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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-16789
INVERNESS MEDICAL INNOVATIONS,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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04-3565120
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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51 Sawyer Road, Suite 200, Waltham, Massachusetts
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02453
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(Address of principal executive
offices)
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(Zip Code)
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(781) 647-3900
(Registrants telephone
number, including area code)
Securities registered pursuant to
Section 12(b) of the Securities Exchange Act of 1934 (the
Exchange Act):
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 per share par value
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New York Stock Exchange
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Series B Convertible Perpetual Preferred Stock, $0.001 per
share par value
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New York Stock Exchange
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Securities registered pursuant to
Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act of
1933. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o Smaller
reporting
company o
(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting common stock held by
non-affiliates of the registrant based on the closing price of
the registrants stock on the American Stock Exchange on
June 30, 2008 (the last business day of the
registrants most recently completed second fiscal quarter)
was $1,824,439,990.
As of February 25, 2009, the registrant had
78,626,101 shares of common stock, par value $0.001 per
share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to
be filed in connection with the registrants annual meeting
of shareholders currently scheduled to be held on May 21,
2009 are incorporated by reference into Part III of this
Form 10-K.
TABLE OF CONTENTS
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PART I |
| ITEM 1. BUSINESS |
| GENERAL |
| ITEM 1A. RISK FACTORS |
| ITEM 1B. UNRESOLVED STAFF COMMENTS |
| ITEM 2. PROPERTIES |
| ITEM 3. LEGAL PROCEEDINGS |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
PART II |
| ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
| ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA |
| ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
| ITEM 9A. CONTROLS AND PROCEDURES |
PART III |
| ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
| ITEM 11. EXECUTIVE COMPENSATION |
| ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
| ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES |
PART IV |
| ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
SIGNATURES |
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
CONSOLIDATED STATEMENTS OF OPERATIONS |
CONSOLIDATED BALANCE SHEETS |
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS (in thousands, except par value amounts) |
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS (Continued) (in thousands, except par value amounts) |
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS (Continued) (in thousands, except par value amounts) |
CONSOLIDATED STATEMENT OF CASH FLOWS |
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Ex-10.2 Amendment No.1 to Distribution Agreement between Biosite and Fisher Scientific Company L.L.C., effective January 1, 2006 |
Ex-10.3 Amendment No.2 to Distribution Agreement between Biosite and Fisher Scientific Company L.L.C., effective June 30, 2008 |
Ex-10.4 Amendment No.2B to Distribution Agreement between Biosite and Fisher Scientific Company L.L.C., effective July 8, 2008 |
Ex-10.5 Amendment No.3 to Distribution Agreement between Biosite and Fisher scientific Company L.L.C., effective July 11, 2008 |
Ex-10.30 Form of Non-Qualified Stock Option Agreement for Non-Employee Directors |
Ex-10.31 Form of Non-Qualified Stock Option Agreement for U.S. Executives |
Ex-10.32 Form of Non-Qualified Stock Option Agreement for Non-U.S. Executives |
Ex-10.33 Form of Incentive Stock Option Agreement for Executives |
Ex-10.34 Inverness Medical Innovations, Inc. HM Revenue and Customs Share Option Plan (2007) |
Ex-10.35 Rules of the Inverness Medical innovations, Inc. 2001 Stock Option and Incentive Plan for the Grant of Options to Participants in France |
Ex-21.1 List of Subsidiaries of the Company as of February 25, 2009 |
Ex-23.1 Consent of BDO Seidman, LLP |
Ex-31.1 Section 302 Certification of the Chief Executive Officer |
Ex-31.2 Section 302 Certification of the Chief Financial Officer |
Ex-32.1 Section 906 Certification of the Chief Executive Officer and Chief Financial Officer |
PART I
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Readers can identify these statements by
forward-looking words such as may,
could, should, would,
intend, will, expect,
anticipate, believe,
estimate, continue or similar words.
Readers should carefully review statements that contain these
words because they discuss our future expectations, contain
projections of our future results of operations or of our
financial condition or state other forward-looking
information. We caution investors that all such forward-looking
statements involve risks and uncertainties that could cause our
actual results to differ materially from any projected results
or expectations that we discuss in this report. You should
therefore carefully review the risk factors and uncertainties
discussed in Item 1A entitled Risk Factors,
which begins on page 13 of this report, as well as those
factors identified from time to time in our periodic filings
with the Securities and Exchange Commission. We undertake no
obligation to update any forward-looking statements.
Unless the context requires otherwise, references in this
Annual Report on
Form 10-K
to we, us, our, or our
company refer to Inverness Medical Innovations, Inc. and
its subsidiaries.
GENERAL
Inverness Medical Innovations enables individuals to take charge
of improving their health and quality of life at home by
developing new capabilities in near-patient diagnosis,
monitoring and health management. Our global leading products
and services, as well as our new product development efforts,
focus on cardiology, womens health, infectious disease,
oncology and drugs of abuse. Inverness Medical Innovations,
Inc., a Delaware corporation, was formed to acquire the
womens health, nutritional supplements and professional
diagnostics businesses of its predecessor, Inverness Medical
Technology, Inc., through a split-off and merger transaction,
which occurred in November 2001. We became an independent,
publicly-traded company immediately after the split-off and our
common stock was listed on the American Stock Exchange under the
symbol IMA. We are now listed on the New York Stock
Exchange under the symbol IMA. Since the split-off,
we have grown our businesses through strategic use of our
superior intellectual property portfolio and through strategic
acquisitions. Our Alere health management business, which
represents the union of Matria Healthcare, LLC, or Matria,
acquired in 2008; Alere Medical, Inc., or Alere Medical, and
ParadigmHealth, Inc., or ParadigmHealth, each acquired during
2007, is a leading provider of health management services to
insurers and employers and we are confident that our unique
ability to offer rapid diagnostic tools combined with
value-added healthcare services will improve care and lower
healthcare costs for both providers and patients.
Our principal executive offices are located at 51 Sawyer Road,
Suite 200, Waltham, Massachusetts 02453 and our telephone
number is
(781) 647-3900.
Our website is www.invmed.com and we make available through this
site, free of charge, our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and Amendments to those reports, filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after such
reports are electronically filed with, or furnished to, the
Securities and Exchange Commission, or the SEC. These reports
may be accessed through our websites investor information
page. We also make our code of ethics and certain other
governance documents and policies available through this site.
Segments
Our major reportable operating segments are professional
diagnostics, health management, consumer diagnostics and
vitamins and nutritional supplements. Below are discussions of
each of these reportable segments. Financial information about
our reportable segments is provided in Note 20 of the
Notes to Consolidated Financial Statements, which
are included elsewhere in this report.
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Products
and Services
Professional Diagnostics. Professional
diagnostics are generally designed to assist medical
professionals in both preventative and interventional medicine,
and includes testing or monitoring performed in hospitals and
doctors offices and, increasingly, testing or monitoring
done at home at the direction of the medical professional, or
through patient self-testing. Professional diagnostic products
provide for qualitative or quantitative analysis of a
patients body fluids or tissue for evidence of a specific
medical condition or disease state or to measure response to
therapy. Within professional diagnostics, we focus on
point-of-care, rapid diagnostic testing and the developing
patient self-testing market. We distinguish the point-of-care
and patient self-testing markets from clinical diagnostic
markets consisting of large, centralized laboratories offering a
wide range of highly-automated laboratory services in hospital
or related settings. The point-of-care market for rapid
diagnostic products consists primarily of small and medium size
laboratories and testing locations, such as physician office
laboratories, specialized mobile clinics, emergency rooms and
some rapid-response laboratories in larger medical centers.
In the market for rapid diagnostic products, the ability to
deliver faster, accurate results at reasonable prices generally
drives demand. This means that, while there is certainly demand
for faster, more efficient automated equipment from large
hospitals and major reference testing laboratories, there is
also growing demand by point-of-care facilities and smaller
laboratories for fast, high-quality, less expensive,
self-contained diagnostic kits. As the speed and accuracy of
such products improve, we believe that these products will play
an increasingly important role in achieving early diagnosis,
timely intervention and therapy monitoring outside of acute
medicine environments, especially where supplemented by the
support and management services that we also provide.
Our current professional diagnostic products test for over 100
disease states and conditions and include point-of-care and
laboratory tests in the following areas:
Cardiology. Cardiovascular disease
encompasses a spectrum of conditions and illnesses, including
high blood pressure, high cholesterol, metabolic syndrome,
coronary artery disease, heart attack, heart failure and stroke.
It is estimated that 80 million (one out of every three)
American adults alone have one or more types of cardiovascular
disease. The worldwide cardiology diagnostic market, including
the markets for heart failure diagnostics, coronary artery
disease risk assessment, coagulation testing and acute coronary
syndrome, exceeds $1.5 billion and, in the near-patient
categories where we focus, annual growth is estimated at 15% to
20%. Our Biosite Triage, Cholestech LDX and HemoSense INRatio
products, all acquired through acquisitions in 2007, have
established us as a leader in this market. Our Triage system is
used in approximately 63% of U.S. hospitals and in over 50
countries worldwide. The Triage system consists of a portable
fluorometer that interprets consumable test devices for
cardiovascular conditions, as well as the detection of certain
drugs of abuse. The Biosite Triage cardiovascular tests include
the following:
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Triage BNP Test. An immunoassay that measures
B-type Natriuretic Peptide (BNP) in whole blood or plasma, used
as an aid in the diagnosis and assessment of severity of heart
failure. The test is also used for the risk stratification of
patients with acute coronary syndrome and heart failure. We also
offer a version of the Triage BNP Test for use on Beckman
Coulter lab analyzers.
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Triage Cardiac Panel. An immunoassay for the
quantitative determination of CK-MB, myoglobin and troponin I in
whole blood or plasma, used as an aid in the diagnosis of acute
myocardial infarction.
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Triage CardioProfilER Panel. An immunoassay
for use as an aid in the diagnosis of acute myocardial
infarction, the diagnosis and assessment of severity of
congestive heart failure, risk stratification of patients with
acute coronary syndromes and risk stratification of patients
with heart failure. This panel combines troponin I, CK-MB,
myoglobin and BNP to provide rapid, accurate results in whole
blood and plasma.
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Triage Profiler Shortness of Breath (S.O.B)
Panel. An immunoassay for use as an aid in the
diagnosis of myocardial infarction, the diagnosis and assessment
of severity of congestive heart failure, the assessment and
evaluation of patients suspected of having disseminated
intravascular coagulation and thromboembolic events, including
pulmonary embolism and deep vein thrombosis, and the risk
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stratification of patients with acute coronary syndromes. This
panel combines troponin I, CK-MB, myoglobin, BNP and
d-dimer to provide rapid, accurate results in whole blood and
plasma.
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Triage D-Dimer Test. An immunoassay for use as
an aid in the assessment and evaluation of patients suspected of
having disseminated intravascular coagulation or thromboembolic
events, including pulmonary embolism and deep vein thrombosis.
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The Cholestech LDX System is a point-of-care monitor of blood
cholesterol and related lipids which is used to test patients at
risk of, or suffering from, heart disease and related
conditions. The Cholestech LDX System makes it possible to
provide a complete lipid profile with tests for total
cholesterol (TC), HDL & LDL cholesterol,
triglycerides, and glucose (GLU), as well as tests for ALT and
AST (for liver enzyme monitoring), and high sensitivity
C-reactive protein (hs-CRP). The Cholestech LDX System can also
provide coronary heart disease risk assessment from the
patients results as measured on the lipid profile
cassette. The Cholestech LDX System provides results in five
minutes per test cassette (seven minutes for CRP) and is
CLIA-waived, meaning that the United States Food and Drug
Administration, or FDA, has waived the more stringent
requirements for laboratory testing applicable to moderate or
high complexity laboratories based on the Cholestech LDX
Systems ease of use and accuracy. This allows the
Cholestech LDX System to be marketed to physicians
offices, rather than hospitals or larger laboratories, and it is
present in approximately 12% of U.S. CLIA-waived
physicians office laboratories with an installed base of
approximately 10,000 units in regular use.
The HemoSense INRatio System is an easy-to-use, hand-held blood
coagulation monitoring system for use by patients and healthcare
professionals in the management of warfarin, a commonly
prescribed medication used to prevent blood clots. The HemoSense
INRatio System measures PT/INR, which is the patients
blood clotting time reported pursuant to an internationally
normalized ratio, to help ensure that patients with risk of
blood clot formation are maintained within the therapeutic range
with the proper dosage of oral anticoagulant therapy. The
INRatio System is 510(k) cleared by the FDA for use by
healthcare professionals, as well as for patient self-testing,
and is also CE marked in Europe. The INRatio System is targeted
to both the professional, or point-of-care market, as well as
the patient self-testing market. Recently we introduced the
INRatio2 System, which targets the patient self-testing market
and offers enhanced ease of use. Patient self-testing has gained
significant momentum since March 2008 when Centers for Medicare
& Medicaid Services expanded coverage of home INR
monitoring to include chronic atrial fibrillation and venous
thromboembolism patients on warfarin.
We also sell disposable, lateral flow rapid diagnostic tests for
d-dimer and troponin I under our Clearview brand. These tests
offer efficiency, as well as ease of use and accuracy, to
clinics, hospitals and laboratories around the world.
Womens Health. Since womens
health and general sexual health issues are a global health
concern, this remains a priority area for us. In the
professional marketplace, we are a global leader in pregnancy
fertility/ovulation testing and bone therapy (osteoporosis)
monitoring. Our professional pregnancy tests are generally
urine-based, CLIA-waived rapid tests in dipstick or cassette
format.
Our professional womens health products also target
diseases, such as rubella and Group B strep, which pose unique
threats to unborn or newborn babies and, in addition, we market
a portfolio of tests for sexually-transmitted diseases. Our
womens health products are sold under our Acceava,
Clearview, Sure-Step, Inverness Medical TestPack and Osteomark
brands.
Infectious Disease. We believe that the
demand for infectious disease diagnostic products is growing
faster than many other segments of the immunoassay market due to
the increasing incidence of certain diseases or groups of
diseases, including viral hepatitis, respiratory syncytial virus
(RSV), influenza, tuberculosis, acquired immunodeficiency
syndrome (AIDS), herpes and other sexually-transmitted diseases.
To meet this demand, we have continued to expand our product
offerings and now offer one of the worlds largest
infectious disease test menus. We develop and market a wide
variety of point-of-care tests for Influenza A/B, strep throat,
HIV, HSV-2, malaria, C.difficile, infectious mononucleosis, lyme
disease, chlamydia, H.pylori, RSV, rubella and other infectious
diseases. Our tests for infectious disease are sold under brand
names which
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include Acceava, BinaxNOW, Clearview, Determine, Inverness
Medical TestPack, DoubleCheckGold, Panbio and
TECHLAB®.
In addition to point-of-care products, we also offer a line of
indirect fluorescent antibody, or IFA, assays for over 20 viral,
bacterial and autoimmune diseases, a full line of serology
diagnostic products covering a broad range of disease categories
and over 70 enzyme-linked immunosorbent assays (ELISA) tests for
a wide variety of infectious and autoimmune diseases, as well as
a full line of automated instrumentation for processing ELISA
assays. We are the exclusive U.S. distributor of the AtheNA
Multi-Lyte®
Test System, a multiplexed, fluorescent bead-based system
designed to simultaneously perform multiple assays from a single
sample using just one well. It offers a simple and streamlined
alternative to IFA and ELISA testing, providing improved
clinical sensitivity and comparable clinical specificity in a
labor-saving, automation-friendly format. Our IFA, serology and
ELISA products, which generally serve the clinical diagnostics
laboratory markets, are generally marketed under our Wampole
brand.
Demand for certain infectious disease tests, primarily Influenza
A/B, or flu, is significantly affected by the seasonal nature of
the cold and flu season. As a result, we typically experience
higher sales of our flu tests in the first and fourth quarters.
Sales of our flu products also vary from year to year based in
large part on the severity, length and timing of the onset of
the cold and flu season. While we believe that the severity,
length and timing of the onset of the cold and flu season will
continue to impact sales of certain of our infectious disease
products, there can be no assurance that our future sales of
these products will necessarily follow historical patterns.
Oncology. Among chronic disease
categories, we are focused on oncology diagnostics as an area of
significant future opportunity. The Matritech NMP22 BladderChek
Test is the only in-office test approved by the FDA as an aid in
the diagnosis of bladder cancer. The NMP22 BladderChek Test is a
non-invasive assay, performed on a single urine sample, that
detects elevated levels of NMP22 protein. The test can be
performed in a physicians office with results delivered
during the patient visit, allowing a rapid, accurate and
cost-effective means of aiding the detection of bladder cancer
in patients at risk, when used in conjunction with standard
diagnostic procedures. We also offer the NMP22 Test Kit, a
quantitative ELISA also designed to detect elevated levels of
NMP22 protein.
Our Clearview FOB and Ultra FOB rapid tests aid in the early
detection of colorectal cancer, the third most common type of
cancer in men and the second most common in women.
Drugs of Abuse. Drug abuse is a major
global health problem, as well as a social and economic burden.
In addition to being a primary cause of lost workforce
productivity, family conflict and drug-related crime, drug abuse
is linked to the spread of HIV/AIDS through contaminated
needles. Drug abuse is one of the most costly health problems in
the United States. As a result, employers, law enforcement
officials and others expend considerable effort to be sure their
employees and constituents are free of substance abuse, creating
a significant market for simple, reliable tests to detect the
most commonly abused substances. Urine-based screening tests for
drugs of abuse range from simple immunoassay tests to complex
analytical procedures. The speed and sensitivity of immunoassays
have made them the most widely-accepted method for screening
urine for drugs of abuse.
We offer one of the broadest and most comprehensive lines of
drugs of abuse tests available today. We offer tests to detect
alcohol, as well as the following illicit and prescription drugs
of abuse: amphetamines/methamphetamines, cocaine, opiates,
phencyclidine, tetrahydrocannabinol, acetaminophen,
barbiturates, benzodiazepines, methadone, propoxyphene and
tricyclic antidepressants, using both urine and saliva body
fluids.
Our rapid drugs of abuse tests are sold primarily under the
brands Triage, iScreen and SureStep. The TOX Drug Screen panel
sold for use with the Biosite Triage System detects the presence
of any illicit or prescription drugs listed above at the
point-of-care in approximately 15 minutes.
Through our subsidiary Redwood Toxicology Laboratories, or
Redwood, we also offer comprehensive, low-cost laboratory
testing services. Through its laboratory services, Redwood
offers its clients, including law
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enforcement agencies, penal systems, insurers and employers, the
certainty of science, the dependability of proven processes and
the assurance of legally defensible results.
Health Management. We believe that by
utilizing both existing professional diagnostic devices and new
devices under development to enhance the delivery of health
management and other services to healthcare providers, we can
further facilitate cost containment and outcome-driven decision
making. Accordingly, during 2007, we entered the growing health
management marketplace with our acquisitions of Alere Medical
and ParadigmHealth, and in May 2008 we acquired Matria. Combined
as Alere, our health management business strives to empower
participants of our programs and physicians so that they can
work together towards better health. Our expert-designed
programs:
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Embrace the entire lifespan, from pre-cradle to end-of-life, and
targeted health states, from wellness to prevention to complex
care
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Target high-cost chronic conditions with programs designed to
improve outcomes and reduce expenditures
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Provide health coaches who engage and motivate participants
during teachable moments
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Help participants improve their health by supporting their
individual health goals
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Bring greater clarity to healthcare with empowering technologies
that lead to better outcomes
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Offer 2,200+ healthcare professionals who share a passion for
excellence in everything we do
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Our key health management programs are:
Care. The Alere Disease Management
Program provides technology-enabled, evidence-based solutions
for managing chronic and high-cost conditions, improving
productivity and reducing healthcare costs. The Alere Disease
Management Program assists individuals with chronic diseases or
conditions to better manage their care by increasing their
knowledge about their illnesses, potential complications and the
importance of medication and treatment plan compliance.
Aleres highly-trained clinicians proactively contact
participants to monitor their progress and ensure they are
following the plan of care set by their physician. They work
with participants to identify potential gaps in care, which
occur when individuals do not receive national standards of
care, or best practices, or when an individual fails to comply
with their treatment plan. Alere offers a personal health
support model of care. This model differs from providers of
traditional, total population health models in several ways,
including how individuals are selected, as well as a more
disciplined approach to defining who can benefit from what kinds
of touches and how these specific interactions are
best accomplished. A second key differentiator is the use of the
Alere DayLink Monitor for persons participating in higher risk
health management programs. The DayLink Monitor records a
participants weight
and/or
answers to questions regarding their symptoms. This information
is gathered daily and sent to Alere clinicians for review. The
Alere Disease Management Program currently assists individuals
with the following diseases or conditions: asthma, coronary
artery disease, chronic obstructive pulmonary disease, diabetes,
heart failure, pain, weight management and depression. In
addition, Alere also offers Complex Care Management and Chronic
Care Management for participants who require more attention and
care than a traditional disease management program provides.
What distinguishes our two programs is that Complex Care
provides
on-site
care, and the Chronic Complex program involves telephone contact
with Alere clinicians.
Womens & Childrens
Health. Aleres Womens and
Childrens Health division delivers a total spectrum of
obstetrical care services, ranging from a risk assessment to
identify women at risk for preterm birth to a neonatal program
for early infant care management. In between are home-based
obstetrical programs to manage and monitor pregnant women who
have medical or pregnancy-related problems that could harm the
health of the mother or baby. Alere delivers telephonic and
home-based nursing services that support physician and patient
goals. Alere has developed and refined these services over the
years to accommodate physician plans of care. We focus on
assessment of patient data and providing education. Our
high-risk pregnancy management program revenues tend to be
seasonal. Revenues tend to decrease with the onset of the
holiday season starting with Thanksgiving. As a result, first
and fourth quarter revenues of each year tend to be lower than
second and third quarter revenues.
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Oncology. The Alere Oncology Program is
the most comprehensive, experienced and long-running cancer
management program in the nation, managing 122 cancer types,
covering more than eight million lives and effectively
managing more than 50,000 participants. Cancer continues to
challenge employers and health plans as they search for tools to
compassionately manage this condition among their population in
the most cost-effective manner. By incorporating best of
breed practices and coordinating with physicians and
participants, Alere provides an integrated solution to
proactively manage this expensive and debilitating disease.
Wellness. Wellness Solutions is a suite
of integrated wellness programs and resources designed to help
organizations reduce health risks and improve the health and
productivity of their employees while reducing
healthcare-related costs. Wellness programs include screening
for risk factors associated with diabetes, cardiovascular heart
disease, hypertension and obesity; screening for high-risk
pregnancies; assessments of health risks for broad populations;
programs that promote better health by encouraging sustainable
changes in behavior; and health coaching. In addition, the Alere
Health Portal provides employers and health plans with a
powerful front door to Aleres continuum of
healthcare services and the Alere Personal Health Record allows
individuals to create a completely confidential on-line record
of all of their personal healthcare data.
Consumer Diagnostics. On May 17, 2007, we
and affiliates of The Procter & Gamble Company, or
P&G, commenced a 50/50 joint venture for the development,
manufacturing, marketing and sale of existing and
to-be-developed consumer diagnostic products, outside the
cardiology, diabetes and oral care fields. As part of this
arrangement we transferred essentially all of the assets of our
consumer diagnostics business, other than our manufacturing and
core intellectual property assets, to the joint venture, and
P&G acquired its interest in the joint venture.
Accordingly, substantially all of the consumer diagnostics
business conducted by us prior to the joint venture, including
all of our products targeting the worldwide over-the-counter
pregnancy and fertility/ovulation test market, are now sold by
the joint venture, which is an unconsolidated entity operating
primarily under the name SPD Swiss Precision Diagnostics GmbH,
or SPD.
As part of the SPD joint venture with P&G, we entered into
a finished product purchase agreement, pursuant to which we
currently manufacture and sell to SPD substantially all of the
consumer diagnostic products which it sells. We also entered
into certain transition and long-term services agreements with
SPD, pursuant to which we provide certain operational support
services to the joint venture. Our consumer diagnostics segment
recognizes the revenue and costs arising from these arrangements.
Our other current consumer diagnostic products consist of our
market-leading First Check brand of over-the-counter drugs of
abuse tests for at-home testing for marijuana, cocaine,
methamphetamines and opiates, as well as First Check brand
over-the-counter tests for alcohol abuse, cholesterol monitoring
and colon cancer screening. Taking advantage of our leadership
in the field of womens health, we also sell Balance Activ
Vaginal Gel directly to consumers and health care professionals
alike for the effective treatment of bacterial vaginosis without
antibiotics.
Vitamins and Nutritional Supplements. We also
market a wide variety of vitamins and nutritional supplements
primarily within the United States. Most growth in this market
is attributed to new products that generate attention in the
marketplace. Well-established market segments, where competition
is greater and media commentary less frequent, are generally
stable. Slow overall growth in the industry has resulted in
retailers reducing shelf space for nutritional supplements and
has forced many under-performing items out of distribution,
including several broad product lines. Sales growth of private
label products has generally outpaced the overall industry
growth, as retailers continue to add to the number of private
label nutritional products on their shelves.
Our subsidiary, Inverness Medical Nutritionals Group, or IMN, is
a national supplier of private label vitamins and nutritional
products for major drug and food chains and also manufactures
bulk vitamins, minerals, nutritional supplements and
over-the-counter drug products under contract for unaffiliated
brand name distributors. IMN also manufactures an assortment of
vitamin, mineral and nutritional supplement products for sale
under Inverness Medical brand names.
Our Inverness Medical branded nutritional products are
high-quality products sold at moderate prices through national
and regional drug stores, groceries and mass merchandisers.
These branded products include
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Stresstabs, a B-complex vitamin with added antioxidants;
Ferro-Sequels, a time-release iron supplement; and Posture-D, a
calcium supplement.
Methods
of Distribution and Customers
In the United States, Canada, the United Kingdom, Germany,
Italy, Spain, the Netherlands, France, Austria, India, Japan,
China, Australia, South Africa, Brazil, Colombia and Israel, we
distribute our professional diagnostic products to hospitals,
reference laboratories, physicians offices and other
point-of-care settings through our own sales forces and
distribution networks. In these countries, as well as in all
other major world markets, we also utilize third-party
distributors to sell our products. In the United States, we have
distribution relationships with all of the major distributors to
hospitals and reference laboratories, as well as with the major
distributors serving physicians offices and other
non-hospital, point-of-care settings. One of our distributors of
cardiology and other professional diagnostic products, Thermo
Fisher Scientific, accounted for 22% of our consolidated net
revenue in 2008. Our Quality Assured Services, Inc., or QAS
subsidiary facilitates the distribution of our HemoSense INRatio
and INRatio2 coagulation monitors by contacting targeted
customers and facilitating the Medicare reimbursement process
for physicians and for patients monitoring at home. Under the
terms of our acquisition of our Determine products from Abbott
Laboratories in June 2005, Abbott distributes a portion of our
Determine products, which are sold outside of the United States,
in certain countries where we do not currently have suitable
distribution capabilities. We also sell these products to Abbott
as the exclusive supplier of its global Access to HIV
Care program, through which Abbott provides free or
low-cost testing products for HIV testing in underdeveloped
countries around the world.
We market our health management programs primarily to health
plans (both commercial and governmental) and self-insured
employers, and to a lesser extent to pharmaceutical companies
and physicians, through our employee sales force and channel
partners.
We market and sell our First Check consumer drug testing
products in the United States and Canada through retail drug
stores, drug wholesalers, groceries and mass merchandisers.
These products compete intensively with other brand name drug
testing products based on price, performance and brand
awareness, which is achieved through targeted print advertising.
We primarily market and sell our vitamins and nutritional
supplements in the United States through private label
arrangements with retail drug stores, groceries, mass
merchandisers and warehouse clubs who sell our products under
their store brands. We also sell a variety of branded products
to the retail drug stores, groceries and mass merchandisers.
Manufacturing
We have major manufacturing facilities are located in Hangzhou
and Shanghai, China; Matsudo, Japan; and San Diego, California.
We are in the process of closing another significant facility in
Bedford, England and transferring the manufacturing operations
located there to our low cost production facilities mainly in
China. We also manufacture products at a number of other
facilities in the United States and in the United Kingdom, as
well as in Israel, Australia and South Africa. All of our
important manufacturing facilities are ISO certified and
registered with the FDA. We manufacture substantially all of our
consumable diagnostic products and nutritional products at these
facilities. We also manufacture the consumable diagnostic
devices containing the diagnostic chemistry or other proprietary
diagnostic technology which are used in conjunction with our
diagnostic or monitoring systems, including our Biosite Triage
system, our Cholestech LDX monitoring devices, our INRatio
monitoring devices and the digital pregnancy and ovulation
prediction tests and fertility monitors that we supply to the
SPD joint venture. We contract with third parties to supply the
electronic reader portion of these diagnostic or monitoring
systems and to supply various other products which we sell,
including our
Triage®
BNP Test for use on Beckman Coulter systems, a majority of our
IFA and ELISA tests and our
TECHLAB®
products.
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We manufacture substantially all of our vitamin and nutritional
products at IMNs facilities in Freehold and Irvington, New
Jersey. IMN internally manufactures substantially all of its
softgel requirements at the Irvington facility. Both facilities
manufacture to the Good Manufacturing Practices, or GMP,
standards.
Research
and Development
Our primary research and development centers are in Jena,
Germany; Stirling, Scotland and San Diego, California. We
also conduct research and development in Bedford and Cambridge,
England; Hangzhou, China; Scarborough, Maine; Hayward,
California; Brisbane, Australia; and Yavne, Israel; and, to a
lesser extent, at certain of our other facilities. Our research
and development programs currently focus on the development of
cardiology, infectious disease, oncology, HIV and womens
health diagnostic products.
Our facility in Stirling, Scotland was formed in connection with
a February 2005 co-development agreement with ITI Scotland
Limited, or ITI, whereby ITI agreed to provide us with
approximately £30.0 million over three years to
partially fund research and development programs and we agreed
to invest at least £37.5 million in these programs
over three years. The funding arrangement with ITI, as well
as our investment commitments related thereto, expired during
the first quarter of 2008.
Global
Operations
We are a global company. We have major manufacturing facilities
in San Diego, California; Hangzhou and Shanghai, China and
Matsudo, Japan and significant research and development
operations in Jena, Germany and Stirling, Scotland. Our
distribution network supporting our professional diagnostics
business includes offices in the United States, Canada, England,
France, Spain, Germany, Italy, Switzerland, Austria, Australia,
New Zealand, Japan, South Africa, Israel, India, Brazil and
Colombia.
Our professional diagnostic products are sold throughout the
world. Our health management programs are offered almost
exclusively in the United States and our vitamins and
nutritional supplements are sold primarily in the United States
and, to a lesser extent, in Canada. During 2008 and 2007,
respectively, approximately 72% and 63% of our net revenues were
generated from the United States, approximately 17% and 24% of
our net revenues were generated from Europe, and approximately
11% and 13% of our net revenues were generated from customers
located elsewhere. Revenues from the United States increased
during 2008 due the disproportionate impact of our
newly-established health management business and, in particular,
our acquisition of Matria in May 2008.
Competition
Professional Diagnostics. The main competitors
for our professional rapid diagnostic products are Becton
Dickinson and Quidel. Some competitors in this market, such as
Becton Dickinson, are large companies with substantial
resources, while numerous smaller, yet aggressive companies are
also competitors. Some automated immunoassay systems can be
considered competitors when labor shortages force laboratories
to automate or when the costs of such systems are lower. Such
systems are provided by Abbott, Siemens AG, Beckman Coulter,
Johnson & Johnson, Roche Diagnostics and other large
diagnostic companies. In the infectious disease area, new
technologies utilizing amplification techniques for analyzing
molecular DNA gene sequences, from companies such as Abbott,
Roche Diagnostics, Cepheid and Gen-Probe, are making in-roads
into this market. Competition for rapid diagnostics is intense
and is primarily based on price, breadth of product line and
distribution capabilities.
Our competitors in the ELISA diagnostics market include the
large diagnostics companies named above, which manufacture
state-of-the-art automated immunoassay systems and a wide array
of diagnostic products designed for processing on those systems.
Other competitors in this market, DiaSorin and Diamedx, in
particular, are smaller companies who compete based on quality
and service. In the United States and Canada, we focus on
matching the instrumentation and product testing requirements of
our customers by offering a wide selection of diagnostic
products and test equipment.
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The markets for our serology and our IFA and microbiology
products are mature and competition is based primarily on price
and customer service. Our main competitors in serology and
microbiology testing include Remel and Biokit. Our main
competitors in IFA testing are Bio-Rad Laboratories, INOVA
Diagnostics, Immuno Concepts, The Binding Site, Trinity Biotech,
Meridian Biosciences and DiaSorin. However, products in these
categories also compete to a large extent against rapid membrane
and ELISA products, which are often easier to perform and read
and can be more precise.
In cardiology, the majority of diagnostic immunoassays utilized
by physicians and other healthcare providers are performed by
independent clinical reference laboratories and hospital-based
laboratories using automated analyzers for batch testing. As a
result, the primary competitors of our Triage and LDX
point-of-care testing systems, which consist of rapid diagnostic
devices interpreted by portable electronic readers, are the
large diagnostic companies identified above who produce
automated immunoassay systems. We expect these large companies
to continue to compete vigorously to maintain their dominance of
the cardiology testing market. Although we offer our Triage BNP
test for use on Beckman Coulter Immunoassay Systems, our other
primary cardiology products are not currently designed for
automated batch testing. Our Triage products face strong
competition from Abbott Laboratories i-Stat handheld
system and our LDX system also faces direct competition from
Abaxis Medical Diagnostics, which markets its point-of-care
blood laboratory systems to physicians office laboratories
and Polymer Technology Systems, which sells a home cholesterol
test system. The primary competitors for our INRatio coagulation
monitoring system are Roche Diagnostics and International
Technidyne Corporation, a division of Thoratec, who together
currently account for over 75% of the domestic sales of PT/INR
point-of-care and patient self-testing devices.
In oncology, our Matritech NMP-22 diagnostic products aid in
diagnosing and monitoring bladder cancer patients, in
conjunction with standard diagnostic procedures, and are based
on our proprietary nuclear matrix protein technology. Our NMP-22
BladderChek Test is currently the only in-office test approved
by the FDA as an aid in the diagnosis of bladder cancer.
However, competition in the development and marketing of cancer
diagnostics and therapeutics, using a variety of other
technologies, is intense. Competing diagnostic products based on
other technologies may be introduced by other companies and
could adversely affect our competitive position. In a larger
sense, our tests also compete with more invasive or expensive
procedures, such as surgery, bone scans, magnetic resonance
imaging and other in vivo imaging techniques. In the market for
urine-based diagnostic tests, our NMP-22 tests also compete with
existing cellular-based tests, such as the microscopic
examination of suspicious cells and a test known as
UroVysiontm,
which is a fluorescent in-situ hybridization test.
Generally, our professional diagnostic products
competitive positions may be based on, among other things, being
first to market with a novel product, product performance,
accuracy, convenience, cost-effectiveness, the strength of our
intellectual property and price, as well as on the effectiveness
of our sales force and our marketing and distribution partners.
Where we face competition from large diagnostic companies, these
competitors have greater resources than we do. In addition,
certain competitors may have more favorable competitive
positions than we do in markets outside of the United States.
We believe that our dedication to research and development and
our strong intellectual property portfolio, coupled with our
advanced manufacturing expertise, diversified product
positioning, global market presence and established distribution
networks, provide us with a competitive advantage in the
point-of-care markets in which we compete.
Health Management. Competition for our health
management services is also intense. Other health management
service providers include Health Dialog and Healthways. Our
competitors and potential competitors also include health plans,
self-insured employers, healthcare providers, pharmaceutical
companies, pharmacy benefit management companies, case
management companies and other organizations that provide
services to health plans and self-insured employers. Some of
these entities, health plans and self-insured employers in
particular, may be customers or potential customers and may own,
acquire or establish health management service providers or
capabilities for the purpose of providing health management
services in-house. Many of these competitors are considerably
larger than us, with access to greater resources. We believe
however that our ability to improve clinical and financial
outcomes and our highly-regarded technology platforms will
enable us to compete effectively.
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Consumer Diagnostics. Our First Check tests
compete against over-the-counter diagnostic tests sold primarily
by Phamatech, Inc., but also by other smaller competitors.
Essentially all of our remaining consumer diagnostic product
sales are to SPD, our joint venture. These products are sold by
SPD in retail markets where competition is intense and based
primarily on brand recognition and price. Our revenues, as well
as our share of the profits from the sale of these products by
SPD, are dependent upon SPDs ability to effectively
compete in these markets.
Vitamins and Nutritional Supplements. The
market for private label vitamins and nutritional supplements is
extremely price sensitive, with quality, customer service and
marketing support also being important. Many of the companies
that mass market branded vitamins and nutritionals, including
U.S. Nutrition and Pharmavite, also sell to private label
customers and constitute our major competitors for private label
business. In addition, there are several companies, such as
Perrigo Company, that compete only in the private label business.
In the branded nutritional supplements industry, competition is
based upon brand name recognition, price, quality, customer
service and marketing support. There are many companies, both
small and large, selling vitamin products to retailers. A number
of these companies, particularly manufacturers of nationally
advertised brand name products, are substantially larger than we
are and have greater financial resources. Among the major
competitors of our branded products that are sold through
groceries and other mass retailers are U.S. Nutrition,
Wyeth, Pharmavite and GlaxoSmithKline.
Patents
and Proprietary Technology; Trademarks
We have built a strong intellectual property portfolio in the
area of lateral flow immunoassays, the technology which
underlies many rapid diagnostic test formats, including most
one-step home pregnancy and fertility/ovulation tests and most
of our rapid membrane products for the point-of-care
marketplaces that we serve. We believe that our intellectual
property rights in the major patent families in this area of
technology give us a distinct advantage and underpin our
continuing success in this area. In addition, our intellectual
property portfolio also includes an increasing number of other
patents, patent applications and licensed patents protecting our
vision of the technologies and products of the future. Our
intellectual property portfolio consists of patents that we own
and, in some cases, licenses to patents or other proprietary
rights of third parties which may be limited in terms of field
of use, transferability or may require royalty payments.
The medical products industry, including the diagnostic testing
industry, historically has been characterized by extensive
litigation regarding patents, licenses and other intellectual
property rights. As the fact of our pending litigation with
Healthways, Inc. and Robert Bosch North America Corp. and with
Health Hero Network Inc. suggests, litigation relating to
intellectual property rights is also prevalent in the health
management industry. For more information regarding these
pending matters see Item 3 entitled Legal
Proceedings beginning on page 30.
We believe that our history of successfully enforcing our
intellectual property rights in the United States and abroad
demonstrates our resolve in enforcing our intellectual property
rights, the strength of our intellectual property portfolio and
the competitive advantage that we have in this area. We have
incurred substantial costs, both in asserting infringement
claims against others and in defending ourselves against patent
infringement claims, and we expect to incur substantial
litigation costs as we continue to aggressively protect our
technology and defend our proprietary rights.
Finally, we believe that certain of our trademarks are valuable
assets that are important to the marketing of both our products
and services. Many of these trademarks have been registered with
the United States Patent and Trademark Office or
internationally, as appropriate.
The medical products industry, including the diagnostic testing
industry, and the health management industry place considerable
importance on obtaining and enforcing patent and trade secret
protection for new technologies, products, services and
processes. Trademark protection is an important factor in the
success of certain of our product lines and health management
programs. Our success therefore depends, in part, on our
abilities to obtain and enforce the patents and trademark
registrations necessary to protect our products, to preserve our
trade secrets and to avoid or neutralize threats to our
proprietary rights from third parties. We
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cannot, however, guarantee our success in enforcing or
maintaining our patent rights; in obtaining future patents or
licensed patents in a timely manner or at all; or as to the
breadth or degree of protection that our patents or trademark
registrations or other intellectual property rights might afford
us. For more information regarding the risks associated with our
reliance on intellectual property rights see the risk factors
discussed in Item 1A. entitled Risk Factors on
pages 13 through 29 of this report.
Government
Regulation
Our businesses are subject to extensive and frequently changing
federal, state and local regulations. Changes in applicable laws
or any failure to comply with existing or future laws,
regulations or standards could have a material adverse effect on
our results of operations, financial condition, business and
prospects. We believe our current arrangements and practices are
in material compliance with applicable laws and regulations.
There can be no assurance that we are in compliance with all
applicable existing laws and regulations or that we will be able
to comply with new laws or regulations.
Our research, development and clinical programs, as well as our
manufacturing and marketing operations, are subject to extensive
regulation in the United States and other countries. Most
notably, all of our products sold in the United States are
subject to the Federal Food, Drug and Cosmetic Act, or the FDCA,
as implemented and enforced by the FDA. All of our diagnostic
products sold in the United States require FDA clearance to
market under Section 510(k) of the FDCA, which may require
pre-clinical and clinical trials. Foreign countries may require
similar or more onerous approvals to manufacture or market these
products. The marketing of our consumer diagnostic products is
also subject to regulation by the U.S. Federal Trade
Commission, or the FTC. In addition, we are required to meet
regulatory requirements in countries outside the United States,
which can change rapidly with relatively short notice.
The manufacturing, processing, formulation, packaging, labeling
and advertising of our nutritional supplements are subject to
regulation by one or more federal agencies, including the FDA,
the Drug Enforcement Administration, the FTC and the Consumer
Product Safety Commission. These activities are also regulated
by various agencies of the states, localities and foreign
countries in which our nutritional supplements are now sold or
may be sold in the future. In particular, the FDA regulates the
safety, manufacturing, labeling and distribution of dietary
supplements, including vitamins, minerals and herbs, as well as
food additives, over-the-counter and prescription drugs and
cosmetics. The GMP standards promulgated by the FDA are
different for nutritional supplement, drug and device products.
In addition, the FTC has jurisdiction along with the FDA to
regulate the promotion and advertising of dietary supplements,
over-the-counter drugs, cosmetics and foods.
Certain of the clinicians, such as nurses, must comply with
individual licensing requirements. All of our clinicians who are
subject to licensing requirements are licensed in the state in
which they are physically present, such as the location of the
call center from which they operate. In the future, multiple
state licensing requirements for healthcare professionals who
provide services telephonically over state lines may require us
to license some of our clinicians in more than one state. New
judicial decisions, agency interpretations or federal or state
legislation or regulations could increase the requirement for
multi-state licensing of a greater number of our clinical staff,
which would increase our administrative costs.
Certain aspects of our health management business are subject to
unique licensing or permit requirements by state and local heath
agencies. In addition, our health management business is subject
to the security regulations of the Health Insurance Portability
and Accountability Act (HIPAA). We may also be required to
obtain certification to participate in governmental payment
programs, such as state Medicaid programs. Some states have
established Certificate of Need, or CON, programs regulating the
expansion of healthcare operations. The failure to obtain, renew
or maintain any of the required licenses, certifications or CONs
could adversely affect our business.
Employees
As of January 31, 2009, we had approximately
8,300 employees, including temporary and contract
employees, of which approximately 5,900 employees are
located in the United States. In addition, we utilize
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consultants specializing in areas such as research and
development, risk management, regulatory compliance, strategic
planning and marketing.
The risks described below may materially impact your
investment in our company or may in the future, and, in some
cases already do, materially affect us and our business,
financial condition and results of operations. You should
carefully consider these factors with respect to your investment
in our securities. This section includes or refers to certain
forward-looking statements; you should read the explanation of
the qualifications and limitations on such forward-looking
statements beginning on pages 2 and 36 of this report.
Disruptions in the capital and credit markets related to the
current national and worldwide financial crisis, which may
continue indefinitely or intensify, could adversely affect our
results of operations, cash flows and financial condition, or
those of our customers and suppliers.
The current disruptions in the capital and credit markets may
continue indefinitely or intensify, and adversely impact our
results of operations, cash flows and financial condition, or
those of our customers and suppliers. These disruptions could
adversely affect our ability to draw on our bank revolving
credit facility, which is dependent on the ability of the banks
that are parties to the facility to meet their funding
commitments. Those banks may not be able to meet their funding
commitments to us if they experience shortages of capital and
liquidity. Disruptions in the capital and credit markets as a
result of uncertainty, changing or increased regulation, reduced
alternatives or failures of significant financial institutions
could adversely affect our access to liquidity needed to conduct
or expand our businesses or conduct acquisitions or make other
discretionary investments, as well as our ability to effectively
hedge our currency or interest rate. Such disruptions may also
adversely impact the capital needs of our customers and
suppliers, which, in turn, could adversely affect our results of
operations, cash flows and financial condition.
Our business has substantial indebtedness, which could, among
other things, make it more difficult for us to satisfy our debt
obligations, require us to use a large portion of our cash flow
from operations to repay and service our debt or otherwise
create liquidity problems, limit our flexibility to adjust to
market conditions, place us at a competitive disadvantage and
expose us to interest rate fluctuations.
We currently have, and will likely continue to have, a
substantial amount of indebtedness. As of December 31,
2008, in addition to other indebtedness, we had approximately
$1.1 billion in aggregate principal amount of indebtedness
outstanding under our senior secured credit facility, or the
senior secured facility, $250.0 million in aggregate
principal amount of indebtedness outstanding under our junior
secured credit facility, or the junior secured facility
(collectively with the senior secured facility, the secured
credit facilities), and $150.0 million in indebtedness
under our outstanding 3% senior subordinated convertible
notes, or the senior subordinated convertible notes. The term
loan under the senior secured facility bears interest at a rate
per annum of LIBOR plus 2.00%, while the revolving
line-of-credit under the senior secured facility, which provides
up to $150.0 million of borrowing availability, is expected
to bear interest at a rate per annum of LIBOR plus between 1.75%
and 2.25%, depending on our consolidated leverage ratio. The
junior secured facility bears interest at a rate per annum of
LIBOR plus 4.25%. Our ability to incur additional indebtedness
is subject to restrictions under our secured credit facilities
and the senior subordinated convertible notes.
Our substantial indebtedness could affect our future operations
in important ways. For example, it could:
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make it more difficult to satisfy our obligations under the
senior subordinated convertible notes, our secured credit
facilities and our other debt-related instruments;
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require us to use a large portion of our cash flow from
operations to pay principal and interest on our indebtedness,
which would reduce the amount of cash available to finance our
operations and service obligations, to delay or reduce capital
expenditures or the introduction of new products
and/or
forego business opportunities, including acquisitions, research
and development projects or product design enhancements;
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limit our flexibility to adjust to market conditions, leaving us
vulnerable in a downturn in general economic conditions or in
our business and less able to plan for, or react to, changes in
our business and the industries in which we operate;
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impair our ability to obtain additional financing;
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place us at a competitive disadvantage compared to our
competitors that have less debt; and
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expose us to fluctuations in the interest rate environment with
respect to our indebtedness that bears interest at variable
rates.
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We expect to obtain the money to pay our expenses and to pay the
principal and interest on the senior subordinated convertible
notes, our secured credit facilities and our other debt from
cash flow from our operations and potentially from other debt or
equity offerings. Accordingly, our ability to meet our expenses
depends on our future performance, which will be affected by
financial, business, economic and other factors. We will not be
able to control many of these factors, such as economic
conditions in the markets in which we operate and pressure from
competitors. We cannot be certain that our cash flow will be
sufficient to allow us to pay principal and interest on our debt
and meet our other obligations. If our cash flow and capital
resources prove inadequate, we could face substantial liquidity
problems and might be required to dispose of material assets or
operations, restructure or refinance our debt, including the
notes, seek additional equity capital or borrow more money. We
cannot guarantee that we will be able to do so on acceptable
terms. In addition, the terms of existing or future debt
agreements, including the credit agreements governing our
secured credit facilities and the indenture governing the senior
subordinated convertible notes, may restrict us from adopting
any of these alternatives.
We have entered into agreements governing our indebtedness
that subject us to various restrictions that may limit our
ability to pursue business opportunities.
The agreements governing our indebtedness, including the credit
agreements governing our secured credit facilities and the
indenture governing the senior subordinated convertible notes,
subject us to various restrictions on our ability to engage in
certain activities, including, among other things, our ability
to:
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incur additional indebtedness;
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pay dividends or make distributions or repurchase or redeem our
stock;
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acquire other businesses;
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make investments;
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make loans to or extend credit for the benefit of third parties
or their subsidiaries;
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enter into transactions with affiliates;
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raise additional capital;
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make capital or finance lease expenditures;
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dispose of or encumber assets; and
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consolidate, merge or sell all or substantially all of our
assets.
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These restrictions may limit our ability to pursue business
opportunities or strategies that we would otherwise consider to
be in our best interests.
Our secured credit facilities contain certain financial
covenants that we may not satisfy which, if not satisfied, could
result in the acceleration of the amounts due under these
facilities and the limitation of our ability to borrow
additional funds in the future.
The agreements governing our secured credit facilities subject
us to various financial and other covenants with which we must
comply on an on-going or periodic basis. These include covenants
pertaining to capital expenditures, interest coverage ratios,
leverage ratios and minimum cash requirements. If we violate any
of
14
these covenants, we may suffer a material adverse effect. Most
notably, our outstanding debt under our secured credit
facilities could become immediately due and payable, our lenders
could proceed against any collateral securing such indebtedness
and our ability to borrow additional funds in the future may be
limited. Alternatively, we could be forced to refinance or
renegotiate the terms and conditions of our secured credit
facilities, including the interest rates, financial and
restrictive covenants and security requirements of the
facilities, on terms that may be significantly less favorable to
us.
A default under any of the agreements governing our
indebtedness could result in a default and acceleration of
indebtedness under other agreements.
The agreements governing our indebtedness, including the credit
agreements governing our secured credit facilities and the
indenture governing the senior subordinated convertible notes,
contain cross-default provisions whereby a default under one
agreement could result in a default and acceleration of our
repayment obligations under other agreements. If a cross-default
were to occur, we may not be able to pay our debts or borrow
sufficient funds to refinance them. Even if new financing were
available, it may not be on commercially reasonable terms or
acceptable terms. If some or all of our indebtedness is in
default for any reason, our business, financial condition and
results of operations could be materially and adversely affected.
We may not be able to satisfy our debt obligations upon a
fundamental change or change of control, which could limit our
opportunity to enter into a fundamental change or change of
control transaction.
Upon the occurrence of a fundamental change, as
defined in the indenture governing the senior subordinated
convertible notes, each holder of our senior subordinated
convertible notes will have the right to require us to purchase
the notes at a price equal to 100% of the principal amount,
together with any accrued and unpaid interest. A fundamental
change includes, among other things, the acquisition of more
than 50% of our common stock by any person or group, the sale of
all or substantially all of the our assets or a recapitalization
or similar transaction involving us. Our failure to purchase, or
give notice of purchase of, the senior subordinated convertible
notes would be a default under the indenture, which would in
turn be a default under our secured credit facilities. In
addition, the occurrence of a change of control, as
defined in the credit agreements governing our secured credit
facilities, will constitute an event of default under the
secured credit facilities. A default under our secured credit
facilities would result in an event of default under our senior
subordinated convertible notes and, if the lenders accelerate
the debt under our secured credit facilities
and/or under
the indenture governing the senior subordinated convertible
notes, this may result in the acceleration of our other
indebtedness outstanding at the time. As a result, if we do not
have enough cash to repay all of our indebtedness or to
repurchase all of the senior subordinated convertible notes, we
may be limited in the fundamental change or change of control
transactions that we may pursue.
Our acquisitions may not be profitable, and the integration
of these businesses may be costly and difficult and may cause
disruption to our business.
Since commencing activities in November 2001, we have acquired
and integrated into our operations numerous businesses. Since
the beginning of 2006, we have acquired and integrated, or are
in the process of integrating the rapid diagnostics business
that we acquired from ACON Laboratories, Inc., or the Innovacon
business; Instant Technologies, Inc., or Instant; Biosite
Incorporated, or Biosite; Cholestech Corporation, or Cholestech;
HemoSense, Inc., or HemoSense; Alere Medical; Redwood;
ParadigmHealth; Panbio Limited, or Panbio; BBI Holdings Plc, or
BBI; and Matria. We have also made a number of smaller
acquisitions. The ultimate success of all of these acquisitions
depends, in part, on our ability to realize the anticipated
synergies, cost savings and growth opportunities from
integrating these businesses or assets into our existing
businesses. However, the successful integration of independent
businesses or assets is a complex, costly and time-consuming
process. The difficulties of integrating companies and acquired
assets include, among others,:
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consolidating manufacturing, research and development operations
and health management information technology platforms, where
appropriate;
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integrating newly-acquired businesses or product lines into a
uniform financial reporting system;
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coordinating sales, distribution and marketing functions and
strategies, including the integration of our current health
management products and services;
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establishing or expanding manufacturing, sales, distribution and
marketing functions in order to accommodate newly-acquired
businesses or product lines or rationalizing these functions to
take advantage of synergies;
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preserving the important licensing, research and development,
manufacturing and supply, distribution, marketing, customer and
other relationships;
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minimizing the diversion of managements attention from
on-going business concerns; and
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coordinating geographically separate organizations.
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We may not accomplish the integration of our acquisitions
smoothly or successfully. The diversion of the attention of our
management from current operations to integration efforts and
any difficulties encountered in combining operations could
prevent us from realizing the full benefits anticipated to
result from these acquisitions and adversely affect our other
businesses. Additionally, the costs associated with the
integration of our acquisitions may be substantial. To the
extent that we incur integration costs that are not anticipated
when we finance our acquisitions, these unexpected costs could
adversely impact our liquidity or force us to borrow additional
funds. Ultimately, the value of any business or asset that we
have acquired may not be greater than or equal to the purchase
price of that business or asset.
If we choose to acquire or invest in new and complementary
businesses, products or technologies rather than developing them
internally, such acquisitions or investments could disrupt our
business and, depending on how we finance these acquisitions or
investments, could result in the use of significant amounts of
cash.
Our success depends in part on our ability to continually
enhance and broaden our product offerings in response to
changing technologies, customer demands and competitive
pressures. Accordingly, from time to time, we may seek to
acquire or invest in businesses, products or technologies
instead of developing them internally. Acquisitions and
investments involve numerous risks, including:
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the inability to complete the acquisition or investment;
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disruption of our on-going businesses and diversion of
management attention;
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difficulties in integrating the acquired entities, products or
technologies;
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difficulties in operating the acquired business profitably;
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difficulties in transitioning key customer, distributor and
supplier relationships;
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risks associated with entering markets in which we have no, or
limited, prior experience; and
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unanticipated costs.
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In addition, any future acquisitions or investments may result
in:
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issuances of dilutive equity securities, which may be sold at a
discount to market price;
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use of significant amounts of cash;
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the incurrence of debt;
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the assumption of significant liabilities, including litigation;
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unfavorable financing terms;
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large one-time expenses; and
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the creation of intangible assets, including goodwill, the
write-down of which may result in significant charges to
earnings.
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Our joint venture transaction with P&G may not realize
all of its intended benefits.
