the Company. The Company would also fund ongoing costs in defending a legal action as they are incurred rather than after judgement has been given. In the event of an unsuccessful defence in an action against them, individual Directors would be liable to repay the Company for any damages and to repay defence costs to the extent funded by the Company.
Liaison with Shareholders
The Executive Directors meet regularly with investors to discuss the Companys business and financial performance both at the time of the announcement of results and at industry investor events. During 2012, the Executive Directors held meetings with institutional investors, including investors representing approximately 46% of the share capital as at December 2012.
As part of this programme of investor meetings, during 2012, as Chairman of the Company, I met with investors representing 14% of the share capital. Over the last three years, I have met investors representing in aggregate 20% of the share capital. Also during 2012, Joseph Papa met with shareholders holding 25% of the share capital to discuss remuneration policies and plans.
We receive a short report at every Board meeting reviewing our major shareholders and any significant changes in their holdings since the previous meeting. Olivier Bohuon and Adrian Hennah and his successor Julie Brown routinely advise us of any concerns or issues that shareholders have raised with them in their meetings. We also receive copies of analysts reports on the Company and our peers between Board meetings.
The Companys website (www.smith-nephew.com) contains information of interest to both institutional investors and private shareholders, including financial information and webcasts of the results presentations to analysts for each quarter, as well as specific information for private shareholders relating to the management of their shareholding.
Share Capital
As at 19 February 2013, the Companys total issued share capital with voting rights consisted of 904,988,045 Ordinary Shares of 20 US cents each. 59,503,197 Ordinary Shares are held in treasury and are not included in the above figure.
As at 19 February 2013, notification had been received from the undernoted investors under the DTR in respect of interests in 3% or more of the issued Ordinary Shares with voting rights of the Company.
Number of
Shares |
% | |||||||
Invesco |
105,165,112 | 11.6 | ||||||
BlackRock, Inc. |
44,811,205 | 5.0 | ||||||
Legal and General Group plc |
28,331,119 | 3.1 |
In addition to the above the Company is aware that Walter Scott & Partners Limited hold approximately 39m Ordinary Shares (4.3%). Otherwise, the Company is not aware of any person who has a significant direct or indirect holding of securities in the Company and is not aware of any persons holding securities which may control the Company. There are no securities in issue which have special rights as to the control of the Company.
Dividend
The Board has proposed a final dividend of 16.20 US cents per share which, together with the interim dividend of 9.90 US cents, makes a total for 2012 of 26.10 US cents. The final dividend is expected to be paid, subject to shareholder approval, on 8 May 2013 to shareholders on the Register of Members at the close of business on 19 April 2013.
Annual General Meeting
The Companys Annual General Meeting is to be held on 11 April 2013 at 2:00 pm at IET London: Savoy Place, 2 Savoy Place, Westminster, London, WC2R 0BL. Registered shareholders have been sent either a Notice of Annual General Meeting or notification of availability of the Notice of Annual General Meeting, as appropriate.
Code of Ethics for Senior Financial Officers
We have adopted a Code of Ethics for senior financial officers, which is available on the Groups website (www.smith-nephew.com) and on request. This applies to the Chief Executive Officer, Chief Financial Officer, Group Financial Controller and the Groups senior financial officers. There have been no waivers to any of the Codes provisions nor any amendments made to the Code during 2012 or up until 19 February 2013.
Evaluation of Internal Controls Procedures
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
We, as a Board, are responsible overall for reviewing and approving the adequacy and effectiveness of internal controls operated by the Group, including financial, operational and compliance controls and risk management. We have delegated responsibility for the review of financial, ethical compliance and quality management systems controls to the Audit Committee, which reviews the internal control process on an annual basis and evaluates its effectiveness to ensure that it remains robust and to identify any control weaknesses. The latest review covered the financial year to 31 December 2012 and included the period up to the approval of this Annual Report. The main elements of this annual review are as follows:
The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Groups disclosure controls and procedures as at 31 December 2012. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded on 19 February 2013 that the disclosure controls and procedures were effective as at 31 December 2012.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management assessed the effectiveness of the Groups internal control over financial reporting as at 31 December 2012 in accordance with the requirements in the US under s404 of the Sarbanes-Oxley Act. In making this assessment, they used the criteria set forth by the Committee of Sponsoring Organisations of the Treadway Commission in Internal Control-Integrated Framework. Based on their assessment, management concluded and reported that, as at 31 December 2012, the Groups internal control over financial reporting is effective based on those criteria.
Having received the report from management, the Audit Committee reports to the Board on the effectiveness of controls.
Ernst & Young LLP, an independent registered public accounting firm issued an audit report on the Groups internal control over financial reporting as at 31 December 2012. This report appears on page 91. |
Section 6 Corporate Governance |
67 |
There is an established system of internal control throughout the Group and our Divisions. The main elements of the internal control framework are as follows:
The management of each Division is responsible for the establishment and review of effective internal financial controls within their Division.
The Group Finance Manual sets out, amongst other things, financial and accounting policies and minimum internal financial control standards.
The Internal Audit function agrees an annual work plan and scope of work with the Audit Committee.
The Audit Committee reviewed reports from the internal auditors on their findings on internal financial controls.
The Audit Committee reviews the Group Whistleblower procedures.
The Audit Committee reviews regular reports from the Group Financial Controller and the Heads of the Taxation and Treasury functions.
|
This system of internal control has been designed to manage rather than eliminate material risks to the achievement of our strategic and business objectives and can provide only reasonable, and not absolute, assurance against material misstatement or loss. Because of inherent limitations, our internal controls over financial reporting may not prevent or detect all mis-statements. In addition, our projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This process complies with the Turnbull working party guidance, revised October 2005 and additionally contributes to our compliance with the obligations under the Sarbanes-Oxley Act 2002 and other internal assurance activities. There has been no change in the Groups internal control over financial reporting during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, the Groups internal control over financial reporting.
Principal accountant fees and services
Fees for professional services provided by Ernst & Young LLP, the Groups independent auditors in each of the last two fiscal years, in each of the following categories were:
2012
$m |
2011
$m |
|||||||
Audit |
3 | 3 | ||||||
Audit related fees |
| | ||||||
Tax |
2 | 2 | ||||||
Other |
| | ||||||
5 | 5 |
Audit fees include fees associated with the annual audit and local statutory audits required internationally. A more detailed breakdown of audit fees may be found in Note 3 of the Notes to the Group accounts.
Disclosure of information to the auditors
In accordance with Section 418 of the Companies Act 2006, the Directors serving at the time of approving the Directors Report confirm that, to the best of their knowledge and belief, there is no relevant audit information of which the auditors, Ernst & Young LLP, are unaware and the Directors also confirm that they have taken reasonable steps to be aware of any relevant audit information and, accordingly, to establish that the auditors are aware of such information.
Auditors
Ernst & Young LLP have expressed their willingness to continue as auditors and resolutions proposing their reappointment and to authorise the Directors to determine their remuneration will be proposed at the Annual General Meeting as approved by the Audit Committee.
Directors Report
The Directors Report includes the following sections; Marketplace and Business Segment Review (pages 22 to 33), Sustainability Review (pages 35-41), Financial review and principal risks (pages 43 to 54), Corporate Governance (pages 57 to 74) and Group and investor information (pages 144 to 159).
Corporate headquarters and registered office
The corporate headquarters is in the UK and the registered office address is: Smith & Nephew plc, 15 Adam Street, London WC2N 6LA, UK. Registered in England and Wales No. 324357. Tel: +44 (0) 20 7401 7646. Website: www. smith-nephew.com.
Committees of the Board
We delegate some of the Boards detailed work to four Committees. Each of these has their own terms of reference, which may be found on the Groups website at www.smith-nephew.com. The Company Secretary or her designate is secretary to each of the Committees. The Chairman of each Committee reports orally to the Board and minutes of the meetings are circulated to all members of the Board.
68 Smith & Nephew Annual Report 2012 |
Corporate Governance Statement continued
Audit Committee
Ian Barlow |
|
Membership
Ian Barlow (Chairman) (Independent and financial expert)
Brian Larcombe (Independent)
Joseph Papa (Independent)
Richard De Schutter (Independent)
Rolf Stomberg (Independent) (retired 12 April 2012)
In addition, all meetings were attended by the Chief Executive Officer, the Chief Financial Officer, the Head of Internal Audit, the external auditors and key finance personnel. |
Eight Meetings One matter agreed by written resolution |
Main Responsibilities Financial reporting
Ensuring the integrity of the financial statements and their compliance with UK and US statutory requirements
Reviewing significant financial reporting judgments and compliance with accounting standards, policies and practices
Monitoring announcements relating to the Groups financial performance
Internal controls and risk management
Monitoring the effectiveness of internal controls and compliance with the Sarbanes-Oxley Act specifically S 302 and 404
Reviewing the operation of the Groups risk management processes and the control environment mitigating compliance and quality management system risk
Receive reports on fraud and whistleblowing Internal audit
Agreeing internal audit plans and reviewing internal audit reports
Monitor the effectiveness of the internal audit function
External audit
Overseeing the Boards relationship with the external auditors, monitoring and reviewing their performance, evaluating their effectiveness and making recommendations to the Board for their reappointment |
Key Activities in 2012 (in addition to main responsibilities)
Reviewed plans for continuing the reformatting of the Annual Report in light of the new Narrative Reporting requirements
Considered the management of strategic risk by the Tax function.
Received and considered a report from the Treasury function.
Reviewed an external report on the effectiveness of the internal audit function and monitored implementation of its recommendations.
Reviewed capabilities of finance function.
|
Nomination & Governance Committee
Sir John Buchanan |
|
Membership
Sir John Buchanan (Chairman) (Independent on appointment)
Olivier Bohuon
Brian Larcombe (Independent) (appointed 12 April 2012)
Richard De Schutter (Independent)
Rolf Stomberg (Independent) (retired 12 April 2012)
|
Seven Meetings
|
Main Responsibilities
Review size and composition of Board
Oversee Board succession plans
Recommend Director appointments
Oversee governance aspects of the Board and its Committees
Oversee review into the Boards Effectiveness
Consider and update the Schedule of Matters Reserved to the Board and the Terms of Reference of the Board Commtitees
Monitor external corporate governance activities and keep the Board updated
Oversee Board development programme and the induction process for new Directors
|
Key Activities in 2012 (in addition to main responsibilities)
Recommended the appointment of Julie Brown as Chief Financial Officer
Recommended the appointment of Baroness Bottomley as an additional Non-Executive Director
Considered the appointment of Michael Friedman as an additional Non-Executive Director
Expanded remit of the Committee to include governance matters
Continued consideration of diversity issues
|
Section 6 Corporate Governance |
69 |
Ethics & Compliance Committee
Pamela Kirby |
|
Membership
Pamela Kirby (Chairman) (Independent)
Geneviève Berger (Independent) (to 1 November 2012)
Joseph Papa (Independent)
Richard De Schutter (Independent)
|
Five Meetings
|
Main Responsibilities
Review ethics and compliance programmes
Review policies and training programmes
Review compliance performance based on monitoring, auditing and investigations data
Review allegations of significant compliance failures
Review Groups internal and external communications relating to ethical and compliance issues
Review external developments and compliance activities
Receive reports from the Groups ethics and compliance meetings and from the Chief Compliance Officer and the Chief Legal Officer
|
Key Activities in 2012 (in addition to main responsibilities)
Approved FCPA settlement with the US Department of Justice and Securities and Exchange Commission
Met with independent monitor appointed under the DOJ/SEC settlement to discuss the effectiveness of our Global Compliance programme, review his initial report, and consider further enhancements
Continued to review compliance programme for third party sellers and other third parties doing business with the Company
Reviewed development of employee compliance training programmes
Considered level and trend of investment in the Companys compliance efforts
Considered compliance implications relating to potential acquisitions, including due diligence findings and integration plans
|
Remuneration Committee
Joseph Papa |
|
Membership
Joseph Papa (Chairman) (Independent)
Baroness Bottomley (Independent) (appointed 19 September 2012)
Pamela Kirby (Independent)
Brian Larcombe (Independent)
Richard De Schutter (Independent)
|
Seven Meetings Three matters agreed by written resolution
|
Main Responsibilities
Determine remuneration policy for Executive Directors and senior executives
Approve individual remuneration packages for Executive Directors and Executive Officers at least annually and any major changes to individual packages throughout the year
Determine the use of long-term incentive plans and oversee the use of shares in all executive and all-employee plans
Approve appropriate performance measures for short-term and long-term incentive plans for Executive Directors and senior executives
Determine pay-outs under short-term and long-term incentive plans for Executive Directors and senior executives
Approve Directors Remuneration Report ensuring compliance with related governance provisions
Maintain constructive engagement on remuneration issues with shareholders
Have regard to remuneration policies and practices across the Group
|
Key Activities in 2012 (in addition to main responsibilities)
Approved package for incoming Chief Financial Officer
Approved joining and leaving packages for all direct reports to Chief Executive Officer
Implemented new remuneration arrangements for top 70 senior executives to align remuneration with the updated Group strategy
Continued engagement programme with major shareholders to explain new remuneration arrangements
Reviewed policies on termination payments and compensation payments for lost incentives by new hires
Monitored external developments relating to remuneration best practice
|
70 Smith & Nephew Annual Report 2012 |
Corporate Governance Statement continued
Dear Shareholder
The Audit Committee had a busy year with five main meetings supplemented by three telephone meetings to approve quarterly financial reports. The topics covered the membership and the principal duties of the Committee are set out in the table on page 68 of this report. Its terms of reference can be found on our website www.smith-nephew.com. I comment in this report by exception on our main responsibilities and in more detail on one off work.
The members of the Committee, who are all independent Directors, bring a variety of relevant expertise from their current or prior roles as Chief Executives of substantial businesses both in the UK and US and from their roles as Non-Executive Directors at other corporations. I am the designated finance expert, being a Chartered Accountant and former senior partner at KPMG UK, retiring in 2008.
Main Responsibilities
Financial reporting
Our review of the appropriateness of the Groups principal accounting policies, practices and accounting judgments concentrated on the valuation of inventory and receivables, on the carrying value of goodwill, intangible and tangible assets, on the valuation of retirement benefits, contingencies and provisions. In light of current market conditions we paid particular attention to the review of the management of receivables derived from trading in Southern European countries.
We continued to review the style and format of the Annual Report during 2012, building on the improvements we made in 2011. In particular, this year we have concentrated on the disclosure of metrics around our key performance indicators and have changed the ordering of sections to provide a better flow through the document.
Internal controls and risk management
We ensured compliance with the UK Corporate Governance Code and the Sarbanes-Oxley Act.
On behalf of the Board, we reviewed the system of internal financial control and satisfied ourselves that we are meeting required standards both for the year ended 31 December 2012 and up to the date of approval of this Annual Report.
No concerns were raised with us in 2012 about possible improprieties in matters of financial reporting or other matters.
We continued to work with the full Board to improve the clarity of evaluation of risk by the executive and Board and the systems for reporting and managing risk and for how it is dealt with in this Annual Report. The underlying purpose is to enable the Board to focus on the key strategic risks, both on the upside not doing things and on the downside. Aside from routine reporting the Board conducted a strategic discussion on risk during the year.
Internal Audit
Our Internal Audit function carries out work in three areas: our financial systems and processes; our systems that ensure compliance with regulation and laws; and our quality management systems in our manufacturing activities. In all three areas they act as a third line of defence behind operational managements front line and own assurance activities. During the year they completed 67 reviews, the results of which were seen by the Committee which also oversees the effective and timely remediation of any recommendations.
We also considered an external review of the effectiveness of the Internal Audit function undertaken by PricewaterhouseCoopers LLP. The report was positive about the team and made recommendations principally related to further strengthening the Internal Audit team, improving methods of managing its workload and communicating its work to external stakeholders and the scope to extend the reach of its work.
In this context from 2013 the scope of the Internal Audit function has been widened to include auditing clinical and regulatory assurance.
Receipt of functional reports
During the year, we received reports from the Group Financial Controller on Shared Services, from the heads of Tax and Treasury in relation to their functions, from the Chief Information Officer in relation to IT security and from the SVP of Quality and Regulatory Affairs on quality assurance. In all cases we concentrated on the risk environment, the risk parameters within which the Board wishes to operate and the effectiveness of the systems and processes to manage those risks.
Review of the work of the external auditors
We monitored the work of Ernst & Young, our external auditors throughout the year. Their work provided essential assurance over the financial systems and reporting that valuably supplements the work of Internal Audit. They continue to evidence their independence in the challenge they provide to management and the insight they bring to the Committee from their work with us and comparative observations of other companies.
We formally reviewed their effectiveness through review of their regular reports on accounting matters, governance and control and accounting developments. In addition we utilised formal year end feedback from all our operating units as a result of which we asked for improvements to be made in two operating locations and conducted a formal questionnaire of Committee members. We reviewed the inspection reports from the Auditor Oversight Boards in the UK and the US. Finally we reviewed the fees of the auditors using benchmarking against groups of comparable size and complexity.
Our conclusions were that the external audit was carried out effectively and with necessary objectivity and independence. This is the basis for our recommendation to the Board and shareholders that Ernst & Young be reappointed for 2013.
We also considered the Financial Reporting Councils proposals on auditor rotation and, in light of the recent change in Chief Financial Officer, agreed that the implications for the company should be reviewed during 2013.
Auditor Independence Policy
We have determined a schedule of approved non-audit services for the Group external auditors to undertake. Our Auditor Independence Policy prohibits the external auditors from performing services which would result in the auditing of their own work, participating in activities normally undertaken by management, acting as advocates for the Group and creating a mutuality of interest between the auditors and the Group by, for example, being remunerated through a success fee structure. On an annual basis, we pre-approve the budget for fees relating to audit and non-audit work, including taxation compliance services, in accordance with a listing of particular services. In the event that limits for these services are expected to be exceeded or the Group wants the external auditors to perform services that have not been pre-approved, my approval is required. The Committee is subsequently advised of any such services and fees. In this way all services provided by the external auditors during the year were pre-approved by the Audit Committee.
The Auditor Independence Policy also governs the policy regarding the audit partner rotation in accordance with the Auditing Practices Board Ethical Standards in the UK and the SEC rules in the US. Partners and senior audit staff may not be recruited by the Group unless two years have expired since their previous involvement with the Group. No such recruitment has occurred. We consider that the implementation of this policy helps ensure that auditor objectivity and independence is safeguarded.
2013
In addition to our main responsibilities we will be looking at the systems of control and risk management over the Groups recent acquisitions.
Ian Barlow
Chairman of Audit Committee
Section 6 Corporate Governance |
71 |
Nomination & Governance Committee
Dear Shareholder
I am pleased to present my report on the activities of the Nomination & Governance Committee in 2012. The membership and the principal duties of the Committee are set out in the table on page 68 of this report.
In 2012, we dealt with the following matters:
Appointment of Julie Brown
We recommended the appointment of Julie Brown as Chief Financial Officer to replace Adrian Hennah who left the Company at the end of 2012 to take up a position elsewhere.
Appointment of Non-Executive Directors
In 2011, we recommended the appointment of Ajay Piramal, who joined the Board in 2012, bringing a wealth of experience as a succesful businessman in India. We also conducted and completed the search for Baroness Bottomley, who joined the Board in April 2012. She too brings a great deal of experience in the area of governmental healthcare policy.
We have throughout the year continued our search for additional Non-Executive Directors, in particular focusing on the skills, experience, independence and diversity each candidate can bring to the Board. All Non-Executive Director appointments are linked to the strategic priorities identified by the Board:
Emerging Market experience
US healthcare experience
European healthcare experience |
Since the year end, we have recommended the appointment of Michael Friedman who will join the Board on 11 April. He brings exceptional experience of the US Healthcare market.
As and when we find further appropriate candidates willing to join our Board, we will replace some of our longer-serving Directors.
Where appropriate we use the services of external search agents, recognising however, that suitable candidates may sometimes come to our attention by other means.
Expanded the Remit of the Committee
We reviewed the remit of the Committee during 2012 and agreed to expand its role to cover governance matters. As part of our role in recommending appointments to the Board, we were already considering matters of governance such as the independence of Non-Executive Directors, succession planning, diversity and conflicts of interest. The Committee also oversees the process around the review into the Boards Effectiveness. It therefore made logical sense to recognise this formally by changing the name of the committee to the Nomination & Governance Committee and expanding its role to consider wider areas of governance.
The expanded role includes oversight of the effective governance of the Board and its committees, the review of terms of reference of the Board and its Committees, supervision of the induction process for new directors and the ongoing Board Development programme. We will also monitor external governance activities to ensure that the Board is kept up to date on changes that might affect us.
The whole Board remains responsible for ensuring that the Company is governed appropriately, but the more detailed work to support this will now be carried out by this Committee.
Sir John Buchanan
Chairman of Nomination & Governance
Committee
72 Smith & Nephew Annual Report 2012 |
Corporate Governance Statement continued
Ethics & Compliance Committee
Dear Shareholder,
I am pleased to present my report on the activities of the Ethics & Compliance Committee in 2012. The membership and the principal duties of the Committee are set out in the table on page 69 of this report.
In 2012 we dealt with the following matters:
Settlement with US Securities and Exchange Commission (SEC) and US Department of Justice (DOJ)
In January 2012, we reviewed and approved the final terms of the settlement between the Company and the SEC and DOJ in connection with their Foreign Corrupt Practices Act (FCPA) investigation of the medical devices industry. This has been a matter that we as a Committee have monitored closely since the formation of the Committee in 2008. The settlement included the appointment of an independent monitor who worked with the Company over most of 2012 to evaluate the effectiveness of our compliance programme and make recommendations, as appropriate, for further enhancements to the programme. We have been working collaboratively with the monitor for this purpose. The Committee reviewed his initial report and continues to review the Companys progress towards implementation of his recommended enhancements.
Compliance Programme for Distributors
We continued to review and improve our compliance programme with third party sellers (such as distributors and sales agents), particularly in the Emerging and International markets. We have initiated a semi-annual communication to our sellers to reinforce our commitment to ethical and legal behaviour and making it clear that we will not tolerate any improper inducements in the sale of products. We also developed a set of resources to help sellers build or enhance their own compliance programme. Our sellers can customise and brand these materials, which have been translated.
Compliance Programme for other Third Parties
We have continued to strengthen our controls over vendors, service providers and other third parties engaged by us but that do not sell our products, based on the supplier type and risk profile. We have created Guidance on the Smith & Nephew Code of Conduct and Business Principles for Third Parties to highlight the areas of our Code that apply directly to third parties and that we expect them to follow when working on our behalf.
Employee Compliance Programme
New employees are trained on our Code of Conduct which sets out the basic legal and ethical principles for carrying out business and applies both to employees and others who act on the Groups behalf. It sets out in detail how persons covered by the Code of Conduct are expected to interact ethically with healthcare professionals and government officials. A copy of the Code of Conduct can be found on the Groups website (www.smith-nephew.com).
The Code of Conduct includes our whistle-blowing policy, which (subject to local law) requires covered persons to report any breach either directly or anonymously through an independent provider. Members of the public are also encouraged to report concerns. All reports are reviewed and the appropriate action taken, including referral to senior management or the Board, where warranted. The Code also states that we have a non-retaliation policy against anyone who makes a report in good faith. The Ethics & Compliance Committee is advised of any potentially significant improprieties which are reported.
We have also monitored the development and enhancement of the employee compliance training programme. Employees are required to undertake compliance training and managers are encouraged to discuss ethical matters with their teams. Some training is tailored for employees in specific job situations. Further support is provided through a comprehensive set of tools and resources located on our global intranet platform.
Compliance Infrastructure
We are mindful that an effective compliance programme requires both a culture of integrity and investment in the necessary infrastructure to give effect to that culture.
With that in mind, the Committee reviewed the level and trend of investments in the Companys compliance programme, as well as the costs of compliance defects. As the Company grows in new markets, we continue to expand our global network of Regional Compliance Officers and use them to reinforce the importance of compliance with our employees and third parties around the world.
Compliance Implications around Acquisitions
Finally, as members of the Board discussing acquisition opportunities, we ensure that the compliance implications of each acquisition are considered as part of both the due diligence process and plans for integration of the acquired business.
Pamela Kirby
Chairman of Ethics & Compliance Committee
Section 6 Corporate Governance |
73 |
Other Committees
Executive Risk Committee
Olivier Bohuon chairs our Executive Risk Committee which includes the Executive Directors and Executive Officers of the Group. As an integral part of our planning and review process, the management of each of our divisions identifies the risks applicable to their business, the probability of those risks occurring, the impact if they do occur and the actions required and being taken to manage and mitigate those risks. The Executive Risk Committee meets twice a year to review the major risks they identify across the Group and the mitigation processes and plans. As appropriate, the Executive Risk Committee may re-categorise risks or require further information or mitigating action to be undertaken. We receive an annual report from the Executive Risk Committee, which details the significant risks categorised by potential financial impact on profit and share price and by likelihood of occurrence. Details of new, key or significantly increased risks, along with actions put in place to mitigate such risks, are also reported to us as appropriate. We have provided further information on the principal risks identified through this process in Principal risks and risk management on pages 54 to 55 of this Annual Report.
Disclosures Committee
Olivier Bohuon chairs the Disclosures Committee which includes the Chief Financial Officer and various additional senior executives. The Committee meets as required and approves the release of all major communications to investors, to the UK Listing Authority and to the London and New York Stock Exchanges.
Sir John Buchanan
Chairman
20 February 2013
Section 6 Corporate Governance |
75 |
I am pleased to introduce the Directors Remuneration Report for the year ended 31 December 2012 which has been prepared by the Remuneration Committee and approved by the Board.
2012 has been a strong year for the Company despite a challenging external environment. As the executive team led by Olivier Bohuon continues to drive the new strategy from a strong and stable financial base, the Committee has been working to ensure that our executive remuneration arrangements continue to reinforce and support the delivery of that strategy.
The current remuneration framework was introduced last year with the aim to simplify the overall remuneration structure, drive the delivery of the new strategy, and strengthen the link between pay and performance. Our key financial goal remains to deliver a higher return to shareholders relative to our peer group over the long term, as measured by Total Shareholder Return (TSR) and free cashflow. These Key Performance Indicators are reinforced by our executive incentive arrangements; the annual incentive is based primarily on revenue, profit and cash generation, and the Performance Share Programme rewards superior TSR relative to our peer group and longer-term, sustainable free cashflow.
The Companys remuneration policy is set out on the following page. The Committee believes the policy continues to be appropriate for the 2013 financial year as it is closely aligned with our strategic goals (and hence our shareholders interests), is highly results-oriented and rewards sustained superior performance.
As a Board, we take seriously the views and feedback of our shareholders on remuneration matters. Although the shareholders we consulted were broadly supportive of our moves towards simplification and alignment with our changing corporate strategy, we received some feedback in connection with the 2012 AGM that the explanation of the new Annual Incentive Plan could be improved. We have undertaken to address this in the following report and I hope you find this new layout helpful in understanding our approach to remuneration.
I also took the opportunity in December 2012 to meet with some of our largest shareholders to discuss any concerns relating to remuneration. The Shareholders I met acknowledged the changes we have made to align the remuneration of our executive population more closely with the Strategic Priorities detailed on page 8. They also appreciated our clearer explanation of how we operated the Annual Incentive Plan and understood how we determined an appropriate remuneration package for Julie Brown, our new Chief Financial Officer. We also spent time talking to them about the new remuneration reporting requirements that will apply from 2014 and how we operated our shareholding guidelines.
Joseph Papa
Chairman of the Remuneration Committee
76 Smith & Nephew Annual Report 2012 |
Directors remuneration report continued
Compliance statement
We have prepared this Directors Remuneration Report (the Report) in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the Regulations). It also meets the relevant requirements of the Financial Services Authority (FSA) Listing Rules. In addition, we have been mindful of the BIS proposals on remuneration, with a view to improving the transparency of our reporting. As required by the Regulations, a resolution to approve the Report will be proposed at the Annual General Meeting on 11 April 2013.
Smith & Nephews remuneration policy
Smith & Nephews remuneration policy is designed to attract and motivate talent to drive the strategy over the short, medium and long term, which in turn will lead to higher returns for our shareholders. The Committee believes it is important for remuneration arrangements to be consistent across our senior executive team. In setting the policy and making remuneration decisions, the Committee takes into account pay and conditions elsewhere in the Group and our policy for the remuneration of our executive management group is broadly consistent with that for the Executive Directors.
This section of our report describes the key components of the remuneration arrangements for Executive Directors that were in place for 2012 and remain largely unchanged for 2013.
Section 6 Corporate Governance |
77 |
78 Smith & Nephew Annual Report 2012 |
Directors remuneration report continued
Pay-for-performance: scenario analysis
The following chart shows the potential split between the different elements of the Executive Directors remuneration in 2013 under three different performance scenarios; Below Threshold, Target and Stretch.
CEO data assumes an exchange rate of 1.00 = £0.80
Service contracts
We employ Executive Directors on rolling service contracts with notice periods of 12 months from the Company and six months from the Executive Director. On termination of the contract, we may require the Executive Director not to work their notice period and as such pay them an amount equivalent to the salary, pension and benefits they would have received if they had been required to work their notice period. In addition, we may also, in exceptional circumstances, exercise our discretion to pay the Executive Director a proportion of the annual incentive that they would have received had they been required to work their notice period. Any entitlement or discretionary payment may be reduced in line with Executive Directors duty to mitigate losses, subject to applying our non-compete clause.
In the case of a change in control which results in the termination of an Executive Director or a material alteration to their responsibilities or duties within 12 months of the event, the Executive Director would be entitled to receive 12 months base salary and 12 months target annual incentive, plus pension and benefits.
In 2012, we received comments from some of our shareholders about the provisions contained in our Executive Directors service contracts relating to the entitlement to an at-target annual incentive payout on a change of control, as well as eligibility to earn an annual incentive whilst serving notice. In the course of the year, we have reviewed these provisions, and going forward, the payment of any annual incentive following a change of control will be entirely discretionary and reflect the individuals performance and contributions. This new policy applies to any Executive Director appointed
after 1 November 2012 including Julie Brown, our new Chief Financial Officer. In the first year of employment Julie Browns notice period will be six months from the Company and three months from her.
Executive Director |
Date of Service
Contract |
Effective Date |
Notice period
from company |
|||||||
Olivier Bohuon |
9 February 2011 |
1 April 2011 | 12 months | |||||||
Julie Brown |
7 November 2012 |
4 February 2013 | 6 months |
We encourage our Executive Directors to serve as a Non-Executive Director of a maximum of one external company. Such appointments are subject to the approval of the Nomination & Governance Committee and any fees earned are retained by the Executive Director. Olivier Bohuon is a Member of the Supervisory Board at Virbac SA, and Adrian Hennah is a Non-Executive Director of Reed Elsevier plc. During 2012 Olivier Bohuon received 19,000, and Adrian Hennah received £65,000 in respect of these appointments.
Termination policy
Our policy regarding termination payments is to limit severance payments on termination to pre-established contractual arrangements. In the event that the employment of an Executive Director is terminated, any compensation payable will be determined in accordance with the terms of the service contract between the Company and the employee, as well as the rules of any incentive plans.
Under normal circumstances (excluding termination for gross misconduct), all leavers are entitled to receive termination payments in lieu of notice equal to base salary, pension and benefits. In the event an Executive Director leaves for reasons of ill-health, death, redundancy, or retirement in agreement with the Company, then the vesting of any outstanding Annual Cash Incentive and Equity Incentive Awards will generally depend on the Committees assessment of performance to date. Performance Share Awards will be pro-rated for time worked during the relevant performance period, and will remain subject to performance over the full performance period. For all other leavers, Annual Cash Incentive will generally be forfeited and outstanding Equity Incentive Awards and Performance Share Awards will lapse. The Committee retains discretion to alter these provisions on a case-by-case basis following a review of circumstances and to ensure fairness for both shareholders and participants.
Termination arrangements for Mr Hennah
Adrian Hennah voluntarily resigned as Chief Financial Officer with effect from 31 December 2012 to take up employment elsewhere. He was therefore not entitled to receive any termination payment. He worked up until 31 December 2012 and was paid and received benefits up to that date in accordance with his service contract. As he was employed throughout the year, the Remuneration Committee has decided that it is appropriate for Adrian Hennah to receive an annual cash incentive of £585,800 in respect of the work he undertook during 2012. Further details are given on pages 80 and 81. All unvested Performance Share Awards, Deferred Bonus Awards, options and Equity Incentive Awards lapsed on cessation of employment.
Policy on recruitment arrangements
We have clarified our position on the appointment of Executive Directors who are recruited externally. In many cases, someone appointed externally will forfeit sizeable cash bonuses and share awards if they choose to leave their former employer and join us. The Committee therefore believes that we need to retain the ability to compensate new hires for any bonus or share awards they give up in choosing to leave another employer to join Smith & Nephew. We will use our discretion in setting any such compensation, which will be decided on a case-by-case basis. As a point of policy, we will not provide compensation of greater value than the new appointee is giving up, and we will seek evidence from the previous employer to confirm the full details of bonus or share awards being forfeited. As far as possible, we will seek to replicate forfeited share awards using Smith & Nephew incentive plans, whilst at the same time, aiming for simplicity.
We have followed this policy when determining compensation for Julie Brown, our new Chief Financial Officer, who was appointed on 4 February 2013.
Section 6 Corporate Governance |
79 |
Remuneration arrangements for Julie Brown
Julie Browns remuneration package has been set in line with the Companys existing remuneration policy, and for 2013 will be as follows:
Element of remuneration | ||
Base salary |
£500,000 | |
Pension |
30% of salary | |
Annual Incentive Plan (cash) |
||
Target |
100% of salary | |
Maximum |
150% of salary | |
Annual Incentive Plan (equity) |
||
Target |
50% of salary | |
Maximum |
65% of salary | |
Performance Share Awards |
||
Target |
95% of salary | |
Maximum |
190% of salary |
In addition to the above, Julie Brown will receive partial compensation for unvested incentive awards forfeited on joining Smith & Nephew. She will be granted an award over 75,000 shares, vesting in three equal tranches in February 2014, February 2015 and February 2016, subject to her continued employment. This award partially reflects the value of unvested share awards from her previous employer that she forfeited when leaving their employment. On joining Smith & Nephew, Julie Brown has forfeited shares to the value of £1,434,000, which were due to vest from March 2013-2015 as follows:
Performance Shares |
£1,099,000 | Vesting between March 2013 and March 2015 subject to performance conditions relating to TSR and cash flow being satisfactorily met. | ||||
Restricted Shares |
£335,000 | Vesting in March 2014 and subject to no further performance conditions other than continued employment. |
The Committee therefore believes that this award of 75,000 shares which is valued at £526,500 as at 19 February 2013 is appropriate and will help align Mrs Browns interests with those of our shareholders from the outset of her appointment. Given that the total value of the shares to be awarded is significantly less than the face value of shares forfeited and that not all the shares forfeited were subject to performance conditions, the Committee did not believe that it was appropriate for performance conditions to be applied to these shares over and above her continued employment.
Non-Executive Directors
Non-Executive Directors are engaged by the Company on the basis of letters of appointment. They are normally appointed for terms of three years, terminable at will, without notice by either the Group or the Director and without compensation. The Chairman is engaged on a letter of appointment and has a six-month notice period.
Date of
appointment |
Date of
current letters |
Anticipated expiry
of current term(i) |
||||||||
Sir John Buchanan |
3 February 2005 | 27 April 2012 | 26 April 2015 | |||||||
Ian Barlow |
5 March 2010 | 5 March 2013 | 4 March 2016 | |||||||
Pamela Kirby |
1 March 2002 | 1 January 2013 | 31 December 2013 | |||||||
Brian Larcombe |
1 March 2002 | 1 January 2013 | 31 December 2013 | |||||||
Joseph Papa |
1 August 2008 | 1 August 2011 | 31 July 2014 | |||||||
Ajay Piramal |
1 January 2012 | 1 January 2012 | 31 December 2015 | |||||||
Richard De Schutter |
1 January 2001 | 1 January 2013 | 31 December 2013 | |||||||
Baroness Bottomley |
12 April 2012 | 12 April 2012 | 11 April 2015 |
(i) Subject to the annual re-election of Directors at the Companys AGM.
The Board reviews the pay of the Non-Executive Directors and aims to set fees that are competitive with other companies of equivalent size and complexity. Non-Executive Directors are not entitled to receive awards under the Companys long-term incentive plans. We do, however, require our Non- Executive Directors to hold a personal stake in the Company equivalent to their basic annual fee. These shares may be held as Ordinary Shares or as ADSs held either by themselves or their immediate family. Details of the Non-Executive Directors current shareholdings can be found on page 83.
Non-Executive Directors are paid a fixed basic annual fee. The Chairmen of the Audit, Remuneration and Ethics & Compliance Committees and the Senior Independent Director also receive an additional fee in recognition of their added responsibilities. An additional fee is also payable to Non- Executive Directors in cases where intercontinental travel is necessary to attend Board and Committee meetings.
Remuneration in 2012
Main activities of the Remuneration Committee in 2012
The main work of the Remuneration Committee this year is described on page 69. Key activities have been:
| Continued development of the new remuneration policy introduced last year and implementing new remuneration arrangements for the top 70 senior executives to align remuneration with the updated Group strategy. |
| Determination of remuneration package for Julie Brown, new Chief Financial Officer, and certain other Executive Officers on recruitment. |
| Consideration and updating of remuneration policies on compensation for amounts forfeited by executives recruited externally, termination payments in the event of a change of control and policy on shareholding guidelines. |
| Continued engagement with our largest shareholders and certain shareholder advisory bodies. |
| Consideration of new remuneration reporting requirements being introduced in 2014. |
Remuneration Committee membership in 2012
As set out on page 69 of this Annual Report, my fellow members of the Remuneration Committee are Baroness Bottomley (joined the Committee on 19 September 2012), Pamela Kirby, Brian Larcombe and Richard De Schutter. Details concerning the number of meetings held and the scope and role of our duties may be found on this page.
From time to time in 2012 attendees included Olivier Bohuon, Chief Executive Officer, Susan Swabey, Company Secretary, Helen Maye, Chief Human Resources Officer, Adrian Hennah, Chief Financial Officer and Bob Newcomb, SVP Global Rewards. The Chairman attended some of the meetings by invitation.
Independent advice
During the year, the Committee received information and advice from Towers Watson, an independent executive remuneration consultancy firm appointed by the Committee in 2011. They provided advice on market trends, remuneration benchmarking and remuneration issues in general. Towers Watson also provided other human resources and compensation advice to the Company for levels below the Board.
Throughout 2012, we were also advised by Aon Hewitt and Mercer Limited in relation to salary data, and by Kepler Associates in relation to the structure and content of the Directors Remuneration Report. All these consultants comply with the Code of Conduct for Remuneration Consultants and we are satisfied that their advice is objective and independent.
Base salary and benefits
With effect from 1 April 2012, we approved the following base salaries for the Executive Directors:
Olivier Bohuon |
1,050,000 | |
Adrian Hennah |
£ 585,800 (left company on 31 December 2012) |
80 Smith & Nephew Annual Report 2012 |
Directors remuneration report continued
In February 2013, we reviewed the base salaries of the Executive Directors having considered general economic conditions and average salary increases across the rest of the Group of around 3%. The Committee has agreed that Chief Executive Officer, Olivier Bohuon, will receive an increase in his salary in line with the Group average. This is the first increase in Chief Executive Officer pay since he joined the Company in April 2011. Mrs Browns salary for 2013 (set on her appointment) is £500,000. As a result, the base salaries for the Executive Directors with effect from 1 April 2013 are as follows:
Olivier Bohuon |
1,081,500 | |
Julie Brown |
£500,000 |
Pensions
During the period, Olivier Bohuon and Adrian Hennah both received a salary supplement of 30% of basic salary to apply towards their retirement savings in lieu of membership of a Company run pension scheme. They also received death in service cover of seven times basic salary, of which four times salary is payable as a lump sum with the balance used to provide any spouse and dependant pensions.
The same arrangements will apply in 2013 for Olivier Bohuon and Julie Brown.
2012 Annual Incentive Plan award
During 2012, the Annual Incentive Plan for Executive Directors was based on the achievement of specific financial and business objectives.
For 2012, the financial and business objectives were as follows:
Financial objectives |
Revenue (30%) Trading profit (30%) Trading cash (10%) |
70% | ||
Business objectives |
R&D investment Succession planning Employee engagement Compliance Development of product portfolio (Olivier Bohuon only) Shared services (Adrian Hennah only) |
30% |
In 2013, the financial and business objectives will remain the same.
At the period end the Committee conducted an assessment of each Executive Director against their financial and business objectives.
In addition, the Committee has the discretion to apply a multiplier positively or negatively to the annual incentive assessment of an Executive Director, adjusting the total up or down by up to 10%. This rewards or penalises an Executive Director for how they conduct themself in terms of leadership, corporate reputation, ethics and organisational behaviours and represent the Company both internally and externally.
Over the period, underlying revenue growth was 2% (between target and maximum), trading profit was $965m (between target and maximum), and the trading profit to cash conversion ratio was 104% (above maximum).
The business objectives are personal to each Executive Director, and are tailored to reflect their role and responsibilities during the year. These are set at the start of each year and will reflect some of the most important areas of strategic focus for the Group. Where objectives are repeated year-on-year, the Committee will set annual measurement criteria that are appropriate to motivate and measure an Executive Directors performance in any one year.
For instance, Innovation for Value is at the heart of our Strategic Priorities. Our success here is measured in terms of how we manage our R&D programmes and continue to develop our product portfolio to reflect the need to bring forward new technologies appropriate for our markets and customers globally. Ultimate responsibility for these vital programmes rests with our Executive Directors and we believe it was right to reflect the importance in their 2012 personal business objectives.
Similarly compliance and all that follows from it relating to ethics and quality is the responsibility of the Executive Directors, who must set the standards for the whole Group, and be measured on their execution. This is also true on Employee Engagement, where we want to motivate our leaders to exceed in providing vision and leadership and living our values of Performance, Innovation and Trust.
The Committee reviewed the performance of Olivier Bohuon and Adrian Hennah against their agreed business objectives for 2012 and determined that Olivier Bohuon delivered very strongly against his objectives and that Adrian Hennah had consistently met his objectives for the year. Their achievements during the year include:
Commentary on 2012 performance |
||||
Business objective |
Olivier Bohuon |
Adrian Hennah |
||
R&D investment |
Successfully managed investment levels during the year to fully support progress towards longer-term revenue targets in emerging markets. | |||
Succession planning |
Ensured focus on robust succession planning resulting in minimal disruption or turnover of key roles. | Completed succession planning for all key finance roles. | ||
Employee engagement |
Made significant effort to ensure employee engagement and effective 2-way communication with the wider employee population during a period of significant transistion including a 91% participation rate in the global employee survey. |
Achieved a >90% participation rate by the finance function in the global employee survey.
Identified key focus areas for action in 2013. |
||
Compliance |
Reinforced expectation for the highest levels of ethics and compliance through communication with, and training of, wider employee population. | Ensured that all strategic plans, new products and new businesses were fully assessed for compliance risks. | ||
Development of product portfolio (Olivier Bohuon only) |
Oversaw the successful delivery of a significant number (exceeding expectations in some cases) of planned product launches and registrations during the year.
Focused on delivering a balanced product portfolio globally. |
n/a | ||
Shared services (Adrian Hennah only) | n/a |
Completed implementation of Shared Services model and realised targeted cost savings.
Successfully managed customer satisfaction survey, with overall score of 86%. |
The Committee also considered the multiplier to the annual incentive assessment of Olivier Bohuon and Adrian Hennah and agreed that no multiplier was appropriate in respect of 2012.
Section 6 Corporate Governance |
81 |
The Executive Directors performance against the targets set for 2012 was therefore as follows:
Olivier Bohuon: 2012
Below
threshold |
Between
threshold and target |
Between
target and maximum |
Above
maximum |
|||||||||||
Revenue (30%) |
ü | |||||||||||||
Trading profit (30%) |
ü | |||||||||||||
Trading cash (10%) |
ü | |||||||||||||
Business objectives (30%) |
ü | |||||||||||||
Multiplier (+/-10%) |
N/A |
Adrian Hennah: 2012
Below
threshold |
Between
threshold and target |
Between
target and maximum |
Above
maximum |
|||||||||||
Revenue (30%) |
ü | |||||||||||||
Trading profit (30%) |
ü | |||||||||||||
Trading cash (10%) |
ü | |||||||||||||
Business objectives (30%) |
ü | |||||||||||||
Multiplier (+/-10%) |
N/A |
The 2012 opportunity under the Annual Incentive Plan comprised two parts:
a) a cash element (100% of salary at target, 150% maximum opportunity) and
b) an equity element (50% of salary at target, 65% maximum opportunity).
The cash element is paid following the performance year. The equity element is a conditional award over ordinary shares made under the Global Share Plan 2010 vesting in equal annual tranches over three years, provided that individual and Group performance is sustained at an acceptable level each year. Share awards are subject to malus and will lapse in the event that individual and Group performance is not sustained over the respective performance period.
The assessment of the Committee resulted in the following awards for 2012:
Executive | Cash element | Equity element | ||||||||||||||
Director |
% of salary | Amount | % of salary | Amount | ||||||||||||
Olivier Bohuon |
126% | 1,321,950 | 65% | 682,500 | ||||||||||||
Adrian Hennah |
100% | £585,800 | n/a left on 31 December 2012 |
The equity element of the Annual Incentive Plan was introduced in 2012, so there were no awards due to vest from outstanding cycles in the year under review. It is intended that the Annual Incentive Plan will be operated in a similar manner for 2013. There will be no change to the target or maximum opportunities for the coming year or in the split between financial and business objectives.
2012 Performance Share Programme
The Group operates one long-term incentive plan the Performance Share Programme.
Under the Performance Share Programme, conditional awards of shares vest after three years subject to the achievement of stretching performance targets relating to Total Shareholder Return (TSR) and free cashflow generation. Awards may be subject to clawback in the event of material financial mis-statement or misconduct.
Performance share awards were made to Executive Directors under the Global Share Plan 2010 during the year. The levels of the awards in 2012 were as follows:
Market value
of award vesting at maximum |
Market value
of award vesting at target |
|||||||
Executive Directors |
190% of salary | 95% of salary |
50% of the award will vest based on the Companys TSR performance relative to a bespoke peer group of companies in the medical devices sector over a three-year period commencing 1 January 2012 as follows:
TSR ranking within comparator group |
Award vesting
% of salary |
|
Below median |
Nil | |
Median |
23.75% | |
Upper quartile |
95% |
Awards will vest on a straight line basis between these points. If the Companys TSR performance is below median, none of this part of the award will vest.
The bespoke peer group for the 2012 awards comprises the following companies:
Arthrocare | Conmed | Nuvasive | ||
Bard | Covidien | Orthofix | ||
Baxter | Edwards Life | Stryker | ||
Becton Dickinson | Sciences Corp | St. Jude Medical | ||
Boston Scientific | Medtronic | Wright Medical | ||
Coloplast Group | Nobel Biocar | Zimmer |
The Groups TSR performance and its performance relative to the comparator group will be independently monitored and reported to the Remuneration Committee by Towers Watson.
50% of the award is subject to free cashflow performance. The free cashflow target is a cumulative performance target over the three-year performance period. The inclusion of a cash measure in both the annual and long-term plans reflects its importance over both timescales. The measure for the long-term target is free cashflow, which is defined as net cash inflows from operating activities, less capital expenditure. Free cashflow is considered to be the most appropriate measure of cashflow performance because it relates to the cash generated to finance additional investment in business opportunities, debt repayments and distributions to shareholders. This measure includes significant elements of operational and financial performance and helps to align executives rewards with shareholder value creation.
The 50% of the 2012 award that is subject to free cashflow performance will vest as follows:
Cumulative free cashflow | Award vesting % of salary | |||
Below $1.41 billion |
Nil | |||
$1.41 billion |
23.75% | |||
$1.62 billion |
47.5% | |||
$1.83 billion or more |
95% |
Awards will vest on a straight line basis between these points. If the Companys cashflow performance is below $1.41 billion, none of this part of the award will vest.
82 Smith & Nephew Annual Report 2012 |
Directors remuneration report continued
It is intended that the Committee should have the discretion to adjust, but on an exceptional basis only, the free cashflow target during the performance period for material factors that would otherwise distort the performance measure in either direction. For example, adjustments may be required to reflect exchange rate movements, significant acquisitions or divestments, or major legal and taxation settlements. Any major adjustments to the calculation will be disclosed to shareholders. There is no retesting of performance. Executive Directors do not receive share options under the Performance Share Programme.
Performance targets for 2013 Performance Share Programme (PSP) awards
It is proposed that awards made under the PSP in 2013 will vest after three years with 50% vesting on three-year relative TSR performance and 50% on cumulative free cashflow. No changes are proposed to the operation of the TSR element described above for 2012 PSP awards, for awards to be granted in 2013. The cumulative free cashflow targets for awards to be granted in 2013 will be as follows:
Cumulative free cashflow | Award vesting % of salary | |
Below $1.5 billion |
Nil | |
$1.55 billion |
23.75% | |
$1.78 billion |
47.5% | |
$2.01 billion or more |
95% |
No other changes are proposed to the Performance Share Programme.
Deferred bonus arrangements prior to 2012
Prior to 2012, one-third of any annual bonus earned was compulsorily deferred into share awards that vest in equal tranches over three years, subject to the participants continued employment. Outstanding tranches of awards made to Executive Directors previously are shown on Page 86. No further performance conditions apply to these deferred share awards. On leaving employment voluntarily, Adrian Hennahs unvested share awards lapsed.
Long-term incentive arrangements prior to 2012
Prior to 2012, conditional share awards were made to Executive Directors under the 2004 Performance Share Plan and to other executives under the Global Share Plan 2010.
The vesting of awards made to Executive Directors was linked to adjusted EPS (EPSA) growth, and the number of shares could then be increased subject to TSR performance relative to the major companies in the medical devices industry.
Adrian Hennahs unvested awards (granted in 2010 and 2011) lapsed on his leaving Smith & Nephew. Olivier Bohuon was first granted an award under the 2004 Performance Share Plan in 2011, which will vest subject to performance over the three years ending 31 December 2013. Details of these awards can be found in the table on page 85 of this Report, and the vesting outcome will be reported in next years Directors Remuneration Report.
ESPA growth over the three years ended 31 December 2012 was 18.7% (adjusted for the Bioventus transaction) against the compounded market growth rate of 11.7%. Over the same period, the Company was ranked 10th out of 19 companies in the medical devices comparator group which meant that the multiplier of one was applied to the number of shares vesting under the ESPA target. As a result the following award made in 2010 to a former Executive Director will vest on 1 March 2013.
Number of ADRs
under 2010 award |
Number of ADRs
vesting in 2013 |
% vesting | ||||||||||
David Illingworth |
16,720 | 4,347 | 26% |
(i) | The award granted to David Illingworth will be settled prior to 15 March 2013 in accordance with S409A of the US Internal Revenue Code. |
(ii) | The number of shares under the 2010 award has been pro-rated for service during the performance period. |
Prior to 2012, share option awards were also made to Executive Directors under the 2004 Executive Share Option Plan and to other employees under the Global Share Plan 2010. Options granted to Executive Directors are subject to TSR performance relative to the major companies in the medical devices industry.
Adrian Hennahs unvested awards (granted in 2010 and 2011) lapsed on his leaving Smith & Nephew. Olivier Bohuon was first granted an award under the 2004 Executive Share Option Plan in 2011, which will vest subject to performance over the three years ending 31 December 2013. Details of these awards can be found in the table on page 85 of this Report, and the vesting outcome will be reported in next years Directors Remuneration Report.
Over the three years ended 31 December 2012 the Company was ranked 10th out of 19 companies in the medical devices comparator group which meant that 33% of the options granted to a former Executive Director in 2010 will vest on the 9 September 2013 as follows:
Number of ADRs
under option granted in 2010 |
Number of ADRs
under option vesting in 2013 |
% vesting | ||||||||
David Illingworth |
11,073 | 3,654 | 33% |
(i) | The option granted in 2010 has been pro-rated for service during the performance period. |
Other share schemes
The Company also operates UK and International ShareSave Plans (and an Employee Stock Purchase Plan ESPP in the US), which are all-employee schemes that enable our employees to save on a regular basis and then buy shares in the Company. The Executive Directors are permitted to participate in the ShareSave Plan and details of their participation are included in the table on page 86.
Single figure
To aid transparency to our shareholders, the table below sets out a single figure for the total remuneration received by each Executive Director for the year to 31 December 2012.
2012 |
Fixed pay |
|||||||||||||||||
(000) | Salary | Benefits |
Salary
supplement in lieu of pension |
Subtotal | ||||||||||||||
Olivier Bohuon |
1,050 | 93 | 315 | 1,458 | ||||||||||||||
Adrian Hennah |
£584 | £23 | £175 | £782 | ||||||||||||||
2012 |
Pay for performance |
|||||||||||||||||
(000) |
Annual
cash incentive |
Annual
equity incentive |
Perfor-
mance Shares |
Share options |
Subtotal | |||||||||||||
Olivier |
||||||||||||||||||
Bohuon |
1,322 | 683 | N/A | N/A | 2,005 | |||||||||||||
Adrian |
||||||||||||||||||
Hennah |
£586 | N/A | N/A | N/A | £586 | |||||||||||||
2012 (000) | Total remuneration | |||||||||||||||||
CEO |
3,463 | |||||||||||||||||
CFO |
£1,368 |
Section 6 Corporate Governance |
83 |
The figures have been calculated as follows:
Base salary: the actual salary earned for the year
Annual benefits: the taxable value of benefits received in the year
Pension: the value of the salary supplement paid by the Company in lieu of a pension
Annual Cash Incentive: the value of the cash incentive payable for performance over 2012
Equity Incentive Award: the value of share awards granted for performance over 2012
Performance Shares: the value on 31 December 2012 of shares vesting in 2013 subject to performance over the three-year period ended 31 December 2012
Share options: the embedded gain on 31 December 2012 of options vesting subject to performance over the three-year period ended 31 December 2012 CEO data assumes an exchange rate of 1.00 = £0.81
Shareholding requirements
We believe that one of the best ways our senior executives can act and feel like shareholders is for them to hold a significant number of shares in the Company. We therefore expect our Executive Directors to build up a holding of Smith & Nephew shares of two times their base salary. In order to reinforce this expectation, we require them to retain 50% of all shares vesting under Company share plans (after tax) until this holding has been met recognising that differing international tax regimes affect the pace at which an Executive Director may fulfil the shareholding holding requirement. When calculating whether or not this requirement has been met, we will include Ordinary Shares or ADSs held by the individual and by their immediate family and the intrinsic value of any vested but unexercised options.
We also require our Non-Executive Directors to hold a personal stake in the Company equivalent to their basic annual fee.
The table on page 86 shows the shares/ADRs held by the Directors.
Dilution headroom
The Committee ensures at all times that the number of new shares which may be issued under any share-based plans, including all employee plans, does not exceed 10% of the Companys issued share capital over any rolling ten-year period (of which up to 5% may be issued to satisfy awards under the Companys discretionary share plans. The Committee monitors headroom closely when granting awards over shares, taking into account the number of options or shares that might be expected to lapse or be forfeited before vesting or exercise. In the event that insufficient new shares are available, there are processes in place to purchase shares in the market to satisfy vesting awards and to net-settle option exercises.
Over the previous ten years (2003 to 2012), the number of new shares issued under out share plans has been as follows:
All-employee share plans |
8,349,735 (0.92% of issued share capital as at 19 February 2013) | |
Discretionary share plans |
34,234,721 (3.78% of issued share capital as at 19 February 2013) |
Non-Executive Director fees
Non-Executive Director and Chairman fees in 2012 were as follows:
Fee in UK Sterling | Fee in US Dollars | Fee in Euros | ||||
Basic annual fee |
£63,000 | $120,000 | 84,250 | |||
Committee Chairman and Senior Independent Director fee |
£15,000 | $27,000 | 20,000 | |||
Intercontinental travel fee (per meeting) |
£3,500 | $7,000 | 5,000 | |||
Chairmans fee |
£400,000 | | | |||
Distribution statement
|
||||||
For the year to 31 December 2012 |
For the year to 31 December 2011 |
% change | ||||
Attributable profit for the year |
$729m | $582m | +25% | |||
Dividends declared and paid during the year |
$186m | $146m | +27% | |||
Total Group spend on remuneration |
$ 886m | $930m | 5% |
84 Smith & Nephew Annual Report 2012 |
Directors remuneration report continued
Directors emoluments and pensions
The following sections of the Report up to Total Shareholder Return have been audited by Ernst & Young LLP in accordance with the Regulations.
a) Salaries and Fees
Salaries and fees |
Benefits (i) | Annual Incentive |
Salary Supplement in lieu of pensions |
Total 2012 (viii) | Total 2011 (viii) | |||||||
Thousands | ||||||||||||
Chairman (Non-Executive) |
||||||||||||
Sir John Buchanan |
£407 | | | | £407 | £420 | ||||||
Executive Directors |
||||||||||||
Olivier Bohuon |
1,050 | 93 | 1,322 | 315 | 2,780 | 3,507 | ||||||
Adrian Hennah (ii) |
£584 | £23 | £585 | £175 | £1,367 | £1,308 | ||||||
Non-Executive Directors |
||||||||||||
Ian Barlow |
£85 | | | | £85 | £80 | ||||||
Baroness Bottomley (iii) |
£52 | | | | £52 | | ||||||
Geneviève Berger (iv) |
75 | | | | 75 | 87 | ||||||
Pamela Kirby |
£85 | | | | £85 | £75 | ||||||
Brian Larcombe |
£70 | | | | £70 | £65 | ||||||
Joseph Papa |
$189 | | | | $189 | $173 | ||||||
Ajay Piramal (v) |
£74 | | | | £74 | | ||||||
Richard De Schutter |
$189 | | | | $189 | $181 | ||||||
Rolf Stomberg (vi) |
24 | | | | 24 | 98 |
(i) | Benefits shown in the table above include cash allowances and benefits in kind. |
(ii) | Retired on 31 December 2012. |
(iii) | Appointed on 12 April 2012. |
(iv) | Retired on 1 November 2012. |
(v) | Appointed on 1 January 2012. |
(vi) | Retired on 12 April 2012. |
(vii) | David Illingworth, who retired in August 2011, received a consultancy fee of $40,109 and benefits of £13,880 during the year to 31 December 2012 in accordance with his retirement arrangements. |
(viii) | Total Executive and Non-Executive Directors emoluments for 2012 amounted to $7,468,000 (2011 $10,423,000). |
Section 6 Corporate Governance |
85 |
b) Directors Share Options
Options as at
1 January 2012 (number) |
Granted during
(number) |
Exercise price
of options granted |
Exercised
during 2012 (number) |
Lapsed during
(number) |
Options as at
31 December 2012 (number) |
Average
exercise price |
Range of
(date) |
|||||||||||||||||||||||
Olivier Bohuon (i) |
151,698 | | | | | 151,698 | 607p | 09/2014- 09/2021 | ||||||||||||||||||||||
Adrian Hennah (i) |
430,713 | | | 229,905 | 200,808 | | 537.58p | |||||||||||||||||||||||
David Illingworth (i) |
294,612 | | | 294,612 | | | 592.43p | |||||||||||||||||||||||
(ii) (v) |
173,935 | | | 113,825 | 4,745 | 55,365 | $39.55 (iv) | 08/2013- 03/2014 | ||||||||||||||||||||||
Total |
468,547 | | 408,437 | 4,745 | 55,365 |
(i) | Options over Ordinary Shares granted under Executive Share Option Plans at prices below the market price at 31 December 2012 of 679.50p. |
(ii) | Options over ADSs granted under 2004 Executive Share Option Plans. Figures in the above table show the equivalent number of Ordinary Shares. |
(iii) | Options granted under the UK ShareSave Scheme. |
(iv) | Per ADS. |
(v) | The number of shares under option at 1 January 2012 has been reduced to reflect options over 170,055 shares which lapsed during 2011. |
The range in the market price of the Companys Ordinary Shares during the year was 580.00p to 693.00p and the market price at 31 December 2012 was 679.50p. The gain made by Adrian Hennah on his exercise of options during the year was £357,789.13 (2011 £nil, 2010 £2,781). In 2012 the gain made by David Illingworth on exercising share options was $329,564 plus £38,310 (2011 $nil). On 7 February 2013, 67% of the options granted to David Illingworth under the 2004 Executive Share Option plan lapsed following completion of the performance period. The remainder of options will vest and become capable of being exercised on the third anniversary of the grant in August 2013.
c) Long-Term Incentive Plan Awards
Award type |
Number
of shares
|
Awards
during the year (number) |
Market price
on award |
Vested award
(number) |
Market price
on vesting |
Lapsed
award (number) |
Number of
shares awarded at 31 December 2012 (number) |
Latest
performance period (date) |
||||||||||||||||||||||||||
Olivier Bohuon |
||||||||||||||||||||||||||||||||||
(i) |
RSA | 200,000 | | | (66,667) | 633.5p | | 133,333 | 03/2014 | |||||||||||||||||||||||||
(ii) |
PSP | 227,547 | 267,304 | 622p | | | | 494,851 | 12/2013 | |||||||||||||||||||||||||
(iii) |
EIA | | 91,446 | 622p | | | | 91,446 | 12/2014 | |||||||||||||||||||||||||
Total |
427,547 | 358,750 | (66,667) | | | 719,630 | ||||||||||||||||||||||||||||
Adrian Hennah |
||||||||||||||||||||||||||||||||||
(ii) |
PSP | 451,008 | 177,170 | 622p | (141,920) | 665p | (486,258) | | | |||||||||||||||||||||||||
(iii) |
EIA | | 46,623 | 622p | | (46,623) | | |||||||||||||||||||||||||||
Total |
451,008 | 223,793 | (141,920) | (532,881) | | |||||||||||||||||||||||||||||
David Illingworth |
||||||||||||||||||||||||||||||||||
(iii) (iv) |
PSP | 261,455 | | | (156,510) | $50.18 (v) | (21,345) | 83,600 | 12/2012 |
(i) | Award made over Ordinary Shares under Listing Rule 9. |
(ii) | Awards made over ADSs under the 2004 Performance Share Plan. Figures in the above table show the equivalent number of Ordinary Shares. |
(iii) | Or date of retirement if earlier. |
(iv) | The number of shares awarded at 1 January 2012 has been reduced to reflect awards over 256,185 shares which lapsed and 45,578 shares which vested during 2011. |
(v) | Per ADS. |
86 Smith & Nephew Annual Report 2012 |
Directors remuneration report continued
On 7 February 2013, 74% of the awards granted to David Illingworth in 2010 under the 2004 Performance Share Plan lapsed following completion of the performance period. In accordance with S409A of the US Internal Revenue Code the remainder of David Illingworths award will be paid out prior to 15 March 2013.
d) Deferred Bonus Plan
The vesting of awards under the Deferred Bonus Plan is dependent upon continued employment within the Group throughout the three-year vesting period. Provided the condition of continued employment is met, one third of the total award will vest in each of the three years, on the awards anniversary.
Total as at
1 January 2012 |
Awarded
during 2012 |
Vested during
2012 |
Lapsed
during 2012 |
Total as at
2012 (i) |
||||||||||||||
Adrian Hennah |
67,407 | | 34,398 | 33,009 | |
(i) | Lapsed 31 December 2012. |
Senior Management Remuneration
The Groups administrative, supervisory and management body (the senior management) is comprised, for US reporting purposes, of Executive Directors and Executive Officers. Details of the current Executive Directors and Executive Officers are given on pages 58 to 61.
In respect of the financial year 2011, the total compensation (excluding pension emoluments but including cash payments under the performance related incentive plans) paid to the senior management for the year was $14,941,000 (2011 $17,403,000, 2010 $11,689,000), the total compensation for loss of office was $nil (2011 $1,161,000, 2010 $nil), the aggregate increase in accrued pension benefits was $229,000 (2011 increase of $387,000, 2010 increase of $16,000) and the aggregate amounts provided for under the supplementary schemes was $537,000 (2011 $711,000, 2010 $1,141,000).
During 2012, senior management were granted Equity Incentive Awards over 365,276 shares, performance share awards over 857,210 shares and conditional share awards over a total of 29,700 shares under the Global Share Plan 2010, and options over 3,027 shares under the employee ShareSave plans. As of 19 February 2013, the Senior Management (11 persons) owned 156,491 shares and 44,423 ADSs, constituting less than 0.1% of the issued share capital of the Company. Senior Management also held as of this date, options to purchase 832,759 shares, conditional share awards over 282,512 shares and 20,346 ADSs, Equity Incentive Awards over 318,653 shares, performance share awards over 1,032,415 shares and 38,134 ADSs awarded under the 2004 Performance Share Plan and the Global Share Plan 2010; and awards over 19,119 shares and 6,319 ADSs under the Deferred Bonus Plan.
Directors interests
Beneficial interests of the Directors in the Ordinary Shares of the Company are as follows:
shareholding as | ||||||||||||||||
% of base salary | ||||||||||||||||
1 January 2012 | 31 December 2012 | (annual fee for | ||||||||||||||
(Or at date of appointment) | (Or at date of retirement) | 19 February 2013 (i) | NEDs) (ii) | |||||||||||||
Numbers |
Shares | Options | Shares | Options | Shares | Options | % | |||||||||
Sir John Buchanan |
159,483 | | 162,695 | | 162,695 | | 286 | |||||||||
Julie Brown |
| | | | | | | |||||||||
Olivier Bohuon (ii) |
| 151,698 | 37,015 | 151,698 | 37,015 | 151,698 | 29 | |||||||||
Adrian Hennah |
167,968 | 430,713 | 279,511 | | | | | |||||||||
Ian Barlow |
18,000 | | 18,000 | | 18,000 | | 201 | |||||||||
Geneviève Berger |
1,750 | | 1,750 | | | | | |||||||||
Baroness Bottomley |
| | 17,500 | | 17,500 | | 195 | |||||||||
Pamela Kirby |
15,000 | | 15,000 | | 15,000 | | 167 | |||||||||
Brian Larcombe |
40,000 | | 40,000 | | 40,000 | | 446 | |||||||||
Joseph Papa |
5,000 | | 12,500 | | 12,500 | | 113 | |||||||||
Ajay Piramal |
| | | | | | | |||||||||
Richard De Schutter |
250,000 | | 220,000 | | 220,000 | | 1,990 | |||||||||
Rolf Stomberg |
13,100 | | 13,100 | | | | ||||||||||
Total |
670,301 | 582,411 | 817,071 | 151,678 | 522,710 | 151,698 |
(i) | The latest practicable date for this Annual Report. |
(ii) | Calculated using closing share price of 702p per ordinary share and $54.28 per ADS on 19 February 2013, and an exchange rate of £1/ 1.1562. |
(iii) | In addition, Olivier Bohuon holds 50,000 Deferred Shares. Following the redenomination of Ordinary Shares into US dollars on 23 January 2006, the Company issued 50,000 Deferred Shares, calculated using the latest practicable date share price. These shares are normally held by the Chief Executive Officer and are not listed on any Stock Exchange and have extremely limited rights attached to them. |
The total holdings of the Directors represent less than 1% of the Ordinary share capital of the Company.
The register of Directors interests, which is open to inspection at the Companys registered office, contains full details of Directors shareholdings and share options.
Section 6 Corporate Governance |
87 |
Total shareholder return
A graph of the Companys TSR performance compared to that of the TSR of the FTSE100 index is shown below in accordance with Schedule 8 to the Regulations.
Smith & Nephew Five year Total Shareholder Return (measured in UK sterling, based on monthly spot values)
However, as we compare the Companys performance to a tailored sector peer group of medical devices companies (see page 70), when considering TSR performance in the context of the 2004 Performance Share Plan and Global Share Plan 2010, we feel that the following graph showing the TSR performance of this peer group is also of interest.
Smith & Nephew - Five year Total Shareholder Return (measured in US dollars, based on monthly spot values)
88 Smith & Nephew Annual Report 2012 |
7
|
Accounts and other information |
|||||
Our business model and strategy will drive long-term financial performance. |
||||||
Section 7 Accounts and other information |
89 |
Directors responsibilities for the accounts
The Directors are responsible for preparing the Group and Company accounts in accordance with applicable United Kingdom law and regulations. As a consequence of the Companys Ordinary Shares being traded on the New York Stock Exchange (in the form of American Depositary Shares) the Directors are responsible for the preparation and filing of an annual report on Form 20-F with the US Securities and Exchange Commission.
The Directors are required to prepare Group accounts for each financial year, in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union which present fairly the financial position of the Group and the financial performance and cash flows of the Group for that period. In preparing those Group accounts, the Directors are required to:
| Select suitable accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; |
| Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; |
| Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Groups financial position and financial performance; and |
| State that the Group has complied with IFRS, subject to any material departures disclosed and explained in the accounts. |
Under United Kingdom law the Directors have elected to prepare the Company accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), which are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the Company accounts, the Directors are required to:
| Select suitable accounting policies and then apply them consistently; |
| Make judgments and estimates that are reasonable and prudent; |
| State whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the accounts; and |
| Prepare the accounts on a going concern basis unless it is inappropriate to presume that the Company will continue in business. |
The Directors confirm that they have complied with the above requirements in preparing the accounts.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the accounts comply with the Companies Act 2006 and, in the case of the Group accounts, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Groups website. It should be noted that information published on the internet is accessible in many countries with different legal requirements. Legislation in the UK governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions.
Directors responsibility statement pursuant to disclosure and transparency Rule 4
The Directors confirm that, to the best of each persons knowledge:
| The Group accounts in this report, which have been prepared in accordance with IFRS as adopted by the European Union and those parts of the Companies Act 2006 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and profit of the Group taken as a whole; |
| The Company accounts in this report, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and the Companies Act 2006, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and |
| The Financial review and principal risks section contained in the accounts includes a fair review of the development and performance of the business and the financial position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face. |
By order of the Board, 20 February 2013
Susan Swabey
Company Secretary
90 Smith & Nephew Annual Report 2012 |
Independent auditors UK Report
Independent Auditors Report to the Members of Smith & Nephew plc
We have audited the Group accounts of Smith & Nephew plc for the year ended 31 December 2012 which comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group Balance Sheet, the Group Cash Flow Statement, the Group Statement of Changes in Equity and the related notes 1 to 24. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Companys members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Companys members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Companys members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors Responsibility Statement set out on page 89 the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Boards (APBs) Ethical Standards for Auditors.
Scope of the audit of the accounts
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Groups circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the Group financial statements:
| give a true and fair view of the state of the Groups affairs as at 31 December 2012 and of its profit for the year then ended; |
| have been properly prepared in accordance with IFRSs as adopted by the European Union; and |
| have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. |
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors Report for the financial year for which the Group financial statements are prepared is consistent with the Group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
| certain disclosures of directors remuneration specified by law are not made; or |
| we have not received all the information and explanations we require for our audit. |
Under the Listing Rules we are required to review:
| the Directors statement, set out on page 51, in relation to going concern; and |
| the part of the Corporate Governance Statement relating to the Companys compliance with the nine provisions of the UK Corporate Governance Code; and |
| certain elements of the report to shareholders by the Board on directors remuneration. |
Other matter
We have reported separately on the Company financial statements of Smith & Nephew plc for the year ended 31 December 2012 and on the information in the Directors Remuneration Report that is described as having been audited.
Separate Opinion in Relation to IFRSs
As explained in Note 1 to the Group financial statements, the Group in addition to complying with its legal obligation to comply with IFRS as adopted by the European Union, has also compiled with IFRS as issued by the International Accounting Standards Board.
In our opinion the Group financial statements give a true and fair view, in accordance with IFRS, of the state of the Groups affairs as at 31 December 2012 and of its profit for the year then ended.
Les Clifford (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
20 February 2013
Section 7 Accounts and other information |
91 |
Independent auditors US Report
Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of Smith & Nephew plc
We have audited the accompanying Group balance sheets of Smith & Nephew plc as of 31 December 2012 and 2011, and the related Group income statements, Group statements of comprehensive income, Group cash flow statements and Group statements of changes in equity for each of the three years in the period ended 31 December 2012. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall account presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smith & Nephew plc at 31 December 2012 and 2011, and the consolidated results of its operations and cash flows for each of the three years in the period ended 31 December 2012, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and International Financial Reporting Standards as adopted by the European Union.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Smith & Nephew plcs internal control over financial reporting as of 31 December 2012, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission and our report dated 20 February 2013 expressed an unqualified opinion thereon.
Ernst & Young LLP
London, England
20 February 2013
Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of Smith & Nephew plc
We have audited Smith & Nephew plcs internal control over financial reporting as of 31 December 2012, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (the COSO criteria).
Smith & Nephew plcs management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Smith & Nephew plc maintained, in all material respects, effective internal control over financial reporting as of 31 December 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group balance sheets of Smith & Nephew plc as of 31 December 2012 and 2011, and the related Group income statements, Group statements of comprehensive income, Group cash flow statements and Group statements of changes in equity for each of the three years in the period ended 31 December 2012 and our report dated 20 February 2013 expressed an unqualified opinion thereon.
Ernst & Young LLP
London, England
20 February 2013
92 Smith & Nephew Annual Report 2012 |
Notes |
Year ended
$ million |
Year
ended
$ million |
Year
ended
$ million |
|||||
Revenue |
2 | 4,137 | 4,270 | 3,962 | ||||
Cost of goods sold |
(1,070) | (1,140) | (1,031) | |||||
Gross profit |
3,067 | 3,130 | 2,931 | |||||
Selling, general and administrative expenses |
3 | (2,050) | (2,101) | (1,860) | ||||
Research and development expenses |
(171) | (167) | (151) | |||||
Operating profit |
2 & 3 | 846 | 862 | 920 | ||||
Interest receivable |
4 | 11 | 4 | 3 | ||||
Interest payable |
4 | (9) | (12) | (18) | ||||
Other finance costs |
4 | (3) | (6) | (10) | ||||
Share of results of associates |
11 | 4 | | | ||||
Profit on disposal of net assets held for sale |
22 | 251 | | | ||||
Profit before taxation |
1,100 | 848 | 895 | |||||
Taxation |
5 | (371) | (266) | (280) | ||||
Attributable profit for the year (i) |
729 | 582 | 615 | |||||
Earnings per Ordinary Share (i) |
6 | |||||||
Basic |
81.3¢ | 65.3¢ | 69.3¢ | |||||
Diluted |
80.9¢ | 65.0¢ | 69.2¢ | |||||
Group statement of comprehensive income
|
||||||||
Notes |
Year ended
$ million |
Year
ended
$ million |
Year
ended
$ million |
|||||
Attributable profit for the year (i) |
729 | 582 | 615 | |||||
Other comprehensive income: |
||||||||
Cash flow hedges interest rate swaps |
||||||||
losses arising in the year |
| (1) | (1) | |||||
losses transferred to income statement for the year |
| 1 | 4 | |||||
Cash flow hedges forward foreign exchange contracts |
||||||||
(losses)/gains arising in the year |
(1) | 1 | (3) | |||||
(gains)/losses transferred to inventories for the year |
(6) | 13 | 1 | |||||
Exchange differences on translation of foreign operations |
36 | (32) | 66 | |||||
Exchange on borrowings classified as net investment hedges |
1 | (4) | (14) | |||||
Actuarial (losses)/gains on retirement benefit obligations |
19 | (13) | (70) | 26 | ||||
Taxation on other comprehensive income (ii) |
5 | 20 | 24 | (7) | ||||
Other comprehensive income/(expense) for the year, net of taxation |
37 | (68) | 72 | |||||
Total comprehensive income for the year (i) |
766 | 514 | 687 |
(i) | Attributable to equity holders of the Company and wholly derived from continuing operations. |
(ii) | Taxation on items relating to components of other comprehensive income comprises a credit of $18m related to retirement benefit obligations |
(2011 credit of $27m, 2010 charge of $7m) and a credit of $2m related to cash flow hedges (2011 charge of $3m, 2010 $nil). |
The Notes on pages 96 to 138 are an integral part of these accounts.
Section 7 Accounts and other information |
93 |
Notes |
At 31 December 2012 $ million |
At 31 December 2011 $ million |
||||
Assets |
||||||
Non-current assets: |
||||||
Property, plant and equipment |
7 | 793 | 783 | |||
Goodwill |
8 | 1,186 | 1,096 | |||
Intangible assets |
9 | 1,064 | 423 | |||
Investments |
10 | 2 | 4 | |||
Investments in associates |
11 | 116 | 13 | |||
Loans to associates |
11 | 167 | | |||
Retirement benefit asset |
19 | 6 | | |||
Deferred tax assets |
17 | 164 | 223 | |||
3,498 | 2,542 | |||||
Current assets: |
||||||
Inventories |
12 | 901 | 859 | |||
Trade and other receivables |
13 | 1,065 | 1,037 | |||
Cash and bank |
15 | 178 | 184 | |||
2,144 | 2,080 | |||||
Assets held for sale |
22 | | 125 | |||
Total assets |
5,642 | 4,747 | ||||
Equity and liabilities |
||||||
Equity attributable to owners of the Company: |
||||||
Share capital |
20 | 193 | 191 | |||
Share premium |
488 | 413 | ||||
Treasury shares |
20 | (735) | (766) | |||
Other reserves |
121 | 91 | ||||
Retained earnings |
3,817 | 3,258 | ||||
Total equity |
3,884 | 3,187 | ||||
Non-current liabilities: |
||||||
Long-term borrowings |
15 | 430 | 16 | |||
Retirement benefit obligations |
19 | 266 | 287 | |||
Other payables |
14 | 8 | 8 | |||
Provisions |
18 | 63 | 45 | |||
Deferred tax liabilities |
17 | 61 | 66 | |||
828 | 422 | |||||
Current liabilities: |
||||||
Bank overdrafts and loans |
15 | 38 | 306 | |||
Trade and other payables |
14 | 656 | 564 | |||
Provisions |
18 | 59 | 78 | |||
Current tax payable |
177 | 171 | ||||
930 | 1,119 | |||||
Liabilities directly associated with assets held for sale |
22 | | 19 | |||
Total liabilities |
1,758 | 1,560 | ||||
Total equity and liabilities |
5,642 | 4,747 |
The accounts were approved by the Board and authorised for issue on 20 February 2013 and are signed on its behalf by:
Sir John Buchanan | Olivier Bohuon | |
Chairman | Chief Executive Officer |
The Notes on pages 96 to 138 are an integral part of these accounts.
94 Smith & Nephew Annual Report 2012 |
Notes |
Year ended
$ million |
Year
ended
$ million |
Year
ended
$ million |
|||||
Cash flows from operating activities |
||||||||
Profit before taxation |
1,100 | 848 | 895 | |||||
Net interest (receivable)/payable |
4 | (2) | 8 | 15 | ||||
Depreciation, amortisation and impairment |
312 | 297 | 273 | |||||
Loss on disposal of property, plant and equipment and software |
12 | 9 | 15 | |||||
Share-based payments expense |
24 | 34 | 30 | 21 | ||||
Share of results of associates |
11 | (4) | | | ||||
Dividends received from associates |
11 | 7 | | | ||||
Profit on disposal of net assets held for sale |
22 | (251) | | | ||||
Increase in retirement benefit obligations |
(36) | (44) | (31) | |||||
Decrease in inventories |
12 | 40 | 21 | |||||
Increase in trade and other receivables |
(5) | (47) | (100) | |||||
Increase/(Decrease) in trade and other payables and provisions |
5 | (6) | 2 | |||||
Cash generated from operations (i) (ii) |
1,184 | 1,135 | 1,111 | |||||
Interest received |
4 | 4 | 3 | |||||
Interest paid |
(8) | (12) | (20) | |||||
Income taxes paid |
(278) | (285) | (235) | |||||
Net cash inflow from operating activities |
902 | 842 | 859 | |||||
Cash flows from investing activities |
||||||||
Acquisitions (net of $2m of cash received in 2011) |
22 | (782) | (33) | | ||||
Proceeds on disposal of net assets held for sale |
22 | 103 | | | ||||
Capital expenditure |
2 | (265) | (321) | (315) | ||||
Investment in associate |
11 | (10) | | | ||||
Proceeds on disposal of property, plant and equipment and software |
| | 8 | |||||
Net cash used in investing activities |
(954) | (354) | (307) | |||||
Cash flows from financing activities |
||||||||
Proceeds from issue of ordinary share capital |
77 | 17 | 15 | |||||
Treasury shares purchased |
| (6) | (5) | |||||
Proceeds of borrowings due within one year |
21 | 40 | 78 | 17 | ||||
Settlement of borrowings due within one year |
21 | (296) | (330) | | ||||
Proceeds on borrowings due after one year |
21 | 415 | 92 | 277 | ||||
Settlement of borrowings due after one year |
21 | (1) | (232) | (714) | ||||
Proceeds from own shares |
6 | 7 | 8 | |||||
Settlement of currency swaps |
21 | (1) | (1) | (3) | ||||
Equity dividends paid |
20 | (186) | (146) | (132) | ||||
Net cash from/(used in) financing activities |
54 | (521) | (537) | |||||
Net increase/(decrease) in cash and cash equivalents |
2 | (33) | 15 | |||||
Cash and cash equivalents at beginning of year |
21 | 161 | 195 | 174 | ||||
Exchange adjustments |
21 | 4 | (1) | 6 | ||||
Cash and cash equivalents at end of year |
21 | 167 | 161 | 195 |
(i) | Includes $55m (2011 $20m, 2010 $16m) of outgoings on restructuring and rationalisation expenses. |
(ii) | Includes $3m (2011 $1m, 2010 $nil) of acquisition related costs and $nil (2011 $3m, 2010 $5m) of costs unreimbursed by |
insurers relating to macrotextured knee revisions. |
The Notes on pages 96 to 138 are an integral part of these accounts.
Section 7 Accounts and other information |
95 |
Group statement of changes in equity
Share capital $ million |
Share premium $ million |
Treasury Shares (ii) $ million |
Other Reserves (iii) $ million |
Retained earnings $ million |
Total equity $ million |
|||||||
At 1 January 2010 |
190 | 382 | (794) | 63 | 2,338 | 2,179 | ||||||
Total comprehensive income (i) |
| | | 53 | 634 | 687 | ||||||
Equity dividends declared and paid |
| | | | (132) | (132) | ||||||
Purchase of own shares |
| | (5) | | | (5) | ||||||
Share-based payments recognised |
| | | | 21 | 21 | ||||||
Cost of shares transferred to beneficiaries |
| | 21 | | (13) | 8 | ||||||
Issue of ordinary share capital (iv) |
1 | 14 | | | | 15 | ||||||
At 31 December 2010 |
191 | 396 | (778) | 116 | 2,848 | 2,773 | ||||||
Total comprehensive income (i) |
| | | (25) | 539 | 514 | ||||||
Equity dividends declared and paid |
| | | | (146) | (146) | ||||||
Purchase of own shares |
| | (6) | | | (6) | ||||||
Share-based payments recognised |
| | | | 30 | 30 | ||||||
Deferred taxation on share based payments |
| | | | (2) | (2) | ||||||
Cost of shares transferred to beneficiaries |
| | 18 | | (11) | 7 | ||||||
Issue of ordinary share capital (iv) |
| 17 | | | | 17 | ||||||
At 31 December 2011 |
191 | 413 | (766) | 91 | 3,258 | 3,187 | ||||||
Total comprehensive income (i) |
| | | 30 | 736 | 766 | ||||||
Equity dividends declared and paid |
| | | | (186) | (186) | ||||||
Share-based payments recognised |
| | | | 34 | 34 | ||||||
Cost of shares transferred to beneficiaries |
| | 31 | | (25) | 6 | ||||||
Issue of ordinary share capital (iv) |
2 | 75 | | | | 77 | ||||||
At 31 December 2012 |
193 | 488 | (735) | 121 | 3,817 | 3,884 |
(i) | Attributable to equity holders of the Company and wholly derived from continuing operations. |
(ii) | Refer to Note 20.2 of the Group Financial Statements for further information. |
(iii) | Other reserves comprises gains and losses on cash flow hedges, foreign exchange differences on translation of foreign operations and the difference arising as a result of translating share capital and share premium at the rate ruling on the date of redenomination instead of the rate at the balance sheet date. The cumulative translation adjustments within Other Reserves at 31 December 2012 were $124m (2011 $87m, 2010 $123m). |
(iv) | Issue of Ordinary Share Capital as a result of options being exercised. |
The Notes on pages 96 to 138 are an integral part of these accounts.
96 Smith & Nephew Annual Report 2012 |
1 Basis of preparation
Smith & Nephew plc (the Company) is a public limited company incorporated in England and Wales. In these accounts, Group means the Company and all its subsidiaries. The principal activities of the Group are to develop, manufacture, market and sell medical devices in the sectors of Advanced Surgical Devices and Advanced Wound Management.
As required by the European Unions IAS Regulation and the Companies Act 2006, the Group has prepared its accounts in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) effective as at 31 December 2012. The Group has also prepared its accounts in accordance with IFRS as issued by the International Accounting Standards Board (IASB) effective as at 31 December 2012. IFRS as adopted by the EU differs in certain respects from IFRS as issued by the IASB. However, the differences have no impact for the periods presented.
The preparation of accounts in conformity with IFRS requires management to use estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the reporting period. The accounting policies requiring management to use significant estimates and assumptions are; inventories, impairment, retirement benefits, contingencies and provisions and are discussed under Critical Accounting Policies within the Financial review and principal risks section on page 51. Although these estimates are based on managements best knowledge of current events and actions, actual results ultimately may differ from those estimates.
The Directors continue to adopt the going concern basis for accounting in preparing the annual financial statements. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.
Consolidation
The Group accounts include the accounts of Smith & Nephew plc (the Company) and its subsidiaries for the periods during which they were members of the Group.
A subsidiary is an entity controlled by the Group. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights. Subsidiaries are consolidated in the Group accounts from the date that the Group obtains control, and continue to be consolidated until the date that such control ceases. Intercompany transactions, balances and unrealised gains and losses on transactions between group companies are eliminated on consolidation. All subsidiaries have year ends which are co-terminus with the Groups.
Recognition of financial assets and liabilities
Financial assets and liabilities are recognised on a trade date basis in the Groups balance sheet when the Group becomes party to the contractual provisions of the instrument. The Group carries borrowings in the Balance Sheet at amortised cost.
Foreign currencies
Functional and presentation currency
The Group accounts are presented in US Dollars, which is the Companys functional currency.
Foreign currency transactions
Transactions in foreign currencies are recorded at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date.
Foreign operations
Balance sheet items of foreign operations are translated into US Dollars on consolidation at year-end rates of exchange. Income statement items and the cash flows of overseas subsidiary undertakings and associated undertakings are translated at average rates as an approximation to actual transaction rates, with actual transaction rates used for large one off transactions.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the year-end rates of exchange.
The following are recognised in Other comprehensive income and are presented in Other reserves within equity: exchange differences on the translation at closing rates of exchange of non-US Dollar opening net assets; the differences arising between the translation of profits into US Dollars at actual (or average, as an approximation) and closing exchange rates; to the extent that the hedging relationship is effective, the difference on translation of foreign currency borrowings or swaps that are used to finance or hedge the Groups net investments in foreign operations; and the movement in the fair value of forward foreign exchange contracts used to hedge forecast foreign exchange cash flows. All other exchange differences are taken to the income statement.
The exchange rates used for the translation of currencies into US Dollars that have the most significant impact on the Group results were:
2012 | 2011 | 2010 | ||||
Average rates |
||||||
Sterling |
1.58 | 1.60 | 1.54 | |||
Euro |
1.28 | 1.39 | 1.32 | |||
Swiss Franc |
1.07 | 1.13 | 0.96 | |||
Year-end rates |
||||||
Sterling |
1.63 | 1.55 | 1.57 | |||
Euro |
1.32 | 1.29 | 1.34 | |||
Swiss Franc |
1.09 | 1.06 | 1.07 |
New IFRS accounting standards
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2012 and have not been applied in preparing the Group accounts. None of these are expected to have a significant effect on the financial statements of the group, except for IFRS 9 Financial Instruments. The Group does not plan to adopt this standard early and the extent of the impact has not been determined.
Section 7 Accounts and other information |
97 |
2 Business segment information
The Orthopaedics and Endoscopy business units, reported separately in the Group accounts for the year ended 31 December 2011, have been combined into a single operating division named Advanced Surgical Devices. This segmentation reflects the revised Group structure announced in August 2011. Revenue, trading profit, operating profit, total assets, total liabilities, capital expenditure, depreciation, amortisation, impairment, other significant information and average employees by business segment comparative figures have been restated to reflect this revised segmentation.
For management purposes, the Group is organised into business segments according to the nature of its products and has two business segments Advanced Surgical Devices and Advanced Wound Management. The types of products and services offered by each business segment are:
| Smith & Nephews Advanced Surgical Devices business offers the following products and technologies: |
o | Orthopaedic reconstruction implants which include hip, knee and shoulder joints as well as ancillary products such as bone cement and mixing systems used in cemented reconstruction joint surgery. |
o | Orthopaedic trauma fixation products consisting of internal and external devices and other products, including shoulder fixation and orthobiological materials used in the stabilisation of severe fractures and deformity correction procedures. |
o | Sports medicine products, which offer surgeons a broad array of instruments, technologies and implants necessary to perform minimally invasive surgery of the joints, including knee, hip and shoulder repair. |
o | Arthroscopy Enabling Technologies which offer healthcare providers a variety of technologies such as fluid management equipment for surgical access such as high definition cameras, digital image capture, scopes, light sources and monitors to assist with visualisation inside the joints; radio frequency wands, electromechanical and mechanical blades, and hand instruments for removing damaged tissue. |
| Smith & Nephews Advanced Wound Management business offers a range of products from initial wound bed preparation through to full wound closure. These products are targeted at chronic wounds associated with the older population, such as pressure sores and venous leg ulcers. There are also products for the treatment of wounds such as burns and invasive surgery that impact the wider population. |
Management monitors the operating results of its business segments separately for the purposes of making decisions about resource allocation and performance assessment. Group financing (including interest receivable and payable) and income taxes are managed on a group basis and are not allocated to business segments.
The following tables present revenue, profit, asset and liability information regarding the Groups operating segments. Investments in associates and loans to associates is segmentally allocated to Advanced Surgical Devices.
2.1 Revenue by business segment and geography
Accounting policy
Revenue comprises sales of products and services to third parties at amounts invoiced net of trade discounts and rebates, excluding taxes on revenue. Revenue from the sale of products is recognised upon transfer to the customer of the significant risks and rewards of ownership. This is generally when goods are delivered to customers. Sales of inventory located at customer premises and available for customers immediate use are recognised when notification is received that the product has been implanted or used. Appropriate provisions for returns, trade discounts and rebates are deducted from revenue. Rebates comprise retrospective volume discounts granted to certain customers on attainment of certain levels of purchases from the Group. These are accrued over the course of the arrangement based on estimates of the level of business expected and adjusted at the end of the arrangement to reflect actual volumes. |
2012
$ million |
2011
$ million |
2010
$ million |
||||
Revenue by business segment |
||||||
Advanced Surgical Devices |
3,108 | 3,251 | 3,050 | |||
Advanced Wound Management | 1,029 | 1,019 | 912 | |||
4,137 | 4,270 | 3,962 |
There are no material sales between business segments.
2012
$ million |
2011
$ million |
2010
$ million |
||||
Revenue by geographic market |
||||||
United Kingdom |
297 | 291 | 283 | |||
Other Established Markets | 1,706 | 1,769 | 1,606 | |||
United States |
1,651 | 1,756 | 1,707 | |||
Emerging and International Markets | 483 | 454 | 366 | |||
4,137 | 4,270 | 3,962 |
Revenue has been allocated by basis of origin. No revenue from a single customer is in excess of 10% of the Groups revenue.
98 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
2 Business segment information continued
2.2 Trading and operating profit by business segment
Trading profit is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affects the Groups short-term profitability. The Group presents this measure to assist investors in their understanding of trends. The Group has identified the following items, where material, as those to be excluded from operating profit when arriving at trading profit: acquisition and disposal related items including amortisation of acquisition intangibles and impairments; significant restructuring events; gains and losses arising from legal disputes; and uninsured losses. Operating profit reconciles to trading profit as follows:
Notes |
2012 $ million |
2011 $ million |
2010 $ million |
|||||
Operating profit |
846 | 862 | 920 | |||||
Acquisition related costs |
3 | 11 | | | ||||
Restructuring and rationalisation expenses |
3 | 65 | 40 | 15 | ||||
Amortisation of acquisition intangibles and impairments |
8 & 9 | 43 | 36 | 34 | ||||
Legal provision |
3 | | 23 | | ||||
Trading profit |
965 | 961 | 969 | |||||
Trading profit by business segment |
||||||||
Advanced Surgical Devices |
728 | 714 | 736 | |||||
Advanced Wound Management |
237 | 247 | 233 | |||||
965 | 961 | 969 | ||||||
Operating profit by business segment reconciled to attributable profit for the year |
||||||||
Advanced Surgical Devices |
632 | 630 | 700 | |||||
Advanced Wound Management |
214 | 232 | 220 | |||||
Operating profit |
846 | 862 | 920 | |||||
Net interest receivable/(payable) |
2 | (8) | (15) | |||||
Other finance costs |
(3) | (6) | (10) | |||||
Share of results of associates |
4 | | | |||||
Profit on disposal on net assets held for sale |
251 | | | |||||
Taxation |
(371) | (266) | (280) | |||||
Attributable profit for the year |
729 | 582 | 615 |
Section 7 Accounts and other information |
99 |
2.3 Assets and liabilities by business segment and geography
Business Segment
2012 $ million |
2011 $ million |
2010 $ million |
||||
Balance sheet |
||||||
Assets: |
||||||
Advanced Surgical Devices |
3,518 | 3,396 | 3,547 | |||
Advanced Wound Management |
1,776 | 819 | 755 | |||
Operating assets by business segment |
5,294 | 4,215 | 4,302 | |||
Assets held for sale (relating to Advanced Surgical Devices business segment) |
| 125 | | |||
Unallocated corporate assets |
348 | 407 | 431 | |||
Total assets |
5,642 | 4,747 | 4,733 | |||
Liabilities: |
||||||
Advanced Surgical Devices |
530 | 526 | 581 | |||
Advanced Wound Management |
256 | 169 | 146 | |||
Operating liabilities by business segment |
786 | 695 | 727 | |||
Liabilities directly associated with assets held for sale (relating to Advanced Surgical Devices business segment) |
| 19 | | |||
Unallocated corporate liabilities |
972 | 846 | 1,233 | |||
Total liabilities |
1,758 | 1,560 | 1,960 | |||
Unallocated corporate assets and liabilities comprise the following:
|
||||||
2012 $ million |
2011 $ million |
2010 $ million |
||||
Deferred tax assets |
164 | 223 | 224 | |||
Retirement benefit asset |
6 | | | |||
Cash and bank |
178 | 184 | 207 | |||
Unallocated corporate assets |
348 | 407 | 431 | |||
Long-term borrowings |
430 | 16 | 642 | |||
Retirement benefit obligations |
266 | 287 | 262 | |||
Deferred tax liabilities |
61 | 66 | 69 | |||
Bank overdrafts and loans due within one year |
38 | 306 | 57 | |||
Current tax payable |
177 | 171 | 203 | |||
Unallocated corporate liabilities |
972 | 846 | 1,233 | |||
2012 $ million |
2011 $ million |
2010 $ million |
||||
Capital expenditure |
||||||
Advanced Surgical Devices |
188 | 334 | 285 | |||
Advanced Wound Management |
839 | 31 | 30 | |||
1,027 | 365 | 315 |
100 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
2 Business segment information continued
2.3 Assets and liabilities by business segment and geography continued
Capital expenditure segmentally allocated above comprises:
2012 $ million |
2011 $ million |
2010 $ million |
||||
Additions to property, plant and equipment |
197 | 229 | 250 | |||
Additions to intangible assets |
68 | 92 | 65 | |||
Capital expenditure (excluding business combinations) |
265 | 321 | 315 | |||
Acquisitions Goodwill |
73 | 44 | | |||
Acquisitions Intangible assets |
662 | | | |||
Acquisitions Property, plant and equipment |
27 | | | |||
Capital expenditure |
1,027 | 365 | 315 | |||
2012 $ million |
2011 $ million |
2010 $ million |
||||
Depreciation, amortisation and impairment |
||||||
Advanced Surgical Devices |
274 | 259 | 236 | |||
Advanced Wound Management |
38 | 38 | 37 | |||
312 | 297 | 273 |
Amounts comprise depreciation of property, plant and equipment, amortisation of other intangible assets, impairment of investments and amortisation of acquisition intangibles and impairments as follows:
Section 7 Accounts and other information |
101 |
2.4 Other business segment information
2012 $ million |
2011 $ million |
2010 $ million |
||||
Other significant expenses recognised within operating profit |
||||||
Advanced Surgical Devices |
57 | 32 | 10 | |||
Advanced Wound Management |
19 | 8 | 5 | |||
76 | 40 | 15 |
The $76m incurred in 2012 relates to $65m restructuring and rationalisation expenses and $11m acquisition related costs (2011 $40m relates to restructuring and rationalisation expenses, 2010 $15m relates to restructuring and rationalisation expenses).
2012 numbers |
2011 numbers |
2010 numbers |
||||
Average number of employees |
||||||
Advanced Surgical Devices |
7,194 | 7,611 | 7,179 | |||
Advanced Wound Management |
3,283 | 3,132 | 2,993 | |||
10,477 | 10,743 | 10,172 |
3 Operating profit
Accounting policies |
Research and development
The Group considers that the regulatory, technical and market uncertainties inherent in the development of new products means that development costs should not be capitalised as intangible assets until products receive approval from the appropriate regulatory body. Substantially all development expenditure is complete by the time the product is submitted for regulatory approval. Consequently the majority of expenditure on research and development is expensed as incurred.
Advertising costs
Expenditure on advertising costs is expensed as incurred.
|
2012 $ million |
2011 $ million |
2010 $ million |
||||
Revenue |
4,137 | 4,270 | 3,962 | |||
Cost of goods sold (i) |
(1,070) | (1,140) | (1,031) | |||
Gross profit |
3,067 | 3,130 | 2,931 | |||
Research and development expenses |
(171) | (167) | (151) | |||
Selling, general and administrative expenses: |
||||||
Marketing, selling and distribution expenses (ii) |
(1,440) | (1,526) | (1,414) | |||
Administrative expenses (iii) (iv) (v) (vi) |
(610) | (575) | (446) | |||
(2,050) | (2,101) | (1,860) | ||||
Operating profit |
846 | 862 | 920 |
(i) | 2012 includes $3m of restructuring and rationalisation expenses (2011 $7m , 2010 $nil). |
(ii) | 2012 includes $nil of restructuring and rationalisation expenses (2011 $nil, 2010 $3m). |
(iii) | 2012 includes $51m of amortisation of other intangible assets (2011 $42m, 2010 $34m). |
(iv) | 2012 includes $62m of restructuring and rationalisation expenses and $43m of amortisation of acquisition intangibles (2011 $33m of restructuring and rationalisation expenses and $36m of amortisation of acquisition intangibles, 2010 $12m of restructuring and rationalisation expenses and $34m of amortisation of acquisition intangibles). |
(v) | 2012 includes $nil relating to legal provision (2011 $23m, 2010 $nil). |
(vi) | 2012 includes $11m of acquisition related costs (2011 $nil, 2010 $nil). |
Note that items detailed in (i), (ii), (iv), (v) and (vi) are excluded from the calculation of trading profit.
102 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
3 Operating profit continued
Operating profit is stated after charging the following items:
Section 7 Accounts and other information |
103 |
Acquisition related costs of $11m (2011 $nil, 2010 $nil) were incurred in the twelve month period to 31 December 2012. These costs relate to professional and advisor fees in connection with the acquisition of Healthpoint Biotherapeutics which was completed on 21 December 2012.
3.4 Restructuring and rationalisation expenses
Restructuring and rationalisation costs of $65m (2011 $40m, 2010 $15m) were incurred in the twelve month period to 31 December 2012. Charges of $65m (2011 $26m, 2010 - $nil) were incurred, relating mainly to people costs and contract termination costs associated with the structural and process changes announced in August 2011. During 2012, no charges (2011 $14m, 2010 $15m) were incurred in relation to the earnings improvement programme which was completed in 2011.
3.5 Legal provision
In 2011, the Group established a provision of $23m in connection with the previously disclosed investigation by the US Securities and Exchange Commission (SEC) and Department of Justice (DOJ) into potential violations of the U.S. Foreign Corrupt Practices Act in the medical devices industry.
On 6 February 2012, Smith & Nephew announced that it had reached settlement with the SEC and DOJ in connection with this matter and committed to pay slightly less than $23m in fines and profit disgorgement which have all been paid. Smith & Nephew also agreed to maintain an enhanced compliance programme and appoint an independent monitor for at least 18 months to review and report on its compliance programme.
4 Interest and other finance costs
4.1 Interest receivable/(payable)
Foreign exchange gains or losses recognised in the income statement arose primarily on the translation of intercompany and third party borrowings and amounted to a net $5m loss in 2012 (2011 net $3m gain, 2010 net $8m gain). These amounts were fully matched in the income statement by the fair value gains or losses on currency swaps (carried at fair value through profit and loss) held to manage this currency risk.
104 Smith & Nephew Annual Report 2012
|
Notes to the Group accounts continued |
5 Taxation
Accounting policy
|
The charge for current taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using rates that have been enacted or substantively enacted by the balance sheet date. The accounting policy for deferred taxation is set out in Note 17.
