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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, 2006
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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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American 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 x 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 x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the 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 x 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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer x Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
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, 2006 (the last business day of the
registrants most recently completed second fiscal quarter)
was $690,432,458.
As of February 26, 2007, the registrant had
46,239,163 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 with the Securities and Exchange Commission on or prior
to April 30, 2007 are incorporated by reference into
Part III of this
Form 10-K.
TABLE OF CONTENTS
PART I
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. You can identify these statements by forward-looking
words such as may, could,
should, would, intend,
will, expect, anticipate,
believe, estimate, continue
or similar words. You should read statements that contain these
words carefully because they discuss our future expectations,
contain projections of our future results of operations or of
our financial condition or state other
forward-looking information. 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 11
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
We are a leading global developer, manufacturer and marketer of
in vitro diagnostic products for the
over-the-counter
pregnancy and fertility/ovulation test market and the
professional rapid diagnostic test markets. Our company,
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 is listed
on the American Stock Exchange under the symbol IMA.
Since the split-off, we have grown our businesses by leveraging
our proprietary lateral flow immunoassay technology and our
strong intellectual property portfolio, and by making selected
strategic acquisitions. We have an experienced research and
development team and a continuing commitment to product
development, and have a demonstrated capability for introducing
new and innovative products through internal research and
development efforts. We are presently exploring new
opportunities in a variety of professional diagnostic and
consumer-oriented applications, including immuno-diagnostics
with a focus on cardiology, infectious disease and womens
health.
Our objective is to be a leading provider of innovative rapid
diagnostic products in cardiology to both consumer and
professional diagnostic markets, while enhancing our current
position as a leader in the professional rapid diagnostic test
market though geographic and product line expansions and
selective acquisitions. We plan to further expand our position
in the consumer rapid diagnostic test product market, including
the
over-the-counter
pregnancy and fertility/ovulation test market, through our
pending joint venture with The Procter & Gamble
Company, which is discussed further below.
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.
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RECENT
DEVELOPMENTS
Agreement
with The Procter & Gamble Company to Form Consumer
Diagnostics Joint Venture
In December 2006, we signed a definitive agreement with The
Procter & Gamble Company, or P&G, to form a 50/50 joint
venture for the development, acquisition, manufacturing,
marketing and sale of existing and to-be-developed consumer
diagnostic products outside of the fields of cardiology and
diabetes. In connection with this agreement, we will be
contributing our related consumer diagnostic and monitoring
assets, other than manufacturing and core intellectual property
assets, to a new joint venture entity, and P&G will be
acquiring its interest in the joint venture in consideration for
a cash payment of $325.0 million to us. P&G will retain
an option to require us to purchase its interest in the joint
venture at fair market value during a
60-day
period beginning on the fourth anniversary of the closing. Our
primary role in the collaboration will be to develop and
manufacture consumer diagnostic products, while P&Gs
primary role will be to market, sell and distribute existing and
to-be-developed products. We will retain all rights with respect
to the development and sale of cardiology diagnostic products
and our professional
point-of-care
diagnostic businesses.
Following the completion of the transaction and the formation of
the joint venture, we will cease to consolidate the operating
results of our consumer diagnostics business, which represented
$171.6 million of net product revenue in 2006 and instead
will account for our 50% interest in the results of the joint
venture under the equity method. In our capacity as the
manufacturer of products for the joint venture, we will supply
products to the joint venture and we will record revenue on
those sales. No gain on the proceeds that we receive 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 at fair market value expires.
The transaction is expected to close in the first half of 2007,
subject to the satisfaction of customary closing and other
conditions.
Sale of
6,900,000 Shares of Common Stock
We recently raised net proceeds of approximately
$261.3 million through an underwritten public offering of
6,900,000 shares of our common stock. In January 2007,
we sold 6,000,000 shares to the public at $39.65 per
share, and in February 2007, our underwriters exercised in
full an option to purchase an additional 900,000 shares to
cover over-allotments. Net proceeds include deductions for
underwriting discounts and commissions and take 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, including the financing of potential
acquisitions or other investments.
Acquisition
of First Check
In February 2007, we acquired substantially all of the assets of
First Check Diagnostics LLC (First Check), a
privately-held diagnostics company, for approximately $24.5
million in cash. In addition, we will 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.
First Check is the market leader in the rapidly-growing field of
home testing for drugs of abuse, including marijuana, cocaine,
methamphetamines and opiates. In addition, it offers tests, also
sold through retail channels, for alcohol abuse, cholesterol
monitoring and colon cancer screening.
Segments
Our major reportable segments are consumer diagnostic products,
vitamins and nutritional supplements and professional diagnostic
products. Below are discussions of each of these reportable
segments. Financial information about our reportable segments is
provided in Note 18 of the Notes to Consolidated
Financial Statements, which are included elsewhere in this
report.