In connection with SPD, our 50/50 joint venture with P&G,
we may experience:
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difficulties in integrating our corporate culture and business
objectives with that of P&G into the joint venture;
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difficulties or delays in transitioning clinical studies;
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diversion of our managements time and attention from other
business concerns;
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higher than anticipated costs of integration at the joint
venture;
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difficulties in retaining key employees who are necessary to
manage the joint venture; or
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difficulties in working with an entity based in Switzerland and
thus remote or inconvenient to our Waltham, Massachusetts
headquarters.
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Moreover, because SPD is a 50/50 joint venture, we do not have
complete control over its operations, including business
decisions which may impact SPDs profitability.
For any of these reasons, or as a result of other factors, we
may not realize the anticipated benefits of the joint venture
and cash flow or profits derived from our ownership interest in
SPD may be less than the cash flow or profits that could have
been derived had we retained the transferred assets and
continued to operate the consumer diagnostics business
ourselves. P&G retains an option to require us to purchase
P&Gs interest in SPD at fair market value during the
60-day
period beginning on May 17, 2011. Moreover, certain
subsidiaries of P&G have the right, at any time upon
certain material breaches by us or our subsidiaries of our
obligations under the joint venture documents, to acquire all of
our interest in the joint venture at fair market value less
damages.
If goodwill
and/or other
intangible assets that we have recorded in connection with our
acquisitions of other businesses become impaired, we could have
to take significant charges against earnings.
In connection with the accounting for our acquisitions we have
recorded, or will record, a significant amount of goodwill and
other intangible assets. Under current accounting guidelines, we
must assess, at least annually and potentially more frequently,
whether the value of goodwill and other intangible assets has
been impaired. Any reduction or impairment of the value of
goodwill or other intangible assets will result in a charge
against earnings which could materially adversely affect our
reported results of operations in future periods.
We may experience manufacturing problems or delays, which
could result in decreased revenue or increased costs.
Many of our manufacturing processes are complex and require
specialized and expensive equipment. Replacement parts for our
specialized equipment can be expensive and, in some cases, can
require lead times of up to a year to acquire. In addition, our
private label consumer diagnostics business, and our private
label and bulk nutritional supplements business in particular,
rely on operational efficiency to mass produce products at low
margins per unit. We also rely on numerous third parties to
supply production materials and, in some cases, there may not be
alternative sources immediately available.
In addition, during 2008, we began the process of closing the
manufacturing operations that we acquired with Cholestech and
shifting the production of products from these facilities to our
San Diego campus. We also began the process of closing our
manufacturing facility in Bedford, England, and shifting the
production of units manufactured there to China and to other
lower-cost facilities. We have previously shifted the production
of other products to our manufacturing facilities in China.
Moving the production of products is difficult and involves
significant risk. Problems establishing relationships with local
materials suppliers; acquiring or adapting the new facility and
its equipment to the production of new products; hiring,
training and retaining personnel; and establishing and
maintaining compliance with governmental regulations and
industry standards can cause delays and inefficiencies which
could have a material negative impact on our financial
performance. We also currently rely on a number of significant
third-party manufacturers to produce certain of our professional
diagnostics. Any event which negatively impacts our
manufacturing facilities, our manufacturing systems or
equipment, or our contract manufacturers or suppliers,
including, among others,
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wars, terrorist activities, natural disasters and outbreaks of
infectious disease, could delay or suspend shipments of products
or the release of new products or could result in the delivery
of inferior products. Our revenues from the affected products
would decline or we could incur losses until such time as it is
able to restore its production processes or put in place
alternative contract manufacturers or suppliers. Even though we
carry business interruption insurance policies, we may suffer
losses as a result of business interruptions that exceed the
coverage available under our insurance policies.
We may experience difficulties that may delay or prevent our
development, introduction or marketing of new or enhanced
products or services.
We intend to continue to invest in product and technology
development. The development of new or enhanced products or
services is a complex and uncertain process. We may experience
research and development, manufacturing, marketing and other
difficulties that could delay or prevent our development,
introduction or marketing of new products, services or
enhancements. We cannot be certain that:
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any of the products or services under development will prove to
be effective in clinical trials;
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any products or services under development will not infringe on
intellectual property rights of others;
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we will be able to obtain, in a timely manner or at all,
regulatory approval to market any of our products or services
that are in development or contemplated;
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the products and services we develop can be manufactured or
provided at acceptable cost and with appropriate quality; or
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these products and services, if and when approved, can be
successfully marketed.
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The factors listed above, as well as manufacturing or
distribution problems, or other factors beyond our control,
could delay new product or service launches. In addition, we
cannot assure you that the market will accept these products and
services. Accordingly, there is no assurance that our overall
revenue will increase if and when new products or services are
launched.
If the results of clinical studies required to gain
regulatory approval to sell our products are not available when
expected or do not demonstrate the anticipated utility of those
potential products, we may not be able to sell future products
and our sales could be adversely affected.
Before we can sell our products, we must conduct clinical
studies intended to demonstrate that our potential products
perform as expected. The results of these clinical studies are
used as the basis to obtain regulatory approval from government
authorities such as the FDA. Clinical studies are experiments
conducted using potential products and human patients having the
diseases or medical conditions that the product is trying to
evaluate or diagnose. Conducting clinical studies is a complex,
time-consuming and expensive process. In some cases, we may
spend several years completing certain studies.
If we fail to adequately manage our clinical studies, our
clinical studies and corresponding regulatory approvals may be
delayed or we may fail to gain approval for our potential
product candidates altogether. Even if we successfully manage
our clinical studies, we may not obtain favorable results and
may not be able to obtain regulatory approval. If we are unable
to market and sell our new products or are unable to obtain
approvals in the timeframe needed to execute our product
strategies, our business and results of operations would be
materially and adversely affected.
If we are unable to obtain required clearances or approvals
for the commercialization of our products in the United States,
we may not be able to sell future products and our sales could
be adversely affected.
Our future performance depends on, among other matters, our
estimates as to when and at what cost we will receive regulatory
approval for new products. Regulatory approval can be a lengthy,
expensive and uncertain process, making the timing, cost and
ability to obtain approvals difficult to predict. In addition,
regulatory processes are subject to change, and new or changed
regulations can result in increased costs and unanticipated
delays.
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In the United States, clearance or approval to commercially
distribute new medical devices is received from the FDA through
clearance of a Premarket Notification, or 510(k), or through
approval of a Premarket Approval, or PMA. To receive 510(k)
clearance, a new product must be substantially equivalent to a
medical device first marketed in interstate commerce prior to
May 1976. The FDA may determine that a new product is not
substantially equivalent to a device first marketed in
interstate commerce prior to May 1976 or that additional
information is needed before a substantial equivalence
determination can be made. A not substantially
equivalent determination, or a request for additional
information, could prevent or delay the market introduction of
new products that fall into this category. The 510(k) clearance
and PMA review processes can be expensive, uncertain and
lengthy. It generally takes from three to five months from
submission to obtain 510(k) clearance, and from six to eighteen
months from submission to obtain a PMA approval; however, it may
take longer, and 510(k) clearance or PMA approval may never be
obtained.
Modifications or enhancements that could significantly affect
safety or effectiveness, or constitute a major change in the
intended use of the device, require new 510(k) or PMA
submissions. We have made modifications to some of our products
since receipt of initial 510(k) clearance or PMA approval. With
respect to several of these modifications, we filed new 510(k)s
describing the modifications and received FDA 510(k) clearance.
We have made other modifications to some of our products that we
believe do not require the submission of new 510(k)s or
PMAs. The FDA may not agree with any of our determinations
not to submit a new 510(k) or PMA for any of these modifications
made to our products. If the FDA requires us to submit a new
510(k) or PMA for any device modification, we may be prohibited
from marketing the modified products until the new submission is
cleared by the FDA.
We are also subject to applicable regulatory approval
requirements of the foreign countries in which we sell products,
which are costly and may prevent or delay us from marketing our
products in those countries.
In addition to regulatory requirements in the United States, we
are subject to the regulatory approval requirements for each
foreign country to which we export our products. In the European
Union, regulatory compliance requires affixing the
CE mark to product labeling. Although our products
are currently eligible for CE marking through
self-certification, this process can be lengthy and expensive.
In Canada, as another example, our products require approval by
Health Canada prior to commercialization, along with
International Standards Organization, or ISO, 13485/CMDCAS
certification. It generally takes from three to six months from
submission to obtain a Canadian Device License. Any changes in
foreign approval requirements and processes may cause us to
incur additional costs or lengthen review times of our products.
We may not be able to obtain foreign regulatory approvals on a
timely basis, if at all, and any failure to do so may cause us
to incur additional costs or prevent us from marketing our
products in foreign countries, which may have a material adverse
effect on our business, financial condition and results of
operations.
Failure to comply with on-going regulation applicable to our
businesses may result in significant costs or, in certain
circumstances, the suspension or withdrawal of previously
obtained clearances or approvals.
Our businesses are extensively regulated by the FDA and other
federal, state and foreign regulatory agencies. These
regulations impact many aspects of our operations, including
manufacturing, labeling, packaging, adverse event reporting,
storage, advertising, promotion and record keeping. For example,
our manufacturing facilities and those of our suppliers and
distributors are, or can be, subject to periodic regulatory
inspections. The FDA and foreign regulatory agencies may require
post-marketing testing and surveillance to monitor the effects
of approved products or place conditions on any product
approvals that could restrict the commercial applications of
those products. In addition, the subsequent discovery of
previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product
from the market. We are also subject to routine inspection by
the FDA and certain state agencies for compliance with Quality
System Requirement and Medical Device Reporting requirements in
the United States and other applicable regulations
worldwide, including but not limited to ISO regulations. Certain
portions of our health management business are subject to unique
licensing or permit requirements. For example, we may be
required to obtain certification to participate in governmental
payment programs, such as
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state Medicaid programs, we may need an operating license in
some states, and some states have established Certificate of
Need programs regulating the expansion of healthcare operations.
In addition, we believe certain of our health management
services are educational in nature, do not constitute the
practice of medicine or provision of healthcare, and thus do not
require that we maintain federal or state licenses to provide
such services. However, it is possible that federal or state
laws regarding the provision of virtual or
telephonic medicine could be revised or interpreted to include
our services, or that other laws may be enacted which require
licensure or otherwise relate to our health management services.
In such event, we may incur significant costs to comply with
such laws and regulations. In addition, we are subject to
numerous federal, state and local laws relating to such matters
as privacy, healthcare kickbacks and false claims, safe working
conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially
hazardous substances. We may incur significant costs to comply
with these laws and regulations. If we fail to comply with
applicable regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product
recalls, seizure of products or injunctions against our
distribution, termination of our service agreements by our
customers, disgorgement of money, operating restrictions and
criminal prosecution.
New federal or state laws may be enacted, or regulatory agencies
may also impose new or enhanced standards that would increase
our costs as well as the risks associated with non-compliance.
For example, our manufacturing facilities for nutritional
supplements will be subject to new GMP standards starting
mid-2009. While our manufacturing facilities for nutritional
supplements have been subjected to, and passed, third-party
inspections against GMP standards, the on-going compliance
required in order to meet GMP standards could involve additional
costs and could present new risks associated with any failure to
comply with the regulations in the future. In addition, the
federal government recently enacted the Genetic Information
Non-discrimination Act of 2008 (GINA), and we may incur
additional costs in assisting our customers with their efforts
to comply with GINA while continuing to offer certain of our
services.
Healthcare reform legislation could adversely affect our
revenue and financial condition.
In recent years, there have been numerous initiatives on the
federal and state levels for comprehensive reforms affecting the
payment for, the availability of and reimbursement for
healthcare services in the United States. These initiatives have
ranged from proposals to fundamentally change federal and state
healthcare reimbursement programs, including providing
comprehensive healthcare coverage to the public under
governmental funded programs, to minor modifications to existing
programs. In particular, federal legislation has reduced or
significantly altered Medicare and Medicaid reimbursements.
Legislative and regulatory bodies are likely to continue to
pursue healthcare reform initiatives and may continue to reduce
the funding of the Medicare and Medicaid programs, including
Medicare Advantage, in an effort to reduce overall federal
healthcare spending. The ultimate content or timing of any
future healthcare reform legislation, and its impact on us, is
impossible to predict. If significant reforms are made to the
healthcare system in the United States, or in other
jurisdictions, those reforms may have an adverse effect on our
financial condition and results of operations.
If we deliver products with defects, our credibility may be
harmed, market acceptance of our products may decrease and we
may be exposed to liability in excess of our product liability
insurance coverage.
The manufacturing and marketing of professional and consumer
diagnostics involve an inherent risk of product liability
claims. In addition, our product development and production are
extremely complex and could expose our products to defects. Any
defects could harm our credibility and decrease market
acceptance of our products. In addition, our marketing of
monitoring services and vitamins and nutritional supplements may
cause us to be subjected to various product liability claims,
including, among others, claims that inaccurate monitoring
results lead to injury or death or that the vitamins and
nutritional supplements have inadequate warnings concerning side
effects and interactions with other substances. Potential
product liability claims may exceed the amount of our insurance
coverage or may be excluded from coverage under the terms of the
policy. In the event that we are held liable for a claim for
which we are not indemnified, or for damages exceeding the
limits of our insurance coverage, that claim could materially
damage our business and financial condition.
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The effect of market saturation may negatively affect the
sales of our products, including our Triage BNP tests.
Our meter-based Triage BNP test, launched domestically in
January 2001, was the first blood test available to aid in the
detection of heart failure and benefited from a first-to-market
position until the entry of direct competition in June 2003. As
the acute care and initial diagnosis market segment for
natriuretic testing in the U.S. hospital setting becomes
saturated, unless we are able to successfully introduce new
products into the market and achieve market acceptance of those
products in a timely manner, we expect the growth rates of sales
unit volume for our Triage BNP tests in 2009 and future periods
to be lower than the growth rates experienced over the past
several years. In addition, as the market for BNP testing
matures and more competitive products become available, the
average sales price for the Triage BNP tests is likely to
decline, which will adversely impact our product sales, gross
margins and our overall financial results.
The health management business is a relatively new component
of the overall healthcare industry.
The health management services provided by Alere and QAS are
relatively new components of the overall healthcare industry.
Accordingly, our health management customers have not had
significant experience in purchasing, evaluating or monitoring
such services, which can result in a lengthy sales cycle. The
success of our health management business depends on a number of
factors. These factors include:
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our ability to differentiate our health management services from
those of our competitors;
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the extent and timing of the acceptance of our services as a
replacement for, or supplement to, traditional managed care
offerings;
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the effectiveness of our sales and marketing and engagement
efforts with customers and their health plan participants;
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our ability to sell and implement new and additional services
beneficial to health plans and employers and their respective
participants or employees;
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our ability to achieve, measure and effectively communicate cost
savings for health plans and employers through the use of our
services; and
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our ability to retain health plan and employee accounts as
competition increases.
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Since the health management business is continually evolving, we
may not be able to anticipate and adapt to the developing
market. Moreover, we cannot predict with certainty the future
growth rate or the ultimate size of the market.
Increasing health insurance premiums and co-pays may cause
individuals to forgo health insurance and avoid medical
attention, either of which may reduce demand for our products
and services.
Health insurance premiums and co-pays have generally increased
in recent years. Increased premiums may cause individuals to
forgo health insurance, as well as medical attention. This may
reduce demand for our point-of-care diagnostic products and also
reduce the number of lives managed by our health management
programs. Increased co-pays may cause insured individuals to
forgo medical attention thereby reducing demand for our
professional diagnostic tests, as well as revenues under certain
health management programs.
Our health management business may be adversely affected by
cost reduction pressures among our customers.
Our customers continue to face cost reduction pressures that may
cause them to curtail their use of, or reimbursement for, health
management services to negotiate reduced fees or other
concessions or to delay payment. In addition, the loss of jobs
due to the recent economic crisis may cause the number of lives
we manage to decrease. These financial pressures could have an
adverse impact on our business.
Rising unemployment may negatively impact the collectibility
of uninsured accounts and patient due accounts and/or reduce
total health plan populations.
One of the primary collection risks of our health management
business accounts receivable relates to uninsured patient
accounts and patient accounts for which the primary insurance
carrier has paid the amounts
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covered by the applicable agreement, but patient responsibility
amounts (deductibles and copayments) remain outstanding. As
unemployment rates rise nationally, these uninsured and patient
due accounts could make up a greater percentage of the health
management business accounts receivable. Deterioration in
the collectiblity of these accounts could adversely affect the
health management business collection of accounts
receivable, cash flows and results of operations.
Additionally, certain of our health management contracts provide
reimbursement to us based on total relevant populations managed
by health plans. As unemployment rates rise, certain of our
revenues may be reduced under these contracts as managed lives
may decrease.
If we are unable to retain and negotiate favorable contracts
with managed care plans, our revenues may be reduced.
The ability of our health management business to obtain
favorable contracts with health maintenance organizations,
preferred provider organizations and other managed care plans
significant affects the revenues and operating results of our
health management business. The business future success
will depend, in part, on its ability to retain and renew its
managed care contracts and enter into new managed care contracts
on terms favorable to us. If the health management business is
unable to retain and negotiate favorable contracts with managed
care plans, our revenues may be reduced.
A portion of our health management fees are contingent upon
performance.
Some of our existing health management agreements contain
savings or other guarantees, which provide that our revenues, or
a portion of them, are contingent upon projected cost savings or
other quality performance measures related to our health
management programs. There is no guarantee that we will
accurately forecast cost savings and clinical outcome
improvements under our health management agreements or meet the
performance criteria necessary to recognize potential revenues
under the agreements. Additionally, untimely, incomplete or
inaccurate data from our customers, or flawed analysis of such
data, could have a material adverse impact on our ability to
recognize revenues.
If our costs of providing health management services
increase, we may not be able to pass these cost increases on to
our customers.
Many of our health management services are provided pursuant to
long-term contracts that we may not be able to re-negotiate. If
our costs increase, we may not be able to increase our prices,
which would adversely affect results of operations. Accordingly,
any increase in our costs could reduce our overall profit margin.
Demands of non-governmental payers may adversely affect our
growth in revenues.
Our ability to negotiate favorable contracts with
non-governmental payers, including managed care plans,
significantly affects the revenues and operating results of our
health management business. These
non-governmental
payers increasingly are demanding discounted fee structures, and
the trend toward consolidation among nongovernmental payers
tends to increase their bargaining power over fee structures.
Reductions in price increases or the amounts received from
managed care, commercial insurance or other payers could have a
material, adverse effect on the financial position and results
of operations of our health management business.
Our data management and information technology systems are
critical to maintaining and growing our business.
Our businesses, and in particular our health management
business, are dependent on the effective use of information
technology and consequently, technology failure or obsolescence
may negatively impact our businesses. In addition, data
acquisition, data quality control, data security, and data
analysis, which are a cornerstone of our health management
programs, are intense and complex processes subject to error.
Untimely, incomplete or inaccurate data, flawed analysis of such
data or our inability to properly integrate, implement and
update systems could have a material adverse impact on our
business and results of operations.
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Our sales of branded nutritional supplements have been
trending downward since 1998 due to the maturity of the market
segments they serve and the age of that product line, and we may
experience further declines in sales and/or profitability of
those products.
Our aggregate sales of all of our brand name nutritional
products, including, among others, Ferro-Sequels, Stresstabs,
Protegra, Posture, SoyCare, ALLBEE and Z-BEC, have declined each
year since 1998 through the year 2008, except in 2002 when they
increased slightly as compared to 2001. We believe that these
products have under-performed because they are, for the most
part, aging brands with limited brand recognition that face
increasing private label competition. The overall age of this
product line means that we are subject to future distribution
loss for under-performing brands, while its opportunities for
new distribution on the existing product lines are limited. As a
result, we do not expect significant sales growth of our
existing brand name nutritional products, and we may experience
further declines in overall sales of our brand name nutritional
products in the future.
Our sales of specific vitamins and nutritional supplements
could be negatively affected by media attention or other news
developments that challenge the safety and effectiveness of
those specific vitamins and nutritional supplements.
Most growth in the vitamin and nutritional supplement industry
is attributed to new products that tend to generate greater
attention in the marketplace than do older products. Positive
media attention resulting from new scientific studies or
announcements can spur rapid growth in individual segments of
the market, and also affect individual brands. Conversely, news
that challenges individual segments or products can have a
negative impact on the industry overall, as well as on sales of
the challenged segments or products. Most of our vitamin and
nutritional supplement products serve well-established market
segments and, absent unforeseen new developments or trends, are
not expected to benefit from rapid growth. A few of our vitamin
and nutritional supplement products are newer products that are
more likely to be the subject of new scientific studies or
announcements, which could be either positive or negative. News
or other developments that challenge the safety or effectiveness
of these products could negatively affect the profitability of
our vitamin and nutritional supplements business.
Because sales of our private label nutritional supplements
are generally made at low margins, the profitability of these
products may suffer significantly as a result of relatively
small increases in raw material or other manufacturing costs.
Sales of our private label nutritional supplements, which for
the years ended December 31, 2008 and 2007 provided
approximately 6% and 7%, respectively, of our net product sales,
generate low profit margins. We rely on our ability to
efficiently mass produce nutritional supplements in order to
make meaningful profits from these products. Changes in raw
material or other manufacturing costs can drastically cut into
or eliminate the profits generated from the sale of a particular
product. For the most part, we do not have long-term supply
contracts for our required raw materials and, as a result, our
costs can increase with little notice. The private label
nutritional supplements business is also highly competitive,
such that our ability to raise prices as a result of increased
costs is limited. Customers generally purchase private label
products via purchase order, not through long-term contracts,
and they often purchase these products from the lowest bidder on
a product by product basis. The internet has enhanced price
competition among private label manufacturers through the advent
of on-line auctions, where customers will auction off the right
to manufacture a particular product to the lowest bidder.
Our financial condition or results of operations may be
adversely affected by international business risks.
We generate a significant percentage of our net revenue from
outside the United States and a significant number of our
employees, including manufacturing, sales, support and research
and development personnel,
23
are located in foreign countries, including England, Scotland,
Japan, China, Australia, Germany and Israel. Conducting business
outside the United States subjects us to numerous risks,
including:
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increased costs or reduced revenue as a result of movements in
foreign currency exchange rates;
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decreased liquidity resulting from longer accounts receivable
collection cycles typical of foreign countries;
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lower productivity resulting from difficulties managing sales,
support and research and development operations across many
countries;
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lost revenues resulting from difficulties associated with
enforcing agreements and collecting receivables through foreign
legal systems;
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lost revenues resulting from the imposition by foreign
governments of trade protection measures;
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higher cost of sales resulting from import or export licensing
requirements;
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lost revenues or other adverse effects as a result of economic
or political instability in or affecting foreign countries in
which we sell our products or operate; and
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adverse effects resulting from changes in foreign regulatory or
other laws affecting the sales of our products or our foreign
operations.
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Because our business relies heavily on foreign operations and
revenues, changes in foreign currency exchange rates and our
need to convert currencies may negatively affect our financial
condition and results of operations.
Our business relies heavily on our foreign operations. Three of
our four largest manufacturing operations are conducted outside
the United States in Hangzhou and Shanghai, China; and Matsudo,
Japan, and we also have manufacturing operations in the United
Kingdom, Australia, South Africa and Israel. We also have
significant research and development operations in Jena, Germany
and Stirling, Scotland, as well as in the United Kingdom,
Australia and Israel. In addition, approximately 28% of our net
revenue was derived from sales outside the United States.
Because of our foreign operations and foreign sales, we face
exposure to movements in foreign currency exchange rates. Our
primary exposures are related to the operations of our European
and Asia Pacific subsidiaries and our manufacturing facilities
in China and Japan. These exposures may change over time as
business practices evolve and could result in increased costs or
reduced revenue and could affect our actual cash flow.
Intense competition could reduce our market share or limit
our ability to increase market share, which could impair the
sales of our products and harm our financial performance.
The medical products industry is rapidly evolving, and
developments are expected to continue at a rapid pace.
Competition in this industry, which includes both our
professional diagnostics and consumer diagnostics businesses, is
intense and expected to increase as new products and
technologies become available and new competitors enter the
market. Our competitors in the United States and abroad are
numerous and include, among others, diagnostic testing and
medical products companies, universities and other research
institutions.
Our future success depends upon maintaining a competitive
position in the development of products and technologies in our
areas of focus. Our competitors may:
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develop technologies and products that are more effective than
our products or that render our technologies or products
obsolete or noncompetitive;
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obtain patent protection or other intellectual property rights
that would prevent us from developing potential products; or
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obtain regulatory approval for the commercialization of our
products more rapidly or effectively than we do.
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Also, the possibility of patent disputes with competitors
holding patent rights may limit or delay expansion possibilities
for our diagnostic businesses and new product launches. In
addition, many of our existing or potential competitors have or
may have substantially greater research and development
capabilities, clinical, manufacturing, regulatory and marketing
experience and financial and managerial resources.
The market for the sale of vitamins and nutritional supplements
is also highly competitive. This competition is based
principally upon price, quality of products, customer service
and marketing support. There are numerous companies in the
vitamins and nutritional supplements industry selling products
to retailers, such as mass merchandisers, drug store chains,
independent drug stores, supermarkets, groceries and health food
stores. As most of these companies are privately-held, we are
unable to obtain the information necessary to assess precisely
the size and success of these competitors. However, we believe
that a number of our competitors, particularly manufacturers of
nationally-advertised brand name products, are substantially
larger than we are and have greater financial resources.
We could suffer monetary damages, incur substantial costs or
be prevented from using technologies important to our products
as a result of a number of pending legal proceedings.
We are involved in various legal proceedings arising out of our
businesses, including those matters discussed in Item 3
entitled Legal Proceedings beginning on
page 30. Because of the nature of our business, we may be
subject at any particular time to commercial disputes, product
liability claims, negligence claims or various other lawsuits
arising in the ordinary course of our business, including
infringement, employment or investor matters, and we expect that
this will continue to be the case in the future. Such lawsuits
generally seek damages, sometimes in substantial amounts, for
commercial or personal injuries allegedly suffered and can
include claims for punitive or other special damages. An adverse
ruling or rulings in one or more such lawsuits could,
individually or in the aggregate, have a material adverse effect
on our sales, operations or financial performance. In addition,
we aggressively defend our patent and other intellectual
property rights. This often involves bringing infringement or
other commercial claims against third parties. These suits can
be expensive and result in counterclaims challenging the
validity of our patents and other rights. We cannot assure you
that these lawsuits or any future lawsuits relating to our
businesses will not have a material adverse effect on us.
The rights we rely upon to protect the intellectual property
underlying our products may not be adequate, which could enable
third parties to use our technology and would reduce our ability
to compete in the market.
Our success will depend in part on our ability to develop or
acquire commercially valuable patent rights and to protect our
intellectual property. Our patent position is generally
uncertain and involves complex legal and factual questions. The
degree of present and future protection for our proprietary
rights is uncertain.
The risks and uncertainties that we face with respect to our
patents and other proprietary rights include the following:
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the pending patent applications we have filed, or to which we
have exclusive rights, may not result in issued patents or may
take longer than we expect to result in issued patents;
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the claims of any patents which are issued may not provide
meaningful protection;
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we may not be able to develop additional proprietary
technologies that are patentable;
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the patents licensed or issued to us or our customers may not
provide a competitive advantage;
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other parties may challenge patents or patent applications
licensed or issued to us or our customers;
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patents issued to other companies may harm our ability to do
business; and
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other companies may design around technologies we have patented,
licensed or developed.
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In addition to patents, we rely on a combination of trade
secrets, non-disclosure agreements and other contractual
provisions and technical measures to protect our intellectual
property rights. Nevertheless, these measures may not be
adequate to safeguard the technology underlying our products. If
these measures do not
25
protect our rights, third parties could use our technology and
our ability to compete in the market would be reduced. In
addition, employees, consultants and others who participate in
the development of our products may breach their agreements with
us regarding our intellectual property, and we may not have
adequate remedies for the breach. We also may not be able to
effectively protect our intellectual property rights in some
foreign countries. For a variety of reasons, we may decide not
to file for patent, copyright or trademark protection or
prosecute potential infringements of our patents. Our trade
secrets may also become known through other means not currently
foreseen by us. Despite our efforts to protect our intellectual
property, our competitors or customers may independently develop
similar or alternative technologies or products that are equal
or superior to our technology and products without infringing on
any of our intellectual property rights or design around our
proprietary technologies.
Claims by others that our products infringe on their
proprietary rights could adversely affect our ability to sell
our products and services and could increase our costs.
Substantial litigation over intellectual property rights exists
in both the professional and consumer diagnostics industries. We
expect that our products and services could be increasingly
subject to third-party infringement claims, as the number of
competitors grows and the functionality of products and
technology in different industry segments overlaps. Third
parties may currently have, or may eventually be issued, patents
which our products and services or technology may infringe. Any
of these third parties might make a claim of infringement
against us. Any litigation could result in the expenditure of
significant financial resources and the diversion of
managements time and resources. In addition, litigation in
which we are accused of infringement may cause negative
publicity, have an impact on prospective customers, cause
product delays, require us to develop non-infringing technology,
make substantial payments to third parties or enter into royalty
or license agreements, which may not be available on acceptable
terms, or at all. If a successful claim of infringement were
made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a
timely and cost-effective basis, we may be forced to stop
selling current products or abandon new products under
development and we could be exposed to legal actions by our
customers.
We have initiated, and may need to further initiate, lawsuits
to protect or enforce our patents and other intellectual
property rights, which could be expensive and, if we lose, could
cause us to lose some of our intellectual property rights, which
would reduce our ability to compete in the market.
We rely on patents to protect a portion of our intellectual
property and our competitive position. In order to protect or
enforce our patent rights, we may initiate patent litigation
against third parties, such as infringement suits or
interference proceedings. Litigation may be necessary to:
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assert claims of infringement;
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enforce our patents;
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protect our trade secrets or know-how; or
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determine the enforceability, scope and validity of the
proprietary rights of others.
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Currently, we have initiated a number of lawsuits against
competitors whom we believe to be selling products that infringe
our proprietary rights. These current lawsuits and any other
lawsuits that we initiate could be expensive, take significant
time and divert managements attention from other business
concerns. Litigation also puts our patents at risk of being
invalidated or interpreted narrowly and our patent applications
at risk of not issuing. Additionally, we may provoke third
parties to assert claims against us.
Patent law relating to the scope of claims in the technology
fields in which we operate is still evolving and, consequently,
patent positions in our industry are generally uncertain. We may
not prevail in any of these suits and the damages or other
remedies awarded, if any, may not be commercially valuable.
During the course of these suits, there may be public
announcements of the results of hearings, motions and other
interim proceedings or developments in the litigation. If
securities analysts or investors perceive any of these results
to be negative, our stock price could decline.
26
Non-competition obligations and other restrictions will limit
our ability to take full advantage of our management team, the
technology we own or license and our research and development
capabilities.
Members of our management team have had significant experience
in the diabetes field. In addition, technology we own or license
may have potential applications to this field and our research
and development capabilities could be applied to this field.
However, in conjunction with our split-off from Inverness
Medical Technology, Inc., or IMT, we agreed not to compete with
IMT and Johnson & Johnson in the field of diabetes
through 2011. In addition, our license agreement with IMT
prevents us from using any of the licensed technology in the
field of diabetes. As a result of these restrictions, we are
limited in our ability to pursue opportunities in the field of
diabetes at this time.
Our operating results may fluctuate due to various factors
and as a result period-to-period comparisons of our results of
operations will not necessarily be meaningful.
Factors relating to our business make our future operating
results uncertain and may cause them to fluctuate from period to
period. Such factors include:
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the timing of new product announcements and introductions by us
and our competitors;
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market acceptance of new or enhanced versions of our products;
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the extent to which our current and future products rely on
rights belonging to third parties;
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changes in manufacturing costs or other expenses;
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competitive pricing pressures;
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changes in healthcare reimbursement policies and amounts;
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regulatory changes;
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the gain or loss of significant distribution outlets or
customers;
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increased research and development expenses;
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liabilities and costs associated with litigation
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length of sales cycle and implementation process for new health
management customers;
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the costs and timing of any future acquisitions;
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general economic conditions; or
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general stock market conditions or other economic or external
factors.
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Because our operating results may fluctuate from quarter to
quarter, it may be difficult for us or our investors to predict
future performance by viewing historical operating results.
Period-to-period comparisons of our operating results may not
be meaningful due to our acquisitions.
We have engaged in a number of acquisitions in recent years,
which makes it difficult to analyze our results and to compare
them from period to period. Significant acquisitions since 2006
include our acquisitions of the Innovacon business in March
2006, Instant in March 2007, Biosite in June 2007, Cholestech in
September 2007 and Matria in May 2008. Period-to-period
comparisons of our results of operations may not be meaningful
due to these acquisitions and are not indications of our future
performance. Any future acquisitions will also make our results
difficult to compare from period to period in the future.
Future sales of our common stock issuable upon conversion of
our Series B Convertible Perpetual Preferred Stock, or
Series B Preferred Stock, or our senior subordinated
convertible notes may adversely affect the market price of our
common stock.
Our Series B Preferred Stock is convertible into common
stock in certain circumstances. If the conditions to conversion
were satisfied, then subject to adjustment, each of the
approximately 1.9 million shares of Series B Preferred
Stock outstanding as of December 31, 2008 could convert
into 5.7703 shares of our common stock, or approximately
10.8 million shares of our common stock. Upon certain
extraordinary transactions, depending on the market price of our
common stock at that time, the conversion rate could increase
such that significantly more shares of common stock could be
issued. Our $150.0 million principal
27
amount of senior subordinated convertible notes is convertible
into shares of our common stock at a conversion price of
approximately $43.98 per share, or approximately
3,410,641 shares. Sales of a substantial number of shares
of our common stock in the public market could depress the
market price of our common stock and impair our ability to raise
capital through the sale of additional equity securities. We
cannot predict the effect that future sales of our common stock
or other equity-related securities would have on the market
price of our common stock. The price of our common stock could
be affected by possible sales of our common stock by holders of
our Series B Preferred Stock or our senior subordinated
convertible notes and by other hedging or arbitrage trading
activity that may develop involving our common stock.
The holders of our Series B Preferred Stock are entitled
to receive liquidation payments in preference to the holders of
our common stock.
The current outstanding shares of our Series B Preferred
Stock have an aggregate stated liquidation preference of
approximately $751.5 million. Dividends accrue on the
shares of Series B Preferred Stock at a rate of 3% per
annum, and we have the option to pay these dividends in shares
of common stock or additional shares of Series B Preferred
Stock and in either case must satisfy the dividend obligation by
issuing the requisite number of shares based upon market prices.
Upon a liquidation of our company, the holders of shares of
Series B Preferred Stock shall be entitled to receive a
liquidation payment prior to the payment of any amount with
respect to the shares of our common stock. The amount of this
preferential liquidation payment is the aggregate stated
liquidation preference, plus any accrued but unpaid dividends.
Because of the substantial liquidation preference to which the
holders of the Series B Preferred Stock shall be entitled,
the amount available to be distributed to the holders of our
common stock upon a liquidation of our company could be
substantially limited or reduced to zero.
The terms of the Series B Preferred Stock may limit our
ability to raise additional capital through subsequent issuances
of preferred stock.
For so long as any shares of Series B Preferred Stock
remain outstanding, we are not permitted, without the
affirmative vote or written consent of the holders of at least
50% of the Series B Preferred Stock then outstanding, to
authorize or designate any class or series of capital stock
having rights on liquidation or as to distributions (including
dividends) senior to the Series B Preferred Stock. This
restriction could limit our ability to plan for or react to
market conditions or meet extraordinary capital needs, which
could have a material adverse impact on our business.
Anti-takeover provisions in our organizational documents and
Delaware law may limit the ability of our stockholders to
control our policies and effect a change of control of our
company and may prevent attempts by our stockholders to replace
or remove our current management, which may not be in your best
interests.
There are provisions in our certificate of incorporation and
bylaws that may discourage a third party from making a proposal
to acquire us, even if some of our stockholders might consider
the proposal to be in their best interests, and may prevent
attempts by our stockholders to replace or remove our current
management. These provisions include the following:
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our certificate of incorporation provides for three classes of
directors with the term of office of one class expiring each
year, commonly referred to as a staggered board. By preventing
stockholders from voting on the election of more than one class
of directors at any annual meeting of stockholders, this
provision may have the effect of keeping the current members of
our board of directors in control for a longer period of time
than stockholders may desire;
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our certificate of incorporation authorizes our board of
directors to issue shares of preferred stock without stockholder
approval and to establish the preferences and rights of any
preferred stock issued, which would allow the board to issue one
or more classes or series of preferred stock that could
discourage or delay a tender offer or change in control;
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our certificate of incorporation prohibits our stockholders from
filling board vacancies, calling special stockholder meetings or
taking action by written consent;
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our certificate of incorporation provides for the removal of a
director only with cause and by the affirmative vote of the
holders of 75% or more of the shares then entitled to vote at an
election of directors; and
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our bylaws require advance written notice of stockholder
proposals and director nominations.
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Additionally, we are subject to Section 203 of the Delaware
General Corporation Law, which, in general, imposes restrictions
upon acquirers of 15% or more of our stock. Finally, the board
of directors may in the future adopt other protective measures,
such as a stockholder rights plan, which could delay, deter or
prevent a change of control.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Our principal corporate administrative office, together with the
administrative office for most of our United States consumer
operations, is housed in approximately 22,600 square feet
of leased space located at 51 Sawyer Road, Waltham,
Massachusetts. Our lease of this facility expires on
May 31, 2013.
Our largest Alere health management business office is currently
located in Marietta, Georgia in 77,705 square feet of
leased office space, which currently expires on
February 28, 2010. A new lease was recently signed in
anticipation of consolidating the current Marietta office and an
Atlanta area call center into one facility located in Atlanta,
Georgia and comprising approximately 107,790 square feet.
The move into the new space may occur as early as the second
quarter of 2009, and the lease will expire in 2020.
We also own approximately 26.1 acres of land in
San Diego, California which houses our Biosite operation,
including significant administrative, research and manufacturing
operations for certain professional diagnostics. Our buildings
on this property currently consist of approximately
110,000 square feet of office space, 53,000 square
feet of laboratory space and 167,000 square feet of
manufacturing space.
During the second quarter of 2008, we commenced operations of a
shared services center in Orlando, Florida and moved certain
back-office and sales operations from seven of our
U.S. companies to this center. Our lease of this facility,
which is approximately 57,300 square feet, expires on
January 31, 2013.
Our European operations are currently administered from a
130,000 square foot facility located in Bedford, England.
We also manufacture products for consumer and professional
diagnostics businesses and conduct research and development
activity at the Bedford facility, although we are in the process
of closing the Bedford manufacturing operations, which would
move to our low cost production facilities mainly in China.
Our other primary manufacturing operations are in Hangzhou and
Shanghai, China and Matsudo, Japan. We currently manufacture a
portion of our consumer and professional diagnostics out of a
newly-constructed manufacturing facility of approximately
300,000 square feet in Hangzhou, China, which we own. We
currently manufacture the remainder of our consumer diagnostics
out of approximately 54,000 square feet of space in
Shanghai, China made available by our joint venture partner. Our
Determine products are currently manufactured by us in Matsudo,
Japan in 19,000 square feet of space rented from Abbott
Laboratories and we are currently in the process of transferring
those operations to a new leased facility, also in Matsudo,
providing approximately 35,000 square feet of floor space.
We also have important manufacturing operations in Scarborough,
Maine, and Freehold and Irvington, New Jersey. We manufacture
certain of our professional diagnostics out of a
64,000 square foot facility that we lease in Scarborough,
Maine. These facilities also include significant administrative
and laboratory space. We also own a 160,000 square foot
manufacturing facility in Freehold, New Jersey and lease a
35,000 square foot facility in Irvington, New Jersey. These
New Jersey facilities manufacture our vitamin and nutritional
supplement products.
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We also have leases or other arrangements for smaller
manufacturing facilities, as well as administrative or sales
offices, call centers, laboratory space and warehouses in
various locations worldwide.
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ITEM 3.
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LEGAL
PROCEEDINGS
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Estate of
Melissa Prince Quisenberry v. Alere Medical, Inc., TA
Associates, Inc., Covington Associates, et al.
On September 19, 2008, the Estate of Melissa Prince
Quisenberry filed a class action complaint in the Superior Court
of California on behalf of herself and others similarly situated
against Alere Medical Inc., or Alere Medical, and Agora Parent,
Inc., both of which are wholly-owned subsidiaries; Ronald D.
Geraty, MD, chief executive officer of Alere Medical and certain
other individuals who were executive officers, directors
and/or
significant shareholders of Alere Medical; as well as certain
other unaffiliated entities. Plaintiff and class owned common
and/or
preferred stock in Alere Medical and allege that the defendants
forced them to tender their stock in connection with the
March 14, 2007 sale of Alere Medical to an unaffiliated
entity at a price which was substantially lower than the price
at which we bought Alere Medical in November 2007. Plaintiff
also alleges that the individual defendants breached fiduciary
duties of good faith, fair dealing, loyalty and candor; and that
Alere Medical and certain unaffiliated entities aided, abetted
and substantially participated in the breach of fiduciary duty.
We believe that we have strong defenses to all of the
allegations made by the class and we intend to defend the claims
vigorously. However, an outcome against Alere Medical could
potentially have a material adverse impact on our sales,
operations or financial performance.
Healthways,
Inc. and Robert Bosch North America Corp. v. Alere Medical,
Inc.
Healthways, Inc. and Robert Bosch North America Corp. filed a
complaint in U.S. District Court in the Northern District
of Illinois on November 5, 2008 against Alere Medical
alleging infringement of 11 patents, licensed by Bosch from
Healthways. Alere Medical answered the complaint and filed
counterclaims seeking declarations that the patents are invalid
and not infringed. The plaintiffs subsequently filed an amended
complaint substituting Alere LLC, or Alere, our consolidated
health management subsidiary, as the defendant in place of Alere
Medical. We believe that we have strong defenses to
Healthways allegations and we intend to defend them
vigorously. However, a ruling against Alere could potentially
have a material adverse impact on our sales, operations or
financial performance or could limit our current or future
business opportunities.
Claims in
the Ordinary Course and Other Matters
We are not a party to any other pending legal proceedings that
we currently believe could have a material adverse impact on our
sales, operations or financial performance. However, because of
the nature of our business, we may be subject at any particular
time to commercial disputes, consumer product claims, negligence
claims or various other lawsuits arising in the ordinary course
of our business, including infringement, employment or investor
matters, and we expect that this will continue to be the case in
the future. Such lawsuits generally seek damages, sometimes in
substantial amounts.
As an example, as we have previously reported, in April 2008,
Pyramid Holdings Inc., a purchaser in our November 2007 public
offering of our common stock, filed a putative securities class
action against us, Ron Zwanziger, our chairman, chief
executive officer and president, and David Teitel, our chief
financial officer, in the United States District Court for the
District of Massachusetts, alleging that the prospectus
supplement and registration statement with respect to the
November 2007 public offering were inaccurate and misleading and
omitted to state material facts. The plaintiffs have
subsequently filed their amended class action complaint, adding
as defendants each of our then current directors, a former
director, and a former chief financial officer. We believe that
the allegations are baseless, and we intend to defend against
them vigorously.
Also, our subsidiary Alere Medical continues to defend
infringement claims brought by Health Hero Network, Inc., a
subsidiary of Robert Bosch North America Corp., which alleges to
have patented certain processes related to home monitoring of
patients.
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While we believe that we have strong defenses to the claims
brought by Pyramid Holdings and Health Hero and we intend to
defend them vigorously, these, or other claims, could
potentially have a negative impact on our sales, operations or
financial performance or could limit our existing or future
business opportunities.
In addition, we aggressively defend our patent and other
intellectual property rights. This often involves bringing
infringement or other commercial claims against third parties.
These suits can be expensive and result in counterclaims
challenging the validity of our patents and other rights.
Finally, we were recently notified by the SEC that its 2005
formal order of investigation in connection with the previously
disclosed revenue recognition matter at one of our diagnostic
divisions has been completed and that the SEC does not intend to
recommend any enforcement actions against us.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
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PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 31, 2008, we issued a total of
53,372 shares of common stock, as contingent consideration
in connection with our July 2007 acquisition of Spectral
Diagnostics Private Limited and Source Diagnostics (India)
Private Limited, pursuant to an exemption afforded by
Section 4(2) of the Securities Act of 1933, as amended.
On November 20, 2008, we issued approximately
112,158 shares of common stock as contingent consideration
payable under the share purchase agreement governing our
acquisition of Clondiag GmbH in February 2006 as a result of
Clondiag achieving certain development milestones. We relied on
the exemption from registration provided by Regulation S
under the Securities Act.
Market
Information
In January 2009, our common stock began trading on the New York
Stock Exchange (NYSE) under the symbol IMA. Prior to
that, our common stock traded on the American Stock Exchange
(AMEX) under the symbol IMA. The following table
sets forth the high and low sales prices of our common stock on
AMEX for each quarter during fiscal 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
30.52
|
|
|
$
|
12.33
|
|
Third Quarter
|
|
$
|
36.42
|
|
|
$
|
28.10
|
|
Second Quarter
|
|
$
|
38.71
|
|
|
$
|
30.00
|
|
First Quarter
|
|
$
|
62.65
|
|
|
$
|
26.29
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
65.00
|
|
|
$
|
52.38
|
|
Third Quarter
|
|
$
|
55.79
|
|
|
$
|
44.17
|
|
Second Quarter
|
|
$
|
53.85
|
|
|
$
|
38.00
|
|
First Quarter
|
|
$
|
44.72
|
|
|
$
|
36.90
|
|
On February 25, 2009, there were 2,325 holders of record of
our common stock.
Dividend
Policy
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain earnings to support our
growth strategy and do not anticipate paying cash dividends on
our common stock in the foreseeable future. Payment of future
dividends, if any, on our common stock will be at the discretion
of our board of directors after taking into account various
factors, including our financial condition, operating results,
current and anticipated cash needs and plans for expansion. In
addition, restrictive covenants under our secured credit
facilities and the indenture governing the terms of the senior
subordinated convertible notes currently prohibit the payment of
cash or stock dividends.
32
Stock
Performance Graph
The following line graph compares the change in the cumulative
total stockholder return on our common stock from
December 31, 2003 through December 31, 2008. This
graph assumes an investment of $100.00 on December 31, 2003
in our common stock, and compares its performance with the NYSE
Composite Index and the Dow Jones U.S. Healthcare Index (the
Current Indices). We currently pay no dividends on
our common stock. The Current Indices reflect a cumulative total
return based upon the reinvestment of dividends of the stocks
included in those indices. Measurement points are
December 31, 2003 and the last trading day of each
subsequent year end through December 31, 2008.
The comparisons shown in the graph below are based upon
historical data. We caution that the stock price performance
shown in the graph below is not necessarily indicative of, nor
is it intended to forecast, the potential future performance of
our common stock.
Current
Indices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYSE Composite
|
|
|
Dow Jones U.S.
|
|
Date
|
|
IMA
|
|
|
Index
|
|
|
Healthcare Index
|
|
|
12/31/03
|
|
$
|
100.00
|
|
|
$
|
100.00
|
|
|
$
|
100.00
|
|
12/31/04
|
|
$
|
115.24
|
|
|
$
|
112.16
|
|
|
$
|
103.53
|
|
12/30/05
|
|
$
|
108.86
|
|
|
$
|
119.96
|
|
|
$
|
110.64
|
|
12/29/06
|
|
$
|
177.69
|
|
|
$
|
141.38
|
|
|
$
|
116.39
|
|
12/31/07
|
|
$
|
257.94
|
|
|
$
|
150.69
|
|
|
$
|
124.03
|
|
12/31/08
|
|
$
|
86.82
|
|
|
$
|
89.06
|
|
|
$
|
94.23
|
|
In prior years, we compared our cumulative total stockholder
return to the AMEX U.S. Total Return Index and the AMEX Health
Products & Services Total Return Index (the Old
Indices). However, we have been informed that, following
the acquisition of AMEX by the NYSE in October 2008, the Old
Indices are no longer available. In addition, in January 2009,
we transferred the listing of our common stock from AMEX to the
NYSE. Accordingly, as a result of these events, this year we
compared, for the first time, our cumulative total stockholder
return to the Current Indices, which we believe will provide a
more meaningful comparison of stock performance going forward.
Because the Old Indices are no longer available, we cannot also
provide a concurrent comparison to such indices.
The performance graph above shall not be deemed
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), or otherwise subject to the liability of that
section. This graph will not be deemed incorporated by reference
into any filing under the Securities Act of 1933, as amended, or
the Exchange Act, whether made before or after the date hereof,
regardless of any general incorporation language in such filing.
33
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The following tables set forth selected consolidated financial
data of our company as of and for each of the years in the
five-year period ended December 31, 2008 and should be read
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and notes thereto
included elsewhere in this Annual Report on
Form 10-K.
Our selected consolidated financial data for the years ended
December 31, 2008, 2007 and 2006, and as of
December 31, 2008 and 2007, have been derived from our
consolidated financial statements which are included elsewhere
in this Annual Report on
Form 10-K
and were audited by BDO Seidman, LLP, an independent registered
public accounting firm. Our selected consolidated financial data
for the years ended December 31, 2005 and 2004, and as of
December 31, 2006, 2005 and 2004, have been derived from
our consolidated financial statements not included herein, which
were audited by BDO Seidman, LLP.
For a discussion of certain factors that materially affect the
comparability of the selected consolidated financial data or
cause the data reflected herein not to be indicative of our
future results of operations or financial condition, see
Item 1A Risk Factors and Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
1,240,138
|
|
|
$
|
800,915
|
|
|
$
|
552,130
|
|
|
$
|
406,457
|
|
|
$
|
365,432
|
|
Services revenue
|
|
|
405,462
|
|
|
|
16,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales and services revenue
|
|
|
1,645,600
|
|
|
|
817,561
|
|
|
|
552,130
|
|
|
|
406,457
|
|
|
|
365,432
|
|
License and royalty revenue
|
|
|
25,826
|
|
|
|
21,979
|
|
|
|
17,324
|
|
|
|
15,393
|
|
|
|
8,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
1,671,426
|
|
|
|
839,540
|
|
|
|
569,454
|
|
|
|
421,850
|
|
|
|
373,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net product sales
|
|
|
624,654
|
|
|
|
431,403
|
|
|
|
334,799
|
|
|
|
264,999
|
|
|
|
223,669
|
|
Cost of services revenue
|
|
|
177,098
|
|
|
|
5,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license and royalty revenue
|
|
|
9,115
|
|
|
|
9,149
|
|
|
|
5,432
|
|
|
|
4,539
|
|
|
|
3,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue
|
|
|
810,867
|
|
|
|
445,813
|
|
|
|
340,231
|
|
|
|
269,538
|
|
|
|
226,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
860,559
|
|
|
|
393,727
|
|
|
|
229,223
|
|
|
|
152,312
|
|
|
|
147,004
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
111,828
|
|
|
|
69,547
|
|
|
|
48,706
|
|
|
|
30,992
|
|
|
|
31,954
|
|
Purchase of in-process research and development
|
|
|
|
|
|
|
173,825
|
|
|
|
4,960
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
386,284
|
|
|
|
167,770
|
|
|
|
94,445
|
|
|
|
72,103
|
|
|
|
57,957
|
|
General and administrative
|
|
|
298,595
|
|
|
|
158,438
|
|
|
|
71,243
|
|
|
|
59,990
|
|
|
|
52,707
|
|
Loss on dispositions, net
|
|
|
|
|
|
|
|
|
|
|
3,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
63,852
|
|
|
|
(175,853
|
)
|
|
|
6,371
|
|
|
|
(10,773
|
)
|
|
|
4,386
|
|
Interest expense and other expenses, net, including amortization
of original issue discounts and write-off of deferred financing
costs
|
|
|
(103,356
|
)
|
|
|
(74,251
|
)
|
|
|
(17,822
|
)
|
|
|
(1,617
|
)
|
|
|
(18,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before (benefit) provision for income taxes
|
|
|
(39,504
|
)
|
|
|
(250,104
|
)
|
|
|
(11,451
|
)
|
|
|
(12,390
|
)
|
|
|
(14,321
|
)
|
(Benefit) provision for income taxes
|
|
|
(16,686
|
)
|
|
|
(979
|
)
|
|
|
5,727
|
|
|
|
6,819
|
|
|
|
2,275
|
|
Equity earnings of unconsolidated entities, net of tax
|
|
|
1,050
|
|
|
|
4,372
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,768
|
)
|
|
|
(244,753
|
)
|
|
|
(16,842
|
)
|
|
|
(19,209
|
)
|
|
|
(16,596
|
)
|
Preferred stock dividends
|
|
|
(13,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands, except per share data)
|
|
|
Net loss available to common stockholders(1)
|
|
$
|
(35,757
|
)
|
|
$
|
(244,753
|
)
|
|
$
|
(16,842
|
)
|
|
$
|
(19,209
|
)
|
|
$
|
(17,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic and diluted(1)
|
|
$
|
(0.46
|
)
|
|
$
|
(4.75
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
141,324
|
|
|
$
|
414,732
|
|
|
$
|
71,104
|
|
|
$
|
34,270
|
|
|
$
|
16,756
|
|
Working capital
|
|
$
|
457,198
|
|
|
$
|
674,066
|
|
|
$
|
133,313
|
|
|
$
|
84,523
|
|
|
$
|
62,615
|
|
Total assets
|
|
$
|
5,955,360
|
|
|
$
|
4,880,759
|
|
|
$
|
1,085,771
|
|
|
$
|
791,166
|
|
|
$
|
568,269
|
|
Total debt
|
|
$
|
1,520,534
|
|
|
$
|
1,387,849
|
|
|
$
|
202,976
|
|
|
$
|
262,504
|
|
|
$
|
191,224
|
|
Total stockholders equity
|
|
$
|
3,278,838
|
|
|
$
|
2,586,667
|
|
|
$
|
714,138
|
|
|
$
|
397,308
|
|
|
$
|
271,416
|
|
|
|
|
(1) |
|
Net loss available to common stockholders and basic and diluted
net loss per common share are computed as described in
Notes 2(n) and 15 of our consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K. |
35
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Forward-Looking
Statements
This Annual Report on
Form 10-K,
including this Item 7, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. You can identify these
statements by forward-looking words such as may,
could, should, would,
intend, will, expect,
anticipate, believe,
estimate, continue or similar words. You
should read statements that contain these words carefully
because they discuss our future expectations, contain
projections of our future results of operations or of our
financial condition or state other forward-looking
information. Forward-looking statements in this Item 7
include, without limitation, statements regarding anticipated
expansion in certain of our product categories, research and
development expenditures, the impact of our research and
development activities, potential new product and technology
achievements, the impact of our worldwide distribution network,
our ability to improve our margins through consolidation of
certain of our higher cost manufacturing operations into lower
cost facilities, our ability to achieve further synergies within
expected timelines, our expectations with respect to our SPD
joint venture with P&G, the growth prospects of the health
management market, our ability to improve care and lower
healthcare costs for both providers and patients, and our
funding plans for our future working capital needs and
commitments. Actual results or developments could differ
materially from those projected in such statements as a result
of numerous factors, including, without limitation, those risks
and uncertainties set forth in Item 1A entitled Risk
Factors, which begins on page 13 of this report, as
well as those factors identified from time to time in our
periodic filings with the Securities and Exchange Commission. We
do not undertake any obligation to update any forward-looking
statements. This report and, in particular, the following
discussion and analysis of our financial condition and results
of operations, should be read in light of those risks and
uncertainties and in conjunction with our accompanying
consolidated financial statements and notes thereto.