The Group operates in multiple tax jurisdictions around the world and records provisions for taxation liabilities and tax audits when it is considered probable that a tax charge will arise and the amount can be reliably estimated. Although Group policy is to submit its tax returns to the relevant tax authorities as promptly as possible, at any time the Group has unagreed years outstanding and is involved in disputes and tax audits. Significant issues may take many years to resolve. In estimating the probability and amount of any tax charge management takes into account the views of internal and external advisers and updates the amount of the provision whenever necessary. The ultimate tax liability may differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation.
|
Taxation charge attributable to the Group
2012 $ million |
2011 $ million |
2010 $ million |
||||
Current taxation: |
||||||
UK corporation tax at 24.5% (2011 26.5%, 2010 28%) |
53 | 56 | 52 | |||
Overseas tax |
248 | 214 | 238 | |||
Current income tax charge |
301 | 270 | 290 | |||
Adjustments in respect of prior periods |
(17) | (16) | (18) | |||
Total current taxation |
284 | 254 | 272 | |||
Deferred taxation: |
||||||
Origination and reversal of temporary differences |
88 | 18 | 4 | |||
Changes in tax rates |
(3) | (3) | (2) | |||
Adjustments to estimated amounts arising in prior periods |
2 | (3) | 6 | |||
Total deferred taxation |
87 | 12 | 8 | |||
Total taxation as per the income statement |
371 | 266 | 280 | |||
Deferred taxation in other comprehensive income |
(20) | (24) | 7 | |||
Deferred taxation in equity |
| 2 | | |||
Taxation attributable to the Group |
351 | 244 | 287 |
The tax charge was increased by $82m in 2012 as a consequence of the profit on disposal of net assets held for sale after adjusting for acquisition related costs, restructuring and rationalisation expenses and amortisation of acquisition intangibles. In 2011 and 2010 (2011 $17m and 2010 $10m) the tax charge was reduced as a consequence of restructuring and rationalisation expenses, amortisation of acquisition intangibles and legal provision.
The applicable tax for the year is based on the United Kingdom standard rate of corporation tax of 24.5% (2011 26.5%, 2010 28%). Overseas taxation is calculated at the rates prevailing in the respective jurisdictions. The average effective tax rate differs from the applicable rate as follows:
2012 % |
2011 % |
2010 % |
||||
UK standard rate |
24.5 | 26.5 | 28.0 | |||
Non-deductible/non-taxable items |
0.4 | (0.5) | 0.2 | |||
Prior year items |
(1.3) | (1.6) | (1.5) | |||
Tax losses incurred not relieved/(utilised not previously recognised) |
0.8 | 0.3 | (0.2) | |||
Overseas income taxed at other than UK standard rate |
9.3 | 6.7 | 4.8 | |||
Total effective tax rate |
33.7 | 31.4 | 31.3 |
The enacted UK tax rate applicable from 1 April 2013 was reduced to 23% and the UK Government announced policy to reduce the tax rate to 21%. It is expected that if the stated policy is enacted deferred tax credits will arise.
Section 7 Accounts and other information |
105 |
6 Earnings per Ordinary Share
Accounting policies
|
Basic earnings per share is calculated by dividing the profit attributable to equity holders by the weighted average number of Ordinary Shares in issue during the year, excluding shares held by the Company in the Employees Share Trust or as treasury shares.
Adjusted earnings per share
Adjusted earnings per share is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affects the Groups short-term profitability. The Group presents this measure to assist investors in their understanding of trends. Adjusted attributable profit is the numerator used for this measure. The Group has identified the following items, where material, as those to be excluded when arriving at adjusted attributable profit: acquisition and disposal related items including amortisation of acquisition intangible assets and impairments; significant restructuring events; gains and losses arising from legal disputes and uninsured losses; and taxation thereon.
The calculations of the basic, diluted and adjusted earnings per Ordinary Share are based on the following earnings and numbers of shares:
|
Share options not included in the diluted EPS calculation because they were non-dilutive in the period totalled 8.2m (2011 12.9m, 2010 2.5m).
106 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
7 Property, plant and equipment
Section 7 Accounts and other information |
107 |
Land and buildings includes land with a cost of $15m (2011 $14m) that is not subject to depreciation. Assets held under finance leases with a net book amount of $11m (2011 $12m) are included within land and buildings and $nil (2011 $8m) are included within plant and equipment.
Capital expenditure represents the Groups expected annual investment in property, plant and equipment and other intangible assets. This varies between 7% and 8% (2011 8%) of annual revenue.
Group capital expenditure relating to property, plant and equipment contracted but not provided for amounted to $4m (2011 $9m).
In September 2012 and 2011 impairment reviews were performed by comparing the recoverable amount of each CGU with its carrying amount, including goodwill. These are updated during December, taking into account significant events that occurred between September and December.
For each CGU, the recoverable amounts are based on value-in-use which is calculated from pre-tax cash flow projections for five years using data from the Groups budget and strategic planning process, the results of which are reviewed and approved by the Board. These projections exclude any estimated future cash inflows or outflows expected to arise from future restructurings. The five-year period is in line with the Groups strategic planning process.
108 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
8 Goodwill continued
The calculation of value-in-use for the identified CGUs is most sensitive to discount and growth rates as set out below:
The discount rate reflects managements assessment of risks specific to the assets of each CGU. The pre-tax discount rate used in the Advanced Surgical Devices business is 10% and for the Advanced Wound Management business it is 9% (2011 9%).
In determining the growth rate used in the calculation of the value-in-use, the Group considered the annual sales growth and trading profit margins. Projections are based on anticipated volume and value growth in the markets served by the Group and assumptions as to market share movements. Each year the projections for the previous year are compared to actual results and variances are factored into the assumptions used in the current year. Growth rates for the five-year period for the Advanced Surgical Devices business vary up to 7% and for the Advanced Wound Management business up to 9% (2011 8%).
Specific considerations and strategies taken into account in determining the sales growth and trading profit margin for each CGU are:
| Advanced Surgical Devices In the Advanced Surgical Devices CGU management intends to deliver growth through continuing to focus on the customer, high quality customer service, innovative product development and through continuing to make efficiency improvements. |
| Advanced Wound Management Management intends to develop this CGU by focusing on the higher added value sectors of exudate and infection management through improved wound bed preparation, moist and active healing and negative pressure wound therapy, and by continuing to improve efficiency. |
A long-term growth rate of 4% (2011 4%) in pre-tax cash flows is assumed after five years in calculating a terminal value for the Groups CGUs. Management considers this to be an appropriate estimate based on the growth rates of the markets in which the Group operates.
Management has considered the following sensitivities:
| Growth of market and market share Management has considered the impact of a variance in market growth and market share. The value-in-use calculation shows that if the assumed long-term growth rate was reduced to nil, the recoverable amount of all of the CGUs independently would still be greater than their carrying values. |
| Discount rate Management has considered the impact of an increase in the discount rate applied to the calculation. The value-in-use calculation shows that for the recoverable amount of the CGU to be less than its carrying value, the discount rate would have to be increased to 31% for the Advanced Surgical Devices business and 49% (2011 51%) for the Advanced Wound Management business. |
9 Intangible assets
Accounting policies
Intangible assets
Intangible assets acquired separately from a business combination (including purchased patents, know-how, trademarks, licences and distribution rights) are initially measured at cost. The cost of intangible assets acquired in a material business combination (referred to as acquisition intangibles) is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. All intangible assets are amortised on a straight line basis over their estimated useful economic lives. The estimated useful economic life of an intangible asset ranges between three and 20 years depending on its nature. Internally generated intangible assets are expensed in the income statement as incurred.
Purchased computer software and certain costs of information technology projects are capitalised as intangible assets. Software that is integral to computer hardware is capitalised as plant and equipment.
Impairment of assets
The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which it belongs.
An assets recoverable amount is the higher of an assets or cash-generating units fair value less costs to sell and its value-in-use. In assessing value-in-use, its estimated future cash flow is discounted to its present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset.
In carrying out impairment reviews of intangible assets a number of significant assumptions have to be made when preparing cash flow projections. These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses or products, levels of reimbursement and success in obtaining regulatory approvals. If actual results should differ, or changes in expectations arise, impairment charges may be required which would adversely impact operating results.
|
Section 7 Accounts and other information |
109 |
Acquisition intangibles $ million |
Software $ million |
Distribution Rights $ million |
Patents & Intellectual Property $ million |
Total $ million |
||||||
Cost |
||||||||||
At 1 January 2011 |
440 | 145 | 53 | 113 | 751 | |||||
Exchange adjustment |
(4) | 1 | | | (3) | |||||
Additions |
| 32 | 7 | 53 | 92 | |||||
Disposals |
| (5) | | (1) | (6) | |||||
Transferred to assets held for sale |
| (3) | | (22) | (25) | |||||
At 31 December 2011 |
436 | 170 | 60 | 143 | 809 | |||||
Exchange adjustment |
11 | 1 | | 2 | 14 | |||||
Acquisitions (see Note 22.1) (i) |
662 | | | | 662 | |||||
Additions |
| 37 | | 31 | 68 | |||||
Disposals |
| (3) | (17) | | (20) | |||||
At 31 December 2012 |
1,109 | 205 | 43 | 176 | 1,533 | |||||
Amortisation and impairment |
||||||||||
At 1 January 2011 |
200 | 47 | 24 | 54 | 325 | |||||
Exchange adjustment |
(2) | | | | (2) | |||||
Charge for the year |
36 | 22 | 10 | 10 | 78 | |||||
Disposals |
| (3) | | (1) | (4) | |||||
Transferred to assets held for sale |
| (1) | | (10) | (11) | |||||
At 31 December 2011 |
234 | 65 | 34 | 53 | 386 | |||||
Exchange adjustment |
6 | | | | 6 | |||||
Charge for the year |
43 | 26 | 10 | 15 | 94 | |||||
Disposals |
| | (17) | | (17) | |||||
At 31 December 2012 |
283 | 91 | 27 | 68 | 469 | |||||
Net book amounts |
||||||||||
At 31 December 2012 |
826 | 114 | 16 | 108 | 1,064 | |||||
At 31 December 2011 |
202 | 105 | 26 | 90 | 423 |
(i) | The vast majority of this balance relates to the acquisition of the product rights for two established Healthpoint products (see Note 22.1). These product rights will be amortised over 15 years. |
Group capital expenditure relating to software contracted but not provided for amounted to $4m (2011 $nil).
Commitments
In 2011, the Group was contractually committed to four milestone payments, which totalled $60m and related to the US approval and commercialisation of DUROLANE which would become payable under the terms of the agreement with Q-MED AB signed in June 2006. This commitment transferred to the Groups new associate, Bioventus LLC following the disposal of the Clinical Therapies business during 2012. This transaction is detailed further in Note 22.2.
110 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
10 Investments
Accounting policy
Investments, other than those related to associates, are initially recorded at fair value plus transaction costs on the trade date. The Group has an investment in an entity that holds mainly unquoted equity securities, which by their very nature have no fixed maturity date or coupon rate. The investment is classed as available-for-sale and carried at fair value. The fair value of the investment is based on the underlying fair value of the equity securities: marketable securities are valued by reference to closing prices in the market; non-marketable securities are estimated considering factors including the purchase price, prices of recent significant private placements of securities of the same issuer and estimates of liquidation value. The Group assesses whether there is objective evidence that the investment is impaired. Any objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Changes in fair value are recognised in other comprehensive income except where management considers that there is objective evidence of an impairment of the underlying equity securities, whereupon an impairment is recognised as an expense immediately.
|
2012 $ million |
2011 $ million |
|||
At 1 January |
4 | 6 | ||
Impairment |
(2) | (2) | ||
At 31 December |
2 | 4 |
11 Investments in associates
Accounting policy
Investments in associates, being those entities over which the Group has a significant influence and which is neither a subsidiary nor a joint venture, are accounted for using the equity method, with the Group recording its share of the associates net income and equity. The Groups share in the results of its associates is included in one separate income statement line and is calculated after deduction of their respective taxes.
|
At 31 December 2011 and 31 December 2012, the Group holds 49% of the Austrian entities Plus Orthopedics GmbH and Intraplant GmbH and 20% of the German entity Intercus GmbH. In 2012, the profit after taxation recognised in the income statement relating to the Plus entity was $nil (2011 $nil).
In January 2012, the Group announced its intention to dispose of its Clinical Therapies business. This was completed on 4 May 2012. As part of the consideration, the Group received a 49% holding in a company called Bioventus LLC. The profit after taxation recognised in the income statement relating to Bioventus LLC for the period from acquisition was $4m.
The following table summarises the financial position of the Groups investment in these associates:
2012 $ million |
2011 $ million |
|||
Share of results of associates: |
||||
Revenue |
80 | 11 | ||
Operating costs and taxation |
(76) | (11) | ||
Share of associates profit after taxation recognised in the income statement |
4 | | ||
Investments in associates at 1 January |
13 | 13 | ||
Investment of 49% in Bioventus |
104 | | ||
Additional investment in Bioventus |
10 | | ||
Dividends received |
(7) | | ||
Impairment of goodwill in Austrian associate |
(4) | | ||
Other non-cash movements |
(4) | | ||
Investments in associates at 31 December |
116 | 13 | ||
Investments in associates is represented by: |
||||
Assets |
213 | 10 | ||
Liabilities |
(97) | (1) | ||
Net assets |
116 | 9 | ||
Goodwill |
| 4 | ||
116 | 13 | |||
Loans to associates: |
||||
Loan note receivable from Bioventus |
160 | | ||
Accrued interest on loan note receivable |
7 | | ||
167 | |
Section 7 Accounts and other information |
111 |
12 Inventories
Accounting policy
Finished goods and work-in-progress are valued at factory cost, including appropriate overheads, on a first-in first-out basis. Raw materials and bought-in finished goods are valued at purchase price. All inventories are reduced to net realisable value where lower than cost. Inventory acquired as part of a business acquisition is valued at selling price less costs of disposal and a profit allowance for selling efforts.
Orthopaedic instruments are generally not sold but provided to customers and distributors for use in surgery. They are recorded as inventory until they are deployed at which point they are transferred to plant and equipment and depreciated over their useful economic lives of between three and five years.
A feature of the orthopaedic business is the high level of product inventory required, some of which is located at customer premises and is available for customers immediate use (referred to as consignment inventory). Complete sets of product, including large and small sizes, have to be made available in this way. These outer sizes are used less frequently than standard sizes and towards the end of the product life cycle are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopaedic inventory to anticipate this situation. These adjustments are calculated in accordance with a formula based on levels of inventory compared with historical or forecast usage. This formula is applied on an individual product line basis and is first applied when a product group has been on the market for two years. This method of calculation is considered appropriate based on experience but it involves management judgments on effectiveness of inventory deployment, length of product lives, phase-out of old products and efficiency of manufacturing planning systems.
|
2012 $ million |
2011 $ million |
2010 $ million |
||||
Raw materials and consumables |
138 | 140 | 159 | |||
Work-in-progress |
45 | 24 | 23 | |||
Finished goods and goods for resale |
718 | 695 | 741 | |||
901 | 859 | 923 |
Reserves for excess and obsolete inventories were $332m (2011 $322m, 2010 $322m). During 2012, $84m was recognised as an expense within cost of goods sold resulting from the write down of excess and obsolete inventory (2011 $65m, 2010 $66m). The cost of inventories recognised as an expense and included in cost of goods sold amounted to $906m (2011 $991m, 2010 $909m).
No inventory is carried at fair value less costs to sell in any year.
112 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
13 Trade and other receivables
Accounting policy |
Loans and receivables are carried at amortised cost, less any allowances for uncollectible amounts. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and other receivables are classified as Trade and other receivables in the balance sheet.
The Group manages credit risk through credit limits which require authorisation commensurate with the size of the limit and which are regularly reviewed. Credit limit decisions are made based on available financial information and the business case. Significant receivables are regularly reviewed and monitored at Group level. The Group has no significant concentration of credit risk, with exposure spread over a large number of customers. Furthermore the Groups principal customers are backed by government and public or private medical insurance funding, which historically represent a lower risk of default. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable. The Group does not hold any collateral as security.
|
2012 $ million |
2011 $ million |
2010 $ million |
||||
Trade receivables |
964 | 936 | 952 | |||
Less: provision for bad and doubtful debts |
(49) | (36) | (49) | |||
Trade receivables net (loans and receivables) |
915 | 900 | 903 | |||
Derivatives forward foreign exchange contracts |
12 | 21 | 23 | |||
Other receivables |
65 | 50 | 55 | |||
Prepayments and accrued income |
73 | 66 | 65 | |||
1,065 | 1,037 | 1,046 | ||||
Less non-current portion: Trade receivables |
| | (22) | |||
Current portion |
1,065 | 1,037 | 1,024 |
Management considers that the carrying amount of trade and other receivables approximates to the fair value.
The provision for bad and doubtful debts is based on specific assessments of risk and reference to past default experience. The bad debt expense for the year was $16m (2011 $42m, 2010 $30m). Amounts due from insurers in respect of the macrotextured claim of $137m (2011 $136m, 2010 $133m) are included within other receivables and have been provided in full.
The amount of trade receivables that were past due but not impaired were as follows:
2012 $ million |
2011 $ million |
2010 $ million |
||||
Past due not more than three months |
225 | 198 | 168 | |||
Past due more than three months and not more than six months |
52 | 51 | 52 | |||
Past due more than six months and not more than one year |
52 | 59 | 57 | |||
Past due more than one year |
80 | 94 | 59 | |||
409 | 402 | 336 | ||||
Neither past due nor impaired |
555 | 534 | 616 | |||
Provision for bad and doubtful debts |
(49) | (36) | (49) | |||
Trade receivables net (loans and receivables) |
915 | 900 | 903 | |||
Movements in the provision for bad and doubtful debts were as follows: |
||||||
At 1 January |
36 | 49 | 47 | |||
Exchange adjustment |
| (1) | | |||
Receivables provided for during the year |
16 | 42 | 30 | |||
Utilisation of provision |
(3) | (34) | (28) | |||
Provision transferred to assets held for sale |
| (20) | | |||
At 31 December |
49 | 36 | 49 |
In 2012, $nil trade receivables from third parties are held under factoring agreements with recourse (2011 $nil, 2010 $11m). The amounts disclosed in prior years did not qualify for de-recognition as the Group retained part of the credit risk. The associated liability amounted to $4m in 2010 and was accounted for as a part of current payables.
Section 7 Accounts and other information |
113 |
Trade receivables include amounts denominated in the following major currencies:
2012 $ million |
2011 $ million |
2010 $ million |
||||
US Dollar |
258 | 238 | 282 | |||
Sterling |
100 | 75 | 72 | |||
Euro |
276 | 317 | 283 | |||
Other |
281 | 270 | 266 | |||
Trade receivables net (loans and receivables) |
915 | 900 | 903 |
14 Trade and other payables
2012 $ million |
2011 $ million |
|||
Trade and other payables due within one year |
||||
Trade and other payables |
646 | 549 | ||
Derivatives forward foreign exchange contracts |
10 | 12 | ||
Acquisition consideration |
| 3 | ||
656 | 564 | |||
Other payables due after one year: |
||||
Acquisition consideration |
8 | 8 |
The acquisition consideration due after more than one year is expected to be payable as follows: $8m in 2014 (2011 $8m in 2014).
15.1 Net debt
Net debt comprises borrowings and credit balances on currency swaps less cash and bank.
2012 $ million |
2011 $ million |
|||
Bank overdrafts and loans due within one year |
38 | 306 | ||
Long-term borrowings |
430 | 16 | ||
Borrowings |
468 | 322 | ||
Cash and bank |
(178) | (184) | ||
Debit balance on derivatives currency swaps |
(2) | | ||
Net debt |
288 | 138 |
Borrowings are repayable as follows:
Within one year or on demand $ million |
Between one and two years $ million |
Between
years $ million |
Between three and four years $ million |
Between four and five years $ million |
After five years $ million |
Total $ million |
||||||||||
At 31 December 2012: |
||||||||||||||||
Bank loans |
25 | 1 | 415 | | | | 441 | |||||||||
Bank overdrafts |
11 | | | | | | 11 | |||||||||
Finance lease liabilities |
2 | 2 | 2 | 2 | 2 | 6 | 16 | |||||||||
38 | 3 | 417 | 2 | 2 | 6 | 468 | ||||||||||
At 31 December 2011: |
||||||||||||||||
Bank loans |
280 | 1 | | | | | 281 | |||||||||
Bank overdrafts |
23 | | | | | | 23 | |||||||||
Finance lease liabilities |
3 | 1 | 2 | 2 | 2 | 8 | 18 | |||||||||
306 | 2 | 2 | 2 | 2 | 8 | 322 |
114 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
15 Cash and borrowings continued
15.2 Assets pledged as security
Assets are pledged as security under normal market conditions. Secured borrowings and pledged assets are as follows:
2012 $ million |
2011 $ million |
|||
Finance lease liabilities due within one year |
2 | 3 | ||
Finance lease liabilities due after one year |
14 | 15 | ||
Total amount of secured borrowings |
16 | 18 | ||
Total net book value of assets pledged as security: |
||||
Property, plant and equipment |
11 | 20 | ||
11 | 20 |
15.3 Currency swap analysis
All currency swaps are stated at fair value. Gross US Dollar equivalents of $175m (2011 $112m) receivable and $173m (2011 $112m) payable have been netted. Currency swaps comprise foreign exchange swaps and were used in 2012 and 2011 to hedge intragroup loans and other monetary items.
Currency swaps mature as follows:
At 31 December 2012 |
Amount receivable $ million |
Amount payable Currency million |
||
Within one year: |
||||
Euro |
76 | EUR 58 | ||
Japanese Yen |
19 | JPY 1,500 | ||
Canadian Dollar |
17 | CAD 17 | ||
112 | ||||
At 31 December 2012 |
Amount receivable Currency million |
Amount payable $ million |
||
Within one year: |
||||
New Zealand Dollar |
NZD 1 | 1 | ||
Swiss Franc |
CHF 35 | 38 | ||
Swedish Krona |
SEK 33 | 5 | ||
Australian Dollar |
AUD 14 | 15 | ||
Japanese Yen |
JPY 335 | 4 | ||
63 | ||||
At 31 December 2011 |
Amount receivable $ million |
Amount payable Currency million |
||
Within one year: |
||||
Euro |
1 | EUR 1 | ||
Japanese Yen |
20 | JPY 1,500 | ||
Canadian Dollar |
33 | CAD 34 | ||
54 | ||||
At 31 December 2011 |
Amount receivable Currency million |
Amount payable $ million |
||
Within one year: |
||||
Swiss France |
CHF 18 | 19 | ||
Swedish Krona |
SEK 20 | 3 | ||
Australian Dollar |
AUD 36 | 36 | ||
58 |
Section 7 Accounts and other information |
115 |
15.4 Liquidity risk exposures
The Board has established a set of policies to manage funding and currency risks. The Group uses derivative financial instruments only to manage the financial risks associated with underlying business activities and their financing.
Liquidity risk is the risk that the Group is not able to settle or meet its obligations on time or at a reasonable price. The Groups policy is to ensure that there is sufficient funding and facilities in place to meet foreseeable borrowing requirements. The Group manages and monitors liquidity risk through regular reporting of current cash and borrowing balances and periodic preparation and review of short- and medium-term cash forecasts having regard to the maturities of investments and borrowing facilities.
Bank loans and overdrafts represent drawings under total committed facilities of $1,017m (2011 $1,259m) and total uncommitted facilities of $341m (2011 $375m). The Group has undrawn committed facilities of $597m (2011 $1,003m). Of the undrawn committed facilities, $586m expires after two but within five years (2011 $1,000m expired after two but within five years). The interest payable on borrowings under committed facilities is at floating rate and is typically based on the LIBOR interest rate relevant to the term and currency concerned. Borrowings are shown at book value which approximates to fair value.
In December 2010, the Company entered into a five-year $1 billion multi-currency revolving facility with an initial interest rate of 70 basis points over LIBOR. The commitment fee on the undrawn amount of the revolving facility is 24.5 basis points. The Company is subject to restrictive covenants under the facility agreement requiring the Groups ratio of net debt to EBITDA to not exceed 3.0 to 1 and the ratio of EBITA to net interest to not be less than 3.0 to 1, with net debt, EBITDA, EBITA and net interest all being calculated as defined in the agreement. These financial covenants are tested at the end of each half year for the 12 months ending on the last day of the testing period. As of 31 December 2012, the Company was in compliance with these covenants. The facility is also subject to customary events of default, none of which are currently anticipated to occur.
15.5 Year-end financial liabilities by contractual maturity
The table below analyses the Groups year-end financial liabilities by contractual maturity date, including interest payments and excluding the impact of netting arrangements:
Within one year or on demand $ million |
Between one and two years $ million |
Between two and five years $ million |
After five years $ million |
Total $ million |
||||||
At 31 December 2012 |
||||||||||
Non-derivative financial liabilities: |
||||||||||
Bank overdrafts and loans |
42 | 4 | 418 | | 464 | |||||
Trade and other payables |
646 | 8 | | | 654 | |||||
Finance lease liabilities |
3 | 3 | 9 | 6 | 21 | |||||
Derivative financial liabilities: |
||||||||||
Currency swaps/forward foreign exchange contracts outflow |
1,422 | | | | 1,422 | |||||
Currency swaps/forward foreign exchange contracts inflow |
(1,424) | | | | (1,424) | |||||
689 | 15 | 427 | 6 | 1,137 | ||||||
At 31 December 2011 |
||||||||||
Non-derivative financial liabilities: |
||||||||||
Bank overdrafts and loans |
305 | | | | 305 | |||||
Trade and other payables |
549 | | | | 549 | |||||
Finance lease liabilities |
4 | 3 | 9 | 9 | 25 | |||||
Derivative financial liabilities: |
||||||||||
Currency swaps/forward foreign exchange contracts outflow |
1,053 | | | | 1,053 | |||||
Currency swaps/forward foreign exchange contracts inflow |
(1,052) | | | | (1,052) | |||||
859 | 3 | 9 | 9 | 880 |
The amounts in the tables above are undiscounted cash flows, which differ from the amounts included in the balance sheet where the underlying cash flows have been discounted.
116 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
15 Cash and borrowings continued
15.6 Finance leases
Accounting policy |
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases.
Assets held under finance leases are capitalised as property, plant or equipment and depreciated accordingly. The capital element of future lease payments is included in borrowings and interest is charged to profit before taxation on a reducing balance basis over the term of the lease.
Future minimum lease payments under finance leases together with the present value of the minimum lease payments are as follows:
|
2012 $ million |
2011 $ million |
|||||
Within one year |
3 | 4 | ||||
After one and within two years |
3 | 3 | ||||
After two and within three years |
3 | 3 | ||||
After three and within four years |
3 | 3 | ||||
After four and within five years |
3 | 3 | ||||
After five years |
6 | 9 | ||||
Total minimum lease payments |
21 | 25 | ||||
Discounted by imputed interest |
(5) | (7) | ||||
Present value of minimum lease payments |
16 | 18 |
Present value of minimum lease payments can be split out as: $2m (2011 $3m) due within one year, $8m (2011 $7m) due between one to five years and $6m (2011 $8m) due after five years.
16 Financial instruments and risk management
Accounting policy |
Derivative financial instruments
Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value at subsequent balance sheet dates. The fair value of forward foreign exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments and includes counterparty credit risk.
Changes in the fair value of derivative financial instruments that are designated and effective as cash flow hedges of forecast third party and intercompany transactions are recognised in other comprehensive income until the associated asset or liability is recognised. Amounts taken to other comprehensive income are transferred to the income statement when the hedged transaction affects profit and loss. Where the hedged item is the cost of a non-financial asset, the amounts taken to other comprehensive income are transferred to the initial carrying value of the asset.
Currency swaps to match foreign currency net assets with foreign currency liabilities are fair valued at year-end. Changes in the fair values of currency swaps that are designated and effective as net investment hedges are matched in other comprehensive income against changes in value of the related net assets.
Interest rate swaps transacted to fix interest rates on floating rate borrowings are accounted for as cash flow hedges and changes in the fair values resulting from changes in market interest rates are recognised in other comprehensive income. Amounts taken to other comprehensive income are transferred to the income statement when the hedged transaction affects profit and loss.
Any ineffectiveness on hedging instruments and changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement within other finance income/(costs) as they arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in other comprehensive income is retained there until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in other comprehensive income is transferred to the income statement for the period.
|
Section 7 Accounts and other information |
117 |
16.1 Foreign exchange exposures
The Group operates in over 90 countries and as a consequence has transactional and translational foreign exchange exposure. The Groups policy is to limit the impact of foreign exchange movements on equity by holding liabilities where practical in the same currencies as the Groups non-US Dollar assets. These liabilities take the form of either borrowings or currency swaps. The Group designates a portion of foreign currency borrowings in non-operating units as net investment hedges. As at 31 December 2012, CHFnil (2011 CHF32m) of Group borrowings were designated as net investment hedges; the movement in the fair value of these hedges attributable to changes in exchange rates is recognised directly in other comprehensive income. The fair value of these hedges at 31 December 2012 was $nil (2011 $34m). It is Group policy for operating units not to hold material unhedged monetary assets or liabilities other than in their functional currencies.
Foreign exchange variations affect trading results in two ways. Firstly, on translation of overseas sales and profits into US Dollars and secondly, transactional exposures arising where some or all of the costs of sale are incurred in a different currency from the sale. The principal transactional exposures arise as the proportion of costs in US Dollars, Sterling and Swiss Francs exceed the proportion of sales in each of these currencies and correspondingly the proportion of sales in Euros exceeds the proportion of costs in Euros.
The impact of currency movements on the cost of purchases is partly mitigated by the use of forward foreign exchange contracts. The Group uses forward foreign exchange contracts, designated as cash flow hedges, to hedge forecast third party and intercompany trading cash flows for forecast foreign currency inventory purchases for up to one year. When a commitment is entered into, forward foreign exchange contracts are normally used to increase the hedge to 100% of the exposure. Cash flows relating to cash flow hedges are expected to occur within twelve months of inception and profits and losses on hedges are expected to enter into the determination of profit (within cost of goods sold) within a further 12-month period. The principal currencies hedged by forward foreign exchange contracts are US Dollars, Euros and Sterling. At 31 December 2012, the Group had contracted to exchange within one year the equivalent of $1,250m (2011 $940m).
Based on the Groups borrowings as at 31 December 2012, if the US Dollar were to weaken against all currencies by 10%, the Groups net borrowings would decrease by $8m (2011 increase of $11m). In respect of borrowings held in a different currency to the relevant reporting entity, if the US Dollar were to weaken by 10% against all other currencies, the Groups borrowings would decrease by $4m (2011 increase of $16m). Excluding borrowings designated as net investment hedges, the decrease would be $4m (2011 increase of $13m); this would be fully offset by corresponding movements in group loan values.
If the US Dollar were to weaken by 10% against all other currencies, then the fair value of the forward foreign exchange contracts as at 31 December 2012 would have been $23m lower (2011 $17m), which would be recognised through the hedging reserve. Similarly, if the Euro were to weaken by 10% against all other currencies, then the fair value of the forward foreign exchange contracts as at 31 December 2012 would have been $30m higher (2011 $24m).
A 10% strengthening of the US Dollar or Euro against all other currencies at 31 December 2012 would have had the equal but opposite effect to the amounts shown above, on the basis that all other variables remain constant.
Since it is the Groups policy to hedge all actual foreign exchange exposures and the Groups forward foreign exchange contracts are designated as cash flow hedges, the net impact of transaction related foreign exchange on the income statement from a movement in exchange rates on the value of forward foreign exchange contracts is not significant. In addition, the movements in the fair value of other financial instruments used for hedging such as currency swaps for which hedge accounting is not applied, offset movements in the values of assets and liabilities and are recognised through the income statement.
16.2 Interest rate exposures
The Group is exposed to interest rate risk on cash, borrowings and certain currency swaps which are all at floating rates. The Group uses floating to fixed interest swaps to meet its objective of protecting borrowing costs within parameters set by the Board. Interest rate swaps are accounted for as cash flow hedges and, as such, changes in fair value resulting from changes in market interest rates are recognised in other comprehensive income, with the fair value of the interest rate swaps recorded in the balance sheet. The cash flows resulting from interest rate swaps match cash flows on the underlying borrowings so that there is no net cash flow from movements in market interest rates on the hedged items. At 31 December 2012 the Group had no interest rate swaps (2011 $nil).
Based on the Groups gross borrowings as at 31 December 2012, if interest rates were to increase by 100 basis points in all currencies then the annual net interest charge would increase by $5m (2011 $4m). Excluding the impact of the Groups interest rate hedges, the increase in the interest charge would be $5m (2011 $4m). A decrease in interest rates by 100 basis points in all currencies would have an equal but opposite effect to the amounts shown above.
16.3 Credit risk exposures
The Group limits exposure to credit risk on counterparties used for financial instruments through a system of internal credit limits which, with certain minor exceptions due to local market conditions, require counterparties to have a minimum A rating from one of the major ratings agencies. The financial exposure of a counterparty is determined as the total of cash and deposits, plus the risk on derivative instruments, assessed as the fair value of the instrument plus a risk element based on the nominal value and the historic volatility of the market value of the instrument. The Group does not anticipate non-performance of counterparties and believes it is not subject to material concentration of credit risk as the Group operates within a policy of counterparty limits designed to reduce exposure to any single counterparty.
The maximum credit risk exposure on derivatives at 31 December 2012 was $14m (2011 $21m), being the total debit fair values on forward foreign exchange contracts, interest rate swaps and currency swaps. The maximum credit risk exposure on cash and bank at 31 December 2012 was $178m (2011 $184m). The Groups exposure to credit risk is not material as the amounts are held in a wide number of banks in a number of different countries.
Credit risk on trade receivables is detailed in Note 13.
118 Smith & Nephew Annual Report 2012
|
Notes to the Group accounts continued
16 Financial instruments and risk management continued
16.4 Currency and interest rate profile of interest bearing liabilities and assets
Short-term debtors and creditors are excluded from the following disclosures.
Currency and Interest Rate Profile of Interest Bearing Liabilities:
Fixed rate liabilities | ||||||||||||||||||||||||||
Gross
borrowings $ million |
Currency
$ million |
Total
liabilities $ million |
Floating
rate liabilities $ million |
Fixed
rate liabilities $ million |
Weighted
% |
Weighted
average time for which rate is fixed Years |
||||||||||||||||||||
At 31 December 2012: |
||||||||||||||||||||||||||
US Dollar |
432 | 62 | 494 | 478 | 16 | 7.1 | 4 | |||||||||||||||||||
Euro |
7 | 76 | 83 | 83 | | | | |||||||||||||||||||
Other |
29 | 35 | 64 | 64 | | | | |||||||||||||||||||
Total interest bearing liabilities |
468 | 173 | 641 | 625 | 16 | |||||||||||||||||||||
At 31 December 2011: |
||||||||||||||||||||||||||
US Dollar |
85 | 58 | 143 | 126 | 17 | 7.1 | 5 | |||||||||||||||||||
Swiss Franc |
35 | | 35 | 35 | | 3.0 | 2 | |||||||||||||||||||
Euro |
126 | 1 | 127 | 126 | 1 | 5.0 | 2 | |||||||||||||||||||
Other |
76 | 53 | 129 | 129 | | | | |||||||||||||||||||
Total interest bearing liabilities |
322 | 112 | 434 | 416 | 18 |
At 31 December 2012, $16m (2011 $18m) of fixed rate liabilities relate to finance leases. In 2012, the Group also had liabilities due for deferred acquisition consideration (denominated in US Dollars, Euro and Yen) totalling $8m (2011 $11m, 2010 $nil) on which no interest was payable (see Note 14). There are no other significant interest bearing financial liabilities.
Floating rates on liabilities are typically based on the one or three-month LIBOR interest rate relevant to the currency concerned. The weighted average interest rate on floating rate borrowings as at 31 December 2012 was 1% (2011 2%).
Currency and Interest Rate Profile of Interest Bearing Assets:
Cash and bank $ million |
Currency swaps $ million |
Total assets $ million |
Floating
$ million |
|||||
At 31 December 2012: |
||||||||
US Dollars |
59 | 113 | 172 | 172 | ||||
Other |
119 | 62 | 181 | 181 | ||||
Total interest bearing assets |
178 | 175 | 353 | 353 | ||||
At 31 December 2011: |
||||||||
US Dollars |
56 | 56 | 112 | 112 | ||||
Other |
128 | 56 | 184 | 184 | ||||
Total interest bearing assets |
184 | 112 | 296 | 296 |
Floating rates on assets are typically based on the short-term deposit rates relevant to the currency concerned. There were no fixed rate assets at 31 December 2012 or 31 December 2011.
Section 7 Accounts and other information |
119 |
16.5 Fair value of financial assets and liabilities
For cash and cash equivalents, short-term loans and receivables, overdrafts and other short-term liabilities which have a maturity of less than three months the book values approximate the fair values because of their short-term nature.
Forward foreign exchange contracts are recorded at fair value. These are regarded as Level 2 financial instruments measured at fair value. Level 2 financial instruments are defined as: Valuation techniques for which all observable inputs have a significant effect on the recorded fair values, either directly or indirectly. The Group only has Level 2 financial instruments measured at fair value.
The Group enters into derivative financial instruments with financial institutions with investment grade credit ratings. Derivatives valued using valuation techniques with market observable inputs are mainly interest rate swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates, interest rate curves and forward rate curves.
As at 31 December 2012 and 31 December 2011, the mark-to-market value of a derivative asset position is net of a credit valuation adjustment attributable to derivative counterparty default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness for derivatives designated in hedge relationships and other financial instruments recognised at fair value.
Long-term borrowings are measured in the balance sheet at amortised cost. As the Groups long-term borrowings are not quoted publicly and as market prices are not available their fair values are estimated by discounting future contractual cash flows to net present values at the current market interest rates available to the Group for similar financial instruments as at the year-end. At 31 December 2012 and 31 December 2011, the fair value of the Groups long-term borrowing was not materially different from amortised cost.
Accounting policy |
Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences arising between the carrying amount of assets and liabilities in the accounts and the corresponding tax bases used in computation of taxable profit.
Deferred tax liabilities are recognised for all taxable temporary differences except in respect of investments in subsidiaries where the Group is able to control the timing of the reversal of the temporary difference and it is probable that this will not reverse in the foreseeable future; on the initial recognition of non-deductible goodwill; and on the initial recognition of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, does not affect the accounting or taxable profit.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary difference can be utilised. Their carrying amount is reviewed at each balance sheet date on the same basis.
Deferred tax is measured on an undiscounted basis, and at the tax rates that have been enacted or substantively enacted by the balance sheet date that are expected to apply in the periods in which the asset or liability is settled. It is recognised in the income statement except when it relates to items credited or charged directly to other comprehensive income or equity, in which case the deferred tax is also dealt with in other comprehensive income or equity respectively.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority, when the Group intends to settle its current tax assets and liabilities on a net basis and that authority permits the Group to make a single net payment.
|
120 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
17 Deferred taxation continued
Movements in the main components of deferred tax assets and liabilities were as follows:
Retirement benefit obligation $ million |
Macro- textured claim $ million |
Other $ million |
Total $ million |
|||||
Deferred tax assets: |
||||||||
At 1 January 2011 |
54 | 52 | 118 | 224 | ||||
Exchange adjustment |
| | (2) | (2) | ||||
Movement in income statement current year |
(7) | | (11) | (18) | ||||
Movement in income statement prior years |
| | (2) | (2) | ||||
Movement in other comprehensive income |
31 | | | 31 | ||||
Charge to equity |
| | (1) | (1) | ||||
Transfers |
1 | | (10) | (9) | ||||
At 31 December 2011 |
79 | 52 | 92 | 223 | ||||
Exchange adjustment |
| | 1 | 1 | ||||
Movement in income statement current year |
(4) | | (85) | (89) | ||||
Movement in income statement prior years |
2 | | (4) | (2) | ||||
Movement in other comprehensive income |
17 | | 1 | 18 | ||||
Charge to equity |
| | | | ||||
Acquisition |
| | 13 | 13 | ||||
Transfers |
(9) | | 9 | | ||||
At 31 December 2012 |
85 | 52 | 27 | 164 |
The Group has unused tax losses of $61m (2011 $29m) available for offset against future profits. A deferred tax asset has been recognised in respect of $1m (2011 $1m) of such losses. No deferred tax asset has been recognised on the remaining unused tax losses as these are not expected to be realised in the foreseeable future.
Accelerated tax depreciation $ million |
Intangible assets $ million |
Other $ million |
Total $ million |
|||||
Deferred tax liabilities: |
||||||||
At 1 January 2011 |
(25) | (33) | (11) | (69) | ||||
Exchange adjustment |
1 | | | 1 | ||||
Movement in income statement current year |
3 | 5 | (5) | 3 | ||||
Movement in income statement prior years |
(2) | | 7 | 5 | ||||
Movement in other comprehensive income |
| | (7) | (7) | ||||
Charge to equity |
| | (1) | (1) | ||||
Transfers |
(5) | 1 | 6 | 2 | ||||
At 31 December 2011 |
(28) | (27) | (11) | (66) | ||||
Exchange adjustment |
(1) | | | (1) | ||||
Movement in income statement current year |
2 | 6 | (4) | 4 | ||||
Movement in income statement prior years |
| | | | ||||
Movement in other comprehensive income |
| | 2 | 2 | ||||
Charge to equity |
| | | | ||||
Transfers |
| | | | ||||
At 31 December 2012 |
(27) | (21) | (13) | (61) |
Section 7 Accounts and other information |
121 |
18 Provisions and contingencies
Accounting policy |
In the normal course of business the Group is involved in numerous legal disputes. Provision is made for loss contingencies when it is deemed probable that an adverse outcome will occur and the amount of the loss can be reasonably estimated. Where the Group is the plaintiff in pursuing claims against third parties legal and associated expenses are charged to the income statement as incurred.
The recognition of provisions for legal disputes is subject to a significant degree of estimation. In making its estimates management takes into account the advice of internal and external legal counsel. Provisions are reviewed regularly and amounts updated where necessary to reflect developments in the disputes. The ultimate liability may differ from the amount provided depending on the outcome of court proceedings or settlement negotiations or as new facts emerge.
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. For the purposes of calculating any onerous lease provision, the Group has taken the discounted future lease payments, net of expected rental income. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract.
|
18.1 Provisions
Rationalisation provisions $ million |
Legal and other provisions $ million |
Total $ million |
||||
At 1 January 2011 |
14 | 96 | 110 | |||
Charge to income statement |
22 | 44 | 66 | |||
Utilisation/Released |
(10) | (43) | (53) | |||
At 31 December 2011 |
26 | 97 | 123 | |||
Charge to income statement |
29 | 21 | 50 | |||
Provision arising on acquisition |
| 13 | 13 | |||
Utilisation/Released |
(30) | (34) | (64) | |||
At 31 December 2012 |
25 | 97 | 122 | |||
Provisions due within one year |
25 | 34 | 59 | |||
Provisions due after one year |
| 63 | 63 | |||
At 31 December 2012 |
25 | 97 | 122 | |||
Provisions due within one year |
26 | 52 | 78 | |||
Provisions due after one year |
| 45 | 45 | |||
At 31 December 2011 |
26 | 97 | 123 |
The principal provisions within rationalisation provisions relate to the rationalisation of operational sites (mainly severance and legal costs) arising from the legacy earnings improvement programme and people costs associated with the structural and process changes announced in August 2011.
Included within the legal and other provisions are:
| $17m (2011 $17m) relating to the declination of insurance coverage for macrotextured knee revisions (see Note 18.2). |
| $nil (2011 $23m) in connection with the previously disclosed investigation by the US Securities and Exchange Commission (SEC) and Department of Justice (DOJ) into potential violations of the US Foreign Corrupt Practices Act in the medical devices industry. On 6 February 2012, Smith & Nephew announced that it had reached settlement with the SEC and DOJ in connection with this matter. Smith & Nephew committed to pay approximately $23m in fines and profit disgorgement, maintain an enhanced compliance programme, and appoint an independent monitor for at least 18 months to review and report on its compliance programme. |
| A provision of $13m has been established following the acquisition of Healthpoint Biotherapeutics (see Note 22). |
| The remaining balance largely represents provisions for various litigation and patent disputes. |
All provisions are expected to be substantially utilised within three years of 31 December 2012 and none are treated as financial instruments.
122 Smith & Nephew Annual Report 2012
|
Notes to the Group accounts continued
18 Provisions and contingencies continued
The Company and its subsidiaries are parties to various legal proceedings, some of which include claims for substantial damages. The outcome of these proceedings cannot readily be foreseen, but management believes none of them will result in a material adverse effect on the financial position of the Group. The Group provides for outcomes that are deemed to be probable and can be reliably estimated. There is no assurance that losses will not exceed provisions or will not have a significant impact on the Groups results of operations in the period in which they are realised.
In August 2003, the Group withdrew voluntarily from all markets the macrotextured versions of its OXINIUM femoral knee components. A number of related claims have been filed, most of which have been settled. The aggregate cost at 31 December 2012 related to this matter is approximately $214m. The Group has sought recovery from its primary and excess insurers for costs of resolving the claims. The primary insurance carrier has paid $60m in full settlement of its policy liability. However, the excess carriers have denied coverage, citing defences relating to the wording of the insurance policies and other matters. In December 2004, the Group brought suit against them in the US District Court for the Western District of Tennessee, and trial is expected to commence in 2013. An additional $22m was received during 2007 from a successful settlement with a third party.
A charge of $154m was recorded in 2004 for anticipated expenses in connection with macrotexture claims. Most of that amount has since been applied to settlements of such claims. Management believes that the $17m provision remaining is adequate to cover remaining claims. Given the uncertainty inherent in such matters, there can be no assurance on this point.
The Group is engaged, as both plaintiff and defendant, in litigation with various competitors and others over claims of patent infringement and, in some cases, breach of licence agreement. These disputes are being heard in courts in the United States and other jurisdictions and also before agencies that examine patents. Outcomes are rarely certain with costs and settlements often significant.
19 Retirement benefit obligations
Accounting policy |
The Groups major pension plans are of the defined benefit type. For these plans, the employers portion of past and current service cost is charged to operating profit, with the interest cost net of expected return on assets in the plans reported within other finance income/(costs). Actuarial gains or losses are recognised in full directly in other comprehensive income such that the balance sheet reflects the plans surpluses or deficits as at the balance sheet date.
The defined benefit obligation is calculated annually by external actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates that reference high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and have terms to maturity approximating to the terms of the related pension liability.
A number of key assumptions have to be made in calculating the fair value of the Groups defined benefit pension plans. These assumptions impact the balance sheet assets and liabilities, operating profit and finance income/(costs). The most critical assumptions are the discount rate, the rate of inflation and mortality assumptions to be applied to future pension plan liabilities. The most important assumption for the plan assets is the future expected return. In determining these assumptions management takes into account the advice of professional external actuaries and benchmarks its assumptions against external data.
Where defined contribution plans operate, the contributions to these plans are charged to operating profit as they become payable.
|
19.1 Retirement benefit (assets)/obligations
The Groups retirement benefit obligations comprise:
2012 $ million |
2011 $ million |
|||
Funded Plans: |
||||
UK Plan |
(6) | 24 | ||
US Plan |
147 | 168 | ||
Other Plans (i) |
38 | 33 | ||
179 | 225 | |||
Unfunded Plans: |
||||
Other Plans (i) |
36 | 24 | ||
Retirement Healthcare |
45 | 38 | ||
260 | 287 |
(i) | The analysis in this note for Other Plans combines both the funded and unfunded retirement benefit obligations. |
The Group sponsors pension plans for its employees in most of the countries in which it has major operating companies. Pension plans are established under the laws of the relevant country. Funded plans are funded by the payment of contributions to, and the assets held by, separate trust funds or insurance companies. In those countries where there is no Company-sponsored pension plan, state benefits are considered adequate. Employees retirement benefits are the subject of regular management review. The Groups major defined benefit pension plans in the UK and US were closed to new employees in 2003 and replaced by defined contribution plans.
Defined benefit plans provide employees with an entitlement to retirement benefits varying between 1.3% and 66.7% of final salary on attainment of retirement age. The level of entitlement is dependent on the years of service of the employee.
The present value of the defined benefit obligation and the related current service cost are measured using the projected unit method. Under the projected unit method, the current service cost will increase as the members of the defined benefit plans approach retirement. The principal actuarial assumptions used by the independent qualified actuaries in valuing the major plans in the United Kingdom (UK Plan), the United States (US Plan) and all other plans (Other Plans) and a breakdown of the pension costs charged to income are as follows:
Section 7 Accounts and other information |
123 |
19.2 Principal actuarial assumptions
Of the $64m (2011 $64m, 2010 $60m) net cost for the year, $61m (2011 $57m, 2010 $51m) was charged to operating profit in selling, general and administrative expenses. The interest cost and expected return on plan assets are reported as other finance costs.
The total cost charged to income in respect of the Groups defined contribution plans represents contributions payable to these plans by the Group at rates specified in the rules of the plans. As at 31 December 2012, there were $nil outstanding payments due to be paid over to the plans (2011 $nil, 2010 $nil).
124 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
19 Retirement benefit obligations continued
19.4 Actuarial (losses)/gains recognised in Group Statement of Comprehensive Income
2012 $ million |
2011 $ million |
2010 $ million |
||||
Experience gains in pension scheme assets |
33 | 9 | 34 | |||
Experience gains on scheme liabilities |
18 | | 21 | |||
Losses due to changes in assumptions underlying scheme liabilities |
(64) | (79) | (29) | |||
(13) | (70) | 26 |
The actuarial losses of $13m (2011 loss of $70m, 2010 gain of $26m) were reported in the statement of other comprehensive income making the cumulative charge to date $311m (2011 $298m, 2010 $228m).
The contributions made in the year in respect of defined benefit plans were: UK Plan $39m (2011 $37m, 2010 $37m); US Plan $27m (2011 $30m, 2010 $20m); and Other Plans $7m (2011 $9m, 2010 $8m). The agreed contributions for 2013 in respect of the Groups defined benefit plans are: $39m for the UK Plan (including $30m of supplementary payments), $17m for the US Plan and $6m for other defined benefit plans.
19.5 Scheme assets
The amount included in the balance sheet arising from the Groups obligations in respect of its defined benefit retirement plans and the expected rates of return on investments were:
Section 7 Accounts and other information |
125 |
A reconciliation of the fair value of plan assets is shown in the following tables:
UK Plan $ million |
US Plan $ million |
Other Plans $ million |
Retirement Healthcare $ million |
Total $ million |
||||||
Fair value of plan assets at 1 January 2011 |
595 | 272 | 100 | | 967 | |||||
Expected return on plan assets |
35 | 19 | 5 | | 59 | |||||
Experience gains/(losses) on plan assets |
20 | (12) | 1 | | 9 | |||||
Plan participant contributions |
1 | | 3 | | 4 | |||||
Company contributions |
37 | 30 | 9 | | 76 | |||||
Benefits paid |
(23) | (11) | (6) | | (40) | |||||
Exchange adjustment |
(9) | | (3) | | (12) | |||||
Fair value of plan assets at 31 December 2011 |
656 | 298 | 109 | | 1,063 | |||||
Expected return on plan assets |
33 | 22 | 5 | | 60 | |||||
Experience gains on plan assets |
3 | 24 | 6 | | 33 | |||||
Plan participant contributions |
1 | | 3 | | 4 | |||||
Company contributions |
39 | 27 | 7 | | 73 | |||||
Benefits paid |
(23) | (12) | (9) | | (44) | |||||
Exchange adjustment |
35 | | 3 | | 38 | |||||
Fair value of plan assets at 31 December 2012 |
744 | 359 | 124 | | 1,227 |
19.6 Present value of defined benefit obligations
A reconciliation of the present value of defined benefit obligations is shown in the following tables:
UK Plan $ million |
US Plan $ million |
Other Plans $ million |
Retirement Healthcare $ million |
Total $ million |
||||||
Present value of defined benefit obligations at 1 January 2011 |
654 | 382 | 158 | 35 | 1,229 | |||||
Current service cost |
10 | 9 | 9 | | 28 | |||||
Other finance cost |
36 | 21 | 7 | 2 | 66 | |||||
Experience losses/(gains) on plan liabilities |
6 | (1) | (3) | (2) | | |||||
Losses on change of assumptions |
6 | 66 | 2 | 5 | 79 | |||||
Plan participant contributions |
1 | | 3 | | 4 | |||||
Benefits paid |
(23) | (11) | (6) | | (40) | |||||
Benefits paid directly by employer |
(1) | | | (2) | (3) | |||||
Exchange adjustment |
(9) | | (4) | | (13) | |||||
Present value of defined benefit obligations at 31 December 2011 |
680 | 466 | 166 | 38 | 1,350 | |||||
Current service cost |
8 | 11 | 10 | | 29 | |||||
Other finance cost |
34 | 21 | 6 | 2 | 63 | |||||
Experience gains on plan liabilities |
| (9) | (9) | | (18) | |||||
Losses on change of assumptions |
2 | 29 | 28 | 5 | 64 | |||||
Plan participant contributions |
1 | | 3 | | 4 | |||||
Benefits paid |
(23) | (12) | (9) | | (44) | |||||
Benefits paid directly by employer |
| | (1) | | (1) | |||||
Exchange adjustment |
36 | | 4 | | 40 | |||||
Present value of defined benefit obligations at 31 December 2012 |
738 | 506 | 198 | 45 | 1,487 |
126 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
19 Retirement benefit obligations continued
19.7 History of experience adjustments
The history of experience adjustments is as follows:
Present value of Defined benefit obligations $ million |
Experience (losses)/gains on plan liabilities |
Experience gains/(losses) on plan assets |
||||||||||||||
Fair value of plan assets $ million |
Surplus/ (Deficit) in plan $ million |
Amount gain/(loss) $ million |
Percentage of plan liabilities % |
|
Amount gain/(loss) $ million |
Percentage of plan assets % |
||||||||||
At 31 December 2012: |
||||||||||||||||
UK Plan |
(738) | 744 | 6 | | | 3 | | |||||||||
US Plan |
(506) | 359 | (147) | 9 | 2 | 24 | 7 | |||||||||
Other Plans |
(198) | 124 | (74) | 9 | 5 | 6 | 6 | |||||||||
At 31 December 2011: |
||||||||||||||||
UK Plan |
(680) | 656 | (24) | (6) | 1 | 20 | 3 | |||||||||
US Plan |
(466) | 298 | (168) | 1 | | (12) | 4 | |||||||||
Other Plans |
(166) | 109 | (57) | 3 | 2 | 1 | 1 | |||||||||
At 31 December 2010: |
||||||||||||||||
UK Plan |
(654) | 595 | (59) | 21 | 3 | 26 | 4 | |||||||||
US Plan |
(382) | 272 | (110) | (2) | | 11 | 4 | |||||||||
Other Plans |
(158) | 100 | (58) | 2 | 1 | (3) | 3 | |||||||||
At 31 December 2009: |
||||||||||||||||
UK Plan |
(668) | 534 | (134) | 10 | 2 | 36 | 7 | |||||||||
US Plan |
(343) | 234 | (109) | | | 34 | 15 | |||||||||
Other Plans |
(137) | 87 | (50) | 7 | 5 | 1 | 1 | |||||||||
At 31 December 2008: |
||||||||||||||||
UK Plan |
(516) | 416 | (100) | 1 | | (126) | 30 | |||||||||
US Plan |
(337) | 180 | (157) | (5) | 1 | (100) | 56 | |||||||||
Other Plans |
(141) | 76 | (65) | 5 | 4 | (10) | 13 |
The Group recharges the UK pension plan with the costs of administration and independent advisers. The amount recharged in the year was $2m (2011 $2m, 2010 $2m). The amount receivable at 31 December 2012 was $nil (2011 $nil, 2010 $nil).
19.8 Retirement healthcare
The cost of providing healthcare benefits after retirement is determined by independent actuaries. The principal actuarial assumptions in determining the cost of providing healthcare benefits are those in the UK and the US and are as follows:
2012 | 2011 | 2010 | ||||||||||||||
UK | US | UK | US | UK | US | |||||||||||
% per annum |
||||||||||||||||
Discount rate |
4.5 | 4.0 | 4.9 | 4.6 | 5.5 | 5.6 | ||||||||||
Medical cost inflation |
7.0 | 7.5 | 7.0 | 8.0 | 7.0 | 8.0 |
A 1 percentage point change in the rate of medical cost inflation would not affect the accumulated retirement benefit obligations, or the aggregate of the current service and interest costs, of the UK or US plans in 2012 by more than $3m (2011 more than $2m, 2010 more than $2m).
For the US the retirement healthcare cost trend for 2013 is expected to be 3.5% above the discount rate. Thereafter the healthcare cost trend rate is assumed to decrease each year by 0.5% to an ultimate rate of 5%. For the UK it will remain flat at 7%.
Section 7 Accounts and other information |
127 |
20 Equity
20.1 Share capital
Ordinary Shares (20¢) | Deferred Shares (£1.00) | |||||||||||
Thousand | $ million | Thousand | $ million |
Total $ million |
||||||||
Authorised |
||||||||||||
At 31 December 2010 |
1,223,591 | 245 | 50 | | 245 | |||||||
At 31 December 2011 |
1,223,591 | 245 | 50 | | 245 | |||||||
At 31 December 2012 |
1,223,591 | 245 | 50 | | 245 | |||||||
Allotted, issued and fully paid |
||||||||||||
At 1 January 2010 |
951,021 | 190 | 50 | | 190 | |||||||
Share options |
1,816 | 1 | | | 1 | |||||||
At 31 December 2010 |
952,837 | 191 | 50 | | 191 | |||||||
Share options |
1,991 | | | | | |||||||
At 31 December 2011 |
954,828 | 191 | 50 | | 191 | |||||||
Share options |
8,752 | 2 | | | 2 | |||||||
At 31 December 2012 |
963,580 | 193 | 50 | | 193 |
The deferred shares were issued in 2006 in order to comply with English Company law. They are not listed on any stock exchange and have extremely limited rights and effectively have no value. These rights are summarised as follows:
| The holder shall not be entitled to participate in the profits of the Company; |
| The holder shall not have any right to participate in any distribution of the Companys assets on a winding up or other distribution except that after the return of the nominal amount paid up on each share in the capital of the Company of any class other than the Deferred Shares and the distribution of a further $1,000 in respect of each such share there shall be distributed to a holder of a Deferred Share (for each Deferred Share held by him) an amount equal to the nominal value of the Deferred Share; |
| The holder shall not be entitled to receive notice, attend, speak or vote at any general meeting of the Company; and |
| The Company may create, allot and issue further shares or reduce or repay the whole or any part of its share capital or other capital reserves without obtaining the consent of the holders of the Deferred Shares. |
The Groups objectives when managing capital are to ensure the Group has adequate funds to continue as a going concern and sufficient flexibility within the capital structure to fund the ongoing growth of the business and to take advantage of business development opportunities including acquisitions.
The Group determines the amount of capital taking into account changes in business risks and future cash requirements. The Group reviews its capital structure on an ongoing basis and uses share buy-backs, dividends and the issue of new shares to adjust the retained capital.
The Group considers the capital that it manages to be as follows:
2012 $ million |
2011 $ million |
2010 $ million |
||||
Share capital |
193 | 191 | 191 | |||
Share premium |
488 | 413 | 396 | |||
Treasury shares |
(735) | (766) | (778) | |||
Retained earnings and other reserves |
3,938 | 3,349 | 2,964 | |||
3,884 | 3,187 | 2,773 |
128 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
20 Equity continued
20.2 Treasury shares
Treasury shares represents the holding of the Companys own shares in respect of the Smith & Nephew Employees Share Trust and shares bought back as part of the share buy-back programme, which was suspended in 2008.
The Smith & Nephew 2004 Employees Share Trust (Trust) was established to hold shares relating to the long-term incentive plans referred to in the Directors Remuneration Report. The Trust is administered by an independent professional trust company resident in Jersey and is funded by a loan from the Company. The cost of the Trust is charged to the income statement as it accrues. A partial dividend waiver is in place in respect of those shares held under the long-term incentive plans. The trust only accepts dividends in respect of nil-cost options and deferred bonus plan shares. The waiver represents less than 1% of the total dividends paid.
The movements in Treasury shares and the Employees Share Trust are as follows:
Treasury $ million |
Employees Share Trust $ million |
Total $ million |
||||
At 1 January 2011 |
769 | 9 | 778 | |||
Shares purchased |
| 6 | 6 | |||
Shares transferred from treasury |
(14) | 14 | | |||
Shares transferred to group beneficiaries |
(5) | (13) | (18) | |||
At 31 December 2011 |
750 | 16 | 766 | |||
Shares transferred from treasury |
(10) | 10 | | |||
Shares transferred to group beneficiaries |
(10) | (21) | (31) | |||
At 31 December 2012 |
730 | 5 | 735 | |||
No of shares million |
No of shares million |
No of shares million |
||||
At 1 January 2011 |
62.7 | 0.8 | 63.5 | |||
Shares purchased |
| 0.6 | 0.6 | |||
Shares transferred from treasury |
(1.1) | 1.1 | | |||
Shares transferred to group beneficiaries |
(0.4) | (1.1) | (1.5) | |||
At 31 December 2011 |
61.2 | 1.4 | 62.6 | |||
Shares transferred from treasury |
(0.9) | 0.9 | | |||
Shares transferred to group beneficiaries |
(0.8) | (1.8) | (2.6) | |||
At 31 December 2012 |
59.5 | 0.5 | 60.0 | |||
|
||||||
2012 $ million |
2011 $ million |
2010 $ million |
||||
The following dividends were declared and paid in the year: |
||||||
Ordinary final of 10.80¢ for 2011 (2010 9.82¢, 2009 8.93¢) paid 9 May 2012 |
97 | 88 | 79 | |||
Ordinary interim of 9.90¢ for 2012 (2011 6.60¢, 2010 6.00¢) paid 30 October 2012 |
89 | 58 | 53 | |||
186 | 146 | 132 |
A final dividend for 2012 of 16.20 US cents per Ordinary Share was proposed by the Board on 6 February 2013 and will be paid, subject to shareholder approval, on 8 May 2013 to shareholders on the Register of Members on 19 April 2013. The estimated amount of this dividend on 19 February 2013 is $147m.
Section 7 Accounts and other information |
129 |
21 Cash Flow Statement
Accounting policy |
In the Group Cash Flow Statement, cash and cash equivalents includes cash in hand, deposits held with banks, other short-term liquid investments with original maturities of three months or less and bank overdrafts. In the Group Balance Sheet, bank overdrafts are shown within bank overdrafts and loans under current liabilities.
|
Analysis of net debt
Borrowings | ||||||||||||
Cash $ million |
Overdrafts $ million |
Due within one year $ million |
Due after one year $ million |
Net currency swaps $ million |
Total $ million |
|||||||
At 1 January 2010 |
192 | (18) | (27) | (1,090) | | (943) | ||||||
Net cash flow |
9 | 6 | (17) | 437 | 3 | 438 | ||||||
Exchange adjustment |
6 | | (1) | 11 | (3) | 13 | ||||||
At 31 December 2010 |
207 | (12) | (45) | (642) | | (492) | ||||||
Net cash flow |
(21) | (12) | 252 | 140 | 1 | 360 | ||||||
Other non-cash changes |
| | (517) | 517 | | | ||||||
Exchange adjustment |
(2) | 1 | 27 | (31) | (1) | (6) | ||||||
At 31 December 2011 |
184 | (23) | (283) | (16) | | (138) | ||||||
Net cash flow |
(10) | 12 | 256 | (414) | 1 | (155) | ||||||
Exchange adjustment |
4 | | | | 1 | 5 | ||||||
At 31 December 2012 |
178 | (11) | (27) | (430) | 2 | (288) |
Reconciliation of net cash flow to movement in net debt
130 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
22 Acquisitions and assets held for sale
Accounting policy |
On acquisition, identifiable assets and liabilities (including contingent liabilities) of subsidiaries and associates are measured at their fair values at the date of acquisition using the acquisition method. The fair value of assets includes the taxation benefits resulting from amortisation for income taxation purposes from which a third party separately acquiring the assets would reasonably be expected to benefit. Goodwill, representing the excess of purchase consideration over the Groups share of the fair value of net assets acquired, is capitalised.
|
22.1 Acquisitions
Year ended 31 December 2012
On 21 December 2012 the Group acquired substantially all the assets of Healthpoint Biotherapeutics (Healthpoint), a leader in bioactive debridement, dermal repair and regeneration wound care treatments.
The acquisition is deemed to be a business combination within the scope of IFRS 3. Consideration was in the form of a single payment of $782m. The fair values shown below are provisional. If new information is obtained within the measurement period (no more than one year after the acquisition date) about facts and circumstances that existed at the acquisition date, the acquisition accounting will be revised.
The provisional estimate of the goodwill arising on the acquisition is $73m. It is attributable to the additional economic benefits expected from the transaction, including revenue synergies and the assembled workforce, which has been transferred as part of the acquisition. The goodwill recognised is expected to be deductible for tax purposes.
The following table summarises the consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the acquisition date.
The Group incurred acquisition-related costs of $11m related to professional and advisor fees. These costs have been recognised in administrative expenses in the income statement. No acquisition related costs were incurred in 2011 or 2010.
In 2012, since the date of acquisition the contribution to attributable profit from Healthpoint products was immaterial. The unaudited revenues from Healthpoint products during 2012 were $190m. Given the proximity of the acquisition to year-end it is impracticable to determine what the consolidated attributable profit would have been had the acquisition taken place at the beginning of the year.
Section 7 Accounts and other information |
131 |
Year ended 31 December 2011
On 23 June 2011, Smith & Nephew acquired 100% of the voting rights of Tenet Medical Engineering, Inc., for an initial payment of $35m, a further payment of $3m, deferred for 18 months, and up to $14.5m based on the achievement of future revenue milestones. The cost is assessed as $46m, being the fair value of the probable consideration.
Fair value to Group $ million |
||
Trade and other receivables |
2 | |
Inventories |
1 | |
Trade and other payables |
(3) | |
Cash |
2 | |
Net assets |
2 | |
Goodwill on acquisition |
44 | |
Cost of acquisition |
46 | |
Discharged by: |
||
Cash |
35 | |
Deferred consideration |
3 | |
Contingent consideration |
8 | |
Total consideration |
46 |
As the Group was the only material customer of Tenet Medical Engineering Inc., no contribution to revenue was achieved in 2011. The post-acquisition contribution to attributable profit for 2011 was immaterial.
Year ended 31 December 2010
In the year ended 31 December 2010 there were no acquisitions.
22.2 Disposal of business
Year ended 31 December 2012
In January 2012, the Group announced its intention to sell the Clinical Therapies business to Bioventus LLC (Bioventus). This was completed during May 2012 for a total consideration of $367m and resulted in a profit on disposal before taxation of $251m. The revenue of the Clinical Therapies business in the four-month period to disposal was $69m and profit before taxation was $12m. The details of the transaction are set out below.
$ million | ||
Loan note receivable |
160 | |
Investment in associate |
104 | |
Cash |
103 | |
Total consideration |
367 | |
Net assets of business disposed and disposal transaction costs |
(116) | |
Profit before taxation |
251 |
132 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
22 Acquisitions and assets held for sale continued
The Group has classified following assets and liabilities as held for sale:
2012 $ million |
2011 $ million |
|||
Goodwill |
| 37 | ||
Intangible assets |
| 14 | ||
Property, plant and equipment |
| 3 | ||
Deferred tax assets |
| 7 | ||
Inventory |
| 15 | ||
Trade and other receivables |
| 49 | ||
| 125 | |||
Liabilities directly associated with assets held for sale |
| 19 |
In 2011, the assets and liabilities of the Clinical Therapies business were classified as held for sale. In 2011, this business contributed $237m to revenue and $48m to trading profit. This transaction was completed during May 2012 for a total consideration of $367m (see Note 22.2).
As part of this disposal the Group commitment of $60m detailed in Note 9 was transferred to the associate.
23 Operating leases
Accounting policy |
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases.
Rentals payable under operating leases are expensed in the income statement on a straight line basis over the term of the relevant lease.
Future minimum lease payments under non-cancellable operating leases fall due as follows:
|
2012 $ million |
2011 $ million |
|||
Land and buildings: |
||||
Within one year |
30 | 31 | ||
After one and within two years |
24 | 22 | ||
After two and within three years |
17 | 18 | ||
After three and within four years |
14 | 15 | ||
After four and within five years |
8 | 11 | ||
After five years |
4 | 13 | ||
97 | 110 | |||
Other assets: |
||||
Within one year |
15 | 19 | ||
After one and within two years |
10 | 12 | ||
After two and within three years |
4 | 6 | ||
After three and within four years |
1 | 2 | ||
30 | 39 |
Section 7 Accounts and other information |
133 |
24 Other Notes to the accounts
24.1 Share-based payments
Accounting policy |
The Group operates a number of equity-settled executive and employee share plans. For all grants of share options and awards, the fair value at the grant date is calculated using appropriate option pricing models. The grant date fair value is recognised over the vesting period as an expense, with a corresponding increase in retained earnings.
|
Employee plans
The Smith & Nephew Sharesave Plan (2002) (adopted by shareholders on 3 April 2002) (the Save As You Earn (SAYE) plan), the Smith & Nephew International Sharesave Plan (2002), Smith & Nephew France Sharesave Plan (2002), Smith & Nephew Sharesave Plan (2012) (the Save As You Earn (SAYE 2012) plan) (adopted by shareholders on 12 April 2012), Smith & Nephew International Sharesave Plan (2012) (adopted by shareholders on 12 April 2012) and Smith & Nephew France Sharesave Plan (2012) (adopted by shareholders on 12 April 2012) are together termed the Employee Plans.
The SAYE and SAYE 2012 plans are available to all employees in the UK employed by participating Group companies, subject to three months service. The schemes provide for employees to save up to £250 per month and gives them an option to acquire shares based on the committed amount to be saved. The option price is not less than 80% of the average of middle market quotations of the Ordinary Shares on the three dealing days preceding the date of invitation. The Smith & Nephew International Sharesave Plan (2002) and Smith & Nephew International Sharesave Plan (2012) are available to employees in Australia, Austria, Belgium, Canada, Denmark, Finland, Germany, Hong Kong, Japan, South Korea, Mexico, New Zealand, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland and the United Arab Emirates. Employees in India, Ireland and Italy participated in these plans for the first time in 2012. The Smith & Nephew France Sharesave Plan (2002) and Smith & Nephew France Sharesave Plan (2012) are available to all employees in France. The International and French plans operate on a substantially similar basis to the SAYE plans.
Employees in the US are able to participate in the Employee Stock Purchase Plan, which gives them the opportunity to acquire shares, in the form of ADSs, at a discount of 15% (or more if the shares appreciate in value during the plans quarterly purchase period) to the market price, through a regular savings plan.
Executive plans
The Smith & Nephew 2001 UK Approved Share Option Plan, the Smith & Nephew 2001 UK Unapproved Share Option Plan, the Smith & Nephew 2001 US Share Plan (adopted by shareholders on 4 April 2001), the Smith & Nephew 2004 Executive Share Option Plan (adopted by shareholders on 6 May 2004) and the Smith & Nephew Global Share Plan 2010 (adopted by shareholders on 6 May 2010) are together termed the Executive Plans.
Under the terms of the Executive Plans, the Remuneration Committee, consisting of Non-Executive Directors, may at their discretion approve the grant of options to employees of the Group to acquire Ordinary Shares in the Company. Options granted under the Smith & Nephew 2001 US Share Plan (the US Plan) and the Smith & Nephew 2004 Executive Share Option Plan are to acquire ADSs or Ordinary Shares. For Executive Plans adopted in 2001 and 2004, the market value is the average quoted price of an Ordinary Share for the three business days preceding the date of grant or the average quoted price of an ADS or Ordinary Share, for the three business days preceding the date of grant or the quoted price on the date of grant if higher. For the Global Share Plan adopted in 2010 the market value is the closing price of an Ordinary Share or ADS on the last trading day prior to the grant date. With the exception of options granted under the 2001 US Plan and the Global Share Plan 2010, the vesting of options granted from 2001 are subject to achievement of a performance condition. Options granted under the 2001 US Plan and the Global Share Plan 2010 are not subject to any performance conditions. Prior to 2008, the 2001 US Plan options became cumulatively exercisable as to 10% after one year, 30% after two years, 60% after three years and the remaining balance after four years. With effect from 2008, options granted under the 2001 US Plan became cumulatively exercisable as to 33.3% after one year, 66.7% after two years and the remaining balance after the third year. The 2001 UK Unapproved Share Option Plan was open to certain employees outside the US and the US Plan is open to certain employees in the US, Canada, Mexico and Puerto Rico. The Global Share Plan 2010 is open to employees globally. The 2004 Plan was open to senior executives only.
The maximum term of options granted, under all plans, is 10 years from the date of grant. All share option plans are settled in shares.
134 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
24 Other Notes to the accounts continued
24.1 Share-based payments continued
At 31 December 2012 19,690,000 (2011 27,316,000, 2010 25,753,000) options were outstanding under share option plans as follows:
Section 7 Accounts and other information |
135 |
Options granted during the year were as follows:
Options
granted Thousand |
Weighted
average fair value per option at grant date Pence |
Weighted
average share price at grant date Pence |
Weighted
average exercise price Pence |
Weighted
average option life Years |
||||||||||||||||
Employee Plans |
947 | 184.0 | 681.0 | 535.5 | 3.8 | |||||||||||||||
Executive Plans
|
|
3,046
|
|
|
148.7
|
|
|
650.0
|
|
|
650.0
|
|
|
10.0
|
|
The weighted average fair value of options granted under employee plans during 2011 was 189.2p (2010 170.2p) and those under executive plans during 2011 was 176.1p (2010 173.7p).
Options granted under the executive plans are valued using a binomial model. Options granted under employee plans are valued using the Black-Scholes option model as management consider that options granted under these plans are exercised within a short period of time after the vesting date. Options granted under each plan are valued separately and a weighted average fair value is calculated.
The binomial model is used for executive plans so that proper allowance is made for the possibility of early exercise. At the 2012 grant, management expected 90% of the options granted under the Global Share Plan 2010 to vest (2011 90%, 2010 90%). Each year an assessment is made of the current vesting estimates and they are updated to reflect revised expectations of the number of grants that will vest.
For all plans the inputs to the option pricing models are reassessed for each grant. The following assumptions were used in calculating the fair value of options granted:
Employee plans | Executive plans | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||||
Dividend yield % |
1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | ||||||||||||||||||
Expected volatility % (i) |
25.0 | 30.0 | 30.0 | 25.0 | 30.0 | 30.0 | ||||||||||||||||||
Risk free interest rate % (ii) |
1.3 | 2.0 | 2.5 | 1.2 | 2.0 | 2.5 | ||||||||||||||||||
Expected life in years (iii) |
3.8 | 3.9 | 3.9 | 10.0 | 10.0 | 9.8 |
(i) | Volatility is assessed on a historic basis primarily based on past share price movements over the expected life of the options. |
(ii) | The risk free interest rate reflects the yields available on zero coupon government bonds over the option term and currency. |
(iii) | An assessment of an Executive Plans option life is based on an exercise model. This is based on a mixture of historic experience and generally accepted behavioural traits. 5% (2011 5%, 2010 5%) of Executive Plan option holders are assumed to leave and exercise their options (or forfeit them if under water) each year after vesting. In addition, 50% (2011 50%, 2010 50%) of Executive Plan option holders are assumed to exercise by choice per annum providing the gain available is at least 25% for the options granted under the Global Share Plan 2010 (2011 50% for the options granted to executives and 25% for other recipients under the Global Share Plan 2010, 2010 50% for the 2004 Plan and 50% for the options granted to executives and 25% for other recipients under the Global Share Plan 2010). |
Summarised information about options outstanding under the share option plans at 31 December 2012 is as follows:
Number
outstanding
Thousand |
Weighted average
remaining contract life Years |
|||||||
Employee Plans: |
||||||||
380.0p to 640.5p (i) |
3,162 | 2.6 | ||||||
Above 640.5p (i)
|
|
|
|
|
|
|
||
3,162 | 2.6 | |||||||
Executive Plans: |
||||||||
409.5p to 640.5p (i) |
13,431 | 5.9 | ||||||
640.5p (i) to 680.5p
|
|
3,097
|
|
|
9.5
|
|
||
16,528 | 6.6 |
(i) | The split has been determined based on the weighted average share price of 640.5p. |
136 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
24 Other Notes to the accounts continued
Share-based payments long-term incentive plans
In 2004, a share-based incentive plan was introduced for Executive Directors, executive officers and the next level of senior executives, which replaced the Long-term Incentive Plan (LTIP). The plan included a Performance Share Plan (PSP) and a Bonus Co-Investment Plan (CIP).
Vesting of the PSP awards is dependent upon performance relative to the FTSE 100 and an index based on major international companies in the medical devices industry.
Under the CIP, participants could elect to use up to a maximum of one-half of their annual bonus to purchase shares. If the shares are held for three years and the Groups EPSA growth targets are achieved participants receive an award of matching shares for each share purchased.
From 2009, the CIP was replaced by the Deferred Bonus Plan. This plan was designed to encourage executives to build up and maintain a significant shareholding in the Company. Under the plan, up to one third of any bonus earned at target level or above by an eligible employee was compulsorily deferred into shares which vested, subject to continued employment, in equal annual tranches over three years (i.e. one third each year). No further performance conditions applied to the deferred shares.
From 2010, Performance Share awards were granted under the Global Share Plan 2010 for all executives other than Executive Directors. Awards granted under both plans are combined to provide the figures below. Vesting of the share awards is dependent upon performance relative to the FTSE 100 and an index based on major international companies in the medical devices industry.
From 2012, Deferred Bonus Plan and GSP 2010 options for Executive Directors, executive officers and the next level of senior executives were replaced by Equity Incentive Awards (EIA). EIA are designed to encourage executives to build up and maintain a significant shareholding in the Company. EIA will vest, in equal annual tranches over three years (i.e. one third each year), subject to continued employment and personal performance. No further performance conditions will apply to the EIA.
The fair values of awards granted under long-term incentive plans are calculated using a binomial model. The exercise price for all awards granted under the long term incentive plans is $nil. Performance Share awards under both the PSP and Global Share Plan 2010 contain vesting conditions based on TSR versus a comparator group which represent market-based performance conditions for valuation purposes and an assessment of vesting probability is therefore factored into the award date calculations. The assumptions include the volatilities for the comparator groups. A correlation of 35% (2011 40%, 2010 35%) has also been assumed for the companies in the medical devices sector as they are impacted by similar factors. The Performance Target for the Global Share Plan 2010 is a combination of Free Cash Flow growth and the Groups Total Shareholder Return (TSR) performance over the three year performance period.
The other assumptions used are consistent with the executive scheme assumptions disclosed in Note 24.1.
At 31 December 2012 the maximum number of shares that could be awarded under the Groups long-term incentive plans was:
Number of shares in thousands | ||||||||||||||||||||||||
Other Awards | EIA | PSP | CIP |
Deferred
Bonus Plan |
Total | |||||||||||||||||||
Outstanding at 1 January 2010 |
| | 4,880 | 445 | 292 | 5,617 | ||||||||||||||||||
Awarded |
| | 2,386 | | 338 | 2,724 | ||||||||||||||||||
Vested |
| | (501) | (116) | (101) | (718) | ||||||||||||||||||
Forfeited |
| | (753) | (132) | (7) | (892) | ||||||||||||||||||
Outstanding at 31 December 2010 |
| | 6,012 | 197 | 522 | 6,731 | ||||||||||||||||||
Awarded |
838 | | 2,282 | | 351 | 3,471 | ||||||||||||||||||
Vested |
(44) | | (366) | | (375) | (785) | ||||||||||||||||||
Forfeited |
| | (1,660) | (197) | (6) | (1,863) | ||||||||||||||||||
Outstanding at 31 December 2011 |
794 | | 6,268 | | 492 | 7,554 | ||||||||||||||||||
Awarded |
187 | 1,060 | 2,190 | | | 3,437 | ||||||||||||||||||
Vested |
(263) | (49) | (1,785) | | (287) | (2,384) | ||||||||||||||||||
Forfeited |
| (82) | (1,431) | | (41) | (1,554) | ||||||||||||||||||
Outstanding at 31 December 2012 |
718 | 929 | 5,242 | | 164 | 7,053 |
Other Awards mainly comprises of conditional share awards granted under the Global Share Plan 2010.
The weighted average remaining contractual life of awards outstanding at 31 December 2012 was 0.8 years (2011 1.2 years, 2010 1.8 years) for the PSP, 0.9 years (2011 1.7 years, 2010 1.9 years) for the Deferred Bonus Plan, 2.2 years for the EIA and 0.9 years for the other awards (2011 1.5 years). There were no awards outstanding under the CIP in 2012 and 2011, the remaining contractual life of awards under the CIP was 0.2 years for 2010.
Section 7 Accounts and other information |
137 |
Share-based payments charge to income statement
The expense charged to the income statement for share-based payments is as follows:
2012 $ million |
2011 $ million |
2010 $ million |
||||
Granted in current year |
9 | 9 | 5 | |||
Granted in prior years |
25 | 21 | 16 | |||
Total share-based payments expense for the year |
34 | 30 | 21 |
Under the Executive Plans, PSP, EIA and CIP the number of Ordinary Shares over which options and share awards may be granted is limited so that the number of Ordinary Shares issued or that may be issued during the 10 years preceding the date of grant shall not exceed 5% of the Ordinary Share capital at the date of grant. The total number of Ordinary Shares which may be issuable in any 10-year period under all share plans operated by the Company may not exceed 10% of the Ordinary Share capital at the date of grant.
24.2 Related party transactions
Trading transactions
In the course of normal operations, the Group traded with its associates detailed in Note 11. The aggregated transactions, which have not been disclosed elsewhere in the financial statements, are summarised below:
2012 $million |
2011 $ million |
2010 $ million |
||||
Sales to the associates |
14 | 8 | 8 | |||
Purchases from the associates |
8 | 4 | 4 |
All sale and purchase transactions occur on an arms length basis.
Key management personnel
The remuneration of executive officers (including Non-Executive Directors) during the year is summarised below:
2012 $million |
2011 $ million |
2010 $ million |
||||
Short-term employee benefits |
16 | 19 | 13 | |||
Share-based payments expense |
10 | 9 | 3 | |||
Pension and post-employment benefit entitlements |
1 | 1 | 1 | |||
Termination benefits |
| 1 | | |||
27 | 30 | 17 |
138 Smith & Nephew Annual Report 2012 |
Notes to the Group accounts continued
24 Other Notes to the accounts continued
24.3 Principal subsidiary undertakings
The information provided below is given for principal trading and manufacturing subsidiary undertakings, all of which are 100% owned, in accordance with Section 410 of the Companies Act 2006. A full list will be appended to Smith & Nephews next annual return to Companies House:
Company Name | Activity | Country of operation and incorporation | ||
United Kingdom: |
||||
Smith & Nephew Healthcare Limited |
Medical Devices | England & Wales | ||
Smith & Nephew Medical Limited |
Medical Devices | England & Wales | ||
T. J. Smith & Nephew, Limited
|
Medical Devices
|
England & Wales
|
||
Continental Europe: |
||||
Smith & Nephew GmbH |
Medical Devices | Austria | ||
Smith & Nephew SA-NV |
Medical Devices | Belgium | ||
Smith & Nephew A/S |
Medical Devices | Denmark | ||
Smith & Nephew Oy |
Medical Devices | Finland | ||
Smith & Nephew SAS |
Medical Devices | France | ||
Smith & Nephew Orthopaedics GmbH |
Medical Devices | Germany | ||
Smith & Nephew GmbH |
Medical Devices | Germany | ||
Smith & Nephew Orthopaedics Hellas SA |
Medical Devices | Greece | ||
Smith & Nephew Limited |
Medical Devices | Ireland | ||
Smith & Nephew Srl |
Medical Devices | Italy | ||
Smith & Nephew Nederland CV |
Medical Devices | Netherlands | ||
Smith & Nephew A/S |
Medical Devices | Norway | ||
Smith & Nephew Sp Zoo |
Medical Devices | Poland | ||
Smith & Nephew Lda |
Medical Devices | Portugal | ||
Smith & Nephew SAU |
Medical Devices | Spain | ||
Smith & Nephew AB |
Medical Devices | Sweden | ||
Smith & Nephew Orthopaedics AG
|
Medical Devices
|
Switzerland
|
||
USA: |
||||
Smith & Nephew Inc.
|
Medical Devices
|
United States
|
||
Africa, Asia, Australasia and Other America: |
||||
Smith & Nephew Pty Limited |
Medical Devices | Australia | ||
Smith & Nephew Inc. |
Medical Devices | Canada | ||
Smith & Nephew (Alberta) Inc. |
Medical Devices | Canada | ||
Tenet Medical Engineering Inc. |
Medical Devices | Canada | ||
Smith & Nephew Medical (Shanghai) Limited |
Medical Devices | China | ||
Smith & Nephew Medical (Suzhou) Limited |
Medical Devices | China | ||
Smith & Nephew Orthopaedics (Beijing) Limited |
Medical Devices | China | ||
Smith & Nephew Limited |
Medical Devices | Hong Kong | ||
Smith & Nephew Healthcare Private Limited |
Medical Devices | India | ||
Smith & Nephew KK |
Medical Devices | Japan | ||
Smith & Nephew Limited |
Medical Devices | Korea | ||
Smith & Nephew Healthcare Sdn Berhad |
Medical Devices | Malaysia | ||
Smith & Nephew SA de CV |
Medical Devices | Mexico | ||
Smith & Nephew Limited |
Medical Devices | New Zealand | ||
Smith & Nephew Inc. |
Medical Devices | Puerto Rico | ||
Smith & Nephew Pte Limited |
Medical Devices | Singapore | ||
Smith & Nephew (Pty) Limited |
Medical Devices | South Africa | ||
Smith & Nephew Limited |
Medical Devices | Thailand | ||
Smith & Nephew FZE
|
Medical Devices
|
United Arab Emirates
|
Section 7 Accounts and other information |
139 |
Independent auditors report for the Company
Independent Auditors Report to the members of Smith & Nephew plc
We have audited the parent company financial statements of Smith & Nephew plc for the year ended 31 December 2012 which comprise the Parent Company balance sheet and the related notes 1 to 10. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Companys members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Companys members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Companys members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors Responsibility Statement set out on page 89, the Directors are responsible for the preparation of the Parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Boards (APBs) Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Parent Companys circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on accounts
In our opinion the Parent Company financial statements:
| give a true and fair view of the state of the Companys affairs as at 31 December 2012; |
| have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and |
| have been prepared in accordance with the requirements of the Companies Act 2006. |
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
| the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and |
| the information given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the Parent Company financial statements. |
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
| adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or |
| the Parent Company financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns; or |
| certain disclosures of Directors remuneration specified by law are not made; or |
| we have not received all the information and explanations we require for our audit. |
Other matter
We have reported separately on the Group financial statements of Smith & Nephew plc for the year ended 31 December 2012.
Les Clifford (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
20 February 2013
140 Smith & Nephew Annual Report 2012 |
Notes |
At 31 December
$ million |
At 31 December
$ million |
||||||||||
Fixed assets: |
||||||||||||
Investments |
3 | 3,597 | 3,598 | |||||||||
Current assets: |
||||||||||||
Debtors |
4 | 2,679 | 2,145 | |||||||||
Cash and bank
|
|
7
|
|
|
20
|
|
|
25
|
|
|||
2,699 | 2,170 | |||||||||||
Creditors: amounts falling due within one year: |
||||||||||||
Borrowings |
7 | (1) | (245) | |||||||||
Other creditors |
5 | (1,871) | (1,607) | |||||||||
Provisions due in less than one year
|
|
6
|
|
|
|
|
|
(5)
|
|
|||
(1,872) | (1,857) | |||||||||||
Net current assets |
827 | 313 | ||||||||||
Total assets less current liabilities |
4,424 | 3,911 | ||||||||||
Creditors: amounts falling due after one year: |
||||||||||||
Borrowings
|
|
7
|
|
|
(415)
|
|
|
|
|
|||
Total assets less total liabilities |
4,009 | 3,911 | ||||||||||
Capital and reserves |
||||||||||||
Equity shareholders funds: |
||||||||||||
Called up equity share capital |
8 | 193 | 191 | |||||||||
Share premium account |
8 | 488 | 413 | |||||||||
Capital reserve |
8 | 2,266 | 2,266 | |||||||||
Treasury shares |
8 | (735) | (766) | |||||||||
Exchange reserve |
8 | (52) | (52) | |||||||||
Profit and loss account
|
|
8
|
|
|
1,849
|
|
|
1,859
|
|
|||
Shareholders funds |
4,009 | 3,911 |
The accounts were approved by the Board and authorised for issue on 20 February 2013 and signed on its behalf by:
Sir John Buchanan |
Olivier Bohuon | |||
Chairman |
Chief Executive Officer |
Section 7 Accounts and other information |
141 |
1 Basis of preparation
The separate accounts of the Company are presented as required by the Companies Act 2006. The accounts have been prepared under the historical cost convention, modified to include revaluation to fair value of certain financial instruments as described below, and in accordance with applicable UK accounting standards. As consolidated financial information has been disclosed under IFRS 7 Financial Instruments: Disclosures, the Company is exempt from FRS 29 Financial Instruments: Disclosures. The Group accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union and are presented on pages 92 to 138.
The Company has taken advantage of the exemption in FRS 8 Related Party Disclosures not to present its related party disclosures as the Group accounts contain these disclosures. In addition, the Company has taken advantage of the exemption in FRS 1 Cash Flow Statements not to present its own cash flow statement as the Group accounts contain a consolidated cash flow.
In applying these policies management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on managements best knowledge of current events and actions, actual results ultimately may differ from those estimates.
Foreign currencies
Transactions in foreign currencies are initially recorded at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All exchange differences are dealt with in arriving at profit before taxation.
Deferred taxation
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences are expected to reverse. These are based on tax rates and laws substantively enacted at the balance sheet date.
2 Results for the year
As permitted by section 408(4) of the Companies Act 2006, the Company has not presented its own profit and loss account. Profit for the year was $167m (2011: $166m).
3 Investments
Accounting policy
Investments in subsidiaries are stated at cost less provision for impairment.
Refer to Note 24.3 of the Notes to the Group accounts for the principal trading and manufacturing subsidiary undertakings of the Group.
142 Smith & Nephew Annual Report 2012 |
Notes to the Company accounts continued
4 Debtors
2012 $ million |
2011
$ million |
|||||||
Amounts falling due within one year: |
||||||||
Amounts owed by subsidiary undertakings |
2,628 | 2,113 | ||||||
Prepayments and accrued income |
7 | 5 | ||||||
Current asset derivatives forward foreign exchange contracts |
20 | 25 | ||||||
Current asset derivatives currency swaps |
2 | | ||||||
Current taxation
|
|
22
|
|
|
2
|
|
||
2,679 | 2,145 | |||||||
5 Other creditors | ||||||||
2012 $ million |
2011 $ million |
|||||||
Amounts falling due within one year: |
||||||||
Amounts owed to subsidiary undertakings |
1,832 | 1,574 | ||||||
Other creditors |
19 | 8 | ||||||
Current liability derivatives forward foreign exchange contracts
|
|
20
|
|
|
25
|
|
||
1,871 | 1,607 |
6 Provisions due in less than one year
During quarter four of 2011, a provision of $5m was established by Smith & Nephew plc in connection with the previously disclosed investigation by the US Securities and Exchange Commission (SEC) into potential violations of the US Foreign Corrupt Practices Act in the medical devices industry. On 6 February 2012, Smith & Nephew announced that it had reached settlement with the SEC in connection with this matter. Smith & Nephew committed to pay slightly less than $23m in fines and profit disgorgement, maintain an enhanced compliance programme, and appoint an independent monitor for at least 18 months to review and report on its compliance programme. Of this total amount of slightly less than $23m, $5.4m specifically relates to profit disgorgement imposed by the SEC on Smith & Nephew plc.
7 Cash and borrowings
Accounting policy |
Financial instruments
Currency swaps are used to match foreign currency net assets with foreign currency liabilities. They are initially recorded at fair value and then for reporting purposes remeasured to fair value at exchange rates and interest rates at subsequent balance sheet dates.
Changes in the fair value of derivative financial instruments are recognised in the profit and loss account as they arise. |
2012 $million |
2011
$ million |
|||||||
Bank loans and overdrafts due within one year or on demand |
1 | 245 | ||||||
Bank loans due after one year
|
|
415
|
|
|
|
|
||
Borrowings |
416 | 245 | ||||||
Cash and bank |
(20) | (25) | ||||||
Debit balance on derivatives currency swaps
|
|
(2)
|
|
|
|
|
||
Net debt |
394 | 220 |
All currency swaps are stated at fair value. Gross US Dollar equivalents of $175m (2011 $112m) receivable and $173m (2011 $112m) payable have been netted. Currency swaps comprise foreign exchange swaps and were used in 2012 and 2011 to hedge intragroup loans.
Section 7 Accounts and other information |
143 |
8 Equity and reserves
2012 | 2011 | |||||||||||||||||||||||||||||||
|
Share
Capital $ million |
|
|
Share
Premium $ million |
|
|
Capital
Reserves $ million |
|
|
Treasury
Shares $ million |
|
|
Exchange
reserves $ million |
|
|
Profit and
loss
$ million |
|
|
Total
share- holders funds $ million |
|
|
Total
share- holders funds $ million |
|
|||||||||
At 1 January |
191 | 413 | 2,266 | (766) | (52) | 1,859 | 3,911 | 3,843 | ||||||||||||||||||||||||
Attributable profit for the year |
| | | | | 167 | 167 | 166 | ||||||||||||||||||||||||
Equity dividends paid in the year |
| | | | | (186) | (186) | (146) | ||||||||||||||||||||||||
Share-based payments recognised |
| | | | | 34 | 34 | 30 | ||||||||||||||||||||||||
Cost of shares transferred to beneficiaries |
| | | 31 | | (25) | 6 | 7 | ||||||||||||||||||||||||
New shares issued on exercise of share options | 2 | 75 | | | | | 77 | 17 | ||||||||||||||||||||||||
Treasury shares purchased |
| | | | | | | (6) | ||||||||||||||||||||||||
At 31 December |
193 | 488 | 2,266 | (735) | (52) | 1,849 | 4,009 | 3,911 |
Further information on the share capital of the Company can be found in Note 20 of the Notes to the Group Accounts.
The total distributable reserves of the Company are $1,062m (2011 $1,041m). In accordance with the exemption permitted by Section 408 of the Companies Act 2006, the Company has not presented its own profit and loss account. The attributable profit for the year dealt with in the accounts of the Company is $167m (2011 $166m).
Fees paid to Ernst & Young LLP for audit and non-audit services to the Company itself are not disclosed in the individual accounts because group financial statements are prepared which are required to disclose such fees on a consolidated basis. The fees for the consolidated Group are disclosed in Note 3 of the Notes to the Group Accounts.
9 Share-based payments
The Company operates a number of equity-settled executive and employee share plans. For all grants of share options and awards, the fair value as at the date of grant is calculated using an appropriate option pricing model and the corresponding expense is recognised over the vesting period. Subsidiary companies are recharged for the fair value of share options that relate to their employees.
The disclosure relating to the Company is detailed in Note 24.1 of the Notes to the Group accounts.
10 Contingencies
2012
$ million |
2011
$ million |
|||||||
Guarantees in respect of subsidiary undertakings |
37 | 42 |
The Company has given guarantees to banks to support liabilities under foreign exchange and other contracts and cross guarantees to support overdrafts. Such guarantees are not considered to be liabilities as all subsidiary undertakings are trading as going concerns.
The Company operated defined benefit pension plans in 2004 but at the end of 2005 its pension plan obligations were transferred to Smith & Nephew UK Limited. The Company has provided guarantees to the Trustees of the pension plans to support future amounts due from participating employers (see Note 19 of the Notes to the Group Accounts).
144 Smith & Nephew Annual Report 2012 |
Business overview and Group history
Smith & Nephews operations are organised into two primary divisions that operate globally: Advanced Surgical Devices and Advanced Wound Management.
The Group has a history dating back over 150 years to the family enterprise of Thomas James Smith who opened a small pharmacy in Hull, UK in 1856. Following his death in 1896, his nephew Horatio Nelson Smith took over the management of the business.
By the late 1990s, Smith & Nephew had expanded into being a diverse healthcare conglomerate with operations across the globe, producing various medical devices, personal care products and traditional and advanced wound care treatments. In 1998, Smith & Nephew announced a major restructuring to focus management attention and investment on three global business units advanced wound management, endoscopy and orthopaedics which offered high growth and margin opportunities. In 2011, the Endoscopy and Orthopaedics businesses were brought together to create an Advanced Surgical Devices division.
Smith & Nephew was incorporated and listed on the London Stock Exchange in 1937 and in 1999 the Group was also listed on the New York Stock Exchange. In 2001, Smith & Nephew became a constituent member of the FTSE-100 index in the UK. This means that Smith & Nephew is included in the top 100 companies traded on the London Stock Exchange measured in terms of market capitalisation.
Today, Smith & Nephew is a public limited company incorporated and headquartered in the UK and carries out business around the world.
Property, plant and equipment
The table below summarises the main properties which the Group uses and their approximate areas.
|
Approximate area
(Square feet 000s) |
|
||
Group head office in London, UK |
15 | |||
Group research facility in York, UK |
84 | |||
Advanced Surgical Devices headquarters in Andover, Massachusetts, US |
144 | |||
Advanced Wound Management headquarters and manufacturing facility in Hull, UK |
439 | |||
Advanced Surgical Devices manufacturing facilities in Memphis, Tennessee, US |
971 | |||
Advanced Surgical Devices distribution facility in Memphis, Tennessee, US |
210 | |||
Advanced Surgical Devices manufacturing facility in Aarau, Switzerland |
121 | |||
Advanced Surgical Devices manufacturing facility in Beijing, China |
192 | |||
Advanced Surgical Devices manufacturing and warehouse facility in Warwick, UK |
90 | |||
Advanced Surgical Devices manufacturing and warehouse facility in Tuttlingen, Germany |
64 | |||
Advanced Surgical Devices distribution facility and European headquarters in Baar, Switzerland |
73 | |||
Advanced Surgical Devices manufacturing facility in Mansfield, Massachusetts, US |
98 | |||
Advanced Surgical Devices manufacturing facility in Oklahoma City, Oklahoma, US |
155 | |||
Advanced Surgical Devices manufacturing facility in Calgary, Canada |
17 | |||
Advanced Wound Management manufacturing facility in Gilberdyke, UK |
51 | |||
Advanced Wound Management manufacturing facility in Suzhou, China |
283 | |||
Advanced Wound Management manufacturing facility in Fort Saskatchewan, Canada |
76 | |||
Advanced Wound Management US headquarters in St. Petersburg, Florida, US |
44 | |||
Healthpoint headquarters and laboratory space, Texas, US |
79 |
The Group Global Operations strategy includes ongoing assessment of the optimal facility footprint. The Advanced Surgical Devices manufacturing facilities in Memphis, Tennessee are largely freehold, a portion of Tuttlingen and the Advanced Wound Management facilities in Hull and Gilberdyke are freehold while other principal locations are leasehold. The Group has freehold and leasehold interests in real estate in other countries throughout the world, but no other is individually significant to the Group. Where required, the appropriate governmental authorities have approved the facilities.
Section 7 Accounts and other information |
145 |
Contractual obligations at 31 December 2012 were as follows:
Payments due by period | ||||||||||||||||||||
Total
$ million |
Less than 1 year $ million |
1-3 years $ million |
3-5 years $ million |
More than 5 years $ million |
||||||||||||||||
Debt obligations |
452 | 36 | 416 | | | |||||||||||||||
Finance lease obligations |
16 | 2 | 4 | 4 | 6 | |||||||||||||||
Operating lease obligations |
127 | 45 | 55 | 23 | 4 | |||||||||||||||
Retirement benefit obligation |
62 | 62 | | | | |||||||||||||||
Purchase obligations |
| | | | | |||||||||||||||
Capital expenditure |
8 | 8 | | | | |||||||||||||||
Other |
18 | 10 | 8 | | | |||||||||||||||
683 | 163 | 483 | 27 | 10 |
Other contractual obligations represent $10m of foreign exchange contracts and $8m of acquisition consideration. Provisions that do not relate to contractual obligations are not included in the above table.
The agreed contributions for 2013 in respect of the Groups defined benefits plans are: $39m for the UK (including $30m of supplementary payments), $17m for the US plan and $6m for other funded defined benefit plans. The table above does not include amounts payable in respect of 2014 and beyond as these are subject to future agreement and amounts cannot be reasonably estimated.
There are a number of agreements that take effect, alter or terminate upon a change in control of the Company or the Group following a takeover, such as bank loan agreements and Company share plans. None of these are deemed to be significant in terms of their potential impact on the business of the Group as a whole. In addition, there are service contracts between the Company and its Executive Directors which provide for the automatic payment of a bonus following loss of office or employment occurring because of a successful takeover bid. Further details are set out on page 78.
The Company does not have contracts or other arrangements which individually are essential to the business.
Off-balance sheet arrangements
Management believes that the Group does not have any off-balance sheet arrangements, as defined by the SEC in item 5E of Form 20-F, that have or are reasonably likely to have a current or future effect on the Groups financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Related party transactions
Except for transactions with associates (see Note 24.2 of Notes to the Group Accounts), no other related party had material transactions or loans with Smith & Nephew over the last three financial years.