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Products
Consumer Diagnostic Products. Our current
consumer diagnostic products primarily target the worldwide
over-the-counter
pregnancy and fertility/ovulation test market. There are
numerous pregnancy self-tests on the market, which are typically
urine-based tests and provide results in less than five minutes.
Our pregnancy and fertility/ovulation tests display visual
results in approximately one minute or three minutes depending
on the product. Fertility/ovulation prediction tests inform
women of the best time to conceive a baby by detecting the surge
of the luteinizing hormone, which precedes ovulation.
Fertility/ovulation prediction tests, which are generally
disposable stick tests similar to pregnancy stick tests, are
easy to use and are widely accepted for home use by professional
fertility care providers and the general public. Our
fertility/ovulation prediction test kits provide 24 to
36 hours notice of when ovulation is likely to occur. By
identifying the days when a woman is most fertile, these
products assist couples in planning conception.
To serve these markets we offer premium branded products, value
branded products and private label diagnostic products. Our
premium branded Clearblue home pregnancy and fertility/ovulation
prediction tests are global leaders in terms of both sales and
technology. We also offer Clearblue Easy Digital pregnancy and
fertility/ovulation prediction tests. Our Clearblue Easy Digital
pregnancy test was launched in June 2003 as the first consumer
pregnancy test to display test results in words, as opposed to
displaying results with colored lines that require
interpretation. During 2006 we introduced, under the Clearblue
Easy Digital brand, the first one piece digital pregnancy test,
which contains both the absorbent wick and the digital read
technology in a single disposable stick. To supplement our
premium line of traditional Clearblue fertility/ovulation
disposable stick tests, we also offer the Clearblue Easy
Fertility Monitor, the only hormone-based reusable monitoring
device available for home use to assist women attempting to
conceive. This product, which is sold primarily in the United
States and Canada, not only detects the surge of the luteinizing
hormone, or LH, which causes ovulation, but it is also the only
fertility/ovulation prediction device that identifies additional
days when a woman may conceive by detecting a rise in estrogen
levels that precedes the LH surge.
Our Fact plus and Accu-Clear branded pregnancy and
fertility/ovulation prediction products are marketed to
value-oriented consumers. We also sell Crystal Clear, the
leading brand pregnancy test in Australia. We are also a major
supplier of private label home pregnancy detection and
fertility/ovulation prediction products and we currently supply
Johnson & Johnson, who recently acquired the consumer
healthcare business of Pfizer, with both the digital and
non-digital versions of its e.p.t brand pregnancy tests. We also
sell Persona, a diagnostic monitoring device that provides for a
natural method of contraception by allowing the user to monitor
her menstrual cycle, in foreign countries, primarily in Germany
and the United Kingdom.
In February 2007, we acquired First Check, the market leading
brand of
over-the-counter
drugs of abuse tests for at-home testing for marijuana, cocaine,
methamphetamines and opiates. We also acquired
over-the-counter
tests for alcohol abuse, cholesterol monitoring, and colon
cancer screening which are also sold under the First Check brand.
Vitamins and Nutritional Supplements. We
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 vitamin 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.
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Our Inverness Medical branded nutritional products are high
quality products sold at moderate prices through national and
regional drug stores, groceries and mass merchandisers. These
branded products include Stresstabs, a B-complex vitamin with
added antioxidants; Ferro-Sequels, a time-release iron
supplement; Protegra, an antioxidant vitamin and mineral
supplement; Posture-D, a calcium supplement; SoyCare, a soy
supplement for menopause; ALLBEE, a line of B-complex vitamins;
and Z-BEC, a zinc supplement with
B-complex
vitamins and added antioxidants.
Professional Diagnostic Products. Professional
diagnostic products are designed to assist medical professionals
in both preventative and interventional medicine. These 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. Our current professional diagnostic products consist
primarily of laboratory and
point-of-care
tests in the areas of womens health, infectious disease,
cardiovascular disease and drugs of abuse. The market for rapid
diagnostic products consists primarily of small and medium
sized, non-centralized laboratories and testing locations such
as physician office laboratories, specialist mobile clinics,
emergency rooms and some rapid-response laboratories in larger
medical centers. We distinguish the professional
point-of-care
rapid diagnostic test market from clinical diagnostic markets
that consist of large, centralized laboratories that offer a
wide range of highly-automated laboratory services in hospital
or related settings.
We believe that the demand for infectious disease diagnostic
products is growing faster than 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 and other sexually
transmitted diseases. We also believe that, in general, the
ability to deliver faster, accurate results at reasonable prices
drives demand for professional diagnostic products. This means
that while there is growing demand for faster, more efficient
automated equipment from large hospitals and major reference
testing laboratories, there is also growing demand by
point-of-care
facilities and smaller laboratories for fast, high-quality,
inexpensive, self-contained diagnostic kits. As the speed and
accuracy of such products improve, we believe that these
products will play an increasingly important role in achieving
early diagnosis, timely intervention and therapy-monitoring
outside of acute medicine environments.