Overview
We enable individuals to take charge of improving their health
and quality of life at home by developing new capabilities in
near patient diagnosis, monitoring and health management. Our
global leading products and services, as well as our new product
development efforts, focus on cardiology, womens health,
infectious disease, oncology, and drugs of abuse. With our 2007
acquisitions of Biosite, Cholestech, and HemoSense, we
established our company as a leading supplier of cardiology
diagnostic products. Our acquisitions of Biosite, Instant and
Redwood during 2007 and Ameditech, Inc., or Ameditech, in 2008
enhanced our position in drugs of abuse testing. Additionally,
with our December 2007 acquisition of Matritech, Inc., or
Matritech, we also established a presence in oncology, by
acquiring the unique
NMP-22 ELISA
and rapid point-of-care tests for the screening and monitoring
of bladder cancer in conjunction with standard diagnostic
procedures. We expect to continue to expand in all of these
product categories through focused research and development
projects and further development of our distribution
capabilities.
During 2007 and 2008, we entered the growing health management
market with our acquisitions of Alere Medical, ParadigmHealth
and more recently, Matria. With the acquisition of Matria, we
are now a leader in this field offering a broad range of
services aimed at lowering costs for health plans, hospitals,
employers and patients. Our health management services are
focused in the areas of womens and childrens health,
cardiology and oncology. We are confident that our ability to
offer near patient monitoring tools combined with value-added
healthcare services will improve care and lower healthcare costs
for both providers and patients. During the third quarter of
2008, we began efforts to consolidate the health management
businesses under a single brand. Today, Matria, ParadigmHealth
and Alere Medical, each a leader in their respective areas, are
united as one business under the name Alere. Also, during the
third quarter of 2008, we acquired an overseas health management
business enabling us to establish a presence in the
newly-developing international health management market.
36
Our research and development programs have two general focuses.
We are developing new technology platforms that will facilitate
our primary objective of enabling individuals to take charge of
improving their health and quality of life by moving testing out
of the hospital and central laboratory, and into the
physicians office and ultimately the home. Additionally,
through our strong pipeline of novel proteins or combinations of
proteins that function as disease biomarkers, we are developing
new tests targeted towards all of our areas of focus.
We continue to advance toward our goal of establishing a
worldwide distribution network that will allow us to bring both
our current and future diagnostic products to the global
professional market. In addition, we continue to focus on
improving our margins through consolidation of certain of our
higher cost manufacturing operations into lower cost facilities,
including our 300,000 square foot manufacturing facility
located in Hangzhou, China, as well as our jointly-owned
facility in Shanghai, China, and we are already seeing improved
margins on some of our existing products that we have moved to
these facilities. Our business integration activities remain on
track and we have seen positive results from the integrations
completed to date and as we continue to aggressively integrate
acquired operations in order to achieve further synergies within
expected timelines. During the second half of 2007, we began
implementation of a plan to consolidate sales processing and
certain other back-office services from seven of our
U.S. operations into a shared services center, located in
Orlando, Florida. This shared services center commenced
operations at the beginning of the second quarter of 2008.
2008
Financial Highlights
Net revenue in 2008 of $1.7 billion increased by
$831.9 million, or 99%, from $839.5 million in 2007.
Net revenue increased primarily as a result of our professional
diagnostics-related acquisitions which contributed
$397.8 million of the increase. Additionally, net revenue
increased as a result of our newly-formed health management
segment which provided $357.6 million of incremental
revenue and primarily included the activities of our recent
acquisitions of QAS, Alere Medical, ParadigmHealth and Matria.
Partially offsetting the increased revenue as a result of
acquisitions was the decrease in revenue associated with the
completion of our 50/50 joint venture (SPD) with P&G in May
2007 in which we transferred substantially all of the assets of
our consumer diagnostics business, other than our manufacturing
and core intellectual property assets. Upon completion of the
arrangement to form the joint venture, we ceased to consolidate
the operating results of our consumer diagnostics business
related to the joint venture and instead account for our 50%
interest in the results of the joint venture under the equity
method of accounting in accordance with Accounting Principles
Board (APB) Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock.
Organic growth, particularly from our professional
cardiology, infectious disease and drugs of abuse products, also
contributed to the revenue growth, as well as higher license and
royalty revenue.
Gross profit increased by $466.8 million, or 119%, to
$860.6 million in 2008 from $393.7 million in 2007,
principally as a result of gross profit earned on incremental
revenue from acquired businesses, primarily in our professional
diagnostics and health management businesses, as well as
increased license and royalty revenue. Offsetting these
increases was a decrease in our consumer diagnostics business
gross margin, principally as a result of the formation of our
50/50 joint venture with P&G in May 2007. During 2008,
gross profit was adversely impacted by a $17.9 million
restructuring charge related to the closure of various
manufacturing and operating facilities and a charge of
$2.0 million associated with the
write-up of
inventory acquired to fair value in connection with two of our
2008 acquisitions. Gross profit in 2007 was adversely impacted
by a $2.0 million charge associated with our various
restructuring plans and a charge of $8.2 million associated
with the
write-up of
inventory acquired to fair value in connection with three of our
2007 acquisitions.
We continue to invest aggressively in research and development
of new products and technologies as evidenced by our increased
research and development expense of $111.8 million in 2008,
from $69.5 million in 2007. Expenditures in 2007 are
reported net of $18.5 million arising from the
co-development funding arrangement that we entered into with
ITI, in February 2005. Research and development expense before
considering the co-development funding was $88.0 million in
2007. The increase in spending resulted principally from
expenditures related to our cardiology research programs.
Offsetting these increases was the
37
favorable impact of the 50/50 joint venture with P&G. Our
co-development funding arrangement with ITI expired in the first
quarter of 2008. The final payment under this agreement was
received and earned in the fourth quarter of 2007, and as such,
no funding was earned in 2008.
Results
of Operations
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Net Product Sales. Net product sales increased
by $439.2 million, or 55%, to $1.2 billion in 2008
from $800.9 million in 2007. Excluding the unfavorable
impact of currency translation, net product sales in 2008 grew
by approximately $439.5 million, or 55%, over 2007. Of the
currency adjusted increase, revenue increased primarily as a
result of our professional diagnostic-related acquisitions which
contributed $363.8 million of the increase. Organic growth,
particularly from our professional infectious disease, drugs of
abuse products and vitamin and nutritional supplements, also
contributed to the growth.
Net Product Sales by Business Segment. Net
product sales by business segment for 2008 and 2007 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(decrease)
|
|
|
Professional diagnostics
|
|
$
|
1,000,190
|
|
|
$
|
565,265
|
|
|
|
77
|
%
|
Health management
|
|
|
18,632
|
|
|
|
9,210
|
|
|
|
102
|
%
|
Consumer diagnostics
|
|
|
132,443
|
|
|
|
153,616
|
|
|
|
(14
|
)%
|
Vitamins and nutritional supplements
|
|
|
88,873
|
|
|
|
72,824
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
1,240,138
|
|
|
$
|
800,915
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Diagnostics
The increase in net product sales from our professional
diagnostics business segment was $434.9 million, or 77%,
resulting in $1.0 billion of net product sales in 2008. Of
the increase, revenue increased primarily as a result of our
acquisitions of: (i) Biosite, in June 2007, which
contributed additional product revenue of $161.7 million in
excess of those earned in the prior years comparative
period, (ii) Cholestech, in September 2007, which
contributed additional product revenue of $49.4 million in
excess of those earned in the prior years comparative
period, (iii) Bio-Stat Healthcare Group, or Bio-Stat, in
October 2007, which contributed additional product revenue of
$21.6 million in excess of those earned in the prior
years comparative period, (iv) HemoSense, in November
2007, which contributed additional product revenue of
$27.2 million in excess of those earned in the prior
years comparative period, (v) Redwood, in December
2007, which contributed additional product revenue of
$23.9 million in excess of those earned in the prior
years comparative period, (vi) BBI, in February 2008,
which contributed product revenue of $32.4 million and
(vii) various less significant acquisitions, which
contributed an aggregate of $47.6 million of such increase.
Organic growth, particularly from our professional infectious
disease products, also contributed to the growth. The currency
adjusted organic growth for our professional diagnostics net
product sales, excluding the impact of acquisitions, was 13%.
Health
Management
Our health management net product sales increased
$9.4 million, or 102%, to $18.6 million in 2008. The
increase in net product sales represents additional sales
related to our acquisition of QAS in June 2007.
Consumer
Diagnostics
The decrease in net product sales from our consumer diagnostics
business segment was $21.2 million, or 14%, resulting in
$132.4 million of net product sales for 2008. The decrease
was primarily driven by the completion of our 50/50 joint
venture with P&G in May 2007 in which we transferred
substantially all of the assets of our consumer diagnostics
business, other than our manufacturing and core intellectual
property
38
assets. Upon completion of the arrangement to form the joint
venture, we ceased to consolidate the operating results of our
consumer diagnostics business related to the joint venture and
instead account for our 50% interest in the results of the joint
venture under the equity method of accounting. Net product sales
from our consumer diagnostics business segment for 2008 and 2007
included $103.0 million and $65.0 million,
respectively, of manufacturing revenue associated with our
manufacturing agreement with SPD, whereby we manufacture and
sell consumer diagnostics to the joint venture. Partially
offsetting the impact of the joint venture was an increase
$13.5 million of net product sales attributed to our
acquisitions of: (i) First Check Diagnostics LLC, or First
Check, in January 2007, which contributed additional product
revenue of $1.1 million in excess of those earned in the
prior years comparative period, (ii) Bio-Stat, in
October 2007, which contributed additional product revenue of
$4.6 million in excess of those earned in the prior
years comparative period and (iii) BBI, in February
2008, which contributed product revenue of $7.8 million.
Vitamins
and Nutritional Supplements
Our vitamins and nutritional supplements net product sales
increased by $16.0 million, or 22%, to $88.9 million
in 2008. The increase is primarily a result of increased private
label nutritional sales to our existing and new customers.
Services Revenue. Services revenue was
$405.5 million in 2008, as compared to $16.6 million
in 2007. Services revenue is principally related to our
newly-formed health management business segment which primarily
includes our recent acquisitions of QAS, Alere Medical,
ParadigmHealth and Matria. In addition to the services revenue
generated by our health management businesses, services revenue
also includes revenue generated by our professional drugs of
abuse testing and screening business, along with revenue
associated with our long-term services agreement related to our
consumer diagnostics joint venture formed with P&G in May
2007, pursuant to which we provide certain operational support
services to the joint venture.
Services Revenue by Business Segment. Services
revenue by business segment for 2008 and 2007 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Professional diagnostics
|
|
$
|
29,338
|
|
|
$
|
|
|
Health management
|
|
|
373,767
|
|
|
|
14,164
|
|
Consumer diagnostics
|
|
|
2,357
|
|
|
|
2,482
|
|
|
|
|
|
|
|
|
|
|
Total services revenue
|
|
$
|
405,462
|
|
|
$
|
16,646
|
|
|
|
|
|
|
|
|
|
|
Professional
Diagnostics
Services revenue provided by our professional diagnostics
business segment of $29.3 million in 2008 represents
revenue related to the laboratory-based professional drugs of
abuse testing and screening business at Redwood, which was
acquired in December 2007.
Health
Management
Services revenue provided by our newly-formed health management
business segment was $373.8 million in 2008, with Matria
contributing services revenue of $197.7 million, Alere
Medical contributing services revenue of $91.2 million,
ParadigmHealth contributing services revenue of
$71.3 million and QAS contributing services revenue of
$12.1 million.
Consumer
Diagnostics
Services revenue provided by our consumer diagnostics business
segment decreased by $0.1 million, or 5%, to
$2.4 million in 2008. Services revenue provided by our
consumer diagnostics business segment represents revenue related
to our long-term services agreements with our 50/50 joint
venture with P&G formed in May 2007, pursuant to which we
provide certain operational support services to the joint
venture.
39
Net Product Sales and Services Revenue by Geographic
Location. Net product sales and services revenue
by geographic location for 2008 and 2007 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(decrease)
|
|
|
United States
|
|
$
|
1,186,583
|
|
|
$
|
511,941
|
|
|
|
132
|
%
|
Europe
|
|
|
283,552
|
|
|
|
196,379
|
|
|
|
44
|
%
|
Other
|
|
|
175,465
|
|
|
|
109,241
|
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales and services revenue
|
|
$
|
1,645,600
|
|
|
$
|
817,561
|
|
|
|
101
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales and services revenue of $1.2 billion and
$511.9 million generated in the United States were
approximately 72% and 63%, respectively, of total net product
sales and services revenue for the year ended December 31,
2008 and 2007, respectively. The growth in net product sales and
services revenue in all geographic regions resulted from the
various acquisitions discussed above and organic growth,
partially offset by the decrease in revenue associated with the
formation of our 50/50 joint venture with P&G in May 2007.
License and Royalty Revenue. License and
royalty revenue represents license and royalty fees from
intellectual property license agreements with third parties.
License and royalty revenue increased by $3.8 million, or
18%, to $25.8 million in 2008, from $22.0 million in
2007. License and royalty revenue for 2008 increased primarily
as a result of our acquisition of Biosite in June 2007, which
contributed an additional $1.9 million of royalty revenue
in excess of those earned in 2007. Additionally, incremental
royalty revenue was derived from new royalty agreements entered
into during 2008, along with increases associated with certain
existing royalty agreements, partially offset by decreases in
other royalty agreements.
Gross Profit and Margin. Gross profit
increased by $466.8 million, or 119%, to
$860.6 million in 2008, from $393.7 million in 2007.
Gross profit during 2008 benefited from higher than average
margins earned on revenue from our recently acquired businesses
and from the favorable impact of our low cost manufacturing
facilities in China. Included in gross profit in 2008 were
restructuring charges totaling $17.9 million associated
with the closure of various manufacturing and operating
facilities, a $2.0 million charge related to the
write-up to
fair market value of inventory acquired in connection with our
first quarter acquisitions of BBI and Panbio, and
$1.5 million of stock-based compensation expense. Included
in gross profit in 2007 were restructuring charges totaling
$2.0 million associated with the closure of various
manufacturing and operating facilities, an $8.2 million
charge related to the
write-up to
fair market value of inventory acquired in connection with our
acquisitions of Biosite, Cholestech and HemoSense and
$0.6 million of stock-based compensation expense. Cost of
net revenue included amortization expense of $43.4 million
and $24.0 million in 2008 and 2007, respectively.
Overall gross margin was 52% in 2008, compared to 47% in 2007.
Gross Profit from Net Product Sales by Business
Segment. Gross profit from net product sales
represents total gross profit less gross profit associated with
services revenue and license and royalty revenue. Gross profit
from net product sales increased by $246.0 million to
$615.5 million in 2008, from $369.5 million in 2007.
Gross profit from net product sales by business segment for 2008
and 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(decrease)
|
|
|
Professional diagnostics
|
|
$
|
581,806
|
|
|
$
|
306,710
|
|
|
|
90
|
%
|
Health management
|
|
|
2,729
|
|
|
|
3,076
|
|
|
|
(11
|
)%
|
Consumer diagnostics
|
|
|
23,413
|
|
|
|
52,760
|
|
|
|
(56
|
)%
|
Vitamins and nutritional supplements
|
|
|
7,536
|
|
|
|
6,966
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from net product sales
|
|
$
|
615,484
|
|
|
$
|
369,512
|
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Professional
Diagnostics
Gross profit from our professional diagnostics net product sales
increased by $275.1 million, or 90%, comparing 2008 to
2007, principally as a result of gross profit earned on revenue
from acquired businesses, as discussed above, which contributed
higher than average gross profits. The higher than average
profits were partially offset by a $2.0 million charge
related to the
write-up to
fair market value of inventory acquired in connection with our
acquisitions of BBI and Panbio and $17.9 million in
restructuring charges. Reducing gross profit for 2007 was an
$8.2 million charge related to the
write-up to
fair market value of inventory acquired in connection with our
acquisitions of Biosite, Cholestech and HemoSense and
$0.5 million in restructuring charges.
As a percentage of our professional diagnostics net product
sales, gross profit from our professional diagnostics business
was 58% in 2008, compared to 54% in 2007.
Health
Management
Gross profit from our health management net product sales
decreased by $0.3 million, or 11%, to $2.7 million
during 2008, compared to $3.1 million during 2007.
As a percentage of our health management net product sales,
gross profit from our health management business was 15% in
2008, compared to 33% in 2007.
Consumer
Diagnostics
Gross profit from our consumer diagnostics net product sales
decreased $29.3 million, or 56%, comparing 2008 to 2007.
The decrease is primarily a result of the formation of our 50/50
joint venture with P&G for our consumer diagnostics
business in May 2007, partially offset by the gross profit
earned on revenue from acquired businesses, primarily our BBI
acquisition and the manufacturing profit associated with
products sold under our manufacturing agreement with the joint
venture. Gross profit for 2007 was adversely impacted by
restructuring charges totaling $1.5 million related to the
formation of the joint venture.
As a percentage of our consumer diagnostics net product sales,
gross profit from our consumer diagnostics business was 18% for
2008, compared to 34% in 2007. The decrease in gross margin
percentage for 2008, as compared to 2007, is driven by the
formation of our 50/50 joint venture with P&G in May 2007.
As a result of the joint venture, our consumer diagnostics net
product sales consist of the manufacturing revenue associated
with our manufacturing agreement with the joint venture, whereby
we manufacture and sell consumer diagnostics to the joint
venture.
Vitamins
and Nutritional Supplements
Gross profit from our vitamins and nutritional supplements net
product sales increased $0.6 million, or 8%, comparing 2008
to 2007. The increase is primarily the result of higher private
label sales.
As a percentage of our vitamin and nutritional supplements net
product sales, gross profit from our vitamins and nutritional
supplements business was 9% in 2008, compared to 10% in 2007.
Gross Profit from Services Revenue. Gross
profit from services revenue primarily represents gross profit
related to our newly-formed health management business segment
which includes our recent acquisitions of QAS, Alere Medical,
ParadigmHealth and Matria. In addition to the gross profit from
services revenue generated by our health management businesses,
gross profit from services revenue also includes gross profit
generated by our professional drugs of abuse testing and
screening business, along with gross profit associated with our
long-term services agreement related to our consumer diagnostics
joint venture formed with P&G in May 2007, pursuant to
which we provide certain operational support services to the
joint venture. Our gross profit from services revenue was
$228.4 million in 2008 as compared to $11.4 million in
2007.
Gross Profit from Services Revenue by Business
Segment. Gross profit from services revenue was
$228.4 million and $11.4 million in 2008 and 2007,
respectively, and represents gross profit related to services
revenue associated with our newly-formed health management
business segment, which includes our recent
41
acquisitions of QAS, Alere Medical, ParadigmHealth and Matria,
our professional drugs of abuse testing and screening
businesses, and our long-term services agreement related to our
consumer diagnostics joint venture formed with P&G in May
2007. Gross profit from services revenue by segment for 2008 and
2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Professional diagnostics
|
|
$
|
14,380
|
|
|
$
|
|
|
Health management
|
|
|
211,627
|
|
|
|
8,903
|
|
Consumer diagnostics
|
|
|
2,357
|
|
|
|
2,482
|
|
|
|
|
|
|
|
|
|
|
Gross profit from services revenue
|
|
$
|
228,364
|
|
|
$
|
11,385
|
|
|
|
|
|
|
|
|
|
|
Professional
Diagnostics
Gross profit from services revenue for our professional
diagnostics business segment was $14.4 million in 2008 and
represents gross profit related to the services provided by our
professional drugs of abuse testing and screening business,
Redwood, which was acquired in December 2007.
As a percentage of our professional diagnostics services
revenue, gross margin for 2008 was 49%.
Health
Management
Gross profit from services revenue for our newly-formed health
management business segment was $211.6 million and
$8.9 million in 2008 and 2007, respectively, and represents
gross profit related to the services provided by our health
management businesses, primarily Alere Medical, ParadigmHealth,
QAS and Matria.
As a percentage of our health management services revenue, gross
margin for 2008 and 2007 was 57% and 63%, respectively.
Consumer
Diagnostics
Gross profit from services revenue for our consumer diagnostics
business segment was $2.4 million and $2.5 million in
2008 and 2007, respectively, and represents gross profit from
services revenue related to our long-term services agreements
with the joint venture, pursuant to which we provide certain
operational support services to the joint venture. We presently
do not allocate any cost of goods sold to the services revenue
related to this long-term service agreement. All costs for this
segment are recorded in the gross profit from net product sales.
Research and Development Expense. Research and
development expense increased by $42.3 million, or 61%, to
$111.8 million in 2008 from $69.5 million in 2007. The
year over year increase in research and development expense is
primarily the result of increased spending related to our
cardiology research programs, partially offset by the transition
of our consumer-related research and development efforts into
our 50/50 joint venture with P&G. Additionally, our funding
relationship with ITI was complete as of December 31, 2007
and, as such, no funding was earned during 2008. This funding
relationship was reflected as an offset to research and
development expense totaling $18.5 million during 2007.
Also included in research and development expense is
$4.6 million of stock-based compensation expense,
representing an increase of approximately $2.4 million from
2007. Restructuring charges associated with our various
restructuring plans to integrate our newly-acquired businesses
totaling $7.2 million were included in research and
development expense during 2008, representing an increase of
approximately $4.7 million from 2007. Amortization expense
of $3.7 million and $2.9 million was included in
research and development expense for 2008 and 2007, respectively.
Research and development expense as a percentage of net revenue
decreased to 7% for 2008, from 8% for 2007.
42
Purchase of In-Process Research and Development
(IPR&D). In connection with two
of our acquisitions since 2007, we have acquired various
IPR&D projects. Substantial additional research and
development will be required prior to any of our acquired
IPR&D programs and technology platforms reaching
technological feasibility. In addition, once research is
completed, each product candidate acquired will need to complete
a series of clinical trials and receive FDA or other regulatory
approvals prior to commercialization. Our current estimates of
the time and investment required to develop these products and
technologies may change depending on the different applications
that we may choose to pursue. We cannot give assurances that
these programs will ever reach technological feasibility or
develop into products that can be marketed profitably. For
example, we have discontinued funding certain of the programs
listed below. In addition, we cannot guarantee that we will be
able to develop and commercialize products before our
competitors develop and commercialize products for the same
indications. The following table sets forth IPR&D projects
for companies and certain assets we have acquired since 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used in
|
|
|
|
|
|
|
|
Company/
|
|
|
|
|
|
|
|
|
|
Estimating
|
|
|
Year of
|
|
|
Estimated
|
|
Year Assets
|
|
Purchase
|
|
|
|
|
|
|
|
Cash
|
|
|
Expected
|
|
|
Cost to
|
|
Acquired
|
|
Price
|
|
|
IPR&D(1)
|
|
|
Programs Acquired
|
|
Flows(1)
|
|
|
Launch
|
|
|
Complete
|
|
|
Diamics/2007
|
|
$
|
4,000
|
|
|
$
|
682
|
|
|
PapMap (Pap Screening Methods)
|
|
|
63
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
1,049
|
|
|
C-Map (Automated Pap Screening)
|
|
|
63
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
3,094
|
|
|
POC (Point of Care Systems)
|
|
|
63
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,825
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biosite/2007
|
|
$
|
1,800,000
|
|
|
$
|
13,000
|
|
|
Triage Sepsis Panel
|
|
|
15
|
%
|
|
|
2008-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
156,000
|
|
|
Triage NGAL
|
|
|
15
|
%
|
|
|
2008-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Management assumes responsibility for determining the valuation
of the acquired IPR&D projects. The fair value assigned to
IPR&D for each acquisition is estimated by discounting, to
present value, the cash flows expected once the acquired
projects have reached technological feasibility. The cash flows
are probability adjusted to reflect the risks of advancement
through the product approval process. In estimating the future
cash flows, we also considered the tangible and intangible
assets required for successful exploitation of the technology
resulting from the purchased IPR&D projects and adjusted
future cash flows for a charge reflecting the contribution to
value of these assets. |
Sales and Marketing Expense. Sales and
marketing expense increased by $218.5 million, or 130%, to
$386.3 million in 2008, from $167.8 million in 2007.
The increase in sales and marketing expense primarily relates to
additional spending related to newly-acquired businesses. Also
included in sales and marketing expense is $4.3 million of
stock-based compensation expense, representing an increase of
approximately $2.6 million from 2007. Partially offsetting
the increases was the favorable impact of the formation of our
50/50 joint
venture with P&G. Restructuring charges associated with our
various restructuring plans to integrate our newly-acquired
businesses totaling $4.2 million were included in sales and
marketing expense during 2008, representing an increase of
approximately $3.4 million from 2007. Amortization expense
of $148.6 million and $34.5 million was included in
sales and marketing expense for 2008 and 2007, respectively.
Sales and marketing expense as a percentage of net revenue
increased to 23% for 2008, from 20% for 2007.
General and Administrative Expense. General
and administrative expense increased by $140.2 million, or
89%, to $298.6 million in 2008, from $158.4 million in
2007. The increase in general and administrative expense relates
primarily to additional spending related to newly-acquired
businesses. Legal spending increased by approximately
$14.6 million in 2008, as compared to 2007. Also included
in general and administrative expense is $16.0 million of
stock-based compensation expense, representing a decrease of
approximately $36.9 million from 2007 which included a
charge of $45.2 million related to our acquisition of
43
Biosite. Partially offsetting the increases was the favorable
impact from the formation of our 50/50 joint venture with
P&G. Amortization expense of $18.4 million and
$0.3 million was included in general and administrative
expense for 2008 and 2007, respectively.
General and administrative expense as a percentage of net
revenue decreased to 18% for 2008, from 19% for 2007.
Interest Expense. Interest expense includes
interest charges and the amortization of deferred financing
costs associated with our debt issuances. Interest expense in
2007 also includes the write-off of deferred financing costs and
early termination fees associated with the repayment of
outstanding debt. Interest expense increased by
$18.1 million, or 22%, to $101.1 million in 2008, from
$83.0 million in 2007. The increase in interest expense in
2008 was due to higher average outstanding borrowing balances in
2008 and $6.6 million in interest expense related to the
accelerated present value accretion of our lease restoration
costs due to the early termination of our facility lease in
Bedford, England recorded in connection with our 2008
restructuring plans. Also contributing to the increase in 2008
was $0.8 million of interest expense recorded in connection
with a legal settlement with one of our distributors in June
2008. Interest expense for 2007 included the write-off of
$15.6 million of deferred financing costs and prepayment
premium related to the repayment of outstanding debt, in
conjunction with our financing arrangements related to our
Biosite acquisition.
Other Income (Expense), Net. Other income
(expense), net, includes interest income, realized and
unrealized foreign exchange gains and losses, and other income
and expense. The components and the respective amounts of other
income (expense), net, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Interest income
|
|
$
|
6,718
|
|
|
$
|
11,486
|
|
|
$
|
(4,768
|
)
|
Foreign exchange gains (losses), net
|
|
|
(897
|
)
|
|
|
(1,609
|
)
|
|
|
712
|
|
Other
|
|
|
(8,033
|
)
|
|
|
(1,103
|
)
|
|
|
(6,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
(2,212
|
)
|
|
$
|
8,774
|
|
|
$
|
(10,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net, for 2008 includes a
$12.5 million charge associated with an arbitration
decision, partially offset by $5.5 million of income
associated with settlements of prior years royalties
during 2008.
Other income (expense), net, for 2007 includes a foreign
exchange gain of $1.9 million realized on the settlement of
intercompany notes and $3.9 million in unrealized foreign
currency loss associated with a cash escrow established in
connection with the acquisition of BBI.
(Benefit) Provision for Income
Taxes. (Benefit) provision for income taxes
increased by $15.7 million, to a $16.7 million benefit
in 2008, from a $1.0 million benefit in 2007. The effective
tax rate in 2008 was 43%, compared to 0.4% in 2007. The increase
in the benefit for income taxes from 2007 to 2008 is primarily
related to the recognition of the benefit of losses in Germany,
Japan and the United Kingdom.
The primary components of the 2008 provision for income taxes
relates to U.S. federal and state income taxes, taxes on
foreign income and the recognition of benefit on German and U.K.
losses. The primary components of the 2007 provision for income
taxes relates to the recognition of benefit on U.S. and
U.K. losses, state income taxes and taxes on foreign income. We
recognized the benefit of U.S. net operating loss, or NOL,
carryforwards and other U.S. deferred tax assets due to the
U.S. non-current deferred tax liabilities recorded in
purchase accounting for 2007 acquisitions. During 2007, we
released approximately $83.0 million of valuation allowance
for these pre-acquisition U.S. deferred tax assets, which
was released to goodwill. Thereafter, we recognized a benefit or
recorded a provision, as appropriate, for the current year
U.S. losses.
Net Loss. We incurred a net loss of
$21.8 million in 2008, while we incurred a net loss of
$244.8 million in 2007. Net loss per common share available
to common stockholders was $0.46 per basic and diluted common
share in 2008, as compared to net loss of $4.75 per basic and
diluted common share in 2007. The net loss in 2008 and 2007
resulted from the various factors as discussed above. See
Note 15 of our
44
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K
for the calculation of net loss per common share.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
During 2007 and 2008, we entered the growing health management
market with our acquisitions of QAS, Alere Medical,
ParadigmHealth and more recently Matria. As a result of these
acquisitions, we formed our health management reporting unit in
2008. For presentation and comparative purposes certain amounts
for prior periods have been reclassified to conform to the
current period classification.
Net Product Sales. Net product sales increased
by $248.8 million, or 45%, to $800.9 million in 2007,
from $552.1 million in 2006. Excluding the favorable impact
of currency translation, net product sales in 2007 grew by
approximately $237.8 million, or 43%, over 2006. Of the
currency adjusted increase, revenue increased primarily as a
result of our acquisitions of: (i) First Check, in January
2007, which contributed revenue of $12.9 million,
(ii) Instant, in March 2007, which contributed revenue of
$22.8 million, (iii) Biosite, in June 2007, which
contributed revenue of $167.8 million,
(iv) Cholestech, in September 2007, which contributed
revenue of $24.1 million, (v) Bio-Stat Healthcare
Group, or Bio-Stat, in October 2007, which contributed revenue
of $8.1 million, (vi) HemoSense, in November 2007,
which contributed revenue of $3.5 million and
(vii) various less significant acquisitions, which
contributed an aggregate of $19.4 million of such increase.
Partially offsetting the increased revenue as a result of
acquisitions was the decrease in revenue associated with the
formation of our 50/50 joint venture with P&G on
May 17, 2007 in which we transferred substantially all of
the assets of our consumer diagnostics business, other than our
manufacturing and core intellectual property assets. Upon
completion of the transaction to form the joint venture, we
ceased to consolidate the operating results of our consumer
diagnostics business related to the joint venture and instead
account for our 50% interest in the results of the joint venture
under the equity method of accounting. We recorded
$76.1 million of net product sales in 2007 (through the
date the joint venture was formed), as compared to
$171.6 million of net product sales in 2006. During 2007,
we recorded $65.0 million of manufacturing revenue
associated with our manufacturing agreement with the joint
venture, whereby we manufacture and sell consumer diagnostics to
the joint venture. Organic growth, particularly from our
professional infectious disease and drugs of abuse products,
also contributed to the growth, as well as higher license and
royalty revenue.
Net Product Sales by Business Segment. Net
product sales by business segment for 2007 and 2006 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
2007
|
|
|
2006
|
|
|
(decrease)
|
|
|
Professional diagnostics
|
|
$
|
565,265
|
|
|
$
|
298,472
|
|
|
|
89
|
%
|
Health management
|
|
|
9,210
|
|
|
|
|
|
|
|
|
%
|
Consumer diagnostics
|
|
|
153,616
|
|
|
|
171,607
|
|
|
|
(11
|
)%
|
Vitamins and nutritional supplements
|
|
|
72,824
|
|
|
|
82,051
|
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
800,915
|
|
|
$
|
552,130
|
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Diagnostics
The increase in net product sales from our professional
diagnostics business segment was $266.8 million, or 88%,
comparing 2007 to 2006. Revenue increased primarily as a result
of our acquisitions of: (i) Instant, in March 2007, which
contributed revenue of $22.8 million, (ii) Biosite, in
June 2007, which contributed revenue of $167.8 million,
(iii) Cholestech, in September 2007, which contributed
revenue of $24.1 million,
(iv) Bio-Stat,
in October 2007, which contributed revenue of $8.1 million,
(v) HemoSense, in November 2007, which contributed revenue
of $3.5 million and (vi) various less significant
acquisitions, which contributed an aggregate of
$17.2 million of such increase. Organic growth,
particularly from our professional infectious disease and drugs
of abuse products, also contributed to the growth.
45
Health
Management
Effective January 1, 2008, we formed our health management
business segment which includes the activities of our recent
acquisitions of QAS, which was acquired in June 2007; Alere
Medical, which was acquired in November 2007; and
ParadigmHealth, which was acquired in December 2007. Net product
sales associated with our recently acquired health management
businesses was $9.2 million during 2007.
Consumer
Diagnostics
The decrease in net product sales from our consumer diagnostics
business segment was $18.0 million, or 11%, comparing 2007
to 2006. The decrease was primarily driven by the formation of
our 50/50 joint venture with P&G on May 17, 2007 in
which we transferred substantially all of the assets of our
consumer diagnostics business, other than our manufacturing and
core intellectual property assets. Upon completion of the
transaction to form the joint venture, we ceased to consolidate
the operating results of our consumer diagnostics business
related to the joint venture and instead account for our 50%
interest in the results of the joint venture under the equity
method of accounting. Net product sales of our consumer
diagnostics for 2007 included $65.0 million of
manufacturing revenue associated with our manufacturing
agreement with SPD, whereby we manufacture and sell consumer
diagnostics to the joint venture. Partially offsetting the
impact of the joint venture was $12.9 million of net
product sales from our First Check consumer drugs of abuse
product line which was acquired in January 2007.
Vitamins
and Nutritional Supplements
Our vitamins and nutritional supplements net product sales
decreased by $9.2 million, or 11%, comparing 2007 to 2006.
The decrease was driven primarily by our private label business.
Services Revenue. Services revenue of
$16.6 million in 2007 represents revenue related to our
health management businesses, Alere Medical, ParadigmHealth and
QAS, all of which were acquired during 2007.
Net Product Sales and Services Revenue by Geographic
Location. Net product sales and services revenue
by geographic location for 2007 and 2006 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
2007
|
|
|
2006
|
|
|
(decrease)
|
|
|
United States
|
|
$
|
511,941
|
|
|
$
|
323,046
|
|
|
|
58
|
%
|
Europe
|
|
|
196,379
|
|
|
|
134,528
|
|
|
|
46
|
%
|
Other
|
|
|
109,241
|
|
|
|
94,556
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales and services revenue
|
|
$
|
817,561
|
|
|
$
|
552,130
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales and services revenue of $511.9 million
and $323.0 million generated in the United States were
approximately 63% and 59%, respectively, of total net product
sales and services revenue for the year ended December 31,
2007 and 2006, respectively. The growth in net product sales and
services revenue in all geographic regions resulted from the
various acquisitions discussed above and organic growth,
partially offset by the decrease in revenue associated with the
formation of our 50/50 joint venture with P&G in May 2007.
License and Royalty Revenue. License and
royalty revenue represents license and royalty fees from
intellectual property license agreements with third parties.
License and royalty revenue increased by $4.7 million, or
27%, to $22.0 million in 2007, from $17.3 million in
2006. The increase primarily relates to $3.9 million of
royalty revenue contributed by Biosite, which was acquired in
June 2007. Additionally, incremental royalty revenue was derived
from new royalty agreements entered into during 2007, along with
increases associated with certain existing royalty agreements,
partially offset by decreases in other royalty agreements.
Gross Profit and Margin. Gross profit
increased by $164.5 million, or 72%, to $393.7 million
in 2007, from $229.2 million in 2006. Gross profit during
2007 benefited from higher than average margins earned on
revenue from our recently acquired businesses and from the
favorable impact of our low cost manufacturing
46
facilities in China. Included in cost of net revenue in 2007
were restructuring charges totaling $2.0 million associated
with our joint venture related restructuring plans, a charge of
$8.2 million associated with the
write-up of
inventory acquired to fair value in connection with our
acquisitions of Biosite, Cholestech and HemoSense, and
$0.6 million of stock-based compensation expense.
Additionally, gross profit in 2007 was unfavorably impacted by
the formation of our 50/50 joint venture with P&G. Included
in cost of net revenue during 2006 was a restructuring charge of
$9.5 million related to the closure of our ABI operation in
San Diego, California, along with the write-off of fixed
assets at other facilities impacted by our 2006 restructuring
plans and the closure of CDIL, our manufacturing facility in
Galway, Ireland. Cost of net revenue during 2006 also included a
$0.4 million charge for stock-based compensation expense.
Cost of net revenue included amortization expense of
$24.0 million and $11.2 million in 2007 and 2006,
respectively.
Overall gross margin was 47% in 2007, compared to 40% in 2006.
Gross Profit from Net Product Sales by Business
Segment. Gross profit from net product sales
represents total gross profit less gross profit associated with
services revenue and license and royalty revenue. Gross profit
from net product sales increased by $152.2 million to
$369.5 million in 2007, from $217.3 million in 2006.
Gross profit from net product sales by business segment for 2007
and 2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
2007
|
|
|
2006
|
|
|
(decrease)
|
|
|
Professional diagnostics
|
|
$
|
306,710
|
|
|
$
|
129,636
|
|
|
|
137
|
%
|
Health management
|
|
|
3,076
|
|
|
|
|
|
|
|
|
%
|
Consumer diagnostics
|
|
|
52,760
|
|
|
|
82,658
|
|
|
|
(36
|
)%
|
Vitamins and nutritional supplements
|
|
|
6,966
|
|
|
|
5,037
|
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from net product sales
|
|
$
|
369,512
|
|
|
$
|
217,331
|
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Diagnostics
Gross profit from our professional diagnostics net product sales
increased by $177.1 million, or 137%, comparing 2007 to
2006, principally as a result of gross profit earned on revenue
from acquired businesses, as discussed above, which contributed
higher than average gross profits. The higher than average
profits were partially offset by an $8.2 million charge
associated with the
write-up of
inventory acquired to fair value in connection with our
acquisitions of Biosite, Cholestech and HemoSense,
$0.5 million in restructuring charges and $0.3 million
of stock-based compensation expense. Reducing gross profit for
2006 was a $7.2 million restructuring charge associated
with managements decision to close our ABI operations in
San Diego, California.
As a percentage of our professional diagnostics net product
sales, gross profit from our professional diagnostics business
was 54% in 2007, compared to 43% in 2006.
Health
Management
Effective January 1, 2008, we formed our health management
business segment which includes the activities of our recent
acquisitions of QAS, which was acquired in June 2007; Alere
Medical, which was acquired in November 2007; and
ParadigmHealth, which was acquired in December 2007. Net product
sales associated with our recently-acquired health management
businesses was $3.1 million during 2007.
As a percentage of our health management net product sales,
gross margin for 2007 was 33%.
Consumer
Diagnostics
Gross profit from our consumer diagnostics net product sales
decreased $29.9 million, or 36%, comparing 2007 to 2006.
The decrease is primarily a result of the formation of our 50/50
joint venture with P&G for our consumer diagnostics
business in May 2007, partially offset by the gross profit
earned on revenue from acquired businesses, primarily our First
Check acquisition, as discussed above; the 5%
mark-up on
products
47
sold under our manufacturing agreement with the joint venture, a
restructuring charge of $1.5 million associated with the
decision to close facilities and the formation of our joint
venture with P&G and $0.3 million of stock-based
compensation expense. Gross profit for 2006 was adversely
impacted by restructuring charges totaling $2.2 million
related to the closure of our CDIL manufacturing facility and
$0.4 million of stock-based compensation expense.
As a percentage of our consumer diagnostics net product sales,
gross profit from our consumer diagnostics business was 34% for
2007, compared to 48% in 2006.
Vitamins
and Nutritional Supplements
Gross profit from our vitamins and nutritional supplements net
product sales increased $1.9 million, or 38%, comparing
2007 to 2006. The increase is primarily the result of improved
customer mix, improved factory utilization and our cost
reduction initiatives in our private label manufacturing
business.
As a percentage of our vitamins and nutritional supplements net
product sales, gross profit from our vitamins and nutritional
supplements business was 10% in 2007, compared to 6% in 2006.
Gross Profit from Services Revenue. Gross
profit from services revenue was $11.4 million in 2007, and
represents gross profit related to services revenue associated
with our newly-formed health management business segment, which
includes our recent acquisitions of QAS, Alere Medical,
ParadigmHealth and Matria, our professional drugs of abuse
testing and screening businesses, and our long-term services
agreement related to our consumer diagnostics joint venture
formed with P&G in May 2007.
Research and Development Expense. Research and
development expense increased by $20.8 million, or 43%, to
$69.5 million in 2007, from $48.7 million in 2006.
Research and development expense in 2007 and 2006 is reported
net of co-development funding of $18.5 million and
$16.6 million, respectively, arising from the
co-development funding arrangement that we entered into with ITI
in February 2005. The year over year increase in research and
development expense is primarily the result of increased
spending related to our cardiology research programs,
$21.5 million of spending related to our 2007 acquisitions,
partially offset by the transition of our consumer-related
research and development efforts into our 50/50 joint venture
with P&G in the second quarter of 2007. Also included in
research and development expense is $2.2 million of
stock-based compensation expense, representing an increase of
approximately $0.8 million from 2006. Restructuring charges
associated with the formation of our 50/50 joint venture and our
2007 restructuring plan to integrate our newly-acquired
businesses totaling $2.5 million were included in research
and development expense during 2007. Amortization expense of
$2.9 million and $3.3 million was included in research
and development expense for 2007 and 2006, respectively.
Research and development expense as a percentage of net product
revenue decreased to 9% for 2007, from 10% for 2006.
Purchase of In-Process Research and Development
(IPR&D). In connection with
three of our acquisitions since 2006, we have acquired various
IPR&D projects. Substantial additional research and
development will be required prior to any of our acquired
IPR&D programs and technology platforms reaching
technological feasibility. In addition, once research is
completed, each product candidate acquired will need to complete
a series of clinical trials and receive FDA or other regulatory
approvals prior to commercialization. Our current estimates of
the time and investment required to develop these products and
technologies may change depending on the different applications
that we may choose to pursue. We cannot give assurances that
these programs will ever reach technological feasibility or
develop into products that can be marketed profitably. For
example, we have discontinued funding certain of the programs
listed below. In addition, we cannot guarantee that we will be
able to develop and commercialize products before our
competitors develop and commercialize products for the same
indications. If products based on our acquired IPR&D
programs and technology platforms do not become commercially
viable, our results of operations
48
could be materially adversely affected. The following table sets
forth IPR&D projects for companies and certain assets we
have acquired since 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used in
|
|
|
|
|
|
|
|
Company/
|
|
|
|
|
|
|
|
|
|
Estimating
|
|
|
Year of
|
|
|
Estimated
|
|
Year Assets
|
|
Purchase
|
|
|
|
|
|
|
|
Cash
|
|
|
Expected
|
|
|
Cost to
|
|
Acquired
|
|
Price
|
|
|
IPR&D(1)
|
|
|
Programs Acquired
|
|
Flows(1)
|
|
|
Launch
|
|
|
Complete
|
|
|
Diamics/2007
|
|
$
|
4,000
|
|
|
$
|
682
|
|
|
PapMap (Pap Screening Methods)
|
|
|
63
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
1,049
|
|
|
C-Map (Automated Pap Screening)
|
|
|
63
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
3,094
|
|
|
POC (Point of Care Systems)
|
|
|
63
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,825
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biosite/2007
|
|
$
|
1,800,000
|
|
|
$
|
13,000
|
|
|
Triage Sepsis Panel
|
|
|
15
|
%
|
|
|
2008-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
156,000
|
|
|
Triage NGAL
|
|
|
15
|
%
|
|
|
2008-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clondiag/2006
|
|
$
|
24,000
|
|
|
$
|
1,800
|
|
|
CHF (Congestive Heart Failure)
|
|
|
37
|
%
|
|
|
2008-2009
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
ACS (Acute Coronary Syndrome)
|
|
|
37
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
660
|
|
|
HIV (Human Immuno-deficiency Virus)
|
|
|
37
|
%
|
|
|
2008-2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,960
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Management assumes responsibility for determining the valuation
of the acquired IPR&D projects. The fair value assigned to
IPR&D for each acquisition is estimated by discounting, to
present value, the cash flows expected once the acquired
projects have reached technological feasibility. The cash flows
are probability adjusted to reflect the risks of advancement
through the product approval process. In estimating the future
cash flows, we also considered the tangible and intangible
assets required for successful exploitation of the technology
resulting from the purchased IPR&D projects and adjusted
future cash flows for a charge reflecting the contribution to
value of these assets. |
Sales and Marketing Expense. Sales and
marketing expense increased by $73.3 million, or 78%, to
$167.8 million in 2007, from $94.4 million in 2006.
The increase in sales and marketing expense is primarily the
result of approximately $56.1 million of additional
spending related to newly-acquired businesses, primarily
Biosite, Instant, Cholestech and the various less significant
acquisitions. Also included in sales and marketing expense is
$1.7 million of stock-based compensation expense,
representing an increase of approximately $1.0 million from
2006. Partially offsetting the increases was the favorable
impact of the formation of our 50/50 joint venture with
P&G. Amortization expense of $36.9 million and
$6.8 million was included in sales and marketing expense
for 2007 and 2006, respectively.
Sales and marketing expense as a percentage of net product sales
and services revenue increased to 21% for 2007, from 17% for
2006.
General and Administrative Expense. General
and administrative expense increased by $87.2 million, or
122%, to $158.4 million in 2007, from $71.2 million in
2006. The increase in general and administrative expense is
primarily the result of approximately $26.9 million of
additional spending related to newly-acquired businesses,
primarily Biosite, Instant, Cholestech and the various less
significant acquisitions. Also included in general and
administrative expense is $53.0 million of stock-based
compensation expense, representing an increase of approximately
$50.0 million from 2006. The $53.0 million stock-based
compensation expense includes a one-time charge of
$45.2 million associated with the stock option acceleration
and conversion in connection with the acquisition of Biosite.
Partially offsetting the increases was the favorable impact of
the formation of our 50/50 joint venture with P&G.
Amortization expense of $0.3 million and $0.4 million
was included in general and administrative expense for 2007 and
2006, respectively.
General and administrative expense as a percentage of net
product sales and services revenue increased to 19% for 2007,
from 13% for 2006.
49
Interest Expense. Interest expense in 2007
includes interest charges, amortization of deferred financing
costs, prepayment premiums and the amortization of non-cash
discounts associated with our debt issuances. Interest expense
for 2006 includes interest charges, the write-off and
amortization of deferred financing costs and the amortization of
non-cash discounts associated with our debt issuances in 2004.
Interest expense increased by $56.4 million, or 212%, to
$83.0 million in 2007, from $26.6 million in 2006.
Interest expense increased in 2007 as a result of higher debt
balances than in the prior period. Additionally, in 2007 we
recorded a write-off of $15.6 million of deferred financing
costs and prepayment premium related to the repayment of
outstanding debt, in conjunction with our financing arrangements
related to our Biosite acquisition. In 2006, we recorded a
charge of $1.3 million related to prepayment penalties and
the write-off of debt origination costs resulting from the early
repayment of our $20.0 million, 10% subordinated
promissory notes on September 8, 2006.
Other Income (Expense), Net. Other income
(expense), net, includes interest income, realized and
unrealized foreign exchange gains and losses, and other income
and expense. The components and the respective amounts of other
income (expense), net, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Interest income
|
|
$
|
11,486
|
|
|
$
|
1,693
|
|
|
$
|
9,793
|
|
Foreign exchange gains (losses), net
|
|
|
(1,609
|
)
|
|
|
2,643
|
|
|
|
(4,252
|
)
|
Other
|
|
|
(1,103
|
)
|
|
|
4,412
|
|
|
|
(5,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
8,774
|
|
|
$
|
8,748
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net, for 2007 includes a foreign
exchange gain of $1.9 million realized on the settlement of
intercompany notes and $3.9 million in unrealized foreign
currency loss associated with a cash escrow established in
connection with the acquisition of BBI.
Other income (expense), net, for 2006 includes a foreign
exchange gain of $4.3 million associated with the closure
of our Galway, Ireland manufacturing operation and
$4.7 million in other income, related to the portion of our
settlement with Vedalab S.A., or Vedalab relating to periods
prior to 2006.
(Benefit) Provision for Income
Taxes. (Benefit) provision for income taxes
decreased by $6.7 million, to a $1.0 million benefit
in 2007, from a $5.7 million provision in 2006. The
effective tax rate in 2007 was 0.4%, compared to (52)% in 2006.
The decrease in the provision for income taxes from 2006 to 2007
is primarily related to the recognition of the benefit of
current year losses in the U.S. and the United Kingdom.
The primary components of the 2007 provision for income taxes
relates to the recognition of benefit on U.S. and U.K.
losses, state income taxes, and taxes on foreign income. We
recognized the benefit of U.S. NOL carryforwards and other
U.S. deferred tax assets due to the U.S. non-current
deferred tax liabilities recorded in purchase accounting for
2007 acquisitions. We released approximately $83.0 million
of valuation allowance for these U.S. deferred tax assets,
which was released to goodwill. Thereafter, we recognized a
benefit for the current year U.S. losses. The primary
components of the 2006 provision for income taxes are related to
the recognition of U.S. deferred tax liabilities for
temporary differences between the book and tax bases of goodwill
and certain intangible assets with indefinite lives and to taxes
on foreign income.
Net Loss. We incurred a net loss of
$244.8 million in 2007, while we incurred a net loss of
$16.8 million in 2006. Net loss per common share available
to common stockholders was $4.75 per basic and diluted common
share in 2007, as compared to net loss of $0.49 per basic and
diluted common share in 2006. The net loss in 2007 and 2006
resulted from the various factors as discussed above. See
Note 15 of our consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K
for the calculation of net loss per common share.
Liquidity
and Capital Resources
Based upon our current working capital position, current
operating plans and expected business conditions, we currently
expect to fund our short and long-term working capital needs and
other commitments primarily through our operating cash flow, and
we expect our working capital position to improve as we
50
improve our operating margins and grow our business through new
product introductions and by continuing to leverage our strong
intellectual property position. At this point in time, our
liquidity has not been materially impacted by the recent and
unprecedented disruption in the current capital and credit
markets and we do not expect that it will be materially impacted
in the near future. However, because of the unprecedented nature
and severity of the ongoing financial crisis in the capital and
credit markets, we cannot predict with certainty the ultimate
impact of these events on us. We will therefore continue to
closely monitor our liquidity and capital resources.
In addition, we may also utilize our revolving credit facility,
or other sources of financing, to fund a portion of our capital
needs and other future commitments, including future
acquisitions. If the capital and credit markets continue to
experience volatility and the availability of funds remains
limited, we may incur increased costs associated with issuing
commercial paper
and/or other
debt instruments. In addition, it is possible that our ability
to access the capital and credit markets may be limited by these
or other factors at a time when we would like, or need, to do
so, which could have an impact on our ability to refinance
maturing debt
and/or react
to changing economic and business conditions.
Our funding plans for our working capital needs and other
commitments may be adversely impacted by unexpected costs
associated with prosecuting and defending our existing lawsuits
and/or
unforeseen lawsuits against us, integrating the operations of
newly-acquired companies and executing our cost savings
strategies. We also cannot be certain that our underlying
assumed levels of revenues and expenses will be realized. In
addition, we intend to continue to make significant investments
in our research and development efforts related to the
substantial intellectual property portfolio we own. We may also
choose to further expand our research and development efforts
and may pursue the acquisition of new products and technologies
through licensing arrangements, business acquisitions, or
otherwise. We may also choose to make significant investment to
pursue legal remedies against potential infringers of our
intellectual property. If we decide to engage in such
activities, or if our operating results fail to meet our
expectations, we could be required to seek additional funding
through public or private financings or other arrangements. In
such event, adequate funds may not be available when needed, or,
may be available only on terms which could have a negative
impact on our business and results of operations. In addition,
if we raise additional funds by issuing equity or convertible
securities, dilution to then existing stockholders may result.
As of December 31, 2008, in addition to other indebtedness,
we had approximately $1.1 billion in aggregate principal
amount of indebtedness outstanding under our First Lien Credit
Agreement, $250.0 million in aggregate principal amount of
indebtedness outstanding under our Second Lien Credit Agreement
(collectively with the First Lien Credit Agreement, the secured
credit facilities), and $150.0 million in indebtedness
under our outstanding 3% senior subordinated convertible
notes, or the senior subordinated convertible notes. Included in
the secured credit facilities is a revolving line-of-credit of
$150.0 million, of which $142.0 million was
outstanding as of December 31, 2008.
Interest on our First Lien indebtedness, as defined in the
credit agreement, is as follows: (i) in the case of Base
Rate Loans, at a rate per annum equal to the sum of the Base
Rate and the Applicable Margin, each as in effect from time to
time, (ii) in the case of Eurodollar Rate Loans, at a rate
per annum equal to the sum of the Eurodollar Rate and the
Applicable Margin, each as in effect for the applicable Interest
Period, and (iii) in the case of other Obligations, at a
rate per annum equal to the sum of the Base Rate and the
Applicable Margin for Revolving Loans that are Base Rate Loans,
each as in effect from time to time. The Base Rate is a floating
rate which approximates the U.S. Prime rate and changes on
a periodic basis. The Eurodollar Rate is equal to the LIBOR rate
and is set for a period of one to three months at our election.
Applicable margin with respect to Base Rate Loans is 1.00% and
with respect to Eurodollar Rate Loans is 2.00%. Applicable
margin ranges for our revolving line-of-credit with respect to
Base Rate Loans is 0.75% to 1.25% and with respect to Eurodollar
Rate Loans is 1.75% to 2.25%.
The outstanding indebtedness under the Second Lien Credit
Agreement is a term loan in the amount of $250.0 million.
Interest on this term loan, as defined in the credit agreement,
is as follows: (i) in the case of Base Rate Loans, at a
rate per annum equal to the sum of the Base Rate and the
Applicable Margin, each as in effect from time to time,
(ii) in the case of Eurodollar Rate Loans, at a rate per
annum equal to the sum of
51
the Eurodollar Rate and the Applicable Margin, each as in effect
for the applicable Interest Period, and (iii) in the case
of other Obligations, at a rate per annum equal to the sum of
the Base Rate and the Applicable Margin for Base Rate Loans, as
in effect from time to time. Applicable margin with respect to
Base Rate Loans is 3.25% and with respect to Eurodollar Rate
Loans is 4.25%.