146 Smith & Nephew Annual Report 2012 |
Group information continued
Risk factors
There are known and unknown risks and uncertainties relating to Smith & Nephews business. The factors listed below could cause the Groups business, financial position and results of operations to differ materially and adversely from expected and historical levels. In addition, other factors not listed here that Smith & Nephew cannot presently identify or does not believe to be equally significant could also materially adversely affect Smith & Nephews business, financial position or results of operations.
Highly competitive markets
The Groups business segments compete across a diverse range of geographic and product markets. Each market in which the business segments operate contains a number of different competitors, including specialised and international corporations. Significant product innovations, technical advances or the intensification of price competition by competitors could adversely affect the Groups operating results.
Some of these competitors may have greater financial, marketing and other resources than Smith & Nephew. These competitors may be able to initiate technological advances in the field, deliver products on more attractive terms, more aggressively market their products or invest larger amounts of capital and research and development into their businesses.
There is a possibility of further consolidation of competitors, which could adversely affect the Groups ability to compete with larger companies due to insufficient financial resources. If any of the Groups businesses were to lose market share or achieve lower than expected sales growth, there could be a disproportionate adverse impact on the Groups share price and its strategic options.
Competition exists among healthcare providers to gain patients on the basis of quality, service and price. There has been some consolidation in the Groups customer base and this trend is expected to continue. Increased competition and unanticipated actions by competitors or customers could lead to downward pressure on prices and/or a decline in market share in any of the Groups business areas, which could adversely affect Smith & Nephews results of operations and hinder its growth potential.
Continual development and introduction of new products
The medical devices industry has a rapid rate of new product introduction. In order to remain competitive, each of the Groups business segments must continue to develop innovative products that satisfy customer needs and preferences or provide cost or other advantages. Developing new products is a costly, lengthy and uncertain process. A potential product may not be brought to market or not succeed in the market for any number of reasons, including failure to work optimally, failure to receive regulatory approval, failure to be cost-competitive, infringement of patents or other intellectual property rights and changes in consumer demand. The Groups products and technologies are also subject to marketing attack by competitors. Furthermore, new products that are developed and marketed by the Groups competitors may affect price levels in the various markets in which the Groups business segments operate. If the Groups new products do not remain competitive with those of competitors, the Groups revenue could decline.
The Group maintains reserves for excess and obsolete inventory resulting from the potential inability to sell its products at prices in excess of current carrying costs. Marketplace changes resulting from the introduction of new products or surgical procedures may cause some of the Groups products to become obsolete. The Group makes estimates regarding the future recoverability of the costs of these products and records a provision for excess and obsolete inventories based on historical experience, expiration of sterilisation dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favourable than projected by management, additional inventory write-downs may be required.
Dependence on government and other funding
In most established markets throughout the world, expenditure on medical devices is ultimately controlled to a large extent by governments. Funds may be made available or withdrawn from healthcare budgets depending on government policy. The Group is therefore largely dependent on future governments providing increased funds commensurate with the increased demand arising from demographic trends.
Pricing of the Groups products is largely governed in most established markets by governmental reimbursement authorities. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation, excise taxes and competitive pricing, are ongoing in markets where the Group has operations. This control may be exercised by determining prices for an individual product or for an entire procedure. The Group is exposed to changes in reimbursement policy, tax policy and pricing which may have an adverse impact on sales and operating profit. In particular, changes to the healthcare legislation in the US are due to impose significant taxes on medical device manufacturers from 2013. There may be an increased risk of adverse changes to government funding policies arising from the deterioration in macro-economic conditions in some of the Groups markets.
The Group must adhere to the rules laid down by government agencies that fund or regulate healthcare, including extensive and complex rules in the US. Failure to do so could result in fines or loss of future funding.
World economic conditions
Demand for the Groups products is driven by demographic trends, including the ageing population and the incidence of osteoporosis and obesity. Supply of, use of and payment for the Groups products are also influenced by world economic conditions which could place increased pressure on demand and pricing, adversely impacting the Groups ability to deliver revenue and margin growth. The conditions could favour larger, better capitalised groups, with higher market shares and margins. As a consequence, the Groups prosperity is linked to general economic conditions and there is a risk of deterioration of the Groups performance and finances during adverse macro-economic conditions.
During 2012, economic conditions worldwide continued to create several challenges for the Group, including deferrals of joint replacement procedures, heightened pricing pressure, significant declines in capital equipment expenditures at hospitals and increased uncertainty over the collectability of European government debt, particularly those in certain parts of southern Europe. These factors tempered the overall growth of the Groups global markets and could have an increased impact on growth in the future.
Section 7 Accounts and other information |
147 |
Political uncertainties
The Group operates on a worldwide basis and has distribution channels, purchasing agents and buying entities in over 90 countries. Political upheaval in some of those countries or in surrounding regions may impact the Groups results of operations. Political changes in a country could prevent the Group from receiving remittances of profit from a member of the Group located in that country or from selling its products or investments in that country. Furthermore, changes in government policy regarding import quotas, taxation or other matters could adversely affect the Groups turnover and operating profit. War, terrorist activities or other conflict could also adversely impact the Group.
Currency fluctuations
Smith & Nephews results of operations are affected by transactional exchange rate movements in that they are subject to exposures arising from revenue in a currency different from the related costs and expenses. The Groups manufacturing cost base is situated principally in the US, the UK, China and Switzerland, from which finished products are exported to the Groups selling operations worldwide. Thus, the Group is exposed to fluctuations in exchange rates between the US Dollar, Sterling and Swiss Franc and the currency of the Groups selling operations, particularly the Euro, Australian Dollar and Japanese Yen. If the US Dollar, Sterling or Swiss Franc should strengthen against the Euro, Australian Dollar and the Japanese Yen, the Groups trading margin could be adversely affected.
The Group manages the impact of exchange rate movements on sales and cost of goods sold by a policy of transacting forward foreign currency commitments when firm purchase orders are placed. In addition, the Groups policy is for forecast transactions to be covered between 50% and 90% for up to one year.
The Group uses the US Dollar as its reporting currency and the US Dollar is the functional currency of Smith & Nephew plc. The Groups revenues, profits and earnings are also affected by exchange rate movements on the translation of results of operations in foreign subsidiaries for financial reporting purposes. See Financial position, liquidity and capital resources on page 50.
Manufacturing and supply
The Groups manufacturing production is concentrated at 12 main facilities in Memphis, Mansfield and Oklahoma City in the US, Hull, Warwick and Gilberdyke in the UK, Aarau in Switzerland, Tuttlingen in Germany, Fort Saskatchewan and Calgary in Canada and Suzhou and Beijing in China. If major physical disruption took place at any of these sites, it could adversely affect the results of operations. Physical loss and consequential loss insurance is carried to cover such risks but is subject to limits and deductibles and may not be sufficient to cover catastrophic loss. Management of orthopaedic inventory is complex, particularly forecasting and production planning. There is a risk that failures in operational execution could lead to excess inventory or individual product shortages.
Each of the business segments is reliant on certain key suppliers of raw materials, components, finished products and packaging materials. These suppliers must provide the materials and perform the activities to the Groups standard of quality requirements. If any of these suppliers is unable to meet the Groups needs, compromises on standards of quality or substantially increases its prices, Smith & Nephew would need to seek alternative suppliers. There can be no assurance that alternative suppliers would provide the necessary raw materials on favourable or cost-effective terms at the desired quality. Consequently, the Group may be forced to pay higher prices to obtain raw materials, which it may not be able to pass on to its customers in the form of increased prices for its finished products. In addition, some of the raw materials used may become unavailable, and there can be no assurance that the Group will be able to obtain suitable and cost-effective substitutes. Any interruption of supply caused by these or other factors could negatively impact Smith & Nephews revenue and operating profit.
The Group uses a variety of information systems to conduct its manufacturing, supply and selling operations. An unrecoverable fault in one of these systems could disrupt trading in certain markets and locations.
The Group is in the process of outsourcing to third parties or relocating to lower cost countries certain of its manufacturing and other processes. As a result of these transfers, there is a risk of disruption to supply.
Attracting and retaining key personnel
The Groups continued development depends on its ability to hire and retain highly-skilled personnel with particular expertise. This is critical, particularly in general management, research, new product development and in the sales forces. If Smith & Nephew is unable to retain key personnel in general management, research and new product development or if its largest sales forces suffer disruption or upheaval, its sales and operating profit would be adversely affected. Additionally, if the Group is unable to recruit, hire, develop and retain a talented, competitive workforce, it may not be able to meet its strategic business objectives.
Proprietary rights and patents
Due to the technological nature of medical devices and the Groups emphasis on serving its customers with innovative products, the Group has been subject to patent infringement claims and is subject to the potential for additional claims.
Claims asserted by third parties regarding infringement of their intellectual property rights, if successful, could require the Group to expend time and significant resources to pay damages, develop non-infringing products or obtain licences to the products which are the subject of such litigation, thereby affecting the Groups growth and profitability. Smith & Nephew attempts to protect its intellectual property and regularly opposes third party patents and trademarks where appropriate in those areas that might conflict with the Groups business interests. If Smith & Nephew fails to protect and enforce its intellectual property rights successfully, its competitive position could suffer, which could harm its results of operations.
Product liability claims and loss of reputation
The development, manufacture and sale of medical devices entail risk of product liability claims or recalls. Design and manufacturing defects with respect to products sold by the Group or by companies it has acquired could damage, or impair the repair of, body functions. The Group may become subject to liability, which could be substantial, because of actual or alleged defects in its products. In addition, product defects could lead to the need to recall from the market existing products, which may be costly and harmful to the Groups reputation.
There can be no assurance that customers, particularly in the US, the Groups largest geographical market, will not bring product liability or related claims that would have a material adverse effect on the Groups financial position or results of operations in the future, or that the Group will be able to resolve such claims within insurance limits.
148 Smith & Nephew Annual Report 2012 |
Group information continued
Regulatory standards and compliance in the healthcare industry
Business practices in the healthcare industry are subject to regulation and review by various government authorities. In general, the trend in many countries in which the Group does business is towards higher expectations and increased enforcement activity by governmental authorities. While the Group is committed to doing business with integrity and welcomes the trend to higher standards in the healthcare industry, the Group and other companies in the industry have been subject to investigations and other enforcement activity that have incurred and may continue to incur significant expense. See Legal proceedings on page 52. Under certain circumstances, if the Group were found to have violated the law, its ability to sell its products to certain customers could be restricted.
Regulatory approval
The international medical device industry is highly regulated. Regulatory requirements are a major factor in determining whether substances and materials can be developed into marketable products and the amount of time and expense that should be allotted to such development.
National regulatory authorities administer and enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the safety and efficacy of such products. Of particular importance is the requirement in many countries that products be authorised or registered prior to manufacture, marketing or sale and that such authorisation or registration be subsequently maintained. The major regulatory agencies for Smith & Nephews products include the Food and Drug Administration (FDA) in the US, the Medicines and Healthcare products Regulatory Agency in the UK, the Ministry of Health, Labour and Welfare in Japan and the State Food and Drug Administration in China. At any time, the Group is awaiting a number of regulatory approvals which, if not received, could adversely affect results of operations.
The trend is towards more stringent regulation and higher standards of technical appraisal. Such controls have become increasingly demanding to comply with and management believes that this trend will continue.
Regulatory requirements may also entail inspections for compliance with appropriate standards, including those relating to Quality Management Systems or Good Manufacturing Practices regulations. All manufacturing and other significant facilities within the Group are subject to regular internal and external audit for compliance with national and Group medical device regulation and policies.
Payment for medical devices may be governed by reimbursement tariff agencies in a number of countries. Reimbursement rates may be set in response to perceived economic value of the devices, based on clinical and other data relating to cost, patient outcomes and comparative effectiveness. They may also be affected by overall government budgetary considerations. The Group believes that its emphasis on innovative products and services should contribute to success in this environment.
Failure to comply with these regulatory requirements could have a number of adverse consequences, including withdrawal of approval to sell a product in a country, temporary closure of a manufacturing facility, fines and potential damage to company reputation.
Failure to make successful acquisitions
A key element of the Groups strategy for continued growth is to make acquisitions or alliances to complement its existing business. Failure to identify appropriate acquisition targets or failure to conduct adequate due diligence or to integrate them successfully would have an adverse impact on the Groups competitive position and profitability. This could result from the diversion of management resources towards the acquisition or integration process, challenges of integrating organisations of different geographic, cultural and ethical backgrounds, as well as the prospect of taking on unexpected or unknown liabilities. In addition, the availability of global capital may make financing less attainable or more expensive and could result in the Group failing in its strategic aim of growth by acquisition or alliance.
Other risk factors
Smith & Nephew is subject to a number of other risks, which are common to most global medical technology groups and are reviewed as part of the Groups risk management process.
Section 7 Accounts and other information |
149 |
Dividends
Dividend history
Smith & Nephew has paid dividends on its Ordinary Shares in every year since 1937. Following the capital restructuring and dividend reduction in 2000 the Group adopted a policy of increasing its dividend cover (the ratio of EPSA, as set out in the Selected financial data, to ordinary dividends declared for the year). This was intended to increase the financing capability of the Group for acquisitions and other investments. From 2000 to 2004 the dividend increased in line with inflation and, in 2004, dividend cover stood at 4.1 times. Having achieved this level of dividend cover the Board changed its policy, from that of increasing dividends in line with inflation, to that of increasing dividends for 2005 and after by 10%. Following the redenomination of the Companys share capital into US Dollars the Board re-affirmed its policy of increasing the dividend by 10% a year in US Dollar terms.
On 2 August 2012, the Board announced its intention to pursue a progressive dividend policy, with the aim of increasing the US Dollar value of Ordinary dividends over time broadly based on the Groups underlying growth in earnings, while taking into account capital requirements and cash flows.
From 2013, the Board will review at the time of the full year results, the appropriate level of total annual dividend each year. The Board intends that the interim dividend will be set by a formula and will be equivalent to 40% of the total dividend for the previous year. Dividends will continue to be declared in US Dollars with an equivalent amount in sterling payable to those shareholders whose registered address is in the UK, or who have validly elected to receive sterling dividends.
An interim dividend in respect of each fiscal year is normally declared in August and paid in November. A final dividend will be recommended by the Board of Directors and paid subject to approval by shareholders at the Companys Annual General Meeting.
Future dividends of Smith & Nephew will be dependent upon: future earnings; the future financial condition of the Group; the Boards dividend policy; and the additional factors that might affect the business of the Group set out in Special note regarding forward-looking statements and Risk Factors.
Dividends per share
The table below sets out the dividends per Ordinary Share in the last five years.
Years ended 31 December | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Pence per share: |
||||||||||||||||||||
Interim |
6.811 | 4.639 | 4.233 | 3.650 | 3.194 | |||||||||||||||
Final/Second interim (ii) |
11.656(i) | 7.444 | 6.639 | 6.494 | 6.194 | |||||||||||||||
Total |
18.467 | 12.083 | 10.872 | 10.144 | 9.388 | |||||||||||||||
US cents per share: |
||||||||||||||||||||
Interim |
11.000 | 7.333 | 6.667 | 6.067 | 5.511 | |||||||||||||||
Final/Second interim (ii) |
18.000 | 12.000 | 10.911 | 9.922 | 9.022 | |||||||||||||||
Total |
29.000 | 19.333 | 17.578 | 15.989 | 14.533 |
(i) | Translated at the Bank of England rate on 19 February 2013. |
(ii) | 2008 and 2009 Second interim, 2010 to 2012 Final. |
Dividends above include the associated UK tax credit of 10%, but exclude the deduction of withholding taxes. All dividends, up to the second interim dividend for 2005, were declared in pence per Ordinary Share and translated into US cents per Ordinary Share at the Noon Buying Rate on the payment date. Since the second interim dividend for 2005 all dividends have been declared in US cents per Ordinary Share.
The 2012 final dividend will be payable on 8 May 2013, subject to shareholder approval.
In respect of the proposed final dividend for the year ended 31 December 2012 of 16.20 US cents per Ordinary Share, the record date will be 19 April 2013 and the payment date will be 8 May 2013. The sterling equivalent per Ordinary Share will be set following the record date. Shareholders may elect to receive their dividend in either sterling or US Dollars and the last day for election will be 19 April 2013. The Ordinary Shares will trade ex-dividend on both the London and New York Stock Exchanges from 17 April 2013.
150 Smith & Nephew Annual Report 2012 |
Group information continued
Share prices
The table below sets out, for the periods indicated, the highest and lowest middle market quotations for the Companys Ordinary Shares (as derived from the Daily Official List of the UK Listing Authority) and the highest and lowest sales prices of its ADSs (as reported on the New York Stock Exchange composite tape).
Ordinary Shares | ADSs | |||||||||||||||
High £ |
Low £ |
High
US$ |
Low
US$ |
|||||||||||||
Year ended 31 December: |
||||||||||||||||
2008 |
6.91 | 4.13 | 68.87 | 30.39 | ||||||||||||
2009 |
6.42 | 4.20 | 51.38 | 30.57 | ||||||||||||
2010 |
6.97 | 5.38 | 53.94 | 41.29 | ||||||||||||
2011 |
7.42 | 5.21 | 60.19 | 42.17 | ||||||||||||
2012 |
6.93 | 5.80 | 56.13 | 45.13 | ||||||||||||
Quarters in the year ended 31 December: |
||||||||||||||||
2011: |
||||||||||||||||
1st Quarter |
7.42 | 6.50 | 60.19 | 50.83 | ||||||||||||
2nd Quarter |
7.15 | 6.35 | 58.18 | 51.11 | ||||||||||||
3rd Quarter |
6.87 | 5.21 | 55.30 | 42.17 | ||||||||||||
4th Quarter |
6.26 | 5.41 | 48.15 | 42.68 | ||||||||||||
2012: |
||||||||||||||||
1st Quarter |
6.43 | 5.95 | 51.13 | 45.57 | ||||||||||||
2nd Quarter |
6.40 | 5.80 | 51.23 | 45.13 | ||||||||||||
3rd Quarter |
6.93 | 6.38 | 56.13 | 49.50 | ||||||||||||
4th Quarter |
6.92 | 6.38 | 55.77 | 51.01 | ||||||||||||
2013: |
||||||||||||||||
1st Quarter (to 19 February 2013) |
7.34 | 6.84 | 58.00 | 54.28 | ||||||||||||
Last Six Months: |
||||||||||||||||
August 2012 |
6.79 | 6.50 | 52.92 | 51.33 | ||||||||||||
September 2012 |
6.93 | 6.61 | 56.13 | 52.67 | ||||||||||||
October 2012 |
6.92 | 6.44 | 55.77 | 51.27 | ||||||||||||
November 2012 |
6.62 | 6.38 | 52.77 | 51.01 | ||||||||||||
December 2012 |
6.89 | 6.63 | 55.66 | 53.28 | ||||||||||||
January 2013 |
7.34 | 6.84 | 58.00 | 55.53 | ||||||||||||
February 2013 (to 19 February 2013) |
7.28 | 6.94 | 57.43 | 54.28 |
Section 7 Accounts and other information |
151 |
Financial calendar
Annual General Meeting |
11 April 2013 | |
Quarter One results |
2 May 2013 | |
Payment of 2012 final dividend |
8 May 2013 | |
Half year results announced |
1 August 2013 (i) | |
Quarter Three results announced |
31 October 2013 | |
Payment of 2013 first interim dividend |
November 2013 | |
Full year results announced |
February 2014 (i) | |
Annual Report available |
February/March 2014 | |
Annual General Meeting |
April/May 2014 |
(i) | Dividend declaration dates. |
Shareholder facilities
Shareview
Equinitis online enquiry and portfolio management service for shareholders. To view information about your shareholdings online, register at www.shareview.co.uk. Once registered for Shareview, you will also be able to register your proxy instructions online and elect to receive future shareholder communications via the Companys website (www.smith-nephew.com).
E-communications
We encourage shareholders to elect to receive communications via e-mail as this has significant environmental and cost benefits. Shareholders may register for this service through Equiniti, at www.shareview.co.uk. Shareholders will receive a confirmation letter from Equiniti at their registered address, containing an Activation Code for future use.
Payment of dividends direct to your bank or building society account
Shareholders who wish to avoid the risk of their dividend payments getting lost or mislaid can arrange to have their cash dividends paid directly to a bank or building society account. This facility is available to UK resident shareholders who receive sterling dividends. If you do not live in the UK you may be able to register for the overseas payment service. Further Information is available at www.shareview.co.uk or by contacting Equiniti (UK and overseas helpline numbers as above).
Dividend re-investment plan (DRIP)
The Company offers shareholders (except those in North America) the opportunity to participate in a DRIP. This enables shareholders to reinvest their cash dividends in further Ordinary Shares of Smith & Nephew plc. These are purchased in the market at competitive dealing costs. For further details plus an application form to re-invest future dividends, contact Equiniti (as above).
Individual savings account (ISA)
Shareholders who are UK resident may hold Smith & Nephew plc shares in an Individual Savings Account (ISA), which is administered by the Companys registrar. For information about this service please contact Equiniti (as above).
Ordinary shareholders
Registrar
All general enquiries concerning shareholdings, dividends, changes to shareholders personal details and the AGM should be addressed to:
Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA
Tel: 0871 384 2081 *
Tel: +44 (0) 121 415 7072 from outside the UK.
Website: www.shareview.co.uk
* | Calls to this number are charged at 8p per minute (excluding VAT) plus network extras. Lines are open from 8.30am to 5.30pm Monday to Friday, excluding UK public holidays. |
Shareholder communications
The Company makes quarterly financial announcements which are made available through Stock Exchange announcements and on the Groups website (www.smith-nephew.com). Copies of recent Annual Reports, press releases, institutional presentations and audio webcasts are also available on the website.
The Company sends paper copies of the Notice of Annual General Meeting and Annual Report only to those shareholders that have elected to receive shareholder documentation by post. ADS holders will also not receive a paper copy unless they have elected to do so. Electronic copies of the Annual Report and Notice of Annual General Meeting are available on the Groups website at www.smith-nephew.com. Both Ordinary shareholders and ADS holders can request paper copies of the Annual Report, which the Company provides free of charge. The Company will continue to send to Ordinary shareholders by post the Form of Proxy and an accompanying letter notifying them of the availability of the Annual Report and Notice of Annual General Meeting on the Groups website. Shareholders who elect to receive the Annual Report and Notice of Annual General Meeting electronically are informed by e-mail of the documents availability on the Groups website. ADS holders receive the Form of Proxy by post but will not receive a paper copy of the Notice of Annual General Meeting.
Investor communications
The Company maintains regular dialogue with individual institutional shareholders, together with results presentations. To ensure that all members of the Board develop an understanding of the views of major investors, the Executive Directors review significant issues raised by investors with the Board. Non-Executive Directors are sent copies of analysts and brokers briefings. There is an opportunity for individual shareholders to question the Directors at the AGM and the Company regularly responds to letters from shareholders on a range of issues.
UK capital gains tax
For the purposes of UK capital gains tax the price of the Companys Ordinary Shares on 31 March 1982 was 35.04p.
Smith & Nephew share price
The Companys Ordinary Shares are quoted on the LSE under the symbol SN. The Companys share price is available on the Smith & Nephew website www.smith-nephew.com and at www.londonstockexchange.com where it is updated at intervals throughout the day.
152 Smith & Nephew Annual Report 2012 |
Information for shareholders continued
ShareGift
Shareholders with only a small number of shares, which would cost more to sell than they are worth, may wish to consider donating them to the charity ShareGift (registered charity 1052686) which specialises in accepting such shares as donations. There may be no implications for Capital Gains Tax purposes (no gain or loss) and it may also be possible to obtain income tax relief. The relevant stock transfer form may be obtained from Equiniti at the above address.
Further information about ShareGift is available at www.sharegift.org or by contacting ShareGift at:
ShareGift, 17 Carlton House Terrace, London SW1Y 5AH.
Tel: (+44) (0) 20 7930 3737.
American Depositary Shares (ADSs) and American Depositary Receipts (ADRs)
In the US, the Companys Ordinary Shares are traded in the form of ADSs, evidenced by ADRs, on the NYSE under the symbol SNN. Each American Depositary Share represents five Ordinary Shares. The Bank of New York Mellon is the authorised depositary bank for the Companys ADR programme.
ADS enquiries
All enquiries regarding ADS holder accounts and payment of dividends should be addressed to:
The Bank of New York Mellon, PO Box 358516, Pittsburgh, PA 15252-8516, USA;
Tel: +1-866-259-2287 inside the US (toll free)
Tel: +1-201-680-6825 internationally
Email: shrrelations@bnymellon.com
A Global Buy DIRECT plan is available for US residents, enabling investment directly in ADSs with reduced brokerage commissions and service costs. For further information on Global Buy DIRECT contact: The Bank of New York Mellon (as above) or visit www.bnymellon.com/shareowner.
The Company provides The Bank of New York Mellon, as depositary, with copies of Annual Reports containing Consolidated Financial Statements and the opinion expressed thereon by its independent auditors. Such financial statements are prepared under IFRS. The Bank of New York Mellon will send these reports to recorded ADS holders who have elected to receive paper copies. The Company also provides to The Bank of New York Mellon all notices of shareholders meetings and other reports and communications that are made generally available to shareholders of the Company. The Bank of New York Mellon makes such notices, reports and communications available for inspection by recorded holders of ADSs and sends voting instruction forms by post to all recorded holders of ADSs.
Smith & Nephew ADS price
The Companys ADS price can be obtained from the official New York Stock Exchange website at www.nyse.com, the Smith-Nephew website www.smith-nephew.com and is quoted daily in the Wall Street Journal.
ADS payment information
The Company hereby discloses ADS payment information for the year ended 31 December 2012 in accordance with the Securities and Exchange Commission rules 12.D.3 and 12.D.4 relating to Form 20-F filings by foreign private issuers.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors, including payment of dividends by the Company by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depository services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fee for those services are paid.
Persons depositing or withdrawing shares must pay:
|
For:
|
|
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property | |
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates | ||
$0.02 (or less) per ADS | Any cash distribution to ADS registered holders, including payment of dividend | |
A fee equivalent to the fee that would be payable if securities distributed to holders had been shares and the shares had been deposited for issuance of ADSs | Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders | |
$0.02 (or less) per ADS per calendar year | Depositary services | |
Registration or transfer fees | Transfer and registration of shares on our share register to or from the name of the depositary or its agent when shares are deposited or withdrawn | |
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | As necessary | |
Any charges incurred by the depositary or its agents for servicing the deposited securities | As necessary |
A fee of two US cents per ADS was paid on the 2011 final dividend and a fee of one US cent per ADS was deducted from the 2012 first interim dividend paid in October. In the period 1 January 2012 to 19 February 2013 the total reimbursed by The Bank of New York Mellon was $156,138.56.
Section 7 Accounts and other information |
153 |
Share capital
The principal trading market for the Ordinary Shares is the London Stock Exchange. The Ordinary Shares were listed on the New York Stock Exchange on 16 November 1999, trading in the form of ADSs evidenced by ADRs. Each ADS represents five Ordinary Shares. The ADS facility is sponsored by The Bank of New York Mellon acting as depositary.
All the Ordinary Shares, including those held by Directors and Executive Officers, rank pari passu with each other. On 23 January 2006 the Ordinary Shares of 12 2/9 pence were redenominated as Ordinary Shares of US 20 cents (following approval by shareholders at the extraordinary general meeting in December 2005). The new US Dollar Ordinary Shares carry the same rights as the previous Ordinary Shares. The share price continues to be quoted in sterling and the ADSs continue to represent five Ordinary Shares. In 2006 the Company issued £50,000 of shares in sterling in order to comply with English law. These were issued as Deferred Shares, which are not listed on any stock exchange. They have extremely limited rights and therefore effectively have no value. These shares were allotted to the Chief Executive Officer, although the Board reserves the right to transfer them to another member of the Board should it so wish.
As at 19 February 2013, to the knowledge of the Group, there were 19,122 registered holders of Ordinary Shares, of whom 86 had registered addresses in the US and held a total of 183,774 Ordinary Shares (less than 0.2% of the total issued). Because certain Ordinary Shares are registered in the names of nominees, the number of shareholders with registered addresses in the US is not representative of the number of beneficial owners of Ordinary Shares resident in the US.
Shareholdings
As at 19 February 2013, 6,478,972 ADSs equivalent to 32,394,860 Ordinary Shares or approximately 3.6% of the total Ordinary Shares in issue, were outstanding and were held by 84 registered holders.
Major shareholders
As far as is known to Smith & Nephew, the Group is not directly or indirectly owned or controlled by another corporation or by any government and the Group has not entered into arrangements, the operation of which may at a subsequent date result in a change in control of the Group.
As at 19 February 2013, no persons are known to Smith & Nephew to have any interest (as defined in the Disclosure and Transparency Rules of the FSA) in 3% or more of the Ordinary Shares, other than as shown below. The following tables show changes over the last three years in the percentage and numbers of the issued share capital owned by shareholders holding 3% or more of Ordinary Shares, as notified to the Company under the Disclosure and Transparency Rules:
As at 31 December | ||||||||||||||||
19 February 2013
% |
2012 % |
2011 % |
2010 % |
|||||||||||||
Invesco |
11.6 | 11.9 | 5.0 | | ||||||||||||
BlackRock, Inc. |
5.0 | 5.0 | 5.0 | 5.0 | ||||||||||||
Newton Investment Management Limited |
0.9 | 4.9 | 5.0 | 5.0 | ||||||||||||
Legal and General Group plc |
3.1 | 3.0 | 4.0 | 5.0 | ||||||||||||
Capital Group of Companies Inc. |
| | 0.7 | 5.1 | ||||||||||||
Thornburg Investment Management Inc. |
| | | 4.1 | ||||||||||||
As at 31 December | ||||||||||||||||
19 February 2013
000 |
2012 000 |
2011 000 |
2010 000 |
|||||||||||||
Invesco |
105,165 | 107,823 | 44,901 | | ||||||||||||
BlackRock, Inc. |
44,811 | 44,811 | 44,811 | 44,322 | ||||||||||||
Newton Investment Management Limited |
8,196 | 8,432 | 44,337 | 44,735 | ||||||||||||
Legal and General Group plc |
28,331 | 26,906 | 35,676 | 44,704 | ||||||||||||
Capital Group of Companies Inc. |
| | 6,138 | 44,594 | ||||||||||||
Thornburg Investment Management Inc. |
| | | 36,164 |
In addition to the above, the Company is aware that Walter Scott & Partners Limited held approximately 39m Ordinary Shares (4.3%) at 19 February 2013.
The Company is not aware of any person who has a significant direct or indirect holding of securities in the Company, and is not aware of any persons holding securities which may control the Company. There are no securities in issue which have special rights as to the control of the Company.
154 Smith & Nephew Annual Report 2012 |
Share capital continued
Purchase of Ordinary Shares on behalf of the Company
The share buy-back programme was suspended in November 2008, in light of conditions in the financial markets. The programme is kept under review. The Company will seek a renewal of its permission from shareholders to purchase up to 10% of its own shares at the AGM on 11 April 2013. As at 31 December 2012, 68,240,200 (2011 68,240,200) Ordinary Shares had been purchased under the share buy-back programme that commenced in February 2007. No shares were purchased in the years between 2009 to 2012.
Exchange controls and other limitations affecting security holders
There are no UK governmental laws, decrees or regulations that restrict the export or import of capital or that affect the payment of dividends, interest or other payments to non-resident holders of Smith & Nephews securities, except for certain restrictions imposed from time to time by Her Majestys Treasury of the United Kingdom pursuant to legislation, such as the United Nations Act 1946 and the Emergency Laws Act 1964, against the government or residents of certain countries.
There are no limitations, either under the laws of the UK or under the articles of association of Smith & Nephew, restricting the right of non-UK residents to hold or to exercise voting rights in respect of Ordinary Shares, except that where any overseas shareholder has not provided to the Company a UK address for the service of notices, the Company is under no obligation to send any notice or other document to an overseas address. It is, however, the current practice of the Company to send every notice or other document to all shareholders regardless of the country recorded in the register of members, with the exception of details of the Companys dividend re-investment plan, which are not sent to shareholders with recorded addresses in the US and Canada.
Taxation information for shareholders
The comments below are of a general and summary nature and are based on the Groups understanding of certain aspects of current UK and US federal income tax law and practice relevant to the ADSs and Ordinary Shares not in ADS form. The comments address the material US and UK tax consequences generally applicable to a person who is the beneficial owner of ADSs or Ordinary Shares and who, for US federal income tax purposes, is a citizen or resident of the United States, a corporation (or other entity taxable as a corporation) created or organised in or under the laws of the United States, or an estate or trust the income of which is included in gross income for US federal income tax purposes regardless of its source (each a US Holder). The comments set out below do not purport to address all tax consequences of the ownership of ADSs or Ordinary Shares which may be material to a particular holder and in particular do not deal with the position of shareholders who directly or indirectly own 10% or more of the Companys issued Ordinary Shares. This discussion does not apply to (i) persons whose holding of ADSs or Ordinary Shares is effectively connected with or pertains to either a permanent establishment in the United Kingdom through which a US Holder carries on a business in the United Kingdom or a fixed base from which a US Holder performs independent personal services in the United Kingdom, or (ii) persons whose registered address is inside the UK. This discussion does not apply to certain investors subject to special rules, such as certain financial institutions, tax-exempt entities, insurance companies, broker-dealers, traders in securities that elect to mark to market, partnerships or other entities treated as partnerships for US federal income tax purposes, US Holders holding ADSs or Ordinary Shares as part of a hedging, conversion or other integrated transaction or whose functional currency for US federal income tax purposes is other than the US Dollar and US Holders liable for alternative minimum tax. In addition, the comments below do not address US state, local or non-US (other than UK) taxes. The summary deals only with US Holders who hold ADSs or Ordinary Shares as capital assets. The summary is based on current UK and US law and practice which is subject to change, possibly with retroactive effect. US Holders are recommended to consult their own tax advisers as to the particular tax consequences to them of the ownership of ADSs or Ordinary Shares.
The Company believes, and this discussion assumes, that the Company was not a passive foreign investment company for its taxable year ended 31 December 2012.
This discussion is based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. For purposes of US federal income tax law, US Holders of ADSs will generally be treated as owners of the Ordinary Shares represented by the ADSs. However, the US Treasury has expressed concerns that parties to whom depositary shares are released before shares are delivered to the depositary (pre-released) may be taking actions that are inconsistent with the claiming of foreign tax credits by owners of depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate US Holders. Accordingly, the availability of the reduced tax rate for dividends received by certain non-corporate US Holders of ADSs could be affected by actions that may be taken by parties to whom ADSs are pre-released.
Section 7 Accounts and other information |
155 |
Taxation of dividends in the United Kingdom and the United States
The UK does not currently impose a withholding tax on dividends paid by a UK corporation, such as the Company.
Distributions paid by the Company will be treated for US federal income tax purposes as foreign source ordinary dividend income to a US Holder to the extent paid out of the Companys current or accumulated earnings and profits as determined for US federal income tax purposes. Such dividends will not be eligible for the dividends-received deduction generally allowed to corporate US Holders.
Dividends paid to certain non-corporate US Holders of Ordinary Shares or ADSs may be subject to US federal income tax at lower rates than other types of ordinary income if certain conditions are met. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favourable rates.
Taxation of capital gains
US Holders, who are not resident or ordinarily resident for tax purposes in the UK, will not generally be liable for UK capital gains tax on any capital gain realised upon the sale or other disposition of ADSs or Ordinary Shares unless the ADSs or Ordinary Shares are held in connection with a trade carried on in the UK through a permanent establishment (or in the case of individuals, through a branch or agency). Furthermore, UK resident individuals who acquire ADSs or Ordinary Shares before becoming temporarily non-UK residents may remain subject to UK taxation of capital gains on gains realised while non-resident.
For US federal income tax purposes, gains or losses realised upon a taxable sale or other disposition of ADSs or Ordinary Shares by US Holders generally will be US source capital gains or losses and will be long-term capital gains or losses if the ADSs or Ordinary Shares were held for more than one year. The amount of a US Holders gain or loss will be equal to the difference between the amount realised on the sale or other disposition and such holders tax basis in the ADSs, or Ordinary Shares, determined in US Dollars.
Inheritance and estate taxes
The HM Revenue & Customs imposes inheritance tax on capital transfers which occur on death, and in the seven years preceding death. The HM Revenue & Customs considers that the US/UK Double Taxation Convention on Estate and Gift Tax applies to inheritance tax. Consequently, a US citizen who is domiciled in the United States and is not a UK national or domiciled in the United Kingdom will not be subject to UK inheritance tax in respect of ADSs and Ordinary Shares. A UK national who is domiciled in the United States will be subject to both UK inheritance tax and US federal estate tax but will be entitled to a credit for US federal estate tax charged in respect of ADSs and Ordinary Shares in computing the liability to UK inheritance tax. Conversely, a US citizen who is domiciled or deemed domiciled in the United Kingdom will be entitled to a credit for UK inheritance tax charged in respect of ADSs and Ordinary Shares in computing the liability for US federal estate tax. Special rules apply where ADSs and Ordinary Shares are business property of a permanent establishment of an enterprise situated in the United Kingdom.
US information reporting and backup withholding
A US Holder may be subject to US information reporting and backup withholding on dividends paid on or the proceeds of sales of ADSs or Ordinary Shares made within the US or through certain US-related financial intermediaries, unless the US Holder is an exempt recipient or, in the case of backup withholding, provides a correct US taxpayer identification number and certain other conditions are met. US backup withholding may apply if there has been a notification from the US Internal Revenue Service of a failure to report all interest or dividends.
Any backup withholding deducted may be credited against the US Holders US federal income tax liability, and, where the backup withholding exceeds the actual liability, the US Holder may obtain a refund by timely filing the appropriate refund claim with the US Internal Revenue Service.
Certain US Holders who are individuals (and under proposed Treasury regulations, certain entities) may be required to report information relating to securities issued by a non-US person (or foreign accounts through which the securities are held), subject to certain exceptions (including an exception for securities held in accounts maintained by US financial institutions). US Holders should consult their tax advisers regarding their reporting obligations with respect to the Ordinary Shares or ADSs.
UK stamp duty and stamp duty reserve tax
UK stamp duty is charged on documents and in particular instruments for the transfer of registered ownership of Ordinary Shares. Transfers of Ordinary Shares in certificated form will generally be subject to UK stamp duty at the rate of 1 ⁄ 2 % of the consideration given for the transfer with the duty rounded up to the nearest £5.
UK stamp duty reserve tax (SDRT) arises when there is an agreement to transfer shares in UK companies for consideration in money or moneys worth, and so an agreement to transfer Ordinary Shares for money or other consideration may give rise to a charge to SDRT at the rate of 1 ⁄ 2 % (rounded up to the nearest penny). The charge of SDRT will be cancelled, and any SDRT already paid will be refunded, if within six years of the agreement an instrument of transfer is produced to HM Revenue & Customs and the appropriate stamp duty paid.
Transfers of Ordinary Shares into CREST (an electronic transfer system) are exempt from stamp duty so long as the transferee is a member of CREST who will hold the Ordinary Shares as a nominee for the transferor and the transfer is in a form that will ensure that the securities become held in uncertificated form within CREST. Paperless transfers of Ordinary Shares within CREST for consideration in money or moneys worth are liable to SDRT rather than stamp duty. SDRT on relevant transactions will be collected by CREST at 1 ⁄ 2 %, and this will apply whether or not the transfer is affected in the United Kingdom and whether or not the parties to it are resident or situated in the United Kingdom.
United Kingdom
A charge of stamp duty or SDRT at the rates of 1 1 ⁄ 2 % of the consideration (or, in some circumstances, the value of the shares concerned) will arise on a transfer or issue of Ordinary Shares to the Depositary or to certain persons providing a clearance service (or their nominees or agents) for the conversion into ADRs and will generally be payable by the Depositary or person providing clearance service. In accordance with the terms of the Deposit Agreement, any tax or duty payable by the Depositary on deposits of Ordinary Shares will be charged by the Depositary to the party to whom ADRs are delivered against such deposits.
No liability for stamp duty or SDRT will arise on any transfer of, or agreement to transfer, an ADS or beneficial ownership of an ADS, provided that the ADS and any instrument of transfer or written agreement to transfer remains at all times outside the United Kingdom, and provided further that any instrument of transfer or written agreement to transfer is not executed in the United Kingdom and the transfer does not relate to any matter or thing done or to be done in the United Kingdom (the location of the custodian as a holder of Ordinary Shares not being relevant in this context). In any other case, any transfer of, or agreement to transfer, an ADS or beneficial ownership of an ADS could, depending on all the circumstances of the transfer, give rise to a charge to stamp duty or SDRT.
156 Smith & Nephew Annual Report 2012 |
Selected financial data
|
2012
$ million |
|
|
2011
$ million |
|
|
2010
$ million |
|
|
2009
$ million |
|
|
2008
$ million |
|
||||||
Income statement |
||||||||||||||||||||
Revenue |
4,137 | 4,270 | 3,962 | 3,772 | 3,801 | |||||||||||||||
Cost of goods sold |
(1,070) | (1,140) | (1,031) | (1,030) | (1,077) | |||||||||||||||
Gross Profit |
3,067 | 3,130 | 2,931 | 2,742 | 2,724 | |||||||||||||||
Selling, general and administrative expenses |
(2,050) | (2,101) | (1,860) | (1,864) | (1,942) | |||||||||||||||
Research and development expenses |
(171) | (167) | (151) | (155) | (152) | |||||||||||||||
Operating profit |
846 | 862 | 920 | 723 | 630 | |||||||||||||||
Net interest receivable/(payable) |
2 | (8) | (15) | (40) | (66) | |||||||||||||||
Other finance (costs)/income |
(3) | (6) | (10) | (15) | (1) | |||||||||||||||
Share of results of associates |
4 | | | 2 | 1 | |||||||||||||||
Profit on disposal of net assets held for sale |
251 | | | | | |||||||||||||||
Profit before taxation |
1,100 | 848 | 895 | 670 | 564 | |||||||||||||||
Taxation |
(371) | (266) | (280) | (198) | (187) | |||||||||||||||
Attributable profit for the year |
729 | 582 | 615 | 472 | 377 | |||||||||||||||
Earnings per Ordinary Share |
||||||||||||||||||||
Basic |
81.3¢ | 65.3¢ | 69.3¢ | 53.4¢ | 42.6¢ | |||||||||||||||
Diluted |
80.9¢ | 65.0¢ | 69.2¢ | 53.3¢ | 42.4¢ | |||||||||||||||
Adjusted attributable profit |
||||||||||||||||||||
Attributable profit for the year |
729 | 582 | 615 | 472 | 377 | |||||||||||||||
Acquisition related costs |
11 | | | 26 | 61 | |||||||||||||||
Restructuring and rationalisation expenses |
65 | 40 | 15 | 42 | 34 | |||||||||||||||
Legal settlement |
| 23 | | | | |||||||||||||||
Amortisation of acquisition intangibles and impairments |
43 | 36 | 34 | 66 | 51 | |||||||||||||||
Profit on disposal of net assets held for sale |
(251) | | | | | |||||||||||||||
Taxation on excluded items |
82 | (17) | (10) | (26) | (30) | |||||||||||||||
Adjusted attributable profit |
679 | 664 | 654 | 580 | 493 | |||||||||||||||
Adjusted basic earnings per Ordinary Share (EPSA) (i) |
75.7¢ | 74.5¢ | 73.6¢ | 65.6¢ | 55.6¢ | |||||||||||||||
Adjusted diluted earnings per Ordinary Share (ii) |
75.4¢ | 74.2¢ | 73.6¢ | 65.5¢ | 55.4¢ |
(i) | Adjusted basic earnings per Ordinary Share is calculated by dividing adjusted attributable profit by the average number of shares. |
(ii) | Adjusted diluted earnings per Ordinary Share is calculated by dividing adjusted attributable profit by the diluted number of shares. |
Section 7 Accounts and other information |
157 |
2012 $ million |
2011 $ million |
2010 $ million |
2009 $ million |
2008 $ million |
||||||||||||||||
Group balance sheet |
||||||||||||||||||||
Non-current assets |
3,498 | 2,542 | 2,579 | 2,480 | 2,523 | |||||||||||||||
Current assets |
2,144 | 2,080 | 2,154 | 2,071 | 1,985 | |||||||||||||||
Assets held for sale |
| 125 | | 14 | | |||||||||||||||
Total assets |
5,642 | 4,747 | 4,733 | 4,565 | 4,508 | |||||||||||||||
Share capital |
193 | 191 | 191 | 190 | 190 | |||||||||||||||
Share premium |
488 | 413 | 396 | 382 | 375 | |||||||||||||||
Treasury shares |
(735) | (766) | (778) | (794) | (823) | |||||||||||||||
Retained earnings and other reserves |
3,938 | 3,349 | 2,964 | 2,401 | 1,957 | |||||||||||||||
Total equity |
3,884 | 3,187 | 2,773 | 2,179 | 1,699 | |||||||||||||||
Non-current liabilities |
828 | 422 | 1,046 | 1,523 | 1,841 | |||||||||||||||
Current liabilities |
930 | 1,119 | 914 | 863 | 968 | |||||||||||||||
Liabilities directly associated with assets held for sale |
| 19 | | | | |||||||||||||||
Total liabilities |
1,758 | 1,560 | 1,960 | 2,386 | 2,809 | |||||||||||||||
Total equity and liabilities |
5,642 | 4,747 | 4,733 | 4,565 | 4,508 | |||||||||||||||
Group cash flow statement |
||||||||||||||||||||
Cash generated from operations |
1,184 | 1,135 | 1,111 | 1,030 | 815 | |||||||||||||||
Net interest paid |
(4) | (8) | (17) | (41) | (63) | |||||||||||||||
Income taxes paid |
(278) | (285) | (235) | (270) | (186) | |||||||||||||||
Net cash inflow from operating activities |
902 | 842 | 859 | 719 | 566 | |||||||||||||||
Capital expenditure (including trade investments and net of disposals of property, plant and equipment) |
(265) | (321) | (307) | (318) | (289) | |||||||||||||||
Acquisitions and disposals |
(782) | (33) | | (25) | (16) | |||||||||||||||
Proceeds on disposal of net assets held for sale |
103 | | | | | |||||||||||||||
Investment in associate |
(10) | | | | | |||||||||||||||
Cash received from Plus settlement |
| | | 137 | | |||||||||||||||
Facility fee paid |
| | | | 2 | |||||||||||||||
Proceeds from own shares |
6 | 7 | 8 | 10 | 4 | |||||||||||||||
Equity dividends paid |
(186) | (146) | (132) | (120) | (109) | |||||||||||||||
Issue of ordinary capital and treasury shares purchased |
77 | 11 | 10 | 7 | (174) | |||||||||||||||
(155) | 360 | 438 | 410 | (16) | ||||||||||||||||
Exchange adjustments |
5 | (6) | 13 | (21) | (6) | |||||||||||||||
Opening (net debt)/net cash |
(138) | (492) | (943) | (1,332) | (1,310) | |||||||||||||||
Closing net debt |
(288) | (138) | (492) | (943) | (1,332) | |||||||||||||||
Selected financial ratios |
||||||||||||||||||||
Gearing (closing net debt as a percentage of total equity) |
7% | 4% | 18% | 43% | 78% | |||||||||||||||
Dividends per Ordinary Share (iii) |
26.1¢ | 17.40¢ | 15.82¢ | 14.39¢ | 13.08¢ | |||||||||||||||
Research and development costs to Revenue |
4.1% | 3.9% | 3.8% | 4.1% | 4.0% | |||||||||||||||
Capital expenditure (including intangibles but excluding goodwill) to revenue | 6.4% | 7.5% | 7.7% | 8.4% | 7.7% |
(iii) | The Board has proposed a final dividend of 16.20 US cents per share which together with the first interim dividend of 9.90 US cents makes a total for 2012 of 26.10 US cents. |
158 Smith & Nephew Annual Report 2012 |
The following summarises certain material rights of holders of the Companys Ordinary Shares under the material provisions of the Companys articles of association and English law. This summary is qualified in its entirety by reference to the Companies Act and the Companys articles of association. In the following description, a shareholder is the person registered in the Companys register of members as the holder of an Ordinary Share.
The Company is incorporated under the name Smith & Nephew plc and is registered in England and Wales with registered number 324357.
The Companys Ordinary Shares may be held in certificated or uncertificated form. No holder of the Companys shares will be required to make additional contributions of capital in respect of the Companys shares in the future. In accordance with English law the Companys Ordinary Shares rank equally.
Directors
Under the Companys articles of association, a Director may not vote in respect of any contract, arrangement, transaction or proposal in which he, or any person connected with him, has any material interest other than by virtue of his interests in securities of, or otherwise in or through, the Company. This is subject to certain exceptions relating to proposals (a) indemnifying him in respect of obligations incurred on behalf of the Company, (b) indemnifying a third party in respect of obligations of the Company for which the Director has assumed responsibility under an indemnity or guarantee, (c) relating to an offer of securities in which he will be interested as an underwriter, (d) concerning another body corporate in which the Director is beneficially interested in less than 1% of the issued shares of any class of shares of such a body corporate, (e) relating to an employee benefit in which the Director will share equally with other employees and (f) relating to any insurance that the Company is empowered to purchase for the benefit of Directors of the Company in respect of actions undertaken as Directors (and/or officers) of the Company.
A Director shall not vote or be counted in any quorum present at a meeting in relation to a resolution on which he is not entitled to vote.
The Directors are empowered to exercise all the powers of the Company to borrow money, subject to the limitation that the aggregate amount of all monies borrowed after deducting cash and current asset investments by the Company and its subsidiaries shall not exceed the sum of $6,500,000,000.
Any Director who has been appointed by the Directors since the previous Annual General Meeting of shareholders, either to fill a casual vacancy or as an additional Director holds office only until the conclusion of the next Annual General Meeting and then shall be eligible for re-election by the shareholders. The other Directors retire and are eligible for re-appointment at the third Annual General Meeting after the meeting at which they were last re-appointed. If not re-appointed a Director retiring at a meeting shall retain office until the meeting appoints someone in his place, or if it does not do so, until the conclusion of the meeting. The Directors are subject to removal with or without cause by the Board or the shareholders. Directors are not required to hold any shares of the Company by way of qualification.
Under the Companys articles of association and English law, a Director may be indemnified out of the assets of the Company against liabilities he may sustain or incur in the execution of his duties.
Rights attaching to Ordinary Shares
Under English law, dividends are payable on the Companys Ordinary Shares only out of profits available for distribution, as determined in accordance with accounting principles generally accepted in the United Kingdom and by the Companies Act 2006. Holders of the Companys Ordinary Shares are entitled to receive final dividends as may be declared by the Directors and approved by the shareholders in general meeting, rateable according to the amounts paid up on such shares, provided that the dividend cannot exceed the amount recommended by the Directors.
The Companys Board of Directors may declare such interim dividends as appear to them to be justified by the Companys financial position. If authorised by an ordinary resolution of the shareholders, the Board may also direct payment of a dividend in whole or in part by the distribution of specific assets (and in particular of paid up shares or debentures of the Company).
Any dividend unclaimed after 12 years from the date the dividend was declared, or became due for payment, will be forfeited and will revert to the Company.
There were no material modifications to the rights of shareholders under the Articles during 2012.
Voting rights of Ordinary Shares
Voting at any general meeting of shareholders is by a show of hands unless a poll, which is a written vote, is duly demanded and held. On a show of hands, every shareholder who is present in person at a general meeting has one vote regardless of the number of shares held. On a poll, every shareholder who is present in person or by proxy has one vote for each Ordinary Share held by that shareholder. A poll may be demanded by any of the following:
| the chairman of the meeting; |
| at least five shareholders present or by proxy entitled to vote on the resolution; |
| any shareholder or shareholders representing in the aggregate not less than one-tenth of the total voting rights of all shareholders entitled to vote on the resolution; or |
| any shareholder or shareholders holding shares conferring a right to vote on the resolution on which there have been paid-up sums in aggregate equal to not less than one-tenth of the total sum paid up on all the shares conferring that right. |
A form of proxy will be treated as giving the proxy the authority to demand a poll, or to join others in demanding one, as above.
The necessary quorum for a general meeting is two shareholders present in person or by proxy carrying the right to vote upon the business to be transacted.
Matters are transacted at general meetings of the Company by the processing and passing of resolutions of which there are two kinds; ordinary or special resolutions:
| Ordinary resolutions include resolutions for the re-election of Directors, the approval of financial statements, the declaration of dividends (other than interim dividends), the appointment and re-appointment of auditors or the grant of authority to allot shares. An ordinary resolution requires the affirmative vote of a majority of the votes of those persons voting at the meetings at which there is a quorum. |
| Special resolutions include resolutions amending the Companys articles of association, dis-applying statutory pre-emption rights or changing the Companys name; modifying the rights of any class of the Companys shares at a meeting of the holders of such class or relating to certain matters concerning the Companys winding up. A special resolution requires the affirmative vote of not less than three-quarters of the votes of the persons voting at the meeting at which there is a quorum. |
Annual General Meetings must be convened upon advance written notice of 21 days. Other general meetings must be convened upon advance written notice of at least 14 clear days. The days of delivery or receipt of notice are not included. The notice must specify the nature of the business to be transacted. Meetings are convened by the Board of Directors. Members with 5% of the Ordinary Share capital of the Company may requisition the Board to convene a meeting.
Section 7 Accounts and other information |
159 |
Variation of rights
If, at any time, the Companys share capital is divided into different classes of shares, the rights attached to any class may be varied, subject to the provisions of the Companies Act, with the consent in writing of holders of three-quarters in nominal value of the issued shares of that class or upon the adoption of a special resolution passed at a separate meeting of the holders of the shares of that class. At every such separate meeting, all the provisions of the articles of association relating to proceedings at a general meeting apply, except that the quorum is to be the number of persons (which must be two or more) who hold or represent by proxy not less than one-third in nominal value of the issued shares of the class and at any such meeting a poll may be demanded in writing by any person or their proxy who hold shares of that class. Where a person is present by proxy or proxies, he is treated as holding only the shares in respect of which the proxies are authorised to exercise voting rights.
Rights in a winding-up
Except as the Companys shareholders have agreed or may otherwise agree, upon the Companys winding up, the balance of assets available for distribution:
| after the payment of all creditors including certain preferential creditors, whether statutorily preferred creditors or normal creditors; and |
| subject to any special rights attaching to any other class of shares; |
is to be distributed among the holders of Ordinary Shares according to the amounts paid-up on the shares held by them. This distribution is generally to be made in US Dollars. A liquidator may, however, upon the adoption of any extraordinary resolution of the shareholders and any other sanction required by law, divide among the shareholders the whole or any part of the Companys assets in kind.
Limitations on voting and shareholding
There are no limitations imposed by English law or the Companys articles of association on the right of non-residents or foreign persons to hold or vote the Companys Ordinary Shares or ADSs, other than the limitations that would generally apply to all of the Companys shareholders.
Transfers of shares
The Board may refuse to register the transfer of shares held in certificated form which:
| are not fully paid (provided that it shall not exercise this discretion in such a way as to prevent stock market dealings in the shares of that class from taking place on an open and proper basis); |
| are not duly stamped or duly certified or otherwise shown to the satisfaction of the Board to be exempt from stamp duty, lodged at the Transfer Office or at such other place as the Board may appoint and (save in the case of a transfer by a person to whom no certificate was issued in respect of the shares in question) accompanied by the certificate for the shares to which it relates, and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do; |
| are in respect of more than one class of shares; or |
| are in favour of more than four transferees. |
Deferred shares
Following the redenomination of share capital on 23 January 2006 the Ordinary Shares nominal value became 20 US cents each. There were no changes to the rights or obligations of the Ordinary Shares. In order to comply with the Companies Act 2006, a new class of sterling shares was created, Deferred Shares, of which £50,000 were issued and allotted in 2006 as fully paid to the Chief Executive Officer though the Board reserves the right to transfer them to another member of the Board should it so wish. These Deferred Shares have no voting or dividend rights and on winding up only are entitled to repayment at nominal value only if all Ordinary shareholders have received the nominal value of their shares plus an additional $1,000 each.
Amendments
The Company does not have any special rules about amendments to its articles of association beyond those imposed by law.
160 Smith & Nephew Annual Report 2012 |
This table provides a cross reference from the information included in this Annual Report to the requirements of Form 20-F.
Page | ||||
Part I |
||||
Item 1 |
Identity of Directors, Senior Management and Advisers | n/a | ||
Item 2 |
Offer Statistics and Expected Timetable | n/a | ||
Item 3 |
Key Information | |||
A Selected Financial Data | 156157 | |||
B Capitalisation and Indebtedness | n/a | |||
C Reason for the Offer and Use of Proceeds | n/a | |||
D Risk Factors | 146148 | |||
Item 4 |
Information on the Company | |||
A History and Development of the Company | 144 | |||
B Business Overview | 3, 1933, 97101, 146148 | |||
C Organisational Structure | 3, 138 | |||
D Property, Plant and equipment | 144 | |||
Item 4A |
Unresolved Staff Comments | None | ||
Item 5 |
Operating and Financial Review and Prospects | |||
A Operating results | 2233, 4353 | |||
B Liquidity and Capital Resources | 50-51 | |||
C Research and Development, patents and licences, etc. | 21 | |||
D Trend information | 19-20, 51, 53 | |||
E Off Balance Sheet Arrangements | 145 | |||
F Tabular Disclosure of Contractual Obligations | 145 | |||
G Safe Harbor | Inside back cover | |||
Item 6 |
Directors, Senior Management and Employees | |||
A Directors and Senior Management | 5861, 65 | |||
B Compensation | 74-86 | |||
C Board Practices | 5866, 68-69 | |||
D Employees | 2 | |||
E Share Ownership | 85-86, 133137 | |||
Item 7 |
Major Shareholders and Related Party Transactions | |||
A Major Shareholders | 153 | |||
Host Country Shareholders | 153 | |||
B Related Party Transactions | 137, 145 | |||
C Interests of experts and counsel | n/a | |||
Item 8 |
Financial information | |||
A Consolidated Statements and Other Financial Information | 88138 | |||
Legal Proceedings | 5253 | |||
Dividends | 149 | |||
B Significant Changes | None | |||
Item 9 |
The Offer and Listing | |||
A Offer and Listing Details | 150, 153 | |||
B Plan and Distribution | n/a | |||
C Markets | 153 | |||
D Selling Shareholders | n/a | |||
E Dilution | n/a | |||
F Expenses of the Issue | n/a | |||
Item 10 |
Additional Information | |||
A Share capital | n/a | |||
B Memorandum and Articles of Association | 158159 |
Section 7 Accounts and other information |
161 |
Page | ||||||
C Material Contracts | 29 | |||||
D Exchange Controls | 153 | |||||
E Taxation | 154155 | |||||
F Dividends and Paying Agents | n/a | |||||
G Statement by Experts | n/a | |||||
H Documents on Display | Inside back cover | |||||
I Subsidiary Information | 138 | |||||
Item 11 |
Quantitative and Qualitative Disclosure about Market Risk | 113-119, 146148 | ||||
Item 12 |
Description of Securities Other than Equity Securities | n/a | ||||
Item 12D |
American Depository shares | 152153 | ||||
Part II |
||||||
Item 13 |
Defaults, Dividend Arrearages and Delinquencies | None | ||||
Item 14 |
Material Modifications to the Rights of Security Holders and Use of Proceeds | None | ||||
Item 15 |
Controls and Procedures | 66-67, 70, 91 | ||||
Item 16 |
(Reserved) | n/a | ||||
Item 16A |
Audit Committee Financial Expert | 68 | ||||
Item 16B |
Code of Ethics | 66 | ||||
Item 16C |
Principal Accountant Fees and Services | 67, 70 | ||||
Item 16D |
Exemptions from the Listing Standards for Audit Committee | n/a | ||||
Item 16E |
Purchase of Equity Securities by the Issuer and Affiliated Purchase | 153 | ||||
Item 16F |
Change in Registrants Certifying Accountant | None | ||||
Item 16G |
Corporate Governance | 62 | ||||
Item 16H |
Mine Safety Disclosure | n/a | ||||
Part III |
||||||
Item 17 |
Financial Statements | n/a | ||||
Item 18 |
Financial Statements | 88138 | ||||
Item 19 |
Exhibits |
162 Smith & Nephew Annual Report 2012 |
Unless the context indicates otherwise, the following terms have the meanings shown below:
Term |
Meaning | |
ACL |
The anterior cruciate ligament (ACL) is one of the four major ligaments in the human knee. | |
ADR |
In the US, the Companys Ordinary Shares are traded in the form of ADSs evidenced by American Depository Receipts (ADRs). | |
ADS |
In the US, the Companys Ordinary Shares are traded in the form of American Depositary Shares (ADSs). | |
Advanced Surgical Devices |
A product group comprising products for orthopaedic replacement and reconstruction, endoscopy devices and trauma devices. Products for orthopaedic replacement include systems for knees, hips, and shoulders. Endoscopy devices comprise of support products for orthopaedic surgery such as computer assisted surgery and minimally invasive surgery techniques using specialised viewing and access devices, surgical instruments and powered equipment. Orthopaedics trauma devices are used in the treatment of bone fractures including rods, pins, screws, plates and external frames. | |
Advanced Wound Management |
A product group comprising products associated with the treatment of skin wounds, ranging from products that provide moist wound healing using breathable films and polymers to products providing active wound healing by biochemical or cellular action. | |
AGM |
Annual General Meeting of the Company. | |
Arthroscopy |
Endoscopy of the joints is termed arthroscopy, with the principal applications being the knee and shoulder. | |
ASD |
Advanced Surgical Devices division. | |
AWM |
Advanced Wound Management division. | |
Basis Point |
One hundredth of one percentage point. | |
Chronic wounds |
Chronic wounds are those with long or unknown healing times including leg ulcers, pressure sores and diabetic foot ulcers. | |
Company |
Smith & Nephew plc or, where appropriate, the Companys Board of Directors, unless the context otherwise requires. | |
Companies Act |
Companies Act 2006, as amended, of England and Wales. | |
DUROLANE |
DUROLANE is a registered trademark of Q-MED AB. | |
EBITA |
Earnings before interest, tax and amortisation. | |
EBITDA |
Earnings before interest, tax, depreciation and amortisation. | |
Emerging markets |
Emerging markets include Greater China, India, Brazil and Russia. | |
EPSA |
Adjusted Earnings Per Share is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affects the Groups short-term profitability. The Group presents this measure to assist investors in their understanding of trends. Adjusted attributable profit is the numerator used for this measure. | |
Endoscopy |
Through a small incision, surgeons are able to see inside the body using a monitor and identify and repair defects. | |
ERP |
Enterprise Resource Planning: a software system which integrates internal and external management information, facilitating the flow of information across an organisation. | |
Established Markets |
Established Markets include United States of America, Europe, Australia, New Zealand, Canada and Japan. | |
Euro or |
References to the common currency used in the majority of the countries of the European Union. | |
External fixation |
The use of wires or pins transfixed through bone to hold a frame to the position of a fracture. | |
FDA |
US Food and Drug Administration. | |
Financial statements |
Refers to the consolidated Group Accounts of Smith & Nephew plc. | |
FTSE 100 |
Index of the largest 100 listed companies on the London Stock Exchange by market capitalisation. | |
GMP |
Good manufacturing practice or GMP is the guidance that outlines the aspects of production and testing that can impact the quality of a product. | |
Group or Smith & Nephew |
Used for convenience to refer to the Company and its consolidated subsidiaries, unless the context otherwise requires. | |
IFRIC |
International Financial Reporting Interpretations as adopted by the EU and as issued by the International Accounting Standards Board. | |
IFRS |
International Financial Reporting Standards as adopted by the EU and as issued by the International Accounting Standards Board. | |
International markets |
International Markets include Middle East, North Africa, Southern Africa, Latin America, ASEAN, South Korea and Eastern Europe. | |
LSE |
London Stock Exchange. |
Section 7 Accounts and other information |
163 |
Term |
Meaning | |
Metal-on-metal hip resurfacing | A less invasive surgical approach to treating arthritis in certain patients whereby only the surfaces of the hip joint are replaced leaving the hip head substantially preserved. | |
Negative Pressure Wound Therapy | A technology used to treat chronic wounds such as diabetic ulcers, pressure sores and post-operative wounds through the application of sub-atmospheric pressure to an open wound. | |
NYSE | New York Stock Exchange. | |
Orthobiologics products | Any product that is primarily intended to act as a scaffold and/or actively stimulates bone growth. | |
Orthopaedic products | Orthopaedic reconstruction products include joint replacement systems for knees, hips and shoulders and support products such as computer-assisted surgery and minimally invasive surgery techniques. Orthopaedic trauma devices are used in the treatment of bone fractures including rods, pins, screws, plates and external frames. Clinical therapies products include joint fluid therapy for pain reduction of the knee and an ultrasound treatment to accelerate the healing of bone fractures. | |
OXINIUM | OXINIUM material is an advanced load bearing technology. It is created through a proprietary manufacturing process that enables zirconium to absorb oxygen and transform to a ceramic on the surface, resulting in a material that incorporates the features of ceramic and metal. Management believes that OXINIUM material used in the production of components of knee and hip implants exhibits unique performance characteristics due to its hardness, low-friction and resistance to roughening and abrasion. | |
Parent Company | Smith & Nephew plc. | |
Pound Sterling, Sterling, £, pence or p | References to UK currency. 1p is equivalent to one hundredth of £1. | |
Repair | A product group within ASD comprising specialised devices, fixation systems and bio-absorbable materials to repair joints and associated tissue. | |
Resection | Products that cut or ablate tissue within ASD comprising mechanical blades, radio frequency wands, electromechanical and hand instruments for resecting tissue. | |
SEC | US Securities and Exchange Comission | |
Trading profit | Trading profit is a trend which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affects the Groups short-term profitability. The Group presents this measure to assist investors in their understanding of trends. The Group has identified the following items, where material, as those to be excluded from operating profit when arriving at trading profit: acquisition and disposal related items including amortisation of acquisition intangible assets and impairments; significant restructuring events; acquisition costs; and gains and losses resulting from legal disputes and uninsured losses. | |
UK | United Kingdom of Great Britain and Northern Ireland. | |
UK GAAP | Accounting principles generally accepted in the United Kingdom. | |
US | United States of America. | |
US Dollars, US $ or cents | References to US currency. 1 cent is equivalent to one hundredth of US$1. | |
US GAAP | Accounting principles generally accepted in the United States of America. | |
Visualisation | Products within ASD comprising digital cameras, light sources, monitors, scopes, image capture, central control and multimedia broadcasting systems for use in endoscopic surgery with visualisation. | |
Wound bed | An area of healthy dermal and epidermal tissue of a wound. |
164 Smith & Nephew Annual Report 2012 |
Index
2011 Financial highlights |
48 | |||
2012 Financial highlights |
46 | |||
Accountability, Audit and Internal Control Framework |
66, 70 | |||
Accounting Policies |
96 | |||
Accounts Presentation |
96 | |||
Acquisitions |
130 | |||
Acquisition related costs |
103 | |||
Advanced Surgical Devices Business segment review |
22 | |||
Advanced Wound Management Business segment review |
28 | |||
American Depository Shares |
152, 153 | |||
Articles of Association |
158, 159 | |||
Assets held for sale |
132 | |||
Audit fees |
102 | |||
Board |
58, 59 | |||
Business overview |
2, 3, 4 | |||
Business segment information |
97 | |||
Cash and borrowings |
113 | |||
Chairmans statement |
5 | |||
Chief Executive Officers statement |
9 | |||
Company Auditors Report |
139 | |||
Company Balance Sheet |
140 | |||
Company Notes to the Accounts |
141 | |||
Contingencies |
122 | |||
Contractual obligations |
145 | |||
Corporate Governance Statement |
57 | |||
Critical accounting policies |
51 | |||
Cross Reference to Form 20-F |
160 | |||
Currency fluctuations |
21 | |||
Currency translation |
96 | |||
Deferred taxation |
119 | |||
Directors Remuneration Report |
75 | |||
Directors responsibilities for the accounts |
89 | |||
Directors responsibility statement |
89 | |||
Dividends |
128, 149 | |||
Earnings per share |
105 | |||
Employees/People |
2, 39 | |||
Employees Share Trust |
128 | |||
Executive officers |
60, 61 | |||
Factors affecting results of operations |
54, 55 | |||
Financial instruments |
116 | |||
Financial position, liquidity and capital resources |
50 | |||
Financial highlights |
43 | |||
Glossary of terms |
162 | |||
Goodwill |
107 | |||
Governance and policy |
56 | |||
Group Balance Sheet |
93 | |||
Group Cash Flow Statement |
94 | |||
Group history |
144 |
Group Income Statement |
92 | |||
Group Notes to the Accounts |
96 | |||
Group overview |
2 | |||
Group Statement of Changes in Equity |
95 | |||
Group Statement of Comprehensive Income |
92 | |||
Independent Auditors Reports |
90, 91 | |||
Information for shareholders |
151 | |||
Intangible assets |
108 | |||
Intellectual property |
21 | |||
Interest |
103 | |||
Inventories |
111 | |||
Investments |
110 | |||
Investment in associates |
110 | |||
Investor information |
151 | |||
Key Performance Indicators |
16 | |||
Leases |
116,132 | |||
Legal proceedings |
52 | |||
Manufacturing, supply and distribution |
20 | |||
Marketplace |
19 | |||
New accounting standards |
96 | |||
Off-Balance Sheet arrangements |
145 | |||
Operating profit |
101 | |||
Other finance (costs)/income |
103 | |||
Outlook and trend information |
53 | |||
Parent Company accounts |
139 | |||
Payables |
113 | |||
People/Employees |
2,39 | |||
Principal subsidiary undertakings |
138 | |||
Provisions |
121 | |||
Property, plant and equipment |
106,144 | |||
Receivables |
112 | |||
Regulation |
20 | |||
Related party transactions |
137,145 | |||
Research and development |
21, 46, 101 | |||
Restructuring and rationalisation expenses |
103 | |||
Retirement benefit obligation |
122 | |||
Risk factors |
146 | |||
Risk management |
54 | |||
Sales and marketing |
19 | |||
Selected financial data |
156 | |||
Share based payments |
133 | |||
Share capital |
127, 154 | |||
Shareholder return |
149 | |||
Strategy |
8 | |||
Sustainability |
34 | |||
Taxation |
47,104 | |||
Taxation information for shareholders |
157 | |||
Treasury shares |
128 |
About Smith & Nephew
The Smith & Nephew Group (the Group) is a global medical devices business operating in the markets for advanced surgical devices comprising orthopaedic reconstruction, trauma and sports medicine and advanced wound management, with revenue of approximately $4 billion in 2012. Smith & Nephew plc (the Company) is the parent company of the Group. It is an English public limited company with its shares listed on the premium list of the UK Listing Authority and traded on the London Stock Exchange. Shares are also traded on the New York Stock Exchange in the form of American Depositary Shares (ADSs).
This is the Annual Report of Smith & Nephew plc for the year ended 31 December 2012. It comprises, in a single document, the Annual Report and Accounts of the company in accordance with UK requirements and the Annual Report on Form 20-F in accordance with the regulations of the United States Securities and Exchange Commission (SEC).
Smith & Nephew operates on a worldwide basis and has distribution channels in over 90 countries. In the more established countries by revenue, the Groups business operations are organised by divisions. In the majority of the remaining markets, operations are managed by country managers who are responsible for sales and distribution of the Groups entire product range. These comprise the Emerging Markets and International Markets.
Smith & Nephews corporate website, www.smith-nephew.com, gives additional information on the Group, including an electronic version of this Annual Report. Information made available on this website, or other websites mentioned in this Annual Report, are not, and should not be regarded as being, part of or incorporated into this Annual Report.
For the convenience of the reader, a Glossary of technical and financial terms used in this document is included on pages 162 to 163. The product names referred to in this document are identified by use of capital letters and are trademarks owned by or licensed to members of the Group.
Presentation
The Groups fiscal year end is 31 December. References in this Annual Report to a particular year are to the fiscal year unless otherwise indicated. Except as the context otherwise requires, Ordinary Share or share refer to the Ordinary Shares of Smith & Nephew plc of 20 US cents each.
The Group Accounts of Smith & Nephew in this Annual Report are presented in US Dollars. Solely for the convenience of the reader, certain parts of this Annual Report contain translations of amounts in US Dollars into Sterling at specified rates. These translations should not be construed as representations that the US Dollar amounts actually represent such Sterling amounts or could be converted into Sterling at the rate indicated.
Unless stated otherwise, the translation of US Dollars and cents to Sterling and pence in this Annual Report has been made at the Bank of England exchange rate on the date indicated. On 19 February 2013, the Bank of England rate was US$1.5443 per £1.
The results of the Group, as reported in US Dollars, are affected by movements in exchange rates between US Dollars and other currencies. The Group applied the average exchange rates prevailing during the year to translate the results of companies with functional currency other than US Dollars. The currencies which most influenced these translations in the years covered by this report were Sterling, Swiss Franc and the Euro.
The Accounts of the Group in this Annual Report are presented in millions (m) unless otherwise indicated.
Special note regarding forward-looking statements
The Groups reports filed with, or furnished to, the US Securities and Exchange Commission (SEC), including this document and written information released, or oral statements made, to the public in the future by or on behalf of the Group, contain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995, that may or may not prove accurate. In particular, statements regarding expected revenue growth and trading profit margins discussed under Outlook and Trend Information, market trends and our product pipeline are forward-looking statements. Phrases such as aim, plan, intend, anticipate, well-placed, believe, estimate, expect, target, consider and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results, to differ materially from what is expressed or implied by the statements.
For Smith & Nephew, these factors include: economic and financial conditions in the markets we serve, especially those affecting health care providers, payers and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses; and numerous other matters that affect us or our markets, including those of a political, economic, business or competitive nature. Specific risks faced by the Group are described under Risk factors on pages 146 to 148 of this Annual Report. Any forward-looking statement is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith & Nephew are qualified by this caution. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephews expectations.
Division data
Division data and division share estimates throughout this report are derived from a variety of sources including publicly available competitors information, internal management information and independent market research reports.
Documents on display
It is possible to read and copy documents referred to in this Annual Report at the Registered Office of the Company. Documents referred to in this Annual Report that have been filed with the Securities and Exchange Commission in the US may be read and copied at the SECs public reference room located at 450 Fifth Street, NW, Washington DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. The SEC also maintains a web site at www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC. This Annual Report and some of the other information submitted by the Group to the SEC may be accessed through the SEC website.
The inks used are renewable, biodegradable and emit fewer Volatile Organic Compounds (VOCs) than mineral-oil inks. They are based on high levels of renewable raw materials such as vegetable oils and naturally occuring resin. The inks do not contin any toxic heavy metals and therefore, do not pose a problem if placed in landfill. Designed by Radley Yeldar. Printed by RR Donnelley 472599. |
SIGNATURE
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
Smith & Nephew plc | ||
(Registrant) | ||
By: |
/s/ Susan Swabey |
|
Susan Swabey | ||
Company Secretary |
London, England
February 28, 2013
EXHIBIT INDEX
Exhibit No. |
Description of Document |
Incorporated Herein by Reference To |
Filed
|
|||||
1 | Articles of Association | Form 20-F for the year ended December 31, 2011 filed on March 1, 2012 (File No. 1-14978) | ||||||
4 | (a) (i) | Material Contract: Facility Agreement and Appendices dated 9 December 2010 by and among Barclays Capital, BNP Paribas SA, Deutsche Bank AG, JP Morgan Chase, Lloyds Banking Group, Royal Bank of Scotland, Société Générale SA and Smith & Nephew plc | Form 20-F for the year ended December 31, 2010 filed on March 3, 2011 (File No. 1-14978) | |||||
(ii) | Material contract: Share Purchase Agreement and Appendices dated 12 March 2007 by and among Hyos Invest Holding AG, Dr. U Sigg, Dr. R Riedweg, Active Investor AG, and Smith & Nephew International BV and Smith & Nephew plc | Form 20-F for the year ended December 31, 2006 filed on March 28, 2007 (File No. 1-14978) | ||||||
(iii)* | Material contract: Transaction agreement dated November 27, 2012 by and among Smith & Nephew Inc., Smith & Nephew Inc., Smith & Nephew Inc., Smith & Nephew Orthopaedics AG, Sudbury Acquisitions N.V., DFB Pharmaceuticals, Inc., Healthpoint, Ltd., Healthpoint International, LLC, DFB Biotech of Curaçao, N.V. and Healthpoint Canada ULC. | X | ||||||
(iv)* | Material Contract: Amendment to the transaction agreement dated December 21, 2012 by and among DFB Pharmaceuticals, Inc., and Smith & Nephew, Inc. | X | ||||||
4 | (c) (i) | Service Agreement of Olivier Bohuon | Form 20-F for the year ended December 31, 2010 filed on March 3, 2011 (File No. 1-14978) | |||||
(ii) | Retirement provisions for David J Illingworth | Form 20-F for the year ended December 31, 2010 filed on March 3, 2011 (File No. 1-14978) | ||||||
(iii) | Service Agreement of Julie Brown | X | ||||||
(iv) | Side letter to the Service Agreement of Julie Brown | X | ||||||
(v) | Letter of Appointment of Ian Barlow | Form 20-F for the year ended December 31, 2009 filed on March 26, 2010 (File No. 1-14978) | ||||||
(vi) | Letter of Re-Appointment of Joseph Papa | Form 20-F for the year ended December 31, 2011 filed on March 1, 2012 (File No. 1-14978) | ||||||
(vii) | Letter of Appointment of Ajay Piramal | Form 20-F for the year ended December 31, 2011 filed on March 1, 2012 (File No. 1-14978) | ||||||
(viii) | Letter of Appointment of The Rt. Hon Baroness Bottomley of Nettlestone DL | X | ||||||
(ix) | Letter of Re-Appointment of Richard De Schutter | X | ||||||
(x) | Letter of Re-Appointment of Pamela Kirby | X | ||||||
(xi) | Letter of Re-Appointment of Brian Larcombe | X | ||||||
(xii) | Letter of Re-Appointment of Rolf Stomberg | X | ||||||
(xiii) | Letter of Appointment of Michael A Friedman | X |
* | Confidential treatment has been requested. Confidential material has been redacted and filed separately with the SEC. |
4 | (c) (xiv) | The Smith & Nephew 2001 UK Approved Share Option Plan | Form 20-F for the year ended December 31, 2004 filed on March 16, 2005 (File No. 1-14978) | |||||
(xv) |
The Smith & Nephew 2001 UK Unapproved Share Option Plan | Form 20-F for the year ended December 31, 2004 filed on March 16, 2005 (File No. 1-14978) | ||||||
(xvi) |
The Smith & Nephew 2001 US Share Plan | Registration Statement on Form S-8 No. 333-13694 filed on July 9, 2001 (File No. 1-14978) | ||||||
(xvii) |
The Smith & Nephew Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978) | ||||||
(xviii) |
The Smith & Nephew International Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2004 filed on March 16, 2005 (File No. 1-14978) | ||||||
(xix) |
The Smith & Nephew Italian Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978) | ||||||
(xx) |
The Smith & Nephew Dutch Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed in April 25, 2003 (File No. 1-14978) | ||||||
(xxi) |
The Smith & Nephew Belgian Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978) | ||||||
(xxii) |
The Smith & Nephew French Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978) | ||||||
(xxiii) |
Smith & Nephew Irish Employee Share Option Scheme | Form 20-F for the year ended December 31, 2003 filed on March 26, 2004 (File No. 1-14978) | ||||||
(xxiv) |
Smith & Nephew 2004 Executive Share Option Scheme | Registration statement on Form S-8 No. 333-122801 filed on February 14, 2005 (File No. 1-14978) | ||||||
(xxv) |
Smith & Nephew 2004 Performance Share Plan | Registration statement on Form S-8 No. 333-122801 filed on February 14, 2005 (File No. 1-14978) | ||||||
(xxvi) |
Smith & Nephew 2004 Co-investment Plan | Registration statement on Form S-8 No. 333-122801 filed on February 14, 2005 (File No. 1-14978) | ||||||
(xxvii) |
Smith & Nephew U.S. Employee Stock Purchase Plan | Registration statement on Form S-8 No. 333-12052 filed on May 30, 2000 (File No. 1-14978) |
4 | (c) (xxviii) | Smith & Nephew Long Service Award Scheme | Registration Statement on Form S-8 No. 33-39814 filed on April 5, 1991 (File No. 1-14978) | |||||
(xxix) |
Smith & Nephew 2004 Performance Share Plan | Registration statement on Form S-8 No. 333-155172 filed on November 7, 2008 (File No. 1-14978) | ||||||
(xxx) |
Smith & Nephew 2001 US Share Plan | Registration statement on Form S-8 No. 333-155173 filed on November 7, 2008 (File No. 1-14978) | ||||||
(xxxi) |
Smith & Nephew plc Deferred Bonus Plan | Registration statement on Form S-8 No. 333-158239 filed on March 27, 2009 (File No. 1-14978) | ||||||
(xxxii) |
Smith & Nephew plc Global Share Plan 2010 | Registration statement on Form S-8 No. 333-168544 filed on August 5, 2010 (File No. 1-14978) | ||||||
(xxxiii) |
Smith & Nephew Sharesave Plan (2012) | X | ||||||
(xxxiv) |
Smith & Nephew International Sharesave Plan (2012) | X | ||||||
8 | Principal Subsidiaries | X | ||||||
12 | (a) | Certification of Olivier Bohuon, filed pursuant to Exchange Act Rule 13a-14(a) | X | |||||
(b) | Certification of Julie Brown filed pursuant to Exchange Act Rule 13a-14(a) | X | ||||||
13 | (a) | Certification of Olivier Bohuon and Julie Brown furnished pursuant to Exchange Act Rule 13a-14(b) | X | |||||
15.1 | Consent of Independent Registered Public Accounting Firm | X |
Exhibit 4 (a)(iii)
TRANSACTION AGREEMENT
dated as of
November 27, 2012
among
SMITH & NEPHEW, INC.,
SMITH & NEPHEW INC.,
SMITH & NEPHEW, INC.,
SMITH & NEPHEW ORTHOPAEDICS AG,
SUDBURY ACQUISITIONS N.V.,
DFB PHARMACEUTICALS, INC.,
HEALTHPOINT, LTD.,
HEALTHPOINT INTERNATIONAL, LLC
DFB BIOTECH OF CURAÇAO, N.V.
and
HEALTHPOINT CANADA ULC
Page | ||||||
ARTICLE 1 | 1 | |||||
Section 1.01. |
1 | |||||
Section 1.02. |
20 | |||||
ARTICLE 2 | 21 | |||||
Section 2.01. |
21 | |||||
Section 2.02. |
23 | |||||
Section 2.03. |
24 | |||||
Section 2.04. |
25 | |||||
Section 2.05. |
27 | |||||
Section 2.06. |
27 | |||||
Section 2.07. |
27 | |||||
Section 2.08. |
29 | |||||
Section 2.09. |
29 | |||||
ARTICLE 3 | 30 | |||||
Section 3.01. |
30 | |||||
Section 3.02. |
30 | |||||
Section 3.03. |
33 | |||||
Section 3.04. |
34 | |||||
Section 3.05. |
36 | |||||
ARTICLE 4 | 37 | |||||
Section 4.01. |
37 | |||||
Section 4.02. |
37 | |||||
Section 4.03. |
38 | |||||
Section 4.04. |
38 | |||||
Section 4.05. |
39 | |||||
Section 4.06. |
39 | |||||
Section 4.07. |
40 | |||||
Section 4.08. |
40 | |||||
Section 4.09. |
40 | |||||
Section 4.10. |
41 |
-i-
TABLE OF CONTENTS
(continued)
Page | ||||||
Section 4.11. |
44 | |||||
Section 4.12. |
45 | |||||
Section 4.13. |
45 | |||||
Section 4.14. |
48 | |||||
Section 4.15. |
48 | |||||
Section 4.16. |
50 | |||||
Section 4.17. |
Products . |
51 | ||||
Section 4.18. |
51 | |||||
Section 4.19. |
54 | |||||
Section 4.20. |
54 | |||||
Section 4.21. |
54 | |||||
Section 4.22. |
55 | |||||
Section 4.23. |
55 | |||||
Section 4.24. |
57 | |||||
Section 4.25. |
59 | |||||
Section 4.26. |
60 | |||||
Section 4.27. |
61 | |||||
Section 4.28. |
61 | |||||
ARTICLE 5 | 61 | |||||
Section 5.01. |
61 | |||||
Section 5.02. |
62 | |||||
Section 5.03. |
62 | |||||
Section 5.04. |
62 | |||||
Section 5.05. |
63 | |||||
Section 5.06. |
63 | |||||
Section 5.07. |
63 | |||||
ARTICLE 6 | 63 | |||||
Section 6.01. |
63 | |||||
Section 6.02. |
67 | |||||
Section 6.03. |
68 |
-ii-
Page | ||||||
Section 6.04. |
69 | |||||
Section 6.05. |
70 | |||||
Section 6.06. |
70 | |||||
Section 6.07. |
70 | |||||
Section 6.08. |
71 | |||||
Section 6.09. |
72 | |||||
Section 6.10. |
72 | |||||
Section 6.11. |
73 | |||||
Section 6.12. |
73 | |||||
Section 6.13. |
73 | |||||
Section 6.14. |
74 | |||||
ARTICLE 7 | 74 | |||||
Section 7.01. |
74 | |||||
Section 7.02. |
Access . |
74 | ||||
Section 7.03. |
74 | |||||
Section 7.04. |
74 | |||||
Section 7.05. |
75 | |||||
Section 7.06. |
75 | |||||
Section 7.07. |
75 | |||||
ARTICLE 8 | 75 | |||||
Section 8.01. |
75 | |||||
Section 8.02. |
77 | |||||
Section 8.03. |
77 | |||||
Section 8.04. |
79 | |||||
Section 8.05. |
WARN Act . |
80 | ||||
Section 8.06. |
80 | |||||
Section 8.07. |
81 | |||||
Section 8.08. |
81 | |||||
Section 8.09. |
82 | |||||
ARTICLE 9 | 82 |
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
-iii-
TABLE OF CONTENTS
(continued)
Page | ||||||
Section 9.01. |
82 | |||||
Section 9.02. |
84 | |||||
Section 9.03. |
86 | |||||
Section 9.04. |
87 | |||||
Section 9.05. |
88 | |||||
ARTICLE 10 | 87 | |||||
Section 10.01. |
87 | |||||
Section 10.02. |
88 | |||||
Section 10.03. |
88 | |||||
Section 10.04. |
89 | |||||
Section 10.05. |
90 | |||||
Section 10.06. |
91 | |||||
Section 10.07. |
92 | |||||
Section 10.08. |
92 | |||||
Section 10.09. |
93 | |||||
Section 10.10. |
93 | |||||
ARTICLE 11 | 93 | |||||
Section 11.01. |
Conditions to Obligations of the Buyer Parties and Sellers . |
93 | ||||
Section 11.02. |
93 | |||||
Section 11.03. |
95 | |||||
ARTICLE 12 | 95 | |||||
Section 12.01. |
Survival . |
95 | ||||
Section 12.02. |
96 | |||||
Section 12.03. |
99 | |||||
Section 12.04. |
Third Party Claims Procedures Involving False Claims Act Litigation . |
101 | ||||
Section 12.05. |
102 | |||||
Section 12.06. |
Indemnification Payments; Joint and Several Liability of Seller Parent . |
102 | ||||
Section 12.07. |
103 | |||||
Section 12.08. |
105 | |||||
ARTICLE 13 | 105 |
-iv-
TABLE OF CONTENTS
(continued)
Page | ||||||
Section 13.01. |
105 | |||||
Section 13.02. |
106 | |||||
ARTICLE 14 | 107 | |||||
Section 14.01. |
Notices . |
107 | ||||
Section 14.02. |
108 | |||||
Section 14.03. |
108 | |||||
Section 14.04. |
Expenses . |
109 | ||||
Section 14.05. |
109 | |||||
Section 14.06. |
109 | |||||
Section 14.07. |
109 | |||||
Section 14.08. |
109 | |||||
Section 14.09. |
110 | |||||
Section 14.10. |
110 | |||||
Section 14.11. |
110 | |||||
Section 14.12. |
110 | |||||
Section 14.13. |
110 | |||||
Section 14.14. |
111 | |||||
Section 14.15. |
111 |
-v-
TABLE OF CONTENTS
Exhibit A | Form of Buyer FDA Letter | |
Exhibit B | Form of Escrow Agreement | |
Exhibit C | Form of FCA Settlement Agreement | |
Exhibit D | Form of Lease Amendment | |
Exhibit E | Limited Recourse Agreement | |
Exhibit F | Non-Compete Agreements | |
Exhibit G | Form of Seller FDA Letter | |
Exhibit H | Form of Subcontract | |
Exhibit I | Form of Transition Services Agreement | |
Exhibit J | Form of Resale Certificate | |
Exhibit K | Form of Signing Press Release |
-i-
TRANSACTION AGREEMENT
TRANSACTION AGREEMENT (this Agreement ) dated as of November 27, 2012 among Smith & Nephew, Inc., a Delaware corporation ( Buyer Domestic ), Smith & Nephew Inc., a Canada corporation ( Buyer Canada ), Smith & Nephew, Inc., a Puerto Rican corporation ( Buyer Puerto Rico ), Smith & Nephew Orthopaedics AG, a limited company incorporated under the laws of Switzerland ( Buyer International ), Sudbury Acquisitions N.V., a Curaçao limited liability company ( Buyer NV and together with Buyer Domestic, Buyer Canada, Buyer Puerto Rico and Buyer International, the Buyer Parties ), DFB Pharmaceuticals, Inc., a Texas corporation ( Seller Parent ), Healthpoint, Ltd., a Texas limited partnership ( Healthpoint ), Healthpoint International, LLC, a Texas limited liability company ( Healthpoint International ), DFB Biotech of Curaçao, N.V., a limited liability company incorporated under the laws of the Netherland Antilles and existing under the laws of Curaçao ( Healthpoint Curaçao ), and Healthpoint Canada ULC, a Nova Scotia Unlimited Liability Corporation ( Healthpoint Canada , and collectively with Seller Parent, Healthpoint, Healthpoint International and Healthpoint Curaçao, each a Seller and collectively, the Sellers ).
W I T N E S S E T H :
WHEREAS, Sellers and their respective Affiliates conduct the Business through the Purchased Assets (as defined below);
WHEREAS, Buyer Domestic, together with Buyer Canada, Buyer Puerto Rico, Buyer NV and Buyer International, desire to purchase the Purchased Assets from Sellers upon the terms and subject to the conditions hereinafter set forth;
WHEREAS, as of the date hereof, Buyer Domestic has entered into a Limited Recourse Agreement with *** pursuant to which such Persons have agreed to be bound by Sections 6.14 and 14.05 hereof; and
WHEREAS, as of the date hereof, Buyer Domestic has entered into the Non Compete Agreements with each of the counterparties thereto.
The parties hereto agree as follows:
Section 1.01. Definitions . (a) The following terms, as used herein, have the following meanings:
Action means any claim, audit, action, investigation, suit or proceeding, arbitral action, or criminal prosecution.
Adverse Experience means, with respect to a Product, any untoward medical occurrence in a patient or clinical investigation subject administered such Product, and which
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
does not necessarily have a causal relationship with the treatment for which such Product is used, including any unfavorable and unintended sign (including an abnormal laboratory finding), symptom, or disease temporally associated with the use of the Product or the worsening in severity of a pre-existing condition after administration of the Product, in each case whether or not related to the Product.
Affiliate means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such first Person. For the purposes of this definition, control when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms controlling and controlled have correlative meanings.
Applicable Law means, with respect to any Person, any transnational, domestic or foreign federal, state or local law (statutory, common or otherwise), constitution, treaty, convention, ordinance, code, rule, regulation, order, injunction, judgment, decree, ruling or other similar requirement enacted, adopted, promulgated or applied by a Governmental Authority that is binding upon or applicable to such Person, as amended unless expressly specified otherwise.
Assumed Covenant Agreements means the restrictive covenant agreements set forth in Schedule 10.05(a).
Assumed Employee Agreements means the employment agreements set forth in Schedule 10.05(a).
Assumed Liabilities means (i) the Principal Assumed Liabilities, (ii) the Healthpoint Canada Assumed Liabilities, (iii) the Puerto Rico Branch Assumed Liabilities, (iv) the Switzerland Branch Assumed Liabilities, (v) the Healthpoint Curaçao Assumed Liabilities, (vi) the ROW IP Liabilities and (vii) the Product Candidate Assumed Liabilities.
Balance Sheet means the unaudited pro forma balance sheet of the Business as of the Balance Sheet Date, as if the Closing had occurred on the Balance Sheet Date, included in Schedule 1.01(a).
Balance Sheet Date means June 30, 2012.
BLA means a biologics license application, an establishment license, or any other product license for biological products, including all supplements, predecessor applications and amendments thereto, submitted to the FDA under the provisions of the Public Health Service Act and applicable regulations set forth in 21 C.F.R. Part 601, and the resulting license approval of the application by the FDA for each of Santyl and Regranex.
Business means the business of developing, commercializing, manufacturing, marketing, distributing and selling each of Oasis, Santyl, Regranex, Xenaderm, the Product Candidates and the products set forth in Schedule 1.01(c) in the Territory. For the avoidance of doubt, Business shall not include the business of developing, commercializing, manufacturing, marketing, distributing and selling any Excluded Products.
- 2 -
Business Day means a day, other than Saturday, Sunday or other day on which commercial banks in New York, New York or London, England are authorized or required by Applicable Law to close.
Business Employee means (i) an employee of a Seller (other than Seller Parent) or Healthpoint Management, LLC or (ii) an employee of Seller Parent employed primarily in connection with the Business.
Business Intellectual Property Rights means the Owned Intellectual Property Rights and the Licensed Intellectual Property Rights.
Buyer FDA Letter means the letter substantially in the form of Exhibit A, with any changes thereto as may be mutually agreed by the Sellers and the Buyer Parties prior to the Closing.
CERCLA means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and any rules or regulations promulgated thereunder.
Closing Date means the date of the Closing.
COBRA means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the rules and regulations thereunder.
Code means the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder.
Collagenase means the enzyme complex derived from the fermentation of clostridium histolyticum capable of digesting denatured and undernatured collagen, generally known as collagenase.
Collective Bargaining Agreement means any Contract between a Seller or any of its Affiliates and any labor organization or other authorized employee representative representing Business Employees.
Commonly Controlled Group means each Seller and all members of the controlled group of organizations and all trades or businesses under common control which, together with each Seller, are treated as a single employer under Sections 414(b), (c), (m) or (o) of the Code.
Contract means any legally binding contract, agreement, lease, sublease, license, commitment, sale or purchase order, indenture, note, bond, loan, mortgage, deed of trust, instrument or other arrangement, whether written or oral, other than those relating to Employee Plans.
Controlled Group Liability means any liability for which members of the Commonly Controlled Group are jointly and severally liable (i) under Title IV of ERISA (including liability with respect to reportable events within the meaning of Section 4043 of ERISA), (ii) under Section 302 of ERISA, (iii) under Section 430(k) or 4971 of the Code and (iv) for violation of the continuation requirements of Section 601 et seq. of ERISA and Section 4980B of the Code or the group health requirements of Section 701 et seq. of ERISA and Section 9801 et seq. of the Code.
- 3 -
DEA means the Drug Enforcement Administration of the U.S. Department of Justice.
Employee Plan means any (i) employee benefit plan as defined in Section 3(3) of ERISA, (ii) compensation, employment, consulting, severance, termination, change in control, transaction bonus, retention or similar plan, agreement, arrangement, program or policy or (iii) other plan, agreement, arrangement, program or policy providing for compensation, bonuses, profit-sharing, equity or equity-based compensation or other forms of incentive or deferred compensation, welfare benefits, vacation benefits, insurance (including any self-insured arrangement), medical, dental, vision, prescription or fringe benefits, life insurance, relocation or expatriate benefits, perquisites, disability or sick leave benefits, employee assistance program, workers compensation, supplemental unemployment benefits or post-employment or retirement benefits (including compensation, pension, health, medical or insurance benefits), in each case whether or not written (x) that is sponsored, maintained, administered, contributed to or entered into by a Seller or any of its Affiliates for the current or future benefit of any current or former Service Provider or (y) for which a Seller or any of its Affiliates has any direct or indirect liability with respect to any current or former Service Provider. For the avoidance of doubt, a Collective Bargaining Agreement shall constitute an agreement for the purposes of clauses (ii) and (iii).
Environmental Laws means any Applicable Law or any agreement with any Person relating to the indoor or outdoor environment, to human health and safety (insofar as it relates to exposure to Hazardous Substances), or to pollutants, contaminants, wastes, chemicals or any otherwise hazardous substances.
Environmental Liabilities means any and all liabilities or obligations arising in connection with or in any way relating to a Seller or any of its Affiliates (or any of their respective predecessors or any prior owner of all or part of their respective business or assets), any property now or previously owned, leased or operated by a Seller or any of its Affiliates or their respective predecessors, the Business (as conducted at any time on or prior to the Closing Date), the Purchased Assets or any activities or operations occurring or conducted at the Real Property (including offsite disposal), whether known or unknown, accrued, absolute, fixed, contingent, matured or unmatured, arising by law or contract or otherwise, which (i) arise under or relate to any Environmental Law or any Hazardous Substance Activity occurring on or prior to the Closing Date, and notwithstanding any provision of this Agreement to the contrary, even if the Hazardous Substance Activity continues after the Closing Date and (ii) relate to actions or omissions occurring or conditions existing on or prior to the Closing Date (including any matter disclosed or required to be disclosed in Schedule 4.25), and notwithstanding any provision of this Agreement to the contrary, even if the actions, omissions or conditions continue after the Closing Date; provided , however , that excluded from the foregoing is any liability or obligation to the extent arising from (y) the continuation of any violation of Environmental Law after the Closing Date by the Buyer Parties after they obtain, or reasonably should have obtained, knowledge of such violation and have a reasonable opportunity to correct it and prevent it from continuing and (z) the exacerbation by the Buyer Parties after the Closing Date of any release, discharge, disposal, spill or leak of any Hazardous Substances that commenced on or prior to the Closing Date.
- 4 -
Environmental Permits means all permits, licenses, franchises, certificates, approvals, registrations, concessions, orders, decrees and other similar authorizations of Governmental Authorities required by Environmental Laws in respect of the ownership or operation of the Business, as currently conducted, the Purchased Assets or the Real Property, including any activities or operations currently occurring or conducted thereon.
ERISA means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder.
Escrow Account shall have the meaning set forth in the Escrow Agreement.
Escrow Agent means JPMorgan Chase Bank, National Association, or such other escrow agent as reasonably agreed by Buyer Domestic and Seller Parent.
Escrow Agreement means the Escrow Agreement, dated as of the Closing Date, among Buyer Domestic, Healthpoint, Seller Parent and the Escrow Agent named therein, substantially in the form of Exhibit B, with any changes thereto as may be mutually agreed by the Sellers and the Buyer Parties prior to the Closing, and with any changes reasonably required by the Escrow Agent.
Escrow Amount shall have the meaning set forth in the Escrow Agreement.
Excluded Assets means (i) the Principal Excluded Assets, (ii) the Healthpoint Curaçao Excluded Assets, (iii) the Healthpoint Canada Excluded Assets and (iv) the Excluded IP Assets.
Excluded IP Assets means all Intellectual Property Rights other than the Business Intellectual Property Rights.
Excluded IP Liabilities means all liabilities and obligations of Sellers and their respective Affiliates for the infringement, misappropriation or other violation of Intellectual Property Rights occurring prior to the Closing Date, but excluding (i) the Product Candidate Assumed Liabilities, (ii) the Healthpoint Curaçao IP Liabilities, (iii) the Healthpoint Canada IP Liabilities, (iv) the Puerto Rico Branch IP Liabilities, (v) the ROW IP Liabilities, (vi) the U.S. IP Liabilities and (vii) any such liabilities and obligations resulting from or relating to the *** Litigation.
Excluded Liabilities means (i) the Principal Excluded Liabilities, (ii) the Healthpoint Canada Excluded Liabilities, (iii) the Healthpoint Curaçao Excluded Liabilities, (iv) the Puerto Rico Branch Excluded Liabilities, (v) the Switzerland Branch Excluded Liabilities and (vi) the Excluded IP Liabilities.
Excluded Products means the products set forth on Schedule 1.01(d).
False Claims Act Litigation means United States ex rel. Conrad v. Actavis mid-Atlantic, et al. , No. 1:02-cv-11738, in the U.S. District Court for the District of Massachusetts,
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 5 -
and any other related or similar claims or proceedings, including claims or proceedings by or on behalf of state or other Governmental Authorities or private party plaintiffs against any Person based on or arising out of such litigation or facts alleged therein.
FCA Settlement Agreement means the settlement agreement, in substantially the form of Exhibit C, by and among Healthpoint, the United States of America (acting through applicable administrative bodies including the United States Department of Justice, the United States Attorneys Office for the District of Massachusetts and the Office of Inspector General of the Department of Health and Human Services), and Constance Conrad, as relator, evidencing settlement of United States ex rel. Conrad v. Actavis mid-Atlantic, et al. , No. 1:02-cv-11738.
FCA Settlement Agreement Escrow Amount means an amount equal to $***.
FDA means the United States Food and Drug Administration, or any predecessor or successor agency thereto.
Federal Healthcare Program means Medicare (Title XVIII of the Social Security Act), Medicaid (Title XIX of the Social Security Act) or any other state or federal health care program.
Fort Worth Facility means the land and Improvements, Fixtures and Appurtenances located at 4900 West Vickery Boulevard, Fort Worth, TX.