For the year ended December 31, 2008, interest expense,
including amortization of deferred financing costs, under the
secured credit facilities was $85.2 million. As of
December 31, 2008, accrued interest related to the secured
credit facilities amounted to $3.4 million. As of
December 31, 2008, we were in compliance with all debt
covenants related to the above debt, which consisted principally
of maximum consolidated leverage and minimum interest coverage
requirements.
Interest expense related to our senior subordinated convertible
notes for the year ended December 31, 2008, including
amortization of deferred financing costs, was $5.0 million.
As of December 31, 2008, accrued interest related to the
senior subordinated convertible notes amounted to
$0.6 million.
In August 2007, we entered into interest rate swap contracts,
with an effective date of September 28, 2007, that have a
total notional value of $350.0 million and have a maturity
date of September 28, 2010. These interest rate swap
contracts pay us variable interest at the three-month LIBOR
rate, and we pay the counterparties a fixed rate of 4.85%. These
interest rate swap contracts were entered into to convert
$350.0 million of the $1.2 billion variable rate term
loan under the secured credit facility into fixed rate debt.
In January 2009, we entered into interest rate swap contracts,
with an effective date of January 14, 2009, that have a
total notional value of $500.0 million and have a maturity
date of January 5, 2011. These interest rate swap contracts
pay us variable interest at the one-month LIBOR rate, and we pay
the counterparties a fixed rate of 1.195%. These interest rate
swap contracts were entered into to convert $500.0 million
of the $1.2 billion variable rate term loan under the
secured credit facility into fixed rate debt.
As of December 31, 2008, we had 1.9 million shares of
our Series B preferred stock issued and outstanding. Upon a
conversion of these shares of Series B preferred stock, we
may, at our option and in our sole discretion, satisfy the
entire conversion obligation in cash, or through a combination
of cash and common stock, to the extent permitted under our
secured credit facilities and under Delaware law.
Summary
of Changes in Cash Position
As of December 31, 2008, we had cash and cash equivalents
of $141.3 million, a $273.4 million decrease from
December 31, 2007. Our primary sources of cash during the
year ended December 31, 2008 included $147.8 million
generated by our operating activities, $20.7 million from
common stock issues under employee stock option and stock
purchase plans, $137.2 million from borrowing under of
existing credit facilities, and a decrease of
$139.2 million in restricted cash. Investing activities
during the year ended December 31, 2008 used a total of
$713.3 million of cash, net of cash acquired, primarily
related to our acquisition activities and capital expenditures.
Our financing activities, aside from the decrease in restricted
cash, proceeds from borrowings under our secured credit
facilities and cash received from common stock issues under
employee stock option and stock purchase plans, used
$15.1 million of cash related to repayments under our
secured credit facilities and capital lease obligations.
Fluctuations in foreign currencies negatively impacted our cash
balance by $5.7 million during the year ended
December 31, 2008.
Operating
Cash Flows
Net cash provided by operating activities during the year ended
December 31, 2008 was $147.8 million, which resulted
from $287.0 million of non-cash items, offset by our net
loss of $21.8 million and $117.4 million of cash used
to meet net working capital requirements during the period. The
$287.0 million of non-cash items included
$267.9 million related to depreciation and amortization,
$24.2 million related to the impairment of assets,
$26.4 million related to non-cash stock-based compensation
expense and $5.9 million related to the amortization of
deferred financing costs, partially offset by a
$41.8 million decrease related to the recognition of a tax
benefit for current year losses and a $1.1 million decrease
related to equity investments in unconsolidated entities.
52
Investing
Cash Flows
Our investing activities during the year ended December 31,
2008 utilized $713.3 million of cash, including
$649.9 million used for acquisitions and
transaction-related costs, net of cash acquired,
$65.0 million of capital expenditures, net of proceeds from
sale of equipment, partially offset by a $1.6 million
decrease in investments and other assets, which included an
$11.2 million return of cash from our 50/50 joint venture
with P&G.
The acquisitions of Matria, BBI and Panbio during 2008 accounted
for approximately $576.5 million of the $649.9 million
of cash used for acquisitions.
Financing
Cash Flows
Net cash provided by financing activities during the year ended
December 31, 2008 was $297.8 million. During 2007, in
connection with our acquisition of BBI, a restricted cash
balance was created in the amount of approximately
$140.5 million. Subsequent to the acquisition of BBI in
February 2008, this cash balance became unrestricted and
available for future financing-related activities. Additionally,
financing activities provided $20.7 million from issuance
of common stock under employee stock option and stock purchase
plans, as well as $137.2 million from borrowings under
existing credit facilities.
As of December 31, 2008, we had an aggregate of
$1.0 million in outstanding capital lease obligations which
are payable through 2013.
Income
Taxes
As of December 31, 2008, we had approximately
$256.6 million of domestic NOL carryforwards and
$15.9 million of foreign NOL carryforwards, respectively,
which either expire on various dates through 2027 or may be
carried forward indefinitely. These losses are available to
reduce federal, state and foreign taxable income, if any, in
future years. These losses are also subject to review and
possible adjustments by the applicable taxing authorities. In
addition, the domestic NOL carryforward amount at
December 31, 2008 included approximately
$199.2 million of pre-acquisition losses at Matria, Alere
Medical, Paradigm Health, Biosite, Cholestech, Diamics, Inc., or
Diamics, HemoSense, IMN, Ischemia and Ostex. Prior to adoption
of Statement of Financial Accounting Standards
(SFAS)
No. 141-R,
Business Combinations, these losses were applied first to
reduce to zero any goodwill and other non-current intangible
assets related to the acquisitions, prior to reducing our income
tax expense. Upon adoption of
SFAS No. 141-R
the reduction of a valuation allowance is generally recorded to
reduce our income tax expense. Also included in our domestic NOL
carryforwards at December 31, 2008 is approximately
$17.5 million resulting from the exercise of employee stock
options, the tax benefit of which, when recognized, will be
accounted for as a credit to additional paid-in capital rather
than a reduction of income tax.
Furthermore, all domestic losses are subject to the Internal
Revenue Service Code Section 382 limitation and may be
limited in the event of certain cumulative changes in ownership
interests of significant shareholders over a three-year period
in excess of 50%. Section 382 imposes an annual limitation
on the use of these losses to an amount equal to the value of
the company at the time of the ownership change multiplied by
the long term tax exempt rate. We have recorded a valuation
allowance against a portion of the deferred tax assets related
to our NOLs and certain of our other deferred tax assets
to reflect uncertainties that might affect the realization of
such deferred tax assets, as these assets can only be realized
via profitable operations.
Off-Balance
Sheet Arrangements
We had no material off-balance sheet arrangements as of
December 31, 2008.
53
Contractual
Obligations
The following table summarizes our principal contractual
obligations as of December 31, 2008 and the effects such
obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
Thereafter
|
|
|
Long-term debt obligations(1)
|
|
$
|
1,519,615
|
|
|
$
|
19,058
|
|
|
$
|
26,530
|
|
|
$
|
20,027
|
|
|
$
|
1,454,000
|
|
Capital lease obligations(2)
|
|
|
973
|
|
|
|
495
|
|
|
|
446
|
|
|
|
32
|
|
|
|
|
|
Operating lease obligations(3)
|
|
|
94,382
|
|
|
|
25,377
|
|
|
|
34,539
|
|
|
|
20,996
|
|
|
|
13,470
|
|
Long-term and other liabilities(4)
|
|
|
3,403
|
|
|
|
469
|
|
|
|
938
|
|
|
|
938
|
|
|
|
1,058
|
|
Minimum royalty obligations
|
|
|
220
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related obligations(5)
|
|
|
6,473
|
|
|
|
5,428
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
Purchase obligations capital expenditure
|
|
|
17,492
|
|
|
|
17,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations other(6)
|
|
|
69,763
|
|
|
|
68,996
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
Interest on debt(7)
|
|
|
33,177
|
|
|
|
4,500
|
|
|
|
9,000
|
|
|
|
9,000
|
|
|
|
10,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,745,498
|
|
|
$
|
142,035
|
|
|
$
|
73,265
|
|
|
$
|
50,993
|
|
|
$
|
1,479,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See description of various financing arrangements in this
section and Note 6 of our consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K. |
|
(2) |
|
See Note 8 of our consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K. |
|
(3) |
|
See Note 11(a) of our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K. |
|
(4) |
|
Included in long-term and other liabilities are
$0.2 million in technology license payment obligations and
$3.4 million in pension obligations. Our liability
associated with Financial Accounting Standards Board
(FASB) Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
109, has not been included in the table above, as we
estimate payments annually. |
|
(5) |
|
Amounts represent obligations associated with our acquisitions
which are discussed in more detail below. |
|
(6) |
|
Other purchase obligations relate to inventory purchases and
other operating expense commitments. |
|
(7) |
|
Amounts are based on $150.0 million senior subordinated
notes. Amounts exclude interest on all other debt due to
variable interest rates. See Note 6 of our consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K. |
We have contingent consideration contractual terms related to
our acquisitions of Alere Medical, Ameditech, Binax, Inc., or
Binax, Bio-Stat, CLONDIAG chip technologies GmbH, or Clondiag,
Diamics, First Check, Gabmed GmbH, or Gabmed, Global Diagnostics
CC, or Global , Matritech, Promesan S.r.l., or Promesan,
Spectral Diagnostics Private Limited and its affiliate Source
Diagnostics (India) Private Limited, or Spectral/Source, Vision
Biotech Pty Ltd, or Vision and our most recently acquired
healthcare business. With the exception of Alere Medical, the
contingent considerations will be accounted for as increases in
the aggregate purchase prices if and when the contingencies
occur.
With respect to Alere Medical, the terms of the acquisition
agreement provided for contingent consideration payable to each
Alere Medical stockholder who owned shares of our common stock
or retained the option to purchase shares of our common stock on
the six-month anniversary of the closing of the acquisition. The
contingent consideration, payable in cash or stock at our
election, was equal to the number of such shares of our common
stock or options to purchase our common stock held on the
six-month anniversary multiplied by the amount that $58.31
exceeded the greater of the average price of our common stock
for the ten business days preceding the six-month anniversary
date, or 75% of $58.31. Accordingly, based on the price of our
common stock for the ten business days preceding the six-month
anniversary of the closing of the
54
acquisition, we issued approximately 0.1 million shares of
our common stock on May 30, 2008 to the Alere Medical
stockholders based on the remaining outstanding shares at that
time. Payment of this contingent consideration did not impact
the purchase price for this acquisition.
With respect to Ameditech, the terms of the acquisition
agreement require us to pay an earn-out upon successfully
meeting certain revenue targets for the one-year period ending
on the first anniversary of the acquisition date and the
one-year period ending on the second anniversary of the
acquisition date. The maximum amount of incremental
consideration payable is $4.0 million.
With respect to Binax, the terms of the acquisition agreement
provide for $11.0 million of contingent cash consideration
payable to the Binax shareholders upon the successful completion
of certain new product developments during the five years
following the acquisition. As of December 31, 2008, the
remaining contingent consideration to be earned is approximately
$7.3 million.
With respect to Bio-Stat, the terms of the acquisition provided
for contingent consideration payable in the form of loan notes
to the Bio-Stat shareholders, if certain EBITDA (earnings before
interest, taxes, depreciation and amortization) milestones were
met for 2007. The EBITDA milestones were met in 2007 and loan
notes totaling £3.4 million ($6.2 million) were
issued during the third quarter of 2008. As of December 31,
2008, the loan notes remain outstanding with an approximate
value of $4.9 million.
With respect to Clondiag, the terms of the acquisition agreement
provided for $8.9 million of contingent consideration,
consisting of approximately 0.2 million shares of our
common stock and approximately $3.0 million of cash or
stock in the event that four specified products were developed
on Clondiags platform technology during the three years
following the acquisition date. Successful completion of the
second milestone occurred during the first quarter of 2008 for
which we made a payment for $0.9 million and issued
56,080 shares of our common stock during the first quarter
of 2008. Successful completion of the third and fourth
milestones occurred during the third quarter of 2008 for which
we made payment for $1.6 million and issued
0.1 million shares of our common stock during the fourth
quarter of 2008. No further milestones exist.
With respect to Diamics, the terms of the acquisition agreement
provide for contingent consideration payable upon the successful
completion of certain milestones, including development of
business plans and marketable products. As of December 31,
2008, the remaining contingent consideration to be earned is
approximately $2.3 million.
With respect to First Check, the terms of the acquisition
agreement required us to pay an earn-out to First Check equal to
the incremental revenue growth of the acquired products for 2007
and for the first nine months of 2008, as compared to the
immediately preceding comparable periods. The
2007 milestone, totaling $2.2 million, was met and
accrued as of December 31, 2007 and was paid during the
first quarter of 2008. The 2008 milestone, totaling
$0.3 million, was met and accrued during the third quarter
of 2008 and was paid in the fourth quarter of 2008. No further
milestones exist.
With respect to Gabmed, the terms of the acquisition agreement
provide for contingent consideration totaling up to
750,000 payable in up to five annual amounts beginning in
2007, upon successfully meeting certain revenue and EBIT
(earnings before interest and taxes) milestones in each of the
respective annual periods. The 2007 milestone, totaling
0.1 million ($0.2 million), was met and accrued
as of June 30, 2008 and was paid during the third quarter
of 2008.
With respect to Global, the terms of the acquisition agreement
provided for contingent consideration payable upon successfully
meeting certain revenue targets in 2008. As of December 31,
2008, the 2008 revenue targets were met resulting in accrued
contingent consideration totaling $0.2 million. No further
milestones exist.
With respect to Matritech, the terms of the acquisition
agreement required us to pay an earn-out to the former Matritech
shareholders upon successfully meeting certain revenue targets
in 2008. As of December 31, 2008, the milestones were not
achieved. No further milestones exits.
With respect to Promesan, the terms of the acquisition agreement
provide for contingent consideration payable upon successfully
meeting certain annual revenue targets. Total contingent
consideration of up to
55
0.6 million is payable in three equal annual amounts
of 0.2 million beginning in 2007 and ending in 2009.
The 2007 milestone, totaling 0.2 million
($0.3 million), was met and accrued as of December 31,
2007 and was paid during the first quarter of 2008. The
2008 milestone, totaling 0.2 million
($0.3 million), was met and accrued as of December 31,
2008.
With respect to Spectral/Source, the terms of the acquisition
agreement required us to pay an earn-out equal to two times the
consolidated revenue of Spectral/Source less $4.0 million,
if the consolidated profits before tax of Spectral/Source was at
least $0.9 million on the one year anniversary
(milestone period) following the acquisition date.
If consolidated profits before tax of Spectral/Source for the
milestone period were less than $0.9 million, then the
amount of the payment would be equal to seven times
Spectral/Sources consolidated profits before tax less
$4.0 million. The contingent consideration was payable 60%
in cash and 40% in stock. The revenue and profit milestones were
met and accrued during the fourth quarter of 2008 for which we
made payment for $1.6 million and issued 53,372 shares
of our common stock during the fourth quarter of 2008. No
further milestones exist.
With respect to Vision, the terms of the acquisition agreement
provide for incremental consideration payable to the former
Vision shareholders. The maximum amount of incremental
consideration payable is approximately $3.2 million, of
which $1.0 million is guaranteed and accrued as of
December 31, 2008. The remaining contingent consideration
is payable upon the completion of certain milestones and
successfully maintaining certain production levels and product
costs during each of the two years following the acquisition
date. As of December 31, 2008, no milestones have been met.
With respect to our most recently acquired healthcare business,
the terms of the acquisition agreement provide for contingent
consideration payable upon successfully meeting certain revenue
and EBITDA targets for the twelve months ending June 30,
2009 and December 31, 2010, respectively. We accrued a
liability in the amount of $3.8 million to avoid
recognition of negative goodwill, as a result of not recognizing
additional purchase price consideration that is contingent on
future events. As of December 31, 2008, the
$3.8 million liability remains accrued.
Critical
Accounting Policies
The consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K
are prepared in accordance with accounting principles generally
accepted in the United States of America, or GAAP. The
accounting policies discussed below are considered by our
management and our audit committee to be critical to an
understanding of our financial statements because their
application depends on managements judgment, with
financial reporting results relying on estimates and assumptions
about the effect of matters that are inherently uncertain.
Specific risks for these critical accounting policies are
described in the following paragraphs. For all of these
policies, management cautions that future events rarely develop
exactly as forecast and the best estimates routinely require
adjustment. In addition, the notes to our audited consolidated
financial statements for the year ended December 31, 2008
included elsewhere in this Annual Report on
Form 10-K
include a comprehensive summary of the significant accounting
policies and methods used in the preparation of our consolidated
financial statements.
Revenue
Recognition
We primarily recognize revenue when the following four basic
criteria have been met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred or services
rendered, (3) the fee is fixed and determinable and
(4) collection is reasonably assured.
The majority of our revenue is derived from product revenue. We
recognize revenue upon title transfer of the products to
third-party customers, less a reserve for estimated product
returns and allowances. Determination of the reserve for
estimated product returns and allowances is based on our
managements analyses and judgments regarding certain
conditions. Should future changes in conditions prove
managements conclusions and judgments on previous analyses
to be incorrect, revenue recognized for any reporting period
could be adversely affected.
56
Additionally, we generate services revenue in connection with
contracts with leading healthcare organizations whereby we
distribute clinical expertise through fee-based arrangements.
Revenue for fee-based arrangements is recognized over the period
in which the services are provided. Some contracts provide that
a portion of our fees are at risk if our customers do not
achieve certain financial cost savings over a period of time,
typically one year. Revenue subject to refund is not recognized
if (i) sufficient information is not available to calculate
performance measurements, or (ii) interim performance
measurements indicate that we are not meeting performance
targets. If either of these two conditions exists, we record the
amounts as other current liabilities in the consolidated balance
sheet, deferring recognition of the revenue until we establish
that we have met the performance criteria. If we do not meet the
performance targets at the end of the contractual period we are
obligated under the contract to refund some or all of the at
risk fees.
In connection with the acquisition of the Determine business in
June 2005 from Abbott Laboratories, we entered into a transition
services agreement with Abbott, whereby Abbott would continue to
distribute the acquired products until both parties agreed the
transition was completed. During the transition period, we
recognized revenue on sales of the products when title
transferred from Abbott to third party customers.
We also receive license and royalty revenue from agreements with
third-party licensees. Revenue from fixed fee license and
royalty agreements are recognized on a straight-line basis over
the obligation period of the related license agreements. License
and royalty fees that the licensees calculate based on their
sales, which we have the right to audit under most of our
agreements, are generally recognized upon receipt of the license
or royalty payments unless we are able to reasonably estimate
the fees as they are earned. License and royalty fees that are
determinable prior to the receipt thereof are recognized in the
period they are earned.
Use of
Estimates for Sales Returns and Other Allowances and Allowance
for Doubtful Accounts
Certain sales arrangements require us to accept product returns.
From time to time, we also enter into sales incentive
arrangements with our retail customers, which generally reduce
the sale prices of our products. As a result, we must establish
allowances for potential future product returns and claims
resulting from our sales incentive arrangements against product
revenue recognized in any reporting period. Calculation of these
allowances requires significant judgments and estimates. When
evaluating the adequacy of the sales returns and other
allowances, our management analyzes historical returns, current
economic trends, and changes in customer and consumer demand and
acceptance of our products. When such analysis is not available
and a right of return exists, we record revenue when the right
of return is no longer applicable. Material differences in the
amount and timing of our product revenue for any reporting
period may result if changes in conditions arise that would
require management to make different judgments or utilize
different estimates.
Our total provision for sales returns and other allowances
related to sales incentive arrangements amounted to
$48.0 million, $48.9 million and $52.8 million,
or 4%, 6% and 10%, respectively, of net product sales in 2008,
2007 and 2006, respectively, which have been recorded against
product sales to derive our net product sales.
Similarly, our management must make estimates regarding
uncollectible accounts receivable balances. When evaluating the
adequacy of the allowance for doubtful accounts, management
analyzes specific accounts receivable balances, historical bad
debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in our customer payment
terms and patterns. Our accounts receivable balance was
$280.6 million and $163.4 million, net of allowances
for doubtful accounts of $12.8 million and
$12.2 million, as of December 31, 2008 and
December 31, 2007, respectively.
Additionally, we generate services revenue in connection with
contracts with leading healthcare organizations whereby we
distribute clinical expertise through fee-based arrangements.
Revenue for fee-based arrangements is recognized over the period
in which the services are provided. Some contracts provide that
a portion of our fees are at risk if our customers do not
achieve certain financial cost savings over a period of time,
typically one year. Revenue subject to refund is not recognized
if (i) sufficient information is not available to calculate
performance measurements, or (ii) interim performance
measurements indicate that we are not meeting performance
targets. If either of these two conditions exists, we record the
amounts as other current liabilities in the consolidated balance
sheet, deferring recognition of the revenue until we establish
that
57
we have met the performance criteria. If we do not meet the
performance targets at the end of the contractual period we are
obligated under the contract to refund some or all of the at
risk fees. Our deferred revenue balance was $22.0 million
and $5.3 million, as of December 31, 2008 and
December 31, 2007, respectively.
Valuation
of Inventories
We state our inventories at the lower of the actual cost to
purchase or manufacture the inventory or the estimated current
market value of the inventory. In addition, we periodically
review the inventory quantities on hand and record a provision
for excess and obsolete inventory. This provision reduces the
carrying value of our inventory and is calculated based
primarily upon factors such as forecasts of our customers
demands, shelf lives of our products in inventory, loss of
customers and manufacturing lead times. Evaluating these
factors, particularly forecasting our customers demands,
requires management to make assumptions and estimates. Actual
product and services revenue may prove our forecasts to be
inaccurate, in which case we may have underestimated or
overestimated the provision required for excess and obsolete
inventory. If, in future periods, our inventory is determined to
be overvalued, we would be required to recognize the excess
value as a charge to our cost of sales at the time of such
determination. Likewise, if, in future periods, our inventory is
determined to be undervalued, we would have over-reported our
cost of sales, or understated our earnings, at the time we
recorded the excess and obsolete provision. Our inventory
balance was $199.1 million and $148.2 million, net of
a provision for excess and obsolete inventory of
$10.8 million and $8.1 million, as of
December 31, 2008 and 2007, respectively.
Valuation
of Goodwill and Other Long-Lived and Intangible Assets
Our long-lived assets include (1) property, plant and
equipment, (2) goodwill and (3) other intangible
assets. As of December 31, 2008, the balances of property,
plant and equipment, goodwill and other intangible assets, net
of accumulated depreciation and amortization, were
$284.5 million, $3.0 billion and $1.7 billion,
respectively.
Goodwill and other intangible assets are initially created as a
result of business combinations or acquisitions of intellectual
property. The values we record for goodwill and other intangible
assets represent fair values calculated by accepted valuation
methods. Such valuations require us to provide significant
estimates and assumptions which are derived from information
obtained from the management of the acquired businesses and our
business plans for the acquired businesses or intellectual
property. Critical estimates and assumptions used in the initial
valuation of goodwill and other intangible assets include, but
are not limited to: (1) future expected cash flows from
product sales, customer contracts and acquired developed
technologies and patents, (2) expected costs to complete
any in-process research and development projects and
commercialize viable products and estimated cash flows from
sales of such products, (3) the acquired companies
brand awareness and market position, (4) assumptions about
the period of time over which we will continue to use the
acquired brand and (5) discount rates. These estimates and
assumptions may be incomplete or inaccurate because
unanticipated events and circumstances may occur. If estimates
and assumptions used to initially value goodwill and intangible
assets prove to be inaccurate, ongoing reviews of the carrying
values of such goodwill and intangible assets, as discussed
below, may indicate impairment which will require us to record
an impairment charge in the period in which we identify the
impairment.
Where we believe that property, plant and equipment and
intangible assets have finite lives, we depreciate and amortize
those assets over their estimated useful lives. For purposes of
determining whether there are any impairment losses, as further
discussed below, our management has historically examined the
carrying value of our identifiable long-lived tangible and
intangible assets and goodwill, including their useful lives
where we believe such assets have finite lives, when indicators
of impairment are present. In addition, SFAS No. 142,
Goodwill and Other Intangible Assets, requires that
impairment reviews be performed on the carrying values of all
goodwill on at least an annual basis. For all long-lived
tangible and intangible assets and goodwill, if an impairment
loss is identified based on the fair value of the asset, as
compared to the carrying value of the asset, such loss would be
charged to expense in the period we identify the impairment.
Furthermore, if our review of the carrying values of the
long-lived tangible and intangible assets with finite lives
indicates impairment of such assets, we may determine that
shorter estimated useful lives are more appropriate. In that
58
event, we will be required to record higher depreciation and
amortization in future periods, which will reduce our earnings.
Valuation
of Goodwill
We perform an impairment review on the carrying value of
goodwill at least annually, or more frequently if events occur
or circumstances exist that indicate that a reporting
units carrying value exceeds its fair value. We performed
our annual impairment review as of September 30, 2008,
using the discounted cash flows approach and, based upon this
review, we do not believe that the goodwill related to our
professional diagnostics, health management and consumer
diagnostics reporting units was impaired. Because future cash
flows and operating results used in the impairment review are
based on managements projections and assumptions, future
events can cause such projections to differ from those used at
September 30, 2008, which could lead to significant
impairment charges of goodwill in the future. As of
December 31, 2008, we have goodwill balances related to our
professional diagnostics, health management and consumer
diagnostics reporting units, which amounted to
$1.7 billion, $1.3 billion and $52.7 million,
respectively.
Despite current economic conditions and the fluctuation in our
common stock price during the fourth quarter of 2008, we
determined that, based on our 2008 financial performance, our
unchanged expectations of future financial performance and the
improvement in our common stock price subsequent to year end, a
triggering event that would warrant further impairment testing
had not occurred and therefore no updated testing was performed
and no goodwill impairment was recorded during 2008. Should
economic conditions deteriorate further or remain depressed for
a prolonged period of time, estimates of future cash flows for
each reporting unit may be insufficient to support carrying
value and the goodwill assigned to it, requiring us to test for
impairment. Impairment charges, if any, may be material to our
results of operations and financial position.
Valuation
of Other Long-Lived Tangible and Intangible Assets
Factors we generally consider important which could trigger an
impairment review on the carrying value of other long-lived
tangible and intangible assets include the following:
(1) significant underperformance relative to expected
historical or projected future operating results;
(2) significant changes in the manner of our use of
acquired assets or the strategy for our overall business;
(3) underutilization of our tangible assets;
(4) discontinuance of product lines by ourselves or our
customers; (5) significant negative industry or economic
trends; (6) significant decline in our stock price for a
sustained period; (7) significant decline in our market
capitalization relative to net book value; and (8) goodwill
impairment identified during an impairment review under
SFAS No. 142. Although we believe that the carrying
value of our long-lived tangible and intangible assets was
realizable as of December 31, 2008, future events could
cause us to conclude otherwise.
Stock-Based
Compensation
We account for stock-based compensation in accordance with
SFAS No. 123-R,
Share-Based Payment. Under the fair value recognition
provisions of this statement, share-based compensation cost is
measured at the grant date based on the value of the award and
is recognized as expense over the vesting period. Determining
the fair value of share-based awards at the grant date requires
judgment, including estimating our stock price volatility and
employee stock option exercise behaviors. If actual results
differ significantly from these estimates, stock-based
compensation expense and our results of operations could be
materially impacted.
Our expected volatility is based upon the historical volatility
of our stock. The expected term is based on the assumption that
all outstanding options will exercise at the midpoint of the
vesting date and the full contractual term, including data on
experience to date. As stock-based compensation expense is
recognized in our consolidated statement of operations is based
on awards ultimately expected to vest, the amount of expense has
been reduced for estimated forfeitures.
SFAS No. 123-R
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience. If factors change and
we employ different assumptions in the application of
SFAS No. 123-R,
the compensation expense that we record in future periods may
differ significantly from what we have recorded in the current
period.
59
Accounting
for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
us estimating our actual current tax exposure and assessing
temporary differences resulting from differing treatment of
items, such as reserves and accruals and lives assigned to
long-lived and intangible assets, for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities. We must then assess the likelihood that our
deferred tax assets will be recovered through future taxable
income and, to the extent we believe that recovery is not more
likely than not, we must establish a valuation allowance. To the
extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within our tax
provision.
Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net
deferred tax assets. We have recorded a valuation allowance of
$12.7 million as of December 31, 2008 due to
uncertainties related to the future benefits, if any, from our
deferred tax assets related primarily to our foreign businesses
and certain U.S. net operating losses and tax credits.
Included in this valuation allowance is $3.7 million for
deferred tax assets of acquired companies, the future benefits
of which will be generally applied to reduce our income tax
expense as required
SFAS No. 141-R,
Business Combinations. This is a reduction of
$6.2 million from the valuation allowance of
$18.9 million as of December 31, 2007, and resulted in
additional goodwill. The decrease is primarily related to the
recognition of foreign NOLs. The valuation allowance is
based on our estimates of taxable income by jurisdiction in
which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results
differ from these estimates or we adjust these estimates in
future periods, we may need to establish an additional valuation
allowance or reduce our current valuation allowance which could
materially impact our tax provision.
On January 1, 2007 we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
109. In accordance with FIN 48, we established reserves
for tax uncertainties that reflect the use of the comprehensive
model for the recognition and measurement of uncertain tax
positions. We are currently undergoing routine tax examinations
by various state and foreign jurisdictions. Tax authorities
periodically challenge certain transactions and deductions we
reported on our income tax returns. We do not expect the outcome
of these examinations, either individually or in the aggregate,
to have a material adverse effect on our financial position,
results of operations, or cash flows.
Loss
Contingencies
In the section of this Annual Report on
Form 10-K
titled Part I, Item 3, Legal Proceedings,
we have reported on material legal proceedings. In addition,
because of the nature of our business, we may from time to time
be subject to commercial disputes, consumer product claims or
various other lawsuits arising in the ordinary course of our
business, including employment matters, and we expect this will
continue to be the case in the future. These lawsuits generally
seek damages, sometimes in substantial amounts, for commercial
or personal injuries allegedly suffered and can include claims
for punitive or other special damages. In addition, we
aggressively defend our patent and other intellectual property
rights. This often involves bringing infringement or other
commercial claims against third parties, which can be expensive
and can result in counterclaims against us.
We do not accrue for potential losses on legal proceedings where
our company is the defendant when we are not able to reasonably
estimate our potential liability, if any, due to uncertainty as
to the nature, extent and validity of the claims against us,
uncertainty as to the nature and extent of the damages or other
relief sought by the plaintiff and the complexity of the issues
involved. Our potential liability, if any, in a particular case
may become reasonably estimable and probable as the case
progresses, in which case we will begin accruing for the
expected loss.
60
Recent
Accounting Pronouncements
Recently
Issued Standards
In June 2008, the FASB ratified Emerging Issue Task Force
(EITF) Issue
No. 07-05,
Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entitys Own Stock, which addresses the
accounting for certain instruments as derivatives under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. Under this new pronouncement, specific
guidance is provided regarding requirements for an entity to
consider embedded features as indexed to the entitys own
stock. This Issue is effective for fiscal years beginning after
December 15, 2008. We are currently in the process of
evaluating the impact of adopting this pronouncement.
In May 2008, the FASB issued FASB Staff Position
(FSP) APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled In Cash upon Conversion (Including Partial Cash
Settlement). FSP APB
14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entitys nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods. FSP
APB 14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods
within those fiscal years. This FSP should be applied
retrospectively for all periods presented. We are currently in
the process of evaluating the impact of adopting this
pronouncement.
In April 2008, the FASB issued
FSP 142-3,
Determination of the Useful Life of Intangible Assets.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets.
FSP 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, as well as interim
periods within those fiscal years. We are currently in the
process of evaluating the impact of adopting this pronouncement.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an Amendment of FASB Statement
No. 133. This statement requires entities that utilize
derivative instruments to provide qualitative disclosures about
their objectives and strategies for using such instruments, as
well as any details of credit-risk-related contingent features
contained within derivatives. It also requires entities to
disclose additional information about the amounts and location
of derivatives located within the financial statements, how the
provisions of SFAS No. 133 have been applied and the
impact that hedges have on an entitys financial position,
financial performance and cash flows. This statement is
effective for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. We
are currently in the process of evaluating the impact of
adopting this pronouncement.
In December 2007, the FASB ratified the consensus reached by the
EITF in EITF Issue
No. 07-01,
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property.
The EITF concluded that a collaborative arrangement is one in
which the participants are actively involved and are exposed to
significant risks and rewards that depend on the ultimate
commercial success of the endeavor. Revenues and costs incurred
with third parties in connection with collaborative arrangements
would be presented gross or net based on the criteria in EITF
Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent,
and other accounting literature. Payments to or from
collaborators would be evaluated and presented based on the
nature of the arrangement and its terms, the nature of the
entitys business, and whether those payments are within
the scope of other accounting literature. The nature and purpose
of collaborative arrangements are to be disclosed along with the
accounting policies and the classification and amounts of
significant financial statement amounts related to the
arrangements. Activities in the arrangement conducted in a
separate legal entity should be accounted for under other
accounting literature; however required disclosure under EITF
Issue
No. 07-01
applies to the entire collaborative agreement. This Issue is
effective for fiscal years beginning after December 15,
2008, and is to be applied retrospectively to all periods
presented for all collaborative arrangements existing as of the
effective date. We are currently in the process of evaluating
the impact of adopting this pronouncement.
61
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an Amendment of Accounting Research
Bulletin (ARB) No. 51. This statement amends
ARB No. 51 to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity and should therefore be
reported as equity in the consolidated financial statements. The
statement also establishes standards for presentation and
disclosure of the non-controlling results on the consolidated
income statement. SFAS No. 160 is effective for fiscal
years beginning on or after December 15, 2008. We are
currently in the process of evaluating the impact of adopting
this pronouncement.
In December 2007, the FASB issued
SFAS No. 141-R,
Business Combinations. This statement replaces
SFAS No. 141, but retains the fundamental requirements
in SFAS No. 141 that the acquisition method of
accounting be used for all business combinations. This statement
requires an acquirer to recognize and measure the identifiable
assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at their fair values as
of the acquisition date. The statement requires acquisition
costs and any restructuring costs associated with the business
combination to be recognized separately from the fair value of
the business combination.
SFAS No. 141-R
establishes requirements for recognizing and measuring goodwill
acquired in the business combination or a gain from a bargain
purchase as well as disclosure requirements designed to enable
users to better interpret the results of the business
combination.
SFAS No. 141-R
is effective for fiscal years beginning on or after
December 15, 2008. Given our history of acquisition
activity, we anticipate the adoption of
SFAS No. 141-R
to have a significant impact on our consolidated financial
statements. Early adoption of this statement is not permitted.
As of December 31, 2008 there were $3.8 million in
capitalized acquisition costs classified in other non-current
assets. The capitalized costs will be written off in January
2009 when this statement becomes effective.
Recently
Adopted Standards
Effective October 2008, we adopted
FSP 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.
FSP 157-3
clarifies the application of SFAS No. 157 in an
inactive market. It demonstrated how the fair value of a
financial asset is determined when the market for that financial
asset is inactive. The adoption of these provisions did not have
a material impact on our consolidated financial statements.
Effective January 1, 2008, we adopted EITF Issue
No. 07-03,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities.
EITF 07-03
concludes that non-refundable advance payments for future
research and development activities should be deferred and
capitalized until the goods have been delivered or the related
services have been performed. If an entity does not expect the
goods to be delivered or services to be rendered, the
capitalized advance payment should be charged to expense. The
effect of applying this EITF is prospective for new contracts
entered into on or after the date of adoption. The adoption of
this EITF did not have a material impact on our consolidated
financial statements.
Effective January 1, 2008, we adopted
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an
Amendment of FASB No. 115. This Statement provides
companies with an option to measure, at specified election
dates, many financial instruments and certain other items at
fair value that are not currently measured at fair value. The
standard also establishes presentation and disclosure
requirements designed to facilitate comparison between entities
that choose different measurement attributes for similar types
of assets and liabilities. If the fair value option is elected,
the effect of the first remeasurement to fair value is reported
as a cumulative effect adjustment to the opening balance of
retained earnings. The statement is to be applied prospectively
upon adoption. The adoption of these provisions did not have a
material impact on our consolidated financial statements.
Effective January 1, 2008, we adopted
SFAS No. 157, Fair Value Measurements, for all
financial instruments and non-financial instruments accounted
for at fair value on a recurring basis. SFAS No. 157
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands
62
disclosures about fair value measurements. The standard applies
whenever other standards require, (or permit), assets or
liabilities to be measured at fair value. The standard does not
expand the use of fair value in any new circumstances. The FASB
has provided a one-year deferral for the implementation for
other non-financial assets and liabilities. The adoption of
these provisions did not have a material impact on our
consolidated financial statements. For further information about
the adoption of the required provisions of
SFAS No. 157 see Note 7.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The following discussion about our market risk disclosures
involves forward-looking statements. Actual results could differ
materially from those discussed in the forward-looking
statements. We are exposed to market risk related to changes in
interest rates and foreign currency exchange rates. We do not
use derivative financial instruments for speculative or trading
purposes.
Interest
Rate Risk
We are exposed to market risk from changes in interest rates
primarily through our investing and financing activities. In
addition, our ability to finance future acquisition transactions
or fund working capital requirements may be impacted if we are
not able to obtain appropriate financing at acceptable rates.
Our investing strategy, to manage interest rate exposure, is to
invest in short-term, highly liquid investments. Our investment
policy also requires investment in approved instruments with an
initial maximum allowable maturity of eighteen months and an
average maturity of our portfolio that should not exceed six
months, with at least $500,000 cash available at all times.
Currently, our short-term investments are in money market funds
with original maturities of 90 days or less. At
December 31, 2008, our short-term investments approximated
market value.
At December 31, 2008, we had a term loan in the amount of
$960.8 million and a revolving line-of-credit available to
us of up to $150.0 million, of which $142.0 million
was outstanding as of December 31, 2008, under our First
Lien Credit Agreement. Interest on the term loan, as defined in
the credit agreement, is as follows: (i) in the case of
Base Rate Loans, at a rate per annum equal to the sum of the
Base Rate and the Applicable Margin, each as in effect from time
to time, (ii) in the case of Eurodollar Rate Loans, at a
rate per annum equal to the sum of the Eurodollar Rate and the
Applicable Margin, each as in effect for the applicable Interest
Period, and (iii) in the case of other Obligations, at a
rate per annum equal to the sum of the Base Rate and the
Applicable Margin for Revolving Loans that are Base Rate Loans,
each as in effect from time to time. The Base Rate is a floating
rate which approximates the U.S. Prime rate and changes on
a periodic basis. The Eurodollar Rate is equal to the LIBOR rate
and is set for a period of one to three months at our election.
Applicable margin with respect to Base Rate Loans is 1.00% and
with respect to Eurodollar Rate Loans is 2.00%. Applicable
margin ranges for our revolving line-of-credit with respect to
Base Rate Loans is 0.75% to 1.25% and with respect to Eurodollar
Rate Loans is 1.75% to 2.25%.
At December 31, 2008, we also had a term loan in the amount
of $250.0 million under our Second Lien Credit Agreement.
Interest on this term loan, as defined in the credit agreement,
is as follows: (i) in the case of Base Rate Loans, at a
rate per annum equal to the sum of the Base Rate and the
Applicable Margin, each as in effect from time to time,
(ii) in the case of Eurodollar Rate Loans, at a rate per
annum equal to the sum of the Eurodollar Rate and the Applicable
Margin, each as in effect for the applicable Interest Period,
and (iii) in the case of other Obligations, at a rate per
annum equal to the sum of the Base Rate and the Applicable
Margin for Base Rate Loans, as in effect from time to time.
Applicable margin with respect to Base Rate Loans is 3.25% and
with respect to Eurodollar Rate Loans is 4.25%.
In August 2007, we entered into interest rate swap contracts,
with an effective date of September 28, 2007, that have a
total notional value of $350.0 million and have a maturity
date of September 28, 2010. These interest rate swap
contracts will pay us variable interest at the three-month LIBOR
rate, and we will pay the counterparties a fixed rate of 4.85%.
These interest rate swap contracts were entered into to convert
$350.0 million of the $1.2 billion variable rate term
loan under the senior credit facility into fixed rate debt.
63
In January 2009, we entered into interest rate swap contracts,
with an effective date of January 14, 2009, that have a
total notional value of $500.0 million and have a maturity
date of January 5, 2011. These interest rate swap contracts
pay us variable interest at the one-month LIBOR rate, and we pay
the counterparties a fixed rate of 1.195%. These interest rate
swap contracts were entered into to convert $500.0 million
of the $1.2 billion variable rate term loan under the
secured credit facility into fixed rate debt.
Assuming no changes in our leverage ratio and considering our
interest rate swaps, which would affect the margin of the
interest rates under the credit agreements, the effect of
interest rate fluctuations on outstanding borrowings as of
December 31, 2008 over the next twelve months is quantified
and summarized as follows (in thousands):
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
Increase
|
|
|
Interest rates increase by 100 basis points
|
|
$
|
5,028
|
|
Interest rates increase by 200 basis points
|
|
$
|
10,055
|
|
Foreign
Currency Risk
We face exposure to movements in foreign currency exchange rates
whenever we, or any of our subsidiaries, enter into transactions
with third parties that are denominated in currencies other than
our, or its, functional currency. Intercompany transactions
between entities that use different functional currencies also
expose us to foreign currency risk. During 2008, the net impact
of foreign currency changes on transactions was a loss of
$0.9 million. Historically, we have not used derivative
financial instruments or other financial instruments with
original maturities in excess of three months to hedge such
economic exposures.
Gross margins of products we manufacture at our European and
Chinese plants and sell in U.S. dollars and manufacturing
by our U.S. plants and sold in currencies other than the
U.S. dollar are also affected by foreign currency exchange
rate movements. Our gross margin on total net product sales was
49.6% in 2008. If the U.S. dollar had been stronger by 1%,
5% or 10%, compared to the actual rates during 2008, our gross
margin on total net product sales would have been 49.7%, 49.9%
and 50.1%, respectively.
In addition, because a substantial portion of our earnings is
generated by our foreign subsidiaries, whose functional
currencies are other than the U.S. dollar (in which we
report our consolidated financial results), our earnings could
be materially impacted by movements in foreign currency exchange
rates upon the translation of the earnings of such subsidiaries
into the U.S. dollar. If the U.S. dollar had been
uniformly stronger by 1%, 5% or 10%, compared to the actual
average exchange rates used to translate the financial results
of our foreign subsidiaries, our net product sales and net loss
would have been impacted by approximately the following amounts
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
Approximate
|
|
|
|
Decrease in
|
|
|
Increase in
|
|
|
|
Net Revenue
|
|
|
Net Loss
|
|
|
If, during 2008, the U.S. dollar was stronger by:
|
|
|
|
|
|
|
|
|
1%
|
|
$
|
3,909
|
|
|
$
|
229
|
|
5%
|
|
$
|
19,545
|
|
|
$
|
1,143
|
|
10%
|
|
$
|
39,089
|
|
|
$
|
2,287
|
|
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements and supplementary data, except for
selected quarterly financial data which are summarized below,
are listed under Item 15.(a) and have been filed as part of
this report on the pages indicated.
64
The following table presents selected quarterly financial data
for each of the quarters in the years ended December 31,
2008 and 2007, (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter(2)
|
|
|
Quarter(3)
|
|
|
Quarter(4)
|
|
|
Quarter(5)
|
|
|
Net revenue
|
|
$
|
372,233
|
|
|
$
|
401,127
|
|
|
$
|
438,800
|
|
|
$
|
459,266
|
|
Gross profit
|
|
$
|
180,390
|
|
|
$
|
206,102
|
|
|
$
|
228,148
|
|
|
$
|
245,919
|
|
Net (loss) income
|
|
$
|
(4,174
|
)
|
|
$
|
(30,348
|
)
|
|
$
|
(3,659
|
)
|
|
$
|
16,413
|
|
Net (loss) income per common share basic and
diluted(1)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter(6)
|
|
|
Quarter(7)
|
|
|
Quarter(8)
|
|
|
Quarter(9)
|
|
|
Net revenue
|
|
$
|
158,979
|
|
|
$
|
154,965
|
|
|
$
|
237,636
|
|
|
$
|
287,960
|
|
Gross profit
|
|
$
|
78,338
|
|
|
$
|
66,340
|
|
|
$
|
110,298
|
|
|
$
|
138,751
|
|
Net income (loss)
|
|
$
|
6,305
|
|
|
$
|
(54,674
|
)
|
|
$
|
(180,612
|
)
|
|
$
|
(15,772
|
)
|
Net income (loss) per common share basic and
diluted(1)
|
|
$
|
0.14
|
|
|
$
|
(1.17
|
)
|
|
$
|
(3.74
|
)
|
|
$
|
(0.24
|
)
|
|
|
|
(1) |
|
Net (loss) income available to common stockholders and basic and
diluted net (loss) income per common share are computed as
consistent with the annual per share calculations described in
Notes 2(n) and 15 of our consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K. |
|
(2) |
|
Included in net loss for the first quarter of 2008 is
$16.3 million related to restructuring charges associated
with the decision to close various facilities, a write-off of
$1.7 million related to inventory
write-ups
recorded in connection with the acquisitions of Panbio Limited
and BBI, a $1.7 million net realized foreign currency loss
associated with a cash escrow established in connection with the
acquisition of BBI, and $5.6 million of non-cash
stock-based compensation expense. |
|
(3) |
|
Included in net loss for the second quarter of 2008 is
$23.6 million related to restructuring charges associated
with the decision to close various facilities, a write-off of
$0.3 million related to inventory
write-ups
recorded in connection with the acquisitions of Panbio Limited
and BBI, and $7.2 million of non-cash stock-based
compensation expense. |
|
(4) |
|
Included in net loss for the third quarter of 2008 is
$5.8 million related to restructuring charges associated
with the decision to close various facilities, and
$7.0 million of non-cash stock-based compensation expense. |
|
(5) |
|
Included in net income for the fourth quarter of 2008 is
$5.0 million related to restructuring charges associated
with the decision to close various facilities and
$6.7 million of non-cash stock-based compensation expense. |
|
(6) |
|
Included in net income for the first quarter of 2007 is
$0.6 million related to the restructuring charge associated
with the closure of our ABI operation, a $0.2 million
charge to write-off deferred financing costs related to the
payment of outstanding debt, and $1.6 million of non-cash
stock-based compensation expense. |
|
(7) |
|
Included in net loss for the second quarter of 2007 is
$0.4 million related to restructuring charges associated
with the decision to close facilities and the formation of our
joint venture with P&G, a $1.2 million write-off
related to an inventory
write-up
recorded in connection with the Biosite acquisition, a charge of
$15.4 million associated with the write-off of debt
origination costs and a prepayment premium paid upon early
extinguishment of related debt, a $1.9 million foreign
currency gain realized on the settlement of intercompany notes,
and $47.3 million of non-cash stock-based compensation
expense. |
|
(8) |
|
Included in net loss for the third quarter of 2007 is
$0.5 million related to restructuring charges associated
with the decision to close facilities and the formation of our
joint venture with P&G, a $6.3 million write-off
related to inventory
write-ups
recorded in connection with the Biosite and Cholestech
acquisitions, a |
65
|
|
|
|
|
write-off of $169.0 million associated with the value of
purchased IPR&D incurred in connection with the Biosite
acquisition, and $3.3 million in non-cash stock-based
compensation expense. |
|
(9) |
|
Included in net loss for the fourth quarter of 2007 is
$5.2 million related to restructuring charges associated
with the decision to close facilities and formation of our joint
venture with P&G, a $0.8 million write-off related to
inventory
write-ups
recorded in connection with the Cholestech and HemoSense
acquisitions, a write-off of $4.8 million associated with
the value of purchased IPR&D incurred in connection with
the Diamics acquisition, a $3.9 million unrealized foreign
currency loss associated with a cash escrow established in
connection with the acquisition of BBI, and $5.3 million in
non-cash stock-based compensation expense. |
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Managements
conclusions regarding the effectiveness of our disclosure
controls and procedures
Our management evaluated, with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this Annual Report on
Form 10-K.
Based on this evaluation, our management, including the CEO and
CFO, concluded that our disclosure controls and procedures were
effective at that time. We and our management understand
nonetheless that controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of
achieving the desired control objectives, and our management
necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. In reaching their
conclusions stated above regarding the effectiveness of our
disclosure controls and procedures, our CEO and CFO concluded
that such disclosure controls and procedures were effective as
of such date at the reasonable assurance level.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended. Our
companys internal control over financial reporting is a
process designed under the supervision of the CEO and CFO 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. Our internal control over financial
reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of our company
are being made only in accordance with authorizations of our
management and directors; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of assets that could have a material effect on the financial
statements.
There are inherent limitations in the effectiveness of any
internal control, including the possibility of human error and
the circumvention or overriding of controls. Accordingly, even
effective internal controls can provide only reasonable
assurances with respect to financial statement preparation.
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.
66
Management assessed the effectiveness of our companys
internal control over financial reporting as of
December 31, 2008. In making this assessment, management
used the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on
managements assessment and those criteria, management
determined that the Company maintained effective internal
control over financial reporting as of December 31, 2008.
In conducting managements evaluation of the effectiveness
of our companys internal control over financial reporting,
management excluded all 2008 acquisitions except for Matria. The
contribution from these acquisitions represented approximately
2% and 4% of total assets and net revenue, respectively, as of
and for the year ended December 31, 2008. Refer to
Note 4 of the accompanying consolidated financial
statements for further discussion of our acquisitions and their
impact on our consolidated financial statements.
Our independent registered public accounting firm, BDO Seidman,
LLP, has issued an audit report on our internal controls over
financial reporting, which appears on page 68.
Changes
in internal control over financial reporting
There was no change in our internal control over financial
reporting that occurred during our fourth fiscal quarter of 2008
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
67
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Inverness Medical Innovations, Inc.:
We have audited Inverness Medical Innovations, Inc. and
Subsidiaries (the Company) internal control
over financial reporting as of December 31, 2008, based on
criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). The Companys
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 Annual Report on
Internal Control Over Financial Reporting appearing under
Item 9a. 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, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included 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 authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized 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.
As indicated in the accompanying Managements Annual Report
on Internal Control Over Financial Reporting appearing under
Item 9a, managements assessment of and conclusion on
the effectiveness of internal control over financial reporting
excluded all 2008 acquisitions, except for Matria, which are all
included in the consolidated balance sheet of the Company as of
December 31, 2008, and the related consolidated statements
of operations, stockholders equity and comprehensive loss,
and cash flows for the year then ended. The acquired entities
which were excluded constituted 2% and 4% of total assets and
net revenue, respectively, as of and for the year ended
December 31, 2008. Management did not assess the
effectiveness of internal control over financial reporting of
these acquired entities because of the timing of the
acquisitions which were completed in 2008. Our audit of internal
control over financial reporting of the Company also did not
include an evaluation of the internal control over financial
reporting of above acquisitions.
68
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Inverness Medical Innovations,
Inc. and Subsidiaries as of December 31, 2008 and 2007, and
the related consolidated statements of operations,
stockholders equity and comprehensive loss, and cash flows
for each of the three years in the period ended
December 31, 2008 and our report dated February 27,
2009 expressed an unqualified opinion thereon.
Boston, Massachusetts
February 27, 2009
69
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information regarding directors, executive officers and
corporate governance included in our definitive Proxy Statement
to be filed pursuant to Regulation 14A in connection with
our 2009 Annual Meeting of Shareholders (the Proxy Statement) is
incorporated herein by reference.
On or about January 5, 2009, in connection with the
transfer of our common stock from AMEX to the NYSE, we filed
with the NYSE the Annual CEO Certification regarding our
compliance with the NYSEs corporate governance listing
standards as required by
Section 303A-12(a)
of the NYSE Listed Company Manual. In addition, we have filed as
exhibits to this Annual Report on
Form 10-K,
the applicable certifications of our Chief Executive Officer and
our Chief Financial Officer required under Section 302 of
the Sarbanes-Oxley Act of 2002, regarding the quality of our
public disclosures.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information regarding executive compensation included in the
Proxy Statement is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information regarding security ownership of certain
beneficial owners and management and related stockholder matters
included in the Proxy Statement is incorporated herein by
reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information regarding certain relationships and related
transactions, and director independence included in the Proxy
Statement is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information regarding principal accounting fees and services
included in the Proxy Statement is incorporated herein by
reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) 1. Financial Statements.
The financial statements listed below have been filed as part of
this report on the pages indicated:
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-2
|
Consolidated Statements of Operations for the Years Ended
December 31, 2008, 2007 and 2006
|
|
F-3
|
Consolidated Balance Sheets as of December 31, 2008 and 2007
|
|
F-4
|
Consolidated Statements of Stockholders Equity and
Comprehensive Loss for the Years Ended December 31, 2008,
2007 and 2006
|
|
F-5
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008, 2007 and 2006
|
|
F-8
|
Notes to Consolidated Financial Statements
|
|
F-9
|
2. Financial Statement Schedules.
70
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
have been omitted because they are inapplicable or the required
information is shown in the consolidated financial statements,
or the notes, thereto, included here in.
3. Exhibits.
|
|
|
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated as of May 17, 2007 by
and among Inverness Medical Innovations, Inc., Inca Acquisition,
Inc. and Biosite Incorporated (incorporated by reference to
Exhibit 2.1 to the Companys Current Report on
Form 8-K,
event date May 17, 2007, filed on May 18, 2007)
|
|
2
|
.2
|
|
Agreement and Plan of Reorganization dated as of June 4,
2007, among Inverness Medical Innovations, Inc., Iris Merger
Sub, Inc. and Cholestech Corporation (incorporated by reference
to Exhibit 2.1 to the Companys Current Report on
Form 8-K,
event date June 4, 2007, filed on June 4, 2007)
|
|
2
|
.3
|
|
Agreement and Plan of Merger, dated January 27, 2008,
between Inverness Medical Innovations, Inc., Milano MH
Acquisition Corp., Milano MH Acquisition LLC and Matria
Healthcare, Inc. (incorporated by reference to Exhibit 2.1
to the Companys Current Report on
Form 8-K,
event date January 28, 2008, filed on January 29, 2008)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2001)
|
|
3
|
.2
|
|
First Amendment to the Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.4 to Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007)
|
|
3
|
.3
|
|
Second Amendment to the Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.3 to Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2008)
|
|
3
|
.4
|
|
Certificate of Designation, Preferences and Rights of
Series A Convertible Preferred Stock of the Company
(incorporated by reference to Exhibit 99.2 to the
Companys Current Report on
Form 8-K
dated December 20, 2001)
|
|
3
|
.5
|
|
Certificate of Designations of Series B Convertible
Perpetual Preferred Stock of the Company (incorporated by
reference to Exhibit 3.1 to the Companys Current
Report on
Form 8-K,
event date, May 9, 2008, filed on May 14, 2008)
|
|
3
|
.6
|
|
Certificate of Elimination of Series A Convertible
Preferred Stock of the Company (incorporated by reference to
Exhibit 3.2 to the Companys Current Report on
Form 8-K,
event date, May 9, 2008, filed on May 14, 2008)
|
|
3
|
.7
|
|
Certificate of Correction to the First Amendment to the Amended
and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.5 to the
Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
|
3
|
.8
|
|
Second Certificate of Correction to the First Amendment to the
Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.5 to Companys
Registration Statement on
Form S-4,
as amended (File
333-149259))
|
|
3
|
.9
|
|
Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.3 to the Companys Annual
Report on
Form 10-K,
as amended, for the year ended December 31, 2001)
|
|
4
|
.1
|
|
Indenture, dated May 14, 2007, between the Company and U.S.