Fort Worth Facility Deed means a deed without warranty, in a form reasonably satisfactory to Seller Parent and Buyer Domestic, duly executed by Healthpoint and notarized and otherwise in recordable form, conveying to Buyer Domestic fee simple title to the Fort Worth Facility.
Fort Worth Facility Survey means a survey of the Fort Worth Facility prepared by a surveyor licensed in the state of Texas and (i) certified to Buyer Domestic and the title insurance company in accordance with a form of certification which is reasonably acceptable to Buyer Domestic, such certification to include a statement that the survey has been prepared in accordance with 2011 minimum standard detail requirements for land surveys jointly adopted by ALTA/ACSM and to include Table A items reasonably requested by Buyer Domestic and (ii) showing no Liens which are not Permitted Liens.
Fort Worth Facility Title Insurance Policy means a Texas T-1 owners title insurance policy issued with respect to the Fort Worth Facility (or an unconditional and irrevocable commitment for the issuance of such title insurance policy) by a national title insurance company reasonably acceptable to Buyer Domestic, in an amount equal to the fair market value of the Fort Worth Facility, insuring that good and marketable, fee simple title to the Fort Worth Facility is vested in Buyer Domestic, subject to no Liens other than Permitted Liens, and containing such endorsements as are reasonably requested by Buyer Domestic.
Fundamental Buyer Representations means the representations and warranties made in Sections 5.01 (Existence and Power), 5.02 (Authorization), 5.03 (Governmental Authorization) and 5.07 (Finders Fees) of this Agreement and, solely for purposes of Section 11.03(a), Section 5.04 (Noncontravention) of this Agreement.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 6 -
Fundamental Seller Representations means the representations and warranties made in Sections 4.01 (Existence and Power), 4.02 (Authorization), 4.03 (Governmental Authorization), 4.16 (Sufficiency of and Title to the Purchased Assets), 4.22 (Finders Fees), 4.25 (Environmental Matters), 4.26 (Related Party Transactions) and 9.01 (Tax Representations) of this Agreement and, solely for purposes of Section 11.02(a), Section 4.04 (Noncontravention) of this Agreement.
GAAP means generally accepted accounting principles in the United States applied on a consistent basis.
Governmental Authority means any transnational, domestic or foreign federal, state or local governmental, regulatory or administrative authority, department, court, agency or official, including any political subdivision thereof, or any arbitral body.
Governmental Order means any order, judgment, award, injunction or decree issued, promulgated or entered by any Governmental Authority of competent jurisdiction.
Growth-Arrested Skin Cells means cell-based therapy using fibroblasts and keratinocytes applied in a suspension and not requiring engineering into a performed cellular matrix.
Hazardous Substances means any pollutant, contaminant, waste or chemical or any toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous substance, waste or material or any substance, waste or material having any constituent elements displaying any of the foregoing characteristics including petroleum, its derivatives, by-products and other hydrocarbons, asbestos-containing materials, toxic mold, polychlorinated biphenyls, biological, medical or infectious substances, wastes or materials, and any substance, waste or material regulated under any Environmental Law.
Hazardous Substances Activity means the handling, transportation, transfer, recycling, storage, use, treatment, investigation, removal, remediation, release, discharge, disposal, spill, leak, emission or distribution of, or exposure to, any Hazardous Substances.
Healthpoint Canada Assumed Liabilities means all the liabilities and obligations of Healthpoint Canada of any kind, character or description (whether known or unknown, accrued, absolute, fixed, contingent, matured or unmatured, arising by law or by contract or otherwise) that would have been Principal Assumed Liabilities if they were liabilities and obligations of the Principal Seller Group, including, for the avoidance of doubt, the Healthpoint Canada IP Liabilities, but excluding all (i) Healthpoint Canada Excluded Liabilities, (ii) Product Candidate Assumed Liabilities, (iii) Switzerland Branch Assumed Liabilities, (iv) Puerto Rico Branch Assumed Liabilities, (v) Healthpoint Curaçao Assumed Liabilities, (vi) U.S. IP Liabilities and (vii) ROW IP Liabilities.
Healthpoint Canada Business Intellectual Property Rights means all Business Intellectual Property Rights owned or held by Healthpoint Canada other than the Business Intellectual Property Rights included in the Product Candidate Purchased Assets.
- 7 -
Healthpoint Canada Excluded Assets means any assets or properties of Healthpoint Canada that would have been Principal Excluded Assets if held by the Principal Seller Group.
Healthpoint Canada Excluded Liability means any liability or obligation of Healthpoint Canada (or any of its predecessors or any prior owner of all or part of its business or assets) of whatever nature, whether presently in existence or arising hereafter that would have been a Principal Excluded Liability if it were a liability or obligation of the Principal Seller Group, including any Healthpoint Canada Excluded Tax Liability and any liability or obligation related to any Healthpoint Canada Excluded Asset.
Healthpoint Canada Excluded Tax Liability means any liability or obligation relating to Taxes of Healthpoint Canada (or any of its predecessors or any prior owner of all or part of its business or assets), including any liability or obligation related to any Healthpoint Canada Excluded Asset, that would have been a Principal Excluded Tax Liability if it were a liability or obligation of the Principal Seller Group; provided that for the avoidance of doubt any liabilities and obligations for Taxes (other than income Taxes and other than Apportioned Obligations and Transfer Taxes, which shall be governed by Section 9.02) not yet due and payable incurred in the ordinary course of business consistent with past practice imposed on or with respect to the Business of Healthpoint Canada in any Pre-Closing Tax Period that, together with any Healthpoint Curaçao Excluded Tax Liabilities and any Principal Assumed Tax Liabilities, do not exceed $*** in the aggregate shall not be a Healthpoint Canada Excluded Tax Liability.
Healthpoint Canada IP Liabilities means all liabilities and obligations of Healthpoint Canada for the infringement, misappropriation or other violation of Intellectual Property Rights other than the Product Candidate Assumed Liabilities, and including, for the avoidance of doubt, any such liabilities and obligations resulting from or relating to the *** Litigation.
Healthpoint Canada Purchased Assets means all assets, properties, rights, titles, business and interests of Healthpoint Canada, of every kind and description, wherever located, real, personal or mixed, tangible or intangible, that would constitute Principal Purchased Assets if they were assets, properties, rights, titles, business and interests of a member of the Principal Seller Group and, for the avoidance of doubt, including the Healthpoint Canada Business Intellectual Property Rights but excluding all (i) Healthpoint Canada Excluded Assets, (ii) Product Candidate Purchased Assets, (iii) Switzerland Branch Purchased Assets, (iv) Puerto Rico Branch Purchased Assets, (v) Healthpoint Curaçao Purchased Assets, (vi) U.S. Business Intellectual Property Rights, and (vii) ROW Business Intellectual Property Rights.
Healthpoint Curaçao Assumed Liabilities means all liabilities and obligations, whether known or unknown, accrued, absolute, fixed, contingent, matured or unmatured, arising by law or contract or otherwise, of Healthpoint Curaçao that would have been Principal Assumed Liabilities if they were liabilities and obligations of the Principal Seller Group, including, for the avoidance of doubt, the Healthpoint Curaçao IP Liabilities but excluding all Healthpoint Curaçao Excluded Liabilities.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 8 -
Healthpoint Curaçao Business Intellectual Property Rights means all Business Intellectual Property Rights owned or held by Healthpoint Curaçao other than the Business Intellectual Property Rights included in the Product Candidate Purchased Assets.
Healthpoint Curaçao Defined Contribution Pension Plan means the Retirement Plan Rules DFB Biotech of Curaçao N.V. dated August 19, 2009 and entered into effective as of July 1, 2009.
Healthpoint Curaçao Required Consents means those consents and actions set forth on Schedule 1.01(b) with respect to or under the Contracts listed on such Schedule.
Healthpoint Curaçao Excluded Assets means any assets or properties of Healthpoint Curaçao that would have been Principal Excluded Assets if held by the Principal Seller Group.
Healthpoint Curaçao Excluded Liabilities means any liability or obligation of Healthpoint Curaçao (or any of its predecessors or any prior owner of all or part of its business or assets) of whatever nature, whether presently in existence or arising hereafter that would have been a Principal Excluded Liability if it were a liability or obligation of the Principal Seller Group, including any Healthpoint Curaçao Excluded Tax Liability and any liability or obligation related to any Healthpoint Curaçao Excluded Asset.
Healthpoint Curaçao Excluded Tax Liability means any liability or obligation relating to Taxes of Healthpoint Curaçao (or any of its predecessors or any prior owner of all or part of its business or assets), including any liability or obligation that would have been a Principal Excluded Tax Liability if it were a liability or obligation of the Principal Seller Group; provided that for the avoidance of doubt any liabilities and obligations for Taxes (other than income Taxes and other than Apportioned Obligations and Transfer Taxes, which shall be governed by Section 9.02) not yet due and payable incurred in the ordinary course of business consistent with past practice imposed on or with respect to the Business of Healthpoint Curaçao in any Pre-Closing Tax Period that, together with any Healthpoint Canada Excluded Tax Liabilities and any Principal Assumed Tax Liabilities, do not exceed $*** in the aggregate shall not be a Healthpoint Curaçao Excluded Tax Liability
Healthpoint Curaçao IP Liabilities means all liabilities and obligations of Healthpoint Curaçao for the infringement, misappropriation or other violation of Intellectual Property Rights other than the Product Candidate Assumed Liabilities, and including, for the avoidance of doubt, any such liabilities and obligations resulting from or relating to the *** Litigation.
Healthpoint Curaçao Purchased Assets means all assets, properties, rights, titles, business and interests of Healthpoint Curaçao, of every kind and description, wherever located, real, personal or mixed, tangible or intangible, that would constitute Principal Purchased Assets if they were assets, properties, rights, titles, business and interests of a member of the Principal Seller Group and, for the avoidance of doubt, including the Healthpoint Curaçao Business Intellectual Property Rights but excluding all Healthpoint Curaçao Excluded Assets.
Healthpoint Financials means (i) the audited consolidated balance sheets of Healthpoint as of December 31, 2011 and 2010 and the related audited statements of income and
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 9 -
cash flows for each of the years ended December 31, 2011, 2010, and 2009 and (ii) the unaudited consolidated interim balance sheet of Healthpoint as of June 30, 2012 and the related unaudited interim statements of income and cash flows for the six-month periods ended June 30, 2012 and 2011.
Healthpoint Puerto Rico Branch means the branch of Healthpoint International located in Puerto Rico and doing business as Healthpoint Puerto Rico.
Healthpoint Switzerland Branch means the branch of Healthpoint International located in Switzerland and doing business as Healthpoint International Swiss Branch.
HP-802 means the product candidate currently referred to by Sellers and their Affiliates as HP-802 (previously referred to as Allox) and all revisions, improvements, additions and extensions thereof and all other products or potential products developed, researched or owned by, or otherwise contemplated in the business of, Sellers and their respective Affiliates that are based on Growth-Arrested Skin Cells.
HSR Act means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Immediate Family means, with respect to an individual, a child, stepchild, grandchild, parent, stepparent, grandparent, sibling or current spouse, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and includes any adoptive relationships.
Improvements, Fixtures and Appurtenances means (i) all buildings, structures and improvements located at the Fort Worth Facility, (ii) all fixtures, machinery, apparatus and equipment affixed to any such buildings, structures or improvements at the Fort Worth Facility and (iii) all right, title and interest of a Seller or any of its Affiliates in and to all easements, if any, in or upon the Fort Worth Facility and in and to all other rights and appurtenances belong or in any way pertaining to the Fort Worth Facility.
Income Tax Act means the Income Tax Act , R.S.C. 1985, c.1 (5th Supplement) and the regulations thereunder, as amended.
IND means (a) an Investigational New Drug Application as defined in the Federal Food, Drug and Cosmetic Act, 21 USC Section 301, et seq. and applicable regulations promulgated thereunder by the FDA and (b) all supplements and amendments that may be filed with respect to the foregoing.
Indebtedness means (i) all obligations for borrowed money, (ii) all obligations evidenced by notes, bonds, debentures, mortgages, deeds of trust or other instruments, (iii) all obligations for the deferred purchase price of property or services (other than (a) current liabilities incurred in the ordinary course of business that do not constitute Excluded Liabilities and which are taken into account in the calculation of Final Closing Net Assets and (b) the milestone and earn-out payments set forth on Schedule 2.03(d) which are taken into account in the calculation of Final Closing Net Assets), (iv) all commitments by which a Person assures a creditor against loss (including contingent reimbursement obligations regarding letters of credit), (v) all obligations under capitalized leases, (vi) all guarantees, including guarantees of any items
- 10 -
set forth in clauses (i) through (v) and, with respect to any Person, any liability of another Person that is recourse to such Person or any of its assets or that is otherwise its legal liability or that is secured in whole or in part by the assets of such Person (whether or not such obligation is assumed by such Person), and (vii) all prepayment premiums, if any, and accrued interest, fees, penalties and expenses associated with the prepayment of any of the items set forth in clauses (i) through (vi).
Indemnified Party means a party seeking indemnification pursuant to Section 12.02.
Indemnifying Party means a party against whom indemnification is sought pursuant to Section 12.02.
Intellectual Property Rights means any and all of the following, whether or not registered, in the United States and all other jurisdictions throughout the world: (i) inventions and improvements thereto, whether or not patentable, and patents and patent applications (including all reissues, divisions, continuations, continuations-in-part, extensions and reexaminations thereof); (ii) trademarks, service marks, trade dress, logos, domain names, rights of publicity, trade names and corporate names, and all goodwill associated therewith; (iii) copyrights, including all derivative works, moral rights, renewals, extensions, reversions or restorations associated with such copyrights, now or hereafter provided by law, regardless of the medium of fixation or means of expression; (iv) computer software (including source code, object code, firmware, operating systems and specifications); (v) trade secrets and, whether or not confidential, business information (including pricing and cost information, business and marketing plans and customer and supplier lists) and Know How; (vi) cell banks (including all cells and related media); (vii) databases and data collections; (viii) any other type of intellectual property right; (ix) registrations and applications for registration of any of the foregoing; (x) copies and tangible embodiments of any of the foregoing; and (xi) rights to sue or recover and retain damages, costs and attorneys fees for past, present or future infringement, misappropriation or violation of any of the foregoing.
Intercompany Accounts means all intercompany accounts among Sellers and their respective Affiliates relating to the Business, in each case including any intercompany accounts payable, notes payable, trade payables, prepaid expenses, accounts receivable, notes receivable and the like of or relating to the Business.
International Plan means any Employee Plan primarily for the benefit of Service Providers located primarily outside of the United States.
Inventory means raw materials, work-in-process, finished goods, supplies and other inventories used or held for use in the conduct of the Business as conducted on the date of determination.
IRS means the Internal Revenue Service.
IT Assets means all computers, software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines and all other information technology and communication equipment, and all associated documentation, owned by a Seller or licensed or leased by a Seller pursuant to written agreements (excluding any public networks).
- 11 -
Key Employee means a Business Employee listed as a Key Employee on Schedule 4.23(a).
Know How means all information, specifications, processes, methods, knowledge, experience, formulae, skills, techniques, schematics, drawings, blueprints, utility models, designs and technology, including technical information and processes relating to cell banks, manufacturing and production processes and techniques, research and development information, engineering and other manuals and drawings, standard operating procedures, flow diagrams, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical, safety, quality assurance, quality control and clinical data, patient records and similar data and information.
Knowledge of any Person that is not an individual means the actual knowledge of such Persons officers after reasonable inquiry of those employees of such Person having responsibility for the matter in question.
Lease Amendment means the amendment to the lease agreement for the first three floors (approximately 30,000 square feet) of the building located at 3909 Hulen Street, Fort Worth, TX, to be entered into at Closing among Seller Parent, Healthpoint and Buyer Domestic in substantially the form of Exhibit D hereto, with any changes thereto as may be mutually agreed by the Sellers and the Buyer Parties prior to the Closing.
Licensed Back IP means any and all Intellectual Property Rights included in the Purchased Assets (but not any improvements thereon or extensions thereof developed by the Buyer Parties or any of their Affiliates) to the extent necessary to develop or manufacture the products or business opportunities listed on Schedule 1.01(e).
Licensed Intellectual Property Rights means all Intellectual Property Rights owned by a third party and licensed or sublicensed to a Seller that are related to the Business as conducted in the Territory.
Lien means, with respect to any property or asset, any mortgage, deed of trust, lien, pledge, charge, security interest, hypothecation, claim, attachment, levy, option, right of first offer, right of first refusal, restriction, covenant, easement, right-of-way, encumbrance or other adverse claim of any kind in respect of such property or asset, in each case, whether voluntarily incurred or arising by operation of law.
Limited Recourse Agreement means the agreement between Buyer Domestic and each of ***, dated and effective as of the date hereof and attached hereto as Exhibit E, pursuant to which such Persons have agreed to be bound by selected provisions of this Agreement.
MAA means a Marketing Authorization Application, including all supplements, amendments and variations thereto, submitted to and approved by the European Medicines Agency or by the applicable Governmental Authority of one of the European Medicines Agencys member states in accordance with Volume 1, The rules governing medicinal products in the European Union.
Material Adverse Effect means a material adverse effect on (i) the financial condition, business, assets or results of operations of the Business; provided , however , that none of the
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 12 -
following shall be deemed, either alone or in combination, to constitute, and no change or effect resulting from any of the following shall be taken into account in determining whether there has been, a Material Adverse Effect ***:
MDR Reportable Event means (a) an event that user facilities become aware of that reasonably suggests that a device has or may have caused or contributed to a death or Serious Injury, or (b) an event that manufacturers or importers become aware of that reasonably suggests that one of their marketed devices: (i) may have caused or contributed to a death or Serious Injury, or (ii) has malfunctioned and that the device or a similar device marketed by the manufacturer or importer would be likely to cause or contribute to a death or Serious Injury if the malfunction were to recur.
Multiemployer Plan means a multiemployer plan as defined in Section 3(37) of ERISA.
Non-Compete Agreements means the Non-Compete Agreements between Buyer Domestic and each of ***, in each case dated as of the date hereof and effective as of the Closing and attached hereto as Exhibit F.
Oasis means the acellular wound care matrix that is currently marketed by Sellers and their respective Affiliates under the name Oasis® Wound Matrix or Oasis® Ultra and manufactured as of the date hereof by Cook Biotech.
Owned Intellectual Property Rights means all Intellectual Property Rights owned or purported to be owned by a Seller that are related to the Business as conducted in the Territory.
PBGC means the Pension Benefit Guaranty Corporation.
Pending Regulatory Reviews means, collectively, ***.
Person means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a Governmental Authority.
Pre-Closing Tax Period means (i) any Tax Period ending on or before the Closing Date and (ii) with respect to a Tax Period that commences on or before but ends after the Closing Date, the portion of such period up to and including the Closing Date.
Principal Seller Group means Healthpoint and Healthpoint International.
Product means each of Oasis, Regranex, Santyl, Xenaderm, the Product Candidate and each of the products set forth in Schedule 1.01(c) but, for the avoidance of doubt, excludes the Excluded Products.
Product Candidate means HP-802.
Product Candidate Assumed Liabilities means all the liabilities and obligations of each Seller and its Affiliates relating to or arising out of the Product Candidate Purchased Assets or to the extent primarily relating to or arising from the operations of the Business with respect to
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 13 -
the Product Candidate of any kind, character or description (whether known or unknown, accrued, absolute, fixed, contingent, matured or unmatured, arising by law or by contract or otherwise), except to the extent any such liability or obligation constitutes (or, if such liability or obligation were a liability or obligation of a member of the Principal Seller Group, would constitute) a Principal Excluded Liability (without giving effect to the reference to Product Candidate Assumed Liabilities in the parenthetical of the second sentence of Section 2.04) and including, for the avoidance of doubt, all liabilities and obligations of Sellers and their respective Affiliates for the infringement, misappropriation or other violation of Intellectual Property Rights resulting from or relating to the *** Litigation.
Product Candidate Purchased Assets means the assets, properties, rights, titles, business and interests of each Seller and its Affiliates, of every kind and description, wherever located, real, personal or mixed, tangible or intangible, that are used primarily in or arising from the Business with respect to the Product Candidate, except to the extent any such asset, property, right, title, business or interest constitutes (or, if it were an asset, property, right, title, business or interest of a member of the Principal Seller Group, would constitute) a Principal Excluded Asset (it being understood that Product Candidate Purchased Assets will include the Business Intellectual Property Rights primarily related to the Business with respect to the Product Candidates).
Projections means the Healthpoint financial projections provided to Buyer Domestic on June 4, 2012, included in Schedule 1.01(f).
Puerto Rico Branch Assumed Liabilities means all the liabilities and obligations of each Seller relating to or arising out of the Puerto Rico Branch Purchased Assets (including the Puerto Rico Branch IP Liabilities) or to the extent primarily relating to or arising from the operations of the Business with respect to operations of Healthpoint Puerto Rico Branch of any kind, character or description (whether known or unknown, accrued, absolute, fixed, contingent, matured or unmatured, arising by law or by contract or otherwise), except to the extent any such liability or obligation constitutes (or, if such liability or obligation were a liability or obligation of the Principal Seller Group, would constitute) a Principal Excluded Liability (without giving effect to the reference to Puerto Rico Branch Assumed Liabilities in the parenthetical of the second sentence of Section 2.04 and excluding all Product Candidate Assumed Liabilities, U.S. IP Liabilities, ROW IP Liabilities, Healthpoint Curaçao IP Liabilities and Healthpoint Canada IP Liabilities).
Puerto Rico Branch Excluded Liabilities means any liability or obligation of each Seller to the extent relating to the business of Healthpoint Puerto Rico Branch of whatever nature, whether presently in existence or arising hereafter that would have been a Principal Excluded Liability if it were a liability or obligation of the Principal Seller Group.
Puerto Rico Branch Business Intellectual Property Rights means all Business Intellectual Property Rights owned, held or used in the conduct of the business of Healthpoint Puerto Rico Branch other than the Business Intellectual Property Rights included in the Product Candidate Purchased Assets.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 14 -
Puerto Rico Branch IP Liabilities means all liabilities and obligations of Healthpoint Puerto Rico Branch for the infringement, misappropriation or other violation of Intellectual Property Rights other than the Product Candidate Assumed Liabilities and including, for the avoidance of doubt, any such liabilities and obligations resulting from or relating to the *** Litigation.
Puerto Rico Branch Purchased Assets means the assets, properties, rights, titles, business and interests of each Seller, of every kind and description, wherever located, real, personal or mixed, tangible or intangible, held or used in the conduct of the business of Healthpoint Puerto Rico Branch (including the Puerto Rico Branch Business Intellectual Property Rights), except to the extent such asset, property, right, title, business or interest is (or, if it were an asset, property, right, title, business or interest of a member of the Principal Seller Group, would constitute) a Principal Excluded Asset (and excluding all Product Candidate Purchased Assets).
Purchased Assets means (i) the Principal Purchased Assets, (ii) the Healthpoint Canada Purchased Assets, (iii) the Puerto Rico Branch Purchased Assets, (iv) the Switzerland Branch Purchased Assets, (v) the Healthpoint Curaçao Purchased Assets, (vi) the ROW Business Intellectual Property Rights and (vii) the Product Candidate Purchased Assets.
Regranex means (i) the becaplermin gel that is currently approved for marketing under BLA #103691 by the FDA and marketed under the name Regranex ® , (ii) all revisions, improvements, additions and extensions thereof and (iii) all other products or potential products developed, researched or owned by, or otherwise contemplated in the business of, Sellers and their respective Affiliates related to the field of wound healing that are based on becaplermin, a human platelet-derived growth factor.
Regulatory Approvals means any approvals (including pricing and reimbursement approvals), clearances, licenses, Permits, applications, registrations or authorizations approved by or submitted to any Governmental Authority in connection with the Business, including the development, manufacture, marketing, distribution or sale of a Product in a regulatory jurisdiction, including BLAs, DEA licenses, FDA Permits, INDs, MAAs and Seller Regulatory Filings.
Regulatory Files means the following, to the extent owned by, in the possession of, or controlled by, a Seller or any of its Affiliates: (i) all files (together with material correspondence associated with such files) related to obtaining any Regulatory Approvals, (ii) completed clinical and preclinical reports (together with clinical data sets associated with such reports) with respect to a Product, (iii) copies of the approved label components with respect to a Product, (iv) all labeling decision documents with respect to a Product, (v) the safety database for each Product, (vi) all reports pertaining to any Adverse Experience and other data, information and materials relating to Adverse Experiences with respect to a Product and (vii) any other notices, communications or other correspondence between a Seller or any of its Affiliates, on the one hand, and any Governmental Authority, on the other hand, relating to a Product.
Required Consents means those consents and actions set forth on Schedule 1.01(g) with respect to or under the Contracts or Permits listed on such Schedule.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 15 -
Retained Employee means Mark Mitchell.
*** Litigation means ***.
ROW Business Intellectual Property Rights means all Business Intellectual Property Rights related to the Business as conducted outside the United States other than (i) the Healthpoint Curaçao Business Intellectual Property Rights, (ii) the Healthpoint Canada Business Intellectual Property Rights, (iii) the Puerto Rico Branch Business Intellectual Property Rights and (iv) the Business Intellectual Property Rights included in the Product Candidate Purchased Assets.
ROW IP Liabilities means all liabilities and obligations of Sellers and their respective Affiliates related to the Business as conducted outside the United States for the infringement, misappropriation or other violation of Intellectual Property Rights other than (i) the Product Candidate Assumed Liabilities, (ii) the Healthpoint Curaçao IP Liabilities, (iii) the Healthpoint Canada IP Liabilities and (iv) the Puerto Rico Branch IP Liabilities, and including, for the avoidance of doubt, any such liabilities and obligations resulting from or relating to the *** Litigation.
Santyl means the ointment that is currently marketed by Sellers and their respective Affiliates under the name Santyl ® and all revisions, improvements, additions and extensions thereof occurring prior to the Closing Date and all other products or potential products developed, researched or owned by, or otherwise contemplated in the business of, Sellers and their respective Affiliates related to the field of wound healing and the treatment of topical scarring that are based on Collagenase.
Santyl Inventory means Inventory of Santyl that is unexpired and in good and saleable and/or usable quality and condition, including for the avoidance of doubt finished goods inventory of Santyl held in quarantine at Halo.
Seller Disclosure Schedule means the disclosure schedule delivered by Seller Parent to Buyer Domestic concurrently with the execution and delivery of this Agreement.
Seller FDA Letter means the letter substantially in the form of Exhibit G, with any changes thereto as may be mutually agreed by the Sellers and the Buyer Parties prior to the Closing.
Serious Adverse Event means, with respect to any biologic, device, drug or product, any Adverse Experience that results in any of the following outcomes: death, a life-threatening Adverse Experience, inpatient hospitalization or prolongation of existing hospitalization, a persistent or significant disability/incapacity, a congenital anomaly/birth defect or any other effect that may otherwise jeopardize the patient or may require intervention to prevent one of the aforementioned outcomes.
Serious Injury means, with respect to a medical device, an injury or illness that (i) is life-threatening, (ii) results in permanent impairment of a body function or permanent damage to a body structure, (iii) necessitates medical or surgical intervention to preclude permanent impairment of a body function or permanent damage to a body structure or (iv) results in fetal distress, fetal death or any congenital abnormality or birth defect.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 16 -
Service Provider means any director, officer, employee or individual independent contractor of a Seller or any of its Affiliates dedicated primarily to the Business.
Shareholders means collectively each of the shareholders of Seller Parent and each of the partners of Healthpoint.
State FCA Settlement Amount means an amount determined in accordance with the methodology set forth on Schedule 1.01(h), which amount is to be used to pay costs of settlement with any state that is not a party to the FCA Settlement Agreement.
Subcontract means the Subcontract Agreement between Sellers and the Buyer Parties, substantially in the form of Exhibit H, with any changes thereto as may be mutually agreed by the Sellers and the Buyer Parties prior to the Closing.
Switzerland Branch Assumed Liabilities means all the liabilities and obligations of each Seller relating to or arising out of the Switzerland Branch Purchased Assets or to the extent primarily relating to or arising from the operations of the Business with respect to operations of Healthpoint Switzerland Branch of any kind, character or description (whether known or unknown, accrued, absolute, fixed, contingent, matured or unmatured, arising by law or by contract or otherwise), except to the extent any such liability or obligation constitutes (or, if such liability or obligation were a liability or obligation of the Principal Seller Group, would constitute) a Principal Excluded Liability (without giving effect to the reference to Switzerland Branch Assumed Liabilities in the parenthetical of the second sentence of Section 2.04 and excluding all Product Candidate Assumed Liabilities, U.S. IP Liabilities, ROW IP Liabilities, Healthpoint Curaçao IP Liabilities, Healthpoint Canada IP Liabilities and Puerto Rico Branch IP Liabilities).
Switzerland Branch Excluded Liabilities means any liability or obligation of each Seller to the extent relating to the business of Healthpoint Switzerland Branch of whatever nature, whether presently in existence or arising hereafter that would have been a Principal Excluded Liability if it were a liability or obligation of the Principal Seller Group.
Switzerland Branch Purchased Assets means the assets, properties, rights, titles, business and interests of each Seller, of every kind and description, wherever located, real, personal or mixed, tangible or intangible, held or used in the conduct of the business of Healthpoint Switzerland Branch, except to the extent such asset, property, right, title, business or interest is (or, if it were an asset, property, right, title, business or interest of a member of the Principal Seller Group, would constitute) a Principal Excluded Asset (and excluding all Product Candidate Purchased Assets and Business Intellectual Property Rights).
Tax (and with correlative meaning, Taxes, Taxing and Taxable) means (i) foreign, federal, state, provincial, territorial, local and all other taxes, charges, fees, levies or other assessments, including any income tax or franchise tax based on net income, any alternative or add-on minimum taxes, any gross income, gross receipts, premium, sales, use, ad valorem, value-added, transfer, profits, license, payroll (e.g., social security, Medicare,
- 17 -
unemployment, disability), employment, withholding (on amounts paid or received), excise, severance, stamp, occupation, property, environmental or windfall profit tax, custom duty or other tax, governmental fee or other like assessment together with any interest, penalty, addition to tax or additional amount imposed by any Governmental Authority (a Taxing Authority) responsible for the imposition of any such tax, or (ii) liability for the payment of any amounts of the type described in (i) as a result of being party to any agreement or any express or implied obligation to indemnify any other Person.
Tax Return means any Tax return, statement, report, election, declaration, disclosure, schedule or form (including any estimated Tax or information return or report) filed or required to be filed with any Taxing Authority.
Territory means everywhere in the world.
Transaction Documents means this Agreement, the Escrow Agreement, the Fort Worth Facility Deed, the Lease Amendment, the Subcontracts and the Transition Services Agreement.
Transferred Employee Compensation Payments means any unpaid or unsatisfied amounts, in each case, attributable to the service of Transferred Employees with Sellers in 2012, for (i) annual or quarterly incentive bonuses, (ii) accrued, but unpaid, contributions to the Seller DC Plan, (iii) payments pursuant to commission or other short-term incentive plans, and (iv) accrued, but unpaid, premium payments or claims under Sellers welfare benefit plans, in each case in accordance with Sellers Employee Plans set forth on Schedule 4.24.
Transition Services Agreement means the Transition Services Agreement, dated as of the Closing Date, among Buyer Domestic and Sellers, substantially in the form of Exhibit I, with any changes thereto as may be mutually agreed by the Sellers and the Buyer Parties prior to the Closing.
U.S. Business Intellectual Property Rights means all Business Intellectual Property Rights related to the Business other than (i) the Healthpoint Curaçao Business Intellectual Property Rights, (ii) the Healthpoint Canada Business Intellectual Property Rights, (iii) the Puerto Rico Branch Business Intellectual Property Rights, (iv) the ROW Business Intellectual Property Rights and (v) the Business Intellectual Property Rights included in the Product Candidate Purchased Assets.
U.S. IP Liabilities means all liabilities and obligations of Sellers and their respective Affiliates related to the Business for the infringement, misappropriation or other violation of Intellectual Property Rights (including, for the avoidance of doubt, any such liabilities and obligations resulting from or relating to the *** Litigation), other than (i) the Product Candidate Assumed Liabilities, (ii) the Healthpoint Curaçao IP Liabilities, (iii) the Healthpoint Canada IP Liabilities, (iv) the Puerto Rico Branch IP Liabilities and (v) the ROW IP Liabilities.
WARN means the Worker Adjustment and Retraining Notification Act and any comparable foreign, state or local law.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 18 -
Wound Care means the business of developing, commercializing, manufacturing, marketing, distributing or selling solutions and therapy for ***.
(b) Each of the following terms is defined in the Section set forth opposite such term:
Term |
Section | |||
Accepted Offer Employee |
10.01 | |||
Accounting Referee |
3.03 | |||
acting improperly |
4.27 | |||
Agreement |
Preamble | |||
Allocation Statement |
3.03 | |||
Apportioned Obligations |
9.02 | |||
Base Net Assets |
3.05 | |||
Base Santyl Inventory Amount |
3.05 | |||
Buyer Canada |
Preamble | |||
Buyer Domestic |
Preamble | |||
Buyer Indemnified Parties |
12.02 | |||
Buyer International |
Preamble | |||
Buyer NV |
Preamble | |||
Buyer Parties |
Preamble | |||
Buyer Puerto Rico |
Preamble | |||
Cap |
12.02 | |||
Clearance Certificate |
9.02 | |||
Closing |
3.02 | |||
Closing Date Balance Sheet |
3.04 | |||
Closing Net Assets |
3.04 | |||
Closing Santyl Inventory Amount |
3.04 | |||
Closing Statement |
3.04 | |||
Collaborative Partner |
4.13 | |||
Confidentiality Agreement |
7.01 | |||
Current Policies |
4.19 | |||
Damages |
12.02 | |||
|
14.01 | |||
End Date |
13.01 | |||
Equityholder Materials |
4.08 | |||
FCA Release Date |
12.07 | |||
FCPA |
4.27 | |||
FDA Permits |
4.13 | |||
Field |
7.06 | |||
Final Closing Net Assets |
3.05 | |||
Final Closing Santyl Inventory Amount |
3.05 | |||
GINA |
2.02 | |||
Government Contract |
4.10 | |||
Healthpoint |
Preamble | |||
Healthpoint Canada |
Preamble | |||
Healthpoint Curaçao |
Preamble |
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 19 -
Term |
Section | |||
Healthpoint International |
Preamble | |||
HIPAA |
4.13 | |||
Illustrative Net Assets Statement |
3.04 | |||
Indemnifying Sellers |
12.02 | |||
Material Contracts |
4.10 | |||
Novation Agreement |
8.03 | |||
Other Consents |
4.05 | |||
Permits |
4.20 | |||
Permitted Liens |
4.15 | |||
Policies |
4.19 | |||
Post-Closing Tax Period |
9.02 | |||
Preliminary Closing Date Balance Sheet |
3.04 | |||
Principal Assumed Liabilities |
2.03 | |||
Principal Assumed Tax Liabilities |
2.04 | |||
Principal Excluded Assets |
2.02 | |||
Principal Excluded Liabilities |
2.04 | |||
Principal Purchased Assets |
2.01 | |||
Purchase Price |
3.01 | |||
Real Property |
4.15 | |||
Referee |
9.03 | |||
Related Party |
4.26 | |||
Related Party Agreement |
4.10 | |||
Replacement Contract |
8.09 | |||
Restricted Business |
6.08 | |||
Restricted Period |
6.08 | |||
Schedule Supplement |
6.04 | |||
Seller(s) |
Preamble | |||
Seller DC Plans |
10.03 | |||
Seller FSA Plan |
10.06 | |||
Seller Indemnified Parties |
12.02 | |||
Seller Parent |
Preamble | |||
Seller Regulatory Filings |
4.13 | |||
Shared Contract |
8.09 | |||
Social Security Act |
4.13 | |||
Third Party Claim |
12.03 | |||
Threshold |
12.02 | |||
Transfer Taxes |
9.02 | |||
Transferred Employee |
10.01 | |||
UK Bribery Act |
4.27 | |||
Warranty Breach |
12.02 | |||
Workers Compensation Event |
10.04 |
Section 1.02. Other Definitional and Interpretative Provisions . The words hereof, herein and hereunder and words of like import used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The
- 20 -
captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. References to Articles, Sections and Exhibits are to Articles, Sections and Exhibits of this Agreement unless otherwise specified. All Exhibits annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. All Schedules refer to the Schedules of the Seller Disclosure Schedule. Any capitalized terms used in any Exhibit or Schedule but not otherwise defined therein shall have the meaning as defined in this Agreement. Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular. Whenever the words include, includes or including are used in this Agreement, they shall be deemed to be followed by the words without limitation, whether or not they are in fact followed by those words or words of like import. Writing, written and comparable terms refer to printing, typing and other means of reproducing words (including electronic media) in a visible form. References to any statute shall be deemed to refer to such statute as amended from time to time and to any rules or regulations promulgated thereunder. References to any Contract are to that Contract as amended, modified or supplemented from time to time in accordance with the terms hereof and thereof; provided that with respect to any Contract listed on any Schedules hereto, all such amendments, modifications or supplements must also be listed in the appropriate Schedule. References to any Person include the successors and permitted assigns of that Person. References from or through any date mean, unless otherwise specified, from and including or through and including, respectively. References to law, laws or to a particular statute or law shall be deemed also to include any and all Applicable Law.
CLOSING TRANSACTIONS
Section 2.01. Purchase and Sale with Buyer Domestic . On the terms and subject to the conditions set forth in this Agreement, at the Closing, Buyer Domestic agrees to purchase from the Principal Seller Group, and each such Seller shall, and shall cause the other members of the Principal Seller Group to, sell, convey, assign, transfer and deliver to Buyer Domestic, free and clear of all Liens, other than Permitted Liens, all of the Principal Seller Groups right, title and interest in, to and under the assets, properties, rights, titles, business and interests, of every kind and description, wherever located, real, personal or mixed, tangible or intangible, owned, held or used in the development, commercialization, manufacture, marketing, distribution or sale of the Products, or otherwise owned, held or used primarily in the operation of or arising from the conduct of the Business as the same shall exist as of the Closing, other than (t) the Principal Excluded Assets, (u) the Healthpoint Canada Purchased Assets, (v) the Healthpoint Curaçao Purchased Assets, (w) the Puerto Rico Branch Purchased Assets (x) the Switzerland Branch Purchased Assets, (y) the ROW Business Intellectual Property Rights and (z) the Product Candidate Purchased Assets (the Principal Purchased Assets), and including all right, title and interest of the Principal Seller Group in, to and under the following, unless otherwise indicated, to the extent primarily related to the Business:
(a) the Fort Worth Facility, including all buildings, fixtures, and improvements erected thereon;
- 21 -
(b) all personal property and interests therein, including machinery, equipment, furniture, office equipment, communications equipment, vehicles, storage tanks, spare and replacement parts and other tangible property, including the items listed on Schedule 4.15(b);
(c) all Inventory;
(d) all Contracts, including the items listed on Schedules 2.02(f) and 4.10 (but excluding the Contracts set forth on Schedule 2.02(h)), and all records and notices related thereto;
(e) all accounts, notes and other receivables;
(f) all prepaid expenses, including in respect of ad valorem Taxes (subject to Section 9.02), leases and rentals but excluding prepaid insurance premiums;
(g) all rights, claims, counter-claims, credits, causes of action or rights of set-off against third parties, including unliquidated rights under manufacturers and vendors warranties;
(h) all U.S. Business Intellectual Property Rights, including the items listed on Schedule 2.01(h), but excluding the DFB Pharmaceuticals trademark and any derivative thereof;
(i) all transferrable Regulatory Approvals, including (i) the entire drug master file, BLA and IND in documentary and electronic form for each of Santyl, Regranex, Xenaderm and the Product Candidate, as applicable, and (ii) the items listed on Schedule 4.20;
(j) all Regulatory Files;
(k) subject to Section 2.02(d), all books, records, files, data and papers, whether in hard copy or computer format, used in, or related to or required for the operation of, the Business, including engineering information, sales and promotional literature, manuals and data, sales and purchase correspondence, lists of present and former customers of the Business, personnel and employment records and any information, whether in hard copy or computer format, relating to any Tax imposed on the Purchased Assets; provided however , that with respect to any such books, records, files and papers that also relate to or are also required for the operation of the Principal Excluded Assets, Healthpoint may retain the originals of such books, records, files and papers and deliver, or cause to be delivered, copies thereof to Buyer Domestic and redact from any such books, records, files and papers any information that is not related to the Principal Purchased Assets or the Business, as applicable, pursuant to this Section 2.01(k);
(l) all transferable Permits, including Environmental Permits; and
(m) all goodwill associated with the Business.
- 22 -
Section 2.02. Principal Excluded Assets . Sellers and the Buyer Parties expressly understand and agree that the following assets and properties of the Principal Seller Group (the Principal Excluded Assets ) shall not be included in the Principal Purchased Assets:
(a) the property and assets described on Schedule 2.02(a);
(b) cash and cash equivalents on hand and in banks;
(c) subject to the agreements contained in Section 6.03 of this Agreement, all insurance policies relating to the Business and all claims, credits, causes of action or rights thereunder;
(d) all personnel and employment records and other records that members of the Principal Seller Group are required to retain in their respective possession by Applicable Law; provided that, subject to Applicable Law, Healthpoint shall deliver copies thereof to Buyer Domestic at or prior to the Closing (without limiting the generality of the foregoing, Sellers shall not, and shall ensure that their respective Affiliates do not, disclose to the Buyer Parties or any of their respective Affiliates any medical information regarding any current or former Service Provider, including any genetic information within the meaning of the Genetic Information Nondiscrimination Act of 2008 ( GINA ), further including an individuals family medical history except as otherwise permitted by GINA and the Family and Medical Leave Act, the results of an individuals or family members genetic tests, the fact that an individual or an individuals family member sought or received genetic services, and genetic information of a fetus carried by an individual or an individuals family member or an embryo lawfully held by an individual or family member receiving assistive reproductive services);
(e) all rights of Sellers under this Agreement or the other Transaction Documents;
(f) all Related Party Agreements other than those set forth on Schedule 2.02(f);
(g) the sponsorship of, and assets maintained under, the Employee Plans;
(h) any Contracts listed on Schedule 2.02(h);
(i) all bank accounts, whether or not used in the Business;
(j) the shares of capital stock, partnership interests, membership interests or other equity interests of any Person;
(k) the organizational documents, Tax Returns, books of account and other records having to do with the organization of the members of the Principal Seller Group;
- 23 -
(l) the DFB Pharmaceuticals trademark and any trademarks related to the Excluded Products, and any derivatives thereof;
(m) prepaid insurance premiums; and
(n) any assets that would have been Principal Purchased Assets but for the fact that they were sold or otherwise disposed of in the ordinary course of business and not in violation of any provisions of this Agreement during the period from the date hereof until the Closing Date.
Section 2.03. Assumption of Liabilities by Buyer Domestic . On the terms and subject to the conditions set forth in this Agreement, Buyer Domestic agrees, effective at the time of the Closing, to assume all liabilities and obligations of the Principal Seller Group of any kind, character or description (whether known or unknown, accrued, absolute, fixed, contingent, matured or unmatured, arising by law or by contract or otherwise) to the extent relating to or arising from the Principal Purchased Assets or to the extent primarily relating to or arising from the ordinary course operations of the Business prior to, or the operations of the Business after the Closing, except for (t) the Principal Excluded Liabilities, (u) the Healthpoint Canada Assumed Liabilities, (v) the Healthpoint Curaçao Assumed Liabilities, (w) the ROW IP Liabilities, (x) the Puerto Rico Branch Assumed Liabilities, (y) the Switzerland Branch Assumed Liabilities and (z) the Product Candidate Assumed Liabilities (the Principal Assumed Liabilities ), including the following:
(a) all warranty liabilities and obligations of Healthpoint incurred in the ordinary course and relating to the Products manufactured or sold by the Business on or prior to the Closing Date, excluding the liabilities and obligations set forth in Schedule 2.04(p);
(b) the U.S. IP Liabilities;
(c) all liabilities and obligations expressly allocated to Buyer Domestic under Article 10 hereunder;
(d) subject to Section 2.04(e), all liabilities and obligations under Contracts included in the Principal Purchased Assets (but only to the extent such Contracts are assigned to Buyer Domestic or Buyer Domestic otherwise receives the rights and benefits of such Contracts pursuant to Section 2.09 below);
(e) all liabilities and obligations relating to the Business reflected on the Closing Date Balance Sheet as a dollar amount;
(f) (i) any liabilities or obligations relating to Taxes (other than income Taxes, Apportioned Obligations and Transfer Taxes) not yet due and payable incurred in the ordinary course of business consistent with past practice imposed on or with respect to the Business in any Pre-Closing Tax Period or (ii) any liabilities or obligations for Taxes (other than income Taxes, Apportioned Obligations and Transfer Taxes) not yet due and payable incurred in the ordinary course of business consistent with past practice imposed on a member of the Principal Seller Group, any member of any consolidated,
- 24 -
affiliated, combined or unitary group of which such member of the Principal Seller Group is or has been a member, or any direct or indirect owner of any member of the Principal Seller Group, other than in the case of clauses (i) and (ii) above any such liabilities or obligations that, together with any Healthpoint Curaçao Excluded Tax Liabilities and any Healthpoint Canada Excluded Tax Liabilities, exceed $*** in the aggregate; provided that Apportioned Obligations shall be paid in the manner set forth in Section 9.02 and Transfer Taxes shall be paid in the manner set forth in Section 9.02(c) (all liabilities and obligations described in this Section 2.03(f), the Principal Assumed Tax Liabilities ); and
(g) the other liabilities and obligations set forth in Schedule 2.03(f).
Notwithstanding the foregoing, the Principal Assumed Liabilities shall not include (x) the Principal Excluded Liabilities, (y) the ROW IP Liabilities or (z) the Product Candidate Assumed Liabilities.
Section 2.04. Buyer Domestic Excluded Liabilities . Notwithstanding any provision in this Agreement or any other writing to the contrary, Buyer Domestic shall assume only the Principal Assumed Liabilities and is not assuming any other liability or obligation of the Principal Seller Group (or any of their respective predecessors or any prior owner of all or part of their respective business or assets) of whatever nature, whether presently in existence or arising hereafter. All such other liabilities and obligations shall be retained by and remain liabilities and obligations of the Principal Seller Group (all such liabilities and obligations not assumed (other than the ROW IP Liabilities, the Puerto Rico Branch Assumed Liabilities, the Switzerland Branch Assumed Liabilities and the Product Candidate Assumed Liabilities) herein collectively referred to as the Principal Excluded Liabilities ), including the following:
(a) any Environmental Liability;
(b) all liabilities and obligations resulting from any False Claims Act Litigation;
(c) all liabilities and obligations resulting from any Action pending against a member of the Principal Seller Group or relating to the Business as of the Closing or any possible proceeding listed or cross-referenced in Schedule 2.04(c);
(d) any liabilities or obligations relating to or arising out of Contracts included in the Principal Purchased Assets relating to or arising out of (i) any breach of such Contracts occurring on or prior to the Closing Date or (ii) any violation of law, breach of warranty, tort or infringement occurring or arising on or prior to the Closing Date, but in each case only to the extent such breach, violation, tort or infringement relates to the period ending on the Closing Date;
(e) any liabilities or obligations of a member of Healthpoint under this Agreement or the other Transaction Documents or the transactions contemplated hereby or thereby;
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 25 -
(f) (i) any liabilities or obligations relating to Taxes (other than Apportioned Obligations and Transfer Taxes) imposed on or with respect to the Business in any Pre-Closing Tax Period or (ii) any liabilities or obligations for Taxes (other than Apportioned Obligations and Transfer Taxes) of a member of the Principal Seller Group, any member of any consolidated, affiliated, combined or unitary group of which such member of the Principal Seller Group is or has been a member, or any direct or indirect owner of any member of the Principal Seller Group, other than in the case of clauses (i) and (ii) above the Principal Assumed Tax Liabilities; provided that Apportioned Obligations shall be paid in the manner set forth in Section 9.02 and Transfer Taxes shall be paid in the manner set forth in Section 9.02(c);
(g) any liabilities or obligations relating to the operation by Healthpoint or any of its Affiliates of any business other than the Business, including any liabilities or obligations in respect of the Excluded Products;
(h) any liabilities or obligations arising prior to the Closing to indemnify, reimburse or advance amounts to any officer, director, employee or agent of Healthpoint or any of its Affiliates;
(i) any liabilities or obligations of a member of the Principal Seller Group in respect of Indebtedness;
(j) any liabilities or obligations arising out of or relating to any violation of Applicable Law by Healthpoint or any of its Affiliates, but only to the extent such violation relates to the period ending on the Closing Date;
(k) any liabilities or obligations to any outside professionals (including any broker, finder, agent, investment banker, legal, accounting or tax advisor) for any costs, fees or expenses (including investment banking or brokerage fees, finders fees or commissions) relating to the process of selling the Business or the Purchased Assets, whether incurred in connection with this Agreement, the other Transaction Documents or otherwise, and any other fees and expenses for which a member of the Principal Seller Group is responsible pursuant to Section 14.04 and which are not included in the calculation of Final Closing Net Assets;
(l) any liabilities or obligations relating to any current or former limited partner of Healthpoint, or any current or former shareholder of Seller Parent, including any liability arising from or relating to the exercise of dissenters, appraisal or similar rights with respect to the transactions contemplated by this Agreement or the other Transaction Documents by any such Person under Applicable Law;
(m) any liabilities or obligations relating to (i) the Employee Plans (other than the Healthpoint Curaçao Defined Contribution Pension Plan), (ii) any benefit or compensation plan, program, policy, agreement or arrangement other than the Employee Plans at any time sponsored, maintained or contributed to by Sellers or any of their Affiliates and (iii) current or former employees of Sellers or any of their Affiliates (including any current or former Service Provider), except for those liabilities expressly assumed by Buyer Domestic under Article 10 or liabilities related to the service of Transferred Employees to Buyer Domestic or any of its Affiliates following the Closing;
- 26 -
(n) any liabilities or obligations relating to or arising out of the Equityholder Materials;
(o) any liabilities or obligations relating to a Principal Excluded Asset;
(p) the other liabilities and obligations set forth in Schedule 2.04(p); and
(q) any product liability claims arising from the sale of Products prior to the Closing Date.
Section 2.05. Purchase and Assumption by Buyer Canada .
(a) On the terms and subject to the conditions set forth in this Agreement, at the Closing, Buyer Canada agrees to purchase from Healthpoint Canada, and Healthpoint Canada shall sell, convey, assign, transfer and deliver to Buyer Canada, free and clear of all Liens, other than Permitted Liens, all of Healthpoint Canadas right, title and interest in, to and under the Healthpoint Canada Purchased Assets including the items listed on Schedule 2.05(a).
(b) On the terms and subject to the conditions set forth in this Agreement, Buyer Canada agrees, effective at the time of the Closing, to assume the Healthpoint Canada Assumed Liabilities and only the Healthpoint Canada Assumed Liabilities, and, for the avoidance of doubt, excluding the Healthpoint Canada Excluded Liabilities.
Section 2.06. Purchase and Assumption by Buyer International .
(a) On the terms and subject to the conditions set forth in this Agreement, at the Closing, each Seller shall sell, convey, assign, transfer and deliver to Buyer International, and Buyer International agrees to purchase, all of each Sellers right, title and interest in, to and under (i) the Switzerland Branch Purchased Assets, (ii) the ROW Business Intellectual Property Rights, including the items listed on Schedule 2.06(a)(ii), and (iii) the Product Candidate Purchased Assets, in each case, free and clear of all Liens, other than Permitted Liens.
(b) On the terms and subject to the conditions set forth in this Agreement, Buyer International agrees, effective at the time of the Closing, to assume all the ROW IP Liabilities, the Switzerland Branch Assumed Liabilities and the Product Candidate Assumed Liabilities and only the ROW IP Liabilities, the Switzerland Branch Assumed Liabilities and the Product Candidate Assumed Liabilities, and, for the avoidance of doubt, excluding the Switzerland Branch Excluded Liabilities.
Section 2.07. Purchase and Assumption by Buyer NV .
(a) On the terms and subject to the conditions set forth in this Agreement, at the later of (i) five Business Days following receipt of the Healthpoint Curaçao Required Consents and (ii) the Closing, each Seller shall sell, convey, assign, transfer and deliver to Buyer NV, and Buyer NV agrees to purchase, all of each Sellers right, title and interest in, to and under the Healthpoint Curaçao Purchased Assets, in each case, free and clear of all Liens, other than Permitted Liens.
- 27 -
(b) On the terms and subject to the conditions set forth in this Agreement, Buyer NV agrees, effective at the later of (i) five Business Days following receipt of the Healthpoint Curaçao Required Consents and (ii) the time of the Closing, to assume all the Healthpoint Curaçao Assumed Liabilities and only the Healthpoint Curaçao Assumed Liabilities, and, for the avoidance of doubt, excluding the Healthpoint Curaçao Excluded Liabilities.
(c) Notwithstanding the foregoing provisions of this Section 2.07, if prior to the Closing, all of the Healthpoint Curaçao Required Consents have not been obtained, Buyer Domestic may elect, in its sole discretion, by delivery of written notice in accordance with Section 2.07(d), to cause Buyer NV or an Affiliate of Buyer NV to purchase 100% of the outstanding equity interests of Healthpoint Curaçao (the Healthpoint Curaçao Equity Interests ) from Healthpoint International in lieu of Buyer NVs purchase of the Healthpoint Curaçao Purchased Assets and assumption of the Healthpoint Curaçao Assumed Liabilities.
(d) In the event Buyer Domestic gives notice of its election to cause Buyer NV or an Affiliate thereof to purchase the Healthpoint Curaçao Equity Interests from Healthpoint International pursuant to Section 2.07(c) (which notice shall be given not later than the third Business Day prior to the Closing), then (i) the applicable Buyer Parties and Sellers agree to negotiate in good faith and execute and deliver, or cause to be executed and delivered, such documents and other instruments and to take, or cause to be taken, such further actions as may be reasonably required to effectuate the transfer of the Healthpoint Curaçao Equity Interests to Buyer NV or its applicable Affiliate and to vest in Buyer NV or its applicable Affiliate good and marketable title to the Healthpoint Curaçao Equity Interests and (ii) the representations and warranties and covenants of Sellers set forth on Schedule 2.07 shall automatically, without further action by any party hereto, be incorporated by reference into this Agreement and shall become effective as of the time of such notice.
(e) If as of the Closing Date the Healthpoint Curaçao Required Consents have not been obtained and Buyer NV has not elected to purchase the Healthpoint Curaçao Equity Interests, then Healthpoint Curaçao shall make available its employees to operate the facility operated by Healthpoint Curaçao immediately prior to the Closing Date. Buyer NV shall reimburse Healthpoint Curaçao for all out-of-pocket expenses incurred by Healthpoint Curaçao in operating such facility on behalf of Buyer NV, including without limitation all wages, bonuses and benefits owed to such employees (which wages, bonuses and benefits shall not be increased by Healthpoint Curaçao except to the extent required by Applicable Law), amounts due under the lease of the facility, the management services fee due to DPT Laboratories Ltd. or its Affiliates, and any Taxes due as a result of operating such facility on behalf of Buyer NV. With respect to payments to employees pursuant to this Section 2.07(e), Healthpoint Curaçao shall advise Buyer NV in writing at least five Business Days prior to the date any payment is due to its employees, the landlord of the facility and/or DPT Laboratories Ltd., and Buyer NV shall pay to Healthpoint Curaçao, by wire transfer of immediately available funds no later than one Business Day prior to the due date for any such payment, all amounts due to such employees or landlord. Buyer NV shall reimburse Healthpoint Curaçao for all other amounts paid by Healthpoint Curaçao (or on its behalf by any other Seller) within five Business Days following receipt of written notice from Healthpoint Curaçao of such payment. Healthpoint Curaçao shall provide to Buyer NV reasonably detail of the amount of such payments.
- 28 -
(f) Notwithstanding anything herein to the contrary, if the Healthpoint Curaçao Required Consents have not been obtained on or before the 90th day following the Closing Date, Healthpoint International shall immediately (or, if such 90 th day is not a Business Day, on the first Business Day following such 90 th day) transfer to Buyer NV the Healthpoint Curaçao Equity Interests.
Section 2.08. Purchase and Assumption by Buyer Puerto Rico .
(a) On the terms and subject to the conditions set forth in this Agreement, at the Closing, each Seller shall sell, convey, assign, transfer and deliver to Buyer Puerto Rico, and Buyer Puerto Rico agrees to purchase, all of each Sellers right, title and interest in, to and under the Puerto Rico Branch Purchased Assets, in each case, free and clear of all Liens, other than Permitted Liens.
(b) On the terms and subject to the conditions set forth in this Agreement, Buyer Puerto Rico agrees, effective at the time of the Closing, to assume all the Puerto Rico Branch Assumed Liabilities and only the Puerto Rico Branch Assumed Liabilities, and, for the avoidance of doubt, excluding the Puerto Rico Branch Excluded Liabilities.
Section 2.09. Assignment of Contracts and Rights .
Notwithstanding anything in this Agreement to the contrary, neither this Agreement nor any other Transaction Document shall constitute an agreement to assign any Purchased Asset or any claim or right or any benefit arising thereunder or resulting therefrom if such assignment, without the consent of a third party thereto, would constitute a breach or other contravention of such Purchased Asset or in any way adversely affect in any material respect the rights of a Seller, any of its Affiliates or any Buyer Party thereunder; provided that the foregoing shall not limit or affect Sellers representations and warranties in Article 4 or the conditions set forth in Section 11.02; provided further , that upon the Closing, subject to each Seller having complied with (and, to the extent applicable, continuing to comply with) its covenants, agreements and obligations pursuant to this Agreement (including this Section 2.09 and Section 8.01), Sellers shall have no liability or obligation under Article 12 or otherwise for the failure to obtain any such consent. Each Seller and each Buyer Party shall use their respective commercially reasonable efforts (but without any payment of money by a Seller or a Buyer Party (or any of their respective Affiliates)) to obtain the consent of such third parties to any such Purchased Asset or any claim or right or any benefit arising thereunder for the assignment thereof to the applicable Buyer Party as Buyer Domestic may reasonably request. If such consent is not obtained, or if an attempted assignment thereof would be ineffective or would adversely affect the rights of a Seller thereunder so that the applicable Buyer Party would not in fact receive all such rights, each Seller and each Buyer Party shall (and cause their respective Affiliates to) cooperate in a mutually agreeable arrangement under which the applicable Buyer Party would obtain the benefits and assume the obligations thereunder in accordance with this Agreement (including, in the case of Government Contracts, Section 8.03), including sub-contracting, sub-licensing, or sub-leasing to the applicable Buyer Party, or under which a Seller or any of its Affiliates would
- 29 -
enforce (at the direction and expense of Buyer Domestic) for the benefit of the applicable Buyer Party, with the applicable Buyer Party assuming the obligations of such Seller or its Affiliates, any and all rights of such Seller or any of its Affiliates against a third party thereto (including, if applicable, the right to elect to terminate such Purchased Asset in accordance with the terms thereof upon Buyer Domestics request). Each Seller shall promptly pay to the applicable Buyer Party when received all monies received by such Seller or any of its Affiliates under any Purchased Asset or any claim or right or any benefit arising thereunder, except to the extent the same represents an Excluded Asset. Upon receipt of any required consents to assignment of a Purchased Asset, each Seller shall, or shall cause its Affiliates to, sell, transfer, convey, assign and deliver such Purchased Asset to the applicable Buyer Party with no additional purchase price due therefor. In addition, following the Closing, the parties shall execute and deliver, or shall cause to be executed and delivered, such documents and other instruments and shall take, or shall cause to be taken, such further actions as may be reasonably required to carry out this Section and give effect to the transactions contemplated by this Section.
ADDITIONAL CLOSING TRANSACTIONS
Section 3.01. Purchase Price . The purchase price for the Purchased Assets is $782,000,000 in cash (the Purchase Price ); provided, however , that if the Closing shall not have occurred on or prior to December 31, 2012 solely because the condition set forth in Section 11.01(a) was not satisfied prior to such date, the Purchase Price shall be increased to $***. The Purchase Price shall be paid as provided in Section 3.02(a) and shall be subject to adjustment as provided in Section 3.05.
Section 3.02. Closing; Closing Deliverables . Unless otherwise agreed in writing by Buyer Domestic and Seller Parent, the closing (the Closing ) of the purchase and sale of the Purchased Assets hereunder shall take place at the offices of Sidley Austin LLP, One South Dearborn Street, Chicago, Illinois, as soon as possible, but in no event later than five Business Days after satisfaction or waiver of the conditions set forth in Article 11 (other than conditions which, by their nature, are to be satisfied at the Closing), or, if earlier, on the End Date (assuming all of the conditions set forth in Article 11 (other than conditions which, by their nature, are to be satisfied at the Closing) have been satisfied or waived as of the End Date). At the Closing:
(a) Buyer Domestic shall deliver, or cause to be delivered, the following amounts:
(i) to the Escrow Agent an amount equal to the sum of (A) $*** plus (B) if the FCA Settlement Agreement has not been executed and delivered by all parties thereto at or prior to the Closing, the FCA Settlement Agreement Escrow Amount, or if the FCA Settlement Agreement has been executed and delivered by all parties thereto at or prior to the Closing, the State FCA Settlement Amount, in each case to be delivered in immediately available funds by wire transfer for deposit pursuant to the Escrow Agreement;
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 30 -
(ii) if the FCA Settlement Agreement has been executed and delivered by all parties thereto at or prior to the Closing, on behalf of the Sellers upon the written request thereof, any amounts due and owing under the FCA Settlement Agreement to the Governmental Authorities entitled to payment under the FCA Settlement Agreement by wire transfer of immediately available funds, in the amounts designated by Sellers by notice to Buyer Domestic, which notice shall be delivered not later than five Business Days prior to the Closing Date; and
(iii) an aggregate amount equal to the Purchase Price less (A) the amount delivered to the Escrow Agent pursuant to the immediately preceding clause (i) and less (B) the amount delivered to Governmental Authorities on behalf of Sellers pursuant to the immediately preceding clause (ii), if any, in immediately available funds by wire transfer to the Sellers and in the amounts designated by Sellers by notice to Buyer Domestic, which notice shall be delivered not later than five Business Days prior to the Closing Date.
(b) Buyer Domestic shall deliver, or cause to be delivered, to Sellers the following:
(i) counterparts to each of the Transaction Documents to be entered into at Closing by a Buyer Party duly executed by such Buyer Party, including the following:
(A) the Escrow Agreement, dated on or prior to the Closing Date, duly executed by Buyer Domestic;
(B) the Lease Amendment, dated on or prior to the Closing Date, duly executed by Buyer Domestic; and
(C) the Transition Services Agreement, dated on or prior to the Closing Date, duly executed by Buyer Domestic.
(ii) the certificate contemplated by Section 11.03(a), dated as of the Closing Date, executed by a duly authorized officer of Buyer Domestic;
(iii) a resale certificate in substantially the form attached hereto as Exhibit J, with any changes thereto as may be mutually agreed by the Sellers and the Buyer Parties prior to the Closing, duly executed by Buyer Domestic
(iv) such documents and instruments as Healthpoint may reasonably request to consummate the transactions contemplated by this Agreement and the other Transaction Documents; and
(v) such instruments of transfer and assignment and other documentation as may be reasonably required by Seller Parent to evidence the assumption by the applicable Buyer Party of the applicable Assumed Liabilities in accordance with the terms hereof, duly executed by such applicable Buyer Party, including instruments of assumption, dated as of the Closing Date, duly executed by each applicable Buyer Party and in form and substance reasonably satisfactory to Seller Parent.
- 31 -
(c) Sellers shall deliver, or cause to be delivered, to Buyer Domestic the following:
(i) such instruments of transfer and assignment and other documentation as may be reasonably required by Buyer Domestic to evidence the transfer of the applicable Purchased Assets to the applicable Buyer Party including such deeds, bills of sale, endorsements, consents, assignments and other good and sufficient instruments of conveyance and assignment as the parties and their respective counsel shall deem reasonably necessary to vest in the applicable Buyer Party all right, title and interest in, to and under the applicable Purchased Assets and to evidence the assumption by the applicable Buyer Party of the applicable Assumed Liabilities in accordance with the terms hereof, in each case duly executed by the applicable Seller(s) or Affiliate(s) of a Seller:
(A) instruments of assignment, dated as of the Closing Date, duly executed by each Seller and in form and substance reasonably satisfactory to Buyer Domestic;
(B) certificates of title or origin (or like documents) with respect to any equipment included in the Purchased Assets for which a certificate of title or origin is required in order to transfer title;
(C) assignments, in recordable form, with respect to each of the leases of leased Real Property, duly executed by the applicable Seller and in form and substance reasonably satisfactory to Buyer Domestic;
(D) assignments, in recordable form, with respect to any registered Business Intellectual Property Rights included in the Purchased Assets, duly executed by the applicable Seller and in form and substance reasonably satisfactory to Buyer Domestic; and
(E) the certificate contemplated by Section 11.02(a), dated as of the Closing Date, executed by a duly authorized executive officer of Seller Parent;
(ii) such instruments of transfer and assignment and other documentation as may be reasonably required by Buyer Domestic to evidence the consummation of the other transactions contemplated by this Agreement and the other Transaction Documents;
(iii) with respect to any Purchased Asset that constitutes a United States real property interest within the meaning of Section 897 of the Code and the Treasury regulations thereunder, a properly executed non-foreign status certificate from the Seller thereof substantially in the form set forth in Treas. Reg. § 1.1445-2(b)(2);
- 32 -
(iv) customary affidavits and other instruments or documents reasonably required by the title insurance company for the title insurance company to issue the Fort Worth Title Insurance Policy (it being understood that Sellers shall not be required to make any indemnity, statement, representation or warranty in any such customary affidavit or other instrument or document as to any matter for which Sellers have not made a similar indemnity, statement, representation or warranty in this Agreement; provided , however , that Sellers shall, in any event, be required to deliver a customary gap indemnity with respect to the period commencing on the Closing Date to and including the date that the Fort Worth Facility Deed is recorded if required for the title insurance company to issue the Fort Worth Title Insurance Policy);
(v) counterparts to each of the Transaction Documents to be entered into at the Closing by a Seller duly executed by such Seller, as applicable, including the following:
(A) the Escrow Agreement, dated on or prior to the Closing Date, duly executed by Healthpoint and Seller Parent;
(B) the Fort Worth Facility Deed, dated on or prior to the Closing Date, duly executed by Healthpoint;
(C) the Lease Amendment, dated on or prior to the Closing Date, duly executed by Seller Parent and Healthpoint; and
(D) the Transition Services Agreement, dated on or prior to the Closing Date, duly executed by Sellers;
(vi) certificates of the secretary (or other equivalent officer) of each Seller, dated as of the Closing Date, in form and substance reasonably satisfactory to Buyer Domestic, as to (A) the organization, existence, authorization and similar matters relating to such Seller party to a Transaction Document or any closing deliverable required to be delivered hereunder and (B) the authorization and approval of the transactions contemplated by this Agreement and the Transaction Documents or any closing deliverable required to be delivered hereunder by the limited partners, shareholders or other equityholders of such Seller;
(vii) a receipt, duly executed by the applicable Seller, evidencing the receipt of the portion of the Purchase Price delivered pursuant to Section 3.02(a); and
(viii) a duly executed Seller FDA Letter.
Section 3.03. Allocation of Purchase Price .
(a) As promptly as practicable, and in any event within 90 days after the Closing, Buyer Domestic shall deliver to Seller Parent a statement (the Allocation Statement ), allocating the Purchase Price (plus Assumed Liabilities, to the extent properly taken into account
- 33 -
under Section 1060 of the Code or under similar provisions in non-U.S. jurisdictions, as applicable) among the Purchased Assets in accordance with Section 1060 of the Code or under similar provisions in non-U.S. jurisdictions and shall be consistent with the allocations set forth on Schedule 3.03. The Allocation Statement as so determined by Buyer Domestic shall be binding on all the parties hereto unless within 10 Business Days after the delivery of the Allocation Statement Seller Parent notifies Buyer Domestic in writing that Seller Parent objects to the allocation set forth in the Allocation Statement, setting forth in reasonable detail its objection(s) and the basis therefor. If within such 10 Business Day period Seller Parent so objects, Buyer Domestic and Seller Parent shall use commercially reasonable efforts to resolve such dispute within 20 days. In the event that Buyer Domestic and Seller Parent are unable to resolve such dispute within 20 days, Buyer Domestic and Seller Parent shall jointly retain the Fort Worth, Texas office of KPMG LLP, or such other firm with the requisite expertise as Buyer Domestic and Seller Parent may mutually agree (such firm, the Accounting Referee ), to resolve the disputed items. Upon resolution of the disputed items, the allocation reflected on the Allocation Statement shall be adjusted to reflect such resolution. Buyer Domestic and Seller Parent shall each bear the costs, fees and expenses of the Accounting Referee for such determination pursuant to a proration of expenses to the parties by the Accounting Referee based on the relation of the outcome to the position of the parties as submitted to the Accounting Referee.
(b) Seller Parent and Buyer Domestic agree to (i) be bound by the Allocation Statement and (ii) act in accordance with the Allocation Statement in the preparation, filing and audit of any Tax Return (including filing Form 8594 with its federal income Tax Return for the taxable year that includes the date of the Closing or other similar filings in non-U.S. jurisdictions).
(c) If an adjustment is made with respect to the Purchase Price pursuant to Section 3.05, the Allocation Statement shall be adjusted in accordance with Section 1060 of the Code and as mutually agreed by Buyer Domestic and Seller Parent. In the event that an agreement is not reached within 20 days after the determination of Closing Net Assets, any disputed items shall be resolved in the manner described in Section 3.03(a). Buyer Domestic and Seller Parent agree to file any additional information return required to be filed pursuant to Section 1060 of the Code and to treat the Allocation Statement as adjusted in the manner described in Section 3.03(b).
(d) Not later than 30 days prior to the filing of their respective Forms 8594 relating to this transaction, each party shall deliver to the other party a copy of its Form 8594.
Section 3.04. Closing Statement .
(a) As promptly as practicable, but no later than 90 days, after the Closing Date, Buyer Domestic shall in good faith prepare, or cause to be prepared, and shall deliver to Seller Parent (i) a balance sheet of the Business as of the close of business on the Closing Date (the Preliminary Closing Date Balance Sheet ) and (ii) a statement setting forth its determination of each of (A) the Closing Net Assets and (B) the Closing Santyl Inventory Amount based on such balance sheet (the Closing Statement ). The Closing Statement shall set forth (x) Buyer Domestics determination of Closing Net Assets, which shall include only
- 34 -
those categories of assets and liabilities and line items included in, and be in form consistent with, the illustrative statement set forth on Schedule 3.04(a), which statement shows the calculation of Base Net Assets (the Illustrative Net Assets Statement ) and (y) Buyer Domestics determination of Closing Santyl Inventory Amount, which shall be consistent with the amount included in Closing Net Assets in respect of Santyl Inventory. The Preliminary Closing Date Balance Sheet shall be prepared in accordance with GAAP and the determination of Closing Net Assets and Closing Santyl Inventory Amount shall be made in accordance with GAAP and accounting policies and practices consistent with those used in the preparation of the Illustrative Net Assets Statement. Closing Net Assets means, as of the close of business on the Closing Date, (i) total Purchased Assets (including, without duplication, all Santyl Inventory) minus (ii) without duplication total Assumed Liabilities and any amounts reimbursed to Sellers pursuant to Section 10.05, in each case as set forth on the Closing Date Balance Sheet and consistent with the Illustrative Net Assets Statement, determined in accordance with this Section 3.04(a) but, for the avoidance of doubt, excluding all Tax assets and liabilities (including any provision for deferred Tax assets or liabilities), Intercompany Accounts and accrued salary, bonus, 401(k) match, vacation, medical benefit and other accrued employment expenses relating to the three Business Employees identified in the Illustrative Net Assets Statement. Closing Santyl Inventory Amount means the net book value of Santyl Inventory owned by Sellers and included in the Purchased Assets, determined as of the close of business on the Closing Date.
(b) If Seller Parent disagrees with Buyer Domestics determination of the Preliminary Closing Date Balance Sheet or calculation of Closing Net Assets or Closing Santyl Inventory Amount delivered pursuant to Section 3.04(a), Seller Parent may, within 45 days after delivery of the documents referred to in Section 3.04(a), deliver a notice to Buyer Domestic disagreeing with such Preliminary Closing Date Balance Sheet or such calculations, as the case may be, and setting forth, in reasonable detail, Seller Parents objections to such Preliminary Closing Date Balance Sheet and/or calculation of such amounts and Seller Parents grounds for such disagreement. Any such notice of disagreement shall specify those items or amounts as to which Seller Parent disagrees, and Seller Parent shall be deemed to have agreed with all other items and amounts contained in the Closing Statement and Preliminary Closing Date Balance Sheet and the calculation of Closing Net Assets and Closing Santyl Inventory Amount delivered pursuant to Section 3.04(a).
(c) If a notice of disagreement shall be duly delivered pursuant to Section 3.04(b), Buyer Domestic and Seller Parent shall, during the 30 days following such delivery, use their commercially reasonable efforts to reach agreement on the disputed items or amounts in order to determine, as may be required, (i) the amounts to be set forth in the final Closing Date Balance Sheet (the Closing Date Balance Sheet ) and/or (ii) the amount of Closing Net Assets and/or Closing Santyl Inventory Amount, as applicable, which amount shall not be less than the amount of Closing Net Assets or Closing Santyl Inventory Amount, as applicable, shown in Buyers calculations delivered pursuant to Section 3.04(a) nor more than the amount of Closing Net Assets or Closing Santyl Inventory Amount, as applicable, shown in Seller Parents calculation delivered pursuant to Section 3.04(b). If Buyer Domestic and Seller Parent are unable to reach such agreement during such period, they shall, promptly thereafter upon the request of either Buyer Domestic or Seller Parent, jointly retain the Accounting Referee to resolve such disputed items. Buyer Domestic and Seller Parent agree that any such engagement shall provide that neither shall have any ex parte communications with the Accounting Referee.
- 35 -
Buyer Domestic and Seller Parent shall cause the Accounting Referee to promptly review this Agreement and the disputed items or amounts for the purpose of (i) determining the amounts to be set forth in the Closing Date Balance Sheet and/or (ii) calculating Closing Net Assets and/or Closing Santyl Inventory Amount, as applicable. In making such calculation, the Accounting Referee shall consider only those items or amounts in the Closing Statement, Preliminary Closing Date Balance Sheet or Buyer Domestics calculation of Closing Net Assets or Closing Santyl Inventory Amount, as applicable, as to which Seller Parent has disagreed, and all determinations shall be based solely on the presentations of Buyer Domestic and Seller Parent and their respective representatives, and not by independent review. In resolving any disputed item, the Accounting Referee: (i) shall be bound by the principles set forth in this Section 3.04(c); and (ii) shall not assign a value to any item greater than the greatest value for such item claimed by either party or less than the smallest value for such item claimed by either party. The Accounting Referee shall deliver to Buyer Domestic and Seller Parent, as promptly as practicable, a report setting forth such calculation. Such report shall be final and binding upon Buyer Domestic and Seller Parent. The cost of such review and report shall be borne (i) by Buyer Domestic if the aggregate difference between Final Closing Net Assets and Buyer Domestics calculation of Closing Net Assets and between Final Closing Santyl Inventory Amount and Buyer Domestics calculation of Closing Santyl Inventory Amount is greater than the aggregate difference between Final Closing Net Assets and Seller Parents calculation of Closing Net Assets and between Final Closing Santyl Inventory Amount and Seller Parents calculation of Closing Santyl Inventory Amount, (ii) by Seller Parent if the first such difference is less than the second such difference and (iii) otherwise equally by Buyer Domestic and Seller Parent.
(d) Buyer Domestic and Seller Parent agree that they shall, and agree to cause their respective independent accountants (if applicable) to, cooperate and assist in the preparation of the Closing Date Balance Sheet and the Closing Statement and the calculation of Closing Net Assets and Closing Santyl Inventory Amount and in the conduct of the reviews referred to in this Section 3.04 including making available to the extent necessary all books, records, work papers and personnel (subject to reasonable confidentiality restrictions and to providing such assurances, releases, indemnities or other agreements as accountants may customarily require in such circumstances).
Section 3.05. Adjustment of Purchase Price .
(a) Healthpoint shall pay, and Seller Parent shall cause to be paid, to Buyer Domestic, as an adjustment to the Purchase Price, in the manner provided in Section 3.05(c), the sum of (i) the amount, if any, by which Base Net Assets exceeds Final Closing Net Assets and (ii) the amount, if any, by which Base Santyl Inventory Amount exceeds Final Closing Santyl Inventory Amount. If Final Closing Net Assets is equal to or exceeds Base Net Assets and Final Closing Santyl Inventory Amount is equal to or exceeds Base Santyl Inventory Amount, then Healthpoint shall not pay any amount to Buyer Domestic pursuant to this Section 3.05.
(b) Final Closing Net Assets means Closing Net Assets (i) as shown in Buyer Domestics calculation delivered pursuant to Section 3.04(a) if no notice of disagreement with respect thereto is duly delivered pursuant to Section 3.04(b); or (ii) if such a notice of disagreement is delivered, (A) as agreed by Buyer Domestic and Seller Parent pursuant to
- 36 -
Section 3.04(c) or (B) in the absence of such agreement, as shown in the Accounting Referees calculation delivered pursuant to Section 3.04(c); provided that in no event shall Final Closing Net Assets be less than Buyer Domestics calculation of Closing Net Assets delivered pursuant to Section 3.04(a) or more than Seller Parents calculation of Closing Net Assets delivered pursuant to Section 3.04(b). Base Net Assets means $***. Final Closing Santyl Inventory Amount means Closing Santyl Inventory Amount (i) as shown in Buyer Domestics calculation delivered pursuant to Section 3.04(a) if no notice of disagreement with respect thereto is duly delivered pursuant to Section 3.04(b); or (ii) if such a notice of disagreement is delivered, (A) as agreed by Buyer Domestic and Seller Parent pursuant to Section 3.04(c) or (B) in the absence of such agreement, as shown in the Accounting Referees calculation delivered pursuant to Section 3.04(c); provided that in no event shall Final Closing Santyl Inventory Amount be less than Buyer Domestics calculation of Closing Santyl Inventory Amount delivered pursuant to Section 3.04(a) or more than Seller Parents calculation of Closing Santyl Inventory Amount delivered pursuant to Section 3.04(b). For the avoidance of doubt, in calculating Base Net Assets and Closing Santyl Inventory Amount, no reduction shall be made for any Santyl Inventory that is recalled as a result of the letter referred to in clause (i) of the definition of Pending Regulatory Reviews and any supplemental or related correspondence. Base Santyl Inventory Amount means $***.
(c) Any payment required to be made by Healthpoint pursuant to Section 3.05(a) shall be made at a mutually convenient time and place within 10 days after Final Closing Net Assets and Final Closing Santyl Inventory Amount have been determined by wire transfer of immediately available funds to Buyer Domestic.
REPRESENTATIONS AND WARRANTIES OF SELLERS
Subject to Section 14.03, except as set forth in the Seller Disclosure Schedule, Sellers represent and warrant to the Buyer Parties as of the date hereof and as of the Closing Date that:
Section 4.01. Existence and Power . Each Seller is a Person duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has all corporate, partnership or limited liability company, as applicable, powers required to carry on its business as now conducted. Each Seller is duly qualified to do business as a foreign entity and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect. Prior to the date hereof, Seller Parent has heretofore made available to Buyer Domestic true and complete copies of the certificate of incorporation, bylaws, limited partnership agreement and all similar organizational documents of each Seller as currently in effect.
Section 4.02. Authorization . The execution, delivery and performance by each Seller of this Agreement and the other Transaction Documents to which it is or will be a party, and each of the other documents and instruments to be executed and delivered by such Seller pursuant hereto and thereto, and the consummation of the transactions contemplated hereby and thereby are, or shall be, as the case may be, within such Persons corporate, partnership or
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 37 -
limited liability company, as applicable, powers and have been duly authorized by all necessary corporate, partnership or limited liability company, as applicable, action on the part of such Person, including, to the extent applicable, approval by the Executive Committee of Seller Parent, the Board of Directors of Seller Parent, and each of the Dorman Group, the Feik Group and the Burnett Group (as each such group is defined in Schedule 4.02), which authorizations Seller Parent has heretofore delivered evidence of to Buyer Domestic. No other corporate, partnership or limited liability company, as applicable, approval or action by any board, committee or persons performing similar functions or any holder of any of a Sellers outstanding equity interests is required in connection with the transactions contemplated by this Agreement or any of the other Transaction Documents. This Agreement and each of the other Transaction Documents to which a Seller is or will be a party, and each of the other documents and instruments to be executed and delivered by such Seller pursuant hereto and thereto constitute, or shall constitute, as the case may be, a valid and binding agreement of such Seller enforceable against such Person in accordance with its terms (subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other laws affecting creditors rights generally and general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity)).
Section 4.03. Governmental Authorization . The execution, delivery and performance by each Seller of this Agreement and the other Transaction Documents to which it is or will be a party, and each of the other documents and instruments to be executed and delivered by such Seller pursuant hereto and thereto, and the consummation of the transactions contemplated hereby and thereby require no action by or in respect of, or filing with, any Governmental Authority other than (x) compliance with any applicable requirements of (a) the HSR Act and (b) any Applicable Law or Governmental Authority necessary for the transfer of the Regulatory Approvals contemplated hereby, including (i) the entire drug master file, BLA and IND for each of Santyl, Regranex and the Product Candidate, as applicable, and (ii) the items listed on Schedule 4.20 and (y) any notice, declaration or filing with, or consent or approval of, any Governmental Authority where the failure to notify, declare, file or obtain the consent or approval thereof would not, individually or in the aggregate, reasonably be expected to (1) adversely affect in any material respect the ability of any Seller to consummate, or otherwise materially delay the consummation of, the transactions contemplated hereby and thereby, (2) subject the Buyer Parties, taken as a whole, or the Business to any material liability or (3) adversely affect in any material respect the Buyer Parties ability to conduct the Business as presently conducted.
Section 4.04. Noncontravention . The execution, delivery and performance by each Seller of this Agreement and the other Transaction Documents to which it is or will be a party, and each of the other documents and instruments to be executed and delivered by such Seller pursuant hereto and thereto, and the consummation of the transactions contemplated hereby and thereby do not and shall not (i) violate the certificate of incorporation, bylaws, limited partnership agreement or any similar organizational documents of such Seller, (ii) assuming compliance with the filings and notices to Governmental Authorities referred to in Section 4.03, violate any Applicable Law, (iii) assuming the obtaining of all Required Consents and Other Consents, constitute a default or an event that, with or without notice or lapse of time or both, would constitute a default under or give rise to any right of termination, cancellation or acceleration of any right or obligation of such Seller or to a loss of any benefit relating to the
- 38 -
Business to which such Seller is entitled under any provision of any agreement or other instrument binding upon such Person with respect to the Business or by which any of the Purchased Assets or such Seller is or may be bound, including any Material Contract, or (iv) result in the creation or imposition of any Lien on any Purchased Asset, other than Permitted Liens, except, in the case of clauses (ii) and (iii) of this Section 4.04 (in the case of clause (iii), other than with respect to a Material Contract, as to which this exception shall not apply), for any such conflicts, defaults, violations, terminations, cancellations, accelerations, losses or Liens that would not, individually or in the aggregate, reasonably be expected to (x) adversely affect in any material respect the ability of any Seller to consummate, or otherwise materially delay the consummation of, the transactions contemplated hereby and thereby, (y) subject the Buyer Parties, taken as a whole, or the Business to any material liability or (z) adversely affect in any material respect the Buyer Parties ability to conduct the Business as presently conducted.
Section 4.05. Other Consents . Schedule 4.05 sets forth a true and complete list of each consent or action by any Person other than the Required Consents (the Other Consents ) under any Contracts or Permits that is required with respect to the execution, delivery and performance of this Agreement and the other Transaction Documents.
Section 4.06. Financial Statements .
(a) The Healthpoint Financials fairly present in all material respects, in conformity with GAAP (except as may be indicated in the notes thereto), the financial position of Healthpoint (on a consolidated basis) as of the dates thereof and the results of operations and cash flows of Healthpoint (on a consolidated basis) (subject to normal year-end adjustments and the absence of footnotes in the case of the unaudited interim financial statements).
(b) Each of the (i) Illustrative Net Assets Statement set forth on Schedule 3.04(a), (ii) unaudited pro forma income statements of Healthpoint for the year ended December 31, 2011 and the six-month period ended June 30, 2012 set forth on Schedule 4.06(b)(ii), (iii) Balance Sheet and (iv) contribution by Product analysis for the year ended December 31, 2011 set forth on Schedule 4.06(b)(iv), in each case, was derived from the books and records of Sellers, was prepared in good faith and is an accurate presentation, in all material respects, of the information described therein.
(c) Healthpoint has established and maintains a system of internal control over financial reporting sufficient to provide reasonable assurance (i) that Healthpoint maintains records that, in reasonable detail, accurately and fairly reflect in all material respects the respective transactions and dispositions of assets of Healthpoint, (ii) that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP, (iii) that receipts and expenditures are being made only in accordance with authorizations of management and the general partner of Healthpoint and (iv) regarding prevention or timely detection of the unauthorized acquisition, use or disposition of Healthpoints assets that could have a material effect on Healthpoints financial statements.
(d) The Projections were prepared in good faith based on assumptions that the management of Seller Parent believed at the time to be fair and reasonable in light of current market conditions, it being acknowledged and agreed by the Buyer Parties that (i) projections as
- 39 -
to future events are not to be viewed as facts and that the actual results during the period or periods covered by such projections may differ from the projected results by a material amount and (ii) such projections include the revenues and expenses associated with certain products that are not included in the Purchased Assets.
Section 4.07. Absence of Certain Changes .
(a) Since the Balance Sheet Date, (i) the Business has been conducted in the ordinary course consistent with past practices and (ii) there has not been any event, occurrence, development or state of circumstances or facts that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
(b) Since the Balance Sheet Date, there has been no damage, destruction, loss or claim, whether or not covered by insurance, or condemnation or other taking adversely affecting in any material respect any of the Purchased Assets having a replacement cost in excess of $*** individually or $*** in the aggregate.
(c) From the Balance Sheet Date until the date hereof, there has not been any action taken by a Seller or any of its Affiliates that, if taken during the period from the date of this Agreement through the Closing Date without Buyer Domestics consent, would constitute a breach of Section 6.01.
Section 4.08. Materials Provided to Equityholders . Any written or other materials sent or furnished by a Seller or any of its Affiliates to the holders of such Sellers outstanding equity interests in connection with the transactions contemplated by this Agreement or the other Transaction Documents, including in connection with any approval or action required by such Person to consummate such transactions (collectively, the Equityholder Materials ) comply, or will comply, when sent or furnished, as to form and substance in all material respects with the requirements of Applicable Law.
Section 4.09. No Undisclosed Liabilities . There are no liabilities of the Business of any kind whatsoever, whether known, unknown, fixed, matured, unmatured, accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability, other than:
(a) liabilities provided for in the Balance Sheet or disclosed in the notes thereto, in such amounts shown or reserved for in the Balance Sheet;
(b) liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice;
(c) liabilities arising from matters specifically disclosed in the Seller Disclosure Schedule without reference to the contents of any underlying documents disclosed on such Disclosure Schedule;
(d) liabilities included in the calculation of Final Closing Net Assets;
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 40 -
(e) liabilities arising under the Contracts included in the Purchased Assets but excluding liabilities arising out of any breach of or default under any provision of such Contracts;
(f) liabilities disclosed on Schedule 4.09; and
(g) other undisclosed liabilities that do not exceed $***, either individually or in the aggregate.
Section 4.10. Material Contracts .
(a) With respect to the Business or the Purchased Assets, no Seller or any of its Affiliates is a party to or bound by:
(i) any lease, sublease or license of (A) personal property providing for annual rental payment of $*** or more or (B) real property;
(ii) any Contract for the purchase or sale of real property;
(iii) any Contract providing for either (A) annual payments by a Seller or any of its Affiliates of $*** or more or (B) aggregate payments by a Seller or any of its Affiliates of $*** or more (including contingent milestone and royalty payments);
(iv) any Contract providing for either (A) annual payments to a Seller or any of its Affiliates of $*** or more or (B) aggregate payments to a Seller or any of its Affiliates of $*** or more (including contingent milestone or royalty payments);
(v) (A) any Contract requiring the future purchase of materials, supplies or equipment, other than purchase orders issued in the ordinary course of business, or (B) any management, service or other similar type of Contract, in each case that has an aggregate future liability to any Person in excess of $*** or is not terminable by a Seller or its Affiliates by notice of not more than 90 days without payment of any penalty;
(vi) any Contract that relates to the research, development, distribution, marketing, supply, license, collaboration, co-promotion or manufacturing of any Product, which, if terminated or not renewed, would be reasonably likely to be materially adverse to the research, development, distribution, marketing, supply, license, collaboration, co-promotion or manufacturing of such Product;
(vii) any Contract with any Person that distributes or promotes any Product for or on behalf of the Business that cannot be unilaterally terminated by a Seller or its Affiliates upon 60 days notice (excluding incidental provisions (including indemnities) that by their terms survive the termination of the relevant agreement);
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 41 -
(viii) any Contract with any Collaborative Partner;
(ix) any managed care Contract with any customer listed or required to be listed on Schedule 4.28(a);
(x) any (A) partnership Contract, (B) joint venture Contract or (C) other Contract involving the sharing of profits or losses;
(xi) any stockholders, investors rights, registration rights or similar Contract;
(xii) any Contract relating to the acquisition or disposition of any business or Person (whether by merger, sale of stock, sale of assets or otherwise) included in the Business;
(xiii) any Contract granting any Person an option or a right of first refusal or first offer or similar preferential right to purchase or acquire any Purchased Asset;
(xiv) any so called requirements Contract requiring a Seller or any of its Affiliates to purchase its requirements or a specified minimum amount of a particular raw material, resource or product from a particular supplier or suppliers, or to purchase all or substantially all of the output or production of a particular supplier;
(xv) any Contract involving foreign currency swaps, commodity swaps, options, caps, collars, hedges or forward exchanges, or other similar agreements, regardless of whether entered into for the purposes of hedging, investment or otherwise;
(xvi) any mortgage, deed of trust, pledge, security agreement, note, loan agreement or other instrument granting a Lien on any Purchased Asset;
(xvii) any Contract relating to Indebtedness;
(xviii) any Contract (including so-called take-or-pay or keep-well Contracts) under which (A) any Person has directly or indirectly guaranteed liabilities or obligations of a Seller or any of its Affiliates with respect to the Business, or (B) a Seller or any of its Affiliates has directly or indirectly guaranteed liabilities or obligations of any Person with respect to the Business;
(xix) any Contract containing most favored nation provisions;
(xx) any Contract with a Related Party of a Seller or any of its Affiliates, including any Contract providing for the furnishing of services by, rental of real or personal property from, or otherwise requiring payments to, or from, any Related Party of a Seller or any of its Affiliates, other than employment at will arrangements in the ordinary course of business (each, a Related Party Agreement );
- 42 -
(xxi) any Contract that limits or restricts the conduct of the Business or any successor thereto, including any Contract (A) that limits or restricts the freedom of a Seller or any of its Affiliates (1) to compete in any line of business or with any Person or in any area solely with respect to the Business, (2) to own, operate, sell, transfer, pledge or otherwise dispose of or encumber any Purchased Asset, (3) to offer or refuse to offer any Product or Product improvements, additions or extensions to any Person or (4) to hire or solicit any individual to perform employment or consulting services or (B) that would so limit the freedom of any Buyer Party after the Closing Date;
(xxii) any Contract related to the Business under which a Seller or any of its Affiliates is granted any material license, right or immunity (including a covenant not to sue or right to enforce or prosecute any patents) with respect to the Intellectual Property Rights of any third party;
(xxiii) any Contract related to the Business under which a Seller or any of its Affiliates has granted to a third party any material license, right or immunity (including a covenant not to sue or right to enforce or prosecute any patents) with respect to the Business Intellectual Property Rights;
(xxiv) any Contract with a Governmental Authority related to the Business (each, a Government Contract );
(xxv) any sales Contract which entitles any customer to a rebate or right of set-off to return any product after acceptance thereof, or to delay acceptance thereof, other than customary volume rebates or warranty provisions in the ordinary course of business; or
(xxvi) any other Contract not made in the ordinary course of business that is material to the Business.
(b) (i) Each Contract disclosed in any Schedule to this Agreement or required to be disclosed pursuant to this Section that is included in the Purchased Assets (collectively, the Material Contracts ) is a valid, binding and enforceable agreement of the respective Seller or its Affiliates party thereto (subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other laws affecting creditors rights generally and general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity)) and is in full force and effect, (ii) no Seller or Affiliate of Seller or, to the Knowledge of Sellers, any other party thereto is in default or breach in any material respect under the terms of any such Material Contract, (iii) to the Knowledge of Sellers, no event or circumstance has occurred that, with notice or lapse of time or both, would constitute any default or breach under any such Material Contract in any material respect by any Seller or Affiliate of a Seller party thereto or any other party thereto, (iv) there is no pending action or proceeding challenging the validity, enforceability or effectiveness of any such Material Contract and (v) no Seller or
- 43 -
Affiliate of a Seller has received written notice that any other party to a Material Contract intends to cancel or terminate such Material Contract and, to the Knowledge of Sellers, no such other party intends to deliver such notice. Prior to the date hereof, true and complete copies of each such Material Contract have been made available to Buyer Domestic.
(c) (i) The Sellers and their Affiliates have complied in all material respects with the terms and conditions of each Government Contract, including all clauses, provisions and requirements incorporated by reference or by operation of law in such Government Contract; (ii) the Sellers and their Affiliates have complied in all material respects with all Applicable Laws pertaining to each Government Contract, including, where applicable, the Truth in Negotiations Act, Buy American Act/Trade Agreements Act and similar domestic content requirements; (iii) all representations and certifications made to a Governmental Authority in a formal certification executed by any Seller and its Affiliates pertaining to each Government Contract were current, accurate and complete in all material respects as of their effective date, and the Sellers and their Affiliates have complied in all material respects with all such representations and certifications in the performance of such Government Contract; (iv) as of the date hereof, no Governmental Authority, prime contractor, subcontractor or other Person has notified the Sellers or their Affiliates during the past five years in writing that the Sellers or their Affiliates have breached or violated in any respect any Applicable Law with respect to, or certification, representation, clause, provision or requirement of, any Government Contract; (v) no suspension, debarment, declaration of ineligibility to receive award, termination for convenience, termination for default, cure notice or show cause notice, or other notice intended to serve the same purpose, has been issued during the past five years with respect to any Government Contract; (vi) within the past five years, no money due to any Seller or its Affiliates pertaining to any such Government Contract has been withheld, reduced or set off, nor has any claim been made to withhold or set off money, other than in the ordinary course of business; and (vii) the Sellers within the past five years have not received any written notice alleging a violation, non-compliance or defective pricing with respect to proposals and contracts subject to Federal Acquisition Regulation Part 31, Office of Management and Budget Circular allowable cost provisions, or similar allowable cost provisions, the U.S. Cost Accounting Standards or similar cost accounting standards, of any Governmental Authority, or the Truth In Negotiations Act.
Section 4.11. Litigation and Governmental Orders . There is no Action pending (to the Knowledge of Sellers in the case of audits and investigations) and, to the Knowledge of Sellers, there is no Action threatened, against any Seller or any of its Affiliates with respect to the Business or any Purchased Asset that, if determined or resolved adversely in accordance with the plaintiffs demands would reasonably be expected to be, individually or in the aggregate, material to the Business as a whole or which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated by this Agreement or the other Transaction Documents. The Sellers, their Affiliates, the Business and the Purchased Assets are not subject to any material Governmental Order which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated by this Agreement or the other Transaction Documents, and a true and complete list of all Governmental Orders to which Sellers, their Affiliates, the Business or the Purchased Assets are subject or by which they are bound is set forth on Schedule 4.11. There is no Action pending in which Sellers or any of their Affiliates is the plaintiff or the claimant, and which relates to the Purchased Assets or the Business.
- 44 -
Section 4.12. Compliance with Laws and Court Orders . No Seller or any of its Affiliates is in violation of, has since January 1, 20*** violated, and to the Knowledge of Sellers is not under investigation with respect to and has not been threatened to be charged with or given notice of any violation of, any Applicable Law relating to the Purchased Assets or the conduct of the Business, except for any such violations that would not, individually or in the aggregate, reasonably be expected to (y) subject the Buyer Parties, taken as a whole, or the Business to any material liability or (z) adversely affect in any material respect the Buyer Parties ability to conduct the Business as presently conducted. There is no judgment, decree, injunction, or order of any arbitrator or Governmental Authority (including the U.S. Department of Health and Human Services, its Office of Inspector General, the U.S. Department of Justice and any State Attorney General) in effect against a Seller or any of its Affiliates to which the Business or any Purchased Asset is subject or by which it is bound finding that the Business is not in compliance in all material respects with Applicable Law or that in any manner seeks to prevent, enjoin, alter or materially delay the consummation of the transactions contemplated by this Agreement or the other Transaction Documents or that would adversely affect in any material respect the Buyer Parties ability to conduct the Business as presently conducted.
Section 4.13. Regulatory Matters .
(a) Sellers have all material Permits required by the FDA and any other Governmental Authority that regulates the manufacture, sale or distribution of the Products to conduct the Business (the FDA Permits ). All of the FDA Permits are in full force and effect, the holder of such permit is in compliance in all material respects with, and is not in material default under (and to the Knowledge of Sellers, no event which with the giving of notice or lapse of time, or both, would become a material default under), each such FDA Permit, and to the Knowledge of Sellers none of such Permits shall be terminated or impaired or become terminable, in whole or in part, as a result of the transactions contemplated by this Agreement and the other Transaction Documents. To the Knowledge of Sellers, no written notice of cancellation, default or any dispute concerning any FDA Permit has been received by the Seller or any of its Affiliates. Sellers are the sole and exclusive owners of the FDA Permits and the associated filings and applications with the FDA or any other Governmental Authority, including any BLA, NDA, 510(k) submission, premarket approval, IND or investigational device exemption application, comparable regulatory application or filing made or held by or issued to a Seller or any of its Affiliates (collectively, the Seller Regulatory Filings ) and hold all right, title and interest in and to all Seller Regulatory Filings free and clear of any Lien (other than Permitted Liens). No Seller or any of its Affiliates has granted any third party any right or license to use, access or reference any of the Seller Regulatory Filings, including any of the Know-How contained in any of the Seller Regulatory Filings or rights (including any regulatory exclusivities) associated with each such Seller Regulatory Filing.
(b) Since January 1, 20***, there has not been any voluntarily or involuntarily initiated, conducted, or issued recall, market withdrawal, safety alert, warning, dear doctor letter, market correction, or investigator notice relating to an alleged material lack of safety or efficacy of any Product.
(c) With respect to the Products, each Seller and each of its Affiliates is in compliance in all material respects with all Applicable Laws and any other letters, notices or
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 45 -
guidances issued by the FDA or any Governmental Authority which regulates the sale of pharmaceutical products or biological, device or regenerative medicine products in any jurisdiction. There are no regulatory Actions pending (to the Knowledge of Sellers with respect to audits and investigations) and, to the Knowledge of Sellers, there are no regulatory Actions threatened (in each case, other than non-material routine or periodic inspections) pertaining to any Product against any Person (each, a Collaborative Partner ) that manufactures any component, ingredient, or material used in manufacturing the Products pursuant to a development, commercialization, manufacturing, supply or other collaboration arrangement with a Seller or any of its Affiliates by the FDA or any Governmental Authority which regulates the sale of pharmaceutical products or biologic, device or regenerative medicine products in any jurisdiction. Since January 1, 20*** there have been no written notices, reports, warning letters, or untitled letters alleging or asserting noncompliance in any material respect with any Applicable Law with respect to the Products or any subpoenas or investigative demands or other written inquiries that would reasonably be interpreted as raising a compliance concern sent or delivered by any Governmental Authority with regard to any Product.
(d) The manufacture of the Products by the Sellers or their Affiliates and, to the Knowledge of the Sellers, by third parties has, since January 1, 20***, been and is being conducted in compliance in all material respects with current good manufacturing practices, as defined by the FDA, including, as applicable, the FDAs Quality System Regulation set forth in 21 C.F.R. Part 820 and 21 C.F.R. Parts 211, 600 & 820. The sale of Products with Regulatory Approvals by Healthpoint or any of its Affiliates has, since January 1, 20***, been and is being conducted in all material respects in accordance with those Regulatory Approvals and without unlawful promotion of off-label or other prohibited uses.
(e) Each Seller and its Affiliates are and since January 1, 20*** have been with respect to the Business in compliance in all material respects with all Applicable Laws requiring the maintenance or submission of reports or records under requirements administered by the FDA or any other Governmental Authority, including, for avoidance of doubt, records and reports relating to product corrections and removals (including FDA requirements set forth in 21 C.F.R. Part 806), MDR Reportable Events (including FDA requirements set forth in 21 C.F.R. Part 803), Adverse Experiences, Serious Adverse Events, Serious Injuries, incidents or near-incidents and product malfunctions.
(f) No Seller, any of its Affiliates or, to the Knowledge of Sellers, any of their respective Collaborative Partners, agents or subcontractors with respect to the Business (i) has been convicted of any crime or engaged in any conduct which has resulted or could result in debarment or disqualification by the FDA or any other Governmental Authority or (ii) has failed to disclose a material fact required to be disclosed to any Governmental Authority with respect to the Purchased Assets, and there are no proceedings pending or, to the Knowledge of Sellers, threatened that would reasonably be expected to result in criminal or civil liability or debarment or disqualification by the FDA or any other Governmental Authority. No Seller, its Affiliates or, to the Knowledge of Sellers, any of their respective Collaborative Partners has committed any act, made any statement or failed to make any statement that would reasonably be expected to provide a basis for the FDA to invoke its policy with respect to Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities or for any other Governmental Authority to invoke any similar policy.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 46 -
(g) There have been no Serious Adverse Events, Serious Injuries or MDR Reportable Events associated with the use (including in clinical trials) of any Product that have not been reported to the FDA or any other Governmental Authority in accordance with Applicable Law. Prior to the date hereof, Seller Parent has made available to Buyer Domestic (i) a schedule of all payouts made by a Seller or any of its Affiliates to end-users since January 1, 20*** in respect of claims relating to any Product and (ii) a schedule of all actual or threatened (in writing) claims made by end-users against a Seller or any of its Affiliates relating to a Product since January 1, 20***.
(h) All studies, tests, and preclinical and clinical research being conducted by a Seller, any of its Affiliates, and to the Knowledge of Sellers, on behalf of a Seller or any of its Affiliates by any of their respective Collaborative Partners, with respect to any Product, are being, and at all times have been, conducted in compliance in all material respects with all Applicable Laws, including, as applicable, good laboratory practice regulations set forth in 21 C.F.R. Part 58, good clinical practices, as defined or recognized by the FDA, including the ICH Tripartite Guideline for Good Clinical Practice, other applicable provisions of the Federal Food, Drug and Cosmetic Act and its applicable implementing regulations at 21 C.F.R. Parts 50, 54, 56, 58, 312 and 812, and comparable Applicable Laws of any other Governmental Authority. No clinical trial conducted by a Seller or any of its Affiliates or, to the Knowledge of Sellers, on behalf of a Seller or any of its Affiliates, with respect to any Product has been terminated or suspended prior to completion for safety or non-compliance reasons, and neither the FDA nor any other Governmental Authority, clinical investigator or institutional review board that has or had jurisdiction over or participated in any such clinical trial has initiated or, to the Knowledge of Sellers, threatened in writing to initiate, any action to place a clinical hold order on, or otherwise terminate, materially delay or suspend, any such ongoing clinical trial, or to disqualify, restrict or debar any clinical investigator or other person or Person involved in any such clinical trial.
(i) No Seller, any of its Affiliates or any of their respective officers, directors, managing employees (as those terms are defined in 42 C.F.R. § 1001.1001), nor, to the Knowledge of Sellers, any agent (as such term is defined in 42 C.F.R. § 1001.1001(a)(1)(ii)) of a Seller or any of its Affiliates is a party to or bound by, any order, individual integrity agreement, corporate integrity agreement or other formal or informal agreement with any Governmental Authority concerning compliance with Applicable Laws governing any Federal Healthcare Program with respect to any Product, and, to the Knowledge of Sellers, no such agreement is threatened in writing.
(j) No Seller, any of its Affiliates, nor any of their respective officers, directors, managing employees (as those terms are defined in 42 C.F.R. § 1001.1001), nor, to the Knowledge of Sellers, any agent (as such term is defined in 42 C.F.R. § 1001.1001(a)(1)(ii)) of a Seller or any of its Affiliates: (i) has been debarred, excluded or suspended from participation in any Federal Healthcare Program; (ii) has had a civil monetary penalty assessed against it, him or her under Section 1128A of the Social Security Act of 1935, codified at Title 42, Chapter 7, of the United States Code (the Social Security Act ); (iii) is currently listed on the General Services Administration published list of parties excluded from federal procurement programs and non-procurement programs; (iv) to the Knowledge of Sellers, is the target or subject of any current investigation by a Governmental Authority relating to any Federal Healthcare Program-related offense; or (v) is currently charged with or convicted of any criminal offense relating to the delivery of an item or service under any Federal Healthcare Program.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 47 -
(k) There are no filings of an Action pending and, to the Knowledge of Sellers, there are no filings of an Action threatened against a Seller or any of its Affiliates relating to the Business or any Product under any federal or state whistleblower statute, including under the False Claims Act of 1863 (31 U.S.C. § 3729 et seq.).
(l) To the Knowledge of Sellers, no Seller or any of its Affiliates is under investigation by any Governmental Authority for a violation of the Health Insurance Portability and Accountability Act of 1995, as amended by the Health Information Technology for Economic and Clinical Health Act ( HIPAA ), or the regulations contained in 45 C.F.R. Parts 160 and 164, including receiving any notices from the United States Department of Health and Human Services Office of Civil Rights relating to any such violations, or any comparable state or local Applicable Laws. No Seller or any of its Affiliates is a covered entity as that term is defined in HIPAA. Each Seller and its Affiliates have been in compliance in all material respects with federal and state data breach Applicable Laws.
(m) To the extent a Seller provides reimbursement coding or billing advice regarding any Product or procedures related thereto, such advice is and has been true and complete in all material respects and in compliance in all material respects with the payment requirements of Medicare and other Applicable Laws governing a Federal Healthcare Program.
(n) Each Seller and its Affiliates have at all times complied in all material respect with Applicable Laws with respect to the Business relating to security and privacy standards regarding protected health information.
Section 4.14. Intercompany Accounts . Schedule 4.14 contains a complete list of the balances of all Intercompany Accounts as of the Balance Sheet Date.
(a) Schedule 4.15(a) correctly describes all real property used or held for use primarily in the Business (all such property, collectively, the Real Property ), which a Seller or any of its Affiliates owns, leases, subleases, licenses or operates, and any Liens thereon, specifying in the case of leases, subleases and licenses, the name of the parties thereto, the lease, sublease or license term, as applicable, and basic annual rent or annual license fee, as applicable.
(b) Schedule 4.15(b) correctly lists all leases and subleases of personal property used or held for use primarily in the Business to which a Seller or any of its Affiliates is a party, and any Liens thereon, specifying the name of the lessor or sublessor, the lease term and the approximate current monthly lease obligation.
(c) No Purchased Asset is subject to any Lien, except:
(i) Liens disclosed on the Balance Sheet or in the notes thereto, other than any Liens encumbering any Real Property;
- 48 -
(ii) Liens for Taxes not yet due or being contested in good faith (and for which adequate accruals or reserves have been established on the Balance Sheet or, for periods after the Balance Sheet Date, on the books and records of Sellers);
(iii) Landlords, workmens, repairmens, materialmens, warehousemens and carriers liens and other similar liens imposed by Applicable Law, in each case incurred in the ordinary course of business, including liens incurred in the ordinary course of the construction at the Fort Worth Facility;
(iv) In the case of the Real Property, Liens that are (A) easements, quasi-easements, licenses, covenants, rights of way, utility agreements and other similar restrictions or (B) zoning, building and other similar restrictions, that in any case described in this clause (iv) do not materially detract from the value, or materially interfere with any current use, of the Real Property they encumber; or
(v) With respect to assets other than Real Property, Liens which do not materially detract from the value of such Purchased Asset, or materially interfere with any present use of such Purchased Asset (clauses (i) (v) of this Section 4.15(c) are, collectively, the Permitted Liens ).
(d) To the Knowledge of Sellers, there are no developments affecting any of the Purchased Assets or, with respect to any leased Real Property, the Real Property subject to the applicable lease, pending or, to the Knowledge of Sellers, threatened, which would reasonably be expected to materially detract from the value or materially interfere with any present use of such Purchased Assets or such leased Real Property.
(e) The Real Property includes all real property, and only such real property, as is used or held for use primarily in connection with the conduct and operations of the Business as heretofore conducted by the Sellers.
(f) Seller Parent has delivered or made available to Buyer Domestic, prior to the date hereof, true, correct and complete copies of all existing title insurance policies, title insurance commitments, title reports and surveys with respect to the Fort Worth Facility in possession of a Seller or any of its Affiliates.
(g) To the Knowledge of Sellers, the plants, buildings, structures and building systems (HVAC, etc.) included in the Purchased Assets and, with respect to any leased Real Property, the Real Property subject to the applicable lease, have no material defects, are in all material respects in good operating condition and repair, reasonable wear and tear excepted, and have been reasonably maintained (giving due account to the age and length of use of same, ordinary wear and tear excepted), are suitable in all material respects for their present uses and, in the case of plants, buildings and other structures (including the roofs thereof), are structurally sound in all material respects.
(h) The plants, buildings and structures included in the Purchased Assets and, with respect to any leased Real Property, the Real Property subject to the applicable lease, currently have access to (i) public roads or valid easements over private streets or private
- 49 -
property for such ingress to and egress from all such plants, buildings and structures and (ii) to the Knowledge of Sellers, proper and legally permitted water supply, storm and sanitary sewer facilities, telephone, gas and electrical connections, fire protection, drainage and other public utilities, in each case as is necessary for the conduct of the Business as it is currently conducted by the Sellers. To the Knowledge of Sellers, none of the structures on the Real Property encroaches upon real property of another Person, and no structure of any other Person substantially encroaches upon any Real Property.
(i) There are no condemnation, compulsory purchase orders or similar proceedings pending, or to the Knowledge of Sellers, threatened, with respect to the Real Property.
(j) The Real Property, and its continued use, occupancy and operation as currently used, occupied and operated, does not constitute a nonconforming use under all Applicable Laws relating to building, zoning, subdivision and other land use.
(k) Healthpoint has made all notifications to Governmental Authorities required by Applicable Law, except where the failure to make such notifications would not, individually or in the aggregate, reasonably be expected to (i) adversely affect in any material respect the construction, use, occupancy or operation of the Fort Worth Facility or (ii) subject the Buyer Parties, taken as a whole, or the Business, to any material liability, and Healthpoint holds all material Permits, including construction permits, certificates of completion and occupancy permits required for the construction, use, occupancy and operation of the Fort Worth Facility and the improvements thereon, and all such Permits are in full force and effect.
(l) None of the Purchased Assets is an equity interest in an entity.
Section 4.16. Sufficiency of and Title to the Purchased Assets .
(a) The Purchased Assets, together with the Lease Amendment, the Policies, and cash and cash equivalents, constitute all of the property and assets held or used in the development, commercialization, manufacture, marketing, distribution or sale of the Products, or otherwise held or used primarily in the operation of or arising from the conduct of the Business and, together with the services to be provided to the Buyer Parties and their respective Affiliates pursuant to the Transition Services Agreement, are adequate to conduct the Business as currently conducted and as conducted as of the Balance Sheet Date.
(b) Sellers have valid and subsisting ownership or leasehold interests in, and, in the case of owned Real Property, fee simple title to, all tangible Purchased Assets. At the Closing, Sellers shall transfer to the Buyer Parties good and marketable title in and to, or a valid leasehold interest in, each of the Purchased Assets, free and clear of all Liens, except for Permitted Liens, Liens granted by any Buyer Party or any of its Affiliates and Liens arising solely as a result of the identity and status of the Buyer Parties.
(c) The tangible Purchased Assets (other than the plants, buildings, structures and building systems (HVAC, etc.) included in the Purchased Assets) are in good and serviceable operating condition (giving due account to the age and length of use of same, normal wear and tear excepted) and are suitable for the uses for which intended.
- 50 -
Section 4.17. Products . Each of the Products is, and at all times up to and including the sale thereof has been, (i) in compliance in all material respects with all Applicable Laws and Regulatory Approvals and (ii) fit for the ordinary purposes for which it is intended to be used and conforms in all material respects to any promises or affirmations of fact made on the container or label for such product or in connection with its sale. There is no design defect with respect to any of such products and each of such products contains adequate warnings, presented in a reasonably prominent manner, in accordance with Applicable Laws, and current industry practice with respect to its contents and use. Since January 1, 20***, no Seller or any of its Affiliates has sold or agreed to sell any Product accompanied by payment, pricing or shipment terms (e.g., deferred due dates, reduced pricing or payment discounts) that are outside the ordinary course of business consistent with past practice.
Section 4.18. Intellectual Property .
(a) Schedule 4.18(a) contains a true and complete list of all of the registrations and applications for registrations (i) included in the Business Intellectual Property Rights. Seller shall distinguish in such schedule Owned Intellectual Property Rights from Licensed Intellectual Property Rights.
(b) The Business Intellectual Property Rights included in the Purchased Assets constitute all the Intellectual Property Rights related to the Business as currently conducted or that otherwise pertain to the making, using, selling, offering for sale or importing the Products. There exist no material contractual restrictions on the disclosure, use, license or transfer of the Business Intellectual Property Rights. The consummation of the transactions contemplated by this Agreement will not alter, encumber, impair or extinguish any Business Intellectual Property Rights material to the conduct of the Business as currently conducted. Other than as listed on Schedule 4.18(b), the Sellers and their Affiliates have not licensed to any third party any rights under the Business Intellectual Property Rights.
(c) No Seller, any Affiliate of a Seller nor the conduct of the Business is infringing, misappropriating or otherwise violating, or has infringed, misappropriated or otherwise violated, any Intellectual Property Right of any Person in any material respect. There is no Action pending (to the Knowledge of Sellers with respect to audits and investigations) and, to the Knowledge of Sellers, there is no Action threatened against a Seller or any of its Affiliates (i) based upon, or challenging or seeking to deny or restrict, the rights of a Seller or any of its Affiliates in any of the Business Intellectual Property Rights, (ii) alleging that the use of the Business Intellectual Property Rights or any services provided, processes used or products manufactured, used, imported or sold with respect to the Business do or may conflict with, misappropriate, infringe or otherwise violate any Intellectual Property Right of any third party or (iii) alleging that the conduct of the Business infringed, misappropriated or otherwise violated any Intellectual Property Right of any Person. No Seller or any of its Affiliates has received from any Person a written offer to license any Intellectual Property Rights of such Person in connection with the Business.
(d) None of the Owned Intellectual Property Rights or, to the Knowledge of Sellers, the Licensed Intellectual Property Rights material to the operation of the Business as currently conducted has been adjudged invalid or unenforceable in whole or part, and, to the Knowledge of Sellers, the Business Intellectual Property Rights are valid and enforceable in all material respects.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 51 -
(e) Sellers hold all right, title and interest in and to all Owned Intellectual Property Rights and all licenses of Licensed Intellectual Property Rights, free and clear of any Lien other than Permitted Liens. Effective written assignments constituting an unbroken, complete chain-of-title from the original owners to a Seller have been obtained with respect to all Owned Intellectual Property Rights. In each case where a patent or patent application, trademark registration or trademark application, service mark registration or service mark application, or copyright registration or copyright application included in the Owned Intellectual Property Rights is held by assignment, the assignment has been duly recorded with the Governmental Authority from which the patent or registration issued or before which the application or application for registration is pending. Sellers have taken all commercially reasonable actions necessary to maintain and protect their rights in the Business Intellectual Property Rights, including payment of applicable maintenance fees and filing of applicable statements of use.
(f) To the Knowledge of Sellers, no Person is infringing, misappropriating or otherwise violating or has infringed, misappropriated or otherwise violated any Business Intellectual Property Right. Sellers and their respective Affiliates have taken reasonable steps to maintain the confidentiality of all Business Intellectual Property Rights material to the operation of the Business and the value of which is contingent upon maintaining such confidentiality. Except as provided by Applicable Law, no such Business Intellectual Property Rights that are material to the operation of the Business have been disclosed other than to employees, representatives and agents of a Seller or any of its Affiliates, all of whom are bound by written confidentiality agreements substantially in the form previously made available to Buyer Domestic, or to the Sellers and their Affiliates legal, business or financial advisors, all of whom are bound to keep such Intellectual Property Rights confidential, whether by written agreement or otherwise.
(g) Sellers have procedures in place designed to provide that all Business Intellectual Property Rights related to the Business conceived of or developed by their employees or other Persons acting on behalf of a Seller or any of its Affiliates have been assigned to a Seller and such employees or other Persons do not retain any reversionary or contingent right to such Business Intellectual Property Rights or compensation therefor. To the extent that any Intellectual Property Right has been developed or created by a third party (including any current or former employee of a Seller or any of its Affiliates) for Seller, such Seller has a valid and binding written agreement with such third party with respect thereto that is in full force and effect, and a Seller thereby either (i) has obtained ownership of and is the sole and exclusive owner of such Intellectual Property Right or (ii) has obtained a valid and unrestricted right to exploit such Intellectual Property Right, sufficient for the conduct of the Business as currently conducted.
(h) With respect to pending applications and applications for registration of the Business Intellectual Property Rights that are material to the Business, no Seller or any of its Affiliates has Knowledge of any reason that would reasonably be expected to prevent any such application or application for registration from being granted with coverage substantially equivalent to the latest amended version of the pending application or application for
- 52 -
registration. None of the trademarks, service marks, applications for trademarks and applications for service marks included in the Owned Intellectual Property Rights or, to the Knowledge of any Seller or any of its Affiliates, Licensed Intellectual Property Rights that are material to the Business has been the subject of an opposition or cancellation procedure. None of the patents and patent applications included in the Owned Intellectual Property Rights that are material to the Business has been the subject of an interference, protest, public use proceeding or third party reexamination request.
(i) No Seller or any of its Affiliates has received a written opinion of counsel with respect to the invalidity, non-infringement or unenforceability of any patent or patent application included in the Business Intellectual Property Rights.
(j) No government funding or facility of a university, college, other educational institution or research center was used in the development of any Business Intellectual Property Rights material to the conduct of the Business. To the Knowledge of Sellers, no current or former employee, consultant or independent contractor who was involved in, or contributed to, the creation or development of any material Owned Intellectual Property Rights has performed services for the government or a university, college or other educational institution or research center during a period of time during which such employee, consultant or independent contractor was also involved in, or contributing to, the creation or development of any material Owned Intellectual Property Rights.
(k) The IT Assets included in the Purchased Assets operate and perform in a manner that permits Sellers to conduct the Business as currently conducted in all material respects. To the Knowledge of Sellers, no Person has gained unauthorized access to any of the IT Assets. Sellers have implemented reasonable backup technology with respect to the IT Assets.
(l) Sellers and their respective Affiliates have at all times with respect to the Business complied in all material respects with (i) Applicable Law relating to privacy, data protection and the collection and use of personal information and user information gathered or accessed in the course of the Business and (ii) all rules, policies and procedures established by Sellers and their respective Affiliates with respect to the foregoing. No claims have been asserted or to the Knowledge of Sellers threatened in writing against a Seller or any of its Affiliates by any Person alleging a violation of such Persons privacy, personal or confidentiality rights under any such Applicable Law, rules, policies or procedures with respect to the Business. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents will not breach or otherwise cause any violation of any such Applicable Law, rules, policies or procedures.
(m) With respect to all personal and user information referred to in Section 4.18(l), Sellers and their respective Affiliates have at all times taken all steps reasonably necessary (including, without limitation, implementing and monitoring compliance with adequate measures with respect to technical and physical security) to ensure that such information is protected against loss and unauthorized access, use, modification, disclosure or other misuse. To the Knowledge of Sellers, there has been no unauthorized access to or other misuse of such information.
- 53 -
Section 4.19. Insurance Coverage . Seller Parent has furnished to Buyer Domestic a list of (a) all insurance policies and fidelity bonds relating to the Purchased Assets, the Business and/or any of the Business Employees (the Current Policies ) that are currently in effect as of the date hereof, together with true and complete copies thereof, (b) all historic insurance policies and fidelity bonds relating to the Purchased Assets, the Business and/or any of the Business Employees (together with the Current Policies, the Policies ) that (i) with respect to liability insurance policies, were effective anytime from January 1, 20*** to the date hereof and (ii) with respect to non-liability insurance policies, were effective any time from January 1, 20*** to the date hereof and (c) all claims paid and pending under such Policies as of the date hereof. Except as disclosed on Schedule 4.19, the full policy limits (subject to deductibles provided in such Policies) are available and unimpaired under each such Policy. No underwriter of any of the Policies has questioned, disclaimed, denied, disputed or reserved its rights, in each case in writing, with respect to a particular claim under any such Policy or such Policy itself. Sellers and their respective Affiliates have disclosed and declared promptly all material facts with respect to the Policies to the respective underwriters thereof. All premiums payable under the Policies have been timely paid and each Seller and its Affiliates have otherwise complied in all material respects with the terms and conditions of all such Policies. Each of the Policies is in full force and effect and, to the Knowledge of Sellers, there is no threatened termination of, premium increase with respect to, or material alteration of coverage under, any of the Current Policies.
Section 4.20. Licenses and Permits . Schedule 4.20 correctly describes each license, franchise, permit, certificate, registration, concession, order, decree or other similar authorization, other than the FDA Permits, required to permit Sellers to conduct the Business in all material respects as currently conducted, including Environmental Permits (the Permits ), together with the name of the Governmental Authority issuing such Permit. The Permits are valid and in full force and effect, no Seller is in default under, and to the Knowledge of Sellers no condition exists that with notice or lapse of time or both would constitute a default under, the Permits (except for any such defaults that would not, individually or in the aggregate, reasonably be expected to (y) subject the Buyer Parties, taken as a whole, or the Business to any material liability or (z) adversely affect in any material respect the Buyer Parties ability to conduct the Business as presently conducted) and none of the Permits shall be terminated or impaired or become terminable, in whole or in part, as a result of the transactions contemplated hereby. To the Knowledge of Sellers, no written notice of (i) cancellation, default or any dispute concerning any Permit or (ii) any event, condition or state of facts described in the preceding sentence, has been received by the Seller or any of its Affiliates.
Section 4.21. Accounts Receivables; Inventories .
(a) All accounts receivable of the Sellers with respect to the Business have arisen from bona fide transactions by such parties in the ordinary course of the Business. All accounts receivable reflected in the Balance Sheet are owned by Sellers and, to the Knowledge of Sellers, are good and collectible in the ordinary course of business at the aggregate recorded amounts thereof, net of any applicable allowance for doubtful accounts reflected in the Balance Sheet.
(b) As of the Closing, all Inventory (i) shall not be adulterated or misbranded under Applicable Laws or Regulatory Approvals at the time the same is tendered to the Buyer,
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 54 -
(ii) shall be manufactured, labeled and packaged in all material respects in accordance with the good manufacturing practices set forth in the Regulatory Approvals for the applicable Product and all other Applicable Laws including all Applicable Laws in effect at the time and place of manufacture of such Inventory, (iii) shall have been maintained in the ordinary course of business, (iv) shall be owned by Sellers free and clear of all Liens other than Permitted Liens, (v) shall be free from defects in processing, materials and workmanship, (vi) shall be in quantities sufficient for the normal operation of the Business in accordance with past practice for at least six months from the Closing Date, and (vii) shall be, in the case of finished goods, of a quality and quantity saleable in the ordinary course of business and, in the case of all other Inventories, of a quality and quantity useable in the ordinary course of business, in each case net of applicable reserves for obsolescence set forth on the books and records of Healthpoint.
(c) The Inventory set forth in the Balance Sheet was properly stated therein at the lesser of cost or fair market value determined in accordance with GAAP.
(d) No Inventory of this Business is held on consignment or otherwise by third parties.
(e) Since January 1, 20***, (i) no Seller nor any of its Affiliates has effected a price change with respect to any Product and (ii) no Product has been sold by Sellers or, to the Knowledge of Sellers, by any other Person acting as an agent of Sellers, in a manner that is inconsistent with Sellers normal sales channel practices at January 1, 20***.
Section 4.22. Finders Fees . Except for Banc of America Merrill Lynch and J.P. Morgan Securities LLC, whose fees and expenses shall be paid by Sellers, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of a Seller, any of their respective directors or officers or equityholders or any of their respective Affiliates who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement and the other Transaction Documents.
(a) Schedule 4.23(a) sets forth, for each Business Employee on the date hereof, such employees name, employer, title, hire date, location, whether full- or part-time, whether active or on leave (and, if on leave, the nature of the leave and the expected return date), whether exempt or non-exempt, annual base salary or wage rate, accrued and unused vacation days, most recent annual bonus received, current annual bonus opportunity, whether such Business Employee is a Key Employee and whether such Business Employee, if working in the United States, has or will require a green card or other work authorization under Applicable Law in order to be employed by any of the Buyer Parties or their respective Affiliates. Schedule 4.23(a) separately sets forth, for each Service Provider on the date hereof other than a Business Employee, such Service Providers name, duties and rate of compensation. No Key Employee has indicated in writing to Sellers or any of their respective Affiliates that he or she intends to resign or retire as a result of the transactions contemplated by this Agreement or otherwise within one year after the Closing Date.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 55 -
(b) Sellers and their respective Affiliates are, and have been since January 1, 20***, with respect to current or former Service Providers, in material compliance with all Applicable Laws relating to labor and employment, including those relating to labor management relations, wages, hours, overtime, employee classification, discrimination, sexual harassment, civil rights, human rights, affirmative action, work authorization, immigration, work status, safety and health, information privacy and security, workers compensation, continuation coverage under group health plans, wage payment and the payment and withholding of Taxes. There are no pending Actions (other than audits or investigations) with respect to any of the Business Employees, to the Knowledge of Sellers, there are no pending Actions consisting of audits or investigations with respect to any of the Business Employees and, to the Knowledge of Sellers, there are no threatened Actions with respect to any of the Business Employees, including, in each case, any labor or employment disputes or controversies or unfair labor practice charges, health or safety related charges or other Actions, or complaints with respect to any of the Business Employees.
(c) None of Sellers or any of their respective Affiliates is or has been a party to or subject to, or is currently negotiating in connection with entering into, any Collective Bargaining Agreement or other labor agreement with any union or labor organization that covers any of the Business Employees, and to the Knowledge of Sellers there is not and there has not been any activity or proceeding of any labor organization or employee group (or representative thereof) to organize any such employees. There are not and, since January 1, 20***, there have not been any (i) labor strikes, slowdowns or stoppages or written threats of the same against any of the Sellers or any of their respective Affiliates with respect to or affecting the Business; (ii) representation claims or petitions pending before the National Labor Relations Board or any foreign equivalent with respect to any of the Business Employees; or (iii) grievances or arbitration proceedings against any of the Sellers or any of their respective Affiliates arising out of or under any Collective Bargaining Agreement. The consent or consultation of, or the rendering of formal advice by, any labor or trade union, works council or other employee representative body is not required for Sellers to enter into this Agreement or to consummate any of the transactions contemplated hereby.
(d) Within the past three years, none of Sellers nor their respective Affiliates have implemented any plant closing or layoff of Business Employees that could implicate WARN and none of Sellers or any of their respective Affiliates has taken any action that would reasonably be expected to cause Buyer Parties to have any liability or other obligation as of, or immediately following, the Closing Date under WARN.
(e) To the Knowledge of Sellers, no Business Employee is a party to any noncompetition agreement, Contract with a third party or any other obligations of any kind (and the Seller and any of its Affiliates has not received any written notice alleging that any employee is such party or so subject) that (i) prohibits or otherwise limits in any way (or purports to prohibit or limit in any way) any employee from performing his or her duties with respect to the Business, (ii) restricts or limits in any way the scope or type of work in which he or she may be engaged other than for the benefit of the Business or (iii) requires him or her to transfer, assign or disclose information concerning his or her work on behalf of Sellers or any of their Affiliates, as applicable, to any third party.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 56 -
Section 4.24. Employee Plans .
(a) Schedule 4.24(a) lists each Employee Plan. For each Employee Plan, Seller Parent has furnished to Buyer Domestic a copy of such plan (or a description, if such plan is not written) and all amendments thereto and, as applicable: (A) all trust agreements, insurance contracts or other funding arrangements and amendments thereto; (B) the current prospectus or summary plan description and all current summaries of material modifications; (C) the most recent favorable determination or opinion letter from the IRS; (D) all documents and correspondence relating thereto received from or provided to the U.S. Department of Labor, the PBGC, the IRS or any other Governmental Authority during the past three years relating to any material Action; (E) all current employee handbooks, manuals and policies; and (F) if such plan is an International Plan, documents that are substantially comparable (taking into account differences in Applicable Law and practices) to the documents required to be provided in clauses (A) through (E).
(b) Each Employee Plan has been maintained in material compliance with its terms and all Applicable Law, including ERISA and the Code, with respect to the Business Employees. There is no pending or, to the Knowledge of Sellers, threatened Action (to the Knowledge of Sellers with respect to audits and investigations) involving any Employee Plan (other than routine claims for benefits) that could become a claim against or a liability to a Buyer Party or any of its Affiliates (including Affiliates resulting from this transaction). No Action (to the Knowledge of Sellers with respect to investigations or audits) is pending or, to the Knowledge of Sellers, threatened against or under any Employee Plan with respect to the Business Employees before any court or arbitrator or any other Governmental Authority, including the IRS, the U.S. Department of Labor or the PBGC.
(c) No Business Employee has ever participated in any Employee Plan that is subject to Section 302 or Title IV of ERISA or Section 412 or 430 of the Code or is otherwise a defined benefit plan including, without limitation, any Multiemployer Plan. No Controlled Group Liability has been imposed on a Seller or any of its Affiliates and no circumstances exist that could reasonably be expected to result in the imposition of Controlled Group Liability on a Buyer Party or any of its Affiliates at or after the Closing, in either case, as a result of such Seller or any of its Affiliates being a member of the Commonly Controlled Group prior to the Closing.
(d) Each Employee Plan that is a Seller DC Plan intended to be qualified under Section 401(a) of the Code has received a favorable determination letter, or has pending or has time remaining in which to file an application for such determination from the IRS, and to the Knowledge of Sellers there is no reason why any such determination letter should be revoked or not be reissued. No material events have occurred with respect to any Employee Plan that could result in payment or assessment by or against the Business, a Buyer Party or any of its Affiliates of any material excise Taxes under Sections 4972, 4975, 4976, 4977, 4979, 4980B, 4980D, 4980E or 5000 of the Code.
(e) Each International Plan (i) has been maintained in all material respects in compliance with its terms and Applicable Law, (ii) if intended to qualify for special tax treatment, meets all the requirements for such treatment and (iii) if intended to be funded or book-reserved, is fully funded or book-reserved, as applicable, based on reasonable actuarial
- 57 -
assumptions. Healthpoint Curaçao entered into an Insurance Agreement Retirement Plan with Ennia Caribe Leven N.V. The Insurance Agreement Retirement Plan with Ennia Caribe Leven N.V. terminated as of June 30, 2012. In replacement of the Insurance Agreement Retirement Plan with Ennia Caribe Leven N.V., Healthpoint Curacao entered into a Defined Contribution Program Financing Agreement with VidaNova Pension Fund Foundation dated August 28, 2012. To the Sellers Knowledge, the above described agreement with VidaNova Pension Fund Foundation fully secures Healthpoint Curaçaos commitments under the Healthpoint Curaçao Defined Contribution Pension Plan. Without limiting the foregoing, to the Sellers Knowledge the liability of Ennia Caribe Leven N.V., as insurer for the Healthpoint Curaçao Defined Contribution Pension Plan, shall be sufficient to provide for the projected benefit obligations, as of the Closing Date, with respect to all current and former participants in such plan, and no transaction contemplated by this Agreement shall cause such insurance obligations to be less than such projected benefit obligations as of the Closing Date.
(f) No Seller nor any of its Affiliates has any current or projected liability for, and no Employee Plan provides or promises, any post-employment or post-retirement medical, dental, disability, hospitalization, life or similar benefits (whether insured or self-insured) to any current or former Service Provider (other than coverage mandated by COBRA).
(g) With respect to each Employee Plan, all contributions, premiums and payments that are due have been made for such plan within the time periods prescribed by the terms of such plan and Applicable Law, and all contributions, premiums and payments for any period ending on or before the Closing Date that are not due are properly accrued to the extent required to be accrued under applicable accounting principles and have been properly reflected on the Balance Sheet. No events have occurred with respect to any Employee Plan that could result in payment or assessment by or against a Buyer Party or any of its Affiliates of any material excise Taxes or penalties.
(h) There has been no amendment to, written interpretation of or announcement (whether or not written) by a Seller or any of its Affiliates relating to, or change in employee participation or coverage under any Employee Plan that would increase the expense of maintaining such Employee Plan above the level of expense incurred in respect thereof for the most recent fiscal year ended prior to the date hereof.
(i) Except as set forth in Schedule 4.24(i) or as provided in Article 10, neither the execution of this Agreement or the other Transaction Documents nor the consummation of the transactions contemplated hereby or thereby (either alone or together with any other event) will (i) entitle any current or former Service Provider to any payment or benefit, including any bonus, severance, retirement, job security or other payment or benefit, (ii) accelerate the time of payment or vesting or trigger any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, or increase the amount payable or trigger any other obligation pursuant to, any Employee Plan or (iii) limit or restrict the right of a Seller or any of its Affiliates or, after the Closing, any Buyer Party or any of its Affiliates, to merge, amend or terminate any Employee Plan.
(j) No Employee Plan or the payments thereunder could, individually or collectively, reasonably be expected to result in the payment of any amount that would not be
- 58 -
deductible pursuant to Section 280G of the Code or result in an excise Tax imposed on any disqualified individual under Section 4999 of the Code. Seller Parent is a small business corporation (as defined in Section 1361(b) of the Code) and no facts or circumstances exist that could reasonably be expected to result in Seller Parent failing to qualify as a small business corporation prior to the Closing.
(k) With respect to any Business Employee who becomes a Transferred Employee, each Employee Plan subject to Section 409A or 457A of the Code, and any award thereunder, that is or forms part of a nonqualified deferred compensation plan within the meaning of Sections 409A and 457A of the Code, is in all material respects in documentary compliance with, and has been operated in material compliance with, all applicable requirements of Sections 409A and 457A of the Code.
(l) No Seller or any of its Affiliates has any obligation to gross-up, indemnify or otherwise reimburse any current or former Service Provider for any Tax incurred by such Service Provider, including without limitation under Section 409A, 457A or 4999 of the Code which could reasonably be expected to become a liability of a Buyer Party or any of its Affiliates.
Section 4.25. Environmental Matters .
(a) In connection with or relating to the Purchased Assets, the Business (as conducted at any time on or prior to the Closing Date), or the Real Property, no written notice, notification, demand, request for information, citation, summons or order has been received, to the Knowledge of Sellers no complaint has been filed, no penalty has been assessed and no Action is pending (to the Knowledge of Sellers with respect to audits and investigations) or, to the Knowledge of Sellers, threatened by any Person relating to or arising out of any Environmental Law or Hazardous Substance Activities.
(b) To the Knowledge of Sellers, there are no material liabilities or obligations arising in connection with or relating to the Purchased Assets, Business, or Real Property of any kind whatsoever, whether known, unknown, fixed, matured, unmatured, accrued, contingent, absolute, determined, determinable or otherwise, arising under or relating to any Environmental Law or Hazardous Substance Activities.
(c) No Hazardous Substance has been discharged, disposed of, dumped, injected, pumped, deposited, spilled, leaked, emitted or released at, to, from, in, on or under any property, by a Seller or any of its Affiliates in connection with the Purchased Assets or the Business (as conducted at any time on or prior to the Closing Date) in violation in any material respect of any applicable Environmental Law or that would reasonably be expected to give rise to a material liability.
(d) No Real Property, no property now or previously owned, leased or operated by a Seller or any of its Affiliates (in connection with the Purchased Assets or the Business), no property at which Hazardous Substances are located as a result of the use of any Purchased Asset or Real Property or for which a Seller or any of its Affiliates is actually or allegedly responsible, nor any property to which the Business has, directly or indirectly,
- 59 -
transported or arranged for the transportation of any Hazardous Substances, is listed or, to the Knowledge of Sellers, is proposed for listing on the National Priorities List promulgated pursuant to CERCLA, on CERCLIS (as defined in CERCLA) or on any similar federal, state, local or foreign list of sites requiring investigation or cleanup.
(e) Each of the Purchased Assets, the Business, the Real Property and, in connection with the Purchased Assets or the Business (as conducted at any time on or prior to the Closing Date), each Seller and its Affiliates, is and since January 1, 20*** has been in compliance in all material respects with all Environmental Laws and since January 1, 20*** has been and is in compliance in all material respects with all Environmental Permits; such Environmental Permits are valid and in full force and effect and, assuming the related Required Consents and Other Consents have been obtained prior to the Closing Date, are transferable and, to the Knowledge of Sellers, none of the Environmental Permits shall be terminated or become terminable, in whole or in part, as a result of the transactions contemplated hereby or by the other Transaction Documents.
(f) There has been no environmental investigation, study, audit, test, review or other analysis conducted since January 1, 20*** that is in the possession, custody or control of a Seller or any of its Affiliates in relation to the Business (as conducted at any time on or prior to the Closing Date) or any Purchased Asset or Real Property or any other property or facility now or previously owned, leased or operated in connection with the Purchased Assets, Business or any Person or business which is, in whole or in part, a predecessor of the Business, which has not been made available to Buyer Domestic.
(g) None of the Purchased Assets or the Real Property is located in New Jersey or Connecticut.
(h) For the purposes of this Section (other than clause (f)), the terms Seller, and Business shall each include any Person or business which is, in whole or in part, a predecessor thereof.
Section 4.26. Related Party Transactions . No Seller, any of their respective Affiliates or any of their respective members, equityholders, officers or directors or, to the Knowledge of Sellers, their respective Immediate Families (each officer or director and their respective Immediate Families a Related Party ) controls or is a director or executive officer of any Person that is a material customer, supplier, lessor, lessee, debtor, creditor or competitor of the Business. To the extent relating to the Business, no Seller or any of their respective Affiliates has made any payment or commitment to pay any commission, fee or other amount to, or to purchase or obtain or otherwise contract to purchase or obtain any goods or services from, any Person of which any Related Party of a Seller or any of their respective Affiliates is an officer or director or otherwise holds a greater than five percent (5%) financial interest in (except stock holdings solely for investment purposes in securities of publicly held and traded companies). No Related Party of any Seller or any of its Affiliates (other than a member of the Principal Seller Group) (a) owes any money to a Seller or any of their respective Affiliates as it relates to the Business or (b) has any interest in any property, real or personal, tangible or intangible, used in or pertaining to the Business, including any Purchased Asset.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 60 -
Section 4.27. Foreign Corrupt Payments . No Seller, any of their respective Affiliates or any director or officer of a Seller, any of their respective Affiliates, or, to the Knowledge of Sellers, any employee, distributor, dealer, consultant, agent or other Person acting for or on behalf of a Seller or any of their respective Affiliates has taken any action that would result in a violation by such Persons of the Foreign Corrupt Practices Act (15 U.S.C. §§ 78m(b), 78dd-1, 78dd-2, 78ff) (the FCPA ), The Bribery Act of 2010 of the United Kingdom (the UK Bribery Act ), or any other applicable anti-corruption law, including: (a) by making use of the mails or any means or instrumentality of interstate commerce in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value, directly or indirectly, to any foreign official (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office to secure official action, or to any person (whether or not a foreign official) to influence that person to act in breach of a duty of good faith, impartiality or trust ( acting improperly ) or to reward the person for acting improperly, in contravention of the FCPA or the UK Bribery Act or any other applicable anti-corruption law or (b) by requesting, agreeing to receive or accepting a financial or other advantage intending that, as a consequence, anyones work duties will be performed improperly, or as a reward for anyones past improper performance. Each Seller and each of their respective Affiliates have conducted their respective businesses in compliance in all material respects with all applicable anti-corruption laws, including the FCPA and, since its enactment, the UK Bribery Act.
Section 4.28. Customers and Suppliers . Schedule 4.28(a) sets forth a list of names of (i) the ten largest Federal Healthcare Program customers of the Business, (ii) the ten largest commercial insurer customers of the Business, (iii) the ten largest group purchasing customers of the Business, (iv) the ten largest hospital customers of the Business and (v) the five largest pharmacy customers (including closed-door pharmacies) of the Business (in each case measured by dollar volume of purchases or sales) during the year ended December 31, 20*** and the period from January 1, 20*** through June 30, 20*** and Schedule 4.28(b) sets forth a list of names of the ten largest suppliers of the Business (measured by dollar volume of purchases or sales) during such periods. Except as set forth in Schedule 4.28, there exists no actual or to the Knowledge of Sellers threatened in writing termination, cancellation or limitation of, or any materially adverse modification or change in, the business relationship of Sellers with any customer or group of customers listed in Schedule 4.28(a), or with any supplier or group of suppliers listed in Schedule 4.28(b).
REPRESENTATIONS AND WARRANTIES OF BUYER PARTIES
The Buyer Parties represent and warrant to Sellers as of the date hereof and as of the Closing Date that:
Section 5.01. Existence and Power . Each Buyer Party is a Person duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has all corporate or limited liability company, as applicable, powers and all governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted. Each Buyer Party is duly qualified to do business as a foreign entity and is in good
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 61 -
standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, reasonably be expected to adversely affect in any material respect the ability of any Buyer Party to consummate, or otherwise materially delay the consummation of, the transactions contemplated pursuant to this Agreement or the other Transaction Documents to which it is or will be a party.
Section 5.02. Authorization . The execution, delivery and performance by each Buyer Party of this Agreement and the other Transaction Documents to which it is or will be a party, and each of the other documents and instruments to be executed and delivered by such Buyer Party pursuant hereto and thereto are, or shall be, as the case may be, within such Buyer Partys corporate or limited liability company, as applicable, powers and have been duly authorized by all necessary corporate or limited liability company, as applicable, action on the part of such Buyer Party, which authorizations Buyer Domestic has heretofore delivered evidence of to Seller Parent. This Agreement and each of the other Transaction Documents to which a Buyer Party is or will be a party, and each of the other documents and instruments to be executed and delivered by such Buyer Party pursuant hereto and thereto constitute, or shall constitute, as the case may be, a valid and binding agreement of such Buyer Party enforceable against such Buyer Party in accordance with its terms (subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other laws affecting creditors rights generally and general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity)).
Section 5.03. Governmental Authorization . The execution, delivery and performance by each Buyer Party of this Agreement and the other Transaction Documents to which it is or will be a party, and each of the other documents and instruments to be executed and delivered by such Buyer Party pursuant hereto and thereto, and the consummation of the transactions contemplated hereby and thereby require no action by or in respect of, or filing with, any Governmental Authority other than (x) compliance with any applicable requirements of (a) the HSR Act and (b) any Applicable Law or Governmental Authority necessary for the transfer of the Regulatory Approvals contemplated hereby, including (i) the entire drug master file, BLA and IND for each of Santyl, Regranex and the Product Candidate, as applicable, and (ii) the items listed on Schedule 4.20 and (y) any notice, declaration or filing with, or consent or approval of, any Governmental Authority where the failure to notify, declare, file or obtain the consent or approval thereof would not, individually or in the aggregate, reasonably be expected to adversely affect in any material respect the ability of any Buyer Party to perform its obligations under this Agreement or the other Transaction Documents or consummate, or otherwise materially delay the consummation of, the transactions contemplated hereby and thereby.
Section 5.04. Noncontravention . The execution, delivery and performance by each Buyer Party of this Agreement and the other Transaction Documents to which it is or will be a party, and each of the other documents and instruments to be executed and delivered by such Buyer Party pursuant hereto and thereto, and the consummation of the transactions contemplated hereby and thereby do not and shall not (a) violate the certificate of incorporation, bylaws, limited partnership agreement or any similar organizational documents of such Buyer Party, (b) assuming compliance with the filings and notices to Governmental Authorities referred to in Section 5.03, violate any Applicable Law or (c) constitute a default or an event that, with or
- 62 -
without notice or lapse of time or both, would constitute a default under or give rise to any right of termination, cancellation or acceleration of any right or obligation of such Buyer Party or to a loss of any benefit to which such Buyer Party is entitled under any provision of any agreement or other instrument binding upon such Buyer Party, except in the case of clause (c) for any violation or default that would not, individually or in the aggregate, reasonably be expected to adversely affect in any material respect the ability of any Buyer Party to perform its obligations under this Agreement or the other Transaction Documents or consummate, or otherwise materially delay the consummation of, the transactions contemplated hereby and thereby.
Section 5.05. Financing . The Buyer Parties have, or shall have prior to the Closing, sufficient cash, available lines of credit or other sources of immediately available funds to enable them to make payment of the Purchase Price and any other amounts to be paid by them hereunder and under the other Transaction Documents.
Section 5.06. Litigation and Governmental Orders . There is no Action (to the Knowledge of the Buyer Parties with respect to audits and investigations) pending and, to the Knowledge of the Buyer Parties, there is no Action threatened against any Buyer Party which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated by this Agreement or the other Transaction Documents. The Buyer Parties are not subject to any Governmental Order which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated by this Agreement or the other Transaction Documents.
Section 5.07. Finders Fees . Except for Deutsche Bank Securities Inc., whose fees and expenses shall be paid by a Buyer Party, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of a Buyer Party, any of their respective directors or officers or equityholders or any of their respective Affiliates who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement and the other Transaction Documents.
COVENANTS OF SELLERS
Sellers agree that:
Section 6.01. Conduct of the Business . From the date hereof until the Closing Date (or the earlier termination of this Agreement pursuant to Section 13.01), except as set forth in Schedule 6.01, as expressly contemplated by this Agreement or the other Transaction Documents, as required by Applicable Law or a Governmental Authority or as consented to in writing by Buyer Domestic, each Seller shall, and shall cause its Affiliates to, cause the Business to be conducted in the ordinary course consistent with past practice and use its commercially reasonable efforts, subject to the limitations set forth in this Agreement, to (i) preserve intact the present business organization of the Business, (ii) maintain in effect all foreign, federal, state and local Permits, FDA Permits and Regulatory Approvals of the Business, (iii) keep available the services of the directors, officers and other management employees of the Business, (iv) maintain satisfactory relationships with the customers, lenders, suppliers, distributors, purchasers
- 63 -
of Product and others having material business relationships with the Business, (v) continue the capital expenditure projects set forth on Schedule 6.01(a) in accordance in all material respects with the treatment of such projects in Healthpoints capital budget for the applicable fiscal year, and (vi) if and to the extent reasonably requested by Buyer Domestic, pursue, in such manner as may be reasonably directed by Buyer Domestic, any on-going variations, amendments and renewals of the Regulatory Approvals that are pending as of the date hereof and shall not withdraw them. Without limiting the generality of the foregoing, except as set forth in Schedule 6.01, as expressly contemplated by this Agreement or the other Transaction Documents, as required by Applicable Law or a Governmental Authority or as consented to in writing by Buyer Domestic, each Seller shall not, and shall cause its Affiliates not to:
(a) incur any capital expenditures with respect to the Business, except for (i) those expenditures provided for in the capital budget set forth on Schedule 6.01(a) and (ii) any unbudgeted capital expenditures not to exceed $*** individually or $*** in the aggregate;
(b) acquire (by merger, consolidation, acquisition of stock or assets or otherwise), directly or indirectly, any assets, securities, properties, interests or businesses for the conduct of the Business, other than supplies, equipment and Inventory in the ordinary course of business in a manner that is consistent with past practice;
(c) sell, lease, license, sublicense, or otherwise transfer (including by way of dividend or distribution) or grant any rights with respect to, abandon, allow to lapse or otherwise forfeit any material rights with respect to, or create or incur any Lien (other than Permitted Liens) on, any Purchased Assets, other than (i) sales of Inventory in the ordinary course of business consistent with past practice, (ii) sales of obsolete equipment in the ordinary course of business consistent with past practice and (iii) as expressly required by the terms of any Contract in effect as of the date of this Agreement;
(d) intentionally stuff the distribution channels of any Product in anticipation or contemplation of the transactions contemplated by this Agreement or the other Transaction Documents;
(e) intentionally encourage customers of the Business to return any Product outside of the ordinary course of business consistent with past practice;
(f) other than in connection with actions permitted by Section 6.01(a) or Section 6.01(b), make any loans, advances or capital contributions to, or investments in, any other Person with respect to the Business, other than in the ordinary course of business consistent with past practice;
(g) create, incur, assume, suffer to exist or otherwise be liable with respect to any Indebtedness with respect to the Business or guarantees thereof, in each case other than in the ordinary course of business in a manner that is consistent with past practice;
(h) (i) enter into any Contract that would constitute a Material Contract if it had been entered into as of the date hereof, (ii) amend or modify in any material respect or terminate (excluding terminations upon expiration of the term thereof in accordance
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 64 -
with their terms) any existing Material Contract or any Contract that if in effect as of the date hereof would have been a Material Contract or (iii) otherwise waive, release or assign any material rights, claims or benefits of the Business;
(i) fail to make any filing, pay any fee, or take any other action necessary to maintain the ownership, validity and enforceability of any material Business Intellectual Property Right;
(j) (i) grant or increase any severance or termination pay to, or enter into or amend any severance, retention, termination, employment, consulting, bonus, change in control or severance agreement with any current or former Service Provider, (ii) increase the compensation or benefits provided to any current or former Service Provider (other than (w) as required by the terms of any Employee Plan, (x) as required by Applicable Law, (y) increases in base salary that do not, in the aggregate, exceed $*** on an annualized basis or (z) as expressly provided in this Agreement), (iii) establish, adopt, enter into or, except as required by Applicable Law or the terms of any Employee Plan or Collective Bargaining Agreement, amend any Employee Plan or Collective Bargaining Agreement, (iv) hire or engage any Service Providers other than to the extent necessary to maintain the ordinary course operation of the Business, (v) change primary work location or assigned territory for any Service Provider, (vi) offer relocation benefits, (vii) terminate the employment of any Key Employee other than for cause (as defined in Schedule 6.01(j)) or knowingly take any action or omit to take any action that would reasonably be expected to provide a basis for any Business Employee to terminate his or her employment for Good Reason (as such term is defined in any applicable employment, change in control, severance or similar agreement, plan or policy applicable to such Business Employee) or (viii) take or omit to take any action with respect to any Service Provider that would create liabilities or obligations of any kind on the part of any Seller or any of the Buyer Parties or any of their respective Affiliates under the WARN Act (without giving effect to the termination of employment of any Service Provider by the Buyer Parties after the Closing);
(k) change in any material respect (i) a Sellers normal accounting practices and policies, including those relating to the collection of accounts receivable, the payment of accounts payable or other similar liabilities of the Business or (ii) the application of such policies;
(l) fail to replenish Inventories or supplies in the ordinary course of business;
(m) enter into any Contract or transaction with any Related Party of a Seller with respect to the Business, except in the ordinary course of business as expressly required by the terms of any Related Party Agreement in effect as of the date hereof;
(n) make any material change in any method of accounting or accounting practice by a Seller or any of its Affiliates with respect to the Business, except as required by concurrent changes in GAAP as agreed to by its independent public accountants;
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 65 -
(o) commence, settle, or offer or propose to settle, (i) any litigation, investigation, arbitration or proceeding or any other Action involving or against the Business that is not an Excluded Liability, (ii) any False Claims Act Litigation (other than (x) the execution and delivery of the FCA Settlement Agreement and (y) following the execution and delivery of the FCA Settlement Agreement, a settlement with any state that was not party to the FCA Settlement Agreement at the time of execution) or (iii) any litigation, arbitration, proceeding or dispute that relates to this Agreement, the other Transaction Documents or the transactions contemplated hereby or thereby;
(p) offer or propose to settle any litigation, investigation, arbitration or proceeding or any other Action that could reasonably be expected to (i) permit any order, injunction or other equitable relief to be entered, directly or indirectly, against any Seller, the Business or any Purchased Asset or (ii) materially detract from the value of the Business or the Purchased Assets or materially interfere with any present use of the Business or the Purchased Assets;
(q) solely with respect to each Seller, amend (i) its certificate of incorporation, bylaws or any similar organizational document (whether by merger, consolidation or otherwise) or (ii) any shareholders agreement or similar agreement that is binding upon it and its equity holders if the effect of such amendment would be to adversely affect or delay in any material respect the ability of the Sellers to consummate the transactions contemplated hereby;
(r) knowingly take any action or omit to take any action that would materially impact coverage under the Policies;
(s) knowingly take any action or knowingly omit to take any action that is reasonably likely to result in any of the conditions to Closing set forth in Sections 11.01 or 11.02 not being satisfied (other than the taking of any action required to be taken under Applicable Law or the omission of any action prohibited by Applicable Law); or
(t) agree, resolve or commit to do any of the foregoing.
Buyer Domestic shall respond with reasonable promptness to any and all written requests by Seller Parent for consent(s) for any Seller or any of its Affiliates to take any of the actions specified in this Section 6.01, no such requested consent shall be unreasonably withheld, conditioned or delayed and any such consent will act to prevent any action so approved from being deemed a breach of any representation or warranty or covenant of the Sellers set forth in this Agreement.
Nothing contained in this Agreement shall give the Buyer Parties, directly or indirectly, the right to control or direct the operations of the Sellers or the Business prior to the Closing Date. Prior to the Closing Date, the Sellers and their Affiliates shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over their respective operations.
- 66 -
Section 6.02. Access to Information; Confidentiality .
(a) From the date hereof until the Closing Date (or the earlier termination of this Agreement pursuant to Section 13.01), each Seller shall, and shall cause its Affiliates to, (i) give each Buyer Party, its counsel, financial advisors, consultants, auditors and other authorized representatives full access to the offices, properties, books and records of such Seller and its Affiliates relating to the Business, Purchased Assets, Business Employees and Real Property (at reasonable times and upon reasonable notice, but excluding any soil or groundwater testing of any Real Property), (ii) furnish to each Buyer Party, its counsel, financial advisors, consultants, auditors and other authorized representatives such financial and operating data and other information relating to the Business, Purchased Assets and Real Property as such Persons may reasonably request and (iii) instruct the employees, counsel and financial advisors of such Seller and its Affiliates to cooperate with each Buyer Party in its investigation of the Business, Purchased Assets and Real Property. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of Sellers and their respective Affiliates and shall not require a Seller or any of its Affiliates to permit access to any privileged information or where permitting such access would contravene any Applicable Law.
(b) After the Closing, each Seller shall hold, and shall cause its Affiliates to hold, and each shall use its commercially reasonable efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by Applicable Law, all confidential documents and information concerning the Business, Purchased Assets and Real Property, except to the extent that such information can be shown to have been in the public domain through no fault of a Seller or its Affiliates. The obligation of each Seller and its Affiliates to hold any such information in confidence shall be satisfied if they exercise the same care with respect to such information as they would take to preserve the confidentiality of their own similar information.
(c) On and after the Closing Date, subject to Section 7.01, each Seller shall, and shall cause its Affiliates to, afford promptly to each Buyer Party and its Affiliates and agents reasonable access, upon reasonable prior notice, to its books of account, financial and other records, information, employees and auditors, and shall request that its independent accountant furnish its workpapers to Buyer Domestic (upon execution of customary access letters), in each case to the extent necessary or useful for a Buyer Party or any of its Affiliates in connection with any audit, investigation, dispute or litigation (other than a dispute or litigation between Sellers and/or their Affiliates and the Buyer Parties) or any other reasonable business purposes relating to the Business, Purchased Assets and Real Property (subject to providing such assurances, releases, indemnities or other agreements as accountants may customarily require in such circumstances); provided that any such access by a Buyer Party or any of its Affiliates shall not unreasonably interfere with the conduct of the business of Sellers and their respective Affiliates and shall not require a Seller or any of its Affiliates to permit access to any privileged information or where permitting such access would contravene any Applicable Law. Buyer Domestic shall bear all of the out-of-pocket costs and expenses (excluding reimbursement of general overhead, salaries and employee benefits) reasonably incurred in connection with the exercise of the foregoing rights under this Section by a Buyer Party or any of its Affiliates.
- 67 -
(d) Each Seller shall, and shall cause its Affiliates to, maintain the books and records retained by it and relating to the Business, Purchased Assets and Real Property for at least five years after which such Seller shall have the right to destroy such books and records in its sole discretion, subject to the requirements of Applicable Law; provided that such Seller shall give Buyer Domestic advance written notice of any such proposed destruction and shall provide Buyer Domestic with a reasonable opportunity to request and take delivery of any such books and records.
Section 6.03. Certain Insurance Matters .
(a) Prior to the Closing, each Seller shall, and shall cause its Affiliates to, maintain the Current Policies without any amendment or modification thereto that would be adverse, in any material respect, to the Business, or any Purchased Asset; provided that to the extent any Current Policy would expire prior to the Closing, each Seller shall, and shall cause its Affiliates to, use commercially reasonable efforts to cause such Current Policy to be extended or renewed by the existing carrier or replaced by a policy or bond providing substantially similar insurance coverage by an underwriter or underwriters rated by A.M. Best Company, Inc. as having a financial strength rating of at least A- VII. With respect to any loss, liability or damage relating to, resulting from or arising out of the conduct of the Business prior to the Closing which is an Assumed Liability, for which a Seller or any of its Affiliates would be entitled to assert, or cause any other Person to assert, a claim for recovery under any Policy, Seller Parent shall (i) at the request of Buyer Domestic, use its commercially reasonable efforts to assert, or cause to be asserted, one or more claims under such Policy covering such loss, liability or damage and, subject to the consummation of the Closing, pay all amounts received in respect of such claims (net of the cost and expenses incurred in obtaining such recovery) to Buyer Domestic, (ii) furnish, or cause to be furnished, to Buyer Domestic all records, information and testimony relating to such claim that are received or produced by Seller Parent or any of its Affiliates and (iii) consult with, and shall cause its Affiliates to consult with, Buyer Domestic prior to any negotiation of or proposal with respect to any claim settlement; provided that with respect to any claims related to products liability, Seller Parent shall obtain the prior written consent of Buyer Domestic (such consent not to be unreasonably withheld, conditioned or delayed) before Seller Parent or any of its Affiliates enters into any settlement with respect thereto if such settlement would reasonably be expected to prohibit or limit the ability of any Buyer Party or its successors or assigns to market, sell or distribute any Product or to operate the Business, it being understood that a settlement that results solely in a monetary payment by Sellers shall not require the consent of Buyer Domestic. For the avoidance of doubt, the parties hereto agree that all proceeds (net of the cost and expenses incurred in obtaining such recovery) received by a Seller or any of its Affiliates from Policies in respect of Assumed Liabilities or for damages to any Purchased Asset occurring prior to the Closing where neither the Sellers nor any of their Affiliates paid for repair of the damaged Purchased Asset, shall constitute Purchased Assets. No more than ten Business Days and no less than two Business Days prior to the Closing, Seller Parent shall furnish to Buyer Domestic a list of all claims pending under the Policies as of such time and whether such claim constitutes a Purchased Asset.
(b) In the event that Healthpoint and Seller Parent are liquidated or otherwise dissolved prior to the third anniversary of the Closing Date, Seller Parent shall, at its expense, obtain extended reporting coverage under its Current Policy for products liability claims and
- 68 -
maintain such extended reporting coverage for at least seven years following the Closing. Seller Parent shall cause Buyer Domestic to be granted additional insured rights under any products liability insurance policy maintained by it and any such extended reporting coverage policy obtained by it, which rights shall entitle Buyer Domestic to directly assert claims for recovery under such coverage with respect to any product liability claims arising from the sale of Products prior to the Closing.
Section 6.04. Notices of Certain Events . Seller Parent shall promptly notify Buyer Domestic of:
(a) any written notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement or the other Transaction Documents;
(b) any written notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement or the other Transaction Documents;
(c) any actions, suits, claims or proceedings or, to its Knowledge, any investigations, commenced or, to its Knowledge, threatened against a Seller, any of its Affiliates, the Purchased Assets or the Business that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Article 4 or that relate to the consummation of the transactions contemplated by this Agreement or the other Transaction Documents;
(d) the damage or destruction by fire or other casualty of any material Purchased Asset or part thereof or in the event that any material Purchased Asset or part thereof becomes the subject of any proceeding or, to the Knowledge of Sellers, threatened proceeding for the taking thereof or any part thereof or of any right relating thereto by condemnation, eminent domain or other similar governmental action;
(e) any material developments related to or arising out of any False Claims Act Litigation, the *** Litigation, the Pending Regulatory Reviews or any material Regulatory Approval, including in each case where applicable (i) any proposed settlements thereof, (ii) any responses to such proposals and (iii) any other non-privileged communications related thereto;
(f) any notice from any Governmental Authority of any material noncompliance with any Regulatory Approval or any other Applicable Law relating to the manufacture, distribution or sale of Products by any Seller, any Affiliate of any Seller or any Collaborative Partner that manufactures Products for any Seller; and
(g) any breach of a representation or warranty of a Seller in this Agreement or failure of a Seller to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, in any such case, which, individually or in the aggregate, would reasonably be expected to result in any condition to the obligations of the Buyer Parties to effect the transactions contemplated by this Agreement not to be satisfied;
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 69 -
provided , however , that the delivery of any notice pursuant to this Section 6.04 shall not limit or otherwise affect the remedies available hereunder to the Buyer Parties.
From time to time, but no later than five Business Days prior to the Closing Date, Seller Parent may amend, modify, update or supplement the Seller Disclosure Schedule relating to any representation or warranty contained in Article 4 or Article 9 with respect to any matter that, if existing or occurring at or prior to the date hereof, would have been required to be set forth or described on such Schedule or that is necessary to complete or correct any information in any representation or warranty contained in Article 4 or Article 9 (any such amendment, modification, update or supplement, a Schedule Supplement ); it being understood that any such Schedule Supplement shall be for informational purposes only and shall not be deemed to update the Seller Disclosure Schedule or cure any breach of any representation, warranty, covenant or other agreement for any purpose under this Agreement or to prejudice any right of any Buyer Party under this Agreement, including the right to seek indemnification pursuant to Article 12 and the right to assert that a condition to Closing set forth in Section 11.02(a) has not been satisfied.
Section 6.05. Cooperation Regarding Release of Liens .
(a) Each Seller shall, and shall cause its Affiliates to, provide all assistance reasonably requested by any Buyer Party in connection with obtaining, effective at or as soon as possible following the Closing, appropriate termination statements under the Uniform Commercial Code (or equivalent documents pursuant to Applicable Law), payoff letters and other instruments, in connection with the release of any security interests or other Liens (other than Permitted Liens) against or relating to any of the Purchased Assets.
(b) At or prior to the Closing, Sellers shall cause the full release of any Liens (other than Permitted Liens) granted on the Purchased Assets.
Section 6.06. Intercompany Matters . At or prior to the Closing, each Seller shall, and shall cause its Affiliates to pay, settle, release, cancel or otherwise terminate all Intercompany Accounts effective at or prior to the Closing. Notwithstanding anything to the contrary in this Agreement, any liability (including any Tax liability) that results from the actions described in the preceding sentence shall be an Excluded Liability. Except for the Transaction Documents, all intercompany Contracts solely between or among a Seller and its Affiliates relating to the Business, shall, in each case, be terminated immediately prior to the Closing without any further liability or obligation on the part of any party thereto. All intercompany Contracts described in the preceding sentence (other than the Transaction Documents) are set forth on Schedule 6.06.
Section 6.07. Fort Worth Facility .
(a) Each Seller shall, and shall cause its Affiliates to, provide the Buyer Parties and their surveyors such access to the Fort Worth Facility as is necessary for the preparation of the Fort Worth Facility Survey.
(b) Each Seller shall, and shall cause its Affiliates to, execute and deliver customary closing documentation and use commercially reasonable efforts to take other
- 70 -
customary actions as reasonably requested by Buyer Domestic or the title company to close the transfer of the Fort Worth Facility and facilitate the issuance of the Fort Worth Title Insurance Policy.
Section 6.08. Non-Competition .
(a) In order that the Buyer Parties may have and enjoy the full benefit of the Business and the Purchased Assets and as an inducement to the Buyer Parties to enter into this Agreement and the other Transaction Documents (without which inducement the Buyer Parties would not have entered into such agreements), from the Closing Date until the *** anniversary thereof (the Restricted Period ), each Seller agrees not to, and agrees to cause each of its Affiliates not to, directly or indirectly, in the United States or elsewhere, on such Persons own behalf or on the behalf of another (including as a shareholder, member, partner, joint venturer or investor of another Person):
(i) engage in, control, advise, manage, serve as a director, officer or employee of, act as a consultant to or contractor or other agent for, receive any economic benefit from or exert any influence upon, any business that develops, commercializes, manufactures, markets, distributes or sells *** products (including any business that markets products that compete with the Products) (the Restricted Business );
(ii) invest or own any interest publicly or privately in any Person engaged in the Restricted Business; or
(iii) hire, employ, engage or solicit for employment or services (either on a full time or part time basis, or in a consultancy or other non-employee role) any Service Provider or encourage or induce any such individual to leave his or her employment or consultancy relationship with any Buyer Party or any of its Affiliates; provided that a Seller may hire, employ or engage any Service Provider whose employment has been terminated by the applicable Buyer Party.
(b) The restrictions imposed by Section 6.08(a)(i) and (ii) shall not apply to:
(i) for so long as Sellers and their Affiliates do not, either individually or collectively, directly or indirectly control (whether through majority ownership of voting securities, majority representation on the board of directors or other analogous governing body or otherwise having the ability to direct the operations of such Person by contract or otherwise) *** or any successor thereto, participating in the activities and operations of *** and any successor thereto (including ownership of equity interests in, or service as, or the designation of persons to serve as, directors of, *** and its subsidiaries and any successors thereto by any Seller or its Affiliates);
(ii) the ownership of capital stock or other equity interests by a Seller of any Person whose securities are listed on a national securities exchange so long as (A) such Seller, together with its Affiliates, and any member of a group in which such Seller or any of its Affiliates is a party, do not own more than 5% of the outstanding voting power of such Person and (B) such capital stock or other equity interests of such Person are held solely as a passive investment;
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 71 -
(iii) the fulfillment by any Seller or any of its Affiliates of its obligations under the Transition Services Agreement; or
(iv) the performance by ***. or its subsidiaries of contract development work for third parties, either (A) outside of the field of *** or (B) solely with respect to products and technologies involving large molecules in plant cell fermentation within the field of ***, and specifically excluding ***.
(c) Each Seller (on its own behalf and on behalf of its Affiliates) acknowledges that the restrictions contained in this Section 6.08 are reasonable and necessary to protect the legitimate interests of the Buyer Parties and constitute a material inducement to the Buyer Parties to enter into this Agreement and the other Transaction Documents and to consummate the transactions contemplated hereby and thereby. Each Seller (on its own behalf and on behalf of its Affiliates) acknowledges that any violation of this Section 6.08 shall result in irreparable injury to the Buyer Parties and agrees that the Buyer Parties shall be entitled to seek specific performance of this Section 6.08 pursuant to Section 14.13. Without limiting the generality of the foregoing, the Restricted Period applicable to any Seller and its Affiliates shall be extended for an additional period equal to any period during which such Seller or any of its Affiliates is found by a court of competent jurisdiction to be in breach of the obligations under this Section 6.08.
(d) If any provision contained in this Section 6.08 shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Section 6.08, but this Section 6.08 shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. It is the intention of the parties that if any of the restrictions or covenants contained in this Section 6.08 is held to cover a geographic area or to be for a length of time that is not permitted by Applicable Law, or in any way construed to be too broad or to any extent invalid, such provision shall (to the maximum extent permitted by Applicable Law) not be construed to be null, void and of no effect, but instead shall be construed and interpreted or reformed to provide for a covenant having the maximum enforceable geographic area, time period and other provisions (not greater than those contained herein) as shall be valid and enforceable under Applicable Law.
Section 6.09. Post-Closing Payments on Purchased Assets . From and after Closing, each Seller shall promptly pay over to the applicable Buyer Party any amounts received by such Seller or any of its Affiliates in respect of the Purchased Assets or in respect of which any Buyer Party is otherwise entitled to under this Agreement or the other Transaction Documents, including any amounts received in respect of accounts receivable included in the Purchased Assets or in respect of any Inventory sold by the Business after Closing.
(a) Each Seller shall, and shall cause its Affiliates to, cooperate with each Buyer Party and provide all assistance and information reasonably requested by any Buyer Party
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 72 -
in connection with the preparation and submission of the Buyer FDA Letter, the Seller FDA Letter and all other approvals, consents, registrations, Permits, FDA Permits, authorizations and other confirmations required to be obtained from any Governmental Authority that are necessary to transfer the Regulatory Approvals contemplated by Section 2.01(i). The costs of relabeling Product would be for Buyers account.
(b) Each Seller shall cause each signatory to the Seller FDA Letter to duly execute the Seller FDA Letter at or prior to the Closing.
Section 6.11. License to Buyer Parties . Each Seller, on behalf of itself and its Affiliates, hereby grants to the Buyer Parties and their respective Affiliates a perpetual, irrevocable, non-exclusive, fully transferable, fully sublicensable, royalty-free, fully paid-up, worldwide license to (a) any and all Business Intellectual Property Rights not included in the Purchased Assets and (b) any and all other Intellectual Property Rights owned or licensable by any Seller or any of its Affiliates and related to the Business (including any Intellectual Property Rights included in the Excluded Assets), in each case for any manner of use or exploitation whatsoever.
Section 6.12. Pending Regulatory Review Liabilities . In the event that Buyer Domestic incurs any Damages arising from or in connection with circumstances or developments relating to the Pending Regulatory Reviews or the subject matter thereof, including those associated with related product replacement or recall or migration to other sources for any Santyl components if deemed to be necessary by Buyer Domestic in its reasonable judgment, that exist or occur during the period prior to the earlier of (a) *** months after the Closing Date or (b) the date the matters described in the definition of Pending Regulatory Reviews are finally resolved, the Sellers shall indemnify the Buyer Parties for any such Damages, up to a maximum of $***; provided , however , that with respect to the matters described in clause (ii) of the definition of Pending Regulatory Reviews, Damages to be indemnified hereunder shall not include any costs or expenses associated with the current investigation and proposed activities pertaining to the *** issue and any related activities as described in Schedule 6.12 (the *** white paper) as well any regulatory actions resulting from the actions or inactions of Buyer Parties after the Closing Date. Such funds shall be released from the Escrow Account within five Business Days following delivery to Seller Parent of documentation reasonably satisfactory to Seller Parent detailing the Buyer Parties Damages. The parties hereto agree that except as provided in this Section 6.12, the Sellers shall have no liability to the Buyer Parties for any Damages arising out of the Pending Regulatory Reviews.
Section 6.13. Name Change . Promptly following the Closing, and in any event no later than 15 days following the Closing Date, Healthpoint shall, and shall cause its applicable Affiliates to, change their respective entity names to a name that does not contain (and that is not confusingly similar to) the names Healthpoint. and Healthpoint Biotherapeutics. From and after the Closing, Sellers shall not, directly or indirectly, use and shall not license or authorize any third party to use any name, slogan, logo or trademark which is similar or deceptively similar to any of the trademarks or any other name used in connection with the Business.
Section 6.14. ***
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 73 -
COVENANTS OF THE BUYER PARTIES
The Buyer Parties agree that:
Section 7.01. Confidentiality . Prior to the Closing Date and after any termination of this Agreement, the Buyer Parties and their respective Affiliates shall comply with that certain Confidentiality and Non-Disclosure Agreement, dated December 7, 2010, between Buyer Domestic and Healthpoint (the Confidentiality Agreement ).
Section 7.02. Access . Subject to each Sellers compliance with its obligations under Section 6.02, on and after the Closing Date through the sixth anniversary of the Closing Date, upon request, each Buyer Party shall, and shall cause its Affiliates to, afford each Seller and its agents reasonable access to its properties, books, records and employees to the extent necessary or useful for a Seller in connection with any audit, investigation, dispute or litigation (other than a dispute or litigation between Sellers and/or their Affiliates and the Buyer Parties) relating to any period ending on or before the Closing Date; provided that any such access by Seller shall not unreasonably interfere with the conduct of the business of any Buyer Party or any of its Affiliates and shall not require a Buyer Party or any of its Affiliates to permit access to any privileged information or where permitting such access would contravene any Applicable Law. Seller Parent shall bear all of the out-of-pocket costs and expenses (excluding reimbursement for general overhead, salaries and employee benefits) reasonably incurred in connection with the exercise of the foregoing rights under this Section by a Seller or any of its Affiliates.
Section 7.03. Notices of Certain Events . Buyer Domestic shall promptly notify Seller Parent of:
(a) any written notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement or the other Transaction Documents;
(b) any written notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement or the other Transaction Documents; and
(c) any breach of a representation or warranty of a Buyer Party in this Agreement or failure of a Buyer Party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, in any such case, which, individually or in the aggregate, would reasonably be expected to result in any condition to the obligations of the Sellers to effect the transactions contemplated by this Agreement not to be satisfied;
provided , however , that the delivery of any notice pursuant to this Section 7.03 shall not limit or otherwise affect the remedies available hereunder to the Sellers.
Section 7.04. Post-Closing Payments on Excluded Assets . From and after Closing, each Buyer Party shall promptly pay over to the applicable Seller any amounts received
- 74 -
by such Buyer Party or any of its Affiliates in respect of the Excluded Assets or in respect of which any Seller is otherwise entitled to under this Agreement or the other Transaction Documents.
Section 7.05. Survey and Title Insurance . Buyer Domestic shall, at its sole cost and expense (but without derogating from Sellers representations and warranties and covenants under this Agreement), use its commercially reasonable efforts to obtain, as soon as possible, the Fort Worth Facility Survey and the Fort Worth Facility Title Insurance Policy.
Section 7.06. License to Sellers . Without limiting Section 6.08, each Buyer Party, on behalf of itself and its Affiliates, hereby grants to the Sellers and their respective Affiliates a perpetual, non-exclusive, royalty-free, fully paid-up, worldwide license to the Licensed Back IP for use solely in the field of developing or manufacturing the products or business opportunities listed on Schedule 1.01(e) and for no other purpose whatsoever (the Field ). The license set forth in this Section 7.06 shall be transferable and sublicensable by Sellers and their Affiliates, in each case solely for use within the Field. For the avoidance of doubt, neither Sellers nor any of their Affiliates, nor any transferee or sublicensee of Sellers or their Affiliates, may use the license set forth in this Section 7.06 for any purpose within the Wound Care field.
Section 7.07. *** Litigation . No Buyer Party shall enter into any settlement of the *** Litigation that result in the Indemnifying Sellers being required to indemnify any Buyer Indemnified Party pursuant to Section 12.02(a)(iii) without the prior written consent of Healthpoint, such consent not to be unreasonably withheld, conditioned or delayed. Healthpoint shall have the right to continue to participate in the *** Litigation at its expense and pursuant to a mutually agreeable Joint Defense Agreement to be negotiated by the parties in good faith.
COVENANTS AND AGREEMENTS OF THE BUYER PARTIES AND SELLERS
The Buyer Parties and each Seller agree that:
Section 8.01. Commercially Reasonable Efforts; Further Assurances
(a) Subject to the terms and conditions of this Agreement, each Buyer Party and each Seller shall, and shall cause its Affiliates to, use their commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under Applicable Laws to consummate the transactions contemplated by this Agreement and the other Transaction Documents, including (i) preparing and filing as promptly as practicable with any Governmental Authority or other third party all documentation to effect all necessary filings, notices, petitions, statements, registrations, submissions of information, applications and other documents and (ii) obtaining and maintaining all approvals, consents, registrations, Permits, FDA Permits, authorizations and other confirmations required to be obtained from any Governmental Authority or other third party that are necessary, proper or advisable to consummate the transactions contemplated by this Agreement and the other Transaction Documents, including the transfer of the Regulatory Approvals contemplated by
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 75 -
Section 2.01(i). Each Buyer Party and each Seller agree to, and each Seller shall cause its Affiliates to, execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be reasonably necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement and the other Transaction Documents and to vest in the Buyer Parties good and marketable title to the Purchased Assets.
(b) If any objections are asserted with respect to the transactions contemplated by this Agreement and the other Transaction Documents under any antitrust law or if any action, suit or other proceeding is instituted or threatened by any Governmental Authority or any private party challenging any of the transactions contemplated hereby as violative of any antitrust law or other Applicable Law, each Seller and each Buyer Party shall, and each Seller shall cause its Affiliates to, use its respective commercially reasonable efforts promptly to resolve such objections; provided that nothing in this Agreement (including this Section 8.01) shall require any party or any of its Affiliates to (and, without the prior written consent of Buyer Domestic, each Seller shall not, and shall cause its Affiliates not to) (i) enter into any settlement, undertaking, consent decree, stipulation or agreement with any Governmental Authority in connection with the transactions contemplated hereby, (ii) divest or otherwise hold separate (including by establishing a trust or otherwise), or take any other action (or otherwise agreeing to do any of the foregoing) with respect to the Business or the Purchased Assets or, in the case of the Buyer Parties, any assets or business of any Buyer Party or any of their respective Affiliates or (iii) litigate or participate in the litigation of any proceeding, whether judicial or administrative, brought by any Governmental Authority or other Person.
(c) In furtherance and not in limitation of the foregoing, each of Buyer Domestic and Seller Parent shall make as promptly as practicable (and in any event no later than November 28, 2012) an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated hereby, together with a request for early termination. Each of Buyer Domestic and Seller Parent shall supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR Act and take all other actions necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act as soon as practicable.
(d) In furtherance and not in limitation of the foregoing, as promptly as practicable after the date of this Agreement, each Seller shall, and shall cause its Affiliates to, use its commercially reasonable efforts to give all necessary notices to, and obtain all consents, waivers and approvals from, any parties to any Contract that may be required in connection with the transactions contemplated by this Agreement and the other Transaction Documents, including the Required Consents and the Other Consents, and the Buyer Parties shall reasonably cooperate with each Seller to give or obtain such notices, consents, waivers and approvals; provided , however , that no Seller, any of its Affiliates or any Buyer Party shall be required to compensate any Person or offer or grant any accommodation (financial or otherwise) to any Person in connection therewith; provided , further , that no Seller, nor any of their respective Affiliates, shall, without Buyer Domestics prior written consent (which consent shall not be unreasonably withheld, conditioned or delayed), (i) grant any waiver, make any concession or otherwise amend or alter in any material respect any terms of any Material Contract in order to obtain any consent, waiver or approval or (ii) distribute any materials to be used by any Seller (or
- 76 -
any of its Affiliates) in connection with the giving or obtaining of such notices, consents, waivers and approvals. Each Seller shall promptly upon their receipt make available to Buyer Domestic copies of any and all substantive correspondence between such Seller or any of its Affiliates and the party to any such Contract (or its agents) relating to any such notice, consent, waiver or approval of the transactions contemplated hereby. At all times prior to the Closing, each Seller shall keep Buyer Domestic reasonably informed of the status of obtaining the Required Consents and the Other Consents. Each Buyer Party agrees and acknowledges that, subject to each Seller having complied with (or, to the extent applicable, continuing to comply with) its covenants, agreements and obligations pursuant to this Agreement (including Section 2.09 and this Section 8.01), Sellers shall not have any liability whatsoever to any Buyer Indemnified Party (and no Buyer Indemnified Party shall be entitled to assert any claims) arising out of or relating to the failure to obtain such Other Consent that may have been or may be required in connection with the transactions contemplated by this Agreement or because of the default, acceleration or termination of any such contractual obligation as a result thereof.
(e) The Buyer Parties and each Seller shall, to the extent permitted by Applicable Law, have the right to review in advance, and each shall consult the other on, any filing made with, or written materials submitted to, any third party or any Governmental Authority in connection with the transactions contemplated by this Agreement and the other Transaction Documents. In exercising the foregoing right, each of the parties shall act reasonably and as promptly as practicable. The Buyer Parties and each Seller (with respect to itself and its Affiliates) shall, to the extent permitted by Applicable Law, (i) promptly advise the other of the receipt of any substantive communication from a Governmental Authority with respect to the transactions contemplated hereby and by the other Transaction Documents, (ii) provide the other with a reasonable opportunity to participate in the preparation of any response thereto and to review any such response prior to the filing or submission thereof and (iii) provide the other with the opportunity to participate in any meetings or substantive telephone conversations that such party or its Affiliates or any of their respective agents may have from time to time with any Governmental Authority with respect to the transactions contemplated by this Agreement and the other Transaction Documents.
Section 8.02. Certain Filings and Third Party Consents . Each Seller and Buyer Domestic shall cooperate with one another (a) in determining whether any action by or in respect of, or filing with, any Governmental Authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any Contracts, Permits, FDA Permits or any other Purchased Assets, in connection with the consummation of the transactions contemplated by this Agreement and the other Transaction Documents, including the transfer of the Regulatory Approvals contemplated hereby, and (b) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers.
Section 8.03. Transfer and Novation of Government Contracts .
(a) As promptly as practicable after the date of this Agreement, and in any event no later than promptly following the Closing, Sellers will, in accordance with, and to the extent required by, Federal Acquisition Regulation Part 42, Subpart 42.12, submit in writing to each responsible contracting officer of each applicable Governmental Authority with respect to
- 77 -
each prime Government Contract (to the extent such Government Contract is not assignable) a request, in form and substance reasonably satisfactory to Buyer Domestic, of such Governmental Authority, and Buyer Domestic shall cooperate with Sellers with respect to the submission of any such request, to (i) recognize Buyer Domestic as the successor-in-interest to the applicable Government Contract and (ii) if required, enter into a novation agreement (each, a Novation Agreement ), in substantially the form contemplated by such regulations, and otherwise in compliance with all Applicable Laws (including all applicable U.S. federal regulations) and in form and substance reasonably satisfactory to Buyer Domestic, and provide all documentation reasonably necessary to effect each such novation, including all instruments, certifications, requests, legal opinions, financial information and other documents required by Federal Acquisition Regulation Part 42. Buyer Domestic and Sellers will each use commercially reasonable efforts to (i) promptly obtain all consents, approvals and waivers required for the purpose of processing, entering into and completing a Novation Agreement with respect to each such prime Government Contract, including responding to requests for information by the Governmental Authority with respect to such Novation Agreement, and (ii) provide all information and take all other actions reasonably necessary to execute and consummate each such Novation Agreement; provided, however , that no Seller nor any of their respective Affiliates shall, without Buyer Domestics prior written consent (which consent shall not be unreasonably withheld, conditioned or delayed), (A) grant any waiver, make any concession or otherwise amend or alter in any material respect any terms of any Governmental Contract in order to obtain any consent pursuant to this Section 8.03 or (B) distribute to any Governmental Authority any materials to be used by any Seller (or any of their respective Affiliates) in connection with obtaining any such consent. Without limiting the generality of the foregoing, Sellers shall continue to communicate with the responsible contracting officers of each applicable Governmental Authority from time to time, both before and after the Closing, as may be appropriate and permissible, to request and facilitate expedited action on any and all requests for consent to novation. For the avoidance of doubt, Sellers and the Buyer Parties agree that no such prime Government Contract will be assigned to Buyer Domestic unless and until all documentation necessary to effect the novation of such prime Government Contract pursuant to the terms and conditions of such Government Contract, Applicable Law, and the applicable Novation Agreement in respect thereof have been completed and delivered.
(b) With respect to each prime Government Contract (to the extent such Government Contract is not assignable), effective as of the Closing, each applicable Seller will, in accordance with, and to the extent required by, Federal Acquisition Regulation Part 42, Subpart 42.12, (i) engage Buyer Domestic as a subcontractor, pursuant to the Subcontract and schedules attached thereto, to perform for and in the place of Seller under such prime Government Contract (to the extent that such obligations are included in the Assumed Liabilities), and provide any and all services and other performance obligations under such prime Government Contract as of the Closing Date, (ii) take all reasonable instruction from Buyer Domestic as to Sellers conduct under such prime Government Contract, and (iii) with respect to amounts related to services provided after the Closing, receive all receipts related to such prime Government Contract in trust for Buyer Domestic and promptly pay to Buyer Domestic the full amount of Sellers receipts related to each such prime Government Contract. Such payments will be handled through bank and sweep account or other arrangements to be negotiated in good faith and mutually agreed upon by Buyer Domestic and Sellers, which arrangements will be set forth in greater detail in the applicable Subcontract. From the Closing until the earlier to occur
- 78 -
of (1) the effective date of novation with respect to the relevant prime Government Contract and (2) the termination of the Subcontract, and provided that Sellers pay over to Buyer Domestic contract payments received under such prime Government Contract in accordance with clause (iii) of the foregoing sentence, Buyer Domestic shall be responsible for paying, in accordance with the terms of the Subcontract, all amounts required to be paid by Sellers under each such prime Government Contract relating to services provided after the Closing, as well as the other reasonable expenses related to each such prime Government Contract that are agreed upon by Buyer Domestic and Healthpoint, which terms and conditions will be set forth in the Subcontract.
(c) If the applicable Governmental Authority declines to enter into a Novation Agreement recognizing the transfer of any prime Government Contract to Buyer Domestic in accordance with, and to the extent required by, Federal Acquisition Regulation Part 42, Subpart 42.12, or until such time as the applicable Governmental Authority recognizes such transfer by entering into a Novation Agreement, (i) nothing in this Agreement will constitute a transfer, assignment, attempted transfer or an attempted assignment of any such prime Government Contract, and (ii) the Subcontract shall, subject to the terms thereof, remain in full force and effect for the remainder of the term of such prime Government Contract.
(d) Each Seller that is party to a Government Contract that is not assignable without the consent of the applicable Governmental Authority shall maintain its existence until the last of the prime Government Contracts to which such Seller is a party either have been duly transferred to Buyer Domestic pursuant to a Novation Agreement or have been duly terminated in accordance with their terms. Prior to termination of any Sellers existence in accordance with the terms of this Agreement, such Seller shall satisfy all liabilities and obligations of such Seller relating to the Government Contracts.
(e) Seller agrees that, with respect to all Government Contracts not subject to novation, it shall in advance of the Closing Date use its commercially reasonable efforts to obtain any and all consents to assignment that might be necessary under the terms and conditions of those Government Contracts in order to effectuate the full and complete transfer and assignment of such Government Contracts to Buyer Domestic effective as of the Closing; provided , that (i) Sellers shall not be required to pay any amount to any Governmental Authority to obtain such consent and (ii) to the extent that the Closing occurs notwithstanding the failure to obtain such a written consent to assignment with respect to any such Government Contract by the Closing, Section 2.09 shall apply to such Government Contract.
Section 8.04. Communications . The parties shall use their respective commercially reasonable efforts to develop promptly a joint communications plan with respect to communications between the date hereof and the Closing Date by the parties and their respective Affiliates in respect of this Agreement, the other Transaction Documents or the respective transactions contemplated thereby with the suppliers, customers, distributors and non-management employees of the Business. Unless otherwise required by Applicable Law, any listing agreement with any U.S. or U.K. securities exchange or share market, or any listing authority including the U.K. Listing Authority, prior to the Closing except as contemplated by the first sentence of this Section 8.04, each Seller and each Buyer Party shall not, and each Seller and Buyer Party shall cause its respective Affiliates not to, make any public announcement or
- 79 -
disseminate any written communication to any supplier, customer, distributor or non-management employee of the Business in respect of this Agreement, the other Transaction Documents or the respective transactions contemplated thereby, or otherwise communicate with any news media regarding this Agreement, the other Transaction Documents or the respective transactions contemplated thereby, without the prior written consent of Buyer Domestic and Seller Parent (which consent shall not be unreasonably withheld, conditioned or delayed); provided that if any such announcement or communication is so required, Buyer Domestic and Seller Parent shall consult with each other, to the extent reasonably practicable, in advance as to the contents and timing thereof; provided further , that after the transactions contemplated by this Agreement and the other Transaction Documents have been announced, each of the Buyer Parties and the Sellers shall be entitled to respond to questions in the ordinary course or issue any press release or make any other public statement that, in each case, is consistent with any public statement previously issued or made by it in accordance with the provisions of this Section 8.04 or is necessary to implement the provisions of this Agreement. On the date hereof, each of Buyer Domestic and Seller Parent may issue a press release in substantially the form attached hereto as Exhibit K.
Section 8.05. WARN Act . The parties agree to cooperate in good faith to determine whether any notification may be required under the WARN Act as a result of the transactions contemplated by this Agreement or the other Transaction Documents. Buyer Domestic will be responsible for providing any notification that may be required after the Closing under the WARN Act with respect to any Transferred Employees. Sellers will be responsible for providing any notification that may be required at or prior to the Closing under the WARN Act with respect to any Business Employees that are not Transferred Employees.
Section 8.06. Acknowledgement by the Buyer Parties .
(a) Each Buyer Party represents that it is an informed and sophisticated Person, and has engaged expert advisors experienced in the evaluation and acquisition of businesses such as the Business as contemplated hereunder. Each Buyer Party acknowledges that (i) it has conducted to its satisfaction an independent investigation and verification of the financial condition, results of operations, assets, liabilities, properties and projected operations of the Business, and has been provided with and has evaluated such documents and information as it has deemed necessary to enable it to make an informed and intelligent decision with respect to the execution, delivery and performance of this Agreement, the other Transaction Documents and the transactions contemplated hereby and thereby; and (ii) in making its determination to proceed with the transactions contemplated by this Agreement and the other Transaction Documents, such Buyer Party has relied solely on the results of its own independent investigation and verification and the representations and warranties of the Sellers expressly and specifically set forth in Articles 4 and 9, as qualified by the Seller Disclosure Schedule and, in the case of each other Transaction Document, the representations and warranties set forth in such agreement. The representations and warranties by Sellers expressly and specifically set forth in Articles 4 and 9 constitute the sole and exclusive representations, warranties and statements of any kind of the Sellers and its Affiliates to the Buyer Parties in connection with the transactions contemplated hereby, and each Buyer Party understands, acknowledges and agrees that all other representations, warranties and statements of any kind or nature expressed or implied (including any relating to the future or historical financial condition, results of operations, prospects, assets or liabilities of the Business, or the quality, quantity, merchantability, fitness for a particular purpose, or condition of the Purchased Assets) are specifically disclaimed by the Sellers.
- 80 -
(b) In connection with the investigation by the Buyer Parties of the Business, the Buyer Parties and their representatives have received or may receive from the Sellers certain projections, forward-looking statements and other forecasts and certain business plan information. Each Buyer Party acknowledges that there are uncertainties inherent in attempting to make such estimates, projections, forward-looking statements and other forecasts and plans, that such Buyer Party is familiar with such uncertainties, that, except as expressly set forth in Sections 4.06(b) and 4.06(d), such Buyer Party is taking full responsibility for making its own evaluation of the adequacy and accuracy of all estimates, projections, forward-looking statements and other forecasts and plans so furnished to it (including the reasonableness of the assumptions underlying such estimates, projections, forward looking statements, forecasts or plans), and that such Buyer Party shall have no claim against anyone with respect thereto. Accordingly, each Buyer Party acknowledges that neither, except as expressly set forth in Sections 4.06(b) and 4.06(d), the Sellers, their Affiliates nor any stockholder, officer, director, employee, partner, member or agent of any of the foregoing, whether in an individual, corporate or any other capacity, makes any representation, warranty or other statement with respect to, and such Buyer Party is not relying on, such estimates, projections, forward-looking statements and other forecasts or plans (including the reasonableness of the assumptions underlying such estimates, projections, forward-looking statements and other forecasts or plans).
(c) Notwithstanding the foregoing, nothing in this Agreement (including this Section 8.06) shall be construed to limit a partys remedies in respect of fraud. The provisions of this Section 8.06 shall not apply to any of the other Transaction Documents.
Section 8.07. Acknowledgement by the Sellers . Each Seller specifically acknowledges and agrees that the representations and warranties of the Buyer Parties expressly and specifically set forth in Article 5 and in the other Transaction Documents constitute the sole and exclusive representations, warranties and statements of any kind of the Buyer Parties and their respective Affiliates to the Sellers and their respective Affiliates in connection with the transactions contemplated hereby and thereby, and each Seller understands, acknowledges and agrees that all other representations, warranties and statements of any kind or nature expressed or implied (including any relating to the future or historical financial condition, results of operations, prospects, assets or liabilities of the Buyer Parties) are specifically disclaimed by the Buyer Parties. The provisions of this Section 8.07 shall not apply to any of the other Transaction Documents.
Section 8.08. Regulatory Transition Matters . Following the Closing, the Sellers shall cooperate with Buyer Domestic in good faith to fulfill all pharmacovigilance requirements under applicable law with respect to the Products, including requirements found in 21 C.F.R. § 600.80. In furtherance of the foregoing, Sellers hereby grant Buyer Domestic the authority to perform all activities on their behalf necessary to fulfill all pharmacovigilance requirements, including requirements found in 21 C.F.R. § 600.80, following the Closing and, effective as of the Closing, Sellers do hereby nominate, constitute and appoint Buyer Domestic as the true and lawful Attorney-in-Fact for Sellers in their name, place and stead, and hereby give and grant unto Buyer Domestic full power and authority to operate and otherwise conduct the
- 81 -
Business with full use and enjoyment of the BLAs issued to Sellers with respect to the Products, and do hereby give and grant unto Buyer Domestic full power and authority to represent to third parties said authority to execute all necessary forms and other instruments which require the use of the BLAs to perform any act which shall be required by or be incidental to the full use and enjoyment of the Products; provided , that this Power of Attorney shall terminate and be void and of no further force or effect upon the transfer to Buyer Domestic or its Affiliates of all of the BLAs relating to the Products.
Section 8.09. Shared Contracts . The parties acknowledge that certain Contracts that are included among the Purchased Assets and are set forth on Schedule 8.09 relate to both the Business and to certain of Sellers retained businesses. In the case of such Contracts (the Shared Contracts), the parties shall cooperate with each other and use their respective commercially reasonable efforts to (i) obtain the agreement of the third party that is the counterparty to each Shared Contract to enter into a new contract effective as of the Closing Date pursuant to which the applicable Seller or its Affiliates will receive substantially the same goods and services provided to them under the Shared Contract prior to the Closing on terms and conditions substantially similar to those contained in the Shared Contract as of the Closing Date (each, a Replacement Contract) and, where applicable, to cause the applicable counterparty to release the applicable Buyer Party assuming such Shared Contract from any applicable minimum quantity or other commitments to the extent such commitments relate to Sellers retained businesses and (ii) to the extent a Seller is a party to a Shared Contract, obtain from the counterparty to such Shared Contract a release, effective as of the Closing Date, of such Seller and its Affiliates from obligations arising after the Closing Date under the Shared Contract. If one or more Replacement Contracts are not obtained prior to or on the Closing Date, unless the parties otherwise agree in writing, during the remaining term of the applicable Shared Contract, the parties shall use their respective commercially reasonable efforts to allow the Sellers and their Affiliates, as applicable, to the extent permitted by Applicable Law and to the extent reasonably within the contractual or other ability or control of the applicable Buyer Party, as the case may be, to receive substantially the same goods and services of the subject matter of the Shared Contract received prior to the Closing and to bear the economic and other burdens of such Shared Contract. For the avoidance of doubt, in no event shall any Replacement Contract impose any obligations or liability on any Buyer Party or its Affiliates after the Closing.
TAX MATTERS
Section 9.01. Tax Representations .
(a) Except as set forth in the Seller Disclosure Schedule, Sellers represent and warrant to the Buyer Parties that, with respect to the Purchased Assets and as of the date hereof and as of the Closing Date:
(i) Each Seller and its Affiliates have timely paid all Taxes which will have been required to be paid on or prior to the date hereof, the non-payment of which would result in a Lien on any Purchased Asset, would otherwise adversely affect the Business in any material respect or would result in a Buyer Party or any of its Affiliates becoming liable or responsible therefor.
- 82 -
(ii) Each Seller and its Affiliates have established, in accordance with GAAP consistent with that of preceding periods, adequate reserves for the payment of, and each Seller shall, or shall cause its Affiliates to, timely pay, all Taxes which arise from or with respect to the Purchased Assets or the operation of the Business and are incurred in or attributable to the Pre-Closing Tax Period, the non-payment of which would result in a Lien on any Purchased Asset, would otherwise adversely affect the Business or would result in a Buyer Party or any of its Affiliates becoming liable therefor.
(iii) No Seller or its Affiliates has received written notice from, and to the Knowledge of Sellers no notice has been threatened by, any Governmental Authority in a jurisdiction where no Tax Return is filed by any Seller or its Affiliates that a Seller or any of its Affiliates, in each case principally by virtue of the operations of the Business, is or may be subject to taxation in that jurisdiction.
(iv) There is no Action (to the Knowledge of Sellers with respect to audits and investigations) now pending or, to the Knowledge of Sellers, threatened against a Seller or any of its Affiliates in respect of any Taxes relating to the operations of the Business.
(v) No statute of limitations in respect of a Tax Return has been waived and no agreement to any extension of time (other than by operation of filing an automatic extension of time to file a Tax Return) with respect to a Tax assessment or deficiency has been made, in each case by a Seller or any of its Affiliates with respect to the operations of the Business.
(vi) Each Seller and its Affiliates has timely withheld and paid over to the appropriate Governmental Authority all amounts required to have been withheld and paid over to such Governmental Authority from any payment to an employee, independent contractor or other payee.
Solely for purposes of this Section 9.01(a), the term Affiliates shall not include any Shareholder.
(b) Except as set forth in the Seller Disclosure Schedule, Sellers represent and warrant to the Buyer Parties that, with respect to Healthpoint Canada as of the date hereof and as of the Closing Date:
(i) Healthpoint Canada is not a non-resident of Canada for purposes of the Income Tax Act;
(ii) None of the Purchased Assets other than the Healthpoint Canada Purchased Assets are taxable Canadian property for purposes of the Income Tax Act;
- 83 -
(iii) Healthpoint Canada has withheld from each payment made to any of its present or former Business Employees and, in respect of other payments, to all Persons who are or are deemed to be non-residents of Canada for purposes of the Income Tax Act and all other Persons all amounts required by Applicable Law to be withheld, and has remitted such withheld amounts within the prescribed periods to the appropriate Governmental Authority. Healthpoint Canada has remitted all Canada Pension Plan contributions, provincial pension plan contributions, employment insurance premiums, employer health Taxes and other Taxes payable by it in respect of the Business Employees to the proper Governmental Authority within the time required under Applicable Law. Healthpoint Canada has charged, collected and remitted on a timely basis all Taxes as required under Applicable Law on any sale, supply or delivery whatsoever, made by Healthpoint Canada;
(iv) Healthpoint Canada has filed all Tax Returns required to be filed by it in all applicable jurisdictions so as to prevent any valid Lien (other than a Permitted Lien) of any nature on the Healthpoint Canada Purchased Assets and has paid all Taxes relating to Healthpoint Canada when due; and
(v) The Healthpoint Canada Purchased Assets constitute all or substantially all of the property that can reasonably be regarded as being necessary for Buyer Canada to be capable of carrying on the business of Healthpoint Canada. Healthpoint Canada is registered for GST/HST purposes under Part IX of the Excise Tax Act (Canada) and Healthpoint Canadas GST/HST registration number is ***.
(c) Buyer Canada is registered for GST/HST purposes under Part IX of the Excise Tax Act (Canada) and Buyer Canadas GST/HST registration number is ***.
Section 9.02. Tax Cooperation; Allocation of Taxes .
(a) The Buyer Parties and Sellers agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information and assistance relating to the Business and the Purchased Assets (including access to books and records) as is reasonably necessary for the filing of all Tax Returns, the making of any election relating to Taxes, the preparation for any audit by any Taxing Authority and the prosecution or defense of any claim, suit or proceeding relating to any Tax. The Buyer Parties and Sellers shall retain all books and records with respect to Taxes pertaining to the Purchased Assets for a period of at least six years following the Closing Date. On or after the end of such period, Seller Parent and Buyer Domestic shall provide the other with at least 10 days prior written notice before destroying, or causing to be destroyed, any such books and records, during which period the party receiving such notice can elect to take possession, at its own expense, of such books and records. Sellers and the Buyer Parties shall, and shall cause their respective Affiliates to, cooperate with each other in the conduct of any audit or other proceeding relating to Taxes involving the Purchased Assets or the Business.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 84 -
(b) All real property Taxes, personal property Taxes and similar ad valorem obligations levied with respect to the Purchased Assets for a taxable period which includes (but does not end on) the Closing Date (collectively, the Apportioned Obligations ) shall be apportioned between Sellers and the Buyer Parties based on the number of days of such taxable period included in the Pre-Closing Tax Period and the number of days of such taxable period after the Closing Date (such portion of such taxable period, the Post-Closing Tax Period ). Sellers shall be liable for the proportionate amount of such Taxes that is attributable to the Pre-Closing Tax Period, and the Buyer Parties shall be liable for the proportionate amount of such Taxes that is attributable to the Post-Closing Tax Period.
(c) (i) Except as provided in Section 9.02(c)(ii), all excise, sales, use, value-added, registration-stamp, recording, documentary, conveyancing, franchise, property, transfer, gains and similar Taxes, levies, charges and fees (collectively, Transfer Taxes ) incurred in connection with the transactions contemplated by this Agreement and the other Transaction Documents shall be borne ***% by Sellers and ***% by the Buyer Parties. The Buyer Parties and Sellers shall cooperate in providing each other with any appropriate resale exemption certifications and other similar documentation.
(ii) Notwithstanding Section 9.02(c)(i), if any Swiss value-added Tax is charged with respect to the Switzerland Branch Purchased Assets or if any Canadian goods and services Tax is charged with respect to the Healthpoint Canada Purchased Assets, Buyer International and Buyer Canada, respectively, shall bear 100% of such Tax.
(d) Apportioned Obligations and Taxes described in Section 9.02(c) shall be timely paid, and all applicable filings, reports and returns shall be filed, as provided by Applicable Law. The paying party shall be entitled to reimbursement from the non-paying party in accordance with Sections 9.02(b) or 9.02(c), as the case may be. Upon payment of any such Apportioned Obligation or Tax (or, following the Closing in the case of amounts paid prior to Closing by Sellers), the paying party shall present a statement to the non-paying party setting forth the amount of reimbursement to which the paying party is entitled under Section 9.02(b) or 9.02(c), as the case may be, together with such supporting evidence as is reasonably necessary to calculate the amount to be reimbursed. The non-paying party shall make such reimbursement promptly but in no event later than 10 days after the presentation of such statement.