Bank trust National Association (incorporated by reference
to Exhibit 4.1 to the Companys Current Report on
Form 8-K,
event date May 9, 2007, filed on May 15, 2007)
|
|
+10
|
.1
|
|
Distribution Agreement between Biosite and Fisher Scientific
Company L.L.C. effective January 1, 2006 (incorporated by
reference to Exhibit 10.18 to Annual Report of Biosite
Incorporated on
Form 10-K,
filed March 12, 2007)
|
|
*10
|
.2
|
|
Amendment No. 1 to Distribution Agreement between Biosite
and Fisher Scientific Company L.L.C., effective January 1,
2006
|
|
*10
|
.3
|
|
Amendment No. 2 to Distribution Agreement between Biosite
and Fisher Scientific Company L.L.C., effective June 30,
2008
|
|
*10
|
.4
|
|
Amendment No. 2B to Distribution Agreement between Biosite
and Fisher Scientific Company L.L.C., effective July 8,
2008
|
71
|
|
|
|
|
|
*10
|
.5
|
|
Amendment No. 3 to Distribution Agreement between Biosite
and Fisher Scientific Company L.L.C., effective July 11,
2008
|
|
+10
|
.6
|
|
Semi-exclusive BNP Diagnostic License Agreement Between Biosite
Diagnostics Incorporated and Scios, Inc. effective
December 30, 1996 (incorporated by reference to
Exhibit 10.19 to Annual Report of Biosite Incorporated on
Form 10-K,
filed March 12, 2007)
|
|
+10
|
.7
|
|
First Amendment to Semi-exclusive BNP Diagnostic License
Agreement between Biosite Incorporated and Scios, Inc. effective
August 1, 1997 (incorporated by reference to
Exhibit 10.20 to Annual Report of Biosite Incorporated on
Form 10-K,
filed March 12, 2007)
|
|
+10
|
.8
|
|
Amendment #2 To Semi-exclusive BNP Diagnostic License Agreement
Biosite Incorporated and Scios, Inc. effective August 30,
2002 (incorporated by reference to Exhibit 10.21 to Annual
Report of Biosite Incorporated on
Form 10-K,
filed March 12, 2007)
|
|
+10
|
.9
|
|
BNP Assay Development, Manufacture and Supply Agreement between
Biosite Incorporated and Beckman Coulter, Inc. effective
June 24, 2003 (incorporated by reference to
Exhibit 10.22 to Annual Report of Biosite Incorporated on
Form 10-K,
filed March 12, 2007)
|
|
+10
|
.10
|
|
Shareholder Agreement dated as of May 17, 2007 among
Inverness Medical Switzerland GmbH, Procter & Gamble
International Operations, SA and SPD Swiss Precision Diagnostics
GmbH (incorporated by reference to Exhibit 10.12 to
Companys Quarterly Report on
Form 10-Q,
for the period ended June 30, 2007)
|
|
10
|
.11
|
|
Option Agreement, dated as of May 17, 2007 among US CD LLC,
SPD Swiss Precision Diagnostics GmbH, Inverness Medical
Innovations, Inc., Inverness Medical Switzerland GmbH,
Procter & Gamble International Operations, SA and
Procter & Gamble RHD, Inc. (incorporated by reference
to Exhibit 10.13 to Companys Quarterly Report on
Form 10-Q,
for the period ended June 30, 2007)
|
|
10
|
.12
|
|
Post-Closing Covenants Agreement, dated as of November 21,
2001, by and among Johnson & Johnson, IMT, the
Company, certain subsidiaries of IMT and certain subsidiaries of
the Company (incorporated by reference to Exhibit 10.1 to
the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2001)
|
|
10
|
.13
|
|
Lease between WE 10 Southgate LLC and Binax, Inc. dated as of
August 26, 2004 (incorporated by reference to
Exhibit 10.7 to the Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2005)
|
|
10
|
.14
|
|
Agreement, dated December 1, 1986, between Bernard Levere,
Zelda Levere, Pioneer Pharmaceuticals, Inc. and Essex Chemical
Corp. and Unconditional Guarantee by Essex Chemical Corp.
(incorporated by reference to Exhibit 10.33 to the
Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2001)
|
|
10
|
.15
|
|
Option to Assume and Extend Lease, dated as of
February , 1995, between Bernard Levere, Zelda
Levere and International Vitamin Corporation (incorporated by
reference to Exhibit 10.34 to the Companys Annual
Report on
Form 10-K,
as amended, for the year ended December 31, 2001)
|
|
10
|
.16
|
|
Form of Warrant for the Purchase of Shares of Common Stock of
the Company issued pursuant to the Note and Warrant Purchase
Agreement dated as of December 14, 2001 (incorporated by
reference to Exhibit 99.5 to the Companys Current
Report on
Form 8-K
dated December 20, 2001)
|
|
10
|
.17
|
|
Warrant for the Purchase of Shares of Common Stock of the
Company, dated as of March 31, 2005, issued to Roger Piasio
(incorporated by reference to Exhibit 10.23 to the
Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
|
10
|
.18
|
|
Form of Warrant Agreement issued pursuant to the Note and
Warrant Purchase Agreement (incorporated by reference to
Exhibit 99.3 to the Companys Current Report on
Form 8-K
dated January 4, 2002)
|
|
10
|
.19
|
|
Inverness Medical Innovations, Inc. 2001 Stock Option and
Incentive Plan (incorporated by reference to Exhibit 10.1
to the Companys Registration Statement on
Form S-4,
as amended
(File No. 333-67392))
|
|
10
|
.20
|
|
Amendment No. 1 to Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (incorporated by reference to
Exhibit 4.4 to the Companys Registration Statement on
Form S-8
(File No. 333-90530)
|
72
|
|
|
|
|
|
10
|
.21
|
|
Amendment No. 2 to Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (incorporated by reference to
Exhibit 4.6 to Companys Registration Statement on
Form S-8,
as amended (File
No. 333-106996))
|
|
10
|
.22
|
|
Amendment No. 3 to Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (incorporated by reference to
Exhibit 10.3 to Companys Quarterly Report on
Form 10-Q,
for the period ended June 30, 2005)
|
|
10
|
.23
|
|
Amendment No. 4 to Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (incorporated by reference to
Exhibit 10.41 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
|
10
|
.24
|
|
Amendment No. 5 to Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (incorporated by reference to
Exhibit 10.42 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
|
10
|
.25
|
|
Amendment No. 6 to Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (incorporated by reference to
Exhibit 10.40 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2007)
|
|
10
|
.26
|
|
Amendment No. 7 to Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (incorporated by reference to
Exhibit 10.41 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2007)
|
|
10
|
.27
|
|
Form of Non-Qualified Stock Option Agreement for Non-Employee
Directors under the Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (incorporated by reference to
Exhibit 10.4 to Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2005) (relating to grants
made prior to August 29, 2008)
|
|
10
|
.28
|
|
Form of Non-Qualified Stock Option Agreement for Senior
Executives under the Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (incorporated by reference to
Exhibit 10.5 to Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2005) (relating to grants
made prior to August 29, 2008)
|
|
10
|
.29
|
|
Form of Incentive Stock Option Agreement for Senior Executives
under the Inverness Medical Innovations, Inc. 2001 Stock Option
and Incentive Plan (incorporated by reference to
Exhibit 10.6 to Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2005) (relating to grants
made prior to August 29, 2008)
|
|
*10
|
.30
|
|
Form of Non-Qualified Stock Option Agreement for Non-Employee
Directors under the Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (relating to grants made on or
after August 29, 2008)
|
|
*10
|
.31
|
|
Form of Non-Qualified Stock Option Agreement for U.S. Executives
under the Inverness Medical Innovations, Inc. 2001 Stock Option
and Incentive Plan (relating to grants made on or after
August 29, 2008)
|
|
*10
|
.32
|
|
Form of Non-Qualified Stock Option Agreement for
Non-U.S.
Executives under the Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan (relating to grants made on or
after August 29, 2008)
|
|
*10
|
.33
|
|
Form of Incentive Stock Option Agreement for Executives under
the Inverness Medical Innovations, Inc. 2001 Stock Option and
Incentive Plan (relating to grants made on or after
August 29, 2008)
|
|
*10
|
.34
|
|
Inverness Medical Innovations, Inc. HM Revenue and Customs Share
Option Plan (2007) (relating to grants made on or after
August 29, 2008)
|
|
*10
|
.35
|
|
Rules of the Inverness Medical Innovations, Inc. 2001 Stock
Option and Incentive Plan for the Grant of Options to
Participants in France (adopted as subplan to Inverness Medical
Innovations, Inc. 2001 Stock Option and Incentive Plan)
|
|
10
|
.36
|
|
Rules of Inverness Medical Innovations, Inc. Inland Revenue
Approved Option Plan (adopted as subplan to Inverness Medical
Innovations, Inc. 2001 Stock Option and Incentive Plan)
(incorporated by reference to Exhibit 10.2 to
Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2005)
|
|
10
|
.37
|
|
Rules of Inverness Medical Innovations, Inc. HM Revenue and
Customs Approved Share Option Plan (2007) (adopted as subplan to
Inverness Medical Innovations, Inc. 2001 Stock Option and
Incentive Plan) (incorporated by reference to Exhibit 10.31
to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2007)
|
73
|
|
|
|
|
|
10
|
.38
|
|
Inverness Medical Innovations, Inc. 2001 Employee Stock Purchase
Plan (incorporated by reference to Exhibit 10.2 to the
Companys Registration Statement on
Form S-4,
as amended (File
No. 333-67392))
|
|
10
|
.39
|
|
Inverness Medical Innovations, Inc. 2001 Employee Stock Purchase
Plan First Amendment (incorporated by reference to
Exhibit 10.9 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2001)
|
|
10
|
.40
|
|
Inverness Medical Innovations, Inc. 2001 Employee Stock Purchase
Plan Second Amendment (incorporated by reference to
Exhibit 10.6 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
|
10
|
.41
|
|
Inverness Medical Innovations, Inc. 2001 Employee Stock Purchase
Plan Third Amendment (incorporated by reference to
Exhibit 10.1 to Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2008)
|
|
10
|
.42
|
|
Underwriting Agreement dated January 25, 2007 (incorporated
by reference to Exhibit 1.1 to the Companys Current
Report on
Form 8-K,
dated January 26, 2007)
|
|
10
|
.43
|
|
Underwriting Agreement dated November 14, 2007
(incorporated by reference to Exhibit 1.1 to the
Companys Current Report on
Form 8-K,
dated November 16, 2007)
|
|
10
|
.44
|
|
$1,050,000,000 First Lien Credit Agreement dated as of
June 26, 2007 among IM US HOLDINGS, LLC, as Borrower,
Inverness Medical Innovations, Inc, as Guarantor, The Lenders
and L/C Issuers Party Hereto General Electric Capital
Corporation, as Administrative Agent, Citizens Bank of
Massachusetts, Fifth Third Bank and Merrill Lynch Capital, a
division of Merrill Lynch Business Financial Services, Inc., as
Co-Documentation Agents and UBS Securities LLC, as Joint Lead
Arranger and Syndication Agent (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
event date June 26, 2007, filed on July 2, 2007)
|
|
10
|
.45
|
|
First Amendment to First Lien Credit Agreement dated as of
November 15, 2007 among IM US Holdings, LLC, as Borrower,
Inverness Medical Innovations, Inc., as a Guarantor, the Lenders
signatory hereto and General Electric Capital Corporation, as
collateral agent and administrative agent for the Lenders
(incorporated by reference to Exhibit 10.2 to the
Companys Current Report on
Form 8-K
dated November 20, 2007)
|
|
10
|
.46
|
|
$250,000,000 Second Lien Credit Agreement dated as of
June 26, 2007 among IM US HOLDINGS, LLC, as Borrower,
Inverness Medical Innovations, Inc., as a Guarantor, The Lenders
General Electric Capital Corporation, as Administrative Agent
and UBS Securities LLC, as Syndication Agent, Joint Lead
Arranger and Sole Bookrunner (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K,
event date June 26, 2007, filed on July 2, 2007)
|
|
10
|
.47
|
|
First Lien Guaranty And Security Agreement dated as of
June 26, 2007 among IM US HOLDINGS, LLC, as Borrower, and
Each Grantor and General Electric Capital Corporation, as
Administrative Agent (incorporated by reference to
Exhibit 10.3 to the Companys Current Report on
Form 8-K,
event date June 26, 2007, filed on July 2, 2007)
|
|
10
|
.48
|
|
Second Lien Guaranty And Security Agreement dated as of
June 26, 2007 among IM US HOLDINGS, LLC, as Borrower, and
Each Grantor and General Electric Capital Corporation, as
Administrative Agent (incorporated by reference to
Exhibit 10.4 to the Companys Current Report on
Form 8-K,
event date June 26, 2007, filed on July 2, 2007)
|
|
14
|
.50
|
|
Inverness Medical Innovations Business Conduct Guidelines
(incorporated by reference to Exhibit 14.50 to the
Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
|
*21
|
.1
|
|
List of Subsidiaries of the Company as of February 25, 2009
|
|
*23
|
.1
|
|
Consent of BDO Seidman, LLP, Independent Registered Public
Accounting Firm
|
|
*31
|
.1
|
|
Certification by Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
|
|
*31
|
.2
|
|
Certification by Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
|
|
*32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
|
|
|
|
* |
|
Filed herewith. |
|
+ |
|
We have omitted portions of this exhibit which have been granted
confidential treatment. |
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INVERNESS MEDICAL INNOVATIONS, INC.
Date: February 27, 2009
Ron Zwanziger
Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Ron
Zwanziger
Ron
Zwanziger
|
|
Chief Executive Officer, President and Director (Principal
Executive Officer)
|
|
February 27, 2009
|
|
|
|
|
|
/s/ David
Teitel
David
Teitel
|
|
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Carol
R. Goldberg
Carol
R. Goldberg
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Robert
P. Khederian
Robert
P. Khederian
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ John
F. Levy
John
F. Levy
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Jerry
McAleer
Jerry
McAleer
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ John
A. Quelch
John
A. Quelch
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ David
Scott
David
Scott
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ Peter
Townsend
Peter
Townsend
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ James
Roosevelt, Jr.
James
Roosevelt, Jr.
|
|
Director
|
|
February 27, 2009
|
75
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
Table of
Contents
|
|
|
|
|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-2
|
Consolidated Statements of Operations for the Years Ended
December 31, 2008, 2007 and 2006
|
|
F-3
|
Consolidated Balance Sheets as of December 31, 2008 and 2007
|
|
F-4
|
Consolidated Statements of Stockholders Equity and
Comprehensive Loss for the Years Ended December 31, 2008,
2007 and 2006
|
|
F-5
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008, 2007 and 2006
|
|
F-8
|
Notes to Consolidated Financial Statements
|
|
F-9
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Inverness Medical Innovations, Inc.:
We have audited the accompanying consolidated balance sheets of
Inverness Medical Innovations, Inc. and Subsidiaries (the
Company) as of December 31, 2008 and 2007, and
the related consolidated statements of operations,
stockholders equity and comprehensive loss, and cash flows
for each of the three years in the period ended
December 31, 2008. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
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, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Inverness Medical
Innovations, Inc. and Subsidiaries at December 31, 2008 and
2007, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated February 27, 2009,
expressed an unqualified opinion thereon.
Boston, Massachusetts
February 27, 2009
F-2
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net product sales
|
|
$
|
1,240,138
|
|
|
$
|
800,915
|
|
|
$
|
552,130
|
|
Services revenue
|
|
|
405,462
|
|
|
|
16,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales and services revenue
|
|
|
1,645,600
|
|
|
|
817,561
|
|
|
|
552,130
|
|
License and royalty revenue
|
|
|
25,826
|
|
|
|
21,979
|
|
|
|
17,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
1,671,426
|
|
|
|
839,540
|
|
|
|
569,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net product sales
|
|
|
624,654
|
|
|
|
431,403
|
|
|
|
334,799
|
|
Cost of services revenue
|
|
|
177,098
|
|
|
|
5,261
|
|
|
|
|
|
Cost of license and royalty revenue
|
|
|
9,115
|
|
|
|
9,149
|
|
|
|
5,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue
|
|
|
810,867
|
|
|
|
445,813
|
|
|
|
340,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
860,559
|
|
|
|
393,727
|
|
|
|
229,223
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
111,828
|
|
|
|
69,547
|
|
|
|
48,706
|
|
Purchase of in-process research and development
|
|
|
|
|
|
|
173,825
|
|
|
|
4,960
|
|
Sales and marketing
|
|
|
386,284
|
|
|
|
167,770
|
|
|
|
94,445
|
|
General and administrative
|
|
|
298,595
|
|
|
|
158,438
|
|
|
|
71,243
|
|
Loss on dispositions, net
|
|
|
|
|
|
|
|
|
|
|
3,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
63,852
|
|
|
|
(175,853
|
)
|
|
|
6,371
|
|
Interest expense, including amortization of original issue
discounts and write-off of deferred financing costs
|
|
|
(101,144
|
)
|
|
|
(83,025
|
)
|
|
|
(26,570
|
)
|
Other (expense) income, net
|
|
|
(2,212
|
)
|
|
|
8,774
|
|
|
|
8,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before (benefit) provision for income taxes
|
|
|
(39,504
|
)
|
|
|
(250,104
|
)
|
|
|
(11,451
|
)
|
(Benefit) provision for income taxes
|
|
|
(16,686
|
)
|
|
|
(979
|
)
|
|
|
5,727
|
|
Equity earnings of unconsolidated entities, net of tax
|
|
|
1,050
|
|
|
|
4,372
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,768
|
)
|
|
|
(244,753
|
)
|
|
|
(16,842
|
)
|
Preferred stock dividends
|
|
|
(13,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(35,757
|
)
|
|
$
|
(244,753
|
)
|
|
$
|
(16.842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common sharebasic and diluted
|
|
$
|
(0.46
|
)
|
|
$
|
(4.75
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average sharesbasic and diluted
|
|
|
77,778
|
|
|
|
51,510
|
|
|
|
34,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in thousands, except par value amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
141,324
|
|
|
$
|
414,732
|
|
Restricted cash
|
|
|
2,748
|
|
|
|
141,869
|
|
Marketable securities
|
|
|
1,763
|
|
|
|
2,551
|
|
Accounts receivable, net of allowances of $12,835 and $12,167 at
December 31, 2008 and 2007, respectively
|
|
|
280,608
|
|
|
|
163,380
|
|
Inventories, net
|
|
|
199,131
|
|
|
|
148,231
|
|
Deferred tax assets
|
|
|
104,311
|
|
|
|
18,170
|
|
Income tax receivable
|
|
|
6,406
|
|
|
|
5,256
|
|
Receivable from joint venture, net
|
|
|
12,018
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
74,234
|
|
|
|
58,785
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
822,543
|
|
|
|
952,974
|
|
Property, plant and equipment, net
|
|
|
284,483
|
|
|
|
267,880
|
|
Goodwill
|
|
|
3,046,083
|
|
|
|
2,148,850
|
|
Other intangible assets with indefinite lives
|
|
|
42,984
|
|
|
|
43,097
|
|
Core technology and patents, net
|
|
|
459,307
|
|
|
|
432,583
|
|
Other intangible assets, net
|
|
|
1,169,330
|
|
|
|
869,644
|
|
Deferred financing costs, net, and other non-current assets
|
|
|
46,884
|
|
|
|
51,747
|
|
Investments in unconsolidated entities
|
|
|
68,832
|
|
|
|
77,753
|
|
Marketable securities
|
|
|
591
|
|
|
|
20,432
|
|
Deferred tax assets
|
|
|
14,323
|
|
|
|
15,799
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,955,360
|
|
|
$
|
4,880,759
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
19,058
|
|
|
$
|
20,320
|
|
Current portion of capital lease obligations
|
|
|
451
|
|
|
|
776
|
|
Accounts payable
|
|
|
112,704
|
|
|
|
72,061
|
|
Accrued expenses and other current liabilities
|
|
|
233,132
|
|
|
|
174,935
|
|
Payable to joint venture, net
|
|
|
|
|
|
|
10,816
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
365,345
|
|
|
|
278,908
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
1,500,557
|
|
|
|
1,366,395
|
|
Capital lease obligations, net of current portion
|
|
|
468
|
|
|
|
358
|
|
Deferred tax liabilities
|
|
|
462,787
|
|
|
|
326,128
|
|
Deferred gain on joint venture
|
|
|
287,030
|
|
|
|
293,078
|
|
Other long-term liabilities
|
|
|
60,335
|
|
|
|
29,225
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
2,311,177
|
|
|
|
2,015,184
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 8, 9 and 11)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series B preferred stock, $0.001 par value
(liquidation preference, $751,479)
|
|
|
|
|
|
|
|
|
Authorized: 2,300 shares
|
|
|
|
|
|
|
|
|
Issued and outstanding: 1,879 shares
|
|
|
671,501
|
|
|
|
|
|
Common stock, $0.001 par value
|
|
|
|
|
|
|
|
|
Authorized: 150,000 shares
|
|
|
|
|
|
|
|
|
Issued and outstanding: 78,431 shares at December 31,
2008 and 76,789 shares at December 31, 2007
|
|
|
78
|
|
|
|
77
|
|
Additional paid-in capital
|
|
|
3,029,694
|
|
|
|
2,937,143
|
|
Accumulated deficit
|
|
|
(393,590
|
)
|
|
|
(371,822
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(28,845
|
)
|
|
|
21,269
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
3,278,838
|
|
|
|
2,586,667
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
5,955,360
|
|
|
$
|
4,880,759
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
LOSS
(in
thousands, except par value amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
Notes
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.001
|
|
|
|
|
|
$0.001
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Total
|
|
|
|
Number of
|
|
|
Par
|
|
|
Number of
|
|
|
Par
|
|
|
Paid-in
|
|
|
From
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Loss
|
|
|
BALANCE, DECEMBER 31, 2005
|
|
|
|
|
|
$
|
|
|
|
|
27,497
|
|
|
$
|
27
|
|
|
$
|
515,147
|
|
|
$
|
(14,691
|
)
|
|
$
|
(110,227
|
)
|
|
$
|
7,052
|
|
|
$
|
397,308
|
|
|
|
|
|
Issuance of common stock in connection with acquisitions and
equity offering, net of issuance costs of $9,617
|
|
|
|
|
|
|
|
|
|
|
10,893
|
|
|
|
11
|
|
|
|
295,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,499
|
|
|
|
|
|
Exercise of common stock options and warrants and shares issued
under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
825
|
|
|
|
1
|
|
|
|
10,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,331
|
|
|
|
|
|
Stock-based compensation related to grants of common stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,455
|
|
|
|
|
|
Stock option income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
567
|
|
|
|
|
|
Repayment of notes receivable from stockholder options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,691
|
|
|
|
|
|
|
|
|
|
|
|
14,691
|
|
|
|
|
|
Effect of adoption of SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,738
|
)
|
|
|
(3,738
|
)
|
|
|
|
|
Changes in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,823
|
|
|
|
10,823
|
|
|
$
|
10,823
|
|
Unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
44
|
|
|
|
44
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,842
|
)
|
|
|
|
|
|
|
(16,842
|
)
|
|
|
(16,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
39,215
|
|
|
$
|
39
|
|
|
$
|
826,987
|
|
|
$
|
|
|
|
$
|
(127,069
|
)
|
|
$
|
14,181
|
|
|
$
|
714,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE LOSS
(Continued)
(in thousands, except par value amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.001
|
|
|
|
|
|
$0.001
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Total
|
|
|
|
Number of
|
|
|
Par
|
|
|
Number of
|
|
|
Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Loss
|
|
|
BALANCE, DECEMBER 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
39,215
|
|
|
$
|
39
|
|
|
$
|
826,987
|
|
|
$
|
(127,069
|
)
|
|
$
|
14,181
|
|
|
$
|
714,138
|
|
|
|
|
|
Issuance of common stock in connection with acquisitions and
equity offerings, net of issuance costs of $44,204
|
|
|
|
|
|
|
|
|
|
|
35,204
|
|
|
|
35
|
|
|
|
1,859,985
|
|
|
|
|
|
|
|
|
|
|
|
1,860,020
|
|
|
|
|
|
Exercise of common stock options and warrants and shares issued
under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
2,370
|
|
|
|
3
|
|
|
|
55,095
|
|
|
|
|
|
|
|
|
|
|
|
55,098
|
|
|
|
|
|
Stock-based compensation related to grants of common stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,480
|
|
|
|
|
|
|
|
|
|
|
|
57,480
|
|
|
|
|
|
Fair value associated with options exchanged in acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,022
|
|
|
|
|
|
|
|
|
|
|
|
135,022
|
|
|
|
|
|
Stock option income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
2,574
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341
|
|
|
|
341
|
|
|
$
|
341
|
|
Changes in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,758
|
|
|
|
12,758
|
|
|
|
12,758
|
|
Unrealized loss on interest rate swap (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,518
|
)
|
|
|
(9,518
|
)
|
|
|
(9,518
|
)
|
Unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,507
|
|
|
|
3,507
|
|
|
|
3,507
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(244,753
|
)
|
|
|
|
|
|
|
(244,753
|
)
|
|
|
(244,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(237,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
76,789
|
|
|
$
|
77
|
|
|
$
|
2,937,143
|
|
|
$
|
(371,822
|
)
|
|
$
|
21,269
|
|
|
$
|
2,586,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE LOSS
(Continued)
(in thousands, except par value amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
$0.001
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Loss
|
|
|
BALANCE, DECEMBER 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
76,789
|
|
|
$
|
77
|
|
|
$
|
2,937,143
|
|
|
$
|
(371,822
|
)
|
|
$
|
21,269
|
|
|
$
|
2,586,667
|
|
|
|
|
|
Issuance of Series B preferred stock in connection with
acquisition of Matria Healthcare, Inc., net of issuance costs of
$350
|
|
|
1,788
|
|
|
|
657,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
657,573
|
|
|
|
|
|
Issuance of common stock in connection with acquisitions, net of
issuance costs of $219
|
|
|
|
|
|
|
|
|
|
|
580
|
|
|
|
|
|
|
|
20,945
|
|
|
|
|
|
|
|
|
|
|
|
20,945
|
|
|
|
|
|
Exercise of common stock options and warrants and shares issued
under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
1,062
|
|
|
|
1
|
|
|
|
20,712
|
|
|
|
|
|
|
|
|
|
|
|
20,713
|
|
|
|
|
|
Preferred stock dividends (Note 16)
|
|
|
91
|
|
|
|
13,928
|
|
|
|
|
|
|
|
|
|
|
|
(14,026
|
)
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
Fair value associated with options exchanged in acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,973
|
|
|
|
|
|
|
|
|
|
|
|
20,973
|
|
|
|
|
|
Stock-based compensation related to grants of common stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,405
|
|
|
|
|
|
|
|
|
|
|
|
26,405
|
|
|
|
|
|
Stock option income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,542
|
|
|
|
|
|
|
|
|
|
|
|
17,542
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(562
|
)
|
|
|
(562
|
)
|
|
$
|
(562
|
)
|
Changes in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,889
|
)
|
|
|
(32,889
|
)
|
|
|
(32,889
|
)
|
Unrealized loss on interest rate swap (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,614
|
)
|
|
|
(11,614
|
)
|
|
|
(11,614
|
)
|
Unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,049
|
)
|
|
|
(5,049
|
)
|
|
|
(5,049
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,768
|
)
|
|
|
|
|
|
|
(21,768
|
)
|
|
|
(21,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(71,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2008
|
|
|
1,879
|
|
|
$
|
671,501
|
|
|
|
78,431
|
|
|
$
|
78
|
|
|
$
|
3,029,694
|
|
|
$
|
(393,590
|
)
|
|
$
|
(28,845
|
)
|
|
$
|
3,278,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,768
|
)
|
|
$
|
(244,753
|
)
|
|
$
|
(16,842
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense related to amortization of original issue
discounts and write-off of deferred financing costs
|
|
|
5,930
|
|
|
|
10,963
|
|
|
|
4,158
|
|
Non-cash income related to currency hedge
|
|
|
|
|
|
|
|
|
|
|
(217
|
)
|
Non-cash stock-based compensation expense
|
|
|
26,405
|
|
|
|
52,210
|
|
|
|
5,455
|
|
Charge for in-process research and development
|
|
|
|
|
|
|
173,825
|
|
|
|
4,960
|
|
Impairment of inventory
|
|
|
4,193
|
|
|
|
|
|
|
|
707
|
|
Impairment of long-lived assets
|
|
|
20,031
|
|
|
|
3,872
|
|
|
|
8,866
|
|
Loss (gain) on sale of fixed assets
|
|
|
777
|
|
|
|
59
|
|
|
|
(1,528
|
)
|
Equity earnings of unconsolidated entities
|
|
|
(1,050
|
)
|
|
|
(4,372
|
)
|
|
|
(336
|
)
|
Interest in minority investments
|
|
|
167
|
|
|
|
1,401
|
|
|
|
(299
|
)
|
Depreciation and amortization
|
|
|
267,927
|
|
|
|
101,113
|
|
|
|
39,362
|
|
Deferred and other non-cash income taxes
|
|
|
(41,756
|
)
|
|
|
(27,892
|
)
|
|
|
(409
|
)
|
Other non-cash items
|
|
|
4,378
|
|
|
|
197
|
|
|
|
714
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(48,650
|
)
|
|
|
47,018
|
|
|
|
(13,846
|
)
|
Inventories, net
|
|
|
(49,226
|
)
|
|
|
(1,463
|
)
|
|
|
167
|
|
Prepaid expenses and other current assets
|
|
|
(7,373
|
)
|
|
|
15,432
|
|
|
|
(86
|
)
|
Accounts payable
|
|
|
16,467
|
|
|
|
(6,745
|
)
|
|
|
210
|
|
Accrued expenses and other current liabilities
|
|
|
(32,008
|
)
|
|
|
(33,893
|
)
|
|
|
3,294
|
|
Other non-current liabilities
|
|
|
3,400
|
|
|
|
1,783
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
147,844
|
|
|
|
88,755
|
|
|
|
34,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(66,061
|
)
|
|
|
(36,398
|
)
|
|
|
(19,717
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
1,070
|
|
|
|
264
|
|
|
|
2,244
|
|
Cash paid for acquisitions and transactional costs, net of cash
acquired
|
|
|
(649,899
|
)
|
|
|
(2,036,116
|
)
|
|
|
(131,465
|
)
|
Cash received, net of cash paid, from formation of joint venture
|
|
|
|
|
|
|
324,170
|
|
|
|
|
|
Cash received from (paid for) investments in minority interests
and marketable securities
|
|
|
12,133
|
|
|
|
(10,177
|
)
|
|
|
(25,817
|
)
|
Increase in other assets
|
|
|
(10,575
|
)
|
|
|
(28,273
|
)
|
|
|
(4,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(713,332
|
)
|
|
|
(1,786,530
|
)
|
|
|
(178,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
139,204
|
|
|
|
(141,869
|
)
|
|
|
|
|
Issuance costs associated with preferred stock
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
Cash paid for financing costs
|
|
|
(1,401
|
)
|
|
|
(40,675
|
)
|
|
|
(2,787
|
)
|
Dividends to preferred stockholders
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
20,675
|
|
|
|
1,122,852
|
|
|
|
234,961
|
|
Net repayments on long-term debt
|
|
|
(13,787
|
)
|
|
|
(22,326
|
)
|
|
|
(20,000
|
)
|
Net proceeds (repayments) from revolving lines-of-credit
|
|
|
137,242
|
|
|
|
1,114,171
|
|
|
|
(47,879
|
)
|
Repayments of notes receivable
|
|
|
|
|
|
|
|
|
|
|
14,691
|
|
Tax benefit on exercised stock options
|
|
|
17,542
|
|
|
|
867
|
|
|
|
567
|
|
Principal payments of capital lease obligations
|
|
|
(1,300
|
)
|
|
|
(636
|
)
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
297,769
|
|
|
|
2,032,384
|
|
|
|
179,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on cash and cash equivalents
|
|
|
(5,689
|
)
|
|
|
9,019
|
|
|
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(273,408
|
)
|
|
|
343,628
|
|
|
|
36,834
|
|
Cash and cash equivalents, beginning of period
|
|
|
414,732
|
|
|
|
71,104
|
|
|
|
34,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
141,324
|
|
|
$
|
414,732
|
|
|
$
|
71,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
(1)
|
Description
of Business and Basis of Presentation
|
By developing new capabilities in near-patient diagnosis,
monitoring and health management, Inverness Medical Innovations,
Inc. and subsidiaries enable individuals to take charge of
improving their health and quality of life at home. Our products
and services, as well as our new product development efforts,
focus on infectious disease, cardiology, oncology, drugs of
abuse and womens health. In addition, we manufacture a
variety of vitamins and nutritional supplements that we market
under our brands and those of private label retailers in the
consumer market primarily in the United States.
Our business is organized into four primary operating segments:
(i) professional diagnostics, (ii) health management,
(iii) consumer diagnostics and (iv) vitamins and
nutritional supplements. The professional diagnostics segment
includes an array of innovative rapid diagnostic test products
and other in vitro diagnostic tests marketed to medical
professionals and laboratories for detection of infectious
diseases, cardiac conditions, oncology, drugs of abuse and
pregnancy. The health management segment provides comprehensive,
integrated programs and services focused on wellness, disease
and condition management, productivity enhancement and
informatics, all designed to reduce health-related costs and
enhance the health and quality of life of the individuals we
serve. The consumer diagnostics segment consists primarily of
manufacturing operations related to our role as the exclusive
manufacturer of products for SPD Swiss Precision Diagnostics, or
SPD, our 50/50 joint venture with The Procter & Gamble
Company, or P&G. SPD has significant operations in the
worldwide over-the-counter pregnancy and fertility/ovulation
test market. The vitamins and nutritional supplements segment
includes branded and private label vitamins and nutritional
supplements that are sold over-the-counter.
Acquisitions are an important part of our growth strategy. When
we acquire businesses, we seek to complement existing products
and services, enhance or expand our product lines
and/or
expand our customer base. We determine what we are willing to
pay for each acquisition partially based on our expectation that
we can cost effectively integrate the products and services of
the acquired companies into our existing infrastructure. In
addition, we utilize existing infrastructure of the acquired
companies to cost effectively introduce our products to new
geographic areas. All these factors contributed to the
acquisition prices of acquired businesses that were in excess of
the fair value of net assets acquired and the resultant goodwill
(Note 4).
Following the completion of our 50/50 joint venture with
P&G on May 17, 2007 (Note 13), we ceased to consolidate the
operating results of our consumer diagnostics business, which
represented $76.1 million of net product sales in 2007
(through the date the joint venture was formed) and
$171.6 million of net product sales in 2006, and instead
account for our 50% interest in the results of the joint venture
under the equity method of accounting. In our capacity as the
manufacturer of products for the joint venture, we supply
product to the joint venture and record revenue on those sales.
No gain on the proceeds that we received from P&G through
the formation of our joint venture will be recognized in our
financial statements until P&Gs option to require us
to purchase its interest in the joint venture at market value
expires after the fourth anniversary of the closing.
The consolidated financial statements include the accounts of
Inverness Medical Innovations, Inc. and its subsidiaries.
Intercompany transactions and balances are eliminated and net
earnings are reduced by the portion of the net earnings of
subsidiaries applicable to minority interests. Equity
investments in which we exercise significant influence but do
not control and are not the primary beneficiary are accounted
for using the equity method. Investments in which we are not
able to exercise significant influence over the investee and
which do not have readily determinable fair values are accounted
for under the cost method. Certain amounts for prior periods
have been reclassified to conform to the current period
classification.
F-9
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(2)
|
Summary
of Significant Accounting Policies
|
(a) Use of Estimates
To prepare our financial statements in conformity with
accounting principles generally accepted in the United States of
America, our management must make estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ significantly from such estimates.
(b) Foreign Currencies
We follow the provisions of Statement of Financial Accounting
Standards (SFAS) No. 52, Foreign Currency
Translation. In general, the functional currencies of our
foreign subsidiaries are the local currencies. For purpose of
consolidating the financial statements of our foreign
subsidiaries, all assets and liabilities of the foreign
subsidiaries are translated into U.S. dollars using the
exchange rate at each balance sheet date while the
stockholders equity accounts are translated at historical
exchange rates. Translation gains and losses that result from
the conversion of the balance sheets of the foreign subsidiaries
into U.S. dollars are recorded to cumulative translation
adjustment which is a component of accumulated other
comprehensive income within stockholders equity
(Note 18).
The revenue and expenses of our foreign subsidiaries are
translated using the average rates of exchange in effect during
each fiscal month during the year. Net realized and unrealized
foreign currency exchange transaction losses of
$0.9 million during 2008, losses of $1.6 million
during 2007 and gains of $2.6 million during 2006, are
included as a component of other income (expense), net in the
accompanying consolidated statements of operations.
(c) Cash and Cash Equivalents
We consider all highly liquid investments purchased with
original maturities of three months or less at the date of
acquisition to be cash equivalents. Cash equivalents consisted
of money market funds at December 31, 2008 and 2007.
(d) Restricted Cash
We have restricted cash of $2.7 million and
$141.9 million as of December 31, 2008 and 2007,
respectively. Of the $141.9 million, $139.7 million
represented a cash escrow established in connection with our
February 2008 acquisition of BBI Holdings Plc, or BBI
(Note 4).
(e) Marketable Securities
We account for our investment in marketable securities in
accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
Securities classified as available-for-sale or trading are
carried at estimated fair value, as determined by quoted market
prices at the balance sheet date. Realized gains and losses on
securities are included in earnings and are determined using the
specific identification method. Unrealized holding gains and
losses (except for other than temporary impairments) on
securities classified as available for sale, are excluded from
earnings and are reported in accumulated other comprehensive
income, net of related tax effects. Unrealized gains and losses
on actively-traded securities are included in earnings.
Marketable securities that are held indefinitely are classified
in our accompanying balance sheet as long-term marketable
securities.
F-10
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(2)
|
Summary
of Significant Accounting Policies (Continued)
|
(f) Inventories
Inventories are stated at the lower of cost
(first-in,
first-out) or market and made up of raw material,
work-in-process
and finished goods. The cost elements of
work-in-process
and finished goods inventory consist of raw material, direct
labor and manufacturing overhead. Where finished goods inventory
is purchased from third-party manufacturers, the costs of such
finished goods inventory represent the costs to acquire such
inventory.
(g) Property, Plant and Equipment
We record property, plant and equipment at historical cost or,
in the case of a business combination, at fair value on the date
of the business combination. Depreciation and amortization are
computed using the straight-line method based on the following
estimated useful lives of the related assets: machinery,
laboratory equipment and tooling, 2-21 years; buildings,
20-50 years;
leasehold improvements, lesser of remaining term of lease or
estimated useful life of asset; computer software and equipment,
1-6 years and furniture and fixtures,
2-15 years.
Land is not depreciated. Depreciation and amortization expense
related to property, plant and equipment amounted to
$51.8 million, $28.3 million and $17.6 million in
2008, 2007 and 2006, respectively. Expenditures for repairs and
maintenance are expensed as incurred.
(h) Goodwill and Other Intangible Assets with Indefinite
Lives
We account for goodwill and other intangible assets with
indefinite lives in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, which establishes
financial accounting and reporting standards for acquired
goodwill and other intangible assets. Under the provisions of
SFAS No. 142, goodwill and indefinite-lived intangible
assets are required to be tested for impairment annually, in
lieu of being amortized, using a fair value approach at the
reporting unit level. Furthermore, testing for impairment is
required on an interim basis if an event or circumstance
indicates that it is more likely than not an impairment loss has
been incurred. An impairment loss shall be recognized to the
extent that the carrying amount of goodwill or any
indefinite-lived intangible asset exceeds its implied fair
value. Impairment losses shall be recognized in operating
results.
Our valuation methodology for assessing impairment, using the
discounted cash flows approach, requires management to make
judgments and assumptions based on historical experience and
projections of future operating performance. If these
assumptions differ materially from future results, we may record
impairment charges in the future. Our annual impairment review
performed on September 30, 2008 did not indicate that
goodwill or other indefinite-lived intangible assets related to
our professional diagnostics, health management or our consumer
diagnostics reporting units were impaired.
Despite current economic conditions and the fluctuation in our
common stock price during the fourth quarter of 2008, we
determined that, based on our 2008 financial performance, our
unchanged expectations of future financial performance as used
in our fair value analysis and the improvement in our common
stock price subsequent to year end, a triggering event that
would warrant further impairment testing had not occurred and
therefore no updated testing was performed and no goodwill
impairment was recorded during 2008. Should economic conditions
deteriorate further or remain depressed for a prolonged period
of time, estimates of future cash flows for each reporting unit
may be insufficient to support carrying value and the goodwill
assigned to it, requiring us to test for impairment. Impairment
charges, if any, may be material to our results of operations
and financial position.
(i) Impairment of Other Long-Lived Tangible and
Intangible Assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we evaluate
long-lived tangible and intangible assets whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If indicators of impairment are
present with respect to
F-11
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(2)
|
Summary
of Significant Accounting Policies (Continued)
|
long-lived tangible and intangible assets used in operations and
undiscounted future cash flows are not expected to be sufficient
to recover the assets carrying amount, additional analysis
is performed as appropriate and the carrying value of the
long-lived asset is reduced to the estimated fair value, if this
is lower, and an impairment loss would be charged to expense in
the period the impairment is identified. We believe that the
carrying values of our other long-lived tangible and intangible
assets were realizable as of December 31, 2008.
(j) Business Acquisitions
We account for acquired businesses using the purchase method of
accounting as prescribed by SFAS No. 141, Business
Combinations. Under the purchase method, the operating
results of an acquired business are included in our consolidated
financial statements starting from the consummation date of the
acquisition. In addition, the assets acquired and liabilities
assumed must be recorded at the date of acquisition at their
respective estimated fair values, with any excess of the
purchase price over the estimated fair values of the net assets
acquired recorded as goodwill.
Significant judgment is required in estimating the fair value of
intangible assets and in assigning their respective useful
lives. The fair value estimates are based on available
historical information and on future expectations and
assumptions deemed reasonable by management, but are inherently
uncertain.
We generally employ the income method to estimate the fair value
of intangible assets, which is based on forecasts of the
expected future cash flows attributable to the respective
assets. Significant estimates and assumptions inherent in the
valuations reflect a consideration of other marketplace
participants, and include the amount and timing of future cash
flows (including expected growth rates and profitability), the
underlying product life cycles, economic barriers to entry, a
brands relative market position and the discount rate
applied to the cash flows. Unanticipated market or macroeconomic
events and circumstances may occur, which could affect the
accuracy or validity of the estimates and assumptions.
Other significant estimates associated with the accounting for
acquisitions include exit costs. We have undertaken certain
restructurings of the acquired businesses to realize
efficiencies and potential cost savings. Our restructuring
activities include the elimination of duplicate facilities,
reductions in staffing levels, and other costs associated with
exiting certain activities of the businesses we acquire.
Provided certain criteria are met, the estimated costs
associated with these restructuring activities are treated as
assumed liabilities, consistent with the guidance of Emerging
Issue Task Force (EITF) Issue
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination. Our estimates and assumptions
associated with these restructuring activities may change as we
execute approved plans. Decreases to the estimated costs are
generally recorded as an adjustment to goodwill. Increases to
the estimates are generally recorded as an adjustment to
goodwill during the purchase price allocation period (generally
within one year of the acquisition date) and as operating
expenses thereafter.
Any common stock issued in connection with our acquisitions is
determined based on the average market price of our common stock
pursuant to EITF Issue
No. 99-12,
Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business
Combination.
Some of our acquisitions have involved an exchange of employee
stock options and restricted stock awards. Accordingly, we have
accounted for these exchanges within a purchase business
combination under the guidance of
SFAS No. 123-R,
ShareBased Payments. In general, to the extent that
the fair value of our awards approximate the fair value of the
acquired-company awards, the fair value of the awards has been
recognized as a component of the purchase price. The fair value
of unvested or partially-vested awards is allocated between the
vested and unvested portions of the awards. The fair value of
the unvested portion is deducted from the purchase price and
recognized as compensation cost as that portion vests.
F-12
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(2)
|
Summary
of Significant Accounting Policies (Continued)
|
(k) Income Taxes
We follow the provisions of SFAS No. 109,
Accounting for Income Taxes, under which deferred tax
assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured
using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse. The
provisions of SFAS No. 109 also require the
recognition of future tax benefits such as net operating loss,
or NOL, carryforwards, to the extent that the realization of
such benefits is more likely than not. To the extent that it is
not more likely than not that we will realize such benefits, we
must establish a valuation allowance against the related
deferred tax assets (Note 19).
We follow the provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxesan Interpretation of FASB
Statement No. 109, (FIN 48). In
accordance with FIN 48, we recognize some or all of the
benefit of a tax position, if that position is more likely than
not of being sustained on audit, based on the technical merits
of the position (Note 19).
(l) Revenue Recognition
We primarily recognize revenue when the following four basic
criteria have been met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred or services
rendered, (3) the fee is fixed and determinable and
(4) collection is reasonably assured.
The majority of our revenue is derived from product revenue. We
recognize revenue upon title transfer of the products to
third-party customers, less a reserve for estimated product
returns and allowances. Determination of the reserve for
estimated product returns and allowances is based on our
managements analyses and judgments regarding certain
conditions. Should future changes in conditions prove
managements conclusions and judgments on previous analyses
to be incorrect, revenue recognized for any reporting period
could be adversely affected.
Additionally, we generate services revenue in connection with
contracts with leading healthcare organizations whereby we
distribute clinical expertise through fee-based arrangements.
Revenue for fee-based arrangements is recognized over the period
in which the services are provided. Some contracts provide that
a portion of our fees are at risk if our customers do not
achieve certain financial cost savings over a period of time,
typically one year. Revenue subject to refund is not recognized
if (i) sufficient information is not available to calculate
performance measurements, or (ii) interim performance
measurements indicate that we are not meeting performance
targets. If either of these two conditions exists, we record the
amounts as other current liabilities in the consolidated balance
sheet, deferring recognition of the revenue until we establish
that we have met the performance criteria. If we do not meet the
performance targets at the end of the contractual period we are
obligated under the contract to refund some or all of the at
risk fees.
In connection with the acquisition of the Determine business in
June 2005 from Abbott Laboratories, we entered into a transition
services agreement with Abbott, whereby Abbott would continue to
distribute the acquired products until both parties agreed the
transition was completed. During the transition period, we
recognized revenue on sales of the products when title
transferred from Abbott to third party customers.
We also receive license and royalty revenue from agreements with
third-party licensees. Revenue from fixed fee license and
royalty agreements are recognized on a straight-line basis over
the obligation period of the related license agreements. License
and royalty fees that the licensees calculate based on their
sales, which we have the right to audit under most of our
agreements, are generally recognized upon receipt of the license
or royalty payments unless we are able to reasonably estimate
the fees as they are earned. License and royalty fees that are
determinable prior to the receipt thereof are recognized in the
period they are earned.
F-13
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(2)
|
Summary
of Significant Accounting Policies (Continued)
|
(m) Employee Stock-Based Compensation Arrangements
Effective January 1, 2006, we began recording compensation
expense associated with stock options and other forms of equity
compensation in accordance with
SFAS No. 123-R,
Share-Based Payment, as interpreted by SEC Staff
Accounting Bulletin (SAB) No. 107. We adopted
the modified prospective transition method provided for under
SFAS No. 123-R,
and consequently have not retroactively adjusted results from
prior periods. Under this transition method, compensation cost
associated with stock options now includes:
(i) amortization related to the remaining unvested portion
of all stock option awards granted prior to January 1,
2006, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS No. 123, and
(ii) amortization related to all stock option awards
granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the
provisions of
SFAS No. 123-R.
In addition, we record expense over the offering period in
connection with shares issued under our employee stock purchase
plan. The compensation expense for stock-based compensation
awards includes an estimate for forfeitures and is recognized
over the expected term of the options using the straight-line
method.
Our stock option plans provide for grants of options to
employees to purchase common stock at the fair market value of
such shares on the grant date of the award. The options
generally vest over a four-year period, beginning on the date of
grant, with a graded vesting schedule of 25% at the end of each
of the four years. The fair value of each option grant is
estimated on the date of grant using a Black-Scholes
option-pricing method. We use historical data to estimate the
expected price volatility and the expected forfeiture rate. The
contractual term of our stock option awards is ten years. The
risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant with a remaining term equal to the
expected term of the option. We have not made any dividend
payments nor do we have plans to pay dividends in the
foreseeable future.
(n) Net (Loss) Income per Common Share
Net (loss) income per common share, computed in accordance with
SFAS No. 128, Earnings per Share, is based upon
the weighted average number of outstanding common shares and the
dilutive effect of common share equivalents, such as options and
warrants to purchase common stock, convertible preferred stock
and convertible notes, if applicable, that are outstanding each
year (Note 15).
(o) Other Operating Expenses
We expense advertising costs as incurred. In 2008, 2007 and
2006, advertising costs amounted to $15.7 million,
$16.3 million and $23.0 million, respectively, and are
included in sales and marketing expenses in the accompanying
consolidated statements of operations.
Shipping and handling costs are included in cost of net revenue
in the accompanying consolidated statements of operations.
Additionally, to the extent that we charge our customers for
shipping and handling costs, these costs are recorded as product
revenues.
(p) Concentration of Credit Risk, Off-Balance Sheet
Risks and Other Risks and Uncertainties
Financial instruments that potentially subject us to
concentration of credit risk primarily consist of cash and cash
equivalents and accounts receivable. We invest our excess cash
primarily in high quality securities and limit the amount of our
credit exposure to any one financial institution. We do not
require collateral or other securities to support customer
receivables; however, we perform on-going credit evaluations of
our customers and maintain allowances for potential credit
losses.
At December 31, 2008 and 2007, we had one individual
customer account receivable balance outstanding that represented
14% and 12% of the gross account receivable balance,
respectively. During 2008 and 2007,
F-14
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(2)
|
Summary
of Significant Accounting Policies (Continued)
|
we had one customer that represented 22% and 17% of our net
revenue, respectively, and purchased our professional
diagnostics products. During 2006, no customer represented
greater than 10% of our net revenue.
We rely on a number of third parties to manufacture certain of
our products. If any of our third-party manufacturers cannot, or
will not, manufacture our products in the required volumes, on a
cost-effective basis, in a timely manner, or at all, we will
have to secure additional manufacturing capacity. Any
interruption or delay in manufacturing could have a material
adverse effect on our business and operating results.
(q) Financial Instruments and Fair Value of Financial
Instruments
Our primary financial instruments at December 31, 2008 and
2007 consisted of cash equivalents, marketable securities,
accounts receivable, accounts payable, debt and our interest
rate swap contract. The estimated fair value of these financial
instruments approximates their carrying values at
December 31, 2008 and 2007. The estimated fair values have
been determined through information obtained from market
sources. We account for our derivative instruments in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and related amendments,
including SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities.
(r) Recent Accounting Pronouncements
Recently Issued Standards
In June 2008, the FASB ratified EITF Issue
No. 07-05,
Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entitys Own Stock, which addresses the
accounting for certain instruments as derivatives under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. Under this new pronouncement, specific
guidance is provided regarding requirements for an entity to
consider embedded features as indexed to the entitys own
stock. This Issue is effective for fiscal years beginning after
December 15, 2008. We are currently in the process of
evaluating the impact of adopting this pronouncement.
In May 2008, the FASB issued FASB Staff Position
(FSP) Accounting Principles Board (APB)
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled In Cash upon Conversion (Including Partial Cash
Settlement). FSP APB
14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entitys nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods. FSP
APB 14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods
within those fiscal years. This FSP should be applied
retrospectively for all periods presented. We are currently in
the process of evaluating the impact of adopting this
pronouncement.
In April 2008, the FASB issued
FSP 142-3,
Determination of the Useful Life of Intangible Assets.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets.
FSP 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, as well as interim
periods within those fiscal years. We are currently in the
process of evaluating the impact of adopting this pronouncement.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activitiesan Amendment of FASB Statement No. 133.
This statement requires entities that utilize derivative
instruments to provide qualitative disclosures about their
objectives and strategies for using such instruments, as well as
any details of credit-risk-related contingent features contained
within derivatives. It also requires entities to disclose
additional information about the amounts and location of
derivatives located within the
F-15
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(2)
|
Summary
of Significant Accounting Policies (Continued)
|
financial statements, how the provisions of
SFAS No. 133 have been applied and the impact that
hedges have on an entitys financial position, financial
performance and cash flows. This statement is effective for
fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. We
are currently in the process of evaluating the impact of
adopting this pronouncement.
In December 2007, the FASB ratified the consensus reached by the
EITF in EITF Issue
No. 07-01,
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property.
The EITF concluded that a collaborative arrangement is one in
which the participants are actively involved and are exposed to
significant risks and rewards that depend on the ultimate
commercial success of the endeavor. Revenues and costs incurred
with third parties in connection with collaborative arrangements
would be presented gross or net based on the criteria in EITF
Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent,
and other accounting literature. Payments to or from
collaborators would be evaluated and presented based on the
nature of the arrangement and its terms, the nature of the
entitys business, and whether those payments are within
the scope of other accounting literature. The nature and purpose
of collaborative arrangements are to be disclosed along with the
accounting policies and the classification and amounts of
significant financial statement amounts related to the
arrangements. Activities in the arrangement conducted in a
separate legal entity should be accounted for under other
accounting literature; however required disclosure under EITF
Issue
No. 07-01
applies to the entire collaborative agreement. This Issue is
effective for fiscal years beginning after December 15,
2008, and is to be applied retrospectively to all periods
presented for all collaborative arrangements existing as of the
effective date. We are currently in the process of evaluating
the impact of adopting this pronouncement.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statementsan Amendment of Accounting Research Bulletin
(ARB) No. 51. This statement amends ARB No. 51 to
establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity and should therefore be
reported as equity in the consolidated financial statements. The
statement also establishes standards for presentation and
disclosure of the non-controlling results on the consolidated
income statement. SFAS No. 160 is effective for fiscal
years beginning on or after December 15, 2008. We are
currently in the process of evaluating the impact of adopting
this pronouncement.
In December 2007, the FASB issued
SFAS No. 141-R,
Business Combinations. This statement replaces
SFAS No. 141, but retains the fundamental requirements
in SFAS No. 141 that the acquisition method of
accounting be used for all business combinations. This statement
requires an acquirer to recognize and measure the identifiable
assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at their fair values as
of the acquisition date. The statement requires acquisition
costs and any restructuring costs associated with the business
combination to be recognized separately from the fair value of
the business combination.