(e) Buyer Canada and Healthpoint Canada shall elect jointly in the prescribed form under section 22 of the Income Tax Act, section 184 of the Taxation Act (Québec), if applicable, and the corresponding provisions of any other applicable Tax statute as to the sale of the Canadian accounts receivable and designate in such election an amount equal to the portion of the Purchase Price allocated to the Canadian accounts receivable pursuant to Section 3.03. This election, or these elections, shall be made within the time prescribed for such elections.
(f) Buyer Canada and Healthpoint Canada shall, if applicable, jointly execute and file an election under subsection 20(24) of the Income Tax Act in the manner required by subsection 20(25) of the Income Tax Act and under the equivalent or corresponding provisions of any other applicable provincial or territorial statute, in the prescribed forms and within the time period permitted under the Income Tax Act and under any other applicable provincial or
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 85 -
territorial statute, as to such amount paid by Healthpoint Canada to Buyer Canada for assuming future obligations. In this regard, Buyer Canada and Healthpoint Canada acknowledge that a portion of the Healthpoint Canada Purchased Assets transferred by Healthpoint Canada pursuant to this Agreement and having a value equal to the amount elected under subsection 20(24) of the Income Tax Act and the equivalent provisions of any applicable provincial or territorial statute, is being transferred by Healthpoint Canada as a payment for the assumption of such future obligations by Buyer Canada.
(g) At the request of Buyer Canada and to the extent permitted by the Income Tax Act, the parties shall make, and Healthpoint Canada shall file, any election or amended election in prescribed form (or such other form as Buyer Canada or Healthpoint Canada may reasonably request) and within the prescribed time limits pursuant to subsection 56.4(7) of the Income Tax Act proposed by the Minister of Finance (Canada) as it reads on the date of this Agreement or any amended or successor provision thereto, and any analogous provision of provincial or territorial Tax legislation.
(h) At the Closing, Healthpoint Canada and Buyer Canada shall execute jointly an election under section 167 of the Excise Tax Act (Canada) to have the sale of the Healthpoint Canada Purchased Assets take place on a GST/HST-free basis under Part IX of the Excise Tax Act (Canada) and Buyer Canada shall file such election with its GST/HST return for the reporting period in which the sale of the Healthpoint Canada Purchased Assets takes place. Buyer Domestic shall indemnify and hold Sellers harmless in respect of any goods and services Tax, harmonized sales Tax, penalties, interest and other amounts which may be assessed against Sellers as a result of the transactions under this Agreement not being eligible for such election or as a result of Buyer Canadas failure to file the election within the prescribed time.
(i) Healthpoint Canada shall provide to Buyer Canada on the Closing Date, or as soon as is reasonably possible thereafter, a certificate (a Clearance Certificate ) pursuant to Section 6 of the Retail Sales Tax Act (Ontario) and any similar legislation of any province in which the Healthpoint Canada Purchased Assets are located, indicating that Healthpoint Canada has paid all provincial sales Taxes collectable or payable by Healthpoint Canada up to the Closing Date or has entered into satisfactory arrangements for the payment of such Taxes. Notwithstanding anything to the contrary in this Agreement, until such time as such Clearance Certificates have been provided to Buyer Canada, Healthpoint Canada agrees to indemnify and hold harmless Buyer Canada, its officers, directors, employees and controlling persons for any provincial sales Tax, penalties and interest assessed against Buyer Canada by reason of non-compliance with Section 6 of the Retail Sales Tax Act (Ontario) or any similar legislation of any province in which the Healthpoint Canada Purchased Assets are located.
Section 9.03. Certain Disputes . Disputes that arise under this Article 9 and are not resolved by mutual agreement within 30 days shall be resolved by an internationally recognized expert in the relevant area with no material relationship with any Buyer Party, Seller or their respective Affiliates (the Referee ), chosen and mutually acceptable to both Buyer Domestic and Seller Parent within five days of the date on which the need to choose the Referee arises. The Referee shall resolve any disputed items within 30 days of having the item referred to it pursuant to such procedures as it may require. The costs, fees and expenses of the Referee shall be borne equally by the Buyer Parties and Sellers.
- 86 -
Section 9.04. Purchase Price Adjustment . Except to the extent required by Applicable Law, any amount paid by Seller or Buyer under this Article 9 or Article 12 will be treated as an adjustment to the Purchase Price (for the avoidance of doubt Sellers payment of an Excluded Liability shall not be treated as an adjustment to the Purchase Price).
EMPLOYEE MATTERS
Section 10.01. Transferred Employees . Not more than 10 and not less than 5 days prior to the Closing Date, Sellers will provide Buyer Domestic with a revised version of Schedule 4.23(a), updated as of such date, which shall reflect any terminations of employment, new employee hires or changes to the employee information otherwise contained therein. Buyer Domestic shall, or shall cause its Affiliates to, prior to the Closing Date, make an offer of employment to each actively employed Business Employee (other than Retained Employees and any Business Employee whose employment transfers automatically by operation of Applicable Law) and each individual who has accepted an offer of employment from Seller or any of its Affiliates for employment primarily in connection with the Business but who has not, as of the Closing Date, commenced employment with Seller or its Affiliates (each such person an Accepted Offer Employee ) in accordance with Applicable Law, with such offers effective as of the Closing, subject to the condition that such Business Employee or Accepted Offer Employee (A) accepts the employment offer in a timely fashion (and in no event more than ten Business Days after his or her receipt of such offer of employment), (B) meets Buyer Domestics reasonable employment requirements with respect to satisfactory results of background checks, drug tests, immigration verification, restrictive covenant agreements and similar requirements, and (C) in the case of a Business Employee or Accepted Offer Employee who, immediately prior to the Closing, is absent from work on account of use of vacation or authorized leave of absence (including family medical leave, military leave, sick leave, workmens compensation and short term disability), such Business Employee or Accepted Offer Employee returns to active work within the time required pursuant to the terms of such vacation or authorized leave of absence (but in no event more than *** after the Closing, except as otherwise required by Applicable Law), which terms Sellers shall communicate in writing to Buyer Domestic within a reasonable period before offers of employment are to be given hereunder. For avoidance of doubt, Business Employees who are actively employed include any Business Employee who is, immediately prior to the Closing, absent from work on account of use of vacation and authorized leave of absence (including family medical leave, military leave, sick leave, workmens compensation and short term disability). No offers of employment will be made to inactive or former Business Employees, including any Person who has been on long-term disability leave or unauthorized leave of absence or who has terminated his or her employment or retired on or before the Closing Date. The parties acknowledge and agree that the transactions contemplated by this Agreement and the other Transaction Documents with respect to Switzerland constitute a transfer of business within the meaning of Article 333 of the Swiss Code of Obligations and the parties shall cooperate in good faith to satisfy, or cause to be satisfied, the information and consultation requirements of Articles 333 and 333a of the Swiss Code of Obligations as they apply to the transactions contemplated by this Agreement or the other Transaction Documents. Each Business Employee and Accepted Offer Employee who timely accepts an offer of employment, satisfies the foregoing additional conditions, and becomes employed by Buyer Domestic or its
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 87 -
Affiliates as of the Closing Date, and each Business Employee whose employment transfers automatically by operation of Applicable Law as of the Closing Date, shall be a Transferred Employee on the Closing Date. Notwithstanding the foregoing, nothing in this Agreement or any other Transaction Document shall be construed as an obligation of Buyer Domestic or any of its Affiliates to continue the employment of any Transferred Employee for any period following the Closing Date. Each Seller will not take, and shall cause its Affiliates not to take, any action which would impede, hinder, interfere or otherwise compete with any effort by a Buyer Party to hire any Transferred Employees. Except as required by Applicable Law, Buyer Domestic or, as the case may be, its Affiliates shall not be required to hire or employ, or be deemed to have hired or employed, or assume responsibility for any Business Employee or Accepted Offer Employee who fails to satisfy any one or more of the requirements of subparts (A), (B) or (C) above, and any such Business Employee or Accepted Offer Employee shall not be or become a Transferred Employee.
Section 10.02. Maintenance of Compensation and Benefits . Subject to the immediately following sentence and any greater obligations it may have under the Assumed Employee Agreements or Applicable Law, Buyer Domestic agrees that for a period commencing on the Closing Date and ending on the *** of the Closing Date, it shall provide, or cause its Affiliates to provide, each Transferred Employee with (a) base salary or base wage rate and annual incentive bonus opportunity that in the aggregate are at least comparable to those in effect immediately prior to the Closing, (b) employee benefits (other than equity-based benefits, retention or transaction benefits, post-employment welfare benefits, expatriate benefits and severance), that are, in the aggregate, substantially comparable to the employee benefits (other than equity-based benefits, retention or transaction benefits, post-employment welfare benefits, expatriate benefits and severance) provided to Transferred Employees immediately prior to the Closing and (c) severance benefits that are at least equal to the severance benefits provided by Sellers and their Affiliates pursuant to the severance policy set forth in Schedule 10.02. For the avoidance of doubt, nothing in this Section 10.02 is intended to limit the obligation of Buyer Domestic to provide COBRA continuation health care coverage as required under Applicable Law.
Section 10.03. Retirement Plans .
Effective as of the Closing, each Transferred Employee (other than the Business Employees employed by Healthpoint Curaçao) (i) shall become fully vested in his or her account balance in Seller Parents defined contribution plans intended to qualify under Section 401(a) of the Code (the Seller DC Plans ) and (ii) shall cease to be an active participant in the Seller DC Plans. On or immediately following the Closing Date, Seller Parent shall make to the Seller DC Plans all previously unpaid employee and matching and any other contributions with respect to the Transferred Employees employment service rendered prior to the Closing Date. As soon as practicable following the Closing Date, Transferred Employees shall be eligible to effect a direct rollover (as described in Section 401(a)(31) of the Code) of their account balances (including participant loans) under the Seller DC Plan to a defined contribution plan of a Buyer Party or any Affiliate intended to qualify under Section 401(a) of the Code, in the form of cash and participant loan notes. Any direct rollover described in this Section 10.03 shall comply with Applicable Law.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 88 -
Section 10.04. Retained Employee Plan Liabilities .
(a) Except as specifically provided in this Article 10, Sellers and their respective Affiliates shall retain and be responsible for any liabilities arising or accrued pursuant to any Employee Plan and any other compensation, employment and employee-benefits related liabilities with respect to the Business, the Service Providers or the Accepted Offer Employees arising out of events occurring prior to the Closing Date. Except to the extent expressly retained by a Seller or any of its Affiliates, all liabilities relating to Transferred Employees arising out of their employment with Buyer Domestic or its Affiliates from and following the Closing Date, or the termination of such employment, shall be the exclusive responsibility of Buyer Domestic and its Affiliates. For the avoidance of doubt, except as provided in Section 10.05(b), neither Buyer Domestic nor any of its Affiliates shall have any severance or other obligation with respect to (i) any Business Employees or Accepted Offer Employees who do not timely accept an offer of employment from Buyer Domestic or its Affiliates pursuant to Section 10.01, or who otherwise fail to satisfy any one or more of the requirements of subparts (A), (B) or (C) of Section 10.01, (ii) former Service Providers as of the Closing Date, (iii) any Business Employees who are Retained Employees or (iv) any current or former employees of any Seller or any of its Affiliates who are not Business Employees.
(b) For the avoidance of doubt, subject to Section 10.05(d), Sellers and their respective Affiliates shall retain responsibility with respect to any claims for welfare benefit plan services for Transferred Employees accrued prior to the Closing Date. Subject to Section 10.04(c), claims made by a Transferred Employee for medical benefit plan services from and following the Closing Date shall be the responsibility of the welfare benefit plan provided by Buyer Domestic or its Affiliates to such employees.
(c) Sellers and their respective Affiliates shall be responsible for and shall administer all claims for workers compensation benefits that are incurred by Business Employees prior to the Closing Date (whether or not such Business Employees become Transferred Employees); provided that Buyer Domestic shall reimburse Healthpoint for any out-of-pocket costs (including any retention or deductible amounts) incurred by Sellers associated with any such claims by Transferred Employees. Buyer Domestic and its Affiliates shall be responsible for and shall administer all claims for workers compensation benefits that are incurred from and following the Closing Date by Transferred Employees. A claim for workers compensation benefits shall be deemed to be incurred when the event giving rise to the claim (the Workers Compensation Event ) occurs. If the Workers Compensation Event occurs with respect to a Transferred Employee over a period both prior to and from and following the Closing Date, the claim shall be administered by Sellers and their respective Affiliates to the extent the claim is covered under a workers compensation insurance policy maintained by Sellers or their respective Affiliates, and otherwise such claim shall be administered by Buyer Domestic or one of its Affiliates, but shall be the joint responsibility and liability of Sellers and their respective Affiliates, on the one hand, and Buyer Domestic and its Affiliates, on the other, and shall be equitably apportioned based upon the relative periods of time that the Workers Compensation Event transpired prior to and from and following the Closing Date; provided that Buyer Domestic shall reimburse Healthpoint for any out-of-pocket costs (including any retention or deductible amounts) incurred by Sellers associated with any such claims by Transferred Employees.
- 89 -
(d) From and after the Closing, Buyer Domestic and its Affiliates shall be solely responsible for complying with all applicable health care continuation coverage requirements under COBRA with respect to Business Employees and their qualified beneficiaries as to qualifying events that occur on or prior to the Closing Date and for all individuals who are M&A qualified beneficiaries as such term is defined in Treasury Regulation Section 54.4980B-9.
(e) Sellers and their respective Affiliates shall retain all obligations with respect to the Healthpoint Long Term Incentive Plan and the Healthpoint Partnership Interest Program and neither the Buyer Parties nor their respective Affiliates shall have any obligations with respect to the Healthpoint Long Term Incentive Plan or the Healthpoint Partnership Interest Program on or following the Closing Date. At or within 60 days following the Closing Date (but in no event prior to the time prescribed by the Healthpoint Long Term Incentive Plan), each Seller shall, and shall cause its Affiliates to, make all payments due to participants in the Healthpoint Long Term Incentive Plan in the per-participant amounts set forth in Schedule 10.04(e).
(f) Sellers and their respective Affiliates shall retain all obligations with respect to the payments set forth in Schedule 10.04(f).
Section 10.05. Assumed Employee Plan Liabilities .
(a) As of the Closing, Buyer Domestic shall, or shall cause its Affiliates to, assume, subject to Applicable Law and with such modifications as Buyer Domestic and the applicable Business Employee shall agree, all obligations of Sellers and their Affiliates (to the extent not previously satisfied) under the Assumed Employee Agreements and the Assumed Covenant Agreements; provided , however , that for the avoidance of doubt, (i) the assumption of the Assumed Employee Agreements and the Assumed Covenant Agreements will not require Buyer Domestic or any of its Affiliates to assume any Employee Plan that may be mentioned in but are maintained outside of such agreements or the liabilities accrued or incurred under any such Employee Plan prior to the Closing and (ii) Buyer Domestic or its Affiliate shall be entitled to all protections or benefits provided to the applicable Seller entity (or, as the case may be, Seller Affiliate) that is party to such agreements.
(b) To the extent Sellers or any of their Affiliates are required to pay severance benefits to any Business Employee, other than a Retained Employee or any of the Business Employees listed on Schedule 10.05(b), due solely to the failure of Buyer Domestic or any of its Affiliates to offer employment to such Business Employee (i) with duties that are substantially comparable to the duties performed by such Business Employee for Sellers or their Affiliates immediately prior to the date of this Agreement or (ii) with compensation and benefits that in the aggregate are substantially comparable to the compensation and benefits provided to such Business Employee immediately prior to the date of this Agreement, Buyer Domestic shall reimburse Sellers for the cost of such severance benefits (after taking into account any Tax benefit and/or Tax detriment actually realized or incurred by Sellers in connection with the payment such severance benefits) in an amount determined in accordance with the applicable severance agreement or plan maintained by Sellers or their Affiliates as of the date of this Agreement and heretofore provided to Buyer Domestic.
- 90 -
(c) Buyer Domestic shall, or shall cause its Affiliates to, assume or reimburse Sellers and their Affiliates for the Transferred Employee Compensation Payments at the Closing. To the extent Sellers or any of their respective Affiliates shall at or prior to the Closing pay any amounts in satisfaction of the Transferred Employee Compensation Payments, Seller Parent shall so notify Buyer Domestic in writing and Buyer Domestic or Buyer International, as applicable, shall reimburse Seller Parent for such amounts at the Closing. Transferred Employee Compensation Payments that are not paid at or prior to Closing shall be an Assumed Liability and, with the exception of Seller contributions to the Seller DC Plans, be paid by Buyer Domestic or Buyer International, as applicable, as soon as practicable and in no event later than March 15, 2013. Contributions to the Seller DC Plans and Seller premium or benefit payments under any welfare benefit plan shall be made by Seller Parent, and Buyer Domestic shall reimburse Seller Parent for such amounts promptly following delivery of written notice thereof.
(d) From and after the Closing, Buyer Domestic and its Affiliates shall assume and be responsible for all obligations with respect to the Healthpoint Parent Pharmaceuticals Employee Relocation Program and the Relocation Repayment Agreements set forth in Schedule 10.05(d).
(e) Effective as of the Closing, Buyer NV shall assume the Healthpoint Curaçao Defined Contribution Pension Plan, and Healthpoint Curaçao shall transfer or cause to be transferred to Buyer NV in full all insurance policies, trusts reserves and/or others assets used to fund benefit obligations under the Healthpoint Curaçao Defined Contribution Pension Plan. Not later than the later of (i) five Business Days prior to the Closing Date or (ii) four Business Days following receipt of the Healthpoint Curaçao Required Consents, Healthpoint Curaçao shall deliver to Buyer NV the written consent of VidaNova Pension Fund Foundation to the transfer and assignment to Buyer NV of the Defined Contribution Program Financing Agreement between Healthpoint Curaçao and VidaNova Pension Fund Foundation, and shall take any other actions reasonably requested by Buyer NV to complete the transfer and assignment of such Defined Contribution Program Financing Agreement to Buyer NV. The provisions of this Section 10.05(e) shall not be applicable if Buyer NV elects to purchase the Healthpoint Curaçao Equity Interests.
(f) At the Closing, Buyer Domestic or Buyer International, as applicable, shall reimburse Seller Parent for all 401(k) matching contributions for the year ended December 2012 and 2012 bonuses paid by Sellers on or prior to the Closing Date.
Section 10.06. Flexible Spending Accounts . As of the Closing Date, each Seller shall, and shall cause the, transfer from medical and dependent care account plans of Seller and its Affiliates (each, a Seller FSA Plan ) to one or more medical and dependent care account plans established or designated by Buyer Domestic or its Affiliates the account balances of Transferred Employees, and Buyer Domestic shall, or shall cause its Affiliates to, allow such transferred account balances to be available to Transferred Employees on and after the Closing Date under a flexible spending account plan maintained by Buyer Domestic or its Affiliates. Each Transferred Employee shall be permitted to continue to have payroll deductions made as most recently elected by him or her under the applicable Seller FSA Plan for the plan year of the Seller FSA Plan in which the Closing Date occurs. Promptly after the Closing Date, Buyer Parties shall reimburse Sellers for benefits paid by the Seller FSA Plans to any Transferred
- 91 -
Employee prior to the Closing Date to the extent in excess of the payroll deductions made in respect of such Transferred Employee prior to the Closing Date with respect to the Seller FSA Plan year in which the Closing Date occurs. Promptly after the Closing Date, each Seller shall, and shall cause its Affiliates to, transfer to Buyer Parties in cash any excess amount credited to a Seller FSA Plan that results from the Transferred Employees payroll deductions credited to such Seller FSA Plan exceeding the total amount of benefits that have been paid under such Seller FSA Plan prior to the Closing Date with respect to such Seller FSA Plans plan year in which the Closing Date occurs.
Section 10.07. Credit for Service with Sellers .
(a) From and after the Closing, for the purposes of determining eligibility to participate, vesting and entitlement to benefits where length of service is relevant under any benefit plan or arrangement of Buyer Domestic or its respective Affiliates (other than for any such purpose under any defined benefit pension plan and any retiree welfare plans or provisions), Buyer Domestic shall, and shall cause its Affiliates to, cause each Transferred Employee to receive service credit for service with Sellers or any of their respective Affiliates to the same extent such service credit was granted under the same type of Employee Plan immediately prior to the Closing (other than to the extent resulting in duplication of benefits).
(b) Buyer Domestic shall, and shall cause its Affiliates to, (i) waive all limitations as to preexisting conditions exclusions and waiting periods with respect to participation and coverage requirements applicable to the Transferred Employees (and any dependents or beneficiaries thereof) under any welfare benefit plans that such Transferred Employees may be eligible to participate in after the Closing, other than limitations or waiting periods that are already in effect with respect to such Transferred Employees and that have not been satisfied as of the Closing under any welfare benefit plan maintained for the Business Employees immediately prior to the Closing and (ii) use commercially reasonable efforts to provide each Transferred Employee with credit for any co-payments and deductibles paid prior to the Closing in satisfying any applicable deductible or out-of-pocket requirements under any welfare plans that such employees are eligible to participate in after the Closing.
(c) Buyer Domestic shall, or shall cause its Affiliates to, assume and honor any vacation accrued but unused by each Transferred Employee as of immediately prior to the Closing under the relevant Employee Plan, solely to the extent such liabilities are reflected in Final Closing Net Assets and set forth next to each Transferred Employees name on Schedule 4.23(a). Such accrued vacation time shall be treated in accordance with the terms of the applicable Employee Plan, except as otherwise required by Applicable Law.
Section 10.08. Acknowledgement . Each Seller and each Buyer Party acknowledges and agrees that nothing contained in this Agreement: (i) shall be construed to limit in any way the ability of Buyer Domestic or any of its Affiliates to terminate the employment of any employee (including any Transferred Employee) at any time and for any or no reason; (ii) shall be construed to establish, amend, or modify any benefit or compensation plan, program, agreement or arrangement; (iii) shall alter or limit Buyer Domestics or any of its Affiliates ability to amend, modify or terminate any benefit or compensation plan, program, agreement or arrangement at any time assumed, established, sponsored or maintained by Buyer
- 92 -
Domestic or any of its Affiliates; or (iv) is intended to confer upon any current or former employee (including any Transferred Employees) or any other Person any right to a particular term or condition of employment. Notwithstanding the foregoing, in no event shall any Buyer Party or any of its Affiliates be permitted, prior to the completion of the continuation period set forth in Section 10.02, to reduce the severance benefits payable to Transferred Employees below the severance benefits provided by Sellers and their Affiliates pursuant to the severance policy set forth on Schedule 10.02.
Section 10.09. No Third Party Beneficiaries . Without limiting the generality of Section 14.09, nothing in this Agreement or the other Transaction Documents, express or implied, is intended to confer any rights, benefits, remedies, obligations or liabilities upon any Person other than the parties to this Agreement and their respective successors and assigns, including any current or former employees, retirees, or dependents or beneficiaries of employees or retirees.
Section 10.10. Cooperation . Each Seller and each Buyer Party recognizes it to be in the best interests of the parties hereto and their respective employees that the transactions in this Article 10 be effected in an orderly manner and agrees to devote its commercially reasonable efforts and to cooperate fully in complying with the provisions of this Article 10. Without limiting the generality of the foregoing, each of the parties hereto agrees to, and shall cause its Affiliates to, execute, deliver and file all documents and to take all such actions as are deemed reasonably necessary or desirable in order to carry out and perform the purpose of this Article 10 and to facilitate the transactions referred to in this Article 10.
CONDITIONS TO CLOSING
Section 11.01. Conditions to Obligations of the Buyer Parties and Sellers . The obligations of the Buyer Parties and Sellers to consummate the Closing are subject to the satisfaction (or, to the extent permitted by Applicable Law, waiver by each of Buyer Domestic and Seller Parent) of the following conditions:
(a) Any applicable waiting period under the HSR Act relating to the transactions contemplated hereby shall have expired or been terminated.
(b) No Applicable Law shall prohibit the consummation of the Closing.
Section 11.02. Conditions to Obligation of the Buyer Parties . The obligation of the Buyer Parties to consummate the Closing is subject to the satisfaction (or, to the extent permitted by Applicable Law, waiver by Buyer Domestic) of the following further conditions:
(a) (i) Each Seller shall have performed in all material respects all of its covenants, agreements and obligations hereunder required to be performed by it on or prior to the Closing Date, (ii) the Fundamental Seller Representations shall be true and correct in all material respects at and as of the Closing Date as if made at and as of such date; provided that for the purposes of this Section 11.02(a)(ii), the reference to material liability in clause 4.04(y) shall be deemed to be a monetary liability that would
- 93 -
reasonably be expected to be in excess of $***, (iii) the other representations and warranties of Sellers contained in Articles 4 and 9 (disregarding all qualifications set forth therein relating to materiality or Material Adverse Effect) shall be true and correct in all respects at and as of the Closing Date as if made at and as of such date (except that those representations and warranties that are made as of a specific date need only be true and correct in all respects as of such date), except where the failure of such representations and warranties to be true and correct would not, individually or in the aggregate, reasonably be expected to (A) have a Material Adverse Effect or (B) cause the Buyer Parties and the Business, taken as a whole, to incur or suffer Damages (excluding Damages of the sort that are waived pursuant to Section 12.02(e)) in excess of $***, and (iv) Buyer Domestic shall have received a certificate signed by an executive officer of Seller Parent to the foregoing effect.
(b) There shall not be pending any action or proceeding by any Governmental Authority seeking to (i) restrain, prohibit or otherwise interfere with the ownership or operation by any Buyer Party or any of their respective Affiliates of all or any material portion of the Purchased Assets or the business or assets of any Buyer Party or any of their respective Affiliates as a result of the transactions contemplated hereby, (ii) restrain the consummation of the transactions contemplated by the Transaction Documents or (iii) compel any Buyer Party or any of their Affiliates to take any action of the type described in the proviso to Section 8.01(b) (including consenting to any action over which its consent is required pursuant to such Section) in connection with or related to the transactions contemplated by this Agreement and the other Transaction Documents that such Buyer Party is not otherwise required to take.
(c) There shall not be any action taken, or any Applicable Law enacted, enforced, promulgated, issued or deemed applicable to the purchase of the Business or the Purchased Assets, by any Governmental Authority, other than the application of the waiting period provisions of the HSR Act to the purchase of the Purchased Assets, that, in the reasonable judgment of Buyer Domestic could, directly or indirectly, result in any of the consequences referred to in clauses (i) through (iii) of Section 11.02(b).
(d) Buyer Domestic shall have received evidence reasonably satisfactory to it that all Required Consents, in each case in form and substance reasonably satisfactory to Buyer Domestic, have been obtained by Sellers and are in full force and effect.
(e) Buyer Domestic shall have received evidence, in form and substance reasonably satisfactory to Buyer Domestic, indicating that all Liens (other than Permitted Liens) on the Purchased Assets shall have been released in full.
(f) Buyer Domestic shall not have received evidence indicating that any of the Non-Compete Agreements shall not be in full force and effect effective as of the Closing.
(g) From the date of this Agreement to the Closing, there shall not have occurred and be continuing any event, occurrence, development or state of circumstances or facts which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 94 -
(h) Sellers shall have delivered (or caused to be delivered) to Buyer Domestic the closing deliverables set forth in Section 3.02 required to be delivered by Sellers, in each case in form and substance reasonably acceptable to Buyer Domestic.
(i) The FCA Settlement Agreement shall have been fully executed by each of the parties thereto.
Section 11.03. Conditions to Obligation of Sellers . The obligation of Sellers to consummate the Closing is subject to the satisfaction (or, to the extent permitted by Applicable Law, waiver by Seller Parent) of the following further conditions:
(a) (i) Each Buyer Party shall have performed in all material respects all of its covenants, agreements and obligations hereunder required to be performed by it at or prior to the Closing Date, (ii) the Fundamental Buyer Representations shall be true and correct in all material respects at and as of the Closing Date as if made at and as of such date, (iii) the other representations and warranties of the Buyer Parties contained in Article 5 (disregarding all qualifications set forth therein relating to materiality or material adverse effect) shall be true in all respects at and as of the Closing Date, as if made at and as of such date, except where the failure of such representations and warranties to be true and correct would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the ability of the Buyer Parties to consummate the transactions contemplated hereby, and (iv) Seller Parent shall have received a certificate signed by an officer of Buyer Domestic to the foregoing effect.
(b) Buyer Domestic shall have delivered (or caused to be delivered) to Seller Parent the closing deliverables set forth in Section 3.02 required to be delivered by a Buyer Party, in each case in form and substance reasonably acceptable to Seller Parent.
SURVIVAL; INDEMNIFICATION
Section 12.01. Survival . The representations and warranties hereunder or in any certificate or other writing delivered pursuant hereto or in connection herewith, and the covenants and obligations that are required to be performed at or prior to the Closing Date shall survive the Closing until the *** anniversary of the Closing Date; provided that the Fundamental Seller Representations and the Fundamental Buyer Representations shall survive ***. The covenants, agreements and obligations hereunder or in any certificate or other writing delivered pursuant hereto or in connection herewith that are required to be performed following the Closing Date shall survive the Closing ***; provided , however, that in no event shall indemnity be sought with respect to a breach of Section 6.08 after the *** of the Closing Date; provided , further that in no event shall indemnity be sought pursuant to Section 12.02(a)(ii) with respect to any False Claims Act Litigation claims or proceedings by or on behalf of any private party plaintiffs after the *** of the Closing Date (but for avoidance of doubt, the foregoing proviso shall not limit
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 95 -
indemnity pursuant to Section 12.02(a)(ii) in respect of claims or proceedings by or on behalf of state or other Governmental Authorities). Notwithstanding the preceding sentences, any breach of covenant, agreement, obligation, representation or warranty in respect of which indemnity may be sought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentences, if notice of the inaccuracy thereof giving rise to such right of indemnity shall have been given to the party against whom such indemnity may be sought prior to such time.
Section 12.02. Indemnification .
(a) Effective at and after the Closing, the members of the Principal Seller Group, Healthpoint Curaçao and Healthpoint Canada (the Indemnifying Sellers ) hereby jointly and severally indemnify each Buyer Party, its Affiliates, successors and assigns (collectively, the Buyer Indemnified Parties ) against and agree to hold each of them harmless from any and all damage, loss, liability, fine, penalty and expense (including reasonable expenses of investigation and reasonable attorneys fees and expenses in connection with any action, suit or proceeding whether involving a third-party claim or a claim solely between the parties hereto) ( Damages ) incurred or suffered by any Buyer Indemnified Party arising out of or in connection with:
(i) any inaccuracy, misrepresentation or breach of warranty by any Sellers (determined, except with respect to Sections ***, without regard to any qualification or exception contained therein relating to materiality or Material Adverse Effect or any similar qualification or standard) (each such misrepresentation and breach of warranty a Warranty Breach ), or breach of covenant, agreement or obligation made or to be performed by any Seller pursuant to this Agreement or any other Transaction Document;
(ii) any Excluded Liability; or
(iii) the *** Litigation, but only that portion of such Damages that are in excess of $*** in the aggregate;
provided that with respect to indemnification by the Indemnifying Sellers for Warranty Breaches pursuant to Section 12.02(a)(i), (A) the Indemnifying Sellers shall not be liable unless (1) the amount of Damages with respect to such Warranty Breach arising from a single claim (or series of related claims) exceeds $*** (the Minimum Threshold ) and (2) the aggregate amount of Damages (other than Damages relating to a single claim (or series of related claims) that do not exceed the Minimum Threshold) with respect to all such Warranty Breaches exceeds $*** (the Threshold ) and once such Threshold is exceeded, the Indemnifying Sellers shall indemnify the Buyer Indemnified Parties for the entire amount of Damages (other than Damages relating to a single claim (or series of related claims) that do not exceed the Minimum Threshold) without reduction, and (B) the Indemnifying Sellers maximum liability for Warranty Breaches shall not exceed $*** (the Cap ); provided , that the preceding limitations shall not apply to indemnification by the Indemnifying Sellers for Warranty Breaches of any Fundamental Seller Representation; provided , further that the Indemnifying Sellers maximum liability under Section 12.02(a)(iii) shall not exceed $***; provided , further that the Indemnifying Sellers maximum liability under this
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 96 -
Section 12.02 shall not exceed $***; and provided further that the preceding limitations shall not apply to any indemnification claims based on fraud by the Sellers or any of their respective Affiliates.
(b) Effective at and after the Closing, the Buyer Parties hereby jointly and severally indemnify each Seller, its Affiliates and their respective successors and assigns (collectively, the Seller Indemnified Parties ) against and agree to hold each of them harmless from any and all Damages incurred or suffered by any Seller Indemnified Party arising out of:
(i) any Warranty Breach (determined without regard to any qualification or exception contained therein relating to materiality or Material Adverse Effect or any similar qualification or standard) by any Buyer Party, or breach of covenant, agreement or obligation made or to be performed by any Buyer Party pursuant to this Agreement or any other Transaction Document;
(ii) any Assumed Liabilities; or
(iii) any failure of any Buyer Party to fulfill any of its obligations under any Subcontract;
provided that with respect to indemnification by the Buyer Parties (A) for Warranty Breaches pursuant to Section 12.02(b)(i), Buyer Domestic shall not be liable unless the aggregate amount of Damages with respect to all such Warranty Breaches exceeds the Threshold and once such Threshold is exceeded, Buyer Domestic shall indemnify the Seller Indemnified Parties for the entire amount of Damages without reduction and (B) Buyer Domestics maximum liability under this Section 12.02(b) shall not exceed $***; provided that the preceding limitations shall not apply to indemnification by the Buyer Parties for Warranty Breaches of any Fundamental Buyer Representation any failure of any Buyer Party to fulfill any of its obligations under any Subcontract; and provided further that the preceding limitations shall not apply to any indemnification claims based on fraud by any Buyer Party or any of its Affiliates.
(c) The indemnification obligations under this Section 12.02 shall be subject to each of the following limitations:
(i) there shall be no obligation on the part of the Indemnifying Sellers to indemnify the Buyer Indemnified Parties (y) to the extent that any claim for indemnification relates to an amount otherwise taken into account in determining Final Closing Net Assets or (z) for any Damages primarily arising from or relating to, directly or indirectly, any act, omission or transaction carried out by or at the written request of Buyer Domestic before, on or after the Closing Date, including, without limitation, any change in the accounting policies, practices or procedures of the Business after the Closing, or with the consent of Buyer Domestic before the Closing Date pursuant to Section 6.01; and
(ii) the Damages suffered by any Indemnified Party shall be calculated after giving effect to any amounts recovered from third parties, including insurance proceeds, in each case net of the reasonable third party out-of-pocket costs and expenses and any insurance premium increases directly attributable to
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 97 -
such recoveries, and taking into account any Tax benefit and/or Tax detriment actually realized or incurred by the Indemnified Party and its Affiliates that is associated with such Damages or the receipt of an indemnification payment in respect thereof (it being understood and agreed that the Indemnified Parties shall use their commercially reasonable efforts to seek insurance recoveries in respect of Damages to be indemnified hereunder, but only to the extent the seeking of such insurance recoveries does not materially adversely affect such Indemnified Party). If any insurance proceeds or other recoveries from third parties are actually realized (in each case calculated net of the reasonable third party out-of-pocket costs and expenses and any insurance premium increases directly attributable to such recoveries) by an Indemnified Party subsequent to the receipt by such Indemnified Party of an indemnification payment hereunder in respect of the claims to which such insurance proceedings or third party recoveries relate, the Indemnified Party shall hold such amounts in trust and appropriate refunds shall be made promptly to the Indemnifying Party regarding the amount of such indemnification payment.
(d) Any liability for indemnification hereunder shall be determined without duplication of recovery by reason of the same set of facts giving rise to such liability constituting a breach of more than one representation, warranty, covenant or agreement.
(e) EACH SELLER AND EACH BUYER PARTY, ON BEHALF OF ITSELF AND EACH OF ITS RESPECTIVE AFFILIATES, SUCCESSORS AND ASSIGNS, WAIVES ANY RIGHT TO RECOVER INDIRECT, SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, WHICH MAY INCLUDE (DEPENDING ON THE FACTS) LOST REVENUES OR PROFITS OR DIMINUTION IN VALUE, FOR ANY WARRANTY BREACH, UNLESS (i) SUCH DAMAGES ARE AWARDED TO A PERSON IN AN INDEMNIFIABLE THIRD PARTY CLAIM OR (ii) SOLELY IN THE CASE OF CONSEQUENTIAL, INDIRECT OR SPECIAL DAMAGES: SUCH DAMAGES WERE REASONABLY FORESEEABLE AND ARISE OUT OF EITHER (A) ANY PERMANENT OR TEMPORARY INABILITY TO DEVELOP, MAKE OR SELL A PRODUCT OR (B) ANY KNOWING (AS DEFINED IN THIS AGREEMENT) BREACH OF THIS AGREEMENT. EACH BUYER PARTY ACKNOWLEDGES THAT THERE ARE NO SPECIAL CIRCUMSTANCES THAT DISTINGUISH ANY OF THE BUYER PARTIES FROM OTHER PERSONS ENGAGED IN THE DEVELOPMENT, MANUFACTURE OR SALE OF WOUND CARE PRODUCTS.
(f) No Buyer Party shall have any right to set-off any unresolved indemnification claim pursuant to this Article 12 against any payment due hereunder or under any other Transaction Document.
(g) The Indemnified Parties and the Indemnifying Parties shall use their respective commercially reasonable efforts to mitigate any Damages upon becoming aware of the events or circumstances giving rise to the applicable claim for Damages.
(h) Without limiting the generality of the foregoing, to the extent the events or circumstances giving rise to any claim for indemnification hereunder may be the subject of
- 98 -
indemnification or other contractual rights under any acquisition or other agreement to which any Seller is a party, such Seller shall use its commercially reasonable efforts to obtain indemnification from, or otherwise enforce its contractual rights against, such counterparty in respect of such matter and any recovery resulting therefrom shall be turned over to the applicable Indemnified Party and shall be taken into account in determining the applicable indemnifiable Damages in accordance with Section 12.02.
Section 12.03. Third Party Claim Procedures .
(a) The Indemnified Party seeking indemnification under Section 12.02(a) or 12.02(b) agrees to give prompt notice in writing to the Indemnifying Party of the assertion of any claim or the commencement of any suit, action or proceeding by any third party ( Third Party Claim ) in respect of which indemnity may be sought under such Section. Such notice shall set forth in reasonable detail such Third Party Claim and the basis for indemnification (taking into account the information then available to the Indemnified Party). The failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent such failure shall have materially and adversely prejudiced the Indemnifying Party.
(b) The Indemnifying Party shall be entitled to participate in the defense of any Third Party Claim and, subject to the limitations set forth in this Section, shall be entitled to control and appoint lead counsel for such defense, in each case at its own expense; provided that prior to assuming control of such defense, the Indemnifying Party must acknowledge in writing that, if the facts as alleged by the claimant in the Third Party Claim are true, it would have an indemnity obligation for the Damages resulting from such Third Party Claim as provided under this Article 12.
(c) The Indemnifying Party shall not be entitled to assume or maintain control of the defense of any Third Party Claim and shall pay the fees and expenses of counsel retained by the Indemnified Party if (i) the Indemnifying Party does not deliver the acknowledgment referred to in Section 12.03(b) within 60 days of receipt of notice of the Third Party Claim pursuant to Section 12.03(a), (ii) the Third Party Claim relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation or any other action by or on behalf of a Governmental Authority, (iii) the Indemnified Party reasonably believes an adverse determination with respect to the Third Party Claim would be detrimental to the reputation or future business prospects of the Indemnified Party or any of its Affiliates, (iv) the Third Party Claim seeks an injunction or equitable relief against the Indemnified Party or any of its Affiliates, (v) the Indemnifying Party has failed or is failing to prosecute or defend vigorously the Third Party Claim or (vi) in the case of any Third Party Claim involving a Buyer Indemnified Party as the Indemnified Party, if the amount of the Third Party Claim, if determined in favor of the claimant, would reasonably be expected to result in Damages, together with all other claims for indemnification hereunder, that would exceed the remaining available amount in the Escrow Account or, if such Third Party Claim is in respect of a Warranty Breach (other than a Warranty Breach of any Fundamental Seller Representation) the amount of the Cap (minus the sum of (without duplication) (A) the aggregate dollar amount of all indemnification claims pursuant to Section 12.02(a) in respect of Warranty Breaches (other than Warranty Breaches of any Fundamental Seller Representations) pending as of such date plus (B) the aggregate dollar amount of all indemnification claims pursuant to Section 12.02(a) in respect of Warranty
- 99 -
Breaches (other than Warranty Breaches of any Fundamental Seller Representations) that have been paid prior to such date or are to be paid as of such date). The Indemnified Party shall obtain the prior written consent of the Indemnifying Party before entering into any settlement of a Third Party Claim (which consent shall not be unreasonably withheld, conditioned or delayed).
(d) If the Indemnifying Party shall assume the control of the defense of any Third Party Claim in accordance with the provisions of this Section 12.03, the Indemnifying Party shall obtain the prior written consent of the Indemnified Party before entering into any settlement of such Third Party Claim (which consent shall not be unreasonably withheld, conditioned or delayed); provided that consent of the Indemnified Party shall not be required for any such settlement if (i) the sole relief provided is monetary damages that are paid in full (other than an amount that is less than the Threshold) by the Indemnifying Party, (ii) such settlement does not permit any order, injunction or other equitable relief to be entered, directly or indirectly, against the Indemnified Party and (iii) such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Third Party Claim and does not include any statement as to or any admission of fault, culpability or a failure to act by or on behalf of any Indemnified Party; and provided further , however , that if the Indemnified Party refuses its consent to a bona fide offer of settlement that the Indemnifying Party wishes to accept and that (x) involves no payment of money by such Indemnified Party (other than an amount that is less than the Threshold), (y) involves no material limitation on the future operation of the Business, and (z) releases such Indemnified Party from all liability in connection with such claim except for payments that would be required to be paid by the Indemnified Party representing an amount that is less than the Threshold, the Indemnifying Party may reassign the defense of such claim to such Indemnified Party, who may then continue to pursue the defense of such matter, free of any participation by the Indemnifying Party, at the sole cost and expense of such Indemnified Party. In such event, the obligation of the Indemnifying Party with respect thereto shall not exceed the lesser of (i) the amount of the offer of settlement that such Indemnified Party refused to accept or (ii) the aggregate Damages of the Indemnified Party with respect to such claim.
(e) In circumstances where the Indemnifying Party is controlling the defense of a Third Party Claim in accordance with paragraphs (b) and (c) above, the Indemnified Party shall be entitled to participate in the defense of any Third Party Claim and to employ separate counsel of its choice for such purpose, in which case the fees and expenses of such separate counsel shall be borne by the Indemnified Party; provided that in such event the Indemnifying Party shall pay the fees and expenses of one such separate counsel (and appropriate local counsel) (i) incurred by the Indemnified Party prior to the date the Indemnifying Party assumes control of the defense of the Third Party Claim or (ii) incurred by the Indemnified Party at any time if the Indemnified Party shall reasonably conclude that (A) there is a conflict of interest between the Indemnifying Party and the Indemnified Party in the conduct of the defense of such claim or (B) there are specific defenses or claims available to the Indemnified Party that are different from or additional to those available to the Indemnifying Party. In the case of the foregoing clause (ii), the Indemnifying Party shall keep the Indemnified Party reasonably informed with respect to such Third Party Claim and cooperate with the Indemnified Party in connection therewith.
- 100 -
(f) Each party shall cooperate, and cause its Affiliates to cooperate, in the defense or prosecution of any Third Party Claim and shall furnish or cause to be furnished such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials or appeals, as may be reasonably requested in connection therewith.
(g) The foregoing procedures set forth in this Section 12.03 shall not apply with regard to (i) any claim for indemnification in respect of False Claims Act Litigation, the procedures for which shall be governed solely by Section 12.04 (subject to Section 12.04(d)) or (ii) any Actions listed in Schedule 4.11 that are Excluded Liabilities, provided that no Buyer Indemnified Party has been joined as a party in such Action.
Section 12.04. Third Party Claims Procedures Involving False Claims Act Litigation .
(a) The Indemnifying Sellers and the Buyers acknowledge and agree that *** shall control and appoint lead counsel for the defense of any suit, action or proceeding by any third party constituting False Claims Act Litigation (including United States ex rel. Conrad v. Actavis mid-Atlantic , et al ., No. 1:02-cv-11738), and acknowledge and agree that any Damages arising from such False Claims Act Litigation would constitute for *** purposes of this Agreement.
(b) The *** shall obtain the prior written consent of *** before entering into any settlement of any False Claims Act Litigation if (i) the amount of such settlement, when aggregated with all other Damages to be indemnified hereunder with respect to False Claims Act Litigation, would be in excess of the aggregate available FCA Settlement Agreement Escrow Amount or the amount of any State FCA Settlement Amount that was deposited in the Escrow Account, as applicable, and the cash amounts available to Healthpoint to pay such settlement amount, including amounts obtained from the Shareholders pursuant to the undertaking contained in Section 6.14 (and Healthpoint provides Buyer Domestic with evidence satisfactory to Buyer Domestic in its reasonable judgment of the Indemnifying Sellers ability to obtain from the Shareholders such required amount or that adequate provision has otherwise been made in respect of liabilities and obligations pursuant to such settlement), (ii) any federal, state or local government takes action in furtherance of, or indicates it may take action to seek exclusion, debarment or suspension from any government program or to seek any other non-monetary remedy that would reasonably be expected to impose any prohibition or material limitation on sales, or reimbursement with respect to sales, of any Product by the Business after Closing (and Healthpoint has not provided evidence satisfactory to Buyer Domestic in its reasonable judgment that such action or intent to take action has subsequently been rescinded by the applicable federal, state or local government) or (iii) such settlement requires execution of a corporate integrity agreement or any similar agreement impacting any Buyer Party or its Affiliates or any of the Products.
(c) The *** shall keep *** reasonably informed with respect to any False Claims Act Litigation, and the *** shall furnish or cause to be furnished such records, information and testimony as reasonably requested by *** with respect to the False Claims Act Litigation.
(d) Notwithstanding anything to the contrary contained in this Section 12.04, in the event Buyer Domestic or any of its Affiliates is joined as a defendant at any time in any
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 101 -
False Claims Act Litigation, such False Claims Act Litigation shall thereafter be subject to the procedures set forth in Section 12.03 (including the rights of Buyer Domestic and its Affiliates to participate in the defense of such matter in accordance with Section 12.03), rather than the procedures set forth in this Section 12.04.
Section 12.05. Direct Claim Procedures . In the event an Indemnified Party has a claim for indemnity under Section 12.02 against an Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party agrees to give prompt notice in writing of such claim to the Indemnifying Party. Such notice shall set forth in reasonable detail such claim and the basis for indemnification (taking into account the information then available to the Indemnified Party). The failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent such failure shall have materially and adversely prejudiced the Indemnifying Party. If the Indemnifying Party does not notify the Indemnified Party within 60 days following the receipt of a notice with respect to any such claim that the Indemnifying Party disputes its indemnity obligation to the Indemnified Party for any Damages with respect to such claim, such Damages shall be conclusively deemed a liability of the Indemnifying Party and the Indemnifying Party shall promptly pay to the Indemnified Party any and all Damages arising out of such claim. If the Indemnifying Party has timely disputed its indemnity obligation for any Damages with respect to such claim, the parties shall proceed in good faith to negotiate a resolution of such dispute and, if not resolved through negotiations, such dispute shall be resolved by litigation in an appropriate court of jurisdiction determined pursuant to Section 14.07.
Section 12.06. Indemnification Payments; Joint and Several Liability of Seller Parent .
(a) Any payment required to be made by an Indemnifying Seller to a Buyer Party for Damages (i) for any Warranty Breach (other than Warranty Breaches of any Fundamental Seller Representation) pursuant to Section 12.02(a)(i) and (ii) arising out of the *** Litigation pursuant to Section 12.02(a)(iii) shall be satisfied, subject to the Cap, solely from the funds held in the Escrow Account and, upon the depletion of the Escrow Account, there shall be no further recoveries by the Buyer Indemnified Parties whatsoever with respect to such Warranty Breaches (other than Warranty Breaches of any Fundamental Seller Representation) other than in respect of claims based solely on theories of fraud.
(b) Any payment required to be made by an Indemnifying Seller to a Buyer Party pursuant to this Article 12 in respect of any matter other than Damages (i) for a Warranty Breach that are the subject of the preceding Section 12.06(a) or (ii) arising out of the *** Litigation pursuant to Section 12.02(a)(iii) shall be satisfied first from the Escrow Account and, if the funds then available in the Escrow Account (reducing such available amount by the amount of any pending claims) are insufficient to fully satisfy such payment, then Seller Parent shall be jointly and severally liable with the Indemnifying Seller for such amount as though Seller Parent was an Indemnifying Seller and shall promptly pay to the applicable Buyer Party the amount of such payment not satisfied from the Escrow Account or by payment by the Indemnifying Sellers.
(c) Sellers and Buyer Domestic agree to promptly cause the Escrow Agent to release amounts held in the Escrow Account in accordance with the terms of the Escrow Agreement sufficient to satisfy any payments contemplated to be satisfied from the Escrow Account in accordance with this Section 12.06.
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 102 -
(d) The provisions of this Section 12.06 shall not limit any Buyer Indemnified Partys rights or remedies for any claims, including indemnification claims, based on fraud by Sellers or any of their Affiliates.
Section 12.07. Release of Escrow Account . Sellers and Buyer Domestic agree to cause the Escrow Agent to release amounts held in the Escrow Account to Healthpoint pursuant to the terms of the Escrow Agreement in the amounts and at the times set forth below:
(a) On the fifth Business Day after the earlier of (a) nine months after the Closing Date or (b) the date the matters described in the definition of Pending Regulatory Reviews are finally resolved, an amount equal to $*** (or such lesser amount as is then available in the Escrow Account), minus the sum of (without duplication) (i) the aggregate dollar amount of all indemnification claims relating to the covenant set forth in Section 6.12 pending as of such date plus (ii) the aggregate dollar amount of all indemnification claims relating to the covenant set forth in Section 6.12 that have been paid prior to such date or are to be paid as of such date.
(b) Upon the entry of a final, non-appealable judgment in all pending False Claims Act Litigation or the execution of an FCA Settlement Agreement (the date of entry of such judgment or execution of the FCA Settlement Agreement, the FCA Release Date ), an amount equal to the FCA Settlement Agreement Escrow Amount (or such lesser amount as is then available in the Escrow Account) minus the sum of (without duplication) (i) the aggregate dollar amount of all indemnification claims pursuant to Section 12.02(a)(ii) in respect of the False Claims Act Litigation pending as of such date plus (ii) the aggregate dollar amount of all indemnification claims pursuant to Section 12.02(a)(ii) in respect of the False Claims Act Litigation that have been paid prior to such date or are to be paid as of such date plus (iii) the State FCA Settlement Amount in respect of states that have not reached a settlement with, or obtained a final, non-appealable judgment against, Healthpoint with respect to the False Claims Act Litigation; provided , however , that Buyer Domestic and Sellers shall take all necessary actions to cause (A) the prompt release from the Escrow Account of any amounts (up to the amount of the FCA Settlement Agreement Escrow Amount remaining in the Escrow Account) due and owing under the FCA Settlement Agreement, a settlement with any state or the entry of a final, non-appealable judgment and (B) the payment, on behalf of Sellers, of such amounts directly to the Governmental Authorities entitled to payment under the FCA Settlement Agreement, such settlement or such judgment; provided , further , that if the sum of (1) any amounts due and owing under the FCA Settlement Agreement, (2) any settlement with any state or (3) any final, non-appealable judgment in respect of the False Claims Act Litigation exceeds the FCA Settlement Agreement Escrow Amount remaining in the Escrow Account, then Healthpoint shall (A) cause each Shareholder, pursuant to Section 6.14, to promptly pay to Healthpoint such Shareholders pro rata portion of the amount by which the sum of (1) and (2) exceeds the FCA Settlement Agreement Escrow Amount remaining in the Escrow Account, (B) promptly deposit any such amounts in respect of the State FCA Settlement Amount into the Escrow Account
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 103 -
and (C) promptly pay any such amounts in respect of the FCA Settlement Agreement to the Governmental Authorities entitled to payment under the FCA Settlement Agreement, such settlement or such judgment.
(c) Once all state Governmental Authorities that did not agree to become a party to the FCA Settlement Agreement have either entered into a settlement with Sellers and been paid or a final, non-appealable judgment with respect to all pending False Claims Act Litigation has been rendered with respect to each state that has not entered into a settlement and any judgment paid, an amount equal to the excess, if any, of the State FCA Settlement Amount over the aggregate amount paid to such state Governmental Authorities in respect of all such settlements and judgments; provided , however , that Buyer Domestic and Sellers shall take all necessary actions to cause (i) the prompt release from the Escrow Account of any amounts (up to the amount of the State FCA Settlement Amount remaining in the Escrow Account) required to be paid to a state either as a result of a settlement with such state or the entry of a final, non-appealable judgment with respect to all pending False Claims Act Litigation of such state and (ii) the payment, on behalf of Sellers, of such amounts directly to the state entitled to payment pursuant to such settlement or judgment; and provided further that that Buyer Domestic and Sellers shall take all necessary actions to cause the prompt release from the Escrow Account of any amounts (up to the amount of the State FCA Settlement Amount remaining in the Escrow Account) allocated to any non-settling state that has not commenced a Xenaderm-related action within *** following the Closing Date.
(d) On the *** of the Closing Date, an amount equal to $*** (or such lesser amount as is then available in the Escrow Account), minus the sum of (without duplication) (i) the aggregate dollar amount of all indemnification claims pursuant to Section 12.02(a) pending as of such date plus (ii) the aggregate dollar amount of all indemnification claims pursuant to Section 12.02(a) that have been paid prior to such date or are to be paid as of such date.
(e) On the three-year anniversary of the Closing Date,
(i) if the FCA Release Date has occurred prior to such date, all remaining Escrow Amounts minus the sum of (without duplication) (A) the aggregate dollar amount of all indemnification claims pursuant to Section 12.02(a) pending as of such date and (B) any remaining State FCA Settlement Amount; or
(ii) if the FCA Release Date has not occurred prior to such date, all remaining Escrow Amounts minus the sum of (without duplication) (A) the aggregate dollar amount of all indemnification claims pursuant to Section 12.02(a) pending as of such date and (B) any remaining FCA Settlement Agreement Escrow Amount.
(f) Any amount that would have been released pursuant to Section 12.07(a), (b), (d) or (e) but was withheld from such release on account of a pending indemnification claim shall continue to be held by the Escrow Agent subject to the terms
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
- 104 -
and conditions of the Escrow Agreement until such time as the applicable pending claim is finally resolved in accordance with this Article 12. Sellers and Buyer Domestic agree to promptly following resolution of such claim cause the Escrow Agent to release to Healthpoint any portion of such amount that is not required to be paid to the applicable Indemnified Party in accordance with the resolution of such pending claim.
(g) In no event shall any portion of the State FCA Settlement Amount remaining in the Escrow Account be used to satisfy any obligations of Sellers hereunder other than payments to state Governmental Authorities that did not participate in the FCA Settlement Agreement.
Section 12.08. Exclusive Remedy . Without limiting any claims arising out of the other Transaction Documents, after the Closing, except as otherwise provided in this Agreement (including the provisions of this Agreement that provide for remedies involving injunctive relief or specific performance), the sole and exclusive recourse of the Buyer Indemnified Parties, on the one hand, and the Seller Indemnified Parties, on the other, in connection with all matters in connection with this Agreement (whether based on contract, tort, strict liability, common law, other laws or otherwise) shall be the indemnity set forth in this Article 12, other than in respect of causes of action based solely on theories of fraud or for specific performance of any breach of any of the covenants, agreements and obligations hereunder or in any certificate or other writing delivered pursuant hereto or in connection herewith that are required to be performed following the Closing Date (including Section 6.08). The provisions of this Article 12 shall be inapplicable to the other Transaction Documents.
TERMINATION
Section 13.01. Grounds for Termination . This Agreement may be terminated at any time prior to the Closing:
(a) by mutual written agreement of Seller Parent and Buyer Domestic;
(b) by either Seller Parent or Buyer Domestic if the Closing shall not have been consummated on or before 11:59 p.m., Eastern Time, on December 31, 2012 (the End Date ); provided , that the right to terminate this Agreement pursuant to this Section 13.01(b) shall not be available to any party whose breach of any provision of this Agreement results in the failure of the Closing to be consummated on or before the End Date; and provided further if all the conditions to the Closing other than Section 11.01(a) have been satisfied (other than conditions which, by their nature, will be satisfied at the Closing) or waived (to the extent waivable hereunder), then the End Date shall be extended to the earlier of (i) March 29, 2013 and (ii) five (5) Business Days following satisfaction of the condition set forth in Section 11.01(a) (it being understood that the right to assert that a condition has not been satisfied pursuant to this proviso shall not be available to any party whose breach of any provision of this Agreement results in the failure of such condition to be satisfied);
- 105 -
(c) by Buyer Domestic if a breach of any representation or warranty or failure to perform any covenant, obligation or agreement on the part of a Seller set forth in this Agreement shall have occurred that would cause any condition set forth in Section 11.02(a) not to be satisfied, and either (i) if such breach or failure to perform is of a type that can be cured, such breach or failure to perform shall not have been cured within 30 days by such Seller after receiving notice from Buyer Domestic of such breach or failure to perform or (ii) such condition is incapable of being satisfied by the End Date; provided that no Buyer Party is then in breach of this Agreement so as to cause any of the conditions set forth in Section 11.01 or Section 11.03 not to be satisfied;
(d) by Seller Parent if a breach of any representation or warranty or failure to perform any covenant, obligation or agreement on the part of any Buyer Party set forth in this Agreement shall have occurred that would cause any condition set forth in Section 11.03(a) not to be satisfied, and either (i) if such breach or failure to perform is of a type that can be cured, such breach or failure to perform shall not have been cured within 30 days by such Buyer Party after receiving notice from Seller Parent of such breach or failure to perform or (ii) such condition is incapable of being satisfied by the End Date; provided that no Seller is then in breach of this Agreement so as to cause any of the conditions set forth in Section 11.01 or Section 11.02 not to be satisfied; or
(e) by either Seller Parent or Buyer Domestic if there shall be any Applicable Law that makes consummation of the transactions contemplated hereby illegal or otherwise prohibited or if consummation of the transactions contemplated hereby would violate any nonappealable final order, decree or judgment of any Governmental Authority having competent jurisdiction; provided , however , that the Party seeking to terminate this Agreement pursuant to this Section 13.01(e) shall have (i) complied in all material respects with its covenants, agreements and obligations hereunder required to be performed by it as of the date thereof and (ii) used its commercially reasonable efforts to prevent the entry of and to remove such final order, decree or judgment.
The party desiring to terminate this Agreement pursuant to this Section 13.01 (other than pursuant to Section 13.01(a)) shall give notice of such termination to the other party.
Section 13.02. Effect of Termination . If this Agreement is terminated as permitted by Section 13.01, such termination shall be without liability of either party (or any stockholder, member, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement; provided that if such termination shall result from the (i) willful failure of either party to fulfill a condition to the performance of the obligations of the other party or (ii) willful failure to perform a covenant of this Agreement, such party shall be fully liable for any and all Damages incurred or suffered by the other party as a result of such failure or breach. The provisions of Sections 7.01, 14.02, 14.05, 14.06, 14.07, 14.08 and 14.15 shall survive any termination hereof pursuant to Section 13.01.
- 106 -
MISCELLANEOUS
Section 14.01. Notices . All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission and electronic mail (e-mail) transmission, so long as a receipt of such e-mail is requested and received) and shall be given,
if to the Buyer Parties, to:
c/o Smith & Nephew plc
15 Adam Street
London
WC2N 6LA
United Kingdom
Attention: Company Secretary
Facsimile No.: +44 (0)20 7930 3353
E-mail: Company.Secretary@smith-
nephew.com
With a copy to:
Sidley Austin LLP
One South Dearborn
Chicago, Illinois 60603
Attention: Pran Jha
Facsimile No.: 312-853-7036
E-mail: pjha@sidley.com
and a copy by e-mail to Company.Secretary@smith-nephew.com
if to Sellers, to:
c/o Healthpoint Parent Pharmaceuticals, Inc.
3909 Hulen Street
Fort Worth, TX 76107
Attention: H. Paul Dorman
Facsimile No.: 817-900-4101
E-mail: Paul.Dorman@dfb.com
- 107 -
With a copy to:
Fulbright & Jaworski L.L.P.
300 Convent Street, Suite 2100
San Antonio, Texas 78205-3792
Attention: Daryl Lansdale
Facsimile No.: 210 -270 -7205
E-mail: dlansdale@fulbright.com
or such other address or facsimile number as such party may hereafter specify for the purpose by notice to the other parties hereto. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.
Section 14.02. Amendments and Waivers .
(a) Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of a waiver, by the party against whom the waiver is to be effective, or in the case of an amendment, by each of Buyer Domestic and Seller Parent.
(b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative.
Section 14.03. Disclosure Schedule References . The parties hereto agree that any reference in a particular Section of the Seller Disclosure Schedule shall only be deemed to be an exception to (or, as applicable, a disclosure for the purposes of) (a) the representations and warranties (or covenants, as applicable) of the relevant party that are contained in the corresponding Section of this Agreement and (b) any other representations and warranties of such party that is contained in this Agreement, but only if the relevance of that reference as an exception to (or a disclosure for the purposes of) such representations and warranties would be reasonably apparent, without reference to the contents of any underlying documents referenced therein. The parties acknowledge and agree that the Seller Disclosure Schedule may include certain items and information solely for informational purposes for the convenience of the Buyer Parties and the disclosure by a Seller of any matter in the Seller Disclosure Schedule shall not be deemed to constitute an acknowledgement by such Seller that the matter is required to be disclosed by the terms hereof or that the matter is material, nor shall such information (or the specification of any dollar amount in any representation or warranty) be deemed to establish a standard of materiality. The parties hereto agree that the Seller Disclosure Schedule is not intended to constitute, and shall not be construed as constituting, representations and warranties of the Sellers except to the extent expressly provided in this
- 108 -
Agreement, and nothing in the Seller Disclosure Schedule is intended to broaden the scope of any representation, warranty or covenant of the Sellers contained in this Agreement. The information contained in this Agreement, in the Seller Disclosure Schedule and exhibits hereto is disclosed solely for purposes of this Agreement, and no information contained herein or therein shall be deemed to be an admission by any party hereto to any third-party of any matter whatsoever (including any violation of law or breach of contract).
Section 14.04. Expenses . Except as otherwise provided herein, all costs and expenses incurred in connection with this Agreement or the other Transaction Documents shall be paid by the party incurring such cost or expense.
Section 14.05. Successors and Assigns . The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of each other party hereto; except that any Buyer Party may transfer or assign its rights and obligations under this Agreement, in whole or from time to time in part, to (a) one or more of its Affiliates at any time and (b) after the Closing Date, to any Person; provided that no such transfer or assignment shall relieve such Buyer Party of its obligations hereunder or enlarge, alter or change any obligation of any other party hereto or due to such Buyer Party.
Section 14.06. Governing Law . This Agreement shall be governed by and construed in accordance with the law of the State of Delaware, without regard to the conflicts of law rules of such state.
Section 14.07. Jurisdiction . The parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought and determined in the Court of Chancery of the State of Delaware (or, if the Chancery Court determines that it does not have subject matter jurisdiction, in any appropriate Delaware State or federal court), and that any cause of action arising out of this Agreement shall be deemed to have arisen from a transaction of business in the State of Delaware, and each of the parties hereby irrevocably consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 14.01 shall be deemed effective service of process on such party.
Section 14.08. WAIVER OF JURY TRIAL . EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH SUCH PARTY
- 109 -
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY AND (D) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS IN THIS SECTION 14.08.
Section 14.09. Counterparts; Effectiveness; No Third Party Beneficiaries . This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by all of the other parties hereto. Until and unless each party has received a counterpart hereof signed by the other party hereto, this Agreement shall have no effect and no party shall have any right or obligation hereunder (whether by virtue of any other oral or written agreement or other communication). In the event that any signature is delivered by facsimile transmission, or by e-mail delivery of a .pdf format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or .pdf format data file signature page were an original thereof. No provision of this Agreement is intended to confer any rights, benefits, remedies, obligations or liabilities hereunder upon any Person other than the parties hereto and their respective successors and assigns.
Section 14.10. Entire Agreement . This Agreement, the Confidentiality Agreement, the Non-Compete Agreements and the other Transaction Documents constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this Agreement.
Section 14.11. Bulk Sales Laws . Each Buyer Party and each Seller each hereby waive compliance by Sellers with the provisions of the bulk sales, bulk transfer or similar laws of any state. For the avoidance of doubt, no liability incurred by any Buyer Party or Seller as a result of a Sellers failure to comply with any provisions of such laws shall be treated as a Transfer Tax under Section 9.02(c) of this Agreement.
Section 14.12. Severability . If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other Governmental Authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.
Section 14.13. Specific Performance . Each of the parties to this Agreement acknowledges and agrees that the other parties would be irreparably damaged in the event that any of the terms or provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Therefore, notwithstanding anything to the contrary set forth in this Agreement, each party to this Agreement hereby agrees that the other parties shall be
- 110 -
entitled to an injunction or injunctions to prevent breaches of any of the terms or provisions of this Agreement (including, for avoidance of doubt, Sections 6.08 and 6.14 hereof), and to enforce specifically the performance by any other party under this Agreement, and each party hereby agrees to waive the defense (and not to interpose as a defense or in opposition) in any such suit that the other parties have an adequate remedy at law, and hereby agrees to waive any requirement to post any bond in connection with obtaining such relief. The equitable remedies described in this Section 14.13 shall be in addition to, and not in lieu of, any other remedies at law or in equity that the parties to this Agreement may elect to pursue.
Section 14.14. Time is of the Essence . Time is of the essence with respect to the performance of this Agreement. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. Whenever any action must be taken hereunder on or by a day that is not a Business Day, then such action may be validly taken on or by the next day that is a Business Day.
Section 14.15. Non-Recourse . This Agreement may only be enforced against, and any claim, obligation, liability, action, suit or other legal proceeding (whether in contract or tort, in law or in equity, or granted by statue) based upon, arising out of, or related to this Agreement (including any representation or warranty made in, in connection with, or as an inducement to, this Agreement), or the negotiation, execution or performance of this Agreement, may only be brought against the entities that are expressly named as parties hereto and only with respect to the specific obligations set forth herein. No past, present or future director, officer, employee, incorporator, manager, member, partner, shareholder, Affiliate, agent, attorney or other representative of any party hereto of or any Affiliate of any party hereto, or any past, present or future director, officer, employee, incorporator, manager, member, partner, shareholder, Affiliate, agent, attorney or other representative of any of the foregoing, or any of their successors or permitted assigns (collectively, Nonparty Affiliates ), shall have any liability (whether in contract or tort, in law or in equity, or granted by statute) for any obligations or liabilities of any party hereto under this Agreement or for any claim or Action based on, in respect of or by reason of the transactions contemplated hereby, and, to the maximum extent permitted by law, each Buyer Party and Seller Party hereby waives and releases all such liabilities, claims, causes of action and obligation against any such Nonparty Affiliate. To the maximum extent permitted by law, (a) each Buyer Party hereby waives and releases any and all rights, claims, demands or causes of action that may otherwise be available at law or in equity, or granted by statute, to avoid or disregard the entity form of a Seller Party or otherwise impose liability of a Seller Party under this Agreement on any Nonparty Affiliate (including without limitation any Shareholder), whether granted by statute or based on theories of equity, agency, control, instrumentality, alter ego, domination, sham, single business enterprise, piercing the corporate veil, fraudulent transfer, improper distribution, unfairness, undercapitalization or otherwise, and (b) except (i) as expressly provided in the Non-Compete Agreements and (ii) with respect to the performance obligations of Seller Parent in its capacity as a Seller hereunder, each Buyer Party disclaims any reliance upon any Nonparty Affiliates (including without limitation any Shareholder) with respect to the performance of this Agreement or any representation or warranty made in, in connection with or as an inducement to this Agreement. Notwithstanding anything herein to the contrary, (i) nothing herein shall affect any rights of a Buyer Party under any Non-Compete Agreement, (ii) nothing herein shall affect any rights of a Buyer Party against any Person (including a Nonparty Affiliate) with respect to any liability, claim, cause of action or
- 111 -
other obligation other than any obligation or liability of any Seller Party under this Agreement and (iii) nothing herein shall affect any rights of a Buyer Party against any Person in respect of fraud (or the ability to demonstrate any element thereof) by such Person.
- 112 -
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
SMITH & NEPHEW, INC. | ||
By: |
/s/ Cyrille Petit |
|
Name: Cyrille Petit | ||
Title: Chief Corporate Development Officer | ||
SMITH & NEPHEW INC. | ||
By: |
/s/ Cyrille Petit |
|
Name: Cyrille Petit | ||
Title: Chief Corporate Development Officer | ||
SMITH & NEPHEW, INC. | ||
By: |
/s/ Cyrille Petit |
|
Name: Cyrille Petit | ||
Title: Chief Corporate Development Officer | ||
SMITH & NEPHEW ORTHOPAEDICS AG | ||
By: |
/s/ Cyrille Petit |
|
Name: Cyrille Petit | ||
Title: Chief Corporate Development Officer | ||
SUDBURY ACQUISITIONS N.V. | ||
By: |
/s/ Cyrille Petit |
|
Name: Cyrille Petit | ||
Title: Chief Corporate Development Officer |
DFB PHARMACEUTICALS, INC. | ||
By: |
/s/ H. Paul Dorman |
|
Name: H. Paul Dorman | ||
Title: Chairman & CEO | ||
HEALTHPOINT, LTD. | ||
By: |
/s/ H. Paul Dorman |
|
Name: H. Paul Dorman | ||
Title: Chairman & CEO | ||
HEALTHPOINT INTERNATIONAL, LLC | ||
By: |
/s/ H. Paul Dorman |
|
Name: H. Paul Dorman | ||
Title: Chairman & CEO | ||
DFB BIOTECH OF CURAÇAO, N.V. | ||
By: |
/s/ H. Paul Dorman |
|
Name: H. Paul Dorman | ||
Title: Chairman & CEO | ||
HEALTHPOINT CANADA ULC | ||
By: |
/s/ H. Paul Dorman |
|
Name: H. Paul Dorman | ||
Title: Chairman & CEO |
- 2 -
Exhibit 4(a)(iv)
AMENDMENT TO THE TRANSACTION AGREEMENT
This AMENDMENT TO THE TRANSACTION AGREEMENT (this Amendment ), dated as of December 21, 2012, by and between DFB Pharmaceuticals, Inc., a Texas corporation ( Seller Parent ), and Smith & Nephew, Inc., a Delaware corporation ( Buyer Domestic ).
WHEREAS, Seller Parent, Buyer Domestic, Smith & Nephew Inc., a Canada corporation, Smith & Nephew, Inc., a Puerto Rican corporation, Smith & Nephew Orthopaedics AG, a limited company incorporated under the laws of Switzerland, Sudbury Acquisitions N.V., a Curaçao limited liability company, Healthpoint, Ltd., a Texas limited partnership ( Healthpoint ), Healthpoint International, LLC, a Texas limited liability company, DFB Biotech of Curaçao, N.V., a limited liability company incorporated under the laws of the Netherland Antilles and existing under the laws of Curaçao, and Healthpoint Canada ULC, a Nova Scotia Unlimited Liability Corporation are parties to that certain Transaction Agreement dated as of November 27, 2012 (the Transaction Agreement ), providing for the acquisition of the Purchased Assets and assumption of the Assumed Liabilities by the Buyer Parties; and
WHEREAS, the parties desire to amend the Transaction Agreement as provided in this Amendment in accordance with Section 14.02 of the Transaction Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained in this Amendment, and intending to be legally bound, Seller Parent and Buyer Domestic hereby agree as follows:
1. The defined term State FCA Settlement Amount in Section 1.01 of the Transaction Agreement is hereby amended and restated to read in its entirety as follows:
State FCA Settlement Amount means an aggregate amount equal to $***, which amount is to be used to pay costs of settlement of the False Claims Act Litigation with each state of the United States and the District of Columbia, with $*** of such amount established based upon the share of the state portion of the total settlement as proposed by the National Association of Medicaid Fraud Control Units (NAMFCU) with respect to the states whose attorneys have indicated they will recommend executing the FCA State Template Settlement Agreement and $*** of such amount determined in accordance with the methodology set forth on Schedule 1.01(h).
2. Sections 2.01(1) and (m) of the Transaction Agreement shall be amended and restated in their entirety as set forth below and an additional Section 2.01(n) shall be added as set forth below:
(l) all transferable Permits, including Environmental Permits;
(m) all goodwill associated with the Business; and
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
(n) to the extent transferable, all of the bank accounts of Healthpoint listed in Schedule 2.01(n); provided, that the transfer of ownership of such bank accounts shall not occur until Buyer Domestic has notified Sellers in writing that the Parties regulatory obligations under the Transition Services Agreement and obligations under the Subcontract have been discharged to the parties reasonable satisfaction and such agreements have been terminated or have expired by their terms.
3. Section 2.02(i) of the Transaction Agreement shall be amended and restated in its entirety as set forth below:
(i) all bank accounts, whether or not used in the Business, other than those described in Section 2.01(n).
4. Section 6.13 of the Transaction Agreement shall be amended and restated in its entirety as set forth below:
Section 6.13. Name Change . Promptly upon request by Buyer Domestic, and assuming such actions would not materially interfere with (a) the performance of the Sellers of their obligations under the Subcontract or the Transition Services Agreement (or the applicable Buyer Parties have waived any nonperformance resulting from such actions) or (b) the Sellers performance of any reporting obligations to Governmental Authorities relating thereto, the Sellers shall, and shall cause their applicable Affiliates to, change their respective entity names to a name that does not contain (and that is not confusingly similar to) the name Healthpoint. Promptly following the Closing, and in any event no later than 15 days following the Closing Date, the Sellers shall use commercially reasonable efforts, at Buyer Domestics expense, to assist Buyer Domestic in obtaining the rights to operate under the assumed name Healthpoint Biotherapeutics (including revoking or withdrawing any existing assumed name filings with respect to such name and, if necessary, providing letters of consent regarding the same to any applicable Governmental Authorities). From and after the Closing, (i) Sellers shall not, directly or indirectly, use and shall not license or authorize any third party to use any name, slogan, logo or trademark which is similar or deceptively similar to any of the trademarks or any other name used in connection with the Business; and (ii) Sellers shall not use the names Healthpoint and Healthpoint Biotherapeutics in any manner that would constitute misuse, impairment, disparagement or dilution of such names or the goodwill associated with one or more of such names and shall not operate any business under the names Healthpoint and Healthpoint Biotherapeutics except to provide any transition services to the Buyer Parties in accordance with the Transition Services Agreement.
5. Section 6.10(b) of the Transaction Agreement is hereby amended and restated to read in its entirety as follows:
(b) Each Seller shall cause each signatory to the Seller FDA Letter to duly execute the Seller FDA Letter as soon as all required information is available, but in no event later than thirty (30) days following the Closing Date.
6. The following Section 12.03(h) shall be added to the Transaction Agreement:
(h) The foregoing procedures set forth in this Section 12.03 shall not apply to the *** Litigation, which shall be governed by Section 7.07 and the Joint Defense Agreement referenced therein.
7. Section 12.07(b) of the Transaction Agreement is hereby amended to read in its entirety as follows: (b) Intentionally Omitted.
8. Section 12.07(c) is hereby amended and restated to read in its entirety as follows:
(c) Following the Closing, Buyer Domestic and the Sellers shall, upon the entry into a settlement with any state or the entry of a final, non-appealable judgment with respect to the pending False Claims Act Litigation relating to such state, take all necessary actions to cause (i) the prompt release from the Escrow Account of any amounts due to such state (up to the amount of the State FCA Settlement Amount remaining in the Escrow Account), (ii) the payment, on behalf of Sellers, of such amounts directly to the applicable state and (iii) the release to Sellers of an amount equal to the excess (up to the amount of the State FCA Settlement Amount remaining in the Escrow Account), if any, of (A) the amount set forth opposite such states name in the column entitled State Settlement Share for those states listed as States Recommending Settlement or the column entitled Escrow Amount for those states listed as States Not Recommending Settlement on Schedule 12.07(c) over (B) the amount required to be released from the Escrow Account and paid to such state in accordance with clauses (i) and (ii); provided , however , that the release of any amounts described in clause (iii) of this sentence shall not be made until such time as the pending False Claims Act Litigation relating to the State of *** has been finally resolved through settlement or through the entry of a final, non-appealable judgment, and any releases pursuant to clause (iii) shall be reduced by an amount equal to the excess, if any, of the amounts due to the State of Indiana in connection with such resolution over the amount set forth opposite Indianas name in the column entitled Escrow Amount on Schedule 12.07(c). Buyer Domestic and Sellers shall take all necessary actions to cause the prompt release from the Escrow Account of any amounts (up to the amount of the State FCA Settlement Amount remaining in the Escrow Account) allocated to any state listed as States Who Have Not Yet Provided Notification Regarding Recommendation of Settlement that has not commenced a Xenaderm-related action within *** following the Closing Date.
9. Section 12.07(e) of the Transaction Agreement is hereby amended and restated to read in its entirety as follows:
(e) On the three-year anniversary of the Closing Date, all remaining Escrow Amounts minus the sum of (without duplication) the aggregate dollar amount of all indemnification claims pursuant to Section 12.02(a) pending as of such date.
10. Section 12.07(g) of the Transaction Agreement is hereby amended and restated to read in its entirety as follows:
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
(g) In no event shall any portion of the State FCA Settlement Amount remaining in the Escrow Account be used to satisfy any obligations of Sellers hereunder other than payments to Governmental Authorities of the applicable states in accordance with Section 12.07(c).
11. Buyer Domestic agrees that it will cause to be paid to JPMorgan Chase, N.A. and McKnight Title, on behalf of the Sellers, the amounts owed by Sellers to JPMorgan Chase, N.A., as specified in payoff letters delivered by JPMorgan Chase, N.A. Such payment on behalf of Sellers shall be deemed payment to Sellers pursuant to Section 3.02(a)(iii) of the Transaction Agreement.
12. The parties acknowledge and agree that (i) the definition of Retained Employee shall be amended and restated to read in its entirety as follows:
Retained Employee means ***.
and (ii) the applicable Employment Agreement and Confidentiality, Non-Competition and Intellectual Property Assignment Agreement to which Maxwell Lea is party shall not be an Assumed Employee Agreement and Assumed Covenant Agreement, respectively; provided , however , that the parties acknowledge that Buyer Domestic remains in discussions with Maxwell Lea regarding his employment status, and should Maxwell Lea elect to become employed by Buyer Domestic or one of its Affiliates within 60 days following the Closing, the amendments set forth in this Section 12 (but, for avoidance of doubt, not the amendments contained in the remainder of this Amendment) shall become null and void and shall be of no further force and effect.
13. At the Closing Buyer Domestic shall wire to Healthpoint $***, representing Healthpoints estimate of 2012 bonuses that Buyer Domestic is obligated to reimburse pursuant to Section 10.05(f) of the Transaction Agreement and final December 2012 payroll (including payroll taxes) for the period from December 15, 2012 through December 28, 2012. The parties agree that the portion of the final December 2012 payroll for the period through and including December 21, 2012 is an Assumed Liability (and shall be taken into account in determining Closing Net Assets, without regard to the effect of the payment contemplated by this Section 13), and that the portion of the final December 2012 payroll for the period beginning on December 22, 2012 is being paid to Healthpoint for administrative convenience to pay the Transferred Employees for the period from December 22, 2012 through and including December 28, 2012, and such amount shall not be an Assumed Liability (and shall not be taken into account in determining Closing Net Assets). Following the Closing, Buyer Domestic and Healthpoint shall cooperate in reconciling such estimate to the actual amount of bonuses and payroll paid by Healthpoint, and if Healthpoint paid more than $*** in respect of such matters, then Buyer Domestic shall pay such difference to Healthpoint, and if Healthpoint paid less than $*** in respect of such matters, then Healthpoint shall reimburse such difference to Buyer Domestic. Any dispute between Buyer Domestic and Healthpoint with respect to such reconciliation shall be resolved by the Accounting Referee in accordance with the procedures set forth in Sections 3.04(c) and 3.04(d) of the Transaction Agreement. Buyer Domestic and Seller Parent acknowledge that the 401(k)
*** | Material has been omitted pursuant to a request for confidential treatment and has been filed separately. |
matching contributions for the year ended December 2012 cannot be computed until after December 31, 2012 and therefore will not be paid by Healthpoint on or before Closing, and that Buyer Domestic shall reimburse Healthpoint for such matching contribution upon receipt of notice from Healthpoint that such payment has been made, which notice shall show in reasonable detail the calculation of such matching contribution.
14. Buyer Domestic acknowledges and agrees that the letter granting an extension of the Transition Services Agreement among DPT Laboratories, Ltd., Renaissance Pharma (U.S.) Holdings, Inc., Renaissance SSP Holdings, Inc. and DFB Pharmaceuticals, Inc., dated as of June 29, 2012 (the DPT TSA), in the form provided by Sellers to Buyer Domestic prior to the date hereof, shall be deemed to satisfy the closing condition specified in Section 11.02(d) of the Transaction Agreement relating to receipt of the Required Consent relating to the DPT TSA.
15. Ratification of Agreement . Except as expressly provided in this Amendment, all of the terms, covenants, and other provisions of the Transaction Agreement are hereby ratified and confirmed and shall continue to be in full force and effect in accordance with their respective terms. From and after the date hereof, all references to the Transaction Agreement shall refer to the Transaction Agreement as amended by this Amendment. Capitalized terms used but not defined in this Amendment shall have the meanings assigned to them in the Transaction Agreement.
16. Governing Law . This Amendment shall be governed by and construed in accordance with the law of the State of Delaware, without regard to the conflicts of law rules of such state.
17. Execution of Agreement; Counterparts; Electronic Signatures . This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective when each party hereto shall have received a counterpart hereof signed by all of the other parties hereto. Until and unless each party has received a counterpart hereof signed by the other party hereto, this Amendment shall have no effect and no party shall have any right or obligation hereunder (whether by virtue of any other oral or written agreement or other communication). In the event that any signature is delivered by facsimile transmission, or by e-mail delivery of a .pdf format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or .pdf format data file signature page were an original thereof. No provision of this Amendment is intended to confer any rights, benefits, remedies, obligations or liabilities hereunder upon any Person other than the parties hereto and their respective successors and assigns.
[Signature Page to Follow]
IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the date first above written.
DFB PHARMACEUTICALS, INC. | ||
By: |
/s/ H. Paul Dorman | |
Name: H. Paul Dorman |
||
Title: Chairman & CEO |
||
SMITH & NEPHEW, INC. |
||
By: |
/s/ Cyrille Petit | |
Name: Cyrille Petit |
||
Title: Chief Corporate Development Officer |
Exhibit 4 (c) (iii)
Dated 07/11/2012
EMPLOYMENT AGREEMENT
BETWEEN
(1) | SMITH & NEPHEW UK LIMITED | |
And | ||
(2) | JULIE BROWN |
07/11/2012
PARTIES
(1) | Smith & Nephew UK Limited whose registered office is at 15 Adam Street, London WC2N 6LA (We) or (Us) |
(2) | JULIE BROWN of 15 Adam Street, London WC2N 6LA (You) |
A | This Agreement sets out the terms and conditions that apply to your employment with Us. We also have a staff handbook that contains provisions relevant to your employment. If there is any conflict between that handbook and this Agreement, however, this Agreement prevails. |
B | The final section of the Agreement sets out definitions and general provisions that apply throughout the Agreement. |
C | Our offer of employment under this Agreement is conditional on the following: |
(a) | You must have the right to work in the UK and have provided Us with the documentary evidence of this (e.g. Your passport) that We are required to have under the Immigration, Asylum and Nationality Act 2006. If You do not have an unrestricted right to work in the UK, You are required to keep Us updated with any change to Your personal details and UK immigration status. We may provide Your data to the UK Border Agency to enable Us to fulfil our legal obligations.. |
(b) | You must not be subject to any restrictive covenants or other legal obligations which would prevent You from carrying out your job for Us. |
(c) | You represent and warrant that You have complied with all appropriate legal obligations and have not been charged or (to your knowledge) investigated with regard to any offence other than minor traffic violations or other, similar misdemeanours unrelated to Your work. In particular, You warrant that You have not been prohibited from being a director or been charged with any offence involving dishonesty or violence. We will carry out a background check and Your employment is subject to a satisfactory response. |
(d) | We receive satisfactory references with regard to your prior experience and employment history and satisfactory results to background searches. |
If these conditions are not satisfied and/or You have misled Us, then We have the right to terminate your employment without notice within a reasonable period of Us discovering this.
D | You confirm that by entering into this Agreement and working for Us that You are not in breach of any obligation to any third party or of any court order. |
E | You also confirm that You have disclosed to Us in writing details of all previous criminal convictions (other than those that are spent). |
INDEX
Section |
Description |
|
1 | Your Job | |
2 | Your Remuneration | |
3 | Protecting the Company Whilst You Are Employed | |
4 | Discipline and Grievance | |
5 | Sickness and Absence from Work | |
6 | Termination of Employment | |
7 | Protecting the Company After Your Employment Has Ended | |
8 | Miscellaneous and General Provisions |
SECTION ONE: YOUR JOB
1. | THE APPOINTMENT |
1.1 |
You are employed by Us as Chief Financial Officer of Smith & Nephew plc from January 1 st 2013 or such other date before or after that date being the earliest date on which You are able to secure a release from your existing employment contract, which You shall use reasonable endeavours to achieve. For statutory purposes, You have been continuously employed by Us since the same date. |
1.2 | We can make reasonable changes to your job title, your duties and responsibilities provided always that such changes do not diminish your status and responsibilities or substantially alter the capacity and role in which You are employed. |
1.3 | You must comply with all of our rules, regulations, policies and procedures. |
1.4 | You must carry out all the assigned duties and functions consistent with your role; exercise all the powers and comply with all our instructions in connection with the business that We reasonably require. You must use your reasonable endeavours to promote our interests. |
1.5 | If We ask You for any information or explanations about your employment or our business or affairs, You must give it to Us as soon as reasonably practicable (in writing if required). |
1.6 | You must comply with any restrictions that We may properly impose on You or other executives. In particular, You must not without our written consent: |
(a) | Incur any capital expenditure or liability on our behalf in excess of the authorisation limits that have been set for you; and |
(b) | Enter into any contract or obligation on our behalf that is outside the normal course of our business or your duties or is of an unusual, onerous or long-term nature. |
1.7 | If We ask, You will accept any directorship, trusteeship or other position of responsibility in the Group that We may reasonably require which is generally consistent with your role. |
2. | HOURS OF WORK |
2.1 | Our normal office hours are currently 9 am to 5 pm Monday to Friday but You are expected to work whatever hours We reasonably require of You. |
2.2 | Unless You are off sick or on holiday, You must devote as much of your time, attention and skill to our business as We reasonably require. |
2.3 | We acknowledge that (as a managing executive) the duration of your working time is not measured or predetermined or You can determine it yourself. Nevertheless, if the Working Time Regulations 1998 do govern your working hours, You agree that if We need You to do so that You will work in excess of an average 48 hour working week and that You therefore agree to opt-out of the 48 hour average limit set out in those Regulations. If the law in future permits, You agree that your average working hours should be measured against whatever reference period We may reasonably decide should apply. |
3. | PLACE OF WORK |
3.1 | Your normal place of work is 15 Adam Street, London, WC2N 6LA. Your normal place of work will not be moved from 15 Adam Street, London, WC2N 6LA without your prior written agreement which shall not be unreasonably withheld if the new location is within reasonable commuting distance of your home at the time. However, We may require You to work elsewhere within the United Kingdom on a temporary basis; i.e. for a period (or periods in aggregate) not exceeding two months in any calendar year. |
3.2 | You are required to travel in the UK, Europe or worldwide as part of your duties. |
3.3 | For the purposes of Part I of the Employment Rights Act 1996, it is not expected that You will be required to work outside the United Kingdom for more than one month at a time. |
SECTION TWO: YOUR REMUNERATION
4. | SALARY |
4.1 | Your basic annual salary is £500,000. The salary accrues daily and is payable in equal monthly instalments in arrears on or before the last working day of each month. |
4.2 | Your salary will be reviewed not less than annually on or about 1 April. The first review date for You will be 1 April 2014. We are not under any obligation to increase it at each review but it shall not be reduced. |
4.3 | There is no additional remuneration for any directorship, trusteeship or other position of responsibility that You may hold in the Group. |
5. | SENIOR EXECUTIVE BONUS SCHEME |
5.1 | You will be eligible to participate in the Group Executive Bonus Scheme. Full details will be sent to You under separate cover. The Scheme is performance-based and for target achievement the bonus payment is 100% of basic salary. The plan may be changed by the Remuneration Committee at any time. Any payment under the Plan is discretionary and there is no contractual entitlement to receive it. Bonus is not deemed to be contractual remuneration for pension purposes or otherwise. |
5.2 | In recognition of the fact that you will be foregoing your short term incentive payment from AstraZeneca due in the early part of 2013 You will be provided with a payment of £200,000 in April 2013 provided you accept the offer. The conditions attached to this award are attached in the enclosed letter. Furthermore, on joining Smith and Nephew, you will be provided with a payment with a net value of £30,000 should AstraZeneca decide to recoup the relocation assistance provided. |
5.3 | In addition, You will be granted a conditional award over 75,000 shares as soon as practicable after your appointment, subject to close periods, in recognition of the awards you will be foregoing from AstraZeneca. This award will vest in three equal tranches on the first, second and third anniversaries of the grant date as described in a separate agreement. |
6. | EXECUTIVE SHARE INCENTIVE PLANS |
6.1 | You will be eligible to participate in the 2010 Global Share Plan, or any successor, at the discretion of the Remuneration Committee. Full details will be sent to You under separate cover. The current entitlement comprises: |
(a) An annual equity award equivalent in value to between 50% (at target) and 65% (at maximum) of base salary depending on annual performance vesting, in annual equal tranches over a three year period; and
(b) A performance share award equivalent in value to between 95% (at target) and 190% (at maximum) of base salary vesting after three years subject to performance conditions related to TSR performance and free cash flow.
6.2 | The first awards under these arrangements will be made in March 2013 |
6.3 | The Remuneration Committee regularly reviews these incentive arrangements and the precise structure of these arrangements may change in future. |
7. | EXECUTIVE SHARE OWNERSHIP REQUIREMENTS |
7.1 | One of the main objectives of our suite of incentive plans is to ensure there is strong alignment between the interests of our senior executives, which includes You, with those of our shareholders. Therefore, in order to encourage You to think like our shareholders, there is an expectation that You will build up and maintain an appropriate level of shareholding in Smith & Nephew plc as a consequence of Your participation in the various incentive schemes operated by Us, whether referred to in this agreement or otherwise. The Remuneration Committee is currently reviewing the share ownership requirements and You will be bound by the share ownership requirements once they have been finalised. . For the avoidance of doubt the conditional award over 75,000 shares detailed in 5.2 above will NOT be subject to the share ownership requirements. |
8. | EMPLOYEE SHARE OPTION SCHEME |
8.1 | You will be eligible for the savings related Employee Share Option Scheme providing you have worked for the Group for three months prior to the relevant invitation date. Invitations are usually made on an annual basis and full details will be sent to You under separate cover. |
9. | COMPANY CAR |
9.1 | You will be provided with benefits in accordance with the Smith & Nephew UK Car Policy. Details of approved drivers and insurance cover are as follows: |
(c) | Approved drivers : Company cars may be driven by the designated company car driver, his / her spouse, children over 21, any other authorised nominated driver, and any other Smith & Nephew employee who is a company car driver or is on the list of Approved Drivers. Nominated drivers must hold a valid full UK driving licence, and must have received prior company authorisation. |
It is a requirement that any employees entitled to a company car must sign a Driver Obligation Form prior to driving a company car.
Any variation to the above arrangements can only be authorised by the Chief Executive Officer by written request.
In all schemes (including but not limited to the Car Policy) referred to in this Agreement where there are provisions for a spouse, We will use all reasonable endeavours to procure that the definition of spouse shall include your co-habiting partner.
(d) | Insurance cover : Employees are responsible for taking care of their assigned vehicle and its contents. |
The insurance policy arranged by the company covers all company car drivers, their spouses, and other authorised nominated drivers and any children over 21, subject to the conditions above. All company cars are insured for comprehensive cover, including third party, fire and theft. A copy of the insurance certificate will normally be issued every year.
The insurance cover relates only to company cars, and not to any other personal vehicle, whether or not being used on company business.
Any personal loss will be covered only to a maximum of (under current policy) £100. Any claim above this amount should be made through the employees home or personal insurance.
In the event of accidents, damage, theft or vandalism occurring that is due wholly or in part to the employees negligence, then the employee may be subject to company disciplinary procedures.
(e) | The current company car lease value for your position is £900 per month. Examples of cars currently at this level are: |
BMW 535 DM Sport
Mercedes E350
Audi A8
Lexus Rx400h
You can trade-up, and down (in which case You would receive the difference between the car lease value and the actual cost of the vehicle as cash less Tax and National Insurance).
If You select the option of a company car You will be reimbursed for the cost of business and private mileage (except that used for annual holidays). Alternatively, You can receive a monthly petrol allowance, which under current policy is £100 less tax and national insurance.
(f) | Company car cash alternative: You will be eligible to choose cash payments as an alternative to a company car. The Cash Alternative value for your position is £13,440. The allowance is not pensionable, but is subject to tax and national insurance. Each cash alternative contract will last for a minimum period of 12 months. |
You are entitled to reimbursement of petrol costs for business and private mileage (unless incurred during any holiday period) as if You had opted for a company car. This is paid at the prevailing standard reimbursement rate through payroll, less tax and national insurance.
10. | PENSIONS, LIFE ASSURANCE AND INCOME PROTECTION |
10.1 | Pensions, Life Assurance and Income Protection policy is subject to continuous review by the Board of Smith & Nephew plc and the Remuneration Committee and may be amended from time to time at their discretion. However, You shall be eligible for cover under any such schemes or policies from time to time in force for the benefit of directors and senior executives. |
10.2 | Pension Plan |
You will be able to choose between:
a company contribution to the Smith & Nephew Stakeholder Pension Plan (the Stakeholder Pension Plan) of 30% of basic salary;
or
a cash supplement of 30% of basic salary.
Your decision may then be reviewed annually on a tax year basis. Please note that the cash supplement will be non-pensionable and non-bonusable.
You can elect to contribute to the Stakeholder Pension Plan up to any applicable HM Revenue & Customs limits from time to time in force.
The Company reserves the right to change the basis or level of its contributions to the Stakeholder Pension Plan or cash supplement upon giving You reasonable notice of its intention to do so and, in the event of a reduction in the level of its contributions, without having to provide any benefit or compensation in lieu thereof.
The Company also reserves the right to terminate your ongoing participation in the Stakeholder Pension Plan or the payment of the cash supplement.
The Stakeholder Pension Plan will be a designated stakeholder pension scheme in accordance with the Welfare Reform and Pensions Act 1999 and the regulations made under it.
No contracting out certificate is in force in relation to your employment.
10.3 | Life Assurance |
In addition to the company contribution to the Stakeholder Pension Plan (or salary supplement), We will also provide You with life assurance cover under the Smith & Nephew Stakeholder Group Death in Service Plan (the Death in Service Plan). The cover is provided through an insurance company (the relevant insurer). The benefit provided on death in service is (subject to the terms of the relevant insurer) 7 x base salary, of which 4 x will be paid as a lump sum to your dependants and 3 x will be used to purchase a pension for your dependants.
10.4 | Income Protection |
Subject to the provisions below, We will make provision for an Income Protection Plan provided by an insurance company (the relevant insurer) offering an income protection benefit, whilst You are an employee, of 75% of base pay (including any State Invalidity Benefits) in the event that You are unable to work due to sickness or injury after an initial period of absence of 52 weeks.
10.5 |
Your participation in the Income Protection Plan is subject always to the rules of the relevant insurers scheme for the time being in force (details of which are available from Human Resources) and to the approval of the relevant insurer. In the event that |
the relevant insurer declines to provide or continue to provide benefits, as the case may be, under the Income Protection Plan, we shall not be liable to provide any benefit or compensation in lieu thereof. Further, we shall be entitled at any time (after giving you reasonable notice and reasonable assistance in implementing alternative arrangements) to terminate the Income Protection Plan or the Death in Service Plan or your participation in it and/or to withdraw or change the rules or benefits of the Income Protection Plan or the Death in Service Plan provided that such variation withdrawal or termination applies to all our employees who are employed at a comparable level to you, in which case we shall not be liable to provide any benefit or compensation in lieu thereof. It is a condition of your participation and continuing participation that you agree to undergo any medical examinations that might be required from time to time.
Further details regarding the Stakeholder Pension Plan, the Death in Service cover and the Income Protection Plan will be sent to you under separate cover.
11. | PRIVATE MEDICAL INSURANCE |
11.1 | Private health cover on London scale benefits is provided from the date of joining for yourself, and if applicable, your spouse and any of your unmarried children who are under age 21 (or under age 24 if in full-time education). Full details will be sent under separate cover. |
12. | HOLIDAYS |
12.1 | Our holiday year runs from 1 January to 31 December. In addition to bank holidays, You are entitled to 25 days paid holiday in each holiday year. |
12.2 | Holidays accrue pro-rata in each holiday year. |
12.3 | Holidays must be taken at times agreed with your Manager. Holidays may not be carried forward from one holiday year to the next without our approval. There is no pay in lieu of untaken holiday at the end of the holiday year. |
12.4 | We may decide whether or not any holiday that You have taken forms part of your entitlement under the Working Time Regulations. Unless We decide otherwise, it is assumed that holidays accruing under those Regulations are taken first. |
12.5 | It may be necessary to set aside a certain number of days each year to cover the closure of the office at the Christmas and New Year periods and You will be informed if this is the case. |
13. | EXPENSES |
13.1 | We will reimburse You for all business expenses that are properly and reasonably incurred and claimed by You in accordance with our expenses policy. Expense claims must be supported by whatever receipts or vouchers We require. |
13.2 | If We make a company credit card available to You, You must: |
(g) | Take good care of it and immediately report if it is lost or stolen; |
(h) | Only use the card for our business and in accordance with any applicable policy; and |
(i) | Surrender it immediately on our request. |
SECTION THREE: PROTECTING THE COMPANY WHILST YOU ARE EMPLOYED
14. | GENERAL DUTIES |
14.1 | At all times during your employment (including any period of suspension or while on garden leave) You are subject to a duty of goodwill, trust and confidence, exclusive service and good faith towards Us. Without limitation, these duties require that You must not: |
(j) | compete with the Group; |
(k) | make preparations (during hours when You are required to work) to compete with the Group after your employment has terminated; |
(l) | solicit business from customers or potential customers of the Group; |
(m) | encourage employees to leave employment with the Group against the Groups wishes; and/or |
(n) | copy information relating to the Group for a purpose other than for the benefit of the Group. |
14.2 | If You are appointed as a director of a board of any Group Company, You must notify that board immediately if You act (or omit to act) in a way that may amount to a breach of your obligations to the Group or if You become aware of or suspect any wrongdoing on the part of Group staff or contractors or any acts (or omissions) of third parties which might reasonably be expected to be harmful to the Group. |
15. | OTHER INTERESTS |
15.1 | You must devote all of your working time to the Group. You must not undertake any activity or do anything that might reasonably be expected to affect the full and proper performance of your duties unless We agree first. Without limitation, You must not undertake any other employment or hold any other office without our prior formal agreement (such agreement not to be unreasonably withheld). |
15.2 | You may invest in publicly traded competitors or suppliers, provided the investment is minimal in relation to your net worth, and is formally pre-authorised by the Chief Executive Officer. Ownership of a substantial amount of stock, however, in a publicly traded competitor or ownership of an interest in a privately held company that competes with Smith & Nephew is prohibited. |
15.3 | You confirm that You have informed Us (and will continue to keep Us informed) of any conflict that may exist between your (or your immediate familys) interests and those of the Group. |
15.4 | You are not entitled to receive any discount, rebate, commission or other benefit in respect of business carried out by the Group (whether carried out by You or not) and You must immediately disclose to and account to Us for any such benefit if You do receive it. |
15.5 | You must comply with our Code of Conduct at all times. |
16. | MARKET ABUSE AND INSIDER DEALING |
16.1 | The freedom of Directors and certain employees to deal in the Companys shares and ADRs is restricted in a number of ways including by UK statute, requirements of the London and New York Stock Exchanges and US Federal Securities laws. As a result, the Company has adopted the Smith & Nephew Code of Dealing (the Code of Dealing) which is based on the UK Listing Authoritys Model Code for Dealing in Securities. |
16.2 | The Dealing Code imposes restrictions to ensure that Directors, designated insiders and persons connected with them dont abuse, or place themselves under suspicion of abusing, price sensitive information especially in periods leading up to an announcement of results or potential acquisitions or disposals of part of the business. |
16.3 | In view of your position You are considered to be a designated insider and a copy of the Code of Dealing will be sent to You under separate cover. You will be required to confirm that You have read and understood the Code of Dealing. |
16.4 | Any queries in relation to the Code of Dealing should be addressed to the Company Secretary, Smith & Nephew plc, 15 Adam Street, London WC2N 6LA. |
17. | CONFIDENTIAL INFORMATION |
17.1 | During the course of your employment, You will be exposed to information that is secret, confidential or commercially sensitive and which (if disclosed or used for purposes other than those of the Group) could cause significant harm to the Group. In this Agreement, that information is referred to as Confidential Information and includes without limitation: |
(o) | research and development carried out by the Group (whether or not that research is complete and including the outcome of any clinical or field trials) and potential areas of research and development identified by the Group; |
(p) | details of any applications for regulatory approval or clearance for any products or services developed by the Group; |
(q) | the Groups intellectual property (except where this is not protected by patent or equivalent protection); |
(r) | the Groups manufacturing techniques and methods and ideas for manufacturing techniques and methods; |
(s) | the Groups marketing and sales strategies and plans; |
(t) | potential acquisitions and disposals by the Group; |
(u) | the Groups financial and sales performance; |
(v) | information relating to the Groups employees and contractors including without limitation their perceived strengths and weaknesses, remuneration and contact details. |
17.2 | You must not use, disclose or permit to be used or disclosed (other than in the performance of your duties or as required by law) any Confidential Information. This restriction applies both during the course of your employment and following its termination except in relation to Confidential Information which has come into the public domain other than by virtue of a breach of duty by You. |
17.3 | You acknowledge that in the ordinary course of your employment, You will have access to Inside Information. You agree that all Inside Information is confidential and must not be used, disclosed or permitted to be used or disclosed except as may be necessary for the proper performance of your duties to Us and in accordance with the requirements of the Market Abuse Directive or the law. |
17.4 | We are conscious that You will have been provided with and had access to confidential information relating to Your previous employment. You agree that You have not and will not use any information of a confidential nature that is the property of Your previous employer (except where such information is already in the public domain) for the benefit of Us or our clients or customers. Such practice could expose Us to legal action and could lead to Your summary dismissal. If You have any concerns or questions about the appropriateness of the use of any information which may be of a confidential nature, You should raise this with Human Resources/the Legal Function. |
17.5 | The provisions of this Agreement are without prejudice to any duties and obligations of confidentiality to which You may be subject at common law or equity. |
17.6 | You must not make or issue any press statement or give any interview to a journalist or publish or submit for publication any article or opinion relating directly or indirectly to the Group without our prior agreement. |
17.7 | You must not at any time make any untrue or misleading statement in relation to the Group. |
18. | INTELLECTUAL PROPERTY |
18.1 | Due to the nature of your duties and your particular responsibilities, You recognise that You have a special obligation to further the interests of the Group. |
18.2 | You must disclose to Us at once any idea or invention created in the manner prescribed by sections 39(1) and 39(2) of the Patents Act 1977. Any such inventions will then be dealt with in accordance with the provisions expressed in that Act. |
18.3 | You acknowledge that all trademarks, registered designs, design rights, copyright, database rights and other intellectual property rights (together, where registrable with the right to apply for registration of those rights, aside from those described in Clause 15.2) will vest in and be our exclusive property or any of the Group Companies which We nominate if they come into existence during the normal course of your employment or by using materials, tools or knowledge made available through your employment. This applies regardless of whether those rights are in existence now or come into existence at any time in the future. If required to do so (whether during or after the termination of your employment), You must sign any document and do anything necessary to vest ownership in these rights in the Group as sole beneficial owner. Where ownership does not automatically vest by Act of Parliament, You must immediately assign all your interests to the Group. You irrevocably waive all your rights pursuant to sections 77 to 83 inclusive of the Copyright Designs and Patents Act 1988. |
SECTION FOUR: DISCIPLINE AND GRIEVANCE
19. | You must comply with our disciplinary rules. Failure to do so is a serious breach of this Agreement. A copy of our disciplinary rules may be obtained from Human Resources. |
20. | The disciplinary procedure is referred to in the staff handbook. That procedure does not form part of this Agreement nor does it give rise to any contractual rights as between You and the Group. If You are dissatisfied with any disciplinary decision taken against You, You may appeal to the Chairman of the Board of Smith & Nephew plc within 5 working days. |
21. | If You have any grievance relating to your employment, You should raise it in the first instance with the Chief Executive Officer in accordance with our grievance procedure. |
22. | We have the right to suspend You with full pay and benefits at any time to allow Us to conduct a disciplinary investigation or if your dismissal is being contemplated. Suspension may be for such period as is reasonably necessary in the circumstances and shall not normally exceed 7 days. |
SECTION FIVE: SICKNESS AND ABSENCE FROM WORK
23. | INCAPACITY |
23.1 | If You are unable to attend work due to sickness or accident, You must inform your Manager the first morning of absence, or as soon as is reasonably possible. |
23.2 | If your absence is for a period of 1 working day or more You will need to provide a self-certification form, obtainable from the Human Resources Department. This will cover You for a maximum of 7 calendar days, after which a doctors statement is required. |
23.3 | If You are absent from work owing to illness or injury You will be entitled to salary during the period of absence in accordance with the following scale. All such payments will be subject to deduction of Statutory Sick Pay or National Insurance Sickness Benefit receivable. |
Length of Continuous Service |
Payment entitlement in any 12 month period |
|
0 - 3 years |
6 months full pay
6 months half pay |
|
After 3 years |
12 months full pay |
23.4 | Your sick pay entitlement is based on your service at the beginning of the sickness period. |
23.5 | The table set out in 23.3 also indicates the maximum sick pay entitlement payable in respect of one period of continuous absence as determined by our standard Company policy. This policy statement should be read in conjunction with Clauses 10.5 and 10.6 (Income Protection) which in your case may provide a higher level of benefit. |
23.6 | Your entitlement to salary under the Companys sick pay scheme includes any benefit from the Income Protection Plan where appropriate. |
23.7 | At our request You will agree to undergo a medical examination performed by a doctor appointed and paid for by Us. You authorise the Board and the board of Smith & Nephew plc to have access to any reports produced as a result of that examination provided that You are also shown copies of the same. |
SECTION SIX: TERMINATION OF EMPLOYMENT
24. | NOTICE |
24.1 | We have to give You six months notice in writing to terminate your employment in the first year and twelve months notice in writing thereafter. |
24.2 | If You want to resign, You must give Us three months notice in writing in the first year of your employment and six months thereafter. |
24.3 | We may terminate your employment immediately and without any entitlement to notice under 24.1 or compensation if: |
(w) | You are guilty of gross misconduct or gross negligence; |
(x) | without reasonable cause, You neglect, omit or refuse to perform all or any of your duties or obligations under this Agreement or You fail to any substantial or material extent to observe and perform the provisions of this Agreement to our reasonable satisfaction provided always that where such matters are capable of remedy, We shall not terminate pursuant to this clause unless and until We have given You 28 days written notice of the relevant matter requiring You to remedy the same and You have failed to do so; or |
(y) | You misconduct yourself whether during or outside the course of your duties under this Agreement in such a way that in our reasonable opinion our business, operation, interests or reputation of that of the Group are or are likely to be prejudicially affected, provided always that where such misconduct is capable of remedy so as to avoid such prejudicial effect We shall not terminate pursuant to this clause unless and until We have given You 28 days written notice of the misconduct requiring You to remedy the same and You have failed to do so; or |
(z) | You commit any criminal offence (including in particular any offence involving dishonesty or violence) other than an offence which does not in our reasonable opinion affect your position under this Agreement; or |
(aa) | You commit an offence under any statutory enactment or regulation or any provision of this Agreement relating to insider dealing or market abuse (whether that enactment was passed in the United Kingdom or United States of America or elsewhere); or |
(bb) | You become bankrupt or make or attempt to make any composition with your creditors; or |
(cc) | You become prohibited by law from being a director of a company or You cease to be a director of a Group Company without our consent or concurrence; or |
(dd) | You are guilty of any deliberate act of discrimination, harassment or victimisation on grounds of race, sex, disability, sexual orientation, religion/religious belief or age. |
25. | GARDEN LEAVE |
25.1 | During any period of notice, and provided that We continue to pay your salary and provide the benefits (other than bonus) to which You are entitled under this Agreement until your employment terminates, then We are entitled at our absolute discretion during the remaining period of your notice period (or any part of such period) to place You on garden leave You will be deemed to have taken any accrued but untaken holiday during any period of garden leave. This means that We may require You: |
(ee) | not to carry out all or part of your duties or to exercise your powers or responsibilities under this Agreement or require You to carry out alternative duties; |
(ff) | to resign immediately from any offices You may hold with the Group; |
(gg) | not to attend your place of work or any other Group premises; |
(hh) | not to have contact (including socially) with any suppliers or customers of the Group or with employees (other than socially) except as authorised by Us; |
(ii) | to return to Us all documents, computer disks and other property (including summaries, extracts or copies) belonging to the Group or to its or their customers; |
(jj) | to work from your home and/or to carry out exceptional duties or special projects outside the normal scope of your duties and responsibilities provided always that such special projects are appropriate to your status, skills and experience; and/or |
(kk) | to take or not to take all or part of any outstanding holiday during your notice period. |
25.2 | You will have no entitlement to bonus in respect of any period of garden leave but the Remuneration Committee may, in its absolute discretion, determine to pay You a sum in respect of bonus in respect of such period. |
25.3 | In the event that it is agreed that any period of garden leave should come to an end and your employment terminate to allow You to commence employment elsewhere, all payments to You would then cease and You would have no right to compensation in respect of any outstanding period of notice. |
26. | CORPORATE GOVERNANCE AND PHASED PAYMENTS |
26.1 | Following a decision to terminate your employment (except in the circumstances defined under 24.3) the Remuneration Committee may use its discretion to determine not to require You either to work out your notice period in full (as provided for in Clause 24.1 above) nor to place You on garden leave (as provided for in Clause 25 above). In such circumstances the Remuneration Committee will pay a sum equivalent to all of the salary and benefits (excluding bonus) You would have received if We had required You to work during your notice period. You will have no entitlement to bonus in respect of any period of notice which You have not worked but the Remuneration Committee may, in its absolute discretion, determine to pay You a sum in respect of bonus in respect of such period. |
26.2 |
In deciding whether to exercise any discretion under Clauses 25.2 and 26.1, the Remuneration Committee will take into account all relevant circumstances including the Groups policy not to reward for failure, the appropriateness of your obligation to mitigate for loss, and other relevant corporate governance guidelines. |
27. | OTHER TERMINATION PROVISIONS |
27.1 | Nothing in this Agreement shall prevent Us from terminating your employment on grounds of ill-health if You are unable through health reasons (in circumstances of at least 26 weeks absence) to perform your duties even though at the time your employment terminates You have not exhausted your full sick pay entitlement or the consequence of the termination would be to end your entitlement to any further payments under the Income Protection Plan. |
27.2 | On termination of your employment, your entitlement to accrued holiday pay will be calculated pro-rata. If You have untaken holiday due under the Working Time Regulations on the date your employment terminates, You will be entitled to pay in lieu of that untaken holiday (save that if You are dismissed for gross misconduct or gross negligence then that pay in lieu will be calculated at the rate of £1 per day). |
27.3 | If your employment terminates, You agree that You will immediately (at our expense) transfer all shares held by You as a result of our asking You to hold them on our behalf, either in trust or as a nominee, to whatever persons We direct. |
27.4 | On termination of your employment (or earlier if requested), You will immediately return to Us all Group property in your possession or control (without keeping any copies). This obligation extends to any copies, drafts, notes, extracts or summaries (however stored or made) of all documents and software that relate to the Groups business. If You have stored or copied any of the Groups data or information onto a computer, personal organiser or other electronic storage device which does not belong to the Group then You must immediately irretrievably delete that data or information and must allow Us to have access to that device to verify that the data or information has been deleted. |
27.5 | You will immediately on termination of your employment or at any other time on request of the Board, resign immediately without claim for compensation as a director of any Group Company or from any trusteeship, office or appointment held by You on behalf of the Group. |
28. | CHANGE OF CONTROL |
28.1 | In a change in control situation affecting Smith & Nephew plc the entitlements set out below would be payable where within 12 months of that change there is a significant diminution of role or status, a reduction in salary or benefits, or a mandatory relocation (the so-called double trigger scenario) and where termination by employer or employee is a consequence of such a change in control. |
|
Normal twelve months base salary payable as a lump sum |
|
The Remuneration Committee will consider to what extent an annual bonus award should be made in the change of control circumstances |
|
Lump sum in lieu of 12 months car benefits and healthcare benefits based on current provision costs |
|
Lump sum in lieu of 12 months pension contribution or salary supplement, as appropriate |
|
Reasonable executive outplacement costs |
28.2 | In a change in control situation affecting Smith & Nephew plc entitlement under the and the Groups share plans will be in accordance with the Rules of each of those Plans. |
28.3 | These change in control terms supersede the notice terms and entitlement set out in the Termination of Employment section. |
SECTION SEVEN: PROTECTING THE COMPANY AFTER YOUR EMPLOYMENT HAS ENDED
29. | CONFIDENTIALITY |
29.1 | The confidentiality provisions set out in Clause 17 continue to apply to protect Confidential Information following the termination of your employment. |
30. | RESTRICTIVE COVENANTS |
30.1 | At any time in the period set out in Column A below, You must not carry out the activities set out in Column B. The Column B activities, however, are subject to the provisos and limitations set out in Column C. |
A
(Restricted
|
B (Restricted Activity) |
C (Provisos and Limitations) |
||
12 months from the date your employment with Us ends | Accepting employment with or engaging, assisting or being interested in any undertaking which carries out research, development or manufacturing of products or services in the fields of, orthopaedics, endoscopy and/or wound management and/or biologics related to the above. | This restriction only applies where: (a) You were materially concerned with research, development or manufacturing of that type during the last 12 months of your employment; and (b) that undertaking competes with the Group. | ||
12 months from the date your employment with Us ends | Accepting employment with or engaging, assisting or being interested in any undertaking which carries out marketing and/or selling of products or services in the fields of, orthopaedics, endoscopy and/or wound management and treatment and/or biologics related to the above. | This restriction only applies where: (a) You were materially concerned with marketing and selling of that type during the last 12 months of your employment; and (b) that undertaking competes with the Group; and (c) that marketing or selling takes place in a Prohibited Territory. | ||
12 months from the date your employment with Us ends | Soliciting orders from or being concerned with the supply of orders to any person who is a customer of the Group. | This restriction only applies where: (a) the orders would be supplied in a Prohibited Territory; (b) the orders relate to the supply of products or services in the fields of biologics, orthopaedics, endoscopy and/or wound management; (c) the orders are in competition with the Group; (d) that person was someone with whom (during the last 12 months of your employment) You had personal contact or were materially concerned or about whom You possessed confidential information; and (e) that person had been a customer in the last 12 months of your employment. The expression customer includes a prospective customer. |
12 months from the date your employment with Us ends | Interfering or trying to interfere with the continuance of supplies to the Group or the terms on which those supplies are provided | This restriction only applies if the supplier is a person with whom (during the last 12 months of your employment) You had personal contact or were materially concerned or about whom You possessed confidential information. | ||
12 months from the date your employment with Us ends |
Offering employment to an employee of the Group or persuading an employee to leave the Group. | This restriction only applies if: (a) the employee is engaged in an executive, managerial, sales, research or development role; and (b) during the last 12 months of your employment, You had personal contact or were materially concerned with or possessed confidential information about the employee. The expression employee includes consultants, non-executive directors and contractors. It is immaterial whether or not the employee leaves the Group in breach of contract. |
30.2 | These covenants prevent You from doing the restricted activities yourself or in any other way. You must not do them through others acting on your behalf or on your instructions or with your encouragement. You must not do them whether they are for your benefit or not. |
30.3 | The duration of these restrictive covenants shall be reduced by an amount equal to the time that You may be placed on garden leave by Us in accordance with Clause 25. |
30.4 | The expression in Clause 30.1 the last 12 months of your employment excludes any time spent by You on garden leave. |
30.5 | The expression Prohibited Territory means: |
(ll) | In North and South America - Canada, Mexico, Puerto Rico and the United States |
(mm) | In Europe - Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Eire, Estonia, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Netherlands, Norway, Portugal, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, United Kingdom |
(nn) | In Asia - Brunei, China, Hong Kong, India, Indonesia, Japan, Malaysia, Myanmar, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand |
(oo) | In Australasia - Australia, New Zealand |
(pp) | In Middle East - United Arab Emirates |
(qq) | In Africa - South Africa, |
as well as any other country in which (at the date your employment terminates) the Group markets or sells products or services directly or via a distributor or agent.
30.6 | If the business of the Group expands beyond the fields of biologics, orthopaedics, endoscopy and wound management/treatment then the restrictive covenants will also apply to protect those new fields of activity. |
30.7 | If You apply for or are offered a new employment, appointment or engagement, You must immediately bring the terms of this Agreement to the attention of the person to whom You are applying or the person making that offer. |
SECTION EIGHT: MISCELLANEOUS AND GENERAL PROVISIONS
31 | DEFINITIONS |
31.1 | In this Agreement, the following words have the following meanings: |
Board | Our Board of Directors from time to time and any person or committee authorised by the Board to act as its representative for the purposes of this Agreement | |
Chief Executive Officer | The Chief Executive Officer of Smith & Nephew plc | |
Group Company | Smith & Nephew plc and its subsidiaries and any holding company and the other subsidiaries of that holding company (as those expressions are defined in the Companies Act 1985) together with any associated company (which means any other company in which We or our holding company or any subsidiary of ours or our holding company beneficially holds not less than 20% of the equity share capital), and Group is All or any of the Group Companies. | |
Remuneration Committee | The sub-committee of the board of Smith & Nephew plc comprising non-executive directors, responsible for setting (inter alia) the pay and benefits of the executive directors of Smith & Nephew plc and executive officers of the Group. |
31.2 | Any reference to a statutory provision includes all re-enactments and modifications of that provision and any regulations made under it or them. |
31.3 | The headings in this Agreement are for convenience only. They do not form part of this Agreement and do not affect its interpretation. |
31.4 | Any reference in this Agreement to You, if appropriate, includes your personal representatives. |
31.5 | Any reference in this Agreement to We or Us includes any Group Company if the context requires or if We so decide. |
32. | GENERAL PROVISIONS |
32.1 | Any provision in this Agreement which confers any rights or powers means those rights or powers as exercised by Us from time to time. Those rights or powers may be exercised by the Board or by any other person acting on our behalf and within the scope of their authority. |
32.2 | Any reference to any rule, regulation, policy, procedure or scheme means the rule, regulation, policy, procedure or scheme that is in force and as amended from time to time. |
32.3 |
Any rule, regulation, policy, procedure or scheme referred to in this Agreement may be varied (in whole or part) or cancelled or terminated by Us at any time. We are not obliged to give any prior warning before making that variation, cancellation or termination nor are We under any obligation to compensate You for that variation, cancellation or termination, even if You are disadvantaged (financially or otherwise) |
as a result. We are not obliged to substitute a replacement rule, regulation, policy, procedure or scheme but, if We do provide a substitute, it may be on whatever terms We consider appropriate provided always that You shall be treated no less favourably than other senior executives of comparable status to yourself under those terms. The duty of trust and confidence shall not extend to any exercise by Us of the rights and powers contained in this clause. |
32.4 | If any scheme provider (not limited to an insurance company) or other third party refuses for any reason to provide any benefit which is set out in this Agreement (or to provide any benefit on terms that We consider to be reasonable) in relation to You or if applicable to your spouse, partner or children then We are not liable to make any payment; provide any replacement benefit or pay compensation in lieu of that benefit. We may in our discretion challenge any refusal (and shall not unreasonably refuse your request for such a challenge) by any scheme provider or other third party to provide benefits but, if We do, it is on condition that: |
(rr) | You take all proper measures to appeal against the refusal in accordance with any applicable scheme and meet all reasonable costs associated with that appeal; |
(ss) | You co-operate fully with Us and disclose all relevant personal information; |
(tt) | If required, You attend a medical examination with one or more medical practitioners selected and instructed by Us; and |
(uu) | You indemnify Us fully against all reasonable costs, expenses and claims incurred by Us in connection with challenging that refusal. |
32.5 | Any provision of this Agreement which says that You must not do something means that You must not do it yourself or in any other way. You must not do it through others acting on your behalf or on your instructions or with your encouragement. |
32.6 | You agree to comply with all our policies and procedures including without limitation our email and internet policy and data protection policy. |
32.7 | Nothing in this Agreement confers any rights on your spouse, dependants, relatives or any third party except that, for the purposes of the Contracts (Rights of Third Parties) Act 1999, the Group can enforce the restrictive covenants, confidentiality, intellectual property clauses and any other clause of this Agreement that purports to confer rights on the Group in relation to You. |
32.8 | Any delay by the Group or You in exercising any of its rights under this Agreement will not constitute a waiver of those rights. |
32.9 | You appoint Us to be your attorney (in your name and on your behalf) to execute any instrument or do anything necessary for the purpose of giving to Us or our nominee the full benefit of the provisions of Clauses 18, 27.3 and 27.5 of this Agreement. You acknowledge in favour of any third party that a certificate in writing, which is signed by any director or secretary of the Board, or of the board of Smith & Nephew plc, stating that any instrument or act falls within the authority conferred shall be conclusive evidence that such is the case. |
33. | DEDUCTIONS |
33.1 | You authorise Us at any time during your employment or following its termination (whether or not that termination is lawful) to deduct from your wages (as that expression is defined in the Employment Rights Act 1996) any monies due from You to the Group, including without limitation the outstanding balance of any loan account; the cost of repairing any damage or loss to Group property caused by You; any overpayment of holiday pay; and any loss suffered by the Group as a result of any breach of contract, statutory duty or tort committed by You. |
34. | DATA PROTECTION |
34.1 | You consent to Us processing personal data about You for the purposes of the Data Protection Act 1998. |
34.2 | You agree to use all reasonable endeavours to keep Us informed of any changes to your personal data and to comply with the Data Protection Act 1998. |
35. | COLLECTIVE AGREEMENTS |
35.1 | There are no collective agreements with trade unions that directly affect your terms and conditions of employment. |
36. | NOTICES |
36.1 | Any notice to be given under this agreement shall be in writing. Notices may be delivered by hand; sent by first-class post or email. In your case, a notice will be deemed to have been validly served if it is sent to the last address that You have notified to Us as being your address. In our case, any notice should be addressed to the Company Secretary of Smith & Nephew plc and should be sent to the registered office address or to their personal email address. |
36.2 | Any notice served by post will be deemed to have been served 48 hours after it was posted or in the case of email, 1 hour after it was sent. |
37. | TERMINATION OF PREVIOUS AGREEMENTS |
37.1 | This Agreement, together with any other documents referred to in this Agreement, constitutes the entire agreement and understanding between the parties, and supersedes all other agreements both oral and in writing between You and us which shall be deemed to have been terminated by mutual consent as from the date of this Agreement. |
37.2 | You acknowledge that You have not entered into this Agreement in reliance upon any representation, warranty or undertaking which is not set out in this Agreement or expressly referred to in it as forming part of your contract of employment. |
38. | CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 |
38.1 | A person who is not a party to this Agreement shall have no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any of its terms. |
39. | GOVERNING LAW AND JURISDICTION |
39.1 | This Agreement is governed by and interpreted in accordance with English law. |
39.2 |
The parties submit to the non-exclusive jurisdiction of the High Court of England and Wales in connection with any claim, dispute or matter arising out of relating to this Agreement. |
IN WITNESS of which the parties have executed this Agreement on the date set out above.
EXECUTED AS A DEED | SIGNED and delivered as a deed by | |||
Director/Secretary | JULIE BROWN | |||
/s/ Helen Maye |
/s/ Julie Brown |
|||
Signature: | Signature: | |||
in the presence of | ||||
Name: Helen Maye (Authorised Signatory) | Signature of Witness: /s/ R.D. Newcomb | |||
Name: R.D. Newcomb | ||||
Address of Witness: |
Exhibit 4 (c) (iv)
Mrs Julie Brown
15, Adam Street,
London
WC2N 6LA
21 February 2013
Dear Julie,
We refer to the Service Contract entered between you and Smith & Nephew UK Limited on 7 November 2012 and write to clarify certain provisions in the contract that were unknown at the time the contract was signed, as follows:
1) | Clause 1.1 refers to the commencement date of your employment. |
We confirm that your employment with Smith & Nephew UK Limited commenced on 4 February 2013.
2) | Clause 5.2 refers to a cash payment of £200,000 which would be paid to you if you forfeited the short term incentive payment due to you in respect of 2012 from your former employer AstraZeneca and to a payment of £30,000 which you might have had to repay to AstraZeneca in respect of relocation assistance. |
We confirm that as Astra Zeneca has paid you a short term incentive payment in respect of 2012 and has not required you to repay any amount in respect of relocation assistance, Smith & Nephew UK Limited will not be making payment to you of either £200,000 or £30,000.
Yours sincerely,
/s/ Susan Swabey
Susan Swabey
Director
Exhibit 4 (c) (viii)
12 April 2012
The Rt. Hon The Baroness Bottomley of Nettlestone
15, Adam Street,
London
WC2N 6LA
Dear Virginia,
SMITH & NEPHEW plc (THE COMPANY) AND YOUR APPOINTMENT
AS A NON-EXECUTIVE DIRECTOR
Following the recommendation of the Nominations Committee, the board of the Company (the Board) is pleased to confirm your appointment as a non-executive director on the board of Smith & Nephew plc. This letter sets out the main terms of your appointment to this office. It is agreed that on acceptance of this offer this letter will be a contract for services and not a contract of employment. You should be aware that your appointment will have to be ratified by the Companys shareholders at the annual general meeting in April 2012 and annually thereafter. Your appointment is also subject to the Companys articles of association as amended from time to time. If there is a conflict between the terms of this letter and the articles of association then the articles shall prevail.
DUTIES
1. | The Board as a whole is collectively responsible for promoting the success of the Company by directing and supervising the Companys affairs. The Boards role is to: |
(a) | provide entrepreneurial leadership to the Company within a framework of prudent and effective controls which enable risk to be assessed and managed; |
(b) | set the Companys strategic aims, ensure that the necessary financial and human resources are in place for the Company to meet its objectives, and review management performance; and |
(c) | set the Companys values and standards and ensure that its obligations to its shareholders and others are understood and met. |
1
2. | In your role as a non-executive director you will be required (with the other non-executives) to: |
(a) | constructively challenge and contribute to the development of strategy; |
(b) | scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; |
(c) | satisfy yourself that financial information is accurate and that financial controls and systems of risk management are robust and defensible; and |
(d) | have a prime role in appointing, and where necessary removing, senior management and in succession planning and where required by the relevant policy of the Company from time to time be responsible for determining appropriate levels of remuneration of executive directors. |
3. | You will be required to: |
(a) | exercise relevant powers under the Companys memorandum and articles of association; |
(b) | perform your duties faithfully, efficiently and diligently and use all reasonable endeavours to promote the interests and reputation of the Company; |
(c) | serve on various committees of the Board and attend wherever possible all meetings of such committees. You will be provided with the terms of reference of a committee on your appointment to such a committee; |
(d) | attend wherever possible all Annual General Meetings and Extraordinary General Meetings of the Company; |
(e) | attend wherever possible all meetings of the Board, which meets at least six times a year, normally at 15 Adam Street, London WC2N 6LA (one meeting a year is held at one of the major business units); |
(f) | attend wherever possible the Annual Strategy Review, which is usually held off-site over two or three days in September; |
(g) | consider all relevant papers in advance of each meeting in order to ensure that you can play a full part in the work of the Board and its committees; |
(h) | bring independent judgement to bear on issues of strategy, policy, resources, performance and standards of conduct; |
(i) | make yourself available (on reasonable notice) to provide ad hoc advice to individual directors of the Company. We do not envisage that this would take more than two days of your time a year; |
2
(j) | provide guidance and direction in planning, developing and enhancing the future strategic direction of the Company; |
(k) | share responsibility with the other directors for the effective control of the Company and with the other non-executive directors for the supervision of the executive directors; and |
(l) | comply with the Financial Services Authoritys Model Code for securities transactions by directors of UK listed companies and with any code of conduct relating to securities transactions by directors and specified employees issued by the Company from time to time The Smith & Nephew Code of Dealing in Securities will be sent to you on your appointment. |
4. | Overall the Company anticipates that you will need to spend a minimum of 15 days per year fulfilling your duties. This will include the board meetings, annual general meetings, one board away-day each year and board committee meetings. In addition you will be expected to spend an appropriate period of time preparing for each meeting and be prepared to be available for additional meetings and business when required. By accepting this appointment you confirm that you are able to commit sufficient time to the role to meet the Companys expectations. |
5. | The Company seeks to adhere to the principles in UK Corporate Governance Code. You will be expected to carry out your duties in accordance with the principles set out in these reports, copies of which are available from the Company Secretary. |
6. | The performance of the Board and its committees, and of individual directors, is evaluated annually. At least every third year the performance will be reviewed by an external body. |
7. | You shall, in pursuance of your duties hereunder, be entitled to request such information from the Company, its subsidiary undertakings (as defined in section 1162 of the Companies Act 2006 as amended from time to time) or its or their employees, consultants or professional advisers as may be reasonably necessary to enable you to perform your role effectively. The Company shall use its reasonable endeavours to provide such information promptly. |
CONFIDENTIALITY
During the course of your duties you will have access to confidential information belonging to the Company and its subsidiary undertakings (including, but not limited to, details of suppliers, customers, margins, know-how, marketing and other relevant business information). Unauthorised disclosure of this information could seriously damage the Company. You will therefore undertake not to use or disclose such information save in pursuance of your duties or in accordance with any statutory obligation or court or similar order.
Your attention is drawn to the rules relating to the disclosure of price sensitive information. You must not make any statement or do anything which may be a breach of these rules without prior clearance from the Chairman or Company Secretary.
3
OUTSIDE INTERESTS
The agreement of the Chairman will have to be sought before you accept any new outside interests which might affect the time you are able to devote to this appointment.
In accordance with the principles set out in the Combined Code you will have to inform the Company Secretary of any interests which you have, or acquire, which might reasonably be thought to jeopardise your independence from the Company.
During your appointment you will not be able to take up any office or employment with, or have any interest in, any firm or company which is or may be in direct or indirect competition with the Company.
The Board will determine you to be independent, according to the provisions of the Combined Code.
INSURANCE
During your appointment you will be covered by the Companys directors and officers liability insurance on the terms in place from time to time. Details of the policy are available from the Company Secretary. The Company does not guarantee to maintain this insurance cover after the termination of your appointment, but you will continue to be covered by the policy or any replacement on the same basis as the rest of the Board. A deed of indemnity will be put in place between you and the Company.
APPOINTMENT
Your appointment will be from 12 April 2012 and will be terminable at the will of the parties. However, it is envisaged that it will be for an initial period of 36 months from the date of appointment. The continuation of your appointment depends upon satisfactory performance and re-election at each Annual General Meeting.
All appointments and reappointments to the Board will be subject to the Companys articles of association. If you are not re-elected to your position as a director of the Company by the shareholders at any time and for any reason then this appointment shall terminate automatically and with immediate effect.
On termination of the appointment you shall only be entitled to such fees as may have accrued to the date of termination together with reimbursement in the normal way of any expenses properly incurred prior to that date.
REMUNERATION
The fees are £63,000 (subject to income tax and statutory deductions) per annum and will be reviewed each year. There is an additional allowance relating to inter-continental travel of £3,500 per trip and there would be an additional fee, should you take over as Chairman of any of the Committees.
4
EXPENSES
The Company will reimburse you for any expenses that you may incur properly and reasonably in performing your duties and which are properly documented. Such expenses would include reasonable legal fees if circumstances should arise in which it was necessary for you to seek separate legal advice about the performance of your duties. In such a situation, you will be required to discuss the issue either with me or with one of your non-executive colleagues in advance.
INDEPENDENT PROFESSIONAL ADVICE
In some circumstances you may think that you will need professional advice in the furtherance of your duties as a director. It may also be appropriate for you to seek advice from independent advisers at the Companys expense. The Company will reimburse the full cost of any expenditure incurred.
DATA PROTECTION
By signing this agreement you consent to the Company holding and processing information about you which it may acquire during the course of this agreement, providing such use is in accordance with the Data Protection Act 1998.
THIRD PARTY RIGHTS
The Contracts (Rights of Third Parties) Act 1999 shall not apply to this agreement. No person other than the parties to this agreement shall have any rights under it and it will not be enforceable by any person other than the parties to it.
ENTIRE AGREEMENT
This agreement will constitute the entire and only agreement relating to your appointment between you and the Company.
Any previous agreement or arrangement between you and the Company or any Group company shall be deemed to have been terminated by mutual consent as from the commencement of your appointment.
5
Please sign and return the enclosed copy of this letter to Susan Henderson, our Company Secretary to confirm your agreement to your appointment on the above terms. She will be in touch with you shortly to request further information to enable us to fulfil our statutory obligations.
I look forward to working with you in the future.
Yours sincerely
/s/ John Buchanan |
John Buchanan |
Chairman |
I, Baroness Virginia Bottomley, agree to the above terms of appointment as a non-executive director of Smith & Nephew plc.
Name |
/s/ Virginia Bottomley |
|
Date |
12 April 2012 |
6
Exhibit 4 (c) (ix)
10 April 2012
Mr Richard U. De Schutter
15, Adam Street
London
WC2N 6LA
Dear Dick,
SMITH & NEPHEW plc (THE COMPANY) AND YOUR RE-APPOINTMENT
AS SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR
Following the recommendation of the Nominations Committee, the board of the Company (the Board ) is delighted to hear that you have accepted our offer to remain on the Board as Senior Independent non-executive director of the Company from 1 January 2012. This letter confirms the main terms of your appointment to this office. It is agreed that this is a contract for services and not a contract of employment. You should be aware that your re-appointment will have to be ratified on an annual basis by the Companys shareholders at the annual general meeting and is subject to the Companys articles of association as amended from time to time. If there is a conflict between the terms of this letter and the articles of association then the articles shall prevail.
DUTIES
1. | You are already aware how the Board is structured and what authorities are delegated to the Chief Executive Officer and his colleagues. |
2. | The Board as a whole is collectively responsible for promoting the success of the Company by directing and supervising the Companys affairs. The Boards role is to: |
(a) | provide entrepreneurial leadership to the Company within a framework of prudent and effective controls which enable risk to be assessed and managed; |
(b) | set the Companys strategic aims, ensure that the necessary financial and human resources are in place for the Company to meet its objectives, and review management performance; and |
(c) | set the Companys values and standards and ensure that its obligations to its shareholders and others are understood and met. |
1
3. | In your role as a non-executive director you are required (with the other non-executives) to: |
(a) | constructively challenge and contribute to the development of strategy; |
(b) | scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; |
(c) | satisfy yourself that financial information is accurate and that financial controls and systems of risk management are robust and defensible; and |
(d) | have a prime role in appointing, and where necessary removing, senior management and in succession planning and where required by the relevant policy of the Company from time to time be responsible for determining appropriate levels of remuneration of executive directors. |
4. | You will be required to: |
(a) | exercise relevant powers under the Companys Articles of Association; |
(b) | perform your duties faithfully, efficiently and diligently and use all reasonable endeavours to promote the interests and reputation of the Company; |
(c) | serve on various committees of the Board and attend wherever possible all meetings of such committees. You will be provided with the terms of reference of a committee on your appointment to such a committee; |
(d) | attend wherever possible all Annual General Meetings and other General Meetings of the Company; |
(e) | attend wherever possible all meetings of the Board, which meets at least six times a year, normally at 15 Adam Street, London WC2N 6LA (at least one meeting per year is held at one of the major divisions); |
(f) | attend wherever possible the Annual Strategy Review, which is usually held off-site over two days in September; |
(g) | consider all relevant papers in advance of each meeting in order to ensure that you can play a full part in the work of the Board and its committees; |
(h) | bring independent judgement to bear on issues of strategy, policy, resources, performance and standards of conduct; |
(i) | make yourself available (on reasonable notice) to provide ad hoc advice to individual directors of the Company. We do not envisage that this would take more than three days of your time a year; |
2
(j) | provide guidance and direction in planning, developing and enhancing the future strategic direction of the Company; |
(k) | share responsibility with the other directors for the effective control of the Company and with the other non-executive directors for the supervision of the executive directors; and |
(l) | comply with the Financial Services Authoritys Model Code for securities transactions by directors of UK listed companies and with any code of conduct relating to securities transactions by directors and specified employees issued by the Company from time to time (the Smith & Nephew Code of Dealing in Securities has been sent to you and further copies are available from the Company Secretary). |
5. | Overall the Company anticipates that you will need to spend a minimum of 15 days per year fulfilling your duties. This will include the Board Meetings, Annual General Meetings, one Board away-day each year and Board committee meetings. In addition you will be expected to spend an appropriate period of time preparing for each meeting and be prepared to be available for additional meetings and business when required. By accepting this appointment you confirm that you are able to commit sufficient time to the role to meet the Companys expectations. |
6. | The Company seeks to adhere to the principles in The UK Corporate Governance Code. You will be expected to carry out your duties in accordance with the principles set out in these reports, copies of which are available from the Company Secretary. |
7. | The performance of the Board and its committees, and of individual directors, is evaluated annually. At least every third year the performance will be reviewed by an external body. |
8. | You shall, in pursuance of your duties hereunder, be entitled to request such information from the Company, its subsidiary undertakings (as defined in section 1162 of the Companies Act 2006 as amended from time to time) or its or their employees, consultants or professional advisers as may be reasonably necessary to enable you to perform your role effectively. The Company shall use its reasonable endeavours to provide such information promptly. |
CONFIDENTIALITY
During the course of your duties you will have access to confidential information belonging to the Company and its subsidiary undertakings (including, but not limited to, details of suppliers, customers, margins, know-how, marketing and other relevant business information). Unauthorised disclosure of this information could seriously damage the Company. You therefore undertake not to use or disclose such information save in pursuance of your duties or in accordance with any statutory obligation or court or similar order.
Your attention is drawn to the rules relating to the disclosure of price sensitive information. You must not make any statement or do anything which may be a breach of these rules without prior clearance from the Chairman or Company Secretary.
3
OUTSIDE INTERESTS
The agreement of the Chairman should be sought before you accept any new outside interests which might affect the time you are able to devote to this appointment.
In accordance with the principles set out in The UK Corporate Governance Code you must inform the Company Secretary of any interests which you have, or acquire, which might reasonably be thought to jeopardise your independence from the Company.
During your appointment you must not take up any office or employment with, or have any interest in, any firm or company which is or may be in direct or indirect competition with the Company.
The Board has determined you to be independent, according to the provisions of The UK Corporate Governance Code.
INSURANCE
During your appointment you will be covered by the Companys directors and officers liability insurance on the terms in place from time to time. Details of the policy are available from the Company Secretary. The Company does not guarantee to maintain this insurance cover after the termination of your appointment, but you will continue to be covered by the policy or any replacement on the same basis as the rest of the Board.
A deed of indemnity is in place between you and the Company.
APPOINTMENT
Your re-appointment will be from 1 January 2012 and is terminable at the will of the parties. However, it is envisaged that it will be for a further period of 12 months continuing until 31 December 2012 subject to an annual review taking into account the need for progressive refreshing of the Board. The continuation of your appointment depends upon satisfactory performance and re-election at the each Annual General Meeting.
All appointments and reappointments to the Board are, of course, subject to the Companys Articles of Association. If you are not re-elected to your position as a director of the Company by the shareholders at any time and for any reason then this appointment shall terminate automatically and with immediate effect.
On termination of the appointment you shall only be entitled to such fees as may have accrued to the date of termination together with reimbursement in the normal way of any expenses properly incurred prior to that date.
REMUNERATION
The fees are US$120,000 per annum (subject to income tax and statutory deductions) and will be reviewed each year. There is an additional allowance relating to inter-continental travel of US$7,000 per trip.
As Senior Independent Director you will receive an additional fee of US$27,000 per annum.
4
EXPENSES
The Company will reimburse you for any expenses that you may incur properly and reasonably in performing your duties and which are properly documented. Such expenses would include reasonable legal fees if circumstances should arise in which it was necessary for you to seek separate legal advice about the performance of your duties. In such a situation, you are required to discuss the issue either with me or with one of your non-executive colleagues in advance.
INDEPENDENT PROFESSIONAL ADVICE
In some circumstances you may think that you need professional advice in the furtherance of your duties as a director. It may also be appropriate for you to seek advice from independent advisers at the Companys expense. The Company will reimburse the full cost of any expenditure incurred.
DATA PROTECTION
By signing this agreement you consent to the Company holding and processing information about you which it may acquire during the course of this agreement, providing such use is in accordance with the Data Protection Act 1998.
THIRD PARTY RIGHTS
The Contracts (Rights of Third Parties) Act 1999 shall not apply to this agreement. No person other than the parties to this agreement shall have any rights under it and it will not be enforceable by any person other than the parties to it.
ENTIRE AGREEMENT
This agreement constitutes the entire and only agreement relating to your appointment between you and the Company.
Any previous agreement or arrangement between you and the Company or any Group company shall be deemed to have been terminated by mutual consent as from the commencement of this re-appointment, including but not limited to the re-appointment letter dated 27 September 2011.
Please sign and return the enclosed copy of this letter to confirm your agreement to your re-appointment on the above terms.
I look forward to continue working with you in the future.
Yours sincerely
/s/ Susan Henderson |
Susan Henderson |
Company Secretary |
5
I, Richard De Schutter, agree to the above terms of re-appointment as a non-executive director of Smith & Nephew plc.
Name |
/s/ Richard De Schutter |
|
Date |
11 April 2012 |
6
Exhibit 4 (c) (x)
10 April 2012
Dr Pam Kirby
15, Adam Street,
London
WC2N 6LA
Dear Pam,
SMITH & NEPHEW plc (THE COMPANY) AND YOUR RE-APPOINTMENT
AS A NON-EXECUTIVE DIRECTOR
Following the recommendation of the Nominations Committee, the board of the Company (the Board ) is delighted to hear that you have accepted our offer to remain on the Board as a non-executive director of the Company from 1 January 2012. This letter confirms the main terms of your appointment to this office. It is agreed that this is a contract for services and not a contract of employment. You should be aware that your re-appointment will have to be ratified on an annual basis by the Companys shareholders at the annual general meeting and is subject to the Companys articles of association as amended from time to time. If there is a conflict between the terms of this letter and the articles of association then the articles shall prevail.
DUTIES
1. | You are already aware how the Board is structured and what authorities are delegated to the Chief Executive Officer and his colleagues. |
2. | The Board as a whole is collectively responsible for promoting the success of the Company by directing and supervising the Companys affairs. The Boards role is to: |
(a) | provide entrepreneurial leadership to the Company within a framework of prudent and effective controls which enable risk to be assessed and managed; |
(b) | set the Companys strategic aims, ensure that the necessary financial and human resources are in place for the Company to meet its objectives, and review management performance; and |
(c) | set the Companys values and standards and ensure that its obligations to its shareholders and others are understood and met. |
1
3. | In your role as a non-executive director you are required (with the other non-executives) to: |
(a) | constructively challenge and contribute to the development of strategy; |
(b) | scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; |
(c) | satisfy yourself that financial information is accurate and that financial controls and systems of risk management are robust and defensible; and |
(d) | have a prime role in appointing, and where necessary removing, senior management and in succession planning and where required by the relevant policy of the Company from time to time be responsible for determining appropriate levels of remuneration of executive directors. |
4. | You will be required to: |
(a) | exercise relevant powers under the Companys Articles of Association; |
(b) | perform your duties faithfully, efficiently and diligently and use all reasonable endeavours to promote the interests and reputation of the Company; |
(c) | serve on various committees of the Board and attend wherever possible all meetings of such committees. You will be provided with the terms of reference of a committee on your appointment to such a committee; |
(d) | attend wherever possible all Annual General Meetings and other General Meetings of the Company; |
(e) | attend wherever possible all meetings of the Board, which meets at least six times a year, normally at 15 Adam Street, London WC2N 6LA (at least one meeting per year is held at one of the major divisions); |
(f) | attend wherever possible the Annual Strategy Review, which is usually held off-site over two days in September; |
(g) | consider all relevant papers in advance of each meeting in order to ensure that you can play a full part in the work of the Board and its committees; |
(h) | bring independent judgement to bear on issues of strategy, policy, resources, performance and standards of conduct; |
(i) | make yourself available (on reasonable notice) to provide ad hoc advice to individual directors of the Company. We do not envisage that this would take more than three days of your time a year; |
2
(j) | provide guidance and direction in planning, developing and enhancing the future strategic direction of the Company; |
(k) | share responsibility with the other directors for the effective control of the Company and with the other non-executive directors for the supervision of the executive directors; and |
(l) | comply with the Financial Services Authoritys Model Code for securities transactions by directors of UK listed companies and with any code of conduct relating to securities transactions by directors and specified employees issued by the Company from time to time (the Smith & Nephew Code of Dealing in Securities has been sent to you and further copies are available from the Company Secretary). |
5. | Overall the Company anticipates that you will need to spend a minimum of 15 days per year fulfilling your duties. This will include the Board Meetings, Annual General Meetings, one Board away-day each year and Board committee meetings. In addition you will be expected to spend an appropriate period of time preparing for each meeting and be prepared to be available for additional meetings and business when required. By accepting this appointment you confirm that you are able to commit sufficient time to the role to meet the Companys expectations. |
6. | The Company seeks to adhere to the principles in The UK Corporate Governance Code. You will be expected to carry out your duties in accordance with the principles set out in these reports, copies of which are available from the Company Secretary. |
7. | The performance of the Board and its committees, and of individual directors, is evaluated annually. At least every third year the performance will be reviewed by an external body. |
8. | You shall, in pursuance of your duties hereunder, be entitled to request such information from the Company, its subsidiary undertakings (as defined in section 1162 of the Companies Act 2006 as amended from time to time) or its or their employees, consultants or professional advisers as may be reasonably necessary to enable you to perform your role effectively. The Company shall use its reasonable endeavours to provide such information promptly. |
CONFIDENTIALITY
During the course of your duties you will have access to confidential information belonging to the Company and its subsidiary undertakings (including, but not limited to, details of suppliers, customers, margins, know-how, marketing and other relevant business information). Unauthorised disclosure of this information could seriously damage the Company. You therefore undertake not to use or disclose such information save in pursuance of your duties or in accordance with any statutory obligation or court or similar order.
3
Your attention is drawn to the rules relating to the disclosure of price sensitive information. You must not make any statement or do anything which may be a breach of these rules without prior clearance from the Chairman or Company Secretary.
OUTSIDE INTERESTS
The agreement of the Chairman should be sought before you accept any new outside interests which might affect the time you are able to devote to this appointment.
In accordance with the principles set out in The UK Corporate Governance Code you must inform the Company Secretary of any interests which you have, or acquire, which might reasonably be thought to jeopardise your independence from the Company.
During your appointment you must not take up any office or employment with, or have any interest in, any firm or company which is or may be in direct or indirect competition with the Company.
The Board has determined you to be independent, according to the provisions of The UK Corporate Governance Code.
INSURANCE
During your appointment you will be covered by the Companys directors and officers liability insurance on the terms in place from time to time. Details of the policy are available from the Company Secretary. The Company does not guarantee to maintain this insurance cover after the termination of your appointment, but you will continue to be covered by the policy or any replacement on the same basis as the rest of the Board.
A deed of indemnity is in place between you and the Company.
APPOINTMENT
Your re-appointment will be from 1 January 2012 and is terminable at the will of the parties. However, it is envisaged that it will be for a further period of 12 months continuing until 31 December 2012 subject to an annual review taking into account the need for progressive refreshing of the Board. The continuation of your appointment depends upon satisfactory performance and re-election at the each Annual General Meeting.
All appointments and reappointments to the Board are, of course, subject to the Companys Articles of Association. If you are not re-elected to your position as a director of the Company by the shareholders at any time and for any reason then this appointment shall terminate automatically and with immediate effect.
On termination of the appointment you shall only be entitled to such fees as may have accrued to the date of termination together with reimbursement in the normal way of any expenses properly incurred prior to that date.
4
REMUNERATION
The fees are £63,000 per annum (subject to income tax and statutory deductions) and will be reviewed each year. There is an additional allowance relating to inter-continental travel of £3,500 per trip.
As Chairman of the Ethics and Compliance Committee you will receive an additional fee of £15,000 per annum.
EXPENSES
The Company will reimburse you for any expenses that you may incur properly and reasonably in performing your duties and which are properly documented. Such expenses would include reasonable legal fees if circumstances should arise in which it was necessary for you to seek separate legal advice about the performance of your duties. In such a situation, you are required to discuss the issue either with me or with one of your non-executive colleagues in advance.
INDEPENDENT PROFESSIONAL ADVICE
In some circumstances you may think that you need professional advice in the furtherance of your duties as a director. It may also be appropriate for you to seek advice from independent advisers at the Companys expense. The Company will reimburse the full cost of any expenditure incurred.
DATA PROTECTION
By signing this agreement you consent to the Company holding and processing information about you which it may acquire during the course of this agreement, providing such use is in accordance with the Data Protection Act 1998.
THIRD PARTY RIGHTS
The Contracts (Rights of Third Parties) Act 1999 shall not apply to this agreement. No person other than the parties to this agreement shall have any rights under it and it will not be enforceable by any person other than the parties to it.
ENTIRE AGREEMENT
This agreement constitutes the entire and only agreement relating to your re- appointment between you and the Company.
Any previous agreement or arrangement between you and the Company or any Group company shall be deemed to have been terminated by mutual consent as from the commencement of this re-appointment, including but not limited to the re-appointment letter dated 27 September 2011.
5
Please sign and return the enclosed copy of this letter to confirm your agreement to your re-appointment on the above terms.
I look forward to continue working with you in the future.
Yours sincerely
/s/ Susan Henderson |
Susan Henderson |
Company Secretary |
I, Dr Pam Kirby, agree to the above terms of re-appointment as a non-executive director of Smith & Nephew plc.
Name |
/s/ Pam Kirby |
|
Date |
11 April 2012 |
6
Exhibit 4 (c) (xi)
10 April 2012
Mr Brian Larcombe
15, Adam Street
London
WC2N 6LA
Dear Brian,
SMITH & NEPHEW plc (THE COMPANY) AND YOUR RE-APPOINTMENT
AS A NON-EXECUTIVE DIRECTOR
Following the recommendation of the Nominations Committee, the board of the Company (the Board ) is delighted to hear that you have accepted our offer to remain on the Board as a non-executive director of the Company from 1 January 2012. This letter confirms the main terms of your appointment to this office. It is agreed that this is a contract for services and not a contract of employment. You should be aware that your re-appointment will have to be ratified on an annual basis by the Companys shareholders at the annual general meeting and is subject to the Companys articles of association as amended from time to time. If there is a conflict between the terms of this letter and the articles of association then the articles shall prevail.
DUTIES
1. | You are already aware how the Board is structured and what authorities are delegated to the Chief Executive Officer and his colleagues. |
2. | The Board as a whole is collectively responsible for promoting the success of the Company by directing and supervising the Companys affairs. The Boards role is to: |
(a) | provide entrepreneurial leadership to the Company within a framework of prudent and effective controls which enable risk to be assessed and managed; |
(b) | set the Companys strategic aims, ensure that the necessary financial and human resources are in place for the Company to meet its objectives, and review management performance; and |
(c) | set the Companys values and standards and ensure that its obligations to its shareholders and others are understood and met. |
1
3. | In your role as a non-executive director you are required (with the other non-executives) to: |
(a) | constructively challenge and contribute to the development of strategy; |
(b) | scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; |
(c) | satisfy yourself that financial information is accurate and that financial controls and systems of risk management are robust and defensible; and |
(d) | have a prime role in appointing, and where necessary removing, senior management and in succession planning and where required by the relevant policy of the Company from time to time be responsible for determining appropriate levels of remuneration of executive directors. |
4. | You will be required to: |
(a) | exercise relevant powers under the Companys Articles of Association; |
(b) | perform your duties faithfully, efficiently and diligently and use all reasonable endeavours to promote the interests and reputation of the Company; |
(c) | serve on various committees of the Board and attend wherever possible all meetings of such committees. You will be provided with the terms of reference of a committee on your appointment to such a committee; |
(d) | attend wherever possible all Annual General Meetings and other General Meetings of the Company; |
(e) | attend wherever possible all meetings of the Board, which meets at least six times a year, normally at 15 Adam Street, London WC2N 6LA (at least one meeting per year is held at one of the major divisions); |
(f) | attend wherever possible the Annual Strategy Review, which is usually held off-site over two days in September; |
(g) | consider all relevant papers in advance of each meeting in order to ensure that you can play a full part in the work of the Board and its committees; |
(h) | bring independent judgement to bear on issues of strategy, policy, resources, performance and standards of conduct; |
(i) | make yourself available (on reasonable notice) to provide ad hoc advice to individual directors of the Company. We do not envisage that this would take more than three days of your time a year; |
2
(j) | provide guidance and direction in planning, developing and enhancing the future strategic direction of the Company; |
(k) | share responsibility with the other directors for the effective control of the Company and with the other non-executive directors for the supervision of the executive directors; and |
(l) | comply with the Financial Services Authoritys Model Code for securities transactions by directors of UK listed companies and with any code of conduct relating to securities transactions by directors and specified employees issued by the Company from time to time (the Smith & Nephew Code of Dealing in Securities has been sent to you and further copies are available from the Company Secretary). |
5. | Overall the Company anticipates that you will need to spend a minimum of 15 days per year fulfilling your duties. This will include the Board Meetings, Annual General Meetings, one Board away-day each year and Board committee meetings. In addition you will be expected to spend an appropriate period of time preparing for each meeting and be prepared to be available for additional meetings and business when required. By accepting this appointment you confirm that you are able to commit sufficient time to the role to meet the Companys expectations. |
6. | The Company seeks to adhere to the principles in The UK Corporate Governance Code. You will be expected to carry out your duties in accordance with the principles set out in these reports, copies of which are available from the Company Secretary. |
7. | The performance of the Board and its committees, and of individual directors, is evaluated annually. At least every third year the performance will be reviewed by an external body. |
8. | You shall, in pursuance of your duties hereunder, be entitled to request such information from the Company, its subsidiary undertakings (as defined in section 1162 of the Companies Act 2006 as amended from time to time) or its or their employees, consultants or professional advisers as may be reasonably necessary to enable you to perform your role effectively. The Company shall use its reasonable endeavours to provide such information promptly. |
CONFIDENTIALITY
During the course of your duties you will have access to confidential information belonging to the Company and its subsidiary undertakings (including, but not limited to, details of suppliers, customers, margins, know-how, marketing and other relevant business information). Unauthorised disclosure of this information could seriously damage the Company. You therefore undertake not to use or disclose such information save in pursuance of your duties or in accordance with any statutory obligation or court or similar order.
Your attention is drawn to the rules relating to the disclosure of price sensitive information. You must not make any statement or do anything which may be a breach of these rules without prior clearance from the Chairman or Company Secretary.
3
OUTSIDE INTERESTS
The agreement of the Chairman should be sought before you accept any new outside interests which might affect the time you are able to devote to this appointment.
In accordance with the principles set out in The UK Corporate Governance Code you must inform the Company Secretary of any interests which you have, or acquire, which might reasonably be thought to jeopardise your independence from the Company. .
During your appointment you must not take up any office or employment with, or have any interest in, any firm or company which is or may be in direct or indirect competition with the Company.
The Board has determined you to be independent, according to the provisions of The UK Corporate Governance Code.
INSURANCE
During your appointment you will be covered by the Companys directors and officers liability insurance on the terms in place from time to time. Details of the policy are available from the Company Secretary. The Company does not guarantee to maintain this insurance cover after the termination of your appointment, but you will continue to be covered by the policy or any replacement on the same basis as the rest of the Board.
A deed of indemnity is in place between you and the Company.
APPOINTMENT
Your re-appointment will be from 1 January 2012 and is terminable at the will of the parties. However, it is envisaged that it will be for a further period of 12 months continuing until 31 December 2012 subject to an annual review taking into account the need for progressive refreshing of the Board. The continuation of your appointment depends upon satisfactory performance and re-election at the each Annual General Meeting.
All appointments and reappointments to the Board are, of course, subject to the Companys Articles of Association. If you are not re-elected to your position as a director of the Company by the shareholders at any time and for any reason then this appointment shall terminate automatically and with immediate effect.
On termination of the appointment you shall only be entitled to such fees as may have accrued to the date of termination together with reimbursement in the normal way of any expenses properly incurred prior to that date .
REMUNERATION
The fees are £63,000 per annum (subject to income tax and statutory deductions) and will be reviewed each year. There is an additional allowance relating to inter-continental travel of £3,500 per trip.
4
EXPENSES
The Company will reimburse you for any expenses that you may incur properly and reasonably in performing your duties and which are properly documented. Such expenses would include reasonable legal fees if circumstances should arise in which it was necessary for you to seek separate legal advice about the performance of your duties. In such a situation, you are required to discuss the issue either with me or with one of your non-executive colleagues in advance.
INDEPENDENT PROFESSIONAL ADVICE
In some circumstances you may think that you need professional advice in the furtherance of your duties as a director. It may also be appropriate for you to seek advice from independent advisers at the Companys expense. The Company will reimburse the full cost of any expenditure incurred.
DATA PROTECTION
By signing this agreement you consent to the Company holding and processing information about you which it may acquire during the course of this agreement, providing such use is in accordance with the Data Protection Act 1998.
THIRD PARTY RIGHTS
The Contracts (Rights of Third Parties) Act 1999 shall not apply to this agreement. No person other than the parties to this agreement shall have any rights under it and it will not be enforceable by any person other than the parties to it.
ENTIRE AGREEMENT
This agreement constitutes the entire and only agreement relating to your re-appointment between you and the Company. .
Any previous agreement or arrangement between you and the Company or any Group company shall be deemed to have been terminated by mutual consent as from the commencement of this re-appointment, including but not limited to the re-appointment letter dated 10 April 2012.
Please sign and return the enclosed copy of this letter to confirm your agreement to your re-appointment on the above terms.
I look forward to continue working with you in the future.
Yours sincerely
/s/ Susan Henderson |
Susan Henderson |
Company Secretary |
5
I, Brian Larcombe, agree to the above terms of re-appointment as a non-executive director of Smith & Nephew plc.
Name |
/s/ Brian Larcombe |
|
Date |
11 April 2012 |
6
Exhibit 4 (c) (xii)
10 April 2012
Dr Rolf Stomberg
15, Adam Street,
London
WC2N 6LA
Dear Rolf,
SMITH & NEPHEW plc (THE COMPANY) AND YOUR RE-APPOINTMENT
AS A NON-EXECUTIVE DIRECTOR
Following the recommendation of the Nominations Committee, the board of the Company (the Board ) is delighted to hear that you have accepted our offer to remain on the Board as a non-executive director of the Company from 1 January 2012. This letter confirms the main terms of your appointment to this office. It is agreed that this is a contract for services and not a contract of employment. You should be aware that your re-appointment will have to be ratified on an annual basis by the Companys shareholders at the annual general meeting and is subject to the Companys articles of association as amended from time to time. If there is a conflict between the terms of this letter and the articles of association then the articles shall prevail.
DUTIES
1. | You are already aware how the Board is structured and what authorities are delegated to the Chief Executive Officer and his colleagues. |
2. | The Board as a whole is collectively responsible for promoting the success of the Company by directing and supervising the Companys affairs. The Boards role is to: |
(a) | provide entrepreneurial leadership to the Company within a framework of prudent and effective controls which enable risk to be assessed and managed; |
(b) | set the Companys strategic aims, ensure that the necessary financial and human resources are in place for the Company to meet its objectives, and review management performance; and |
(c) | set the Companys values and standards and ensure that its obligations to its shareholders and others are understood and met. |
1
3. | In your role as a non-executive director you are required (with the other non-executives) to: |
(a) | constructively challenge and contribute to the development of strategy; |
(b) | scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; |
(c) | satisfy yourself that financial information is accurate and that financial controls and systems of risk management are robust and defensible; and |
(d) | have a prime role in appointing, and where necessary removing, senior management and in succession planning and where required by the relevant policy of the Company from time to time be responsible for determining appropriate levels of remuneration of executive directors. |
4. | You will be required to: |
(a) | exercise relevant powers under the Companys Articles of Association; |
(b) | perform your duties faithfully, efficiently and diligently and use all reasonable endeavours to promote the interests and reputation of the Company; |
(c) | serve on various committees of the Board and attend wherever possible all meetings of such committees. You will be provided with the terms of reference of a committee on your appointment to such a committee; |
(d) | attend wherever possible all Annual General Meetings and other General Meetings of the Company; |
(e) | attend wherever possible all meetings of the Board, which meets at least six times a year, normally at 15 Adam Street, London WC2N 6LA (at least one meeting per year is held at one of the major divisions); |
(f) | attend wherever possible the Annual Strategy Review, which is usually held off-site over two days in September; |
(g) | consider all relevant papers in advance of each meeting in order to ensure that you can play a full part in the work of the Board and its committees; |
(h) | bring independent judgement to bear on issues of strategy, policy, resources, performance and standards of conduct; |
(i) | make yourself available (on reasonable notice) to provide ad hoc advice to individual directors of the Company. We do not envisage that this would take more than three days of your time a year; |
2
(j) | provide guidance and direction in planning, developing and enhancing the future strategic direction of the Company; |
(k) | share responsibility with the other directors for the effective control of the Company and with the other non-executive directors for the supervision of the executive directors; and |
(l) | comply with the Financial Services Authoritys Model Code for securities transactions by directors of UK listed companies and with any code of conduct relating to securities transactions by directors and specified employees issued by the Company from time to time (the Smith & Nephew Code of Dealing in Securities has been sent to you and further copies are available from the Company Secretary). |
5. | Overall the Company anticipates that you will need to spend a minimum of 15 days per year fulfilling your duties. This will include the Board Meetings, Annual General Meetings, one Board away-day each year and Board committee meetings. In addition you will be expected to spend an appropriate period of time preparing for each meeting and be prepared to be available for additional meetings and business when required. By accepting this appointment you confirm that you are able to commit sufficient time to the role to meet the Companys expectations. |
6. | The Company seeks to adhere to the principles in The UK Corporate Governance Code. You will be expected to carry out your duties in accordance with the principles set out in these reports, copies of which are available from the Company Secretary. |
7. | The performance of the Board and its committees, and of individual directors, is evaluated annually. At least every third year the performance will be reviewed by an external body. |
8. | You shall, in pursuance of your duties hereunder, be entitled to request such information from the Company, its subsidiary undertakings (as defined in section 1162 of the Companies Act 2006 as amended from time to time) or its or their employees, consultants or professional advisers as may be reasonably necessary to enable you to perform your role effectively. The Company shall use its reasonable endeavours to provide such information promptly. |
CONFIDENTIALITY
During the course of your duties you will have access to confidential information belonging to the Company and its subsidiary undertakings (including, but not limited to, details of suppliers, customers, margins, know-how, marketing and other relevant business information). Unauthorised disclosure of this information could seriously damage the Company. You therefore undertake not to use or disclose such information save in pursuance of your duties or in accordance with any statutory obligation or court or similar order.
Your attention is drawn to the rules relating to the disclosure of price sensitive information. You must not make any statement or do anything which may be a breach of these rules without prior clearance from the Chairman or Company Secretary.
3
OUTSIDE INTERESTS
The agreement of the Chairman should be sought before you accept any new outside interests which might affect the time you are able to devote to this appointment.
In accordance with the principles set out in The UK Corporate Governance Code you must inform the Company Secretary of any interests which you have, or acquire, which might reasonably be thought to jeopardise your independence from the Company.
During your appointment you must not take up any office or employment with, or have any interest in, any firm or company which is or may be in direct or indirect competition with the Company.
The Board has determined you to be independent, according to the provisions of The UK Corporate Governance Code.
INSURANCE
During your appointment you will be covered by the Companys directors and officers liability insurance on the terms in place from time to time. Details of the policy are available from the Company Secretary. The Company does not guarantee to maintain this insurance cover after the termination of your appointment, but you will continue to be covered by the policy or any replacement on the same basis as the rest of the Board.
A deed of indemnity is in place between you and the Company.
APPOINTMENT
Your re-appointment will be from 1 the January 2012 and is terminable at the will of the parties. However, it is envisaged that it will be effective up to the close of the Annual General Meeting on 12 April 2012 or any adjournment thereof.
All appointments and reappointments to the Board are, of course, subject to the Companys Articles of Association. If you are not re-elected to your position as a director of the Company by the shareholders at any time and for any reason then this appointment shall terminate automatically and with immediate effect.
On termination of the appointment you shall only be entitled to such fees as may have accrued to the date of termination together with reimbursement in the normal way of any expenses properly incurred prior to that date.
REMUNERATION
The fees are 84,250 per annum (subject to income tax and statutory deductions). There is an additional allowance relating to inter-continental travel of 5,000 per trip.
4
EXPENSES
The Company will reimburse you for any expenses that you may incur properly and reasonably in performing your duties and which are properly documented. Such expenses would include reasonable legal fees if circumstances should arise in which it was necessary for you to seek separate legal advice about the performance of your duties. In such a situation, you are required to discuss the issue either with me or with one of your non-executive colleagues in advance.
INDEPENDENT PROFESSIONAL ADVICE
In some circumstances you may think that you need professional advice in the furtherance of your duties as a director. It may also be appropriate for you to seek advice from independent advisers at the Companys expense. The Company will reimburse the full cost of any expenditure incurred.
DATA PROTECTION
By signing this agreement you consent to the Company holding and processing information about you which it may acquire during the course of this agreement, providing such use is in accordance with the Data Protection Act 1998.
THIRD PARTY RIGHTS
The Contracts (Rights of Third Parties) Act 1999 shall not apply to this agreement. No person other than the parties to this agreement shall have any rights under it and it will not be enforceable by any person other than the parties to it.
ENTIRE AGREEMENT
This agreement constitutes the entire and only agreement relating to your appointment between you and the Company.
Any previous agreement or arrangement between you and the Company or any Group company shall be deemed to have been terminated by mutual consent as from the commencement of this re-appointment, including but not limited to the re-appointment letter dated 27 September 2011.
Please sign and return the enclosed copy of this letter to confirm your agreement to your re-appointment on the above terms.
I look forward to continue working with you in the future.
Yours sincerely
/s/ Susan Henderson |
Susan Henderson |
Company Secretary |
5
I, Dr Rolf Stomberg, agree to the above terms of re-appointment as a non-executive director of Smith & Nephew plc.
Name |
/s/ Rolf Stomberg |
|
Date |
11 April 2012 |
6
Exhibit 4 (c) (xiii)
20 February 2013
Michael A Friedman
15 Adam Street,
London
WC2N 6LA
Dear Michael,
SMITH & NEPHEW plc (THE COMPANY) AND YOUR APPOINTMENT
AS A NON-EXECUTIVE DIRECTOR
Following the recommendation of the Nominations Committee, the board of the Company (the Board) is pleased to confirm your appointment as a non-executive director on the board of Smith & Nephew plc. This letter sets out the main terms of your appointment to this office. It is agreed that on acceptance of this offer this letter will be a contract for services and not a contract of employment. You should be aware that your appointment will have to be ratified by the Companys shareholders at the annual general meeting in April 2013 and annually thereafter. Your appointment is also subject to the Companys articles of association as amended from time to time. If there is a conflict between the terms of this letter and the articles of association then the articles shall prevail.
DUTIES
1. | The Board as a whole is collectively responsible for promoting the success of the Company by directing and supervising the Companys affairs. The Boards role is to: |
(a) | provide entrepreneurial leadership to the Company within a framework of prudent and effective controls which enable risk to be assessed and managed; |
(b) | set the Companys strategic aims, ensure that the necessary financial and human resources are in place for the Company to meet its objectives, and review management performance; and |
(c) | set the Companys values and standards and ensure that its obligations to its shareholders and others are understood and met. |
1
2. | In your role as a non-executive director you will be required (with the other non-executives) to: |
(a) | constructively challenge and contribute to the development of strategy; |
(b) | scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; |
(c) | satisfy yourself that financial information is accurate and that financial controls and systems of risk management are robust and defensible; and |
(d) | have a prime role in appointing, and where necessary removing, senior management and in succession planning and where required by the relevant policy of the Company from time to time be responsible for determining appropriate levels of remuneration of executive directors. |
3. | You will be required to: |
(a) | exercise relevant powers under the Companys memorandum and articles of association; |
(b) | perform your duties faithfully, efficiently and diligently and use all reasonable endeavours to promote the interests and reputation of the Company; |
(c) | serve on various committees of the Board and attend wherever possible all meetings of such committees. You will be provided with the terms of reference of a committee on your appointment to such a committee; |
(d) | attend wherever possible all Annual General Meetings and Extraordinary General Meetings of the Company; |
(e) | attend wherever possible all meetings of the Board, which meets at least six times a year, normally at 15 Adam Street, London WC2N 6LA (one meeting a year is held at one of the major business units); |
(f) | attend wherever possible the Annual Strategy Review, which is usually held off-site over two or three days in September; |
(g) | consider all relevant papers in advance of each meeting in order to ensure that you can play a full part in the work of the Board and its committees; |
(h) | bring independent judgement to bear on issues of strategy, policy, resources, performance and standards of conduct; |
(i) | make yourself available (on reasonable notice) to provide ad hoc advice to individual directors of the Company. We do not envisage that this would take more than two days of your time a year; |
2
(j) | provide guidance and direction in planning, developing and enhancing the future strategic direction of the Company; |
(k) | share responsibility with the other directors for the effective control of the Company and with the other non-executive directors for the supervision of the executive directors; and |
(l) | comply with the Financial Services Authoritys Model Code for securities transactions by directors of UK listed companies and with any code of conduct relating to securities transactions by directors and specified employees issued by the Company from time to time The Smith & Nephew Code of Dealing in Securities will be sent to you on your appointment. |
4. | Overall the Company anticipates that you will need to spend a minimum of 15 days per year fulfilling your duties. This will include the board meetings, annual general meetings, one board away-day each year and board committee meetings. In addition you will be expected to spend an appropriate period of time preparing for each meeting and be prepared to be available for additional meetings and business when required. By accepting this appointment you confirm that you are able to commit sufficient time to the role to meet the Companys expectations. |
5. | The Company seeks to adhere to the principles in UK Corporate Governance Code. You will be expected to carry out your duties in accordance with the principles set out in these reports, copies of which are available from the Company Secretary. |
6. | The performance of the Board and its committees, and of individual directors, is evaluated annually. At least every third year the performance will be reviewed by an external body. |
7. | You shall, in pursuance of your duties hereunder, be entitled to request such information from the Company, its subsidiary undertakings (as defined in section 1162 of the Companies Act 2006 as amended from time to time) or its or their employees, consultants or professional advisers as may be reasonably necessary to enable you to perform your role effectively. The Company shall use its reasonable endeavours to provide such information promptly. |
CONFIDENTIALITY
During the course of your duties you will have access to confidential information belonging to the Company and its subsidiary undertakings (including, but not limited to, details of suppliers, customers, margins, know-how, marketing and other relevant business information). Unauthorised disclosure of this information could seriously damage the Company. You will therefore undertake not to use or disclose such information save in pursuance of your duties or in accordance with any statutory obligation or court or similar order.
Your attention is drawn to the rules relating to the disclosure of price sensitive information. You must not make any statement or do anything which may be a breach of these rules without prior clearance from the Chairman or Company Secretary.
3
OUTSIDE INTERESTS
The agreement of the Chairman will have to be sought before you accept any new outside interests which might affect the time you are able to devote to this appointment.
In accordance with the principles set out in the Combined Code you will have to inform the Company Secretary of any interests which you have, or acquire, which might reasonably be thought to jeopardise your independence from the Company.
During your appointment you will not be able to take up any office or employment with, or have any interest in, any firm or company which is or may be in direct or indirect competition with the Company.
The Board will determine you to be independent, according to the provisions of the Combined Code.
INSURANCE
During your appointment you will be covered by the Companys directors and officers liability insurance on the terms in place from time to time. Details of the policy are available from the Company Secretary. The Company does not guarantee to maintain this insurance cover after the termination of your appointment, but you will continue to be covered by the policy or any replacement on the same basis as the rest of the Board. A deed of indemnity will be put in place between you and the Company.
APPOINTMENT
Your appointment will be from 11 April 2013 and will be terminable at the will of the parties. However, it is envisaged that it will be for an initial period of 36 months from the date of appointment. The continuation of your appointment depends upon satisfactory performance and re-election at the Annual General Meeting to be held on 11 April 2013 and at each Annual General Meeting.
All appointments and reappointments to the Board will be subject to the Companys articles of association. If you are not re-elected to your position as a director of the Company by the shareholders at any time and for any reason then this appointment shall terminate automatically and with immediate effect.
On termination of the appointment you shall only be entitled to such fees as may have accrued to the date of termination together with reimbursement in the normal way of any expenses properly incurred prior to that date.
REMUNERATION
The fees are $120,000 (subject to income tax and statutory deductions) per annum and will be reviewed each year. There is an additional allowance relating to inter-continental travel of $7,000 per trip and there would be an additional fee, should you take over as Chairman of any of the Committees.
4
EXPENSES
The Company will reimburse you for any expenses that you may incur properly and reasonably in performing your duties and which are properly documented. Such expenses would include reasonable legal fees if circumstances should arise in which it was necessary for you to seek separate legal advice about the performance of your duties. In such a situation, you will be required to discuss the issue either with me or with one of your non-executive colleagues in advance.
INDEPENDENT PROFESSIONAL ADVICE
In some circumstances you may think that you will need professional advice in the furtherance of your duties as a director. It may also be appropriate for you to seek advice from independent advisers at the Companys expense. The Company will reimburse the full cost of any expenditure incurred.
DATA PROTECTION
By signing this agreement you consent to the Company holding and processing information about you which it may acquire during the course of this agreement, providing such use is in accordance with the Data Protection Act 1998.
THIRD PARTY RIGHTS
The Contracts (Rights of Third Parties) Act 1999 shall not apply to this agreement. No person other than the parties to this agreement shall have any rights under it and it will not be enforceable by any person other than the parties to it.
ENTIRE AGREEMENT
This agreement will constitute the entire and only agreement relating to your appointment between you and the Company.
Any previous agreement or arrangement between you and the Company or any Group company shall be deemed to have been terminated by mutual consent as from the commencement of your appointment.
5
Please sign and return the enclosed copy of this letter to Susan Swabey, our Company Secretary to confirm your agreement to your appointment on the above terms. She will be in touch with you shortly to request further information to enable us to fulfil our statutory obligations.
I look forward to working with you in the future.
Yours sincerely |
/s/ Susan Swabey |
Susan Swabey Company Secretary |
I, Michael Friedman, agree to the above terms of appointment as a non-executive director of Smith & Nephew plc.
Name |
/s/ Michael Friedman |
|
Date |
20 February 2013 |
6
Exhibit 4 (c) (xxxiii)
Smith & Nephew plc
The Smith & Nephew Sharesave Plan (2012)
This is a copy of the rules of
The Smith & Nephew Sharesave Plan 2012
as produced to the Annual General Meeting
of the Company on 12 April 2012 and initialled by
the Chairman for the purposes of identification only
Chairman
HMRC Ref No ¨
CONTENTS
Rules | Page | |||||
1. |
Interpretation | 1 | ||||
2. |
Invitations to apply for Options | 6 | ||||
3. |
The Exercise Price | 7 | ||||
4. |
Applications for Options | 8 | ||||
5. |
Acceptance and Scaling-Down of Applications | 8 | ||||
6. |
Grant of Options | 10 | ||||
7. |
Issue of Shares | 11 | ||||
8. |
Limits on Individual Contributions | 11 | ||||
9. |
Non-Transferability and Lapse of Options | 12 | ||||
10. |
Relationship with Service Contract | 12 | ||||
11. |
Exercise of Options | 13 | ||||
12. |
Manner of Exercise of Options | 15 | ||||
13. |
Reconstruction or Winding-Up of the Company | 17 | ||||
14. |
Take-over of the Company | 17 | ||||
15. |
Variation of Share Capital | 19 | ||||
16. |
Alteration of this Plan | 20 | ||||
17. |
Service of Documents | 21 | ||||
18. |
Miscellaneous | 21 | ||||
19. |
Jurisdiction | 21 | ||||
20. |
Data Protection | 22 | ||||
21. |
Third Party Rights | 22 |
RULES OF
SMITH & NEPHEW SHARESAVE PLAN 2012
1. | INTERPRETATION |
1.1 | In this Plan, the following words and expressions shall have the meanings respectively given below: |
3 year Option |
an Option linked to a 3 year Savings Contract | |
5 year Option |
an Option linked to a 5 year Savings Contract and which is not a 7 year Option | |
7 year Option |
an Option linked to a 5 year Savings Contract under which the Optionholder has elected, when applying for such Savings Contract, that repayments under the Savings Contract be taken as including the maximum bonus payable | |
Acquisition Cost |
in relation to the exercise of an Option, an amount equal to the product of:
(a) the maximum number of Shares in respect of which that Option is then exercised in accordance with rule 11; and
(b) the Exercise Price |
|
Announcement Date |
a date of announcement of the annual, half-year or quarterly results of the Company | |
Applicant |
a person who, in response to an Invitation, submits an Application | |
Application |
an application for the grant of an Option made in accordance with rule 4 | |
Application Date |
in relation to any Invitation, such date (being not less than 14 days after the date on which that invitation was issued) as shall be determined by the Committee to be the last day on which an application for the grant of an Option may be submitted in response to Invitations issued on any occasion | |
Approval Date |
the date on which the Company receives notice that this Plan has been approved by HMRC pursuant to Schedule 3 | |
Associated Company |
any company which, in relation to the Company, is an associated company as that term is defined for the purposes of paragraph 47 of Schedule 3 | |
Bonus Date |
in relation to any Employees Savings Contract, the date on which the bonus becomes payable |
1
Committee |
the Remuneration Committee of the Company | |
the Company |
Smith & Nephew plc (registered in England no 324357) | |
control |
the meaning given in section 719 of ITEPA | |
Date of Grant |
in relation to any Option, the date on which that Option is granted | |
Date of Invitation |
in relation to any Option, the date on which the invitation to apply for that Option is issued | |
Dealing Day |
a day on which the London Stock Exchange is open for business | |
Directors |
the board of directors of the Company or a duly constituted committee of that board | |
Eligible Employee |
any Employee (other than an Employee precluded from participating in this Plan by virtue of paragraph 11 of Schedule 3) who:
1.
(a) is employed by a Participating Company and
(b) has been continuously employed by one or more Participating Companies throughout the period of three months ending with the Date of Grant (or such other period immediately preceding that date as the Directors may from time to time determine not being more than 5 years) and
(c) whose earnings from the office or employment are (or would be if there were any) general earnings to which section 15 of ITEPA applies and those general earnings are (or would be if there were any) earnings for a tax year in which the individual is ordinarily resident in the United Kingdom; or
2. is nominated by the Directors as an Eligible Employee for the purposes of this Plan |
|
Employee |
an employee or Full-time Director of any Participating Company |
2
Employees Savings Contract | in relation to an Eligible Employee or an Optionholder, the Savings Contract entered into by that person in connection with the grant to him of an Option (and any reference to his Savings Contract shall be construed accordingly) | |
the Exercise Price |
in relation to Shares subject to any Option, the price per Share payable upon the exercise of that Option | |
Full-time Director |
a director of any Participating Company who is required to work more than 25 hours per week (exclusive of meal breaks) disregarding holiday entitlement | |
Grantor |
in relation to an Option, the Company or the Relevant Trustee which has granted or proposes to grant such Option | |
the Group |
the Company and every other company which is for the time being a Subsidiary | |
HMRC |
Her Majestys Revenue and Customs | |
Initial Market Value |
in relation to any Share in respect of which an Option is to be, or has been, granted the market value of such a Share shall (except as otherwise agreed with the Shares and Assets Valuation of HMRC) be taken to be the average of the middle market quotations of a Share as derived from the Official List for the three consecutive Dealing Days last preceding the date of Invitation | |
Invitation |
an invitation to apply for the grant of an Option issued in accordance with rule 2 | |
ITEPA |
Income Tax (Earnings and Pensions) Act 2003 | |
Jointly Owned Company |
a company (and any subsidiary as defined in section 1159 and Schedule 6 of the Companies Act 2006 of such a company) of which the whole of the issued ordinary share capital is jointly owned by a member of the Group and another person (not being a member of the Group) but which is not a Subsidiary and is not under the control of such other person | |
Key Feature |
a provision of the Plan which is necessary in order to meet the requirements of Schedule 3 | |
London Stock Exchange |
means London Stock Exchange plc, or any successor to that company |
3
Material Interest | the meaning given by paragraphs 11 to 16 of Schedule 3 | |
Model Code | the code adopted by the Company which contains provisions similar in purpose and effect to the provisions of the Model Code for securities transactions by directors and certain employees of listed companies, and persons connected with them, as issued by the UK Listing Authority from time to time | |
Official List | the daily official list of the UK Listing Authority | |
Option | a right to acquire Shares which is granted pursuant to and is exercisable only in accordance with the rules of this Plan | |
Option Certificate | a certificate or other document issued by on or behalf of the Grantor evidencing the grant of an Option | |
Optionholder | in relation to any Option, the person to whom that Option has been granted or, if that person has died, his Personal Representatives | |
Ordinary Share Capital | issued ordinary share capital of the Company | |
Participating Company |
(a) the Company; and
(b) any other company which at the Date of Grant is under the control of the Company and is for the time being designated by the Directors as a Participating Company |
|
Personal Data | has the meaning it bears for the purposes of the Data Protection Act 1998 | |
Personal Representatives | in relation to an Optionholder, the legal personal representatives of the Optionholder (being either the executors of his will to whom a valid grant of probate has been made or if he dies intestate the duly appointed administrator(s) of his estate) who have satisfied the Company of their appointment as such | |
this Plan | the Smith & Nephew Sharesave Plan 2012 as set out in these rules as amended from time to time | |
Relevant Savings Body | in relation to an Employees Savings Contract, the Savings Body which is a party to that Contract |
4
Relevant Trustee | the meaning given in article 71(6) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 | |
Repayment Value | in relation to an Employees Savings Contract, the aggregate amount of all the monthly savings contributions payable under that Savings Contract together with the amount of such bonus as would be due on the Bonus Date | |
Savings Body | such bank or building society which operates an SAYE Scheme as is approved by the Directors for the purposes of this Plan | |
Savings Contract | a savings contract entered into under an SAYE Scheme | |
SAYE Scheme | a certified SAYE savings arrangement within the meaning of section 703 of the Income Tax (Trading and Other Income) Act 2005 which has been approved by HMRC for the purposes of Schedule 3 | |
Schedule 3 | Schedule 3 to ITEPA | |
Shares | fully-paid ordinary shares in the capital of the Company which satisfy the conditions set out in paragraphs 17 to 22 (inclusive) of Schedule 3 at the Date of Grant and date of exercise | |
Specified Age | 65 years of age | |
Subscription Options | Options which are rights granted by the Company to subscribe for Shares or to acquire Treasury Shares | |
Subsidiary | any company which is for the time being both a subsidiary (as defined in section 1159 and Schedule 6 of the Companies Act 2006) of the Company and under the control of the Company | |
Taxable Year | the calendar year or, if it would result in a longer period for the exercise of an Option, the 12 month period in respect of which the Optionholders employing company is obliged to pay tax | |
Treasury Shares | Shares which meet the conditions set out in paragraphs (a) and (b) of section 724(5) of the Companies Act 2006 |
5
UK Listing Authority | the Financial Services Authority in its capacity as the competent authority for the purposes of Part VI of the Financial Services and Markets Act 2000 | |
US Tax | taxation under the tax rules of the United States of America | |
US Taxpayer | a person who is subject to US Tax | |
year | a financial year of the Company. |
1.2 | Words and expressions not defined in this rule 1 have the same meanings as in Schedule 3. |
1.3 | References to any statutory provisions shall be read and construed as references to such provision as amended and re-enacted from time to time and no account should be taken of the rule headings which have been inserted for ease of reference only. |
1.4 | If any question, dispute or disagreement arises as to the interpretation of this Plan, the decision of the Committee shall be final and binding upon all persons. |
1.5 | Words denoting the masculine gender shall include the feminine. |
1.6 | Words denoting the singular shall include the plural and vice versa. |
2. | INVITATIONS TO APPLY FOR OPTIONS |
2.1 | Subject to the following provisions of this rule 2, the Company may from time to time issue, or procure the issue, to all persons who are or are expected to be Eligible Employees, invitations to apply for the grant of Options. |
2.2 | Invitations may be issued: |
2.2.1 | in the period of 42 days after the Approval Date, and thereafter, |
2.2.2 | in the period of 42 days beginning with the fourth Dealing Day following an Announcement Date |
or, if the Company is restricted by statute, order or regulation (including any regulation, order or requirement imposed on the Company by the London Stock Exchange or any other regulatory authority) from issuing invitations in any such period, at any time in the period of 42 days beginning with the date on which such restriction is removed; and
2.2.3 | at any other time if the Directors consider the circumstances to be exceptional unless the Company is or would then be so restricted from issuing invitations at that time. |
2.3 | Invitations may be issued in writing (including by way of hard copy invitation or an invitation by electronic means, as the Committee may specify) and may be in the form of letters, emails or other forms of invitation and/or by way of notices, advertisements, circulars or otherwise for the general attention of Employees and to which the particular attention of individual Employees is drawn by notices issued with pay and salary advice slips. |
6
2.4 | Each such invitation shall: |
2.4.1 | be in the same terms as all other such invitations issued on the same occasion; |
2.4.2 | invite the person to whom it is addressed to apply for such one or more (as the Committee shall specify) 3 year Option, 5 year Option and/or 7 year Option; |
2.4.3 | specify the form and manner in which each such person may apply for any such Option; |
2.4.4 | identify the Savings Body; |
2.4.5 | state the minimum amount of monthly savings contribution which may be made under a Savings Contract (which shall not be less than £5 or more than £10); |
2.4.6 | state the maximum amount of monthly savings contribution which may be made by an Optionholder (being such sum as is mentioned in rule 8.2); |
2.4.7 | if the Company so determines, include a statement that, if it becomes necessary to scale-back applications pursuant to rule 5, such scaling-back shall, in the first instance, apply to every application in relation to which the amount of monthly savings contribution proposed to be made is greater than such lesser amount as is specified in the invitation; |
2.4.8 | if the Company so determines, include a statement that, if it becomes necessary to scale-back applications pursuant to rule 5, all applications for 7 year Options may be accepted on the basis that they are deemed to be applications for 5 year Options and that, in this event, every corresponding application for a 5 year Savings Contract shall be deemed to be made and shall be accepted by the Relevant Savings Body on the basis that, in each such case, the Applicant will be deemed not to have elected for repayments to be taken as including the maximum bonus payable; |
2.4.9 | specify the Application Date |
and shall otherwise be in such form as the Company shall determine.
2.5 | On any occasion on which invitations are issued, the Directors may in their discretion (and acting with the consent of the Grantor where appropriate) determine and announce the maximum number of Shares in respect of which Options will be granted in response to applications made pursuant to the invitations issued on that occasion. |
2.6 | No invitation may be issued after 11 April 2022. |
3. | THE EXERCISE PRICE |
3.1 | Subject to any adjustment in accordance with rule 15, the price per Share payable upon the exercise of Options granted on any occasion shall be determined by the Grantor but shall be not less than 80% (rounded up to the nearest whole penny) of the Initial Market Value of a Share. |
3.2 | Subject to rule 15, the Exercise Price shall be the same in relation to all Options granted on the same occasion and, in relation to Subscription Options, shall not in any event be less than the nominal value of a Share. |
7
4. | APPLICATIONS FOR OPTIONS |
4.1 | Any Eligible Employee to whom an Invitation has been issued may apply for an Option by submitting to the person specified in the Invitation an application in writing (including by way of hard copy application or an application by electronic means, as the Committee may specify) which: |
4.1.1 | is received in such manner and/or at such address as is stipulated in the Invitation not later than the Application Date; |
4.1.2 | specifies the amount of the savings contributions proposed to be paid each month under the Employees Savings Contract (or, if more than one, each such Savings Contract) and authorises the Applicants employer (from time to time) to deduct such amount (or such lesser amount as may be determined pursuant to rule 5) from his pay; |
4.1.3 | if the terms of the Invitation so permit, indicates whether or not the Applicant applies for one or more 3 year Option and/or one or more 5 year Option and/or one or more 7 year Option; |
4.1.4 | includes or is accompanied by an application for a Savings Contract linked to each such Option in a form approved by the Relevant Savings Body; |
4.1.5 | otherwise complies with such terms and conditions as may have been specified in the Invitation; |
4.1.6 | is subject to the Applicant being an Eligible Employee at the Date of Grant; |
4.1.7 | provides that the Applicant agrees to accept and be bound by the rules of this Plan; |
4.1.8 | authorises the transfer and process of the Applicants Personal Data for the purposes of the administration of this Plan; |
4.1.9 | is duly completed and signed by the Applicant |
and is otherwise in such form as the Directors may determine.
4.2 | Subject to rule 5, an application for an Option shall be made shall be made in respect of the whole number of Shares for which the Acquisition Cost payable would be as nearly as may be equal to, but not exceed, the amount which would be the Repayment Value of the Employees Savings Contract if the amount of each of the contributions payable under that Savings Contract (or under each such Savings Contract) was equal to the maximum amount specified by the Applicant in his application. |
5. | ACCEPTANCE AND SCALING-DOWN OF APPLICATIONS |
5.1 | Subject to the following provisions of this rule 5, each application for an Option shall be accepted to the extent of the total number of Shares in respect of which that application is made (as mentioned in rule 4.2). |
5.2 | If the total number of Shares in respect of which applications for Options have been made on that occasion would result in any of the limits in rules 2.5 or 7 being exceeded then the number of Shares in respect of which each application for an Option is accepted shall be reduced in accordance with the following provisions of this rule 5. |
8
5.3 | If the Invitation included such statement as is mentioned in rule 2.4.8, and subject to rules 5.8 and 5.9, the number of Shares in respect of which each application for an Option is made shall be determined on the basis that the amount of monthly savings contribution to be made under such Savings Contract is reduced to the amount so specified. |
5.4 | If, after the application of rule 5.3, the total number of shares in respect of which applications for Options are deemed to have been made on that occasion exceeds any of the limits in rules 2.5 or 7 then each application for a 7 year Option shall be deemed to be an application for a 5 year Option (and the corresponding application(s) for one or more 5 year Savings Contract linked to such Option shall be deemed to be made and shall be accepted by the Relevant Savings Body on the basis that, in each such case, the Applicant has not elected for repayments to be taken as including the maximum bonus). |
5.5 | If, after the application of rule 5.4, the total number of shares in respect of which applications for Options are deemed to have been made on that occasion exceeds any of the limits in rules 2.5 or 7 then the number of Shares in respect of which each application for an Option shall be accepted shall be further reduced as nearly as may be on a proportionate basis to the extent necessary to ensure that none of those limits is exceeded (and the amount of monthly savings contributions to be made under the Savings Contracts linked to each such Option shall be reduced accordingly) SAVE THAT the number of Shares in respect of which any application for an Option shall be accepted shall not be reduced below the number for which the Acquisition Cost payable would be as nearly as may be equal to, but not exceed, the Repayment Value of the Employees Savings Contract linked to that Option if the monthly savings contributions under each such Savings Contract were £5 or such other minimum amount per month specified in the Invitation (the Minimum Number of Shares ). |
5.6 | The provisions of rule 5.5 shall, if necessary, be applied repeatedly until either none of the limits in rules 2.5 and/or 7 will be exceeded or the number of Shares in respect of which each application for an Option would be accepted is reduced to the Minimum Number of Shares. |
5.7 | If, notwithstanding the provisions of rules 5.2 to 5.6 (inclusive), any one or more of the limits in rules 2.5 and 7 would still be exceeded then the selection of applications for acceptance shall be made by the Committee on the basis that each application (after adjustment as mentioned above) has an equal chance of selection for acceptance. |
5.8 | If on any occasion an Applicant has applied for more than one 3 year Option or for more than one 5 year Option or for more than one 7 year Option then, in applying the provisions of this rule 5 the number of Shares in respect of which applications have been received from such Applicant for all such 3 year Options (or, as the case may be, all such 5 year or 7 year Options) shall first be aggregated and treated as if a single application for such an Option had been received in respect of the aggregate number of such Shares. |
5.9 |
Having, in the case of an Applicant who has applied for more than one 3 year Option (or, as the case may be, more than one 5 year or 7 year Option) identified the maximum aggregate number of Shares in respect of which such applications may be accepted, such number of Shares shall be divided by the number of Options for which such Applicant had applied and the monthly contributions to be made in respect of each Savings Contract for which an application has been made shall be identified and such applications shall be deemed to have been made, and shall be accepted, on that basis PROVIDED THAT if in consequence the amount of monthly contributions to be made under any such Savings Contract would be less than the minimum amount specified pursuant to rule 2.4.5 then the number of Savings Contracts for which |
9
applications shall be deemed to have been made by such Applicant, and shall be accepted, shall be reduced so as to ensure that the monthly contributions to be made in each case is not less than that minimum amount. |
5.10 | As soon as reasonably practicable after the Application Date in relation to Invitations issued on any occasion, the Committee (acting with the consent of the Grantor where appropriate) shall: |
5.10.1 | determine the maximum number of Shares in respect of which each application may be accepted; and |
5.10.2 | cause each application for a Savings Contract to be submitted to the Relevant Savings Body. |
6. | GRANT OF OPTIONS |
6.1 | An Option may be granted by the Company or, if the Company has determined with the consent of a Relevant Trustee, the Relevant Trustee. |
6.2 | No Option shall be granted to any person: |
a) who is not an Eligible Employee at the Date of Grant; or
b) who has a Material Interest, or has had a Material Interest at any time within the twelve month period preceding the Date of Grant.
6.3 | Subject to the following provisions of this rule 6, Options for which Invitations are issued on any occasion shall be granted within the period of 30 days beginning with the first of the three days by reference to which the Initial Market Value is determined on that occasion. |
6.4 | The Grantor (or, if the Grantor is the Company, the Committee) shall pass a resolution granting to each Applicant who is an Eligible Employee an Option to acquire the whole number of Shares for which the Acquisition Cost payable would be as nearly as possible equal to, but not exceed, the amount which would be the Repayment Value of the Employees Savings Contract, and the date of such resolution shall be the Date of Grant. |
6.5 | If on any occasion it is necessary to reduce the number of Shares in respect of which any applications are accepted then rule 6.3 shall take effect as if the reference therein to a period of 30 days was a reference to 42 days. |
6.6 | No payment shall be required in respect of the grant of any Option. |
6.7 | As soon as reasonably practicable after the Date of Grant, the Grantor shall issue to each Optionholder an Option Certificate in such form as it may determine which specifies: |
6.7.1 | the Grantor; |
6.7.2 | the Date of Grant; |
6.7.3 | the number of Shares in respect of which the Option is granted; |
6.7.4 | the Exercise Price; and |
6.7.5 | whether a bonus is included. |
6.8 | No Option shall be granted before the date on which this Plan is approved by HMRC pursuant to Schedule 3. |
10
7. | ISSUE OR TRANSFER OF SHARES |
7.1 | Subject to rule 7.2, and unless specified to the contrary by the Committee at the Date of Grant, an Option may be satisfied: |
7.1.1 | by the issue of new Shares; and/or |
7.1.2 | by the transfer of Treasury Shares; and/or |
7.1.3 | by the transfer of Shares (other than the transfer of Treasury Shares). |
The Committee may change the way in which an Option may be satisfied after the Option has been granted, subject always to the limit in rule 7.2.
7.2 | The number of Shares in respect of which Subscription Options may be granted on a given day in any year, when added to: |
7.2.1 | the number of Shares in respect of which Subscription Options have previously been granted (and which, if not exercised, have not ceased to be exercisable); and |
7.2.2 | the number of Shares issued, the number of Treasury Shares transferred and the number of Shares in respect of which any rights to subscribe for Shares or to acquire Treasury Shares have previously been granted (and which have neither been exercised nor ceased to be exercisable) under any other employee share option or share incentive plan |
in that year and the nine preceding years may not exceed such number of Shares as represents 10 per cent of the Ordinary Share Capital on that day.
7.3 | The total number of Shares in respect of which Options may be granted in response to applications made by Eligible Employees pursuant to Invitations issued on any occasion may not exceed the maximum (if any) determined and published by the Grantor on that occasion pursuant to rule 2.5. |
7.4 | The Company may issue Shares to a Relevant Trustee for the purpose of enabling the Relevant Trustee to satisfy the Companys obligation or the Relevant Trustees obligation (as the case may be) to transfer Shares to Optionholders upon the exercise of Options. |
7.5 | To the extent that a Relevant Trustee has purchased Shares to be transferred to Optionholders in satisfaction of any Subscription Options, the Shares over which such Options are held shall be left out of account for the purposes of this rule 7. |
7.6 | If the Options are to be satisfied by the transfer of Shares from a Relevant Trustee, the Committee (acting with the consent of the Relevant Trustee) may from time to time direct and notify the Optionholder in writing that the Exercise Price shall be payable, and the Optionholder shall pay the Exercise Price to the Relevant Trustee (as mentioned in rule 12.4). |
8. | LIMITS ON INDIVIDUAL CONTRIBUTIONS |
8.1 | The aggregate amount of an Employees monthly savings contributions under his Savings Contract, when added to the aggregate amount of his monthly savings contributions under any other Savings Contracts may not at any time exceed the sum specified in rule 8.2. |
11
8.2 | The sum mentioned in rule 8.1 is £250 or such other amount as is specified in the relevant Savings Contract or such other maximum amount (not exceeding such other maximum amount per month specified from time to time in paragraph 25(3) of Schedule 3) as the Grantor may determine SAVE THAT if on any occasion the Grantor shall determine for these purposes a sum (the new limit) which is less than the maximum aggregate of the monthly contributions applicable on any previous occasion then that determination shall be made without prejudice to any Option previously granted to an Optionholder or to any Employees Savings Contract previously entered into by any Optionholder if the aggregate monthly savings contributions payable by that Optionholder under such Savings Contract would thereby exceed the new limit. |
8.3 | The Company may determine that, in relation to the grant of Options on any occasion, the amount of any monthly contribution which would have been made by any such Applicant in the calendar month in which falls the Date of Grant of such Options under the terms of a Savings Contract which has been cancelled or allowed by the Applicant to lapse shall be counted in applying to that Applicant the limit in rule 8.1. |
9. | NON-TRANSFERABILITY AND LAPSE OF OPTIONS |
9.1 | During his lifetime only the individual to whom an Option is granted may exercise that Option. |
9.2 | An Option shall immediately lapse if: |
9.2.1 | it is transferred or assigned (other than to Personal Representatives of the Optionholder), mortgaged, charged or otherwise disposed of by the Optionholder; |
9.2.2 | the Optionholder is adjudged bankrupt or an interim order is made because he intends to propose a voluntary arrangement to his creditors under the Insolvency Act 1986; |
9.2.3 | the Optionholder makes or proposes a voluntary arrangement under the Insolvency Act 1986, or any other scheme or arrangement in relation to his debts, with his creditors or any section of them; or |
9.2.4 | the Optionholder is not, or ceases for any other reason (except his death) to be, the sole legal and beneficial owner of the Option free from encumbrances or would not, upon the exercise of the Option, be the sole legal and beneficial owner of the Shares thereby acquired, free from encumbrances. |
10. | RELATIONSHIP WITH SERVICE CONTRACT |
10.1 | The grant of an Option does not form part of the Optionholders entitlement to remuneration or benefits pursuant to his contract of employment nor does the existence of a contract of employment between any person and any present or past member of the Group or Associated Company or Jointly Owned Company, give such person any right or entitlement to have an Option granted to him in respect of any number of Shares or any expectation that an Option might be granted to him or that he will be invited to apply for the grant of an Option whether subject to any conditions or at all. |
12
10.2 | Neither the existence of this Plan nor the fact that an individual has on any occasion been granted an Option (or been invited to apply for the grant of an Option) shall give such individual any right entitlement or expectation that he has or will in future have any such right entitlement or expectation to participate in this Plan by being granted an Option (or invited to apply for the grant of an Option) on any other occasion. |
10.3 | The rights and obligations of an Optionholder under the terms of his contract of employment with any present or past member of the Group or Associated Company or Jointly Owned Company shall not be affected by the grant of an Option or his participation in this Plan. |
10.4 | An Optionholder shall not be entitled to any compensation or damages for any loss or potential loss which he may suffer by reason of being unable to exercise an Option in consequence of the loss or termination of his office or employment with any present or past member of the Group or Associated Company or Jointly Owned Company for any reason whatsoever (whether or not such termination is ultimately held to be wrongful or unfair). |
11. | EXERCISE OF OPTIONS |
11.1 | Subject to the following provisions of this rule 11.1 and rules 13 and 14, an Option shall only be exercisable within the period of 6 months after the Bonus Date and, if not then exercised, shall lapse and cease to be exercisable at the end of that period. |
11.2 | If an Optionholder dies, his Personal Representatives may exercise that Option: |
11.2.1 | if he dies before the Bonus Date, to the extent permitted by rule 11.10.2 during the period of 12 months commencing on the date of his death; or |
11.2.2 | if he dies within the period of 6 months after the Bonus Date, to the extent permitted by rule 11.10.1 during the period of 12 months commencing on the Bonus Date |
and if it is not then exercised that Option shall lapse and cease to be exercisable at the end of such 12-month period.