SFAS No. 141-R
establishes requirements for recognizing and measuring goodwill
acquired in the business combination or a gain from a bargain
purchase as well as disclosure requirements designed to enable
users to better interpret the results of the business
combination.
SFAS No. 141-R
is effective for fiscal years beginning on or after
December 15, 2008. Given our history of acquisition
activity, we anticipate the adoption of
SFAS No. 141-R
to have a significant impact on our consolidated financial
statements. Early adoption of this statement is not permitted.
As of December, 31, 2008 there were $3.8 million in
capitalized acquisition costs classified in other non-current
assets. The capitalized costs will be written off in January
2009 when this statement becomes effective.
Recently Adopted Standards
Effective October 2008, we adopted
FSP 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.
FSP 157-3
clarifies the application of SFAS No. 157 in an
inactive
F-16
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(2)
|
Summary
of Significant Accounting Policies (Continued)
|
market. It demonstrated how the fair value of a financial asset
is determined when the market for that financial asset is
inactive. The adoption of these provisions did not have a
material impact on our consolidated financial statements.
Effective January 1, 2008, we adopted EITF Issue
No. 07-03,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities.
EITF 07-03
concludes that non-refundable advance payments for future
research and development activities should be deferred and
capitalized until the goods have been delivered or the related
services have been performed. If an entity does not expect the
goods to be delivered or services to be rendered, the
capitalized advance payment should be charged to expense. The
effect of applying this EITF is prospective for new contracts
entered into on or after the date of adoption. The adoption of
this EITF did not have a material impact on our consolidated
financial statements.
Effective January 1, 2008, we adopted
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an Amendment of
FASB No. 115. This Statement provides companies with an
option to measure, at specified election dates, many financial
instruments and certain other items at fair value that are not
currently measured at fair value. The standard also establishes
presentation and disclosure requirements designed to facilitate
comparison between entities that choose different measurement
attributes for similar types of assets and liabilities. If the
fair value option is elected, the effect of the first
remeasurement to fair value is reported as a cumulative effect
adjustment to the opening balance of retained earnings. The
statement is to be applied prospectively upon adoption. The
adoption of these provisions did not have a material impact on
our consolidated financial statements.
Effective January 1, 2008, we adopted
SFAS No. 157, Fair Value Measurements, for all
financial instruments and non-financial instruments accounted
for at fair value on a recurring basis. SFAS No. 157
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. The standard applies whenever other
standards require, (or permit), assets or liabilities to be
measured at fair value. The standard does not expand the use of
fair value in any new circumstances. The FASB has provided a
one-year deferral for the implementation for other non-financial
assets and liabilities. The adoption of these provisions did not
have a material impact on our consolidated financial statements.
For further information about the adoption of the required
provisions of SFAS No. 157 see Note 7.
F-17
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(3)
|
Other
Balance Sheet Information
|
Components of selected captions in the consolidated balance
sheets consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
45,161
|
|
|
$
|
45,111
|
|
Work-in-process
|
|
|
41,651
|
|
|
|
40,184
|
|
Finished goods
|
|
|
112,319
|
|
|
|
62,936
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
199,131
|
|
|
$
|
148,231
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Machinery, laboratory equipment and tooling
|
|
$
|
152,760
|
|
|
$
|
134,776
|
|
Land and buildings
|
|
|
139,186
|
|
|
|
132,512
|
|
Leasehold improvements
|
|
|
22,158
|
|
|
|
29,032
|
|
Computer software and equipment
|
|
|
60,135
|
|
|
|
34,857
|
|
Furniture and fixtures
|
|
|
15,449
|
|
|
|
16,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
389,688
|
|
|
|
347,478
|
|
Less: Accumulated depreciation and amortization
|
|
|
(105,205
|
)
|
|
|
(79,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
284,483
|
|
|
$
|
267,880
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities:
|
|
|
|
|
|
|
|
|
Compensation and compensation-related
|
|
$
|
60,495
|
|
|
$
|
55,397
|
|
Advertising and marketing
|
|
|
7,433
|
|
|
|
6,308
|
|
Professional fees
|
|
|
8,517
|
|
|
|
23,436
|
|
Interest payable
|
|
|
4,459
|
|
|
|
2,436
|
|
Royalty obligations
|
|
|
13,821
|
|
|
|
8,221
|
|
Deferred revenue
|
|
|
21,977
|
|
|
|
5,337
|
|
Taxes payable
|
|
|
47,658
|
|
|
|
39,778
|
|
Acquisition-related obligations
|
|
|
29,107
|
|
|
|
22,375
|
|
Other
|
|
|
39,665
|
|
|
|
11,647
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
233,132
|
|
|
$
|
174,935
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Business
Combinations
|
(a) Acquisitions in 2008
(i) Acquisition of Matria
On May 9, 2008, we acquired Matria Healthcare Inc., or
Matria, a national provider of health improvement, disease
management and high-risk pregnancy management programs and
services. The preliminary aggregate purchase price was
$834.6 million, which consisted of $141.3 million in
cash, Series B convertible preferred stock with a fair
value of approximately $657.9 million, $17.3 million
of fair value associated with Matria employee stock options
exchanged as part of the transaction and $18.0 million for
direct acquisition costs. In addition, we assumed and
immediately repaid debt totaling approximately
$279.2 million. The operating results of Matria are
included in our health management reporting unit and business
segment.
F-18
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
A summary of the preliminary purchase price allocation for this
acquisition is as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
109,106
|
|
Property, plant and equipment
|
|
|
24,460
|
|
Goodwill
|
|
|
836,178
|
|
Intangible assets
|
|
|
325,385
|
|
Other non-current assets
|
|
|
27,184
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,322,313
|
|
|
|
|
|
|
Current liabilities
|
|
|
358,270
|
|
Non-current liabilities
|
|
|
129,486
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
487,756
|
|
|
|
|
|
|
Net assets acquired
|
|
|
834,557
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
17,961
|
|
Fair value of Series B convertible preferred stock issued
(1,787,834 shares)
|
|
|
657,923
|
|
Fair value of stock options exchanged (1,490,655 options)
|
|
|
17,334
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
141,339
|
|
|
|
|
|
|
We expect that all of the amount allocated to goodwill will not
be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
31,000
|
|
|
|
3 years
|
|
Database
|
|
|
25,000
|
|
|
|
10 years
|
|
Trade names
|
|
|
1,185
|
|
|
|
5 months
|
|
Customer relationships
|
|
|
253,000
|
|
|
|
13 years
|
|
Non-compete agreements
|
|
|
15,200
|
|
|
|
0.75-3 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
325,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(ii) Acquisition of BBI
On February 12, 2008, we acquired BBI Holdings Plc, or BBI,
a publicly-traded company headquartered in the United Kingdom
that specializes in the development and manufacture of
non-invasive lateral flow tests and gold reagents. The
preliminary aggregate purchase price was $163.2 million,
which consisted of $138.6 million in cash, including
$14.7 million of cash paid for shares of BBI common stock
which we owned prior to the acquisition date, common stock with
an aggregate fair value of $14.4 million, $6.6 million
for direct acquisition costs and $3.6 million of fair value
associated with BBI employee stock options exchanged as part of
the transaction. The operating results of BBI are included in
our professional and consumer diagnostics reporting units and
business segments.
F-19
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
A summary of the preliminary purchase price allocation for this
acquisition is as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
22,421
|
|
Property, plant and equipment
|
|
|
7,603
|
|
Goodwill
|
|
|
87,713
|
|
Intangible assets
|
|
|
90,201
|
|
Other non-current assets
|
|
|
3,001
|
|
|
|
|
|
|
Total assets acquired
|
|
|
210,939
|
|
|
|
|
|
|
Current liabilities
|
|
|
15,587
|
|
Non-current liabilities
|
|
|
32,141
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
47,728
|
|
|
|
|
|
|
Net assets acquired
|
|
|
163,211
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
6,581
|
|
Fair value of common stock issued (251,085 shares)
|
|
|
14,397
|
|
Fair value of stock options/awards exchanged (329,612
options/25,626 awards)
|
|
|
3,639
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
138,594
|
|
|
|
|
|
|
We expect that all of the amount allocated to goodwill will not
be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
28,043
|
|
|
|
15-20 years
|
|
Trade names and other intangible assets
|
|
|
16,180
|
|
|
|
10-25 years
|
|
Customer relationships
|
|
|
45,978
|
|
|
|
7-25 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
90,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(iii) Acquisition of Panbio
On January 7, 2008, we acquired Panbio Limited, or Panbio,
an Australian publicly-traded company headquartered in Brisbane,
Australia, that develops and manufactures diagnostic tests for
use in the diagnosis of a broad range of infectious diseases.
The preliminary aggregate purchase price was $36.5 million,
which consisted of $35.9 million in cash and
$0.6 million for direct acquisition costs. In June 2008, we
sold certain assets totaling $1.8 million related to a
particular product line. The sale of these assets, at their
acquisition date fair values, is reflected in the preliminary
purchase price allocation. The operating results of Panbio are
included in our professional diagnostics reporting unit and
business segment.
F-20
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
A summary of the preliminary purchase price allocation for this
acquisition is as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
12,835
|
|
Property, plant and equipment
|
|
|
2,080
|
|
Goodwill
|
|
|
13,556
|
|
Intangible assets
|
|
|
17,717
|
|
Other non-current assets
|
|
|
246
|
|
|
|
|
|
|
Total assets acquired
|
|
|
46,434
|
|
|
|
|
|
|
Current liabilities
|
|
|
3,115
|
|
Non-current liabilities
|
|
|
6,810
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
9,925
|
|
|
|
|
|
|
Net assets acquired
|
|
|
36,509
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
566
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
35,943
|
|
|
|
|
|
|
We expect that all of the amount allocated to goodwill will not
be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
4,154
|
|
|
|
5-7 years
|
|
Trade name
|
|
|
2,382
|
|
|
|
10 years
|
|
Customer relationships
|
|
|
11,181
|
|
|
|
17-25 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
17,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(iv)
|
Other acquisitions in 2008
|
During 2008, we acquired the following assets and businesses for
an aggregate preliminary purchase price of $49.2 million,
in which we paid $42.0 million in cash, $1.7 million
in direct acquisition costs, and accrued contingent
consideration and milestone payments totaling $5.5 million:
|
|
|
|
|
Certain assets from Mochida Pharmaceutical Co., Ltd, or Mochida.
As part of the acquisition of certain assets, Mochida
transferred the exclusive distribution rights in Japan for
certain Osteomark products (Acquired April 2008)
|
|
|
|
Privately-owned provider of care and health management services
(Acquired July 2008)
|
|
|
|
Vision Biotech Pty Ltd, or Vision, located in Cape Town, South
Africa, a privately-owned distributor of rapid diagnostic
products predominantly to the South African marketplace
(Acquired September 2008)
|
|
|
|
Global Diagnostics CC, or Global, located in Johannesburg, South
Africa, a privately-owned contract manufacturer and distributor
of high quality rapid diagnostic tests predominantly to the
South African marketplace (Acquired September 2008)
|
F-21
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
|
|
|
|
|
DiaTeam Diagnostika und Arzneimittel Großhandel GmbH, or
DiaTeam, located in Linz, Austria, a privately-owned distributor
of high quality rapid diagnostic tests predominantly to the
Austrian marketplace (Acquired September 2008)
|
|
|
|
Prodimol Biotecnologia S.A., or Prodimol, located in Brazil, a
privately-owned distributor of high quality rapid diagnostic
tests predominantly to the Brazilian marketplace (Acquired
October 2008)
|
|
|
|
Ameditech, Inc., or Ameditech, located in San Diego,
California, a leading manufacturer of high quality drugs of
abuse diagnostic tests (Acquired December 2008)
|
A summary of the preliminary purchase price allocation for these
acquisitions is as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
10,966
|
|
Property, plant and equipment
|
|
|
655
|
|
Goodwill
|
|
|
16,238
|
|
Other non-current assets
|
|
|
173
|
|
Intangible assets
|
|
|
36,938
|
|
|
|
|
|
|
Total assets acquired
|
|
|
64,970
|
|
|
|
|
|
|
Current liabilities
|
|
|
5,838
|
|
Non-current liabilities
|
|
|
9,955
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
15,793
|
|
|
|
|
|
|
Net assets acquired
|
|
|
49,177
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
1,725
|
|
Accrued earned milestone and contingent consideration
|
|
|
5,466
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
41,986
|
|
|
|
|
|
|
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
2,866
|
|
|
|
6-10 years
|
|
Trade names
|
|
|
2,690
|
|
|
|
10 years
|
|
Customer relationships
|
|
|
29,477
|
|
|
|
3.5-14 years
|
|
Non-compete agreements
|
|
|
1,063
|
|
|
|
2-5 years
|
|
Manufacturing know-how
|
|
|
842
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
36,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mochida, Vision, Global, DiaTeam, Prodimol and Ameditech are
included in our professional diagnostics reporting unit and
business segment; and the healthcare acquisition is included in
our health management reporting unit and business segment.
Goodwill has been recognized in the Vision, Global, DiaTeam,
Prodimol and Ameditech transactions and amounted to
approximately $16.2 million. Goodwill related to these
acquisitions, excluding Ameditech, is not deductible for tax
purposes.
F-22
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
(b) Acquisitions in 2007
(i) Acquisition of ParadigmHealth
On December 21, 2007, we acquired ParadigmHealth, Inc., or
ParadigmHealth, a privately-owned leading provider of precise
medical management to provide optimal health outcomes for
acutely ill and clinically complex patients. The aggregate
purchase price was $236.8 million, which consisted of
$236.0 million in cash and $0.8 million for direct
acquisition costs. The operating results of ParadigmHealth are
included in our health management reporting unit and business
segment.
A summary of the purchase price allocation for this acquisition
is as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
34,498
|
|
Property, plant and equipment
|
|
|
2,163
|
|
Goodwill
|
|
|
168,172
|
|
Intangible assets
|
|
|
61,449
|
|
|
|
|
|
|
Total assets acquired
|
|
|
266,282
|
|
|
|
|
|
|
Current liabilities
|
|
|
1,094
|
|
Non-current liabilities
|
|
|
28,397
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
29,491
|
|
|
|
|
|
|
Net assets acquired
|
|
|
236,791
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
844
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
235,947
|
|
|
|
|
|
|
We expect that substantially all of the amount allocated to
goodwill will not be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
6,900
|
|
|
|
5-10 years
|
|
Trademarks
|
|
|
249
|
|
|
|
9 months
|
|
Software
|
|
|
5,100
|
|
|
|
8 years
|
|
Non-compete agreements
|
|
|
2,700
|
|
|
|
2 years
|
|
Customer relationships
|
|
|
46,500
|
|
|
|
6-21 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
61,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(ii) Acquisition of Redwood
On December 20, 2007, we acquired Redwood Toxicology
Laboratories, Inc., or Redwood, a privately-owned drugs of abuse
diagnostics and testing company. The aggregate purchase price
was $53.8 million, which consisted of $53.3 million in
cash and $0.5 million for direct acquisition costs. In
addition, we assumed
F-23
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
and paid debt of $47.7 million. The operating results of
Redwood are included in our professional diagnostics reporting
unit and business segment.
A summary of the purchase price allocation for this acquisition
is as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
11,234
|
|
Property, plant and equipment
|
|
|
5,653
|
|
Goodwill
|
|
|
21,471
|
|
Intangible assets
|
|
|
66,020
|
|
Other non-current assets
|
|
|
84
|
|
|
|
|
|
|
Total assets acquired
|
|
|
104,462
|
|
|
|
|
|
|
Current liabilities
|
|
|
2,947
|
|
Non-current liabilities
|
|
|
47,708
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
50,655
|
|
|
|
|
|
|
Net assets acquired
|
|
|
53,807
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
546
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
53,261
|
|
|
|
|
|
|
We expect that substantially all of the amount allocated to
goodwill will not be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Trademarks
|
|
$
|
5,970
|
|
|
|
10 years
|
|
Non-compete agreements
|
|
|
2,800
|
|
|
|
2-5 years
|
|
Customer relationships
|
|
|
57,250
|
|
|
|
11-12.5 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
66,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(iii) Acquisition of Alere
On November 16, 2007, we acquired Alere Medical, Inc., or
Alere Medical, a privately-held leading provider of care and
health management services. The aggregate purchase price was
$311.3 million, which consisted of $128.6 million in
cash, common stock with an aggregate fair value of
$161.1 million, $1.0 million for direct acquisition
costs and $20.6 million of fair value associated with Alere
Medical employee stock options which were exchanged as part of
the transaction. The operating results of Alere Medical are
included in our health management reporting unit and business
segment.
With respect to Alere Medical, the terms of the acquisition
agreement provided for contingent consideration payable to each
Alere Medical stockholder who owned shares of our common stock
or retained the option to purchase shares of our common stock on
the six-month anniversary of the closing of the acquisition. The
contingent consideration, payable in cash or stock at our
election, was equal to the number of such shares of our common
stock or options to purchase our common stock held on the
six-month anniversary
F-24
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
multiplied by the amount that $58.31 exceeded the greater of the
average price of our common stock for the ten business days
preceding the six-month anniversary date, or 75% of $58.31.
Accordingly, based on the price of our common stock for the ten
business days preceding the six-month anniversary of the closing
of the acquisition, we issued approximately 0.1 million
shares of our common stock on May 30, 2008 to the Alere
Medical stockholders based on the remaining outstanding shares
at that time. Payment of this contingent consideration did not
impact the purchase price for this acquisition.
A summary of the purchase price allocation for this acquisition
is as follows (dollars in thousands):
|
|
|
|
|
Current assets
|
|
$
|
13,332
|
|
Property, plant and equipment
|
|
|
8,897
|
|
Goodwill
|
|
|
262,565
|
|
Intangible assets
|
|
|
55,500
|
|
Other non-current assets
|
|
|
5,523
|
|
|
|
|
|
|
Total assets acquired
|
|
|
345,817
|
|
|
|
|
|
|
Current liabilities
|
|
|
10,651
|
|
Non-current liabilities
|
|
|
23,880
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
34,531
|
|
|
|
|
|
|
Net assets acquired
|
|
|
311,286
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
959
|
|
Fair value of common stock issued (2,762,182 shares)
|
|
|
161,086
|
|
Fair value of stock options exchanged (380,894 options)
|
|
|
20,614
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
128,627
|
|
|
|
|
|
|
We expect that substantially all of the amount allocated to
goodwill will not be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
6,100
|
|
|
|
3-6 years
|
|
Trademarks
|
|
|
1,500
|
|
|
|
10 years
|
|
Customer relationships
|
|
|
46,300
|
|
|
|
9 years
|
|
Non-compete agreements
|
|
|
1,600
|
|
|
|
0.5-1 year
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
55,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(iv) Acquisition of HemoSense
On November 6, 2007, we acquired HemoSense, Inc., or
HemoSense, a publicly-traded developer and marketer of
point-of-care testing products for therapeutic drug monitoring.
The aggregate purchase price was $244.0 million, which
consisted of common stock with an aggregate fair value of
$226.4 million, $0.9 million for direct acquisition
costs and $16.7 million of fair value associated with
HemoSense employee stock options
F-25
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
which were exchanged as part of the transaction. The operating
results of HemoSense are included in our professional
diagnostics reporting unit and business segment.
A summary of the purchase price allocation for this acquisition
is as follows (dollars in thousands):
|
|
|
|
|
Current assets
|
|
$
|
23,399
|
|
Property, plant and equipment
|
|
|
1,936
|
|
Goodwill
|
|
|
137,791
|
|
Intangible assets
|
|
|
100,670
|
|
Other non-current assets
|
|
|
232
|
|
|
|
|
|
|
Total assets acquired
|
|
|
264,028
|
|
|
|
|
|
|
Current liabilities
|
|
|
15,232
|
|
Non-current liabilities
|
|
|
4,747
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
19,979
|
|
|
|
|
|
|
Net assets acquired
|
|
|
244,049
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
939
|
|
Fair value of common stock issued (3,691,369 shares)
|
|
|
226,415
|
|
Fair value of stock options exchanged (380,732 options)
|
|
|
16,695
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
|
|
|
|
|
|
|
We expect that substantially all of the amount allocated to
goodwill will not be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
24,130
|
|
|
|
1-10 years
|
|
Trademarks
|
|
|
7,100
|
|
|
|
10 years
|
|
Customer relationships
|
|
|
69,100
|
|
|
|
20 years
|
|
Non-compete agreements
|
|
|
300
|
|
|
|
1 year
|
|
Internally-developed software
|
|
|
40
|
|
|
|
10 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
100,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(v) Acquisition of Cholestech
On September 12, 2007, we acquired Cholestech Corporation,
or Cholestech, a publicly-traded leading provider of diagnostic
tools and information for immediate risk assessment and
therapeutic monitoring of heart disease and inflammatory
disorders. The aggregate purchase price was $354.7 million,
which consisted of common stock with an aggregate fair value of
$329.8 million, $4.6 million for direct acquisition
costs and $20.3 million of fair value associated with the
Cholestech employee stock options and restricted stock awards
which were exchanged as part of the transaction. The operating
results of Cholestech are included in our cardiology reporting
unit of our professional diagnostics business segment.
F-26
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
A summary of the purchase price allocation for this acquisition
is as follows (dollars in thousands):
|
|
|
|
|
Current assets
|
|
$
|
83,377
|
|
Property, plant and equipment
|
|
|
6,643
|
|
Goodwill
|
|
|
143,611
|
|
Intangible assets
|
|
|
209,078
|
|
Other non-current assets
|
|
|
669
|
|
|
|
|
|
|
Total assets acquired
|
|
|
443,378
|
|
|
|
|
|
|
Current liabilities
|
|
|
17,685
|
|
Non-current liabilities
|
|
|
71,032
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
88,717
|
|
|
|
|
|
|
Net assets acquired
|
|
|
354,661
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
4,556
|
|
Fair value of common stock issued (6,840,361 shares)
|
|
|
329,774
|
|
Fair value of stock options/awards exchanged (733,077
options/awards)
|
|
|
20,331
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
|
|
|
|
|
|
|
We expect that substantially all of the amount allocated to
goodwill will not be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
83,833
|
|
|
|
13 years
|
|
Trademarks
|
|
|
20,590
|
|
|
|
10 years
|
|
Customer relationships
|
|
|
99,060
|
|
|
|
26 years
|
|
License agreement
|
|
|
355
|
|
|
|
7 years
|
|
Non-compete agreements
|
|
|
5,040
|
|
|
|
1.5-2 years
|
|
Internally-developed software
|
|
|
200
|
|
|
|
7 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
209,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(vi) Acquisition of Biosite
On June 29, 2007, we completed our acquisition of Biosite
Incorporated, or Biosite, a publicly-traded global medical
diagnostic company utilizing a biotechnology approach to create
products for the diagnosis of critical diseases and conditions.
The aggregate purchase price was $1.8 billion, which
consisted of $1.6 billion in cash, $68.9 million in
estimated direct acquisition costs and $77.4 million of
fair value associated with Biosite employee stock options which
were exchanged as part of the transaction. In connection with
our acquisition of Biosite, we also recorded $45.2 million
of compensation expense associated with unvested stock options.
The operating results of Biosite are included in our cardiology
reporting unit of our professional diagnostics business segment.
F-27
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
A summary of the purchase price allocation for this acquisition
is as follows (dollars in thousands):
|
|
|
|
|
Current assets
|
|
$
|
325,804
|
|
Property, plant and equipment
|
|
|
145,144
|
|
Goodwill
|
|
|
778,734
|
|
Intangible assets
|
|
|
663,891
|
|
In-process research and development
|
|
|
169,000
|
|
Other non-current assets
|
|
|
102,343
|
|
|
|
|
|
|
Total assets acquired
|
|
|
2,184,916
|
|
|
|
|
|
|
Current liabilities
|
|
|
128,971
|
|
Non-current liabilities
|
|
|
266,621
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
395,592
|
|
|
|
|
|
|
Net assets acquired
|
|
|
1,789,324
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
68,897
|
|
Cash settlement of vested stock options
|
|
|
51,503
|
|
Non-cash income tax benefits on stock options
|
|
|
2,574
|
|
Fair value of stock options exchanged (753,863 options)
|
|
|
25,879
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
1,640,471
|
|
|
|
|
|
|
As part of the purchase price allocation, IPR&D projects
have been valued at $169.0 million. These are projects that
have not yet achieved technological feasibility as of the date
of our acquisition of Biosite.
We expect that substantially all of the amount allocated to
goodwill will not be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their and respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
237,691
|
|
|
|
5-19.5 years
|
|
Trademarks
|
|
|
78,100
|
|
|
|
10.5 years
|
|
Customer relationships
|
|
|
348,100
|
|
|
|
1.5-22.5 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
663,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(vii) Acquisition of Instant
On March 12, 2007, we acquired 75% of the issued and
outstanding capital stock of Instant Technologies, Inc., or
Instant, a privately-owned distributor of rapid drugs of abuse
diagnostic products used in the workplace, criminal justice and
other testing markets. On December 28, 2007, we acquired
the remaining 25% interest, bringing the aggregate purchase
price to $60.8 million, which consisted of
$38.9 million in cash, common stock with an aggregate fair
value of $21.5 million and $0.3 million in direct
acquisition costs. In addition, we assumed and paid debt of
$4.9 million. The operating results of Instant are included
in our professional diagnostics reporting unit and business
segment.
F-28
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
A summary of the purchase price allocation for this acquisition
is as follows (dollars in thousands):
|
|
|
|
|
Current assets
|
|
$
|
9,012
|
|
Property, plant and equipment
|
|
|
141
|
|
Goodwill
|
|
|
43,708
|
|
Intangible assets
|
|
|
28,520
|
|
|
|
|
|
|
Total assets acquired
|
|
|
81,381
|
|
|
|
|
|
|
Current liabilities
|
|
|
4,273
|
|
Non-current liabilities
|
|
|
16,334
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
20,607
|
|
|
|
|
|
|
Net assets acquired
|
|
|
60,774
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
348
|
|
Fair value of common stock issued (463,399 shares)
|
|
|
21,530
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
38,896
|
|
|
|
|
|
|
We expect that the amount allocated to goodwill will not be
deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Trademarks
|
|
$
|
3,170
|
|
|
|
5 years
|
|
Customer relationships
|
|
|
25,350
|
|
|
|
12 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
28,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(viii) Other acquisitions in 2007
During the year ended December 31, 2007, we acquired the
following businesses for an aggregate purchase price of
$184.5 million, in which we paid $116.0 million in
cash, issued 1.0 million shares of our common stock with an
aggregate fair value of $54.1 million, issued notes payable
totaling $9.6 million, incurred $4.5 million in direct
acquisition costs and accrued milestone payments totaling
$0.3 million:
|
|
|
|
|
Matritech, Inc., or Matritech, located in Newton, Massachusetts
and Freiburg, Germany, a biotechnology company principally
engaged in the development, manufacturing, marketing,
distribution and licensing of cancer diagnostic technologies and
products (Acquired December 2007)
|
|
|
|
Aska Diagnostic, Inc., or Aska, located in Tokyo, Japan, a
distributor of professional diagnostics in Japan (Acquired
December 2007)
|
|
|
|
90.91% share in Biosystems S.A., or Biosystems, located in Cali
and Bogota, Colombia, a distributor of diagnostics tests,
instruments and reagents throughout Colombia (Acquired December
2007). In October 2008, we acquired the remaining 9.09% interest
in Biosystems
|
|
|
|
the assets of Akubio, a research company located in Cambridge,
England (Acquired October 2007)
|
F-29
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
|
|
|
|
|
Bio-Stat Healthcare Group, or Bio-Stat, located in Cheshire,
United Kingdom, a privately-owned distributor of core laboratory
and point-of-care diagnostic testing products to the U.K.
marketplace (Acquired October 2007)
|
|
|
|
Spectral Diagnostics Private Limited and its affiliate Source
Diagnostics (India) Private Limited, or Spectral/Source, located
in New Delhi and Shimla, India, distributes professional
diagnostics in India (Acquired July 2007)
|
|
|
|
52.45% share in Diamics, Inc., or Diamics, located in Novato,
California, a developer of molecular-based cancer screening and
diagnostic systems (Acquired July 2007)
|
|
|
|
Quality Assured Services, Inc., or QAS, located in Orlando,
Florida, a privately-owned provider of diagnostic home tests and
services in the U.S. marketplace (Acquired June 2007)
|
|
|
|
Orange Medical, or Orange, located in Tilburg, The Netherlands,
a manufacturer and marketer of rapid diagnostic products to the
Benelux marketplace (Acquired May 2007)
|
|
|
|
Promesan S.r.l., or Promesan, located in Milan, Italy, a
distributor of point-of-care diagnostic testing products to the
Italian marketplace (Acquired January 2007)
|
|
|
|
First Check Diagnostics LLC, or First Check, located in Lake
Forrest, California, a privately-held diagnostics company in the
field of home testing for drugs of abuse, including marijuana,
cocaine, methamphetamines and opiates (Acquired January 2007)
|
|
|
|
the assets of Nihon Schering K.K., or NSKK, located in Japan, a
diagnostic distribution business (Acquired January 2007)
|
|
|
|
Gabmed GmbH, or Gabmed, located in Nettetal, Germany, a
distributor of point-of-care diagnostic testing products in the
German marketplace (Acquired January 2007)
|
|
|
|
Med-Ox Chemicals Limited, or Med-Ox, located in Ottawa, Canada,
a distributor of professional diagnostic testing products in the
Canadian marketplace (Acquired January 2007)
|
F-30
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
A summary of the purchase price allocation for these
acquisitions is as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
38,518
|
|
Property, plant and equipment
|
|
|
4,145
|
|
Goodwill
|
|
|
110,255
|
|
Intangible assets
|
|
|
74,557
|
|
In-process research and development
|
|
|
4,826
|
|
Other non-current assets
|
|
|
838
|
|
|
|
|
|
|
Total assets acquired
|
|
|
233,139
|
|
|
|
|
|
|
Current liabilities
|
|
|
29,100
|
|
Non-current liabilities
|
|
|
19,584
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
48,684
|
|
|
|
|
|
|
Net assets acquired
|
|
|
184,455
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
4,488
|
|
Notes payable
|
|
|
9,551
|
|
Accrued earned milestones
|
|
|
259
|
|
Fair value of common stock issued (1,017,244 shares)
|
|
|
54,111
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
116,046
|
|
|
|
|
|
|
NSKK and Promesan are included in our professional and consumer
diagnostics reporting units and business segments; Matritech,
Aska, Biosystems, Bio-Stat, Akubio, Spectral/Source, Orange,
Gabmed and Med-Ox are included in our professional diagnostics
reporting unit and business segment; QAS is included in our
health management reporting unit and business segment; and First
Check is included in our consumer diagnostics reporting unit and
business segment. Diamics is consolidated and included in our
professional diagnostics reporting unit and business segment.
Goodwill has been recognized in the Matritech, Aska, Biosystems,
Bio-Stat, Spectral/Source, Diamics, QAS, Orange, Gabmed,
Promesan, First Check and Med-Ox transactions and amounted to
approximately $110.3 million. Goodwill related to these
acquisitions, with the exception of Matritech and First Check,
is not deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line
F-31
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
basis. The following are the intangible assets acquired and
their respective amortizable lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
4,234
|
|
|
|
7.0-13.5 years
|
|
Supplier relationships
|
|
|
3,882
|
|
|
|
15 years
|
|
Trademarks
|
|
|
9,278
|
|
|
|
2-10 years
|
|
License agreements
|
|
|
920
|
|
|
|
15 years
|
|
Customer relationships
|
|
|
53,294
|
|
|
|
10-20 years
|
|
Non-compete agreements
|
|
|
801
|
|
|
|
3-4 years
|
|
Internally-developed software
|
|
|
1,910
|
|
|
|
7 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
|
74,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
238
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with indefinite lives
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
74,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Acquisitions in 2006
(i) Acquisition of the Innovacon business, including the
ABON Facility
On March 31, 2006, we acquired the assets of ACON
Laboratories business of researching, developing,
manufacturing, marketing and selling lateral flow immunoassay
and directly-related products in the United States, Canada,
Europe (excluding Russia, the former Soviet Republics that are
not part of the European Union and Turkey), Israel, Australia,
Japan and New Zealand, or the Innovacon business. The
preliminary aggregate purchase price was approximately
$97.7 million which consisted of $55.1 million in
cash, common stock with an aggregate fair value of
$19.7 million, $12.9 million in estimated direct
acquisition costs and an additional liability of
$10.0 million which was paid in 2007, pursuant to the
purchase agreement.
On May 15, 2006, as part of the Innovacon business we
acquired a newly-constructed manufacturing facility in Hangzhou,
China, pursuant to the terms of our acquisition agreement with
ACON Laboratories, Inc. and its affiliates. In connection with
the acquisition of the new facility, we acquired ABON BioPharm
(Hangzhou) Co., Ltd, or ABON, the direct owner of the new
factory and now our subsidiary. The preliminary aggregate
purchase price was approximately $20.8 million which
consisted of $8.8 million in cash and common stock with an
aggregate fair value of $12.0 million. In addition,
pursuant to the acquisition agreement, we made an additional
payment of $4.1 million in cash as a result of the amount
of cash acquired, net of indebtedness assumed, which increased
the preliminary aggregate purchase price to $24.9 million.
This acquisition also had contingent payments due if the
attainment of certain milestones were met. These milestones were
achieved in 2008 resulting an an additional $6.0 million
cash paid. We have made cash payments totaling
$49.0 million and issued common stock with an aggregate
fair value of $21.3 million as various milestones were
achieved. This brings the aggregate purchase price for the
Innovacon business, including the ABON facility to a total of
$192.9 million. The operating results of the Innovacon
business are included in our professional and consumer
diagnostics reporting units and business segments.
F-32
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
A summary of the purchase price allocation for this acquisition
including the ABON facility discussed above is as follows
(dollars in thousands):
|
|
|
|
|
Current assets
|
|
$
|
25,914
|
|
Property, plant and equipment
|
|
|
10,274
|
|
Goodwill
|
|
|
120,920
|
|
Intangible assets
|
|
|
48,000
|
|
|
|
|
|
|
Total assets acquired
|
|
|
205,108
|
|
|
|
|
|
|
Current liabilities
|
|
|
4,081
|
|
Non-current liabilities
|
|
|
8,125
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
12,206
|
|
|
|
|
|
|
Net assets acquired
|
|
|
192,902
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
12,962
|
|
Fair value of common stock issued (1,871,250 shares)
|
|
|
53,052
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
126,888
|
|
|
|
|
|
|
We expect that substantially all of the amount allocated to
goodwill will not be deductible for tax purposes.
Customer relationships are amortized based on patterns in which
the economic benefits of customer relationships are expected to
be utilized. Other finite-lived identifiable assets are
amortized on a straight-line basis. The following are the
intangible assets acquired and their respective amortizable
lives (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
16,200
|
|
|
|
7 years
|
|
Supplier relationships
|
|
|
3,300
|
|
|
|
1.8 years
|
|
Trademarks
|
|
|
800
|
|
|
|
10 years
|
|
Customer relationships
|
|
|
27,700
|
|
|
|
16.8-17.8 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
48,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, in connection with the acquisition of the
Innovacon business, we entered into an agreement for the
purchase of ACON Laboratories lateral flow immunoassay
sales and distribution business in all territories not included
within the territories acquired in connection with our
March 31, 2006 acquisition described above. Under the terms
of this agreement, in the event that this business achieves a
specified level of profitability, we will acquire this business
in 2009 for a formulaic price based on the revenues and earnings
of the business. Alternatively, we may elect not to complete the
acquisition of the business in exchange for a payment equal to
15% of the purchase price that would have been due had we
elected to complete the acquisition.
(ii) Acquisition of Clondiag
On February 28, 2006, we acquired 67.45% of CLONDIAG chip
technologies GmbH, or Clondiag, a privately-held company located
in Jena in Germany which is developing a multiplexing technology
for nucleic acid and immunoassay-based diagnostics. Pursuant to
the acquisition agreement, we purchased the remaining
F-33
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
32.55% on August 31, 2006. The aggregate purchase price was
$23.1 million, which consisted of an initial cash payment
of $11.9 million, common stock with an aggregate fair value
of $5.8 million, a $5.3 million cash payment to
acquire the remaining 32.55% stock ownership and
$0.1 million in direct acquisition costs. Additionally,
pursuant to the terms of the acquisition agreement, we have an
obligation to settle existing employee bonus arrangements with
the Clondiag employees totaling 1.1 million
($1.3 million). In connection with this obligation, we
issued common stock with a fair value of $0.7 million to
the employees of Clondiag and a cash payment of
$0.5 million. As of December 31, 2008, our remaining
obligation was $0.1 million. This obligation increased our
aggregate purchase price to $24.4 million as of
December 31, 2006 and resulted in additional goodwill.
In addition, the terms of the acquisition agreement provided for
contingent consideration in the event that four specified
products were developed on Clondiags platform technology
during the three years following the acquisition date. This
contingent consideration has been accounted for as an increase
in the aggregate purchase price when the milestones are
achieved. During 2007, we paid cash of $0.9 million and
issued 56,079 shares of our common stock with a fair value
of $1.5 million, in conjunction with Clondiag meeting one
of the milestones mentioned above. During 2008, we paid cash of
$2.6 million and issued 0.2 million shares of our
common stock with a fair value of $4.5 million in conjunction
with Clondiag meeting the final three milestones. Upon
settlement of the third and fourth milestones, we recognized a
$0.2 million foreign currency exchange gain which was
included in the aggregate purchase price. The payments of the
contingent consideration have increased our aggregate purchase
price to $34.1 million. The operating expenses of Clondiag,
which consist principally of research and development
activities, have been included in our corporate and other
business segment in 2006 and in our professional diagnostics
segment in 2008 and 2007.
A summary of the purchase price allocation for this acquisition
is as follows (dollars in thousands):
|
|
|
|
|
Current assets
|
|
$
|
1,191
|
|
Property, plant and equipment
|
|
|
1,783
|
|
Goodwill
|
|
|
16,937
|
|
Intangible assets
|
|
|
11,310
|
|
In-process research and development
|
|
|
4,960
|
|
Other non-current assets
|
|
|
20
|
|
|
|
|
|
|
Total assets acquired
|
|
|
36,201
|
|
|
|
|
|
|
Current liabilities
|
|
|
1,296
|
|
Non-current liabilities
|
|
|
850
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,146
|
|
|
|
|
|
|
Net assets acquired
|
|
|
34,055
|
|
Less:
|
|
|
|
|
Acquisition costs
|
|
|
92
|
|
Realized foreign currency exchange gain
|
|
|
221
|
|
Accrued obligation cost
|
|
|
55
|
|
Fair value of common stock issued (467,415 shares)
|
|
|
12,457
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
21,230
|
|
|
|
|
|
|
We also evaluated certain in-process research and development
projects and have expensed, as in-process research and
development, those projects that have not yet attained technical
feasibility. The amount expensed during the year ended
December 31, 2006 was $5.0 million.
F-34
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
We expect that substantially all of the amount allocated to
goodwill will not be deductible for tax purposes.
Other finite-lived identifiable assets are amortized on a
straight-line basis. The following are the intangible assets
acquired and their respective amortizable lives (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortizable Life
|
|
|
Core technology
|
|
$
|
11,310
|
|
|
|
20 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
11,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Restructuring Plans Related to Business
Combinations
In connection with several of our acquisitions, we initiated
integration plans to consolidate and restructure certain
functions and operations, including the relocation and
termination of certain personnel of these acquired entities and
the closure of certain of the acquired entities leased
facilities. These costs have been recognized as liabilities
assumed, in connection with the acquisition of these entities in
accordance with EITF Issue
No. 95-3,
and are subject to potential adjustments as certain exit
activities are confirmed or refined. The following table
summarizes the liabilities established for exit activities
related to these acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Facility
|
|
|
Total Exit
|
|
|
|
Related
|
|
|
And Other
|
|
|
Activities
|
|
|
Balance at December 31, 2005
|
|
$
|
1,489
|
|
|
$
|
939
|
|
|
$
|
2,428
|
|
Payments
|
|
|
(172
|
)
|
|
|
(150
|
)
|
|
|
(322
|
)
|
Currency adjustments
|
|
|
177
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,494
|
|
|
|
789
|
|
|
|
2,283
|
|
Acquisitions
|
|
|
19,823
|
|
|
|
1,327
|
|
|
|
21,150
|
|
Payments
|
|
|
(6,763
|
)
|
|
|
(218
|
)
|
|
|
(6,981
|
)
|
Currency adjustments
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
14,579
|
|
|
|
1,898
|
|
|
|
16,477
|
|
Acquisitions
|
|
|
19,561
|
|
|
|
3,897
|
|
|
|
23,458
|
|
Payments
|
|
|
(23,407
|
)
|
|
|
(854
|
)
|
|
|
(24,261
|
)
|
Currency adjustments
|
|
|
(385
|
)
|
|
|
(15
|
)
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
10,348
|
|
|
$
|
4,926
|
|
|
$
|
15,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) 2008 Acquisitions
In connection with our acquisition of Matria, we implemented an
integration plan to improve operating efficiencies and eliminate
redundant costs resulting from the acquisition. The
restructuring plan impacted all cost centers within the Matria
organization, as activities were combined with our existing
business operations. We recorded $15.2 million in exit
costs, all of which relates to change in control and severance
costs to involuntarily terminate employees. As of
December 31, 2008, $4.0 million in severance costs
remain unpaid.
In conjunction with our acquisition of Panbio, we formulated a
restructuring plan to realize efficiencies and cost savings. In
February 2008, we agreed upon a plan to close Panbios
facility located in Columbia, Maryland. The manufacturing
operation at the Maryland-based facility has been transferred to
a third-party manufacturer and the sales and distribution of the
products at this facility has been transferred to our
newly-formed shared services center in Orlando, Florida. We
recorded $0.6 million in exit costs, including
F-35
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
$0.4 million related to facility and other exit costs and
$0.2 million related to severance costs. As of
December 31, 2008, $0.3 million in exit costs remain
unpaid. See Note 23 for additional restructuring charges
related to the Panbio facility closure and integration.
Although we believe our plan and estimated exit costs for our
2008 acquisitions are reasonable, actual spending for exit
activities may differ from current estimated exit costs.
(ii) 2007 Acquisitions
In conjunction with our acquisition of Biosite, we implemented
an integration plan to improve efficiencies and eliminate
redundant costs resulting from the acquisition. The
restructuring plan impacted all cost centers within the Biosite
organization, as activities were combined with our existing
business operations. Since the inception of the plan, we
recorded $15.4 million in exit costs, of which
$15.1 million relates to change in control and severance
costs to involuntarily terminate employees and $0.3 million
relates to facility and other exit costs. As of
December 31, 2008, $1.3 million in exit costs remain
unpaid.
During 2007, we formulated restructuring plans in connection
with our acquisition of Cholestech, consistent with our
acquisition strategy to realize operating efficiencies and cost
savings. Additionally, in March 2008, we announced plans to
close the Cholestech facility in Hayward, California. We are
transitioning the manufacturing of the related products to our
Biosite facility in San Diego, California and have
transitioned the sales and distribution of the products to our
newly-formed shared services center in Orlando, Florida. Since
inception of the plans, we recorded $9.2 million in exit
costs, of which $6.5 million relates to executive change in
control agreements and severance costs to involuntarily
terminate employees and $2.7 million relates to facility
exit costs. As of December 31, 2008, $6.7 million in
exit costs remain unpaid.
In conjunction with our acquisition of HemoSense, we formulated
restructuring plans during 2007 to realize operating
efficiencies and cost savings. Additionally, in March 2008, we
announced plans to close the HemoSense facility in
San Jose, California. We are transitioning the
manufacturing of the related products to our Biosite facility in
San Diego, California and have transitioned the sales and
distribution of the products to our newly-formed shared services
center in Orlando, Florida. Since inception of the plans, we
recorded $1.5 million in exit costs, of which
$1.3 million relates to severance costs to terminate
employees and $0.2 million relates to facility and other
exit costs. As of December 31, 2008, $0.5 million in
exit costs remain unpaid.
See Note 23 for additional restructuring charges related to
the Cholestech and HemoSense facility closures and integration.
In conjunction with our acquisition of Matritech, we formulated
a plan to exit the leased facility of Matritech in Newton,
Massachusetts and recorded $1.5 million in facility exit
costs. As of December 31, 2008, $1.1 million of the
facility exit costs remain unpaid.
In conjunction with our acquisition of Alere Medical and
ParadigmHealth, we recorded $2.2 million related to
executive change in control agreements and severance costs to
involuntarily terminate employees. As of December 31, 2008,
$0.9 million remains unpaid.
Although we believe our plans and estimated exit costs for our
2007 acquisitions are reasonable, actual spending for exit
activities may differ from current estimated exit costs.
(iii) Other Acquisitions
As a result of our acquisition of Ostex in 2003, we established
a restructuring plan whereby we exited the facilities of Ostex
in Seattle, Washington, and combined the activities of Ostex
with our existing manufacturing and distribution facilities.
Total severance costs associated with involuntarily terminated
F-36
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
employees were $1.6 million, all of which has been paid as
of December 31, 2006. Facility exit costs, including costs
to vacate the Ostex facilities and lease commitments, were
$2.4 million, of which $0.4 million remains unpaid as
of December 31, 2008.
(e) Pro Forma Financial Information
The following table presents selected unaudited financial
information, including the assets of Instant, Biosite,
Cholestech and Matria, as if the acquisitions of these entities
had occurred on January 1, 2007. Pro forma results also
reflect the impact of the formation of our consumer diagnostics
business joint venture with P&G (Note 13(a)(i)) as if
the joint venture had been formed on January 1, 2007. Pro
forma results exclude adjustments for various other less
significant acquisitions completed since January 1, 2007,
as these acquisitions did not materially affect our results of
operations.
The pro forma results are derived from the historical financial
results of the acquired businesses for all periods presented and
are not necessarily indicative of the results that would have
occurred had the acquisitions been consummated on
January 1, 2007 (in thousands, except pet share amount).
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
Pro forma net revenue
|
|
$
|
1,783,801
|
|
|
$
|
1,362,196
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss available to common shareholders
|
|
$
|
(47,793
|
)
|
|
$
|
(131,732
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per common sharebasic and diluted(1)
|
|
$
|
(0.61
|
)
|
|
$
|
(2.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net loss per common share amounts are computed as described in
Note 15. |
F-37
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(5)
|
Goodwill
and Other Intangible Assets
|
The following is a summary of goodwill and other intangible
assets as of December 31, 2008 (in thousands, except useful
life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Useful Life
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology and patents
|
|
$
|
547,816
|
|
|
$
|
88,509
|
|
|
$
|
459,307
|
|
|
|
1-20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier relationships
|
|
|
17,167
|
|
|
|
10,477
|
|
|
|
6,690
|
|
|
|
1.8-15 years
|
|
Trademarks and trade names
|
|
|
151,245
|
|
|
|
27,612
|
|
|
|
123,633
|
|
|
|
2-25 years
|
|
License agreements
|
|
|
10,445
|
|
|
|
9,655
|
|
|
|
790
|
|
|
|
5-8.5 years
|
|
Customer relationships
|
|
|
1,151,893
|
|
|
|
175,150
|
|
|
|
976,743
|
|
|
|
1.5-26 years
|
|
Manufacturing know-how
|
|
|
7,208
|
|
|
|
3,825
|
|
|
|
3,383
|
|
|
|
5-15 years
|
|
Other
|
|
|
78,469
|
|
|
|
20,378
|
|
|
|
58,091
|
|
|
|
0.5-11 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
1,416,427
|
|
|
|
247,097
|
|
|
|
1,169,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
1,964,243
|
|
|
$
|
335,606
|
|
|
$
|
1,628,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,046,083
|
|
|
$
|
|
|
|
$
|
3,046,083
|
|
|
|
|
|
Other intangible assets
|
|
|
42,984
|
|
|
|
|
|
|
|
42,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with indefinite lives
|
|
$
|
3,089,067
|
|
|
$
|
|
|
|
$
|
3,089,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(5) |
Goodwill and Other Intangible Assets (Continued)
|
The following is a summary of goodwill and other intangible
assets as of December 31, 2007 (in thousands, except useful
life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Useful Life
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology and patents
|
|
$
|
476,609
|
|
|
$
|
44,026
|
|
|
$
|
432,583
|
|
|
|
1-20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier relationships
|
|
|
18,307
|
|
|
|
9,101
|
|
|
|
9,206
|
|
|
|
1.8-15 years
|
|
Trademarks and trade names
|
|
|
137,352
|
|
|
|
11,964
|
|
|
|
125,388
|
|
|
|
5-25 years
|
|
License agreements
|
|
|
10,105
|
|
|
|
8,167
|
|
|
|
1,938
|
|
|
|
5-8.5 years
|
|
Customer relationships
|
|
|
770,230
|
|
|
|
46,516
|
|
|
|
723,714
|
|
|
|
1.5-26 years
|
|
Manufacturing know-how
|
|
|
3,616
|
|
|
|
3,558
|
|
|
|
58
|
|
|
|
1-15 years
|
|
Other
|
|
|
10,938
|
|
|
|
1,598
|
|
|
|
9,340
|
|
|
|
0.5-10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
950,548
|
|
|
|
80,904
|
|
|
|
869,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
$
|
1,427,157
|
|
|
$
|
124,930
|
|
|
$
|
1,302,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
2,148,850
|
|
|
$
|
|
|
|
$
|
2,148,850
|
|
|
|
|
|
Other intangible assets
|
|
|
43,097
|
|
|
|
|
|
|
|
43,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with indefinite lives
|
|
$
|
2,191,947
|
|
|
$
|
|
|
|
$
|
2,191,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We amortize intangible assets with finite lives using primarily
the straight-line method over the above estimated useful lives
of the respective intangible asset. We believe that the
straight-line method is appropriate, as it approximates the
pattern in which economic benefits are consumed in circumstances
where such patterns can be reliably determined. In certain
circumstances, such as certain customer relationship assets,
accelerated amortization is recognized which reflect estimate of
the cash flows. Amortization expense of intangible assets, which
in the aggregate amounted to $214.1 million,
$64.6 million and $21.8 million in 2008, 2007 and
2006, respectively, is included in cost of net revenue, research
and development, sales and marketing and general and
administrative in the accompanying consolidated statements of
operations. During 2006, there was no amortization expense
included in general and administrative on the accompanying
consolidated statement of operations. The allocation of
amortization expense to the expense categories is based on the
intended usage and the expected benefits of the intangible
assets in relation to the expense categories.
The following is a summary of estimated aggregate amortization
expense of intangible assets for each of the five succeeding
fiscal years as of December 31, 2008 (in thousands):
|
|
|
|
|
2009
|
|
$
|
233,399
|
|
2010
|
|
$
|
207,012
|
|
2011
|
|
$
|
182,741
|
|
2012
|
|
$
|
159,117
|
|
2013
|
|
$
|
139,607
|
|
In accordance with SFAS No. 142, we perform annual
impairment tests of the carrying value of our goodwill by
reporting unit. Our annual impairment review on
September 30, 2008 did not indicate that
F-39
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(5) |
Goodwill and Other Intangible Assets (Continued)
|
goodwill related to our professional diagnostics, health
management and consumer diagnostics reporting units were
impaired. For further discussion see Note 2(h).
We allocate goodwill by reporting unit based on the relative
percentage of estimated future revenues generated for the
respective reporting unit as of the acquisition date. Goodwill
amounts allocated to our professional diagnostics, health
management and consumer diagnostics reporting units are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
|
|
|
Health
|
|
|
Consumer
|
|
|
|
|
|
|
Diagnostics
|
|
|
Management
|
|
|
Diagnostics
|
|
|
Total
|
|
|
Goodwill at December 31, 2006
|
|
$
|
353,361
|
|
|
$
|
|
|
|
$
|
86,008
|
|
|
$
|
439,369
|
|
Acquisitions(1)
|
|
|
1,267,985
|
|
|
|
463,066
|
|
|
|
8,940
|
|
|
|
1,739,991
|
|
Other(2)(3)
|
|
|
13,254
|
|
|
|
|
|
|
|
(43,764
|
)
|
|
|
(30,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2007
|
|
|
1,634,600
|
|
|
|
463,066
|
|
|
|
51,184
|
|
|
|
2,148,850
|
|
Acquisitions(1)
|
|
|
93,473
|
|
|
|
817,113
|
|
|
|
1,497
|
|
|
|
912,083
|
|
Other(2)
|
|
|
(14,850
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2008
|
|
$
|
1,713,223
|
|
|
$
|
1,280,179
|
|
|
$
|
52,681
|
|
|
$
|
3,046,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes purchase accounting adjustments recorded to the
acquired entities opening balance sheet and additional
payments made for earn-outs and milestones achieved. |
|
(2) |
|
These amounts relate primarily to adjustments resulting from
fluctuations in foreign currency exchange rates. |
|
(3) |
|
Includes amounts written off in connection with the formation of
our 50/50 joint venture with P&G. |
We generally expense costs incurred to internally-develop
intangible assets, except for costs that are incurred to
establish patents and trademarks, such as legal fees for
initiating, filing and obtaining the patents and trademarks. As
of December 31, 2008, we had approximately
$7.8 million of costs capitalized, net of amortization, in
connection with establishing patents and trademarks which are
included in other intangible assets, net, in the accompanying
consolidated balance sheets. Upon the successful registration of
the patents and trademarks, we commence amortization of such
intangible assets over their estimated useful lives. Costs
incurred to maintain the patents and trademarks are expensed as
incurred.
F-40
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We had the following long-term debt balances outstanding (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
First Lien Credit Agreement Term loan
|
|
$
|
960,750
|
|
|
$
|
970,500
|
|
First Lien Credit Agreement Revolving line-of-credit
|
|
|
142,000
|
|
|
|
|
|
Second Lien Credit Agreement
|
|
|
250,000
|
|
|
|
250,000
|
|
3% Senior subordinated convertible notes
|
|
|
150,000
|
|
|
|
150,000
|
|
Lines-of-credit
|
|
|
3,503
|
|
|
|
3,730
|
|
Other
|
|
|
13,362
|
|
|
|
12,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,519,615
|
|
|
|
1,386,715
|
|
Less: Current portion
|
|
|
(19,058
|
)
|
|
|
(20,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,500,557
|
|
|
$
|
1,366,395
|
|
|
|
|
|
|
|
|
|
|
The following describes each of the above listed debt
instruments:
|
|
|
|
(a)
|
First Lien Credit Agreement and Second Lien Credit
Agreement
|
On June 26, 2007, in conjunction with our acquisition of
Biosite, we entered into a First Lien Credit Agreement, or
senior secured credit facility, and a Second Lien Credit
Agreement, or junior secured credit facility, collectively,
secured credit facility, with certain lenders, General Electric
Capital Corporation as administrative agent and collateral
agent, and certain other agents and arrangers, and certain
related guaranty and security agreements. The senior secured
credit facility initially provided for term loans in the
aggregate amount of $900.0 million and, subject to our
continued compliance with the senior secured credit facility, a
$150.0 million revolving line-of-credit. The junior secured
credit facility provides for term loans in the aggregate amount
of $250.0 million. We may repay any future borrowings under
the senior secured credit facility revolving line-of-credit at
any time, but in no event later than June 26, 2013. We must
repay the entire junior facility term loan on June 26,
2015. As of December 31, 2008, the term loans and the
revolving line-of-credit under the senior secured credit
facility bore interest at 3.89% and 3.64%, respectively. The
term loan under the junior secured credit facility bore interest
at 6.14%.