11.3 | If an Optionholder ceases to be an Employee by reason of: |
11.3.1 | injury or disability (evidenced to the satisfaction of the Committee); |
11.3.2 | dismissal by reason of redundancy (within the meaning of the Employment Rights Act 1996); |
11.3.3 | retirement on reaching either the Specified Age or any other age at which he is bound to retire in accordance with the terms of his contract of employment; |
11.3.4 | the company with which he holds office or employment by virtue of which he is eligible to participate in this Plan ceasing to be a Subsidiary; or |
11.3.5 | the fact that the office or employment by virtue of which he is eligible to participate in this Plan relates to a business or part of a business which is transferred to a person which is neither an Associated Company nor a Subsidiary |
then (without prejudice to any rights the Optionholder has under the Employees Saving Contract to make independent arrangements with the Savings Body to continue to make Contributions following cessation of his employment) his Option may be exercised, to the extent permitted by rule 11.10.2 only, during the period of 6 months commencing on
13
the date on which the Optionholder shall have ceased to be an Employee, and if it is not then exercised that Option shall lapse and cease to be exercisable at the end of that period.
11.4 | If, before an Option has lapsed or otherwise been exercised, the Optionholder attains the Specified Age but remains an Employee he may exercise the Option, to the extent permitted by rule 11.10.2, during the period of six months commencing on his attaining such age. |
11.5 | Subject to rule 11.6, if at any time an Optionholder ceases to be an Employee otherwise than as mentioned in rules 11.2, 11.3 or 11.7, any Option which he holds shall lapse and cease to be exercisable upon such cessation. |
11.6 | No Optionholder shall be treated for the purposes of rules 11.3 or 11.5 as ceasing to be an Employee until he no longer holds any office or employment in: |
11.6.1 | a Participating Company; |
11.6.2 | any Associated Company; |
11.6.3 | any other company of which the Company has control; or |
11.6.4 | a Jointly Owned Company. |
11.7 | If, at the Bonus Date, an Optionholder holds an office or employment in a company which is not a Participating Company but is: |
11.7.1 | an Associated Company; |
11.7.2 | any other company of which the Company has control; or |
11.7.3 | a Jointly Owned Company |
then the Optionholder may exercise an Option within the period of six months after the Bonus Date and if it is not then exercised it shall lapse and cease to be exercisable at the end of that period.
11.8 | If the Optionholder obtains repayment of the contributions under his Savings Contract the relevant Option shall immediately cease to be exercisable and will lapse unless, immediately before the repayment, such Option is exercisable by reason of rules 11.1, 11.3, 11.4, 13 or 14. |
11.9 | Except as provided in rule 11.2, no Option shall be capable of being exercised later than six months after the Bonus Date. |
11.10 | An Option may only ever be exercised in respect of such number of Shares as is mentioned below: |
11.10.1 | if the Option is exercisable pursuant to rule 11.1, 11.2.2 or 11.7, the maximum number of Shares in respect of which it shall subsist; |
11.10.2 | if the Option is exercisable pursuant to rules 11.2.1, 11.3, 11.4 or to rules 13 or 14, that number of Shares for which the Acquisition Cost payable is most nearly equal to but does not exceed the aggregate amount of contributions paid under the Employees Savings Contract (excluding the amount of any monthly contribution the due date of payment of which is more than one calendar month after the date on which repayment is made under the Employees Savings Contract) together with the amount of any bonus or interest received or due thereunder as at that date or (if less) the maximum number of Shares in respect of which the Option shall subsist; or |
14
11.10.3 | in either case, such lesser number of Shares as the Optionholder may specify in the notice of exercise given pursuant to rule 12.1. |
11.11 | No Option may be exercised by (or by the Personal Representatives of) any Optionholder who is (or at the date of his death was): |
11.11.1 | not an Employee (unless the Option is or was at the date of his death exercisable pursuant to rules 11.2, 11.3 or 11.7); or |
11.11.2 | ineligible to participate in the Plan at that time by virtue of having a Material Interest. |
11.12 | In deciding whether and when to exercise an Option, an Optionholder shall have regard to the Model Code. |
11.13 | This rule 11.13 shall apply to US Taxpayers. Notwithstanding anything contrary contained in this Plan, a US Taxpayer may only exercise an Option within the shorter of any exercise period specified in the rules of this Plan and the expiry of 2.5 calendar months after the end of the Taxable Year in which the Option first becomes exercisable. |
12. | MANNER OF EXERCISE OF OPTIONS |
12.1 | An Option shall be exercised only by the Optionholder giving notice in writing to the Company, or to such person at such address as may from time to time be notified to Optionholders by the Grantor, which: |
12.1.1 | is given at any time when the Option is exercisable; |
12.1.2 | states that the Option is being exercised in respect of all the Shares in respect of which it is then capable of being exercised or otherwise specifies the number of Shares in respect of which the Option is being exercised in accordance with rule 11.10; |
12.1.3 | is accompanied by a duly completed application to the Relevant Savings Body for payment of the Repayment Value of the Employees Savings Contract; |
12.1.4 | unless the Committee otherwise permits, is accompanied by the Option Certificate relating to that Option; |
and is otherwise in such form as the Company may determine and notify to the Optionholder.
12.2 | Subject to rule 12.9, not later than 30 days after the date on which the Grantor shall have received the Acquisition Cost the Grantor shall either allot and issue (if the Grantor is the Company), or procure the transfer, to the Optionholder of the number of Shares in respect of which the Option is then exercised and as soon as reasonably practicable thereafter: |
12.2.1 | if at that time Shares are listed on the Official List, procure that Shares allotted to the Optionholder are admitted to the Official List; and |
15
12.2.2 | issue or procure the issue of a definitive share certificate or such other acknowledgement of shareholding as is prescribed from time to time in respect of the Shares so allotted or transferred. |
12.3 | If the amount received by the Grantor is greater than the Acquisition Cost of the Shares in relation to which the Optionholder has served a notice of exercise under rule 12.1, the Grantor shall procure repayment of the excess amount to the Optionholder. |
12.4 | If the Committee has made a direction pursuant to rule 7.6 then, when an Option is exercised, the Relevant Trustee may, and shall if so directed by the Committee: |
12.4.1 | apply any amount of the Exercise Price received from the Optionholder (pursuant to rule 7.6), together with such other amount as the Relevant Trustee may receive by way of contribution from the Company (or, the Participating Company with which the Optionholder holds office or employment or, if he has ceased to hold office or employment with any Participating Company, the Company or the Subsidiary with which he last held office or employment), in subscribing for shares at such price (being not less than the Exercise Price) as the Company may determine; and |
12.4.2 | within 30 days after receiving the Exercise Price, transfer such Shares to Optionholders (or to such other persons as are mentioned in rule 12.7) in satisfaction of their rights under the terms of their Options |
and insofar as shares are subscribed and transferred to any Optionholder in such manner upon the exercise of an Option, the Company shall be discharged from all liability to issue such Shares to such Optionholder.
12.5 | If a Subscription Option is exercised, the Committee may within 7 days of the date of exercise request any Relevant Trustee to transfer sufficient Shares to the Optionholder to satisfy the Option in full and if the Relevant Trustee is able and willing to satisfy such Option in full the Shares shall be transferred to the Optionholder within 30 days of the date of exercise and the Company shall pay over the Acquisition Cost to the Relevant Trustee when the Shares are transferred and pay the appropriate stamp duty on behalf of the Optionholder in respect of the transfer. If the Relevant Trustee is unable or unwilling to satisfy the Option in full, rule 12.2 shall apply as if the Committee had not requested the Trustee to satisfy the Option. |
12.6 | A Relevant Trustee may exercise such of its powers and duties as are appropriate to give effect to the arrangements mentioned in rules 7.6, 12.4 and 12.5. |
12.7 | The Grantor may, if the Optionholder so requests in writing, allot and issue or transfer some or all of such Shares to: |
12.7.1 | a nominee of the Optionholder provided that beneficial ownership of such Shares shall be vested in the Optionholder; or |
12.7.2 | to an account manager (or his nominee) of an individual savings account on terms that such Shares shall be in the beneficial ownership of the Optionholder notwithstanding that title to such Shares shall be vested in the account manager or his nominee or jointly in one of them and the Optionholder |
and for the purposes of this rule the terms account manager and individual savings account shall have the meanings they bear in the Individual Savings Account Regulations 1998 (SI 1998/1870).
16
12.8 | All Shares allotted or transferred upon the exercise of any Option shall rank equally in all respects with the Shares for the time being in issue save as regards any rights attaching to such Shares by reference to a record date prior to the date of such allotment or transfer. |
12.9 | The allotment or transfer of Shares pursuant to the exercise of an Option shall be subject to the Articles of Association of the Company and to any necessary consents of any governmental or other authorities (whether in the United Kingdom or elsewhere) under any enactments or regulations from time to time in force and it shall be the responsibility of the Optionholder to comply with any requirements to be fulfilled in order to obtain or obviate the necessity for any such consent. |
13. | RECONSTRUCTION OR WINDING-UP OF THE COMPANY |
13.1 | If the court sanctions a compromise or arrangement proposed for the purposes of or in connection with a scheme for the reconstruction of the Company or its amalgamation pursuant to section 899 of the Companies Act 2006 the Optionholder shall be entitled to exercise his Option to the extent permitted by rule 11.10.2 during the period of 6 months commencing on the date on which the court sanctions the compromise or arrangement, and thereafter the Option shall lapse and cease to be exercisable. |
13.2 | If notice is given to the holders of Shares of a resolution for the voluntary winding-up of the Company, notice of the same shall be given to all Optionholders and each Optionholder shall be entitled to exercise his Option to the extent permitted by rule 11.10.2 at any time within the period of six months commencing on the date on which the resolution is passed. |
13.3 | All Options shall immediately lapse and cease to be exercisable upon the commencement of a winding-up of the Company. |
14. | TAKE-OVER OF THE COMPANY |
14.1 | If, as a result of either: |
14.1.1 | a general offer to acquire the whole of the Ordinary Share Capital which is made on a condition such that if it is satisfied the person making the offer will have control of the Company; or |
14.1.2 | a general offer to acquire all the shares in the Company of the same class as the Shares |
the Company shall come under the control of another person or persons, then the Grantor shall as soon as reasonably practicable thereafter notify every Optionholder accordingly and the Optionholder shall be entitled to exercise his Option to the extent permitted by rule 11.10.2 within 6 months of the date when the person making the offer has obtained control of the Company and any condition subject to which the offer is made has been satisfied (but not in any event more than 6 months after the Bonus Date) and to the extent the Option has not been exercised it shall upon the expiration of that period cease to be exercisable and shall only remain in existence for the purpose of forming the subject of an offer (if any) made pursuant to rule 14.3 and shall lapse upon the expiry of the appropriate period as defined in rule 14.4 if such offer is made but is not accepted by the Optionholder.
14.2 |
If at any time any person becomes entitled or bound to acquire Shares under sections 979 to 982 of the Companies Act 2006 the Optionholder shall be entitled to exercise his Option to the extent permitted in rule 11.10.2 at any time when that |
17
person remains so entitled or bound (but not in any event more than 6 months after the Bonus Date) and to the extent the Option has not been exercised it shall upon the expiration of that period cease to be exercisable and shall only remain in existence for the purpose of forming the subject of an offer (if any) made pursuant to rule 14.3 and shall lapse upon the expiry of the appropriate period as defined in rule 14.4 if such offer is made but is not accepted by the Optionholder. |
14.3 | If any company (in this rule referred to as the acquiring company): |
14.3.1 | obtains control of the Company as a result of making a general offer: |
(a) | to acquire the whole of the Ordinary Share Capital of the Company which is made on a condition such that if it is satisfied the person making the offer will have control of the Company; or |
(b) | to acquire all the shares in the Company which are of the same class as the Shares; |
14.3.2 | obtains control of the Company in pursuance of a compromise or arrangement sanctioned by the court made under section 899 of the Companies Act 2006; or |
14.3.3 | becomes bound or entitled to acquire Shares under sections 979 to 982 (inclusive) of the Companies Act 2006 |
an Optionholder may, at any time within the appropriate period as mentioned in rule 14.4, by agreement with the acquiring company, release his rights under his Option in consideration of the grant to him of rights to acquire shares in the acquiring company or any other company falling within sub-paragraphs (b) and (c) of paragraph 18 of Schedule 3 (read and construed as if references in those provisions to the Company were references to the acquiring company) PROVIDED THAT:
(a) | such rights will be exercisable only in accordance with the provisions of this Plan as it had effect immediately before the release of the rights referred to above (read and construed as mentioned in rule 14.5); |
(b) | the shares to which the new rights relate satisfy the provisions of paragraphs 18 to 22 of Schedule 3; |
(c) | the total market value, immediately before such release, of the Shares in respect of which the Option then subsists is equal to the total market value, immediately after such grant, of the shares in respect of which new rights are granted to the Optionholder; and |
(d) | the total amount payable by the Optionholder for the acquisition of shares upon exercise of the new rights is equal to the total amount that would have been payable for the acquisition of Shares upon exercise of the Option. |
An exchange of Options pursuant to this rule 14 shall not alter the fact that this Plan remains that of Smith & Nephew plc as the original scheme organiser. No further options will be granted other than those granted upon exchange.
14.4 | In rule 14.3 the appropriate period means: |
14.4.1 | in a case falling within rule 14.3.1 the period of six months beginning with the time when the person making the offer has obtained control of the Company and any condition or conditions subject to which the offer is made has or have been satisfied or waived; |
18
14.4.2 | in a case falling within rule 14.3.2 the period of six months beginning with the time when the court sanctions the compromise or arrangement; and |
14.4.3 | in a case falling within rule 14.3.3 the period during which the acquiring company remains bound or entitled as mentioned in that paragraph. |
14.5 | For the purposes mentioned in rule 14.3.3(a) of the proviso to rule 14.3, the provisions of this Plan shall be read and construed as if: |
14.5.1 | references to the Company , except for the purposes of the definitions of Jointly Owned Company and Participating Company and rule 16.2, were references to the company in respect of whose shares the new rights are granted; |
14.5.2 | references to Shares were references to such shares; |
14.5.3 | reference to Option were references to such rights; |
14.5.4 | references to Optionholder were references to the persons to whom such rights are granted; |
14.5.5 | references to Ordinary Share Capital were references to the ordinary share capital (other than fixed rate preference shares) of such company; |
14.5.6 | references to the Directors , except for the purposes of rule 16.2, were references to the directors of such company; and |
14.5.7 | references to the Exercise Price were references to the price per share payable upon the exercise of such new rights. |
14.6 | Rights granted pursuant to rule 14.3 shall be regarded for the purposes of the subsequent application of the provisions of this Plan as having been granted on the Date of Grant of the corresponding rights released as mentioned in rule 14.3. |
14.7 | Apart from rules 14.3 and 14.4 a person shall be deemed to have control of a company if he and others acting in concert with him have together obtained control of it. |
15. | VARIATION OF SHARE CAPITAL |
15.1 | In the event of any alteration of the Ordinary Share Capital by way of a capitalisation or rights issue or by way of sub-division, consolidation, reduction or any other variation in the share capital of the Company, the Grantor may make such adjustment as it considers appropriate: |
15.1.1 | to the aggregate number of Shares subject to any Option; |
15.1.2 | to the Exercise Price; and/or |
15.1.3 | if an Option has been exercised but no Shares have been allotted or transferred, to the number of Shares which may be so allotted or transferred and the Acquisition Cost relating to such Shares |
19
PROVIDED THAT:
(a) | no such adjustment shall be made without the prior approval of HMRC; |
(b) | the aggregate Acquisition Cost payable by an Optionholder on the exercise of all his Options shall not be materially altered; |
(c) | except insofar as the Directors (on behalf of the Company) agree to capitalise the Companys reserves and apply the same at the time of exercise in paying up the difference between the Exercise Price and the nominal value of the Shares, the Exercise Price in relation to any Subscription Option shall not be reduced below the nominal value of a Share; and |
(d) | the number of Shares as so adjusted shall be rounded down to the nearest whole number and the Exercise Price as so adjusted shall be rounded up to the nearest whole penny. |
15.2 | As soon as reasonably practicable after making any adjustment pursuant to rule 15.1 the Grantor shall give notice in writing thereof to every Optionholder affected thereby. |
16. | ALTERATION OF THIS PLAN |
16.1 | Before this Plan is first approved by HMRC, the Committee may make any alteration or addition to these rules as may be necessary or appropriate to take account of comments of HMRC and to ensure that this Plan is so approved. |
16.2 | The Committee may, at any time thereafter, alter or add to the rules of this Plan in any respect PROVIDED THAT : |
16.2.1 | no alteration or addition to a Key Feature shall take effect until approved by HMRC; |
16.2.2 | no alteration or addition shall be made to the advantage of existing or new Optionholders to the provisions relating to eligibility to participate, the overall limitations on the issue of new Shares, the individual limitations on Option grants under this Plan and the basis for determining an Optionholders rights to acquire Shares and the adjustment of such rights in the event of variation of the Ordinary Share Capital without the prior approval by ordinary resolution of the shareholders of the Company SAVE THAT the provisions of this rule 16.2.2 shall not apply to the extent that such alteration or addition is in the opinion of the Committee a minor amendment which is necessary or appropriate: |
(a) | to benefit the administration of this Plan; |
(b) | to take account of any change in legislation; or |
(c) | to maintain HMRC approval of this Plan or obtain or maintain favourable tax, exchange control or regulatory treatment for Optionholders or for the Company or for any Subsidiary; and |
16.2.3 | if in relation to any Options the Grantor is not the Company, no alteration or addition shall be made to the terms of such Options without the approval of the Grantor. |
16.3 | As soon as reasonably practicable after making any such alteration or addition the Committee shall give notice in writing thereof to every Optionholder (if any) affected thereby. |
20
17. | SERVICE OF DOCUMENTS |
17.1 | Except as otherwise provided in this Plan, any notice or document to be given by, or on behalf of, the Company or other Grantor or any administrator appointed to administer the Plan to any person in accordance or in connection with this Plan shall be duly given by sending it through the post in a pre-paid envelope to the address last known to the Company to be his address and, if so sent, it shall be deemed to have been duly given on the date of posting, or if he holds office or employment with any member of the Group or any Associated Company, by delivering it to him at his place of work or by sending to him a facsimile transmission or by electronic means addressed to him at his place of work and if so sent it shall be deemed to have been duly given at the time of transmission. |
17.2 | Any notice or document so sent to an Employee or Optionholder shall be deemed to have been duly given notwithstanding that such Optionholder is then deceased (and whether or not the Company or other Grantor has notice of his death) except where his Personal Representatives have established their title to the satisfaction of the Company and supplied to the Company an address to which documents are to be sent. |
17.3 | Any notice in writing or document to be submitted or given to the Grantor, the Company or any Administrator appointed to administer the Plan in accordance or in connection with this Plan may be delivered, sent by post, facsimile transmission or electronic means but shall not in any event be duly given unless it is actually received by the secretary of the Company or such other individual as may from time to time be nominated by the Company and whose name and address is notified to Optionholders. |
18. | MISCELLANEOUS |
18.1 | No Option to purchase existing Shares shall be granted by any person unless that person beneficially owns such Shares at the Date of Grant or the Committee is satisfied that sufficient Shares will be made available to satisfy the exercise in full of all Options granted or to be granted by that person. |
18.2 | The Committee may from time to time make and vary such rules and regulations not inconsistent herewith and establish such procedures for the administration and implementation of this Plan as they think fit. |
18.3 | The Company shall not be obliged to provide Optionholders with copies of any notices, circular or other documents sent to holders of Shares. |
18.4 | The costs of the administration and implementation of this Plan shall be borne by the Company. |
19. | JURISDICTION |
19.1 | This Plan shall be governed by and construed in all respects in accordance with English law. |
19.2 | In applying for the grant of an Option an Eligible Employee shall be deemed to submit to the exclusive jurisdiction of the English courts as regards any claim legal action or proceedings arising out of this Plan and to waive any objection to such proceedings taking place in the English courts on the grounds of venue or on the grounds that such proceedings have been brought in an inconvenient forum. |
21
20. | DATA PROTECTION |
20.1 | By accepting the grant of an Option the Optionholder shall agree and consent to: |
20.1.1 | the collection, use and processing by any member of the Group, the Savings Body and any Relevant Trustee of Personal Data relating to the Optionholder, for all purposes reasonably connected with the administration of this Plan and the subsequent registration of the Optionholder or any other person as a holder of Shares acquired pursuant to the exercise of an Option; |
20.1.2 | any member of the Group, the Savings Body and any Relevant Trustee transferring Personal Data to or between any of such persons for all purposes reasonably connected with the administration of this Plan; |
20.1.3 | the use of Personal Data by any member of the Group, the Savings Body and any Relevant Trustee for all purposes reasonably connected with the administration of this Plan; and |
20.1.4 | the transfer to and retention of such Personal Data by any third party for such purposes. |
21. | THIRD PARTY RIGHTS |
21.1 | Except as otherwise expressly stated to the contrary, neither this Plan nor the grant of any Option nor the U.K. Contracts (Rights of Third Parties) Act 1999 shall have the effect of giving any third party any rights under this Plan and that Act shall not apply to this Plan or to the terms of any Option granted under it. |
22
Exhibit 4 (c) (xxxiv)
Smith & Nephew plc
The Smith & Nephew International Sharesave Plan (2012)
This is a copy of the rules of
The Smith & Nephew International Sharesave Plan 2012
as produced to the Annual General Meeting
of the Company on 12 April 2012 and initialled by
the Chairman for the purposes of identification only
Chairman
CONTENTS
Rule | Page | |||||
1. |
Interpretation |
3 | ||||
2. |
Issue of Invitations |
8 | ||||
3. |
Applications for Options |
10 | ||||
4. |
Acceptance and Scaling-Down of Applications |
10 | ||||
5. |
Grant of Options |
11 | ||||
6. |
Monthly contributions |
12 | ||||
7. |
Exercise Price |
12 | ||||
8. |
Issue on Transfer of Shares |
13 | ||||
9. |
Exercise of an Option |
13 | ||||
10. |
Manner of Exercise of an Option |
15 | ||||
11. |
Non-Transferability and Lapse of Options |
17 | ||||
12. |
Relationship with Employment Contract |
18 | ||||
13. |
Demerger, Reconstruction or Winding-up of the Company |
18 | ||||
14. |
Take-over of the Company |
19 | ||||
15. |
Variation of Share Capital |
19 | ||||
16. |
Alteration of this Plan |
20 | ||||
17. |
Service of Documents |
21 | ||||
18. |
Applicable Law |
21 | ||||
19. |
Third Party Rights |
21 | ||||
20. |
Protection of Personal Data |
21 | ||||
21. |
Miscellaneous |
22 | ||||
22. |
Optionholder Change of Residence |
22 | ||||
23. |
Withholding Provisions |
23 | ||||
24. |
Share award or cash alternative |
23 | ||||
APPENDIX (Amendments for Particular Jurisdiction) |
35 | |||||
APPENDIX French Sub-Plan |
24 |
2
RULES OF
THE SMITH & NEPHEW INTERNATIONAL SHARESAVE PLAN 2012
1. | INTERPRETATION |
1.1 | Words and expressions used in this Plan shall have the meanings respectively given below: |
Acquisition Cost |
in relation to the exercise of an Option on any occasion, an amount in pounds sterling equal to the product of:
(a) the maximum number of Shares in respect of which that Option is then exercised in accordance with rule 9.5; and
(b) the Exercise Price |
|
the Administrator | such person who is for the time being appointed by the Company to administer this Plan | |
Announcement Date | a date of announcement of the annual, half year or quarterly results of the Company | |
Applicant | a person who, in response to an Invitation, submits an Application | |
Application | an application for the grant of an Option made in accordance with rule 3 | |
Application Date | in relation to any Invitation such date as is specified in accordance with rule 2.5.6 to be the last day on which an Application may be submitted in response to Invitations issued on any occasion | |
Approval Date | the date of the close of the Annual General Meeting of the Company held in 2012 | |
Associated Company | any company which, in relation to the Company, is an associated company as that term is defined by sections 449 and 450 of the UK Corporation Tax Act 2010 except that, for the purposes of this Plan, section 449 shall have effect with the omission of the words or at any time within the preceding 12 months | |
Committee | the Remuneration Committee of the Company | |
Companies Act 2006 | the UK Companies Act 2006 | |
the Company | Smith & Nephew plc (registered in England no 324357) | |
control | the meaning given in section 719 of the UK Income Tax (Earnings and Pensions) Act 2003 |
3
Daily Official List | the daily official list of the UK Listing Authority | |
Date of Grant | in relation to any Option, the date on which such Option was granted | |
Dealing Day | a day on which the London Stock Exchange is open for business | |
Directors | the board of directors for the time being of the Company or a duly constituted committee of that board | |
Eligible Employee |
an Employee who either:
(a) has held employment within the Group for such continuous period as the Directors have determined; or
(b) is nominated by the Directors |
|
Employee | an employee of a Participating Company | |
Employer Company | in relation to an Applicant or an Optionholder at any time, the member of the Group or Associated Company with which such Applicant or Optionholder then holds or, if he has ceased to hold employment within the Group or with any Associated Company, last held office or employment | |
Exchange Rate | in relation to a conversion of currency on any day, the rate to be applied in making such conversion being such published exchange rate as the Committee shall determine for that day or, if the Committee considers appropriate, the preceding day or, if either of those days is not a Dealing Day, the last preceding Dealing Day | |
the Exercise Price | in relation to Shares subject to any Option, the price per Share in pounds sterling payable for the acquisition of such Shares upon the exercise of that Option as determined in rule 7 | |
Grantor | in relation to an Option, the Company or the Relevant Trustee which has granted or proposes to grant such Option | |
the Group | the Company and every other company which is for the time being a Subsidiary | |
the Individual Share Limit | in relation to any Option, the amount of the Notional Sterling Repayment Value divided by the Exercise Price | |
Initial Market Value | in relation to a Share in respect of which an Option is to be, or has been granted, the average of the middle market quotations of a Share as derived from the Daily Official List for the 3 consecutive Dealing Days immediately preceding the Invitation Date |
4
Invitation | an invitation to apply for the grant of an Option issued in accordance with rule 2 | |
Invitation Date | in relation to an Option, the date on which the Invitation was issued | |
Jointly Owned Company | a company (and any subsidiary as defined in section 1159 and Schedule 6 of the Companies Act 2006 of such a company) of which the whole of the issued ordinary share capital is jointly owned by a member of the Group and another person (not being a member of the Group) but which is not a Subsidiary and is not under the control of such other person | |
Local Currency | the local currency of legal tender in the relevant jurisdiction | |
Local Currency Equivalent | in relation to an amount in pounds sterling on a given day, the equivalent value (or as nearly as may be) in Local Currency of such sterling amount after conversion at the Exchange Rate on that day | |
the London Stock Exchange | London Stock Exchange plc, or any successor to that company | |
the Maturity Date |
in relation to an Optionholders Savings:
(a) where the Optionholder has a 3-year Option, the third anniversary of the date on which his first Monthly Contribution is received by the Savings Body; and
(b) where the Optionholder has a 5-year Option, the fifth anniversary of the date on which his first Monthly Contribution is received by the Savings Body. |
|
Model Code | the code adopted by the Company which contains provisions similar in purpose and effect to the provisions of the Model Code for securities transactions by directors and certain employees of Listed Companies, and persons connected with them, as issued by the UK Listing Authority from time to time | |
Monthly Contribution | in relation to any Eligible Employee, the fixed amount (in Local Currency) of each of the 36 (or, in the case of a 5-year Option, 60) monthly savings contributions which that Employee undertakes to make in his Application |
5
Net Pay | in relation to an Optionholder, the amount of his earnings for a given month, being earnings from the Optionholders employment with any one or more members of the Group and any Associated Company, after any deductions have been made by the payer of or on account of any tax or social security contributions and after any other deductions (other than a deduction of a Monthly Contribution) which the payer has made under any legal obligation or pursuant to any authority duly given by the Optionholder | |
Notional Sterling Repayment Value |
in relation to any Application, the aggregate amount in pounds sterling (converted from Local Currency using the Exchange Rate on the fifth dealing day before the Invitation Date, or on such other date as the Committee may determine) of:
(a) in the case of a 3-year Option, 36 Monthly Contributions; and
(b) in the case of a 5-year Option, 60 Monthly Contributions
or, in either case, such other number of Monthly Contributions as the Committee may determine in relation to Options granted on any occasion so as to be consistent with the bonus rates payable on a certified contractual savings scheme within the meaning of section 703 of the UK Income Tax (Trading and Other Income) Act 2005 |
|
Option |
a right to acquire Shares which:
(a) is granted pursuant to, and is exercisable only in accordance with, this Plan and which is a 3-year Option or a 5-year Option; and
(b) has neither been exercised nor ceased to be exercisable |
|
Option Certificate | a certificate or other document issued by or on behalf of the Grantor evidencing the grant of an Option | |
Option Shares | in relation to an Option, the Shares over which that Option subsists | |
Option Tax Liability | in relation to an Optionholder, any liability of any member or former member of the Group or any Associated Company or former Associated Company or any Relevant Trustee to account to any tax authority or other body for any amount of, or representing, income tax or employee social security contributions or any other tax charge levy or other sum which the Optionholder is charged |
6
upon or in consequence of the grant, vesting, exercise, assignment or release of an Option or the acquisition of Shares or cash under this Plan | ||
Optionholder | in relation to any Option, the person to whom that Option has been granted or, if that person has died, his legal personal representatives | |
Ordinary Share Capital | issued ordinary share capital of the Company | |
Participating Company | a member of the Group to which the Directors have determined that this Plan shall extend for the time being | |
Personal Data | has the meaning it bears for the purposes of the UK Data Protection Act 1998 | |
Personal Representatives | in relation to an Optionholder the legal personal representatives of the Optionholder who have satisfied the Company or the Administrator of their appointment as such | |
this Plan | the Smith & Nephew International Sharesave Plan 2012 (approved by shareholders of the Company on the Approval Date) as set out in these rules and as amended from time to time | |
Relevant Trustee | the meaning given in article 71(6) of the UK Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 | |
Savings | in relation to an Optionholder at any time, the aggregate amount of that Optionholders Monthly Contributions held by the Savings Body together with any accrued interest thereon | |
Savings Body | such bank(s) and/or other savings institution(s) as may from time to time be approved by the Company for the purposes of this Plan | |
Shares | fully-paid ordinary shares in the capital of the Company | |
Subscription Options | Options which are rights granted by the Company to subscribe for Shares or to acquire Treasury Shares | |
Subsidiary | a subsidiary (as defined in section 1159 and Schedule 6 of the UK Companies Act 2006) of the Company and which is under the control of the Company |
7
Taxable Year | the calendar year or, if it would result in a longer period for the exercise of an Option, the 12 month period in respect of which the Optionholders employing company is obliged to pay tax | |
Treasury Shares | Shares which meet the conditions set out in paragraphs (a) and (b) of section 724(5) of the Companies Act 2006 | |
UK | the United Kingdom | |
UK Listing Authority | the Financial Services Authority in its capacity as the competent authority for the purposes of Part VI of the UK Financial Services and Markets Act 2000 | |
US Tax | taxation under the tax rules of the United States of America | |
US Taxpayer | a person who is subject to US Tax | |
year | a financial year of the Company. |
1.2 | References to any statutory provision shall be read and construed as references to such provision as amended and re-enacted from time to time and no account should be taken of the rule headings which have been inserted for ease of reference only. |
1.3 | If any question, dispute or disagreement arises as to the interpretation of this Plan, the decision of the Committee shall be final and binding upon all persons. |
1.4 | Words denoting the masculine gender shall include the feminine. |
1.5 | Words denoting the singular shall include the plural and vice versa. |
2. | ISSUE OF INVITATIONS |
2.1 | Subject to the following provisions of this rule 2, the Company may from time to time issue, or procure the issue by the Administrator, to all persons who are or are expected to be Eligible Employees, invitations to apply for the grant of Options. |
2.2 | Invitations may be issued: |
2.2.1 | in the period of 42 days after the Approval Date, and thereafter, |
2.2.2 | in the period of 42 days beginning with the fourth Dealing Day following an Announcement Date |
or, if the Company is restricted by statute, order or regulation (including any regulation, order or requirement imposed on the Company by the London Stock Exchange or any other regulatory authority) from issuing invitations in any such period, at any time in the period of 42 days beginning with the date on which such restriction is removed; and
8
2.2.3 | at any other time if the Directors consider the circumstances to be exceptional unless the Company is or would then be so restricted from issuing invitations at that time. |
2.3 | Invitations issued to Eligible Employees who are employed by a particular Participating Company in a given jurisdiction shall be issued at the same time and be on the same terms. |
2.4 | Invitations may be issued in writing (including by way of hard copy invitation or an invitation by electronic means, as the Committee may specify generally or for particular Eligible Employees) and may be in the form of letters, emails or other forms of invitation and/or by way of notices, advertisements, circulars or otherwise for the general attention of Employees [and to which the particular attention of individual Employees is drawn by notices issued with pay and salary advice slips]. |
2.5 | Each invitation shall: |
2.5.1 | identify the Savings Body; |
2.5.2 | state that it is a condition of the grant of an Option that the Employee must first undertake to make 36 or 60 consecutive monthly savings contributions (by way of deductions from net payments of salary or by such other arrangement as may be permitted by the Directors in a specific country) in Local Currency to an account with the Savings Body; |
2.5.3 | specify the form and manner in which each such person may apply for any such Option; |
2.5.4 | specify the maximum and minimum amounts of such monthly savings contributions; |
2.5.5 | invite the person to whom it is addressed to apply for an Option in respect of such whole number of Shares as shall be as nearly as may be equal to, but shall not exceed, the Individual Share Limit (or such lesser number of Shares as the Company may determine); |
2.5.6 | specify the last day on which an Application may be made |
and shall otherwise be in such form as the Grantor shall determine.
2.6 | On any occasion on which invitations are issued, the Directors may in their discretion (and acting with the consent of the Grantor where appropriate) determine and announce the maximum number of Shares in respect of which Options will be granted in response to Applications made pursuant to such Invitations. |
2.7 | The amount of an Employees Monthly Contribution shall be not less than the Local Currency Equivalent of £5 and not greater than the Local Currency Equivalent of £250 or, in either case, such other sum as the Committee may from time to time determine. Unless the Committee otherwise determines, in calculating the relevant Local Currency Equivalents for the purposes of this Rule 2.7, the Exchange Rate on the fifth Dealing Day before the Invitation Date shall be used. |
2.8 | No invitation may be issued after 11 April 2022. |
9
3. | APPLICATIONS FOR OPTIONS |
3.1 | Any Eligible Employee to whom an Invitation has been issued may apply for an Option by submitting to the person specified in the Invitation an application in writing (including by way of hard copy application or an application by electronic means, as the Committee may specify generally or for particular Eligible Employees) which: |
3.1.1 | is received in such manner and/or at such address as shall be stated in the Invitation not later than the Application Date; |
3.1.2 | specifies the amount of the monthly contributions proposed to be paid by the Employee and authorises his Employer Company to deduct such amount (or such lower amount as may be determined by the Committee having regard to the limitations imposed by the Plan) from his pay; |
3.1.3 | if the terms of the Invitation so permit, indicates whether the Employee wishes to be granted a 3-year Option or a 5-year Option; |
3.1.4 | includes an undertaking by the Employee to his Employer Company to make 36 or, in the case of a 5-year Option, 60 consecutive monthly savings contributions (in Local Currency) to a Savings Body; |
3.1.5 | otherwise complies with such terms and conditions as may have been specified in the Invitation; |
3.1.6 | is subject to the Employee continuing to hold employment with a Participating Company until the Date of Grant; |
3.1.7 | authorises the transfer and processing of the Applicants Personal Data for the purposes of the administration of this Plan; |
3.1.8 | provides that the Applicant agrees to accept and be bound by the rules of the Plan; |
3.1.9 | is duly completed and signed by the Applicant |
and is otherwise in such form as the Committee may determine.
3.2 | Subject to rule 4, an application for an Option shall be made in respect of the whole number of Shares for which the Acquisition Cost payable would be as nearly as may be equal to, but not exceed, the amount which would be the Notional Sterling Repayment Value if the amount of each of the contributions payable was equal to the maximum amount specified by the Applicant in his application. |
4. | ACCEPTANCE AND SCALING-DOWN OF APPLICATIONS |
4.1 | Subject to the following provisions of this rule 4, each application for an Option shall be accepted to the extent of the total number of Shares in respect of which that application is made (as mentioned in rule 3.2.) |
4.2 | If the total number of Shares in respect of which applications for Options have been made on that occasion would result in any of the limits in rules 2.6 or 8 being exceeded then the number of Shares in respect of which each application for an Option is accepted shall be reduced in accordance with the following provisions of this rule 4. |
4.3 | If an Applicant has indicated in his Invitation that he wishes to be granted a 5-year Option, the Committee may, if it is necessary to ensure compliance with rule 8 or any such limit as has been determined as mentioned in rule 2.6, treat such Application as if the Applicant had indicated that he wishes to be granted a 3-year Option. |
10
4.4 | If, after the application of rule 4.3, the total number of shares in respect of which applications for Options are deemed to have been made on that occasion exceeds any of the limits in rules 2.6 or 8 then the number of Shares in respect of which each application for an Option shall be accepted shall be further reduced as nearly as may be on a proportionate basis to the extent necessary to ensure that none of those limits is exceeded (and the amount of monthly savings contributions to be made under the Savings Contracts linked to each such Option shall be reduced accordingly) SAVE THAT the number of Shares in respect of which any application for an Option shall be accepted shall not be reduced below the number for which the Acquisition Cost payable would be as nearly as may be equal to, but not exceed, the Notional Sterling Repayment Value if the monthly savings contributions were £5 or such other minimum amount per month specified in the Invitation (the Minimum Number of Shares ). |
4.5 | The provisions of rule 4.4 shall, if necessary, be applied repeatedly until either none of the limits in rules 2.6 and/or 8 will be exceeded or the number of Shares in respect of which each application for an Option would be accepted is reduced to the Minimum Number of Shares. |
4.6 | If, notwithstanding the provisions of rules 4.2 to 4.5 (inclusive), any one or more of the limits in rules 2.6 and 8 would still be exceeded then the selection of applications for acceptance shall be made by the Committee on the basis that each application (after adjustment as mentioned above) has an equal chance of selection for acceptance. |
4.7 | Without limitation to the above, the Committee may determine that the scaling down provisions may apply in all or particular jurisdictions and may further limit each application in a particular jurisdiction to take into account or minimise the impact of any securities laws requirements. |
5. | GRANT OF OPTIONS |
5.1 | An Option may be granted by the Company or, if the Company has so determined with the consent of a Relevant Trustee, the Relevant Trustee. |
5.2 | An Option shall not be granted to any person who is not an Eligible Employee at the Date of Grant. |
5.3 | The maximum number of Shares in respect of which an Option shall be granted in response to any Application shall not in any event exceed the Individual Share Limit. |
5.4 | Subject to rules 5.3 and 8.3, the Committee shall have an absolute discretion as to whether, and in respect of how many Shares, any Option should be granted. |
5.5 | Unless the Committee determines otherwise (generally or for particular Options), Options for which Invitations have been issued on any occasion shall be granted within the period of 90 days beginning with the first of the 3 days by reference to which the Initial Market Value of a Share is determined on that occasion. |
5.6 | No payment shall be required in respect of the grant of any Options. |
5.7 | As soon as reasonably practicable after the Date of Grant, the Grantor shall or shall procure the issue to each Optionholder of an Option Certificate which specifies: |
5.7.1 | the Grantor; |
11
5.7.2 | the Date of Grant; |
5.7.3 | the number of Shares in respect of which the Option is granted; |
5.7.4 | the Exercise Price; |
5.7.5 | the earliest date on which the Option will normally become exercisable; and |
5.7.6 | that it is a term of the Option that the Optionholder shall (to the extent permitted by law) be responsible for any Option Tax Liability which may arise |
and shall otherwise be in such form as the Grantor shall determine from time to time.
6. | MONTHLY CONTRIBUTIONS |
6.1 | Subject to rule 6.3, a Monthly Contribution may be made by: |
6.1.1 | the Optionholders Employer Company deducting the whole amount from the Optionholders Net Pay for the relevant month and paying such amount (on the Optionholders behalf) to an account with the Savings Body; or |
6.1.2 | the Optionholder entering into such other arrangement as may be permitted by the Employer Company for the Monthly Contribution to be paid to an account with the Savings Body. |
6.2 | An Optionholders Savings shall be deposited with the Savings Body and shall at all times remain the property of the Optionholder so that none of the Company, the Optionholders Employer, the Administrator or any Relevant Trustee shall have any interest in such Savings. |
6.3 | If in any month, and in consequence of an Optionholder being absent from work by reason of maternity, paternity, parental or adoption leave, military service (or such other reason which is, in the Committees opinion an equivalent circumstance or event resulting in a period of temporary suspension in employment), the amount of such Optionholders Net Pay is insufficient to allow for the deduction in full of his Monthly Contribution for, or in respect of, that month, the Optionholder may make other arrangements for payment to the Savings Body of the whole, or any balance remaining, of such Monthly Contribution, provided that the full amount of such Monthly Contribution is paid to the Savings Body not later than 90 days after the end of the relevant month unless the Committee determines that a later payment may be accepted. |
6.4 | An Option shall not lapse and cease to be exercisable by reason only that the Optionholder has failed to make not more than six Monthly Contributions (whether by reason of any insufficiency of Net Pay or otherwise). |
6.5 | An Option shall immediately lapse and cease to be exercisable if, after six of the Optionholders Monthly Contributions have not been made, a seventh Monthly Contribution is not made by the due date for payment. |
7. | EXERCISE PRICE |
7.1 | The Company shall determine the price per Share payable upon the exercise of Options granted on the same day to Eligible Employees in the same jurisdiction, but this shall not be less than: |
7.1.1 | 80% of the Initial Market Value (rounded up to the nearest whole penny); or, if greater |
7.1.2 | in the case of a Subscription Option, the nominal value of a Share. |
12
8. | ISSUE OR TRANSFER OF SHARES |
8.1 | Subject to rule 8.2, and unless specified to the contrary by the Committee at the Date of Grant, an Option may be satisfied: |
8.1.1 | by the issue of new Shares; and/or |
8.1.2 | by the transfer of Treasury Shares; and/or |
8.1.3 | by the transfer of Shares (other than the transfer of Treasury Shares). |
The Committee may change the way in which an Option may be satisfied after the Option has been granted, subject always to the limit in rule 8.2.
8.2 | The number of Shares in respect of which Subscription Options may be granted in any year, when added to: |
8.2.1 | the number of Shares in respect of which Subscription Options have previously been granted (and which, if not exercised, have not ceased to be exercisable); and |
8.2.2 | the number of Shares issued or the number of Treasury Shares transferred and the number of Shares in respect of which rights to subscribe for Shares have previously been granted (and which have neither been exercised, nor ceased to be exercisable) pursuant to any other employee share option or share incentive plan |
in that year and the preceding nine years shall not exceed 10 per cent of the Ordinary Share Capital.
8.3 | The total number of Shares in respect of which Options may be granted in response to applications made by Eligible Employees pursuant to Invitations issued on any occasion may not exceed the maximum (if any) determined and published by the Grantor on that occasion pursuant to rule 2.6. |
8.4 | The Company may issue Shares to a Relevant Trustee for the purpose of enabling the Relevant Trustee to satisfy the Companys obligation or the Relevant Trustees obligation (as the case may be) to transfer Shares to Optionholders upon the exercise of Options. |
8.5 | To the extent that a Relevant Trustee has purchased Shares to be transferred to Optionholders in satisfaction of any Subscription Options, the Shares over which such Options are held shall be left out of account for the purposes of this rule 8. |
8.6 | If the Options are to be satisfied by the transfer of Shares from a Relevant Trustee, the Committee (acting with the consent of the Relevant Trustee) may from time to time direct and notify the Optionholder in writing that the Exercise Price shall be payable, and the Optionholder shall pay the Exercise Price to the Relevant Trustee (as mentioned in rule 10.9). |
9. | EXERCISE OF AN OPTION |
9.1 | Subject to the following provisions of this rule 9 and rules 13 and 14, an Option shall only be exercisable within the period of 6 months beginning with the Maturity Date and, if not then exercised, shall lapse and cease to be exercisable at the end of that period. |
13
9.2 | If an Optionholder dies, his Personal Representatives may exercise that Option to the extent permitted by rule 9.5: |
9.2.1 | if he dies before the Maturity Date, during the period of 12 months commencing on the date of his death; or |
9.2.2 | if he dies within the period of 6 months beginning on or after the Maturity Date, during the period of 12 months beginning on the Maturity Date |
and if it is not then exercised that Option shall lapse and cease to be exercisable at the end of such 12-month period.
9.3 | An Option may be exercised to the extent permitted by rule 9.5 within the period of 6 months following the date upon which the Optionholder ceases to hold employment within the Group by reason of: |
9.3.1 | injury, ill-health or disability (evidenced to the satisfaction of the directors of his Employer Company); |
9.3.2 | dismissal by reason of redundancy; |
9.3.3 | retirement at or after his normal retirement age; |
9.3.4 | the company by which the Optionholder is employed becoming neither a member of the Group nor an Associated Company nor a Jointly Owned Company; or |
9.3.5 | the fact that the Optionholders employment with a member of the Group or an Associated Company relates to a business or part of a business which is transferred to a person which is neither a member of the Group nor an Associated Company nor a Jointly Owned Company; |
and, if it is not then exercised that Option shall lapse and cease to be exercisable at the end of such 6-month period (unless the Committee determines otherwise).
9.4 | If at any time before the Maturity Date an Optionholder ceases to hold employment with a member of the Group or an Associated Company or a Jointly Owned Company for any reason other than those mentioned in rules 9.2 and 9.3, all Options granted to him shall immediately lapse and cease to be exercisable. |
9.5 | An Option may only ever be exercised: |
9.5.1 | subject to the Optionholder not having failed to make any Monthly Contributions, pursuant to rules 9.1 and 9.2.2 in respect of all of the Option Shares; or |
9.5.2 | pursuant to rules 9.2.1, 9.3, 13 or 14 (or pursuant to rules 9.1 and 9.2.2 if the Optionholder has failed to make one or more Monthly Contributions), in respect of such number of Shares as is equal to: |
(a) in the case of a 3-year Option, C x | D | |
36 | ||
(b) in the case of a 5-year Option, C x | D | |
60 | ||
where: |
C is the number of Option Shares; and
D is the number of Monthly Contributions actually made by the Optionholder before the date of exercise of the Option
14
or, in either case, such lesser number of Option Shares as the Optionholder may specify in the notice of exercise given pursuant to rule 10.1.
9.6 | For the purposes of this rule 9, an Optionholder shall not be treated as ceasing to hold employment within the Group until he no longer holds any office as a director or any employment with any member of the Group or any Associated Company or any Jointly Owned Company. |
9.7 | An Option may not be exercised more than once. |
9.8 | In deciding whether and when to exercise an Option, an Optionholder shall have regard to the Model Code. |
9.9 | This rule 9.9 shall apply to US Taxpayers. Notwithstanding anything contrary contained in this Plan, a US Taxpayer may only exercise an Option within the shorter of any exercise period specified in the rules of this Plan and the expiry of 2.5 calendar months after the end of the Taxable Year in which the Option first becomes exercisable. |
10. | MANNER OF EXERCISE OF AN OPTION |
10.1 | An Option shall be exercised only by the Optionholder giving notice in writing to the Grantor or, if so directed by the Company, the Administrator, which: |
10.1.1 | is given at any time when the Option is exercisable; |
10.1.2 | specifies the number of Shares in respect of which the Option is exercised in accordance with rule 9.5; |
10.1.3 | is accompanied by payment of an amount in pounds sterling equal to the Acquisition Cost; |
10.1.4 | unless the Grantor otherwise permits, is accompanied by the Option Certificate, |
and is otherwise in such form and delivered in such manner (whether in hard copy form and/or electronically) as the Grantor may from time to time determine and notify to the Optionholder.
10.2 | Within 30 days after the date on which the Grantor (or the Administrator) shall have received a valid notice of exercise of an Option (including payment of an amount in pounds sterling equal to the Acquisition Cost) the Grantor shall procure that: |
10.2.1 | the monies accompanying that notice are applied in payment of the Acquisition Cost for the number of Shares in respect of which the Option is then exercised; and |
10.2.2 | subject to rules 10.3 and 10.6, the number of Shares in respect of which the Option is then exercised are allotted and issued or transferred to or to the order of the Optionholder. |
10.3 |
The Grantor shall not be obliged to issue, transfer or procure the transfer of any Shares or any interest in any Shares upon the exercise of an Option unless and until the Grantor has |
15
received such sum as, in the opinion of the Company, is sufficient to indemnify any existing or former member of the Group or any existing or former Associated Company or any Relevant Trustee in full against any Option Tax Liability or has made such other arrangement as, in the opinion of the Company, will ensure that the Optionholder will satisfy his liability under such indemnity. |
10.4 | As soon as reasonably practicable after allotting or transferring or procuring the transfer of any Shares as mentioned in rule 10.2.2, the Grantor shall procure: |
10.4.1 | the issue to the Optionholder of a definitive share certificate or such acknowledgement of shareholding as is prescribed from time to time in respect of the Shares so allotted or transferred; and |
10.4.2 | if at that time the Shares are listed on the Daily Official List, that any Shares so allotted are admitted to the Daily Official List. |
10.5 | If after an Option has been exercised, the Grantor is restricted from issuing, transferring or procuring the transfer of Shares to the Optionholder by reason of any statutory, regulatory or other legal provision, rule or the Model Code or any other requirement or guidance which is issued by the UK Listing Authority or any other body on behalf of institutional investors in the Company relating to dealings in Shares by directors or employees of any member of the Group, the Grantor shall not be obliged to issue, transfer or procure the transfer of Shares in consequence of such exercise until after all such restrictions are lifted but shall do so within the period of 30 days thereafter. |
10.6 | The allotment or transfer of any Shares upon the exercise of an Option shall be subject to the Articles of Association of the Company and to any necessary consents of any governmental or other authorities (whether in the United Kingdom or overseas) under any enactments or regulations from time to time in force and it shall be the responsibility of the Optionholder to do all such things as may be necessary to obtain or obviate the necessity of any such consent. |
10.7 | All Shares allotted or transferred upon the exercise of any Option shall rank equally in all respects with the Shares for the time being in issue save as regards any rights attaching to such Shares by reference to a record date prior to the date of such allotment or transfer. |
10.8 | The costs of stamp duty and dealing costs and commissions incurred when Shares are purchased upon the exercise of an Option shall be borne by the Company. |
10.9 | If the Committee has made a direction pursuant to rule 8.6 then, when an Option is exercised, the Relevant Trustee may, and shall if so directed by the Committee: |
10.9.1 | apply any amount of the Exercise Price received from the Optionholder (pursuant to rule 8.6), together with such other amount as the Relevant Trustee may receive by way of contribution from the Company (or, the Participating Company with which the Optionholder holds office or employment or, if he has ceased to hold office or employment with any Participating Company, the Company or the Subsidiary with which he last held office or employment), in subscribing for shares at such price (being not less than the Exercise Price) as the Company may determine; and |
10.9.2 | within 30 days after receiving the Exercise Price, transfer such Shares to Optionholders (or to such other persons as are mentioned in rule 10.12) in satisfaction of their rights under the terms of their Options |
16
and insofar as shares are subscribed and transferred to any Optionholder in such manner upon the exercise of an Option, the Company shall be discharged from all liability to issue such Shares to such Optionholder.
10.10 | If a Subscription Option is exercised, the Committee may within 7 days of the date of exercise request any Relevant Trustee to transfer sufficient Shares to the Optionholder to satisfy the Option in full and if the Relevant Trustee is able and willing to satisfy such Option in full the Shares shall be transferred to the Optionholder within 30 days of the date of exercise and the Company shall pay over the Acquisition Cost to the Relevant Trustee when the Shares are transferred and pay the appropriate stamp duty on behalf of the Optionholder in respect of the transfer. If the Relevant Trustee is unable or unwilling to satisfy the Option in full, rule 10.2 shall apply as if the Committee had not requested the Trustee to satisfy the Option. |
10.11 | A Relevant Trustee may exercise such of its powers and duties as are appropriate to give effect to the arrangements mentioned in rules 8.6, 10.9 and 10.10. |
10.12 | The Grantor may, if the Optionholder so requests in writing and the Grantor in its absolute discretion so decides, allot and issue or transfer some or all of such Shares to a nominee of the Optionholder provided that beneficial ownership of such Shares shall be vested in the Optionholder. |
10.13 | Where, due to fluctuations in the relevant Exchange Rate, the Savings of the Optionholder are insufficient to meet the Acquisition Cost of all Shares on the exercise of the Option, the Optionholder shall be entitled to make or procure the payment of further sums in pounds sterling in order to make up the shortfall, provided that such further sums must be included in the amounts paid on exercise pursuant to Rule 10.1.3 in order for there to be a valid exercise over all the Shares under the Option. |
11. | NON-TRANSFERABILITY AND LAPSE OF OPTIONS |
11.1 | During his lifetime only the individual to whom an Option is granted may exercise that Option. |
11.2 | An Option shall immediately lapse and cease to be exercisable if: |
11.2.1 | it is transferred or assigned (other than to Personal Representatives of the Optionholder), mortgaged, charged or otherwise disposed of by the Optionholder; |
11.2.2 | the Optionholder becomes bankrupt or makes, or proposes to make, a voluntary arrangement with all or any of his creditors in accordance with any applicable laws relating to personal insolvency; |
11.2.3 | the Optionholder is not or ceases for any other reason (except his death) to be the sole legal and beneficial owner of the Option free from encumbrances or would not, upon the exercise of the Option, be the sole legal and beneficial owner of the Shares thereby acquired, free from encumbrances; |
11.2.4 | (unless in any individual case the Company otherwise determines) the Optionholder, whilst remaining in employment with a member of the Group or an Associated Company or a Jointly Owned Company, instructs his Employer Company to cease deducting Monthly Contributions from his salary; |
11.2.5 | if, after six of the Optionholders Monthly Contributions have not been made for any reason, a seventh Monthly Contribution is not made on the due date for payment; or |
17
11.2.6 | (unless in any individual case the Company otherwise determines) an Optionholder obtains repayment of any of his savings contributions (or interest on such contributions) unless such Option is then immediately exercisable pursuant to rules 9.2, 9.3, 13 or 14. |
11.3 | Save as mentioned in rule 9.2.2, an Option shall in any event lapse and cease to be exercisable at the end of the period of 6 months beginning with the Maturity Date. |
12. | RELATIONSHIP WITH EMPLOYMENT CONTRACT |
12.1 | The grant of an Option shall not form part of the Optionholders entitlement to remuneration or benefits pursuant to his contract of employment nor shall the existence of a contract of employment between any person and any present or past member of the Group or Associated Company or Jointly Owned Company, give such person any right entitlement or expectation to have an Option granted to him in respect of any number of Shares or any expectation that an Option might be granted to him or that he will be invited to apply for the grant of an Option whether subject to any conditions or at all. |
12.2 | Neither the existence of this Plan nor the fact that an individual has on any occasion been granted an Option (or been invited to apply for the grant of an Option) shall give such individual any right entitlement or expectation that he has or will in future have any such right entitlement or expectation to participate in this Plan by being granted an Option (or invited to apply for the grant of an Option) on any other occasion. |
12.3 | The rights granted to an Optionholder upon the grant of an Option shall not afford the Optionholder any rights or additional rights to compensation or damages in consequence of the loss or termination of his office or employment with any present or past member of the Group or Associated Company or Jointly Owned Company for any reason whatsoever (whether or not such termination is ultimately held to be wrongful or unfair). |
12.4 | The rights and obligations of an Optionholder under the terms of his contract of employment with any present or past member of the Group or Associated Company or Jointly Owned Company shall not be affected by the grant of an Option or his participation in this Plan. |
12.5 | An Optionholder shall not be entitled to any compensation or damages for any loss or potential loss which he may suffer by reason of being unable to exercise an Option in whole or in part in consequence of the loss or termination of his office or employment with any present or past member of the Group or Associated Company or Jointly Owned Company for any reason whatsoever (whether or not such termination is ultimately held to be wrongful or unfair). |
13. | DEMERGER, RECONSTRUCTION OR WINDING-UP OF THE COMPANY |
13.1 | If notice is given to shareholders of the Company of a proposed demerger of the Company or of any Subsidiary the Company may give notice to Optionholders that Options may then be exercised within such period as the Company may specify in such notice to Optionholders SAVE THAT no such notice to Optionholders shall be given unless the Directors determine that the interests of Optionholders would or might be substantially prejudiced if before the proposed demerger has effect Optionholders could not exercise their Options and be registered as the holders of the Shares thereupon acquired. |
13.2 | If the court sanctions a compromise or arrangement proposed for the purposes of or in connection with a scheme for the reconstruction of the Company or its amalgamation pursuant to section 899 of the Companies Act 2006 the Optionholder shall be entitled to exercise his Option during the period of 6 months commencing on the date on which the court sanctions the compromise or arrangement, and thereafter the Option shall lapse and cease to be exercisable. |
18
13.3 | If notice is given to the shareholders of the Company of a resolution for the voluntary winding-up of the Company, notice of the same shall be given to all Optionholders and each Optionholder shall be entitled to exercise his Option at any time within the period of 6 months commencing on the date on which the resolution is passed. |
13.4 | All Options shall immediately lapse and cease to be exercisable upon the commencement of a winding-up of the Company. |
14. | TAKE-OVER OF THE COMPANY |
14.1 | If, as a result of either: |
14.1.1 | a general offer to acquire the whole of the Ordinary Share Capital which is made on a condition such that if it is satisfied the person making the offer will have control of the Company; or |
14.1.2 | a general offer to acquire all the shares in the Company of the same class as the Shares |
the Company shall come under the control of another person or persons, an Optionholder shall be entitled to exercise his Option to the extent permitted by rule 9.5 within the period of 6 months beginning with the date when the person making the offer has obtained control of the Company and any condition subject to which the offer is made has been satisfied. To the extent that the Option is not then exercised, it shall lapse and cease to be exercisable at the end of such period.
14.2 | If at any time any person becomes entitled or bound to acquire shares in the Company under sections 979 to 982 (inclusive) of the Companies Act 2006 an Optionholder shall be entitled to exercise his Option to the extent permitted by rule 9.5 at any time when that person remains so entitled or bound. To the extent that the Option is not then exercised, it shall lapse and cease to be exercisable at the end of such period. |
14.3 | For the purposes of the preceding provisions of this rule 14 a person shall be deemed to have control of the Company if he and others acting in concert with him have together obtained control of it. |
15. | VARIATION OF SHARE CAPITAL |
15.1 | In the event of any alteration of the Ordinary Share Capital by way of a capitalisation or rights issue or by way of sub-division, consolidation, reduction or any other variation in the share capital of the Company the Grantor may make such adjustments as it considers appropriate: |
15.1 | to the aggregate number of Shares subject to any Option; |
15.2 | to the Exercise Price; and/or |
15.3 | if an Option has been exercised but no Shares have been allotted or transferred, to the number of Shares which may be so allotted or transferred and the Acquisition Cost relating to such Shares |
19
PROVIDED THAT:
(a) | the aggregate Acquisition Cost payable by an Optionholder on the exercise of all of his Options shall not be materially altered; |
(b) | except insofar as the Directors, on behalf of the Company, may then agree to capitalise the Companys reserves and apply the same in paying up the difference between the Exercise Price and the nominal value of the Shares at the time of exercise, the Exercise Price in relation to a Subscription Option is not reduced below the nominal value of those Shares; |
(c) | the number of Shares as so adjusted shall be rounded down to the nearest whole number and the Exercise Price as so adjusted shall be rounded up to the nearest whole penny; and |
(d) | if the Grantor is not the Company, no such adjustment shall be made without the consent of the Grantor. |
15.2 | As soon as reasonably practicable after making any adjustment pursuant to rule 15.1 the Grantor shall give notice in writing thereof to every Optionholder affected thereby and may call in any Option Certificates for endorsement or replacement. |
16. | ALTERATION OF THIS PLAN |
16.1 | The Committee may at any time (with the prior consent of the Grantor) by resolution in writing alter or add to any of the provisions of this Plan in any respect PROVIDED THAT : |
16.1.1 | no such alteration or addition shall be made to the advantage of existing or new Optionholders to the provisions relating to eligibility to participate, basis of determining entitlement to Optionholders rights to acquire shares, exercise price, overall and individual limitations on the grant of options under this Plan and the adjustment of such rights in the event of a variation of Ordinary Share Capital without the prior approval by ordinary resolution of the shareholders of the Company in general meeting SAVE THAT this provision shall not apply to the extent that such alteration or addition is in the opinion of the Committee a minor amendment which is necessary or appropriate: |
(a) | to benefit the administration of this Plan; |
(b) | to take account of a change in legislation; or |
(c) | to obtain or maintain favourable tax, exchange control or regulatory treatment for participants in the Plan or for the Company or any member of the Group in any jurisdiction; |
16.1.2 | if in relation to any Options the Grantor is not the Company, no alteration or addition shall be made to the terms of such Options without the approval of the Grantor; and |
16.1.3 | as soon as reasonably practicable after making any such alteration or addition the Committee (on behalf of the Grantor) shall give notice in writing thereof to every Optionholder (if any) affected thereby. |
16.2 | Without limitation to the above, the Committee may amend the Rules or adopt appendices for Eligible Employees in any jurisdiction without the approval of the Company in general meeting if it considers it necessary or desirable to take account of or mitigate or comply with taxation, securities or exchange control laws or to improve the tax, social security, exchange control and/or securities law treatment of the Eligible Employees, Optionholders, the Company or any other Companies in the Group, Associated Companies or Jointly Owned Companies. The Committee may also create additional sub-plans for any of these purposes. |
20
17. | SERVICE OF DOCUMENTS |
17.1 | Except as otherwise provided in this Plan, any notice or document to be given by, or on behalf of, the Company or other Grantor or any Administrator appointed to administer the Plan to any person in accordance or in connection with this Plan shall be duly given by sending it through the post in a pre-paid envelope to the address last known to the Company to be his address and, if so sent, it shall be deemed to have been duly given on the date of posting, or if he holds office or employment with any member of the Group or any Associated Company, by delivering it to him at his place of work or by sending to him a facsimile transmission or by electronic means addressed to him at his place of work and if so sent it shall be deemed to have been duly given at the time of transmission. |
17.2 | Any notice or document so sent to an Employee or Optionholder shall be deemed to have been duly given notwithstanding that such Optionholder is then deceased (and whether or not the Company or other Grantor has notice of his death) except where his Personal Representatives have supplied to the Company an address to which documents are to be sent. |
17.3 | Any notice in writing or document to be submitted or given to the Grantor, the Company or the Administrator in accordance or in connection with this Plan may be delivered, sent by post, facsimile transmission or electronic means but shall not in any event be duly given unless it is actually received by the secretary of the Company or such other individual as may from time to time be nominated by the Company and whose name and address is notified to Optionholders. |
18. | APPLICABLE LAW |
18.1 | This Plan shall be governed by and construed in all respects in accordance with English law. |
18.2 | In applying for the grant of an Option an Eligible Employee shall be deemed to submit to the exclusive jurisdiction of the English courts as regards any claim legal action or proceedings arising out of this Plan and to waive any objection to such proceedings taking place in the English courts on the grounds of venue or on the grounds that such proceedings have been brought in an inconvenient forum. |
19. | THIRD PARTY RIGHTS |
Except as otherwise expressly stated to the contrary, neither this Plan nor the grant of any Option nor the UK Contracts (Rights of Third Parties) Act 1999 shall have the effect of giving any third party any rights under this Plan and that Act shall not apply to this Plan or to the terms of any Option granted pursuant to this Plan.
20. | PROTECTION OF PERSONAL DATA |
20.1 | By accepting the grant of an Option the Optionholder shall agree and consent to: |
20.1.1 | the collection, use and processing by any member of the Group, the Administrator and any Relevant Trustee of Personal Data relating to the Optionholder, for all purposes reasonably connected with the administration of this Plan and the subsequent registration of the Optionholder or any other person as a holder of Shares acquired pursuant to the exercise of an Option; |
21
20.1.2 | any member of the Group, the Administrator and any Relevant Trustee transferring Personal Data to or between any of such persons for all purposes reasonably connected with the administration of the Plan; |
20.1.3 | the use of Personal Data by any member of the Group, the Administrator or any Relevant Trustee for all purposes reasonably connected with the administration of the Plan; and |
20.1.4 | the transfer to and retention of such Personal Data by any third party for such purposes. |
21. | MISCELLANEOUS |
21.1 | No Option to purchase existing Shares shall be granted by any person unless that person beneficially owns such Shares at the Date of Grant or the Committee is satisfied that sufficient Shares will be made available to satisfy the exercise in full of all Options granted or to be granted by that person. |
21.2 | The Committee may from time to time make and vary such rules and regulations not inconsistent herewith and establish such procedures for the administration and implementation of this Plan as they think fit. |
21.3 | The decision of the Committee shall be final and binding on the interpretation of the Rules or in any dispute relating to any question or right arising from or related to this Plan or in connection with an Option. |
21.4 | The Company shall not be obliged to provide Optionholders with copies of any notices, circulars or other documents sent to holders of Shares. |
21.5 | The costs of the administration and implementation of this Plan shall be borne by the Company. |
21.6 | The issue of an Invitation on any occasion is made at the Companys discretion. No entitlement to the issue of an Invitation, the grant of an Option and/or the issue of Shares in the future shall thereby be created on the grounds that such Invitations were issued or Options were granted in the past nor on the grounds that Options may previously have been granted over a particular number of Shares at a certain price. Even the repeated grant of Options and/or the issue of Shares shall not create future entitlements to receive Options and/or Shares at all or to be granted Options over a specific number of Shares or at a specific price. |
21.7 | If any provision of this Plan is held invalid, illegal or unenforceable for any reason by any court of competent jurisdiction, such provision shall be severed and the remainder of the provisions of this Plan shall continue in full force and effect as if this Plan had been established with the invalid, illegal or unenforceable provision eliminated. |
22. | OPTIONHOLDER CHANGE OF RESIDENCE |
If an Optionholder moves out of any jurisdiction in which the Optionholder is resident at the time when an Option is granted, the Committee may amend, delete from or add to the provisions of the Plan or terms of the Options as they consider necessary or desirable to take account of, or to mitigate or to comply with relevant tax, securities or exchange control laws in the country to which the Optionholder has moved, provided that subsisting Options following such amendments are not more favourable overall than the original Options.
22
23. | WITHHOLDING PROVISIONS |
23.1 | Without limitation to rule 10.3, any Company in the Group, Associated Company, Jointly Owned Company and/or Relevant Trustee shall be entitled to withhold, and the Optionholder shall be obliged to pay, the amount of any tax and/or employee social insurance contributions attributable to or payable in connection with or pursuant to the grant or any vesting, or any exercise, or any release or assignment of any Option or otherwise in connection with the acquisition or sale of Shares pursuant to an Option or otherwise in connection with this Plan. |
23.2 | The Committee may establish appropriate procedures to provide for any such payments, including but not limited to: |
23.2.1 | the deduction of such payment from the salary or bonuses or any other amounts due to an Optionholder by the Company or any other Company in the Group, Associated Company or Jointly Owned Company at any time; |
23.2.2 | the sale of any number of Shares acquired or to be acquired pursuant to the grant, vesting or exercise of an Option and the forwarding of the proceeds of any such sale to any appropriate revenue authority; and |
23.2.3 | by direct collection from an Optionholder at any time. |
23.3 | Without prejudice to the generality of Rule 23.2, each Optionholder authorises the Company, any other company in the Group, Associated Company or Jointly Owned Company or Relevant Trustee to sell or procure the sale of sufficient Shares following the vesting or exercise of his Option on his behalf to obtain sufficient funds to enable any such entity to discharge any obligation it may have to pay tax or employee social security contributions or taxes arising in respect of the vesting or exercise of the Option to the relevant tax authorities. |
24. | SHARE AWARD |
24.1 | The Committee may determine that an Option will not be satisfied by the acquisition of Shares at the time of exercise but instead will be satisfied by the transfer to him of Shares with a value equal to the Gain or will apply such value in the subscription of Shares for him. |
In these circumstances the Acquisition Cost shall not be payable, and if already paid, will be repaid to the Optionholder.
The Committee may make this determination at the time the invitations are made, at the Date of Grant, or afterwards, to take account of local legal and tax requirements.
24.2 | For the purpose of this clause, the Gain means the amount by which the middle market quotation of a Share, as derived from the Daily Official List, for the 3 consecutive Dealing Days immediately preceding the Maturity Date, or such other date as determined by the Committee, less the Exercise Price. The number of shares available under this clause will be after the deduction of any Option Tax Liability. |
23
APPENDIX 1: RULES OF THE SMITH & NEPHEW FRENCH SHARESAVE SUB-PLAN (2012)
The Rules of the Smith & Nephew International Sharesave Plan (2012) (the International Plan) shall apply to Eligible Employees resident in France except as provided by the amendments below.
1. | INTERPRETATION |
Rule 1.1 shall be amended by the replacement and/or addition of the following words and expressions, which shall have the meaning given below.
the Administrator | Such other person who is for the time being appointed by the Company to administer this Plan. The Administrator shall only be vested with pure administrative functions, but not with management nor decision-making powers. | |
Affiliate Company | has the meaning given in Section L. 225180 of the Commerce Code, as amended | |
Associated Company | any company which, in relation to the Company: | |
(a) is an associated company as that term is defined by sections 449 and 450 of the UK Corporation Tax Act 2010 except that, for the purposes of this Plan, section 449 shall have effect with the omission of the words or at any time within the preceding 12 months; or
(b) is an Affiliate Company |
||
Close Periods |
The specific periods as set forth in Section L. 225-177 of the Commerce Code, as amended, during which French-qualified Options cannot be granted in accordance with rule 5.5.
If the French law or regulations are amended after adoption of this Plan to modify the definition and/or applicability of the Close Periods to French-qualified Options, such amendment shall become applicable |
|
Commerce Code | the French Code of Commerce, as amended and restated from time to time | |
Date of Grant | in relation to any Option, the date on which the Committee both (i) designates the Option holders, and (ii) specifies the main terms and conditions of the Option, such as the number of Shares subject to the Option and Exercise Price and the condition for the Maturity Date of the Option. In no event, however, shall the Date of Grant for an Option occur during a Close Period, and if any such option grant is otherwise authorized or approved during such Close Period, the Date of Grant of that option shall be determined in accordance with rule 5.5. | |
Eligible Employee | a French Employee or a French Officer who qualifies as such on the Date of Grant |
24
Employee | an employee of a Participating Company in France | |
Forced Retirement | has the meaning as determined under Section L 1237-5 of the French Labor Code, as amended, and subject to the fulfilment of related conditions. | |
French Employee | an employee ( salarié) of a French Affiliate Company | |
French Officer | Chairman ( Président ), chief executive officer ( directeur général and directeur général délégué ) general manager ( gérant in a société par actions simplifiée ), management board members ( membres du directoire ) of a French Affiliate Company but not directors ( administrateurs ) or supervisory board members ( membres du conseil de surveillance ) except in special circumstances described in Article L. 225-185 of the Commerce Code | |
Initial Market Value | in relation to a Share in respect of which an Option is to be, or has been granted, the average of the quoted closing price of Shares for the twenty Dealing Days immediately preceding the Date of Grant | |
Invitation Date | in relation to an Option, the date on which the invitation to apply for the grant of such Option was issued | |
Jointly Owned Company | a company (and any subsidiary as defined in section 1159 and Schedule 6 of the Companies Act 2006 of such a company) of which the whole of the issued ordinary share capital is jointly owned by a member of the Group and another person (not being a member of the Group) but which is not a Subsidiary | |
Local Currency | Euros, or any successor currency applicable in France. | |
the Maturity Date | in relation to an Optionholders Savings, the fourth anniversary of the date on which his first Monthly Contribution is received by the Savings Body. | |
Monthly Contribution | in relation to any Eligible Employee, the fixed amount (in Local Currency) of each of the 48 monthly savings contributions which that individual undertakes to make in his Application | |
Notional Sterling Repayment Value | in relation to any Application, the aggregate amount in pounds sterling (converted from Local Currency using the Exchange Rate on the fifth day before the Invitation Date or on such other date as the Committee may determine) of 48 Monthly Contributions or, such other number of Monthly Contributions as the Committee may determine in relation to Options granted on any occasion so as to be consistent with the bonus rates payable on a certified contractual savings scheme within the meaning of section 703 of the UK Income Tax (Trading and Other Income) Act 2005 | |
Option or French-qualified Option | a right to subscribe for or acquire Shares which is granted pursuant to, and is exercisable only in accordance with, this Plan and which is a 4-year Option |
25
Option Tax Liability | in relation to an Optionholder, any liability of any member or former member of the Group or any Associated Company or former Associated Company to account to any tax or social authority or other body for any amount of, or representing, income tax or employee social security contributions or any other tax charge levy or other sum which the Optionholder is charged upon or in consequence of the grant, vesting, exercise, assignment or release of an Option or the acquisition or sale of Shares under this Plan | |
Participating Company | a member of the Group to which the Directors have determined that this Plan shall extend | |
Personal Data | has the meaning it bears for the purposes of the UK Data Protection Act 1998 and any applicable local EU data protection laws | |
Personal Representatives | in relation to an Optionholder, the heirs or legatees of the Optionholder | |
this Plan | Appendix 1: Rules of the Smith & Nephew French Sharesave Sub-Plan (2012) as amended from time to time | |
Shares | fully-paid ordinary shares in the capital of the Company registered in nominative form | |
Subscription Options | Options which are rights granted by the Company to subscribe for newly issued Shares | |
Subsidiary | any company which is for the time being a subsidiary of the Company as defined in section 1159 and Schedule 6 of the UK Companies Act 2006 of the Company |
2. | ISSUE OF INVITATIONS |
Rule 2 shall be amended as follows:
The following shall be inserted at the end of Rule 2.1 after grant of Options:
intended to qualify for the specific tax and social security tax treatment in France applicable to stock options granted under Sections L. 225-177 to L.225-186-1 of the Commerce Code, as amended (French-qualified Options or Options).
Rule 2.2.1 shall be deleted.
In Rule 2.3 Participating shall be replaced with the following:
French Affiliate
In Rule 2.3 a given jurisdiction shall be replaced with the following:
France
26
Rule 2.5.2 shall be replaced with the following:
state that it is a condition of the grant of an Option that the Eligible Employee must first undertake to make 48 consecutive monthly savings contributions (by way of deductions from net payments of salary or by such other arrangements as may be permitted under French law and as may be permitted by the Directors and permitted in France) in Local Currency to an account with the Savings Body;
In Rule 2.5.5, the following shall be deleted: in respect of such whole number of Shares as shall be as nearly as may be equal to, but shall not exceed, the Individual Share Limit (or such lesser number of Shares as the Company may determine).
3. | APPLICATION FOR OPTIONS |
Rule 3 shall be amended as follows:
In Rule 3.1.2, the word Eligible shall be inserted before the word Employee.
Rule 3.1.3 shall be deleted.
The new Rule 3.1.3 (formerly 3.1.4) shall be replaced with the following:
includes an undertaking by the Eligible Employee to his Employer Company to make 48 consecutive monthly savings contributions (in Local Currency) to a Savings Body;
In new Rule 3.1.6 (formerly 3.1.7), the following shall be inserted at the end after administration of this Plan:
pursuant to rule 20 of this Plan
4. | ACCEPTANCE AND SCALING DOWN OF APPLICATIONS |
Rule 4 shall be amended as follows:
Rule 4.3 shall be deleted.
Rule 4.4 shall become Rule 4.3, and the following phrase shall be deleted from the new Rule 4.3:
, after the application of rule 4.3,
Rule 4.5 shall become Rule 4.4, and reference to rule 4.4 shall be replaced with the following:
rule 4.3
Rule 4.6 shall become Rule 4.5, and reference to rule 4.5 shall be replaced with the following:
rule 4.4
5. | GRANT OF OPTIONS |
Rule 5 shall be amended as follows:
The following shall be deleted from Rule 5.1:
or, if the Company has so determined with the consent of a Relevant Trustee, the Relevant Trustee.
27
Rule 5.5 shall be replaced with the following:
5.5 Unless the Committee determines otherwise (generally or for particular Options), Options for which Invitations have been issued on any occasion shall be granted within the period of 90 days beginning with the Invitation Date PROVIDED THAT:
5.5.1 French-qualified Options may not be granted during a Close Period to French Eligible Employees as set forth in Section L 225-177 of the Commerce Code, as amended, to the extent such Close Periods are applicable to French-qualified Options granted by the Company. If the Company grants Options to non-French Eligible Employees on a date during a Close Period, the Date of Grant for French Eligible Employees shall be the first date following the expiration of the Close Period, provided such date is not prohibited under the International Plan rules. Options shall not be granted within the following Close Periods:
(a) | 20 Dealing Days from the date: |
(i) | a dividend is distributed (i.e., the ex-dividend date); |
(ii) | of a general right to subscribe to Shares (i.e., a rights offering); |
(b) | 10 Dealing Days preceding and following the Announcement Date (i.e., the disclosure to the public of the consolidated financial statements or the annual statements of the Company) ; |
(c) | any day when the corporate management of the Company possesses confidential information which could, if disclosed to the public, significantly impact the quotation of the Shares of the Company, until 10 Dealing Days after the day such information is disclosed to the public. |
5.5.2 If on any occasion Options cannot be granted as a result of the restriction in rules 5.5.1(a)(i), 5.5.1(a)(ii), or 5.5.1(c), the Committee may grant such Options at any time within the period of 90 days following the end of such restriction provided this next date does not fall within a Close Period; in the latter event, the Date of Grant will be postponed until a date which is not during a Close Period.
The following shall be inserted after Rule 5.7.6:
5.7.7 that the Option shall lapse upon the occurrence of an event referred to in rule 9.4
6. | MONTHLY CONTRIBUTIONS |
Rule 6.2 shall be replaced with the following:
6.2 An Optionholders Savings shall be deposited with the Savings Body and shall at all times remain the property of the Optionholder so that none of the Company, the Optionholders Employer or the Administrator shall have any interest in such Savings.
In Rule 6.3 is, in the Committees opinion an equivalent circumstance or event resulting, shall be replaced with the following:
under applicable law results
28
7. | EXERCISE PRICE |
Rule 7 shall be replaced with the following:
7.1 The Exercise Price and number of shares underlying the Options shall not be modified after the Grant Date, except as provided in rule 15 of this Plan or as otherwise authorised by French law. Any other modification permitted under the International Plan may result in the Option no longer satisfying its status as a French-qualified Option.
7.2 The Exercise Price per Share payable pursuant to Options Granted under this Plan shall be fixed by the Committee on the Date of Grant. In no event shall the exercise price per share be less than the greatest of the following:
7.2.1 95% of the Initial Market Value (rounded up to the nearest whole penny); for an Option over newly-issued Shares;
7.2.2 95% of the Initial Market Value or 95% of the average purchase price paid for such Shares by the Company with respect to Options over Treasury Shares; or if greater
7.3.3 the nominal value of a Share under UK law.
9. | EXERCISE OF AN OPTION |
Rule 9 shall be replaced with the following:
9.1 Subject to the following provisions of this rule 9 and rules 13 and 14, an Option shall only be exercisable within the period of 6 months beginning with the Maturity Date and, if not then exercised, shall lapse and cease to be exercisable at the end of that period.
9.2 If an Optionholder dies while he/she is actively employed, all the Options shall become immediately vested and exercisable in full by the Optionholders heirs or his/her Personal Representatives for the six month period following the date of the Optionholders death, and such Options shall expire six months following the date of the Optionholders death. In the event of the death of an Optionholder after termination of active employment, the treatment of the Options shall be as set forth in the Plan.
9.3 An Option may be exercised to the extent permitted by rule 9.5 within the period of 6 months following the date upon which the Optionholder ceases to hold employment within the Group by reason of
9.3.1 disability, defined as a second or third category disability pursuant to Section L. 341-4 of the French Social Security Code, as amended, and subject to the fulfilment of related conditions;
9.3.2 redundancy for economic or business reasons;
9.3.3 retirement at or after his normal age of retirement;
and, if it is not then exercised that Option shall lapse and cease to be exercisable at the end of such 6 month period (unless the Committee determines otherwise).
Unless the Committee decides otherwise, the Company will restrict the sale or disposal of the Shares acquired upon exercise under rule 9.3.2 or 9.3.3 by such methods as it considers appropriate in order to meet the minimum four year holding period requirement to be eligible for the specific tax and social security regime in France under Sections L.225-177 to L.225-186-1 of the Commerce Code 1 .
1 | If the Shares acquired pursuant to the exercise of an Option under rule 9.3.2, 9.3.3, 9.4.1, or 9.4.2 are sold or otherwise disposed of prior to the Maturity Date, such Option and Shares will no longer be eligible for the specific tax and social security regime in France under Sections L.225-177 to L.225-186-1 of the Commerce Code, and the Optionholder is responsible for paying and reporting any resulting tax and social insurance liabilities. |
29
9.4 If at any time before the Maturity Date an Optionholder ceases to hold employment with a member of the Group or an Associated Company or a Jointly Owned Company for any reason other than those mentioned in rules 9.2 and 9.3:
9.4.1 if such cessation is by reason of:
(d) | the company by which the Optionholder is employed becoming neither a member of the Group nor an Associated Company nor a Jointly Owned Company; or |
(e) | the fact that the Optionholders employment with a member of the Group or an Associated Company relates to a business or part of a business which is transferred to a person which is neither a member of the Group nor an Associated Company nor a Jointly Owned Company |
then the Committee may exercise its discretion to permit the Optionholder to exercise his Option within such period (not exceeding 6 months following cessation) as may be notified to him prior to cessation.
To the extent that the Option is not then exercised within such period, it shall lapse and cease to be exercisable at the end of such period; or
9.4.2 in any other case his Option shall immediately lapse and cease to be exercisable upon cessation but the Committee may exercise its discretion to permit the Optionholder to exercise his Option within such period not exceeding 6 months following cessation.
9.4.3 Unless the Committee decides otherwise, the Company will restrict the sale or disposal of the Shares acquired upon exercise under rule 9.4.1 or 9.4.2 by such methods as it considers appropriate in order to meet the minimum four year holding period requirement to be eligible for the specific tax and social security regime in France under Sections L.225-177 to L.225-186-1 of the Commerce Code 2 .
9.5 An Option may only ever be exercised:
9.5.1 subject to the Optionholder not having failed to make any Monthly Contributions, pursuant to rules 9.1 and 9.2 in respect of all of the Option Shares; or
9.5.2 pursuant to rules 9.2, 9.3, 13, or 14 (or pursuant to rules 9.1 and 9.2 if the Optionholder has failed to make one or more Monthly Contributions), in respect of such number of Shares as is equal to:
C x D
48
where:
C is the number of Option Shares; and
2 | See footnote 1. |
30
D is the number of Monthly Contributions actually made by the Optionholder before the date of exercise of the Option
or, in either case, such lesser number of Option Shares as the Optionholder may specify in the notice of exercise given pursuant to rule 10.1.
9.6 For the purposes of this rule 9, an Optionholder shall not be treated as ceasing to hold employment within the Group until he no longer holds any office as a director or any employment with any member of the Group or any Associated Company or any Jointly Owned Company.
9.7 An option may not be exercised more than once.
9.8 In deciding whether and when to exercise an Option, an Optionholder shall have regard to the Model Code.
9.9 An Option may only be exercised pursuant to rules 13 or 14 if:
9.9.1 such Option would then be exercised in circumstances that allow the Options to qualify for the French specific tax and social security regimes under Articles L. 225-180 et seq of the Commerce Code; or
9.9.2 the Committee exercises its discretion to permit the Optionholder to exercise his Option pursuant to rules 13 or 14.
10. | MANNER OF EXERCISE OF AN OPTION |
Rule 10 shall be amended as follows:
In Rule 10.3, the following shall be deleted:
or any Relevant Trustee
In Rule 10.6, the following shall be inserted after (whether in the United Kingdom, :
the French Republic
11. | NON-TRANSFERABILITY AND LAPSE OF OPTIONS |
Rule 11.2 shall be replaced with the following:
11.2 An Option shall immediately lapse and cease to be exercisable if:
11.2.1 (unless in any individual case the Company otherwise determines) the Optionholder, whilst remaining in employment with a member of the Group or an Associated Company or a Jointly Owned Company, instructs his Employer Company to cease deducting Monthly Contributions from his salary;
11.2.2 if, after six of the Optionholders Monthly Contributions have not been made for any reason, a seventh Monthly Contribution is not made on the due date for payment; or
11.2.3(unless in any individual case the Company otherwise determines) an Optionholder obtains repayment of any of his savings contributions (or interest on such contributions) unless such Option is then immediately exercisable pursuant to rules 9.2, 9.3, 13, or 14.
31
Except in the case of death, French-qualified Options may not be transferred to any third party. The French-qualified Options are exercisable only by the Beneficiary during his or her lifetime, subject to rules 9.2. and 9.3.
In Rule 11.3, the reference to rule 9.2.2 shall be amended to rule 9.2.
13. | DEMERGER, RECONSTRUCTION OR WINDING-UP OF THE COMPANY |
Rule 13 shall be amended as follows:
In Rule 13.1, the following shall be inserted after that Options may then be exercised within such period :
(not exceeding 30 days)
In Rules 13,1 13.2, and 13.3, the following shall be inserted at the beginning of the paragraph:
Subject to rule 9.9,
In Rule 13.4, the following shall be added as a new paragraph after winding-up of the Company:
Assumption or substitution of the French-qualified Options in case of a variation of share capital, as well as acceleration of the Maturity Date and exercisability of the Options or any mechanism implemented upon such variation of share capital, or in any other event, to compensate the Optionholders, may result in the Option no longer being eligible for the specific French tax and social security regimes.
14. | TAKE-OVER OF THE COMPANY |
Rule 14 shall be amended by inserting the following at the beginning of the paragraph in Rules 14.1 and 14.2:
Subject to rule 9.9,
15. | VARIATION OF SHARE CAPITAL |
The first paragraph of Rule 15.1 shall be replaced with the following:
In the event of any alteration of the Ordinary Share Capital by way of a capitalisation or rights issue or by way of sub-division, consolidation, reduction or any other variation in the share capital of the Company the Grantor, may make adjustments to the terms and conditions of the French-qualified Options or underlying shares only in accordance with the International Plan pursuant to applicable French legal and tax rules. Nevertheless, the Committee, at its discretion, may make adjustments in the case of a transaction for which adjustments are not authorized under French law, in which case the Options may no longer qualify as French-qualified Options. The Grantor may make such adjustments as it considers appropriate:
Rule 15.1(d) shall be replaced with the following:
adjustments of the Options issued hereunder shall be made to preclude the dilution or enlargement of benefits under the Option in the event of a truncation by the Company as listed under Section L225-181 of the Commerce Code, as amended, and in case of repurchase of shares by the Company at a price higher than the quotation price in the open market, and according to the provisions of sections L.228-99 of the Commerce Code, as amended, as well as according specific decrees. Nevertheless, the Committee, at its discretion, may make adjustments in the case of a transaction for which adjustments are not authorised under French law, in which case the Options may no longer qualify as French-qualified Options.
32
Assumption or substitution of the French-qualified Options in case of a variation of share capital, as well as acceleration of the Maturity Date and exercisability of the Options or any mechanism implemented upon such variation of share capital, or in any other event, to compensate the Optionholders, may result in the Option no longer being eligible for the specific French tax and social security regimes.
16. | ALTERATION OF THIS PLAN |
Rule 16 shall be amended as follows:
In Rule 16.1(c), the following shall be inserted after to obtain or maintain favourable:
or specific
Rule 16.1.2 shall be renumbered as 16.2.
Rule 16.1.3 shall be renumbered as 16.3.
Rule 16.2 shall be deleted.
20. | PROTECTION OF PERSONAL DATA |
Rule 20.1 shall be replaced with the following:
20.1 By accepting the grant of an Option the Optionholder is informed that the Employer Company will proceed with the following operations:
20.1.1 collection, use and processing of Personal Data relating to the Optionholder, solely for the purposes of administering this Plan and the subsequent registration of the Optionholder or any other person as a holder of Shares acquired pursuant to the exercise of an Option;
20.1.2 sharing of Personal Data with members of the Group within the European Union who have the need to collect, use, and process the Personal Data for purposes of administering the Plan [please list the services within the Group that have access to Personal Data, e.g. HR, legal, financial departments] , the Administrator, the Relevant Trustee, or the relevant third party solely for the purposes of administering the Plan. Only the relevant personnel of these recipients will access the Data, on a need to know basis. The Optionholder has a right to access Personal Data, at any time, require any necessary amendments to it or oppose for legitimate purposes to the processing of his Personal Data for the above purposes in writing by contacting the human resources representative of the Employer Company. The Optionholder acknowledges that opposing the processing of his Personal Data may affect his ability to participate in the Plan.
21. | MISCELLANEOUS |
Rule 21.1 shall be deleted.
The following shall be inserted after the new Rule 21.6 (formerly 21.7):
21.7 |
It is intended that Options granted under this Plan shall qualify for the specific tax and social security treatment applicable to stock options granted under Sections L. 225-177 to L.225-186-1 of the Commerce Code, as amended, and in accordance with the relevant provisions set forth by French tax law and the French tax administration, but no undertaking is made to maintain such status. The terms of |
33
this Plan shall be interpreted accordingly and in accordance with the relevant provisions set forth by French tax and social security laws and relevant guidelines published by French tax and social security administrations and subject to the fulfilment of legal, tax and reporting obligations. In the event of any conflict between the provisions of this Plan and the International Plan, the provisions of this Plan shall control for any grants of Options made hereunder to Optionholders in France. |
24. | SHARE AWARD |
Rule 24 shall be deleted.
34
APPENDIX
(Amendments for Particular Jurisdiction)
35
ANNEX 1 TO THE RULES OF THE SMITH & NEPHEW INTERNATIONAL SHARESAVE PLAN 2012
China
This Annex 1 to the Rules of the Smith & Nephew International Sharesave Plan 2012 (the Plan) governs Options granted to Eligible Employees resident in China. Options granted pursuant to this Annex 1 are subject to all of the terms and conditions set forth in the Plan except as modified by the following provisions which shall replace and/or supplement certain provisions of the Plan as indicated.
1. | INTERPRETATION |
Rule 1.1 shall be amended by the replacement of the following term, which shall have the meaning set forth below.
The following definition shall replace the meaning of Employee in Rule 1.1:
an employee of a Participating Company or an employee employed by a labour agency or other third party providing services to a Participating Company
36
ANNEX 2 TO THE RULES OF THE SMITH & NEPHEW INTERNATIONAL SHARESAVE PLAN 2012
Phantom Options
37
Exhibit 8
PRINCIPAL SUBSIDIARIES
Smith & Nephew plc
Subsidiary Undertakings
Company |
Country of Incorporation |
|
A2 Surgical | France | |
Blue Sky Medical Group Inc | USA | |
Endocare GmbH (80%) | Germany | |
Healicoil Inc. | USA | |
Hipco Inc | USA | |
ICEMBE Medical (pty) Ltd | South Africa | |
Kalypto Medical, Inc. | USA | |
LifeModeler, Inc. | USA | |
Oratec Interventions, Inc | USA | |
Orthopaedic Biosystems Ltd., Inc. | USA | |
OsteoBiologics, Inc | USA | |
Plus Orthopaedics (UK) Ltd | UK | |
Plus Orthopedics GmbH | Austria | |
Plus Orthopedics Hellas SA | Greece | |
Plus Orthopedics Holding AG | Switzerland | |
Plus Orthopedics LLC | USA | |
Smith & Nephew (Alberta) Inc | Canada | |
Smith & Nephew (Europe) B.V. | Netherlands | |
Smith & Nephew (Manchester) Limited | England | |
Smith & Nephew (Overseas) Limited | England | |
Smith & Nephew (Pty) Limited | South Africa | |
Smith & Nephew A/S | Denmark | |
Smith & Nephew A/S | Norway | |
Smith & Nephew AB | Sweden | |
Smith & Nephew AG | Switzerland | |
Smith & Nephew AH Limited | England | |
Smith & Nephew AHP Inc. | USA | |
Smith & Nephew Albion Limited | England | |
Smith & Nephew B.V. | Netherlands | |
Smith & Nephew Beijing Holdings Ltd | Hong Kong | |
Smith & Nephew Business Services Gmbh & Co. KG. | Germany | |
Smith & Nephew Business Services Verwaltungs Gmbh | Germany | |
Smith & Nephew Beta Limited | England | |
Smith & Nephew CC Limited | England | |
Smith & Nephew Chester Limited | England | |
Smith & Nephew Collagenase Limited | England | |
Smith & Nephew Comercios de Productos Medicos Ltda | Brazil | |
Smith & Nephew Consolidated, Inc | USA | |
Smith & Nephew Consumer Products Limited | England | |
Smith & Nephew Crystal (Holdings) Limited | England | |
Smith & Nephew Crystal Limited | England | |
Smith & Nephew Curacao N.V. | Netherlands | |
Smith & Nephew Delta Limited | England | |
Smith & Nephew Deutschland (Holding) GmbH | Germany | |
Smith & Nephew Employees Trustees Limited | England | |
Smith & Nephew Endoscopy KK | Japan | |
Smith & Nephew Epsilon Limited | England |
Company |
Country of Incorporation |
|
Smith & Nephew ESN Limited | England | |
Smith & Nephew Everett Limited | England | |
Smith & Nephew Extruded Films Limited | England | |
Smith & Nephew Finance | England | |
Smith & Nephew Finance Holdings Limited | Cayman Islands | |
Smith & Nephew Finance Oratec | England | |
Smith & Nephew Finance USD Limited | England | |
Smith & Nephew France SAS | France | |
Smith & Nephew FZE | United Arab Emirates | |
Smith & Nephew Gamma Limited | England | |
Smith & Nephew Gibbs Limited | England | |
Smith & Nephew GmbH | Germany | |
Smith & Nephew GmbH | Austria | |
Smith & Nephew Grover Limited | England | |
Smith & Nephew Healthcare Limited | England | |
Smith & Nephew Healthcare Private Limited | India | |
Smith & Nephew Healthcare Sdn Berhad | Malaysia | |
Smith & Nephew Hellas SA | Greece | |
Smith & Nephew Holdings Inc. | USA | |
Smith & Nephew Inc. | Canada | |
Smith & Nephew Inc. | Puerto Rico | |
Smith & Nephew Inc. | USA | |
Smith & Nephew Insurance Company Limited | England | |
Smith & Nephew International S.A. | Luxembourg | |
Smith & Nephew Investment Holdings Limited | England | |
Smith & Nephew Kappa Limited | England | |
Smith & Nephew KK | Japan | |
Smith & Nephew Lda | Portugal | |
Smith & Nephew Lilia Limited | England | |
Smith & Nephew Limited | Ireland | |
Smith & Nephew Limited | Korea | |
Smith & Nephew Limited | Thailand | |
Smith & Nephew Limited | New Zealand | |
Smith & Nephew Limited | Hong Kong | |
Smith & Nephew Lindsay Maid Limited | Scotland | |
Smith & Nephew Management B.V. | Netherlands | |
Smith & Nephew Medical (Shanghai) Limited | China | |
Smith & Nephew Medical (Suzhou) Limited | China | |
Smith & Nephew Medical Fabrics Limited | England | |
Smith & Nephew Medical Limited | England | |
Smith & Nephew Medinvestments Limited | England | |
Smith & Nephew Nederland C.V. | Netherlands | |
Smith & Nephew Nominee Company Limited | England | |
Smith & Nephew Nominee Services Limited | England | |
Smith & Nephew Optics B.V. | Netherlands | |
Smith & Nephew Optics Limited UK | England | |
Smith & Nephew Orthopaedics AG | Switzerland | |
Smith & Nephew Orthopaedics (Beijing) Limited | China | |
Smith & Nephew Orthopaedics France SAS | France | |
Smith & Nephew Orthopaedics GmbH | Germany | |
Smith & Nephew Orthopaedics KK | Japan | |
Smith & Nephew Orthopaedics Limited | England | |
Smith & Nephew Orthopedics (Schweiz) AG | Switzerland | |
Smith & Nephew Orthopedics AG | Switzerland |
Company |
Country of Incorporation |
|
Smith & Nephew OUS, Inc. | USA | |
Smith & Nephew Oy | Finland | |
Smith & Nephew Pensions Nominees Limited | England | |
Smith & Nephew Pharmaceuticals (Proprietary) Limited | South Africa | |
Smith & Nephew Pharmaceuticals Limited | England | |
Smith & Nephew Polyweave Limited | England | |
Smith & Nephew Pte Limited | Singapore | |
Smith & Nephew Pty Limited | Australia | |
Smith & Nephew Raisegrade Limited | England | |
Smith & Nephew Rareletter Limited | England | |
Smith & Nephew Research Limited | England | |
Smith & Nephew S.A.U | Spain | |
Smith & Nephew S.A. de C.V. | Mexico | |
Smith & Nephew S.A.-N.V | Belgium | |
Smith & Nephew S.A.S. | France | |
Smith & Nephew S.r.l. | Italy | |
Smith & Nephew Suzhou Holding Company | Hong Kong | |
Smith & Nephew sp. z.o.o. | Poland | |
Smith & Nephew Surgical Holdings Pty Limited | Australia | |
Smith & Nephew Surgical Limited | England | |
Smith & Nephew Surgical Limited | New Zealand | |
Smith & Nephew Surgical Pty Limited | Australia | |
Smith & Nephew TE I, LLC | USA | |
Smith & Nephew TE II, L.L.C | USA | |
Smith & Nephew Trading Group Limited | England | |
Smith & Nephew UK Limited | England | |
Smith & Nephew USD Limited | England | |
Smith & Nephew Wound Management (LaJolla) | USA | |
Smith & Nephew Wound Management KK | Japan | |
T. J. Smith & Nephew, Limited | England | |
The Albion Soap Company Limited | England | |
TP Limited | Scotland | |
Tenet Medical Engineer Inc | Canada | |
Smith & Nephew Argentina SRL | Argentina | |
Rosebud Acquisition Corporation | USA |
All companies trade under the name of Smith & Nephew and deal with Medical Device products.
Exhibit 12 (a)
CERTIFICATION OF OLIVIER BOHUON
302 CERTIFICATION
I, Olivier Bohuon, certify that:
1. | I have reviewed this annual report on Form 20-F of Smith & Nephew plc; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
4. | The companys other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and |
5. | The companys other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting. |
Date: February 28, 2013
By: |
/s/ Olivier Bohuon |
|
|
||
Name: |
Mr Olivier Bohuon |
|
Title: |
Chief Executive Officer |
Exhibit 12 (b)
CERTIFICATION OF JULIE BROWN
302 CERTIFICATION
I, Julie Brown, certify that:
1. | I have reviewed this annual report on Form 20-F of Smith & Nephew plc; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
4. | The companys other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and |
5. | The companys other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting. |
Date: February 28, 2013
By: |
/s/ Julie Brown |
|
|
||
Name: |
Mrs Julie Brown |
|
Title: |
Chief Financial Officer |
Exhibit 13 (a)
CERTIFICATION OF OLIVIER BOHUON AND JULIE BROWN
906 CERTIFICATION
The certification set forth below is being submitted in connection with the Annual Report on Form 20-F for the year ended December 31, 2012 (the Report) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
Olivier Bohuon, the Chief Executive Officer and Julie Brown, the Chief Financial Officer of Smith & Nephew plc, each certifies that, to the best of their knowledge:
1. | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Smith & Nephew plc. |
Date: February 28, 2013
By: |
/s/ Olivier Bohuon |
|
|
||
Name: |
Mr Olivier Bohuon |
|
Title: |
Chief Executive Officer |
By: |
/s/ Julie Brown |
|
|
||
Name: |
Mrs Julie Brown |
|
Title: |
Chief Financial Officer |
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
1. | Registration Statement (Form S-8 No. 333-122801) pertaining to the Smith & Nephew 2004 Executive Share Option Scheme |
2. | Registration Statement (Form S-8 No. 333-122801) pertaining to the Smith & Nephew 2004 Performance Share Plan |
3. | Registration Statement (Form S-8 No. 333-122801) pertaining to the Smith & Nephew 2004 Co-investment Plan |
4. | Registration Statement (Form S-8 No. 333-13694) pertaining to the Smith & Nephew 2001 US Share Plan |
5. | Registration Statement (Form S-8 No. 333-12052) pertaining to the Smith & Nephew U.S. Employee Stock Purchase Plan |
6. | Registration Statement (Form S-8 No. 33-39814) pertaining to the Smith & Nephew Long Service Award Scheme |
7. | Registration Statement (Form S-8 No. 333-155173) pertaining to the Smith & Nephew 2001 US Share Plan |
8. | Registration Statement (Form S-8 No. 333-155172) pertaining to the Smith & Nephew 2004 Performance Share Plan |
9. | Registration Statement (Form S-8 No. 333-158239) pertaining to the Smith & Nephew plc Deferred Bonus Plan |
10. | Registration Statement (Form S-8 No. 333-168544) pertaining to the Smith & Nephew Global Share Plan 2010 |
of our reports dated February 20, 2013, with respect to the consolidated financial statements of Smith & Nephew plc, and the effectiveness of internal control over financial reporting of Smith & Nephew plc, included in the Annual Report (Form 20-F) for the year ended December 31, 2012.
/s/ Ernst & Young LLP |
Ernst & Young LLP London, England |
February 28, 2013 |