On November 15, 2007, we amended the senior secured credit
facility, increasing the total amount of credit available to us
to $1,125,000,000 resulting from the increase in the term loans
to the aggregate amount of $975.0 million. Additionally,
under the amendment, we must repay the senior secured credit
facility term loans as follows: (a) in two initial
installments in the amount of $2,250,000 each on
September 30, 2007 and December 31, 2007 (each of
which installment payment has been made), (b) in
twenty-five consecutive quarterly installments, beginning on
March 31, 2008 and continuing through March 31, 2014,
in the amount of $2,437,500 each and (c) in a final
installment on June 26, 2014 in an amount equal to the then
outstanding principal balance of the senior secured credit
facility term loans.
As of December 31, 2008, aggregate borrowings amounted to
$142.0 million under the senior secured credit facility
revolving line-of-credit and $1.2 billion under the term
loans. Interest expense related to the secured credit facility
for the year ended December 31, 2008, including amortized
deferred financing costs, was $85.2 million. As of
December 31, 2008, accrued interest related to the credit
facilities amounted to $3.4 million. As of
December 31, 2008, we were in compliance with all debt
covenants related to the above debt, which consisted principally
of maximum consolidated leverage and minimum interest coverage
requirements.
In August 2007, we entered into interest rate swap contracts,
with an effective date of September 28, 2007, that have a
total notional value of $350.0 million and have a maturity
date of September 28, 2010.
F-41
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(6) |
Long-term Debt (Continued)
|
These interest rate swap contracts pay us variable interest at
the three-month LIBOR rate, and we pay the counterparties a
fixed rate of 4.85%. These interest rate swap contracts were
entered into to convert $350.0 million of the
$1.2 billion variable rate term loan under the senior
credit facility into fixed rate debt. Based on the terms of the
interest rate swap contracts and the underlying debt, these
interest rate swap contracts were determined to be effective,
and thus qualify as a cash flow hedge under
SFAS No. 133. As such, any changes in the fair market
value of these interest rate swaps are recorded in accumulated
other comprehensive income on the accompanying consolidated
balance sheet until earnings are affected by the variability of
cash flows. As of December 31, 2008 and 2007, we recorded
cumulative changes of $21.1 million and $9.5 million,
respectively, in accumulated other comprehensive income on the
accompanying balance sheets.
In January 2009, we entered into interest rate swap contracts,
with an effective date of January 14, 2009, that have a
total notional value of $500.0 million and have a maturity
date of January 5, 2011. These interest rate swap contracts
pay us variable interest at the one-month LIBOR rate, and we pay
the counterparties a fixed rate of 1.195%. These interest rate
swap contracts were entered into to convert $500.0 million
of the $1.2 billion variable rate term loan under the
secured credit facility into fixed rate debt.
|
|
|
|
(b)
|
3% Senior Subordinated Convertible Notes, Principal
Amount $150.0 million
|
On May 14, 2007, we sold $150.0 million principal
amount of 3% senior subordinated convertible notes due 2016
(the Convertible Notes) in a private placement to
qualified institutional buyers. At the initial conversion price
of $52.30, the Convertible Notes were convertible into an
aggregate 2,868,120 shares of our common stock. The
conversion price was subject to adjustment one year from the
date of sale. Based upon the daily volume-weighted price per
share of our common stock for the thirty consecutive trading
days ending May 9, 2008, the conversion price decreased
from $52.30 to $43.98 in May 2008. The decrease in conversion
price resulted in additional shares of our common stock becoming
issuable upon conversion of our senior subordinated convertible
notes. The senior subordinated convertible notes are now
convertible into 3.4 million shares of our common stock at
a conversion price of $43.98. Interest accrues at 3% per annum,
compounded daily, on the outstanding principal amount and is
payable in arrears on May 15th and November 15th,
which started on November 15, 2007. Interest expense for
the year ended December 31, 2008 and 2007, including
amortized deferred costs, was $5.0 million and
$3.1 million, respectively.
We evaluated the Convertible Notes agreement for potential
embedded derivatives under SFAS No. 133 and related
applicable accounting literature, including EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock, and EITF Issue
No. 05-4,
The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to Issue
No. 00-19.
The conversion feature and the make-whole provision were
determined to not meet the embedded derivative criteria as set
forth by SFAS No. 133. Therefore, no fair value has
been recorded for these items.
|
|
|
|
(c)
|
Prior Senior Credit Facility
|
As of December 31, 2006, $44.8 million of borrowings
were outstanding under our then senior credit facility dated
June 30, 2005. On February 1, 2007, using a portion of
the proceeds from our January 2007 sale of 6.9 million
shares of common stock (Note 16), we paid the remaining
principal balance outstanding and accrued interest under the
June 2005 senior credit facility. We terminated our June 2005
senior credit facility in conjunction with our refinancing
activities discussed above. We had no outstanding loans under
the June 2005 senior credit facility at the time it was
terminated.
F-42
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(6) |
Long-term Debt (Continued)
|
Borrowings under the revolving lines-of-credit and term loan
bore interest at either (i) the London Interbank Offered
Rate (LIBOR), as defined in the agreement, plus
applicable margins or, at our option or (ii) a floating
Index Rate, as defined in the agreement, plus applicable
margins. For the year ended December 31, 2007, interest
expense, including amortization of deferred financing costs,
under this senior credit facility was $4.7 million.
Included in interest expense is the write-off of
$2.6 million, in unamortized deferred financing costs.
For the year ended December 31, 2006, we recorded interest
expense, including amortization of deferred financing costs,
under these senior credit facilities in the aggregate amount of
$8.9 million.
|
|
|
|
(d)
|
Senior Subordinated Notes, 8.75%, Principal Amount
$150.0 million
|
On June 26, 2007, we fully repaid our 8.75% senior
subordinated notes due 2012 (the Notes). The total
amount repaid, including principal of $150.0 million and a
prepayment premium of $9.3 million, was
$159.3 million. Accrued interest of $4.8 million was
also paid as part of the final settlement of these Notes and
unamortized deferred financing costs of $3.7 million were
written off as a result of the repayment.
Some of our subsidiaries maintain a local line-of-credit for
short-term advances. At December 31, 2008, a total of
$3.5 million was borrowed against these local
lines-of-credit.
Included in other above, for the year ended December 31,
2008, are borrowings by certain of our subsidiaries from various
financial institutions. The borrowed funds are used to fund
capital expenditure and working capital requirements. Interest
expense on these borrowings was $1.4 million for the year
ended December 31, 2008.
|
|
|
|
(g)
|
Maturities of Long-term Debt
|
The following is a summary of the maturities of long-term debt
outstanding on December 31, 2008 (in thousands):
|
|
|
|
|
2009
|
|
$
|
19,058
|
|
2010
|
|
|
15,372
|
|
2011
|
|
|
11,158
|
|
2012
|
|
|
10,177
|
|
2013
|
|
|
9,850
|
|
Thereafter
|
|
|
1,454,000
|
|
|
|
|
|
|
|
|
$
|
1,519,615
|
|
|
|
|
|
|
|
|
(7)
|
Fair
Value Measurements
|
Effective January 1, 2008, we implemented
SFAS No. 157, Fair Value Measurement, for our
financial assets and liabilities that are re-measured and
reported at fair value at each reporting period-end date, and
non-financial assets and liabilities that are re-measured and
reported at fair value at least annually. In accordance with the
provisions of FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157, we have
elected to defer implementation of SFAS No. 157 as it
relates to our non-financial assets and non-financial
liabilities that are recognized and disclosed at fair value in
the financial statements on a non-
F-43
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(7) |
Fair Value Measurements (Continued)
|
recurring basis until January 1, 2009. We are evaluating
the impact, if any, this Standard will have on our non-financial
assets and liabilities. The adoption of SFAS No. 157
to our financial assets and liabilities and non-financial assets
and liabilities that are re-measured and reported at fair value
at least annually did not have an impact on our financial
results.
Financial assets and liabilities recorded on the accompanying
condensed consolidated balance sheets are categorized based on
the inputs to the valuation techniques as follows:
Level 1 - Financial assets and liabilities whose
values are based on unadjusted quoted prices for identical
assets or liabilities in an active market that the company has
the ability to access at the measurement date (examples include
active exchange-traded equity securities, listed derivatives and
most U.S. Government and agency securities).
Level 2 - Financial assets and liabilities whose
values are based on quoted prices in markets where trading
occurs infrequently or whose values are based on quoted prices
of instruments with similar attributes in active markets.
Level 2 inputs include the following:
|
|
|
|
|
Quoted prices for identical or similar assets or liabilities in
non-active markets (examples include corporate and municipal
bonds which trade infrequently);
|
|
|
|
Inputs other than quoted prices that are observable for
substantially the full term of the asset or liability (examples
include interest rate and currency swaps); and
|
|
|
|
Inputs that are derived principally from or corroborated by
observable market data for substantially the full term of the
asset or liability (examples include certain securities and
derivatives).
|
Level 3 - Financial assets and liabilities whose
values are based on prices or valuation techniques that require
inputs that are both unobservable and significant to the overall
fair value measurement. These inputs reflect managements
own assumptions about the assumptions a market participant would
use in pricing the asset or liability. We currently do not have
any Level 3 financial assets or liabilities.
The following table presents information about our assets and
liabilities that are measured at fair value on a recurring basis
as of December 31, 2008, and indicates the fair value
hierarchy of the valuation techniques we utilized to determine
such fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
|
December 31,
|
|
|
Active Markets
|
|
|
Observable Inputs
|
|
Description
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
2,354
|
|
|
$
|
2,354
|
|
|
$
|
|
|
Strategic investments(1)
|
|
|
229
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,583
|
|
|
$
|
2,583
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability(2)
|
|
$
|
21,132
|
|
|
$
|
|
|
|
$
|
21,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
21,132
|
|
|
$
|
|
|
|
$
|
21,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents our investment in StatSure which is included in
investments in unconsolidated entities on our accompanying
consolidated balance sheets. |
|
(2) |
|
Included in other long-term liabilities in our accompanying
consolidated balances sheets. |
F-44
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a schedule of the future minimum lease payments
under the capital leases, together with the present value of
such payments as of December 31, 2008 (in thousands):
|
|
|
|
|
2009
|
|
$
|
495
|
|
2010
|
|
|
362
|
|
2011
|
|
|
84
|
|
2012
|
|
|
10
|
|
2013
|
|
|
22
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
973
|
|
Less: Imputed interest
|
|
|
(54
|
)
|
|
|
|
|
|
Present value of future minimum lease payments
|
|
|
919
|
|
Less: Current portion
|
|
|
(451
|
)
|
|
|
|
|
|
|
|
$
|
468
|
|
|
|
|
|
|
At December 31, 2008, the capitalized amounts of the
building, machinery and equipment and computer equipment under
capital leases were as follows (in thousands):
|
|
|
|
|
Machinery, laboratory equipment and tooling
|
|
$
|
1,077
|
|
Computer equipment
|
|
|
269
|
|
Furniture and fixtures
|
|
|
141
|
|
|
|
|
|
|
|
|
|
1,487
|
|
Less: Accumulated amortization
|
|
|
(514
|
)
|
|
|
|
|
|
|
|
$
|
973
|
|
|
|
|
|
|
The amortization expense of assets recorded under capital leases
is included in depreciation and amortization expense of
property, plant and equipment.
|
|
(9)
|
Postretirement
Benefit Plans
|
(a) Employee Savings Plans
Our company and several of our
U.S.-based
subsidiaries sponsor various 401(k) savings plans, to which
eligible domestic employees may voluntarily contribute a portion
of their income, subject to statutory limitations. In addition
to the participants own contributions to these 401(k)
savings plans, we match such contributions up to a designated
level. Total matching contributions related to employee savings
plans were $4.6 million, $1.5 million and
$0.8 million in 2008, 2007 and 2006, respectively.
F-45
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(9) |
Postretirement Benefit Plans (Continued)
|
(b) U.K. Pension Plans
Changes in benefit obligations, plan assets, funded status and
amounts recognized on the balance sheet as of and for the years
ended December 31, 2008 and 2007, for our Defined Benefit
Plan, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
12,627
|
|
|
$
|
12,370
|
|
Interest cost
|
|
|
677
|
|
|
|
660
|
|
Actuarial loss (gain)
|
|
|
534
|
|
|
|
(470
|
)
|
Benefits paid
|
|
|
(182
|
)
|
|
|
(140
|
)
|
Curtailment gain
|
|
|
(1,113
|
)
|
|
|
|
|
Foreign exchange impact
|
|
|
(3,465
|
)
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
9,078
|
|
|
$
|
12,627
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
9,159
|
|
|
$
|
8,959
|
|
Interest cost
|
|
|
677
|
|
|
|
660
|
|
Actuarial loss (gain)
|
|
|
534
|
|
|
|
(470
|
)
|
Benefits paid
|
|
|
(182
|
)
|
|
|
(140
|
)
|
Curtailment gain
|
|
|
(1,113
|
)
|
|
|
|
|
Foreign exchange impact
|
|
|
(2,508
|
)
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
6,567
|
|
|
$
|
9,159
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
9,143
|
|
|
$
|
8,189
|
|
Actual return on plan assets
|
|
|
(1,543
|
)
|
|
|
220
|
|
Employer contribution
|
|
|
835
|
|
|
|
750
|
|
Benefits paid
|
|
|
(182
|
)
|
|
|
(150
|
)
|
Foreign exchange impact
|
|
|
(2,325
|
)
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
5,928
|
|
|
$
|
9,143
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(3,150
|
)
|
|
$
|
(3,484
|
)
|
|
|
|
|
|
|
|
|
|
The net amounts recognized in the accompanying consolidated
balance sheets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued benefit asset (liability)
|
|
$
|
(603
|
)
|
|
$
|
34
|
|
Long-term benefit liability
|
|
|
(5,498
|
)
|
|
|
(4,594
|
)
|
Intangible asset
|
|
|
2,951
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(3,150
|
)
|
|
$
|
(3,484
|
)
|
|
|
|
|
|
|
|
|
|
The measurement date used to determine plan assets and benefit
obligations for the Defined Benefit Plan was December 31,
2008 and 2007.
F-46
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(9) |
Postretirement Benefit Plans (Continued)
|
The following table provides the weighted-average actuarial
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.10%
|
|
|
|
5.80%
|
|
Rate of compensation increase
|
|
|
3.85%
|
|
|
|
4.15%
|
|
Assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.80%
|
|
|
|
5.25%
|
|
Expected return on plan assets
|
|
|
7.20%
|
|
|
|
7.30%
|
|
Rate of compensation increase
|
|
|
4.15%
|
|
|
|
3.80%
|
|
The actuarial assumptions are reviewed on an annual basis. The
overall expected long-term rate of return on plan assets
assumption was determined based on historical investment return
rates on portfolios with a high proportion of equity securities.
The annual cost of the Defined Benefit Plan is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest cost
|
|
$
|
677
|
|
|
$
|
660
|
|
|
$
|
586
|
|
Expected return on plan assets
|
|
|
(634
|
)
|
|
|
(620
|
)
|
|
|
(461
|
)
|
Amortization of net loss
|
|
|
(80
|
)
|
|
|
(90
|
)
|
|
|
(26
|
)
|
Curtailment gain
|
|
|
(1,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (benefit)
|
|
$
|
(1,150
|
)
|
|
$
|
(50
|
)
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The plan assets of the Defined Benefit Plan comprise of a mix of
stocks and fixed income securities and other investments. At
December 31, 2008, these stocks and fixed income securities
represented 63% and 37%, respectively, of the market value of
the pension assets. We expect to contribute approximately
0.5 million British Pounds Sterling (or $0.6 million
at December 31, 2008) to the Defined Benefit Plan in
2009. We expect benefits to be paid to plan participants of
approximately $0.2 million per year for each of the next
five years and for benefits totaling $0.2 million to be
paid annually for the five years thereafter.
Unipath Limited, or Unipath contributed $1.0 million in
2008 and $1.2 million in 2007 and 2006 to a Defined
Contribution Plan, which was recognized as an expense in the
accompanying consolidated statement of operations.
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(10)
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Derivative
Financial Instruments
|
We use derivative financial instruments (interest rate swap
contracts) in the management of our interest rate exposure
related to our senior credit facilities. We do not hold or issue
derivative financial instruments for speculative purposes.
In August 2007, we entered into interest rate swap contracts,
with an effective date of September 28, 2007, that have a
total notional value of $350.0 million and have a maturity
date of September 28, 2010. These interest rate swap
contracts pay us variable interest at the three-month LIBOR
rate, and we pay the counterparties a fixed rate of 4.85%. These
interest rate swap contracts were entered into to convert
$350.0 million of the $1.2 billion variable rate term
loan under the senior credit facility into fixed rate debt.
Based on the terms of the interest rate swap contracts and the
underlying debt, these interest rate swap contracts were
determined to be effective, and thus qualify as a cash flow
hedge under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. As such, any changes in
the fair value of these
F-47
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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(10) |
Derivative Financial Instruments (Continued)
|
interest rate swaps are recorded in other comprehensive income
on the accompanying consolidated balance sheet until earnings
are affected by the variability of cash flows. As of
December 31, 2008 and 2007, we recorded cumulative changes
of $21.1 million and $9.5 million, respectively, in
accumulated other comprehensive income on the accompanying
balance sheets in connection with our interest rate swap
contracts.
See Note 13(b) regarding our Chembio Diagnostics, Inc., or
Chembio, warrants and Note 13(d) regarding StatSure
Diagnostic Systems, Inc., or StatSure, warrants which are
accounted for as derivative instruments.
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|
(11)
|
Commitments
and Contingencies
|
(a) Operating Leases
We have operating lease commitments for certain of our
facilities and equipment that expire on various dates through
2021. The following schedule outlines future minimum annual
rental payments under these leases at December 31, 2008 (in
thousands):
|
|
|
|
|
2009
|
|
$
|
25,377
|
|
2010
|
|
|
19,159
|
|
2011
|
|
|
15,380
|
|
2012
|
|
|
11,011
|
|
2013
|
|
|
9,985
|
|
Thereafter
|
|
|
13,470
|
|
|
|
|
|
|
|
|
$
|
94,382
|
|
|
|
|
|
|
Rent expense relating to operating leases was approximately
$35.4 million, $17.4 million and $11.8 million
during 2008, 2007 and 2006, respectively.
(b) Capital Expenditure Commitments
At December 31, 2008, we had total outstanding
non-cancelable equipment purchase commitments of
$17.5 million.
(c) Contingent Consideration Obligations
We have contingent consideration contractual terms related to
our acquisitions of Alere Medical, Ameditech, Binax, Inc., or
Binax, Bio-Stat, Clondiag, Diamics, First Check, Gabmed, Global,
Matritech, Promesan, Spectral/Source, Vision and our most
recently acquired healthcare business. With the exception of
Alere Medical, the contingent considerations will be accounted
for as increases in the aggregate purchase prices if and when
the contingencies occur.
With respect to Alere Medical, the terms of the acquisition
agreement provided for contingent consideration payable to each
Alere Medical stockholder who owned shares of our common stock
or retained the option to purchase shares of our common stock on
the six-month anniversary of the closing of the acquisition. The
contingent consideration, payable in cash or stock at our
election, was equal to the number of such shares of our common
stock or options to purchase our common stock held on the
six-month anniversary multiplied by the amount that $58.31
exceeded the greater of the average price of our common stock
for the ten business days preceding the six-month anniversary
date, or 75% of $58.31. Accordingly, based on the price of our
common stock for the ten business days preceding the six-month
anniversary of the closing of the acquisition, we issued
approximately 0.1 million shares of our common stock on
May 30, 2008 to the Alere
F-48
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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(11) |
Commitments and Contingencies (Continued)
|
Medical stockholders based on the remaining outstanding shares
at that time. Payment of this contingent consideration did not
impact the purchase price for this acquisition.
With respect to Ameditech, the terms of the acquisition
agreement require us to pay an earn-out upon successfully
meeting certain revenue targets for the one year period ending
on the first anniversary of the acquisition date and the one
year period ending on the second anniversary of the acquisition
date. The maximum amount of incremental consideration payable is
$4.0 million.
With respect to Binax, the terms of the acquisition agreement
provide for $11.0 million of contingent cash consideration
payable to the Binax shareholders upon the successful completion
of certain new product developments during the five years
following the acquisition. As of December 31, 2008, the
remaining contingent consideration to be earned is approximately
$7.3 million.
With respect to Bio-Stat, the terms of the acquisition provided
for contingent consideration payable in the form of loan notes
to the Bio-Stat shareholders, if certain EBITDA (earnings before
interest, taxes, depreciation and amortization) milestones were
met for 2007. The EBITDA milestones were met in 2007 and loan
notes totaling £3.4 million ($6.2 million) were
issued during the third quarter of 2008. As of December 31,
2008, the loan notes remain outstanding with an approximate
value of $4.9 million.
With respect to Clondiag, the terms of the acquisition agreement
provided for $8.9 million of contingent consideration,
consisting of approximately 0.2 million shares of our
common stock and approximately $3.0 million of cash or
stock in the event that four specified products were developed
on Clondiags platform technology during the three years
following the acquisition date. Successful completion of the
second milestone occurred during the first quarter of 2008 for
which we made a payment for $0.9 million and issued
56,080 shares of our common stock during the first quarter
of 2008. Successful completion of the third and fourth
milestones occurred during the third quarter of 2008 for which
we made payment for $1.6 million and issued
0.1 million shares of our common stock during the fourth
quarter of 2008. No further milestones exist.
With respect to Diamics, the terms of the acquisition agreement
provide for contingent consideration payable upon the successful
completion of certain milestones, including development of
business plans and marketable products. As of December 31,
2008, the remaining contingent consideration to be earned is
approximately $2.3 million.
With respect to First Check, the terms of the acquisition
agreement required us to pay an earn-out to First Check equal to
the incremental revenue growth of the acquired products for 2007
and for the first nine months of 2008, as compared to the
immediately preceding comparable periods. The
2007 milestone, totaling $2.2 million, was met and
accrued as of December 31, 2007 and was paid during the
first quarter of 2008. The 2008 milestone, totaling
$0.3 million, was met and accrued during the third quarter
of 2008 and was paid in the fourth quarter of 2008. No further
milestones exist.
With respect to Gabmed, the terms of the acquisition agreement
provide for contingent consideration totaling up to
750,000 payable in up to five annual amounts beginning in
2007, upon successfully meeting certain revenue and EBIT
(earnings before interest and taxes) milestones in each of the
respective annual periods. The 2007 milestone, totaling
0.1 million ($0.2 million), was met and accrued
as of June 30, 2008 and was paid during the third quarter
of 2008.
With respect to Global, the terms of the acquisition agreement
provided for contingent consideration payable upon successfully
meeting certain revenue targets in 2008. As of December 31,
2008, the 2008 revenue targets were met resulting in accrued
contingent consideration totaling $0.2 million. No further
milestones exist.
F-49
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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(11) |
Commitments and Contingencies (Continued)
|
With respect to Matritech, the terms of the acquisition
agreement required us to pay an earn-out to the former Matritech
shareholders upon successfully meeting certain revenue targets
in 2008. As of December 31, 2008, the milestones were not
achieved. No further milestones exits.
With respect to Promesan, the terms of the acquisition agreement
provide for contingent consideration payable upon successfully
meeting certain annual revenue targets. Total contingent
consideration of up to 0.6 million is payable in
three equal annual amounts of 0.2 million beginning
in 2007 and ending in 2009. The 2007 milestone, totaling
0.2 million ($0.3 million), was met and accrued
as of December 31, 2007 and was paid during the first
quarter of 2008. The 2008 milestone, totaling
0.2 million ($0.3 million), was met and accrued
as of December 31, 2008.
With respect to Spectral/Source, the terms of the acquisition
agreement required us to pay an earn-out equal to two times the
consolidated revenue of Spectral/Source less $4.0 million,
if the consolidated profits before tax of Spectral/Source was at
least $0.9 million on the one year anniversary
(milestone period) following the acquisition date.
If consolidated profits before tax of Spectral/Source for the
milestone period were less than $0.9 million, then the
amount of the payment would be equal to seven times
Spectral/Sources consolidated profits before tax less
$4.0 million. The contingent consideration was payable 60%
in cash and 40% in stock. The revenue and profit milestones were
met and accrued during the fourth quarter of 2008 for which we
made payment for $1.6 million and issued 53,372 shares
of our common stock during the fourth quarter of 2008. No
further milestones exist.
With respect to Vision, the terms of the acquisition agreement
provide for incremental consideration payable to the former
Vision shareholders. The maximum amount of incremental
consideration payable is approximately $3.2 million, of
which $1.0 million is guaranteed and accrued as of
December 31, 2008. The remaining contingent consideration
is payable upon the completion of certain milestones and
successfully maintaining certain production levels and product
costs during each of the two years following the acquisition
date. As of December 31, 2008, no milestones have been met.
With respect to our most recently-acquired healthcare business,
the terms of the acquisition agreement provide for contingent
consideration payable upon successfully meeting certain revenue
and EBITDA targets for the twelve months ending June 30,
2009 and December 31, 2010, respectively. We accrued a
liability in the amount of $3.8 million to avoid
recognition of negative goodwill, as a result of not recognizing
additional purchase price consideration that is contingent on
future events. As of December 31, 2008, the
$3.8 million liability remains accrued.
Estate of Melissa Prince Quisenberry v. Alere Medical,
Inc., TA Associates, Inc., Covington Associates, et al.
On September 19, 2008, the Estate of Melissa Prince
Quisenberry filed a class action complaint in the Superior Court
of California on behalf of herself and others similarly situated
against Alere Medical Inc., or Alere Medical, and Agora Parent,
Inc., both of which are wholly owned subsidiaries; Ronald D.
Geraty, MD, chief executive officer of Alere Medical and certain
other individuals who were executive officers, directors
and/or
significant shareholders of Alere Medical; as well as certain
other unaffiliated entities. Plaintiff and class owned common
and/or
preferred stock in Alere Medical and allege that the defendants
forced them to tender their stock in connection with the
March 14, 2007 sale of Alere Medical to an unaffiliated
entity at a price which was substantially lower than the price
at which we bought Alere Medical on October 24, 2007.
Plaintiff also alleges that the individual defendants breached
fiduciary duties of good faith, fair dealing, loyalty and
candor; and that Alere Medical and certain unaffiliated entities
aided, abetted and substantially participated in the breach of
fiduciary duty. We believe that we have strong defenses to all
of the allegations
F-50
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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(11) |
Commitments and Contingencies (Continued)
|
made by the class and we intend to defend the claims vigorously.
However, an outcome against Alere Medical could potentially have
a material adverse impact on our sales, operations or financial
performance.
Healthways, Inc. and Robert Bosch North America Corp, v.
Alere Medical, Inc.
Healthways, Inc. and Robert Bosch North America Corp. filed a
complaint in U.S. District Court in the Northern District
of Illinois on November 5, 2008 against Alere Medical, Inc.
alleging infringement of 11 patents, licensed by Bosch from
Healthways. Alere Medical answered the complaint and filed
counterclaims seeking declarations that the patents are invalid
and not infringed. The plaintiffs subsequently filed an amended
complaint substituting Alere LLC, or Alere, our consolidated
health management subsidiary, as the defendant in place of Alere
Medical. We believe that we have strong defenses to
Healthways allegations and we intend to defend them
vigorously. However, a ruling against Alere could potentially
have a material adverse impact on our sales, operations or
financial performance or could limit our current or future
business opportunities.
Claims in the Ordinary Course and Other Matters
We are not a party to any other pending legal proceedings that
we currently believe could have a material adverse impact on our
sales, operations or financial performance. However, because of
the nature of our business, we may be subject at any particular
time to commercial disputes, consumer product claims, negligence
claims or various other lawsuits arising in the ordinary course
of our business, including infringement, employment or investor
matters, and we expect that this will continue to be the case in
the future. Such lawsuits generally seek damages, sometimes in
substantial amounts.
As an example, as we have previously reported, in April 2008,
Pyramid Holdings Inc., a purchaser in our November 2007 public
offering of our common stock, filed a putative securities class
action against us, Ron Zwanziger, our chairman, chief
executive officer and president, and David Teitel, our chief
financial officer, in the United States District Court for the
District of Massachusetts, alleging that the prospectus
supplement and registration statement with respect to the
November 2007 public offering were inaccurate and misleading and
omitted to state material facts. The plaintiffs have
subsequently filed their amended class action complaint, adding
as defendants each of our then current directors, a former
director, and a former chief financial officer. We believe that
the allegations are baseless, and we intend to defend against
them vigorously.
Also, our subsidiary Alere Medical continues to defend
infringement claims brought by Health Hero Network, Inc., which
alleges to have patented certain processes related to home
monitoring of patients.
While we believe that we have strong defenses to the claims
brought by Pyramid Holdings and Health Hero and we intend to
defend them vigorously, these, or other claims, could
potentially have a negative impact on our sales, operations or
financial performance or could limit our existing or future
business opportunities.
In addition, we aggressively defend our patent and other
intellectual property rights. This often involves bringing
infringement or other commercial claims against third parties.
These suits can be expensive and result in counterclaims
challenging the validity of our patents and other rights.
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(12)
|
Co-development
Agreement with ITI Scotland Limited
|
On February 25, 2005, we entered into a co-development
agreement with ITI Scotland Limited, or ITI, whereby ITI agreed
to provide us with £30.0 million over three years to
partially fund research and development programs focused on
identifying novel biomarkers and near-patient and home-use tests
for cardiovascular and other diseases (the
programs). We agreed to invest £37.5 million in
the programs over three years from the date of the agreement.
Through our subsidiary, Stirling Medical Innovations Limited, or
Stirling, we established a new research center in Stirling,
Scotland, where we consolidated many of our
F-51
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(12) |
Co-development Agreement with ITI Scotland Limited
(Continued)
|
existing cardiology programs and will ultimately commercialize
products arising from the programs. ITI and Stirling will have
exclusive rights to the developed technology in their respective
fields of use. As qualified expenditures were made under the
co-development arrangement, we recognized the fee earned during
the period as a reduction of our related expenses, subject to
certain limitations. As of December 31, 2007, we had earned
full funding under this arrangement in the amount of
£30.0 million ($56.0 million) and as such, no
funding was earned in 2008. For the fiscal years ended
December 31, 2007 and 2006, we recognized
$20.0 million and $18.4 million of reimbursements,
respectively, of which $18.5 million and
$16.6 million, respectively, offset our research and
development spending and $1.5 million and
$1.8 million, respectively, reduced our general,
administrative and marketing spending incurred by Stirling.
Though the funding arrangement has completed, Stirling continues
to support ITI in exploiting the developed technology into their
fields of interest.
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(13)
|
Investment
in Unconsolidated Entities and Marketable Securities
|
|
|
|
|
(a)
|
Equity Method Investments
|
(i) Joint Venture with P&G
In May 2007, we completed our 50/50 joint venture with P&G
for the development, manufacturing, marketing and sale of
existing and to-be-developed consumer diagnostics, outside the
cardiology, diabetes and oral care fields. At the closing, we
transferred our related consumer diagnostics assets totaling
$63.6 million, other than our manufacturing and core
intellectual property assets, to the joint venture, and P&G
acquired its interest in the joint venture for a cash payment of
approximately $325.0 million.
We also entered into an option agreement with P&G, pursuant
to which P&G has the right, for a period of 60 days
commencing on the fourth anniversary date of the agreement, to
require us to acquire all of P&Gs interest in the
joint venture at fair market value, and P&G has the right,
upon certain material breaches by us of our obligations to the
joint venture, to acquire all of our interest in the joint
venture at fair market value. No gain on the proceeds that we
received from P&G through the formation of the joint
venture will be recognized in our financial statements until
P&Gs option to require us to purchase its interest in
the joint venture expires. The deferred gain recorded on our
accompanying consolidated balance sheets as of December 31,
2008 and 2007 was $287.0 million and $293.1 million,
respectively.
We also entered into a manufacturing agreement with P&G,
whereby we will manufacture consumer diagnostics and sell these
products to the joint venture entity. In our capacity as the
manufacturer of products for the joint venture, we recorded
$103.0 million and $65.0 million in manufacturing
revenue for the year ended December 31, 2008 and 2007,
respectively, which is included in net product sales in our
accompanying consolidated statements of operations.
Furthermore, we entered into certain transition and long-term
services agreements with the joint venture, pursuant to which we
will provide certain operational support services to the joint
venture. Revenue related to these service agreements for the
year ended December 31, 2008 and 2007 was $2.4 million
and $2.5 million, respectively, and is included in our
services revenue on our consolidated statements of operations.
Customer receivables associated with this revenue has been
classified as other receivables within prepaid and other current
assets on our accompanying consolidated balance sheets in the
amount of $16.2 million and $29.5 million as of
December 31, 2008 and 2007, respectively. In connection
with the joint venture arrangement, the joint venture bears the
collection risk associated with these receivables.
Upon completion of the arrangement to form the joint venture, we
ceased to consolidate the operating results of our consumer
diagnostics business related to the joint venture and instead
account for our 50% interest in the results of the joint venture
under the equity method of accounting in accordance with APB
F-52
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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(13) |
Investment in Unconsolidated Entities and Marketable
Securities (Continued)
|
Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock. For the year ended
December 31, 2008 and 2007, we recorded a loss of
$0.9 million and earnings of $3.0 million,
respectively, in equity earnings of unconsolidated entities, net
of tax, in our accompanying consolidated statements of
operations, which represented our share of the joint
ventures net income for the respective periods including
restructuring related expenses. During 2008, the joint venture
paid $11.2 million in cash to both of the parent companies,
equally reducing the respective investments in the joint venture.
(ii) Vedalab S.A.
In November 2006, we acquired 40% of Vedalab S.A., or Vedalab, a
French manufacturer and supplier of rapid diagnostic tests in
the professional markets. The aggregate purchase price was
$9.7 million which consisted of $7.6 million in cash,
49,787 shares of our common stock with an aggregate fair
value of $2.0 million and $0.1 million in estimated
direct acquisition costs. On the same date, we settled an
on-going patent infringement claim with Vedalab. Under the terms
of the settlement, Vedalab paid us $5.1 million and agreed
to pay us royalties on future sales ranging from 5% to 10%,
depending on the products being sold in exchange for a license
under certain patents to manufacture its current products at its
facility in Alencon, France. The payment of $5.1 million
has been included as income in our financial results for the
year ended December 31, 2006, of which $4.6 million
relates to periods prior to 2006 and has been included in other
income (expense), net and the remaining $0.5 million has
been recorded as license and royalty revenue. We account for our
40% investment in Vedalab under the equity method of accounting
in accordance with APB Opinion No. 18, The Equity Method
of Accounting for Investments in Common Stock. In January
2007, we received $0.7 million from Vedalab in the form of
a dividend distribution. This was accounted for as a reduction
in the value of our investment in accordance with APB Opinion
No. 18. For the year ended December 31, 2008 and 2007,
we recorded $0.5 million and $0.3 million,
respectively, in equity earnings of unconsolidated entities, net
of tax, in our accompanying consolidated statement of
operations, which represented our minority share of
Vedalabs net income for the respective period.
(iii) TechLab, Inc.
In May 2006, we acquired 49% of TechLab, Inc., or TechLab, a
privately-held developer, manufacturer and distributor of rapid
non-invasive intestinal diagnostics tests in the areas of
intestinal inflammation, antibiotic associated diarrhea and
parasitology. The aggregate purchase price was $8.8 million
which consisted of 303,417 shares of our common stock with
an aggregate fair value of $8.6 million and
$0.2 million in estimated direct acquisition costs. We
account for our 49% investment in TechLab under the equity
method of accounting, in accordance with APB Opinion
No. 18. In 2008 and 2007, we received $1.4 million and
$0.6 million, respectively, from TechLab in the form of
dividend distributions. These were accounted for as a reduction
in the value of our investment in accordance with APB Opinion
No. 18. For the year ended December 31, 2008, 2007 and
2006, we recorded $1.5 million, $1.1 million and
$0.6 million, respectively, in equity earnings of
unconsolidated entities, net of tax, in our accompanying
consolidated statement of operations, which represented our
minority share of TechLabs net income for the respective
period.
(b) Investment in Chembio
In September 2006, we acquired 5% of Chembio, a developer and
manufacturer of rapid diagnostic tests for infectious diseases,
through the purchase of 40 shares of their preferred stock.
The preferred stock pays a dividend of 7%, payable in cash or
common stock. The aggregate purchase price of $2.0 million
was paid in cash. In addition to the preferred stock, we
received a warrant to purchase 625,000 shares of
Chembios common stock at $0.80 per share. Chembios
stock is publicly-traded. The warrant, accounted for as a
derivative instrument, had a fair value of approximately
$0.4 million at the date of issuance. The fair value of
this warrant was estimated at the time of issuance using the
Black-Scholes pricing model and assuming no
F-53
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
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(13) |
Investment in Unconsolidated Entities and Marketable
Securities (Continued)
|
dividend yield, expected volatility of 116%, risk-free rate of
4.9% and a contractual term of five years. In December 2007, we
exercised our warrant and purchased 625,000 shares of
Chembios common stock and recorded a $0.3 million
loss in connection with our mark-to- market of this warrant,
which we have included in other income (expense), net in our
accompanying consolidated statement of operations for the year
ended December 31, 2007. Furthermore, we converted our
40 shares of their preferred stock into common stock. At
December 31, 2008 and 2007, we owned 5.4 million
shares of common stock in Chembio with a fair market value of
approximately $0.6 million and $1.3 million,
respectively, and which are classified as marketable securities,
non-current on our accompanying consolidated balance sheets. We
recorded an unrealized holding loss of approximately
$1.4 million and $0.6 million in accumulated other
comprehensive income within stockholders equity on our
accompanying consolidated balance sheets as of December 31,
2008 and 2007, respectively.
(c) Investment in BBI
Our investment in BBI consisted of marketable equity securities
purchased in May 2007. On receipt, the shares were recorded at
their market value. At December 31, 2007, the fair market
value of these securities, which have been included in
marketable securities, long-term, on our accompanying
consolidated balance sheet, was approximately
$19.0 million, representing an unrealized holding gain of
approximately $4.3 million which was recorded in
accumulated other comprehensive income within stockholders
equity on our accompanying consolidated balance sheets as of
December 31, 2007. We acquired BBI in February 2008, at
which time we recorded the original cost of this investment as
part of our preliminary purchase price and reversed the
$4.3 million unrealized holding gain from accumulated other
comprehensive income.
(d) Investment in StatSure
In October 2007, we acquired 5% of StatSure, a developer and
marketer of oral fluid collection devices for the drugs of abuse
market, through the purchase of 1.4 million shares of their
common stock. The aggregate purchase price of $0.5 million
was paid in cash. In addition to the common stock, we received a
warrant to purchase 1.1 million shares of StatSures
common stock at $0.35 per share. StatSures stock is
publicly-traded. The warrant, accounted for as a derivative
instrument, in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, had a fair value of approximately
$0.3 million at the date of issuance. The fair value of
this warrant was estimated at the time of issuance using the
Black-Scholes pricing model and assuming no dividend yield,
expected volatility of 150%, a risk-free rate of 3.9% and a
contractual term of five years. We marked-to-market the warrant
over the contractual term and recorded an unrealized loss of
$0.3 million and an unrealized gain of $0.1 million in
other income (expense), net in our accompanying consolidated
statement of operations for the year ended December 31,
2008 and 2007, respectively. As of December 31, 2008, the
warrant was valued at approximately $25,000.
|
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(14)
|
In-Process
Research and Development
|
In connection with three of our acquisitions since 2006, we have
acquired various IPR&D projects. Substantial additional
research and development will be required prior to any of our
acquired IPR&D programs and technology platforms reaching
technological feasibility. In addition, once research is
completed, each product candidate acquired will need to complete
a series of clinical trials and receive FDA or other regulatory
approvals prior to commercialization. Our current estimates of
the time and investment required to develop these products and
technologies may change depending on the different applications
that we may choose to pursue. We cannot give assurances that
these programs will ever reach technological feasibility or
develop into products that can be marketed profitably. For
example, we have discontinued funding certain of
F-54
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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(14) |
In-Process Research and Development (Continued)
|
the programs listed below. In addition, we cannot guarantee that
we will be able to develop and commercialize products before our
competitors develop and commercialize products for the same
indications.
The following table sets forth IPR&D projects for companies
and certain assets we have acquired since 2006 (in thousands):
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|
|
|
|
|
|
|
Discount Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used in
|
|
|
|
|
Company/
|
|
|
|
|
|
|
|
|
|
Estimating
|
|
|
|
|
Year Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
Year of Expected
|
|
Acquired
|
|
Purchase Price
|
|
|
IPR&D(1)
|
|
|
Programs Acquired
|
|
Flows(1)
|
|
|
Launch
|
|
|
Diamics/2007
|
|
$
|
4,000
|
|
|
$
|
682
|
|
|
PapMap (Pap Screening Methods)
|
|
|
63
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
1,049
|
|
|
C-Map (Automated Pap Screening)
|
|
|
63
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
3,094
|
|
|
POC (Point of Care Systems)
|
|
|
63
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biosite/2007
|
|
$
|
1,800,000
|
|
|
$
|
13,000
|
|
|
Triage Sepsis Panel
|
|
|
15
|
%
|
|
|
2008-2010
|
|
|
|
|
|
|
|
|
156,000
|
|
|
Triage NGAL
|
|
|
15
|
%
|
|
|
2008-2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clondiag/2006
|
|
$
|
24,000
|
|
|
$
|
1,800
|
|
|
CHF (Congestive Heart Failure)
|
|
|
37
|
%
|
|
|
2008-2009
|
|
|
|
|
|
|
|
|
2,500
|
|
|
ACS (Acute Coronary Syndrome)
|
|
|
37
|
%
|
|
|
2009-2010
|
|
|
|
|
|
|
|
|
660
|
|
|
HIV (Human Immuno-deficiency Virus)
|
|
|
37
|
%
|
|
|
2008-2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Management assumes responsibility for determining the valuation
of the acquired IPR&D projects. The fair value assigned to
IPR&D for each acquisition is estimated by discounting, to
present value, the cash flows expected once the acquired
projects have reached technological feasibility. The cash flows
are probability adjusted to reflect the risks of advancement
through the product approval process. In estimating the future
cash flows, we also considered the tangible and intangible
assets required for successful exploitation of the technology
resulting from the purchased IPR&D projects and adjusted
future cash flows for a charge reflecting the contribution to
value of these assets. |
|
|
(15)
|
Net Loss
Per Common Share
|
The following table sets forth the computation of basic and
diluted net loss per common share (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net loss per common sharebasic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,768
|
)
|
|
$
|
(244,753
|
)
|
|
$
|
(16,842
|
)
|
Less: Preferred stock dividends
|
|
|
(13,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(35,757
|
)
|
|
$
|
(244,753
|
)
|
|
$
|
(16,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
77,778
|
|
|
|
51,510
|
|
|
|
34,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common sharebasic and diluted
|
|
$
|
(0.46
|
)
|
|
$
|
(4.75
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(15) |
Net Loss Per Common Share (Continued)
|
We had the following potential dilutive securities outstanding
on December 31, 2008: (a) options and warrants to
purchase an aggregate of 10.6 million shares of our common
stock at a weighted average exercise price of $32.15 per share,
(b) 3.4 million shares related to the issuance of our
$150.0 million, 3% senior subordinated convertible
notes and (c) 1.9 million shares of our Series B
convertible preferred stock, convertible under certain
circumstances at $69.32 per share into 10.8 million shares
of our common stock. Potential dilutive securities were not
included in the computation of diluted net loss per common share
in 2008 because the inclusion thereof would be antidilutive.
We had the following potential dilutive securities outstanding
on December 31, 2007: (a) options and warrants to
purchase an aggregate of 8.3 million shares of our common
stock at a weighted average exercise price of $30.82 per share
and (b) 1.8 million shares related to the issuance of
our $150.0 million, 3% senior subordinated convertible
notes. Potential dilutive securities were not included in the
computation of diluted loss per common share in 2007 because the
inclusion thereof would be antidilutive.
We had the following potential dilutive securities outstanding
on December 31, 2006: options and warrants to purchase an
aggregate of 4.1 million shares of our common stock at a
weighted average exercise price of $20.75 per share. Potential
dilutive securities were not included in the computation of
diluted loss per common share in 2006 because the inclusion
thereof would be antidilutive.
|
|
(16)
|
Stockholders
Equity
|
(a) Common Stock
As of December 31, 2008, we had 150.0 million shares
of common stock, $0.001 par value, authorized, of which
approximately 78.4 million shares were issued and
outstanding, 11.1 million shares were reserved for issuance
upon grant and exercise of stock options under current stock
option plans, 0.5 million shares were reserved for issuance
under our employee stock purchase plan and 0.5 million
shares were reserved for issuance upon exercise of outstanding
warrants. In addition, we have potential dilutive securities
consisting of our $150 million, 3% senior subordinated
convertible notes, convertible into 3.4 million shares of
our common stock (Note 6(b)) and 1.9 million shares of
our Seried B convertible preferred stock, convertible under
certain circumstances at $69.32 per share into 10.8 million
shares of our common stock (Note 16(b)).
In November 2007, we sold an aggregate 13.6 million shares
of our common stock at $61.49 per share through an underwritten
public offering. Certain of our officers also sold a total of
165,698 shares of common stock in the offering. Proceeds to
us from the offering were approximately $806.9 million, net
of issuance costs of $31.8 million, which includes
deductions for underwriting discounts and commissions and takes
into effect the reimbursement by the underwriters of a portion
of our offering expenses. The net proceeds were used to fund
certain acquisitions with the remainder of the net proceeds
retained for working capital and other general corporate
purposes.
In January 2007, we sold an aggregate 6.9 million shares of
our common stock at $39.65 per share through an underwritten
public offering, inclusive of 0.9 million shares associated
with the exercise of our underwriter option to purchase
additional shares to cover over-allotments. Proceeds from the
offering were approximately $261.3 million, net of issuance
costs of $12.3 million, which included deductions for
underwriting discounts and commissions and takes into effect the
reimbursement by the underwriters of a portion of our offering
expenses. Of this amount, we used $44.9 million to repay
principal outstanding and accrued interest on our term loan
under our senior credit facility, with the remainder of the net
proceeds retained for working capital and other general
corporate purposes.
F-56
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(16) |
Stockholders Equity (Continued)
|
(b) Preferred Stock
As of December 31, 2008, we had 5.0 million shares of
preferred stock, $0.001 par value, authorized, of which
2.3 million shares were designated as Series B
Convertible Perpetual Preferred Stock, or Series B
preferred stock. On May 8, 2008, in connection with our
acquisition of Matria we issued 1.8 million shares of the
Series B preferred stock with a fair value of approximately
$657.9 million (Note 4(a)(i)).
Each share of Series B preferred stock, which has a
liquidation preference of $400.00 per share, is convertible, at
the option of the holder and only upon certain circumstances,
into 5.7703 shares of our common stock, plus cash in lieu
of fractional shares. The initial conversion price is $69.32 per
share, subject to adjustment upon the occurrence of certain
events, but will not be adjusted for accumulated and unpaid
dividends. Upon a conversion of shares of the Series B
preferred stock, we may, at our option, satisfy the entire
conversion obligation in cash or through a combination of cash
and common stock. There were no conversions as of
December 31, 2008.
Generally, the shares of Series B preferred stock are
convertible, at the option of the holder, if during any calendar
quarter beginning with the second calendar quarter after the
issuance date of the Series B preferred stock, if the
closing sale price of our common stock for each of 20 or more
trading days within any period of 30 consecutive trading days
ending on the last trading day of the immediately preceding
calendar quarter exceeds 130% of the conversion price per share
of common stock in effect on the last trading day of the
immediately preceding calendar quarter. In addition, the shares
of Series B preferred stock are convertible, at the option
of the holder, in certain other circumstances, including those
relating to the trading price of the Series B preferred
stock and upon the occurrence of certain fundamental changes or
major corporate transactions. We also have the right, under
certain circumstances relating to the trading price of our
common stock, to force conversion of the Series B preferred
stock. Depending on the timing of any such forced conversion, we
may have to make certain payments relating to foregone
dividends, which payments we can make, at our option, in the
form of cash, shares of our common stock, or a combination of
cash and shares of our common stock.
Each share of Series B preferred stock accrues dividends at
$12.00, or 3%, per annum, payable quarterly on January 15,
April 15, July 15 and October 15 of each year, commencing
following the first full calendar quarter after the issuance
date. Dividends on the Series B preferred stock are
cumulative from the date of issuance. For the year ended
December 31, 2008, Series B preferred stock dividends
amounted to $14.0 million, which reduced earnings available
to common stockholders for purposes of calculating net loss per
common share in 2008 (Note 15). Accrued dividends are
payable only if declared by our board of directors and, upon
conversion by the Series B preferred stockholder, holders
will not receive any cash payment representing accumulated
dividends. If our board of directors declares a dividend
payable, we have the right to pay the dividends in cash, shares
of common stock, additional shares of Series B preferred
stock or a similar convertible preferred stock or any
combination thereof.
On September 15, 2008, the board of directors declared a
dividend of $4.77 per share on the Series B preferred
stock. The dividend was paid in shares of Series B
preferred stock in an amount per share of Series B
preferred stock equal to the quotient of (a) $4.77 divided
by (b) 97% of the average of the volume-weighted average
price per share of the Series B preferred stock on the
American Stock Exchange for each of the five consecutive trading
days ending on the second trading day immediately prior to the
record date of the dividend. We paid cash in lieu of any
fractional shares resulting from the dividend. The dividend
totaling $8.5 million was paid on October 15, 2008 to
holders of record of Series B preferred stock at the close
of business on October 1, 2008. This was the first dividend
declared and paid on the Series B preferred stock, and such
payment covered the amount of all dividends accrued from
May 9, 2008, the original issuance date of the
Series B preferred stock, through September 30, 2008.
F-57
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(16) |
Stockholders Equity (Continued)
|
On December 10, 2008, the board of directors declared a
dividend of $3.00 per share on the Series B preferred
stock. The dividend was paid in shares of Series B
preferred stock in an amount per share of Series B
preferred stock equal to the quotient of (a) $3.00 divided
by (b) 97% of the average of the volume-weighted average
price per share of the Series B preferred stock on the
American Stock Exchange for each of the five consecutive trading
days ending on the second trading day immediately prior to the
record date of the dividend. We paid cash in lieu of any
fractional shares resulting from the dividend. The dividend
totaling $5.5 million was paid on January 15, 2009 to
holders of record of Series B preferred stock at the close
of business on January 2, 2009. Such payment covered the
amount of all dividends accrued from October 1, 2008
through December 31, 2008. As of December 31, 2008,
1.9 million shares of Series B preferred stock are
issued and outstanding.
The holders of Series B preferred stock have liquidation
preferences over the holders of the Companys common stock
and other classes of stock, if any, outstanding at the time of
liquidation. Upon liquidation, the holders of outstanding
Series B preferred stock would receive an amount equal to
$400.00 per share of Series B preferred stock, plus any
accumulated and unpaid dividends. As of December 31, 2008,
the liquidation preference of the outstanding Series B
preferred stock was $751.5 million. The holders of the
Series B preferred stock have no voting rights, except with
respect to matters affecting the Series B preferred stock
(including the creation of a senior preferred stock).
We evaluated the terms and provisions of our Series B
preferred stock to determine if it qualified for derivative
accounting treatment under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. Based on
our evaluation, these securities do not qualify for derivative
accounting under SFAS No. 133.
(c) Stock Options and Awards
In 2001, we adopted the 2001 Stock Option and Incentive Plan (as
amended, the 2001 Plan) which currently allows for
the issuance of up to 11.1 million shares of common stock
and other awards. The 2001 Plan is administered by the
Compensation Committee of the Board of Directors in order to
select the individuals eligible to receive awards, determine or
modify the terms and conditions of the awards granted,
accelerate the vesting schedule of any award and generally
administer and interpret the 2001 Plan. The key terms of the
2001 Plan permit the granting of incentive or nonqualified stock
options with a term of up to ten years and the granting of stock
appreciation rights, restricted stock awards, unrestricted stock
awards, performance share awards and dividend equivalent rights.
The 2001 Plan also provides for option grants to non-employee
directors and automatic vesting acceleration of all options and
stock appreciation rights upon a change in control, as defined
by the 2001 Plan. As of December 31, 2008 and 2007, there
were 0.8 million and 2.3 million, respectively, shares
available for future grant under the 2001 plan.
In August 2001, we sold to our chief executive officer
1.2 million shares of restricted common stock at a price of
$9.13 per share. Two-thirds of the restricted stock, or
0.8 million shares, vested ratably over 36 months; the
remaining one-third, or 0.4 million shares, vested ratably
over 48 months. Except for the par value of the common
stock, which was paid in cash, the chief executive officer
purchased the restricted stock with a five-year promissory note,
which, for accounting purposes, was treated as a non-recourse
note. The total interest under the promissory note was fully
recourse to our chief executive officer. The note was due and
payable on August 16, 2006 and bore interest at an annual
rate of 4.99%. Interest income recorded under this note amounted
to $0.3 million for the year ended December 31, 2006.
In August, 2006 the note and accrued interest were paid in full
(Note 21).
In August 2001, we granted two non-qualified stock options to
purchase an aggregate of 0.8 million shares of common stock
at an exercise price of $6.20 per share to two other key
executive officers. These
F-58
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(16) |
Stockholders Equity (Continued)
|
options were set to expire on January 31, 2002. In December
2001, the executive officers exercised these options (one fully;
one partially) by paying cash in the amount of par value and
delivering promissory notes for the difference, as permitted
pursuant to the terms of the original grant. For accounting
purposes, the promissory notes were treated as non-recourse
notes. The notes were due and payable in December 2006 and bore
interest at an annual rate of 3.97%, the applicable federal rate
for a five-year note in effect during the month of exercise. The
notes and accrued interest were paid in full in December 2006
(Note 21). Interest income recorded under these notes
amounted to $0.2 million for the year ended
December 31, 2006.
The following summarizes all stock option activity during the
year ended December 31 (in thousands, except exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding at January 1
|
|
|
7,836
|
|
|
$
|
31.42
|
|
|
|
3,775
|
|
|
$
|
21.11
|
|
|
|
3,902
|
|
|
$
|
18.82
|
|
Exchanged
|
|
|
1,820
|
|
|
$
|
30.52
|
|
|
|
3,606
|
|
|
$
|
23.48
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
1,787
|
|
|
$
|
34.13
|
|
|
|
2,807
|
|
|
$
|
49.53
|
|
|
|
666
|
|
|
$
|
31.88
|
|
Exercised
|
|
|
(836
|
)
|
|
$
|
16.84
|
|
|
|
(2,204
|
)
|
|
$
|
23.70
|
|
|
|
(510
|
)
|
|
$
|
17.30
|
|
Canceled/expired/forfeited
|
|
|
(452
|
)
|
|
$
|
37.75
|
|
|
|
(148
|
)
|
|
$
|
33.33
|
|
|
|
(283
|
)
|
|
$
|
21.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
10,155
|
|
|
$
|
32.65
|
|
|
|
7,836
|
|
|
$
|
31.42
|
|
|
|
3,775
|
|
|
$
|
21.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31
|
|
|
5,866
|
|
|
$
|
27.08
|
|
|
|
3,887
|
|
|
$
|
20.03
|
|
|
|
2,408
|
|
|
$
|
17.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the options outstanding at
December 31, 2008 was $9.7 million. The aggregate
intrinsic value of the options exercisable at December 31,
2008 was $9.6 million. The aggregate intrinsic value of
stock options exercised during 2008, 2007 and 2006 was
$18.2 million, $62.5 million and $7.4 million,
respectively. Based on equity awards outstanding as of
December 31, 2008, there was $62.6 million of
unrecognized compensation costs related to unvested share-based
compensation arrangements that are expected to vest. Such costs
are expected to be recognized over a weighted average period of
1.5 years.
F-59
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(16) |
Stockholders Equity (Continued)
|
(d) Warrants
The following is a summary of all warrant activity during the
three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Exercise Price
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, December 31, 2005
|
|
|
758
|
|
|
$
|
3.81-$24.00
|
|
|
$
|
16.47
|
|
Exercised
|
|
|
(452
|
)
|
|
$
|
3.88-$18.12
|
|
|
$
|
16.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, December 31, 2006
|
|
|
306
|
|
|
$
|
3.81-$24.00
|
|
|
$
|
16.42
|
|
Exchanged
|
|
|
285
|
|
|
$
|
14.52-$29.78
|
|
|
$
|
28.98
|
|
Exercised
|
|
|
(122
|
)
|
|
$
|
13.54-$29.78
|
|
|
$
|
19.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, December 31, 2007
|
|
|
469
|
|
|
$
|
3.81-$29.78
|
|
|
$
|
20.80
|
|
Exercised
|
|
|
(12
|
)
|
|
$
|
13.54-$20.06
|
|
|
$
|
19.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, December 31, 2008
|
|
|
457
|
|
|
$
|
3.81-$29.78
|
|
|
$
|
20.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following represents additional information related to
warrants outstanding and exercisable at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
Average
|
|
Exercise Price
|
|
Shares
|
|
|
Contract Life
|
|
|
Exercise Price
|
|
|
|
(in thousands)
|
|
|
(in years)
|
|
|
|
|
|
$3.81-$3.93
|
|
|
4
|
|
|
|
1.48
|
|
|
$
|
3.87
|
|
$4.48-$4.57
|
|
|
1
|
|
|
|
1.54
|
|
|
$
|
4.54
|
|
$5.44-$5.57
|
|
|
4
|
|
|
|
1.58
|
|
|
$
|
5.53
|
|
$7.37-$7.55
|
|
|
2
|
|
|
|
1.66
|
|
|
$
|
7.48
|
|
$13.54-$18.12
|
|
|
219
|
|
|
|
2.97-3.72
|
|
|
$
|
14.41
|
|
$20.06-$29.78
|
|
|
152
|
|
|
|
6.78
|
|
|
$
|
29.66
|
|
$24.00
|
|
|
75
|
|
|
|
6.25
|
|
|
$
|
24.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
|
5.03
|
|
|
$
|
20.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the warrants included in the table above were
issued in connection with debt and equity financings, or
amendments thereto, of which warrants to purchase an aggregate
of 0.3 million shares of our common stock were issued to
officers and directors of our company or entities controlled by
these officers and directors and were outstanding at
December 31, 2008. The value of warrants issued in
connection with debt financings yielded original issue discounts
and additional interest expense of $0.5 million in 2006. No
such expense was incurred during 2008 and 2007. All outstanding
warrants have been classified in equity, pursuant to provision
EITF
No. 00-19.
F-60
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(16) |
Stockholders Equity (Continued)
|
(e) Employee Stock Purchase Plan
In 2001, we adopted the 2001 Employee Stock Purchase Plan under
which eligible employees are allowed to purchase shares of our
common stock at a discount through periodic payroll deductions.
Purchases may occur at the end of every six month offering
period at a purchase price equal to 85% of the market value of
our common stock at either the beginning or end of the offering
period, whichever is lower. We may issue up to 1.0 million
shares of common stock under this plan. At December 31,
2008, 0.5 million shares had been issued under this plan.
|
|
(17)
|
Stock-based
Compensation
|
In accordance with
SFAS No. 123-R,
our results of operations for the year ended December 31,
2008, 2007 and 2006 reflected compensation expense for new stock
options granted since January 1, 2006, and vested under our
stock incentive plan and employee stock purchase plan and the
unvested portion of previous stock option grants which vested
during the years ended December 31, 2008, 2007 and 2006.
Stock-based compensation expense in the amount of
$26.4 million ($20.7 million, net of tax),
$57.5 million ($52.7 million, net of tax) and
$5.5 million ($4.9 million, net of tax), was reflected
in our consolidated statements of operations for the year ended
December 31, 2008, 2007 and 2006, respectively, as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of net revenue
|
|
$
|
1,504
|
|
|
$
|
608
|
|
|
$
|
391
|
|
Research and development
|
|
|
4,627
|
|
|
|
2,215
|
|
|
|
1,390
|
|
Sales and marketing
|
|
|
4,264
|
|
|
|
1,699
|
|
|
|
682
|
|
General and administrative
|
|
|
16,010
|
|
|
|
52,958
|
|
|
|
2,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,405
|
|
|
$
|
57,480
|
|
|
$
|
5,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the amount above for general and administrative
expense for the year ended December 31, 2007, is
$45.2 million related to our assumption of Biosite options.
The expense relates to the acceleration of unvested Biosite
employee options. See Note 4(b) regarding our acquisition
of Biosite.
In accordance with
SFAS No. 123-R,
for the year ended December 31, 2008, 2007 and 2006, the
presentation of our cash flows reports the excess tax benefits
from the exercise of stock options as financing cash flows. For
the year ended December 31, 2008, 2007 and 2006, excess tax
benefits generated from option exercises amounted to
$17.5 million, $0.9 million and $0.6 million,
respectively.
The following assumptions were used to estimate the fair value
of options granted during the year ended December 31, 2008,
2007 and 2006 using the Black-Scholes option-pricing model:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Risk-free interest rate
|
|
2.39-3.14%
|
|
3.15-5.00%
|
|
4.00-4.67%
|
Expected dividend yield
|
|
|
|
|
|
|
Expected life
|
|
5.19 years
|
|
6.25 years
|
|
6.25 years
|
Expected volatility
|
|
37-43%
|
|
44%
|
|
41%
|
The weighted average fair value under the Black-Scholes option
pricing model of options granted to employees during 2008, 2007
and 2006 was $10.66, $24.05 and $15.29, respectively. All
options granted during these periods were granted at fair market
value on date of grants.
For the year ended December 31, 2008, in accordance with
SFAS 123-R,
we recorded compensation expense of $2.8 million related to
our Employee Stock Purchase Plan. The fair value of the option
component
F-61
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(17) |
Stock-based Compensation (Continued)
|
of the Employee Stock Purchase Plan shares was estimated at the
date of grant using the Black-Scholes pricing model and assumed
an expected volatility of 43.31% to 53.87%, a risk-free interest
rate range of 2.13% to 3.32% and an expected life of 181 and
184 days. The charge is included in general and
administrative in the table above.
For the year ended December 31, 2007, in accordance with
SFAS 123-R,
we recorded compensation expense of $1.5 million related to
our Employee Stock Purchase Plan. The fair value of the option
component of the Employee Stock Purchase Plan shares was
estimated at the date of grant using the Black-Scholes pricing
model and assumed an expected volatility of 32.64% to 69.49%, a
risk-free interest rate range of 4.17% to 4.94% and an expected
life of 181 and 184 days. The charge is included in general
and administrative in the table above.
For the year ended December 31, 2006, in accordance with
SFAS 123-R,
we recorded compensation expense of $0.3 million related to
our Employee Stock Purchase Plan. The fair value of the option
component of the Employee Stock Purchase Plan shares were
estimated at the date of grant using the Black-Scholes pricing
model and assumed an expected volatility of 33%, a risk-free
interest rate range of 4.55% to 4.99% and an expected life of
0.5 years. The charge is included in general and
administrative in the table above.
|
|
(18)
|
Other
Comprehensive Income
|
SFAS No. 130, Reporting Comprehensive Income,
establishes standards for the reporting and display of
comprehensive income. In general, comprehensive income combines
net income and other changes in equity during the year from
non-owner sources. Accumulated other comprehensive income is
recorded as a component of stockholders equity. The
following is a summary of the components of and changes in
accumulated other comprehensive income as of December 31,
2008 and in each of the three years then ended (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
Pension
|
|
|
|
|
|
Accumulated
|
|
|
|
Translation
|
|
|
Liability
|
|
|
|
|
|
Other
|
|
|
|
Adjustment
|
|
|
Adjustment
|
|
|
|
|
|
Comprehensive
|
|
|
|
(Note 2(b))
|
|
|
(Note 9(b))
|
|
|
Other(1)
|
|
|
Income (loss)(2)
|
|
|
Balance at December 31, 2005
|
|
$
|
7,052
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,052
|
|
Period change
|
|
|
10,823
|
|
|
|
(3,738
|
)
|
|
|
44
|
|
|
|
7,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
17,875
|
|
|
|
(3,738
|
)
|
|
|
44
|
|
|
|
14,181
|
|
Period change
|
|
|
12,758
|
|
|
|
341
|
|
|
|
(6,011
|
)
|
|
|
7,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
30,633
|
|
|
|
(3,397
|
)
|
|
|
(5,967
|
)
|
|
|
21,269
|
|
Period change
|
|
|
(32,889
|
)
|
|
|
(562
|
)
|
|
|
(16,663
|
)
|
|
|
(50,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
(2,256
|
)
|
|
$
|
(3,959
|
)
|
|
$
|
(22,630
|
)
|
|
$
|
(28,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other represents (realization of) unrealized gains on
available-for-sale securities and interest rate swap. |
|
(2) |
|
All of the components of accumulated other comprehensive income
relate to our foreign subsidiaries, except item (1) above.
No adjustments for income taxes were recorded against other
comprehensive income, as we intend to permanently invest in our
foreign subsidiaries in the foreseeable future. |
Our income tax (benefit) provision in 2008, 2007 and 2006 mainly
represents those recorded by us and certain of our
U.S. subsidiaries and by our foreign subsidiaries Unipath
in the United Kingdom, Inverness
F-62
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(19) |
Income Taxes (Continued)
|
Medical France, and Inverness Medical Switzerland. Loss before
(benefit) provision for income taxes consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
(52,935
|
)
|
|
$
|
(235,862
|
)
|
|
$
|
(5,089
|
)
|
Foreign
|
|
|
13,431
|
|
|
|
(14,242
|
)
|
|
|
(6,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(39,504
|
)
|
|
$
|
(250,104
|
)
|
|
$
|
(11,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our primary temporary differences that give rise to the deferred
tax asset and liability are NOL carryforwards, nondeductible
reserves, accruals and differences in bases of the tangible and
intangible assets, and the gain on the joint venture
transaction. The income tax effects of these temporary
differences are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
NOL and capital loss carryforwards
|
|
$
|
102,484
|
|
|
$
|
141,620
|
|
Tax credit carryforwards
|
|
|
15,884
|
|
|
|
18,236
|
|
Nondeductible reserves
|
|
|
9,488
|
|
|
|
5,327
|
|
Nondeductible accruals
|
|
|
67,142
|
|
|
|
41,318
|
|
Difference between book and tax bases of tangible assets
|
|
|
3,133
|
|
|
|
2,328
|
|
Difference between book and tax bases of intangible assets
|
|
|
35,986
|
|
|
|
35,042
|
|
Gain on joint venture
|
|
|
33,264
|
|
|
|
37,300
|
|
All other
|
|
|
1,162
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
268,543
|
|
|
|
281,197
|
|
Less: Valuation allowance
|
|
|
(12,740
|
)
|
|
|
(18,899
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
255,803
|
|
|
|
262,298
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Difference between book and tax bases of tangible assets
|
|
|
10,824
|
|
|
|
6,249
|
|
Difference between book and tax bases of intangible assets
|
|
|
588,766
|
|
|
|
524,603
|
|
Other
|
|
|
366
|
|
|
|
23,973
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
599,956
|
|
|
|
554,825
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
344,153
|
|
|
$
|
292,527
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Deferred tax assets, current portion
|
|
$
|
104,311
|
|
|
$
|
18,170
|
|
Deferred tax assets, long-term
|
|
|
14,323
|
|
|
|
15,799
|
|
Deferred tax liabilities, current portion
|
|
|
|
|
|
|
(368
|
)
|
Deferred tax liabilities, long-term
|
|
|
(462,787
|
)
|
|
|
(326,128
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(344,153
|
)
|
|
$
|
(292,527
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we had approximately
$256.6 million of domestic NOL carryforwards and
$15.9 million of foreign NOL and foreign capital loss
carryforwards, which either expire on various dates through 2027
or can be carried forward indefinitely. These loss carryforwards
are available to reduce future federal and foreign taxable
income, if any. These loss carryforwards are subject to review
and possible adjustment by the appropriate taxing authorities.
The domestic NOL carryforwards include approximately
F-63
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(19) |
Income Taxes (Continued)
|
$199.2 million of pre-acquisition losses at Matria, Alere
Medical, ParadigmHealth, Biosite, Cholestech, Diamics,
HemoSense, IMN, Ischemia and Ostex. Also included in our
domestic NOL carryforwards at December 31, 2008 was
approximately $17.5 million resulting from the exercise of
employee stock options, the tax benefit of which was recognized
as a credit to additional paid-in capital rather than a
reduction of income tax. Our domestic NOLs are subject to
the Internal Revenue Service Code Section 382 limitation.
Section 382 imposes an annual limitation on the use of
these losses to an amount equal to the value of the company at
the time of the ownership change multiplied by the long-term tax
exempt rate. The Section 382 limited amount for 2009 is
approximately $167.0 million.
We have recorded a valuation allowance of $12.7 million as
of December 31, 2008 due to uncertainties related to the
future benefits, if any, from our deferred tax assets related
primarily to our foreign businesses and certain U.S. net
operating losses and tax credits. This is a reduction of
$6.2 million from the valuation allowance of
$18.9 million as of December 31, 2007. The decrease is
primarily related to the recognition of foreign NOLs. The
valuation allowance is based on our estimates of taxable income
by jurisdiction in which we operate and the period over which
our deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these
estimates in future periods, we may need to establish an
additional valuation allowance or reduce our current valuation
allowance which could materially impact our tax provision.
In accordance with SFAS No. 109, the accounting for
the tax benefits of acquired deductible temporary differences
and NOL carryforwards, which are not recognized at the
acquisition date because a valuation allowance is established
and which are recognized subsequent to the acquisitions, will be
applied first to reduce to zero any goodwill and other
non-current intangible assets related to the acquisitions. Any
remaining benefits would be recognized as a reduction of income
tax expense. As of December 31, 2008, $3.7 million of
deferred tax assets with a valuation allowance pertains to
acquired companies, the future benefits of which will be applied
to reduce our income tax expense as required under
SFAS No. 141-R,
Business Combinations, adopted January 1, 2009.
Our China-based manufacturing subsidiaries qualify for a reduced
income tax rate in 2008 and an income tax holiday for 2007. The
general income tax rate is 25%. The income tax rate for ABON is
12.5% for 2008, 2009 and 2010, and for IM Shanghai it is 9% for
2008, 10% for 2009, 11% for 2010 and 24% for 2011. The reduced
rates for 2008, 2009, 2010 and 2011 are grandfathered in the
China Tax Reform Act. A tax rate of 15% or 25% will apply to
2011 and future years. The tax rate of 15% applies to companies
with high technology status. We are in the process of applying
for high technology status. The reduced tax rate produced a tax
expense of approximately $1.0 million. In the absence of
the reduced tax rate for 2008 a tax rate of 25% would apply
which would have resulted in a tax expense of approximately
$2.0 million in 2008. The earnings per common share effect
of the reduced tax rate is $0.01 for 2008. The tax holiday
provided an income tax rate of 0% in 2007. In the absence of the
tax holiday, a tax rate of 33% would apply, which would have
resulted in a tax expense of approximately $3.8 million in
2007. The earnings per share common effect of the tax holiday is
$0.07 for 2007.
The estimated amount of undistributed earnings of our foreign
subsidiaries is $86.1 million at December 31, 2008. No
amount for U.S. income tax has been provided on
undistributed earnings of our foreign subsidiaries because we
consider such earnings to be indefinitely reinvested. In the
event of distribution of those earnings in the form of dividends
or otherwise, we would be subject to both U.S. income
taxes, subject to an adjustment, if any, for foreign tax
credits, and foreign withholding taxes payable to certain
foreign tax authorities. Determination of the amount of
U.S. income tax liability that would be incurred is not
practicable because of the complexities associated with this
hypothetical calculation, however, unrecognized foreign tax
credit carryforwards may be available to reduce some portion of
the U.S. tax liability, if any.
F-64
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(19) |
Income Taxes (Continued)
|
The following table presents the components of our (benefit)
provision for income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,433
|
|
|
$
|
2,434
|
|
|
$
|
|
|
State
|
|
|
7,250
|
|
|
|
2,073
|
|
|
|
423
|
|
Foreign
|
|
|
10,387
|
|
|
|
22,406
|
|
|
|
5,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,070
|
|
|
|
26,913
|
|
|
|
5,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(5,897
|
)
|
|
|
(4,961
|
)
|
|
|
3,152
|
|
State
|
|
|
(4,237
|
)
|
|
|
(1,523
|
)
|
|
|
289
|
|
Foreign
|
|
|
(31,622
|
)
|
|
|
(21,408
|
)
|
|
|
(3,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,756
|
)
|
|
|
(27,892
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) provision
|
|
$
|
(16,686
|
)
|
|
$
|
(979
|
)
|
|
$
|
5,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a reconciliation from the
U.S. statutory tax rate to our effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Effect of Biosite in-process R&D write-off
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
Effect of Diamics in-process R&D write-off
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Effect of Biosite compensation charges and other non-cash
compensation
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
Effect of losses and expenses not benefited
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
Stock-based compensation
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
Rate differential on foreign earnings
|
|
|
3
|
|
|
|
|
|
|
|
(2
|
)
|
Research and development benefit
|
|
|
6
|
|
|
|
1
|
|
|
|
14
|
|
State income taxes, net of federal benefit
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
Deferred tax on indefinite-lived assets
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
Accrual to return reconciliation
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
Other permanent items and FIN 48
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
|
|
Change in valuation allowance
|
|
|
11
|
|
|
|
(4
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
43
|
%
|
|
|
1
|
%
|
|
|
(52
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We adopted FIN 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement 109 on
January 1, 2007. During the year ended December 31,
2008, we increased the liability for income taxes associated
with uncertain tax positions by $2.4 million for a total of
$11.1 million at December 31, 2008. The primary reason
for the increase is due to our acquisitions of Clondiag and
Matria, where we increased the liability for income taxes
associated with uncertain tax positions by $1.8 million.
Any future recognition of the Clondiag or Matria tax benefit is
generally recorded to income due to the adoption of
SFAS No. 141-R,
Business Combinations, effective January 1, 2009. In
addition, consistent with the provisions of FIN 48, we
classified $11.1 million of income tax liabilities as
non-current income tax liabilities because a payment of cash is
not anticipated within one year of the balance sheet date. These
non-current income tax liabilities are recorded in other
long-term liabilities in our consolidated balance sheet at
December 31, 2008.
F-65
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(19) |
Income Taxes (Continued)
|
We anticipate an increase every quarter to the total amount of
unrecognized tax benefits. We do not anticipate a significant
increase or decrease of the total amount of unrecognized tax
benefits within twelve months of the reporting date.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
Amount
|
|
|
Balances as of January 1, 2007
|
|
$
|
2,248
|
|
Additions for tax positions taken during prior years
|
|
|
53
|
|
Additions for tax positions in current year acquisitions
|
|
|
6,229
|
|
Additions for tax positions taken during current year
|
|
|
235
|
|
Expiration of statutes of limitations or closure of tax audits
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2007
|
|
|
8,765
|
|
Additions for tax positions taken during prior years
|
|
|
63
|
|
Additions for tax positions in current and prior year
acquisitions
|
|
|
2,296
|
|
Additions for tax positions taken during current year
|
|
|
143
|
|
Expiration of statutes of limitations or closure of tax audits
|
|
|
(134
|
)
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
11,133
|
|
|
|
|
|
|
Interest and penalties related to income tax liabilities are
included in income tax expense. The interest and penalties
recorded in 2008 amounted to $0.4 million. The balance of
accrued interest and penalties recorded on the consolidated
balance sheet at December 31, 2008 was $0.8 million.
With limited exceptions, we are subject to U.S. federal,
state and local or
non-U.S. income
tax audits by tax authorities for 2002 through 2007. We are
currently under income tax examination by the IRS and a number
of state and foreign tax authorities and anticipate these audits
will be completed by the end of 2009. We cannot currently
estimate the impact of these audits due to the uncertainties
associated with tax examinations.
|
|
(20)
|
Financial
Information by Segment
|
Under SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, operating segments
are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly
by the chief operating decision maker, or decision-making group,
in deciding how to allocate resources and in assessing
performance. Our chief operating decision-making group is
composed of the chief executive officer and members of senior
management. Our reportable operating segments are Professional
Diagnostics, Health Management, Consumer Diagnostics, Vitamins
and Nutritional Supplements, and Corporate and Other. Our
operating results include license and royalty revenue which are
allocated to Professional Diagnostics and Consumer Diagnostics
on the basis of the original license or royalty agreement.
Included in the operating results of Professional Diagnostics in
2008 are expenses related to our research and development
activities in the area of cardiology, as a result of our recent
cardiology-related acquisitions, which amounted to
$37.0 million.
Included in the operating results of Professional Diagnostics in
2007 are expenses related to our research and development
activities in the area of cardiology, as a result of our 2007
cardiology-related acquisitions, which amounted to
$26.5 million, net of $18.5 million of reimbursements
received from ITI as part of the co-development arrangement that
we entered into in February 2005.
F-66
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(20) |
Financial Information by Segment (Continued)
|
Included in the operating results of Corporate and Other in 2006
are expenses related to our research and development activities
in the area of cardiology, which amounted to $30.2 million,
net of $16.6 million of reimbursements received from ITI as
part of the co-development arrangement mentioned above.
Operating loss of $250.7 million for the year ended
December 31, 2007 in our Corporate and Other segment
includes the write-off of $173.8 million of IPR&D
incurred in connection with our acquisitions of Biosite and
Diamics and $45.2 million of stock-based compensation
related to employee stock options assumed in the acquisition of
Biosite. Total assets related to our cardiology research
operations in Scotland and Germany, which are included in
Professional Diagnostics in 2008 and 2007 and included in
Corporate and Other in 2006 in the tables below, amounted to
$37.9 million at December 31, 2008, $39.4 million
at December 31, 2007 and $18.4 million at
December 31, 2006.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. We
evaluate performance of our operating segments based on revenue
and operating income (loss). Revenues are attributed to
geographic areas based on where the customer is located. Segment
information for 2008, 2007 and 2006 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vitamins and
|
|
|
Corporate
|
|
|
|
|
|
|
Professional
|
|
|
Health
|
|
|
Consumer
|
|
|
Nutritional
|
|
|
and
|
|
|
|
|
2008
|
|
Diagnostics
|
|
|
Management
|
|
|
Diagnostics
|
|
|
Supplements
|
|
|
Other
|
|
|
Total
|
|
|
Net revenue to external customers
|
|
$
|
1,051,301
|
|
|
$
|
392,399
|
|
|
$
|
138,853
|
|
|
$
|
88,873
|
|
|
$
|
|
|
|
$
|
1,671,426
|
|
Operating income (loss)
|
|
$
|
97,994
|
|
|
$
|
11,241
|
|
|
$
|
9,505
|
|
|
$
|
(840
|
)
|
|
$
|
(54,048
|
)
|
|
$
|
63,852
|
|
Depreciation and amortization
|
|
$
|
171,980
|
|
|
$
|
85,990
|
|
|
$
|
6,809
|
|
|
$
|
2,286
|
|
|
$
|
862
|
|
|
$
|
267,927
|
|
Restructuring charge
|
|
$
|
36,196
|
|
|
$
|
|
|
|
$
|
238
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
36,434
|
|
Stock-based compensation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26,405
|
|
|
$
|
26,405
|
|
Assets
|
|
$
|
3,687,685
|
|
|
$
|
1,850,236
|
|
|
$
|
223,383
|
|
|
$
|
65.263
|
|
|
$
|
128,793
|
|
|
$
|
5,955,360
|
|
Expenditures for property, plant and equipment
|
|
$
|
46,859
|
|
|
$
|
7,935
|
|
|
$
|
1,917
|
|
|
$
|
362
|
|
|
$
|
8,988
|
|
|
$
|
66,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vitamins and
|
|
|
Corporate
|
|
|
|
|
|
|
Professional
|
|
|
Health
|
|
|
Consumer
|
|
|
Nutritional
|
|
|
and
|
|
|
|
|
2007
|
|
Diagnostics
|
|
|
Management
|
|
|
Diagnostics
|
|
|
Supplements
|
|
|
Other
|
|
|
Total
|
|
|
Net revenue to external customers
|
|
$
|
582,250
|
|
|
$
|
23,374
|
|
|
$
|
161,092
|
|
|
$
|
72,824
|
|
|
$
|
|
|
|
$
|
839,540
|
|
Operating income (loss)
|
|
$
|
61,067
|
|
|
$
|
(498
|
)
|
|
$
|
15,332
|
|
|
$
|
(1,061
|
)
|
|
$
|
(250,693
|
)
|
|
$
|
(175,853
|
)
|
Depreciation and amortization
|
|
$
|
82,797
|
|
|
$
|
4,487
|
|
|
$
|
9,106
|
|
|
$
|
2,917
|
|
|
$
|
1,806
|
|
|
$
|
101,113
|
|
Restructuring charge
|
|
$
|
3,965
|
|
|
$
|
|
|
|
$
|
2,737
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,702
|
|
Stock-based compensation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
57,480
|
|
|
$
|
57,480
|
|
Assets
|
|
$
|
3,748,931
|
|
|
$
|
635,415
|
|
|
$
|
309,175
|
|
|
$
|
49,655
|
|
|
$
|
137,583
|
|
|
$
|
4,880,759
|
|
Expenditures for property, plant and equipment
|
|
$
|
30,581
|
|
|
$
|
2,257
|
|
|
$
|
1,366
|
|
|
$
|
872
|
|
|
$
|
1,559
|
|
|
$
|
36,635
|
|
F-67
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(20) |
Financial Information by Segment (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vitamins and
|
|
|
Corporate
|
|
|
|
|
|
|
Professional
|
|
|
Health
|
|
|
Consumer
|
|
|
Nutritional
|
|
|
and
|
|
|
|
|
2006
|
|
Diagnostics
|
|
|
Management
|
|
|
Diagnostics
|
|
|
Supplements
|
|
|
Other
|
|
|
Total
|
|
|
Net revenue to external customers
|
|
$
|
310,632
|
|
|
$
|
|
|
|
$
|
176,771
|
|
|
$
|
82,051
|
|
|
$
|
|
|
|
$
|
569,454
|
|
Operating income (loss)
|
|
$
|
42,554
|
|
|
$
|
|
|
|
$
|
26,975
|
|
|
$
|
(3,013
|
)
|
|
$
|
(60,145
|
)
|
|
$
|
6,371
|
|
Depreciation and amortization
|
|
$
|
27,030
|
|
|
$
|
|
|
|
$
|
5,062
|
|
|
$
|
3,270
|
|
|
$
|
4,000
|
|
|
$
|
39,362
|
|
Restructuring charge
|
|
$
|
7,625
|
|
|
$
|
|
|
|
$
|
2,921
|
|
|
$
|
|
|
|
$
|
2,587
|
|
|
$
|
13,133
|
|
Stock-based compensation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,455
|
|
|
$
|
5,455
|
|
Assets
|
|
$
|
625,560
|
|
|
$
|
|
|
|
$
|
314,815
|
|
|
$
|
49,896
|
|
|
$
|
95,500
|
|
|
$
|
1,085,771
|
|
Expenditures for property, plant and equipment
|
|
$
|
9,905
|
|
|
$
|
|
|
|
$
|
1,807
|
|
|
$
|
475
|
|
|
$
|
7,530
|
|
|
$
|
19,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue by Geographic Area:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,209,166
|
|
|
$
|
529,870
|
|
|
$
|
335,405
|
|
Europe
|
|
|
285,696
|
|
|
|
198,525
|
|
|
|
136,971
|
|
Other
|
|
|
176,564
|
|
|
|
111,145
|
|
|
|
97,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,671,426
|
|
|
$
|
839,540
|
|
|
$
|
569,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Long-lived Tangible Assets by Geographic Area:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
222,450
|
|
|
$
|
198,225
|
|
United Kingdom
|
|
|
12,113
|
|
|
|
36,204
|
|
China
|
|
|
19,491
|
|
|
|
17,975
|
|
Other
|
|
|
30,429
|
|
|
|
15,476
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
284,483
|
|
|
$
|
267,880
|
|
|
|
|
|
|
|
|
|
|
|
|
(21)
|
Related
Party Transactions
|
In November 2008, the Zwanziger Family Trust, a trust
established for the benefit of the children of
Ron Zwanziger, our Chairman, Chief Executive Officer and
President, and the trustee of which is Mr. Zwanzigers
sister, purchased certain of our securities from third parties
in market transactions. The purchase consisted of approximately
$1.0 million of each of the following securities: our
common stock, our Series B Preferred Stock, our Convertible
Notes, interests in our First Lien Credit Agreement and
interests in our Second Lien Credit Agreement. To the extent we
make principal and interest payments under the Convertible Notes
and the credit facilities in accordance with their terms, the
Zwanziger Family Trust, as a holder of Convertible Notes and as
a lender under the credit facilities, will receive its
proportionate share. In connection with its purchases of
interests under our First Lien Credit Agreement and Second Lien
Credit Agreement, the Trust agreed that, whenever the consent or
vote of the lenders is required under the credit facilities, it
will vote the outstanding principal amount of its holdings in
the same proportion as the votes cast by the other lenders under
these credit facilities.
In May 2007, we completed our 50/50 joint venture with P&G
for the development, manufacturing, marketing and sale of
existing and to-be-developed consumer diagnostics, outside the
cardiology, diabetes and
F-68
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(21) |
Related Party Transactions (Continued)
|
oral care fields. At December 31, 2008 and 2007, we had a
net receivable from the joint venture of $12.0 million and
a net payable to the joint venture of $10.8 million,
respectively. Additionally, customer receivables associated with
revenue earned after the joint venture was completed have been
classified as other receivables within prepaid and other current
assets on our accompanying consolidated balance sheets in the
amount of $16.2 million and $29.5 million as of
December 31, 2008 and 2007, respectively. In connection
with the joint venture arrangement, the joint venture bears the
collection risk associated with these receivables. Sales to the
joint venture under our manufacturing agreement totaled
$103.0 million and $65.0 million during the year ended
December 31, 2008 and 2007, respectively, and are included
in net product sales in our accompanying statements of
operations. Under the terms of our product supply agreement, SPD
purchases products from our manufacturing facilities in the U.K.
and China. SPD in turn sells a portion of those tests back to
Inverness for final assembly and packaging. Once packaged, the
tests are sold to P&G for distribution to third party
customers in North America. As a result of these related
transactions we have recorded $15.6 million of trade
receivables which are included in accounts receivable on our
consolidated balance sheet as of December 31, 2008 and
$18.9 million of trade accounts payable which are included
in accounts payable on our consolidated balance sheet as of
December 31, 2008. During 2008, the joint venture paid
$11.2 million in cash to both of the parent companies,
equally reducing the respective investments in the joint venture.
On March 22, 2007, we entered into a convertible loan
agreement with BBI whereby we loaned them £7.5 million
($14.7 million as of the transaction date). Under the terms
of the agreement, the loan amount would simultaneously convert
into shares of BBI common stock per the prescribed conversion
formula defined in the loan agreement, in the event the BBI
consummated a specific target acquisition on or before
September 30, 2007. On May 15, 2007, BBI consummated a
specific target acquisition and the loan converted into
5,208,333 shares of BBIs common stock which is
included in investments in unconsolidated entities on our
accompanying consolidated balance sheet at December 31,
2007. In February 2008, we acquired the remaining outstanding
shares of BBI common stock in connection with our acquisition of
BBI (Note 4).
In December 2006, one of our key executive officers, paid us
$1,606,831 in full satisfaction of his obligations to us,
including principal and accrued interest, under a previously
disclosed, five-year promissory note dated August 16, 2001.
The promissory note was provided to us in connection with his
purchase of 250,000 shares of our common stock in August,
2001 (Note 16).
In December 2006, one of our key executive officers, paid us
$2,571,320 in full satisfaction of his obligations to us,
including principal and accrued interest, under a previously
disclosed, five-year promissory note dated August 16, 2001.
The promissory note was provided to us in connection with his
purchase of 399,381 shares of our common stock in August,
2001 (Note 16).
In August 2006, our Chairman, Chief Executive Officer and
President, paid us $11,197,096 in full satisfaction of his
obligations to us, including principal and accrued interest,
under a previously disclosed, five-year promissory note dated
August 16, 2001. The promissory note was provided to us in
connection with his purchase of 1,168,191 shares of our
common stock in August, 2001 (Note 16).
In June 2006, we issued 25,000 shares of our common stock
as consideration for the acquisition of all of the capital stock
of Innovative Medical Devices BVBA. The seller of the capital
stock of Innovative Medical Devices BVBA is the spouse of the
Chief Executive Officer, SPD Swiss Precision Diagnostics, our
50/50 joint venture with P&G.
|
|
(22)
|
Valuation
and Qualifying Accounts
|
We have established reserves against accounts receivable for
doubtful accounts, product returns, discounts and other
allowances. The activity in the table below includes all
accounts receivable reserves. Provisions for doubtful accounts
are recorded as a component of general and administrative
expenses. Provisions for returns,
F-69
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(22) |
Valuation and Qualifying Accounts (Continued)
|
discounts and other allowances are charged against net product
sales. The following table sets forth activities in our accounts
receivable reserve accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Charged
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
|
|
|
Against
|
|
|
End of
|
|
|
|
Period
|
|
|
Provision
|
|
|
Reserves
|
|
|
Period
|
|
|
Year ended December 31, 2006
|
|
$
|
9,748
|
|
|
$
|
22,914
|
|
|
$
|
(24,261
|
)
|
|
$
|
8,401
|
|
Year ended December 31, 2007
|
|
$
|
8,401
|
|
|
$
|
28,352
|
|
|
$
|
(24,586
|
)
|
|
$
|
12,167
|
|
Year ended December 31, 2008
|
|
$
|
12,167
|
|
|
$
|
20,810
|
|
|
$
|
(20,142
|
)
|
|
$
|
12,835
|
|
We have established reserves against obsolete and slow-moving
inventories. The activity in the table below includes all
inventory reserves. Provisions for obsolete and slow-moving
inventories are recorded as a component of cost of net product
sales. The following table sets forth activities in our
inventory reserve accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Charged
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
|
|
|
Against
|
|
|
End of
|
|
|
|
Period
|
|
|
Provision
|
|
|
Reserves
|
|
|
Period
|
|
|
Year ended December 31, 2006
|
|
$
|
7,742
|
|
|
$
|
6,661
|
|
|
$
|
(6,184
|
)
|
|
$
|
8,219
|
|
Year ended December 31, 2007
|
|
$
|
8,219
|
|
|
$
|
8,067
|
|
|
$
|
(8,164
|
)
|
|
$
|
8,122
|
|
Year ended December 31, 2008
|
|
$
|
8,122
|
|
|
$
|
9,194
|
|
|
$
|
(6,478
|
)
|
|
$
|
10,838
|
|
|
|
(23)
|
Restructuring
Activities
|
The following table sets forth the aggregate charges associated
with restructuring plans recorded in operating income (loss) for
the years ended December 31, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Fixed asset and inventory write-off
|
|
$
|
18,837
|
|
|
$
|
3,870
|
|
|
$
|
6,989
|
|
Severance
|
|
|
8,357
|
|
|
|
1,989
|
|
|
|
2,886
|
|
Intangible asset write-off
|
|
|
5,103
|
|
|
|
|
|
|
|
2,722
|
|
Facility and other exit costs
|
|
|
4,137
|
|
|
|
843
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,434
|
|
|
$
|
6,702
|
|
|
$
|
13,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) 2008 Restructuring Plans
In May 2008, we decided to close our facility located in
Bedford, England, and initiated steps to cease operations at
this facility and transition the manufacturing operations
principally to our manufacturing facilities in Shanghai and
Hangzhou, China. Based upon this decision, we recorded
$12.6 million in restructuring charges during the year
ended December 31, 2008, including $6.9 million
related to the acceleration of facility restoration costs,
$4.8 million of fixed asset impairments, $1.1 million
in severance costs, $0.7 million in early termination lease
penalties and $0.9 million related to a pension plan
curtailment gain associated with the Bedford employees being
terminated. Of these restructuring charges, $5.7 million
was charged to our professional diagnostics business segment as
follows: $3.5 million to cost of net product sales,
$0.2 million to research and development expense,
$0.2 million to sales and marketing expense and
$1.8 million to general and administrative expense. We also
recorded $6.7 million related to the accelerated present
value accretion of our lease restoration costs due to the early
termination of our facility lease to interest expense.
F-70
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(23) |
Restructuring Activities (Continued)
|
In addition to the restructuring charges discussed above,
$14.5 million of charges associated with the Bedford
facility closure were borne by SPD our consumer diagnostics
joint venture with P&G, during the year ended
December 31, 2008. Included in these charges were
$8.4 million of fixed asset impairments, $3.2 million
in early termination lease penalties, $2.6 million in
severance and retention costs, $0.2 million facility exit
costs and $0.1 million related to the acceleration of
facility restoration costs. Of these restructuring charges, 50%,
or $7.2 million, has been included in equity earnings of
unconsolidated entities, net of tax, in our consolidated
statements of operations for the year ended December 31,
2008. Of the total exit costs incurred by SPD and us under this
plan, including severance related costs, lease penalties and
restoration costs, $10.1 million remains unpaid as of
December 31, 2008. We anticipate incurring additional costs
of approximately $17.2 million related to the closure of
this facility, including, but not limited to, severance and
retention costs, rent obligations and incremental interest
expense associated with our lease obligations which will
terminate the end of 2011. Of these additional anticipated
costs, approximately $20.5 million will be borne by SPD and
$9.6 million will be borne by us. We expect the majority of
these costs to be incurred by the end of 2009, which is our
anticipated facility closure date.
In February 2008, we decided to cease research and development
activities for one of the products in development at our
Bedford, England facility, based upon comparison of the product
under development with existing products acquired in the
HemoSense acquisition. During the year ended December 31,
2008, we recorded restructuring charges of $9.4 million, of
which $6.8 million related to the impairment of fixed
assets, $1.9 million related to the write-off of inventory,
$0.5 million related to contractual obligations with
suppliers and $0.2 million related to severance costs to
involuntarily terminate employees working on the development of
this product. The $9.4 million was included in our
professional diagnostics business segment and included
$6.0 million charged to cost of net product sales,
$3.3 million charged to research and development expense
and $0.1 million charged to sales and marketing expense. Of
the $0.7 million in contractual obligations and severance
costs, all has been paid as of December 31, 2008. We do not
expect to incur significant additional charges under this plan.
In April 2008, we initiated cost reduction efforts at our
facilities in Stirling, Scotland, consolidating our business
activities into one facility and with our Biosite operations. As
a result of these efforts, we recorded $3.3 million in
restructuring charges for the year ended December 31, 2008,
consisting of $2.0 million in fixed asset impairments,
$1.0 million in severance costs and $0.3 million in
facility exit costs. These charges are included in our
professional diagnostics business segment as follows:
$3.2 million to research and development expense and
$0.1 million to general and administrative expense. Of the
$1.3 million in severance and facility exit costs,
$0.1 million remains unpaid at December 31, 2008. We
do not expect to incur significant additional charges under this
plan.
On March 18, 2008, we announced our plans to close our
BioStar Inc., or BioStar, facility in Louisville, Colorado, and
exit production of the BioStar OIA product line, along with our
plans to close two of our newly-acquired facilities in the
San Francisco, California area, relating to Cholestech and
HemoSense and one of our newly-acquired facility in Columbia,
Maryland, relating to Panbio. The Cholestech operation, which
was acquired in September 2007 and manufactures and distributes
the Cholestech LDX system, a point-of-care monitor of blood
cholesterol and related lipids used to test patients at risk of,
or suffering from, heart disease and related conditions, will
move to our Biosite facility in San Diego, California by
the middle of 2009. The HemoSense operation, which was acquired
in November 2007 and manufactures and distributes the INRatio
System, an easy-to-use, hand-held blood coagulation monitoring
system for use by patients and healthcare professionals in the
management of warfarin, a commonly prescribed medication used to
prevent blood clots, has substantially moved to our Biosite
facility as of December 31, 2008. The Panbio distribution
facility, which was acquired in January 2008, has been
transferred to our distribution center in Freehold, New Jersey
as of December 31, 2008.
F-71
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(23) |
Restructuring Activities (Continued)
|
BioStar manufacturing ceased at the end of June 2008, with
BioStar OIA products available for purchase through the end of
the first quarter of 2009. During the year ended
December 31, 2008, we incurred $10.6 million in
restructuring charges related to this plan, which consisted of
$5.1 million of intangible assets impairment,
$1.4 million in severance-related costs, $0.6 million
in fixed asset impairments, $1.2 million in facility exit
costs and $2.3 million related to the write-off of
inventory. Of the $10.6 million, which is included in our
professional diagnostics business segment, $7.1 million was
charged to cost of net product sales, $2.0 million was
charged to sales and marketing expense and $1.5 million was
charged to general and administrative. We expect to incur an
additional $0.1 million in charges under this plan during
the first half of 2009, primarily related to severance and
facility exit costs. As of December 31, 2008,
$0.4 million in severance and facility exit costs remain
unpaid.
As a result of our plans to transition the businesses of
Cholestech and HemoSense to Biosite and Panbio to Orlando,
Florida and close these facilities, we incurred
$3.8 million in restructuring charges during the year ended
December 31, 2008, of which $2.7 million relates to
severance and retention costs, $0.4 million in fixed asset
impairments, $0.5 million in transition costs and
$0.2 million in present value accretion of facility lease
costs related to these plans. Of the $3.8 million included
in our professional diagnostics business segment,
$1.2 million was charged to cost of net product sales,
$0.5 million was charged to research and development
expense, $0.3 million was charged to sales and marketing
expense and $1.6 million was charged to general and
administrative expense. We also recorded $0.2 million
related to the present value accretion of our facility lease
costs due to the early termination of our facility lease to
interest expense. Of the $3.4 million in exit costs,
$2.5 million remains unpaid as of December 31, 2008.
We anticipate incurring an additional $2.3 million in
restructuring charges under our Cholestech and HemoSense plans,
primarily related to severance, retention and outplacement
benefits, along with other costs to transition the Cholestech
and HemoSense operations to our Biosite facility. See
Note 4(d) for further information and costs related to
these plans.
In addition to transitioning the businesses of Cholestech and
HemoSense to Biosite, we also made the decision to close our
Innovacon facility in San Diego, California and move the
operating activities to Biosite; the Innovacon business is the
rapid diagnostics business that we acquired from ACON
Laboratories, Inc. During the year ended December 31, 2008,
we recorded $0.6 million in restructuring charges, of which
$0.5 million relates to facility lease and exit costs and
$0.1 million relates to impairment of fixed assets. These
charges are included in our professional diagnostics business
segment and were charged to general and administrative. As of
December 31, 2008, $0.2 million in restructuring costs
remain unpaid. We vacated the facility in August 2008 and do not
anticipate incurring additional costs under this plan.
(b) 2007 Restructuring Plans
During 2007, we committed to several plans to restructure and
integrate our world-wide sales, marketing, order management and
fulfillment operations, as well as evaluate certain research and
development projects. The objectives of the plans were to
eliminate redundant costs, improve customer responsiveness and
improve efficiencies in operations. As a result of these
restructuring plans, we recorded $3.0 million in
restructuring charges during the year ended December 31,
2008. The $3.0 million charge included $2.6 million
related to severance charges and outplacement services and
$0.4 million related to facility exit costs. These
restructuring charges consisted of $0.1 million charged to
cost of net revenue, $1.6 million charged to sales and
marketing expenses and $1.3 million charged to general and
administrative expenses, all of which were included in our
professional diagnostics business segments. Since inception of
the plan we have recorded $8.2 million in restructuring
charges, including $3.8 million related to severance
charges and outplacement services, $0.4 million related to
facility exit costs and $4.0 million related to impairment
charges on fixed assets. Of the $8.2 million recorded,
$1.8 million and $6.4 million were included in our
consumer diagnostics and
F-72
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(23) |
Restructuring Activities (Continued)
|
professional diagnostics business segment, respectively. As of
December 31, 2008, $1.2 million of severance-related
charges and facility exit costs remain unpaid. We do not
anticipate incurring additional charges related to this plan.
In addition, we recorded restructuring charges associated with
the formation of our joint venture with P&G. In connection
with the joint venture, we committed to a plan to close one of
our sales offices in Germany and in Sweden, as well as evaluate
redundancies in all departments of the consumer diagnostics
business segment that are impacted by the formation of the joint
venture. For the year ended December 31, 2008, we recorded
$0.2 million in severance costs related to this plan, which
was primarily charged to general and administrative expenses. We
have recorded $1.4 million in restructuring charges since
inception of the plan, of which $1.0 million relates to
severance costs and $0.4 million relates to facility and
other exit costs. Of the total $1.4 million in severance
and exit costs, $0.1 million remains unpaid as of
December 31, 2008. We do not anticipate incurring
additional charges related to this plan.
(c) 2006 Restructuring Plans
In May 2006, we committed to a plan to cease operations at our
ABI manufacturing facility in San Diego, California and to
write off certain excess manufacturing equipment at other
impacted facilities. Additionally, in June 2006, we committed to
a plan to reorganize the sales and marketing and customer
service functions in certain of our U.S. professional
diagnostics companies. For the year ended December 31,
2007, we recorded $0.4 million in net restructuring charges
under these plans, which primarily relates to $0.6 million
in facility exit costs, offset by a $0.2 million adjustment
due to the finalization of fixed asset write-offs. Of the
$0.4 million net charge, the $0.2 million adjustment
was recorded to cost of net revenue, and was included in our
consumer diagnostics segment, and $0.6 million was charged to
general and administrative expense, and was included in our
professional diagnostics business segment.
Net restructuring charges since the commitment date consist of
$6.7 million related to impairment of fixed assets and
inventory, $2.7 million related to an impairment charge on
an intangible asset, $2.5 million related to severance, and
$0.6 million related to facility closing costs. Of the
$12.5 million recorded in operating income,
$8.2 million, $1.7 million and $2.6 million were
included in our professional diagnostics, consumer diagnostics,
and corporate and other business segments, respectively. As of
December 31, 2008, $0.1 million of the severance
related charges remains unpaid.
(d) 2005 Restructuring Plan
In May 2005, we committed to a plan to cease operations at our
facility in Galway, Ireland. During the year ended
December 31, 2006, we recorded a net restructuring gain of
$3.2 million, of which $0.4 million related to charges
for severance, early retirement and outplacement services,
$0.1 million related to an impairment charge of fixed
assets, $0.6 million related to facility closing costs and
$4.3 million related to foreign exchange gains as a result
of recording a cumulative translation adjustment to other income
relating primarily to this plan of termination. The charges for
the year ended December 31, 2006 consisted of
$0.7 million charged to cost of goods sold,
$0.4 million charged to general and administrative and
$4.3 million in gains recorded to other expense. Of the net
restructuring gain of $3.2 million included in our net loss
for the year ended December 31, 2006, the $1.1 million
loss and the $4.3 million gain were included in our
consumer diagnostics and corporate and other business segments,
respectively. Additionally, during the year ended
December 31, 2006, we recorded a $1.4 million gain on
the sale of our CDIL facility in Ireland which has been recorded
in loss on dispositions, net in our consolidated statements of
operations and was included in our corporate and other business
segment for these periods (Note 25).
F-73
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(23) |
Restructuring Activities (Continued)
|
Net restructuring charges since the commitment date consist of
$2.6 million related to severance, early retirement and
outplacement services, $2.4 million related to impairment
of fixed assets and inventory and $1.2 million related to
facility closing costs, offset by $4.3 million related to
net foreign exchange gains relating primarily to this plan of
termination and a $1.4 million gain on the sale of the
manufacturing facility. Of the total $6.2 million
restructuring charges recorded in operating income,
$0.3 million and $5.9 million were included in our
professional diagnostics and consumer diagnostics business
segments, respectively. The $4.3 million and
$1.4 million gains were included in our corporate and other
business segment. The plan of termination was substantially
complete as of December 31, 2006 and all costs related to
severance, early retirement, outplacement services and facility
closing costs have been paid as of December 31, 2006.
(e) Restructuring Reserves
The following table summarizes our liabilities related to the
restructuring activities associated with the plans discussed
above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
to the
|
|
|
Amounts
|
|
|
|
|
|
End of
|
|
|
|
of Period
|
|
|
Reserve
|
|
|
Paid
|
|
|
Other (1)
|
|
|
Period
|
|
|
Year ended December 31, 2006
|
|
$
|
949
|
|
|
$
|
3,422
|
|
|
$
|
(2,820
|
)
|
|
$
|
14
|
|
|
$
|
1,565
|
|
Year ended December 31, 2007
|
|
$
|
1,565
|
|
|
$
|
2,828
|
|
|
$
|
(3,264
|
)
|
|
$
|
(6
|
)
|
|
$
|
1,123
|
|
Year ended December 31, 2008
|
|
$
|
1,123
|
|
|
$
|
25,642
|
|
|
$
|
(9,148
|
)
|
|
$
|
(2,823
|
)
|
|
$
|
14,794
|
|
|
|
|
(1) |
|
Represents foreign currency translation adjustment. |
|
|
(24)
|
Supplemental
Cash Flow Information
|
Cash Paid for Interest and Income Taxes:
During fiscal 2008, 2007 and 2006, we made cash payments for
interest totaling $88.6 million, $65.0 million and
$22.7 million, respectively.
During fiscal 2008, 2007 and 2006, total net cash paid
(received) for income taxes was $5.5 million,
$(31.5) million and $8.8 million, respectively.
F-74
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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|
(24) |
Supplemental Cash Flow Information (Continued)
|
Non-cash
Investing Activities:
During fiscal 2008, 2007 and 2006, we issued shares of our
common stock and exchanged employee stock options in connection
with several of our acquisitions (dollars in thousands):
|
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|
|
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|
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Employee Stock Options/
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|
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|
Restricted Stock Awards
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|
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Common Stock Issued
|
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|
Exchanged
|
|
|
|
|
|
Number of
|
|
|
Fair Value of
|
|
|
Number of
|
|
|
Fair Value of
|
|
Company Acquired
|
|
Date of Acquisition
|
|
Shares
|
|
|
Shares
|
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Shares
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Shares
|
|
|
Matria Healthcare, Inc.
|
|
May 9, 2008
|
|
|
|
|
|
$
|
|
|
|
|
1,490,655
|
|
|
$
|
17,334
|
|
BBI Holdings Plc
|
|
February 12, 2008
|
|
|
251,085
|
|
|
$
|
14,397
|
|
|
|
355,238
|
|
|
$
|
3,639
|
|
Matritech, Inc.
|
|
December 12, 2007
|
|
|
616,671
|
|
|
$
|
35,592
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|
|
|
|
|
|
$
|
|
|
Biosystems S.A.
|
|
December 11, 2007
|
|
|
33,373
|
|
|
$
|
1,948
|
|
|
|
|
|
|
$
|
|
|
Alere Medical, Inc.
|
|
November 16, 2007
|
|
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2,762,182
|
|
|
$
|
161,086
|
|
|
|
380,894
|
|
|
$
|
20,614
|
|
HemoSense, Inc.
|
|
November 6, 2007
|
|
|
3,691,369
|
|
|
$
|
226,415
|
|
|
|
380,732
|
|
|
$
|
16,695
|
|
Cholestech Corporation
|
|
September 12, 2007
|
|
|
6,840,361
|
|
|
$
|
329,774
|
|
|
|
733,077
|
|
|
$
|
20,331
|
|
Spectral Diagnostics Private Limited(1)
|
|
July 27, 2007
|
|
|
93,558
|
|
|
$
|
3,737
|
|
|
|
|
|
|
$
|
|
|
Biosite Incorporated(2)
|
|
June 29, 2007
|
|
|
|
|
|
$
|
|
|
|
|
753,863
|
|
|
$
|
28,453
|
|
Quality Assured Services, Inc.
|
|
June 7, 2007
|
|
|
273,642
|
|
|
$
|
12,834
|
|
|
|
|
|
|
$
|
|
|
Instant Technologies, Inc.
|
|
December 28, 2007
|
|
|
463,399
|
|
|
$
|
21,530
|
|
|
|
|
|
|
$
|
|
|
ABON BioPharm (Hangzhou) Co. Ltd. and ACON Laboratories
|
|
May 15, 2006
|
|
|
1,871,250
|
|
|
$
|
53,052
|
|
|
|
|
|
|
$
|
|
|
CLONDIAG chip technologies GmbH
|
|
February 28, 2006
|
|
|
467,715
|
|
|
$
|
12,457
|
|
|
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
The acquisition of Spectral Diagnostics Private Limited also
included its affiliate Source Diagnostics (India) Private
Limited. |
|
(2) |
|
The value includes $2.6 million associated with net
operating loss, or NOL, carryforwards related to stock options
issued to Biosite Incorporated employees. |
Non-cash
Financing Activities:
During 2008 and 2007, we recorded non-cash charges to
accumulated other comprehensive income of $11.6 million and
$9.5 million, respectively, representing the change in fair
market value of our interest rate swap agreement.
(25) Loss
on Dispositions, Net
During 2006, we recorded a net loss on dispositions of
$3.5 million. Included in this net loss is a
$4.9 million charge associated with managements
decision to dispose of our Scandinavian Micro Biodevices ApS, or
SMB, research operation, which was part of our professional
diagnostics and corporate and other business segments, of which
$2.0 million is related to impaired assets, primarily
goodwill associated with SMB, and a $2.9 million loss on
the sale of SMB. The sale of this operation was completed in the
fourth quarter of 2006. The net loss on dispositions also
includes an offsetting $1.4 million gain on the sale of an
idle manufacturing facility in Galway, Ireland, as a result of
our 2005 restructuring plan. This facility was associated with
our consumer diagnostics business segment.
F-75