Our professional diagnostics products, which are generally
marketed under the trade name, Inverness Medical Professional
Diagnostics, include:
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Rapid Membrane Test Products. We develop and
market a wide variety of rapid membrane tests for pregnancy,
drugs of abuse, RSV, Influenza A/B, strep throat, HIV,
C.difficile, Lyme disease, chlamydia, H.pylori, fecal occult
blood, D-dimer, mononucleosis and rubella. Our rapid tests are
qualitative, visually-interpreted rapid diagnostic tests that
are used in
point-of-care
environments where a rapid response is desired or where the
volume of testing is too low to warrant high-volume methods. Our
rapid tests are sold under brand names which include Acceava,
BinaxNOW, BioStar OIA, Clearview, Determine, Signify, SureStep,
Inverness Medical TestPack and Wampole.
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ELISA Products. We offer 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. Our ELISA
products are generally marketed under our Wampole brand.
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AtheNA Multi-Lyte Test System. We are the
exclusive U.S. distributor of the AtheNA Multi-Lyte Test
System, which is capable of simultaneously performing multiple
assays from a single patient sample in the areas of autoimmune
and infectious disease. The AtheNA Multi-Lyte Test System
provides improved clinical sensitivity and comparable clinical
specificity to ELISA in a labor saving, automated user-friendly
format.
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IFA/Serology Products. We also offer a line of
indirect fluorescent antibody, or IFA, assays for over 20 viral,
bacterial and autoimmune diseases and a full line of serology
diagnostic products covering a broad range of disease
categories. Many of our kits are available in multiple formats
including rapid membrane, latex, red cell and color-enhanced
agglutination. These serology assays provide cost-effective
testing alternatives and most offer results in two minutes or
less.
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Ischemia Test. Our Albumin Cobalt Binding, or
ACB, test is a clinical chemistry assay that detects Ischemia
Modified Albumin, or IMA, by measuring the cobalt binding
capacity of albumin in a patient serum sample. IMA
concentrations in blood rise quickly and remain elevated during
an ischemic event, returning to normal level several hours after
cessation of ischemia. IMA can be used in conjunction with
electrocardiogram (ECG) and troponin as an aid to rule out acute
coronary syndrome at presentation; saving time, resources and
money. ACB test reagents are used by clinical laboratories in
conjunction with clinical chemistry instruments sold by third
parties, including Roche Diagnostics.
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Methods
of Distribution
Consumer Diagnostic Products. We market and
sell our consumer diagnostic products under our own brand names
as well as under store brands. Our customers include retail drug
stores, drug wholesalers, groceries and mass merchandisers in
North America, Europe and Japan such as Walgreens, CVS, Wal-Mart
and Boots. Our Clearblue products are marketed as premium
products and compete intensively with other premium brand name
products. Persona is also marketed as a premium product in
Europe. Marketing of premium branded products focuses on brand
awareness as well as feature and performance differentiation. We
achieve this through radio, television and print advertising.
Our Fact plus and Accu-Clear brand products are value-oriented
brands which are not currently advertised. Our consumer
diagnostic products are marketed in the United States, the
United Kingdom and parts of Western Europe using our own sales
managers and a network of sales representatives. In other areas
of the world, our consumer diagnostic products are sold though
distribution contracts. Private label and contract manufacturing
arrangements accounted for 34% of our consumer diagnostics
business net product sales for 2006.
Vitamins and Nutritional Supplements. We
primarily market and sell our vitamins and nutritional
supplements in the United States through private label
arrangements with retail drug stores, groceries, mass
merchandisers and warehouse clubs who sell our products under
their store brands. We also sell a variety of branded products
to the retail drug stores, groceries and mass merchandisers. To
a lesser extent, we provide contract manufacturing services to
third parties. Our two largest customers during 2006, based on
net product sales, together accounted for almost 63% of our net
product sales for this segment. Our rights to the trademarks
Stresstabs, Ferro-Sequels, Posture-D, Protegra, ALLBEE and Z-BEC
are limited to use in the United States, but we are not
restricted from marketing the formulations sold under those
brand names in other areas of the world.
Professional Diagnostic Products. In the
United States, the United Kingdom, Germany, Spain, Portugal,
France 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.
We have also recently acquired distribution operations in
Australia, Italy, Canada and Japan. In all other major markets
around the world we utilize third party distributors to sell our
products. We also distribute products for other parties,
primarily in Germany, Spain, Portugal, France, Italy and Canada.
Under the terms of our acquisition of our Determine products
from Abbott Laboratories in June 2005, Abbott distributes our
Determine products, which are sold outside of the United States,
for up to 32 months in order to allow us time to obtain
various marketing or sales licenses in the many countries where
these products are sold. Abbott acts as our exclusive
distributor, although we have certain rights to terminate the
distribution arrangement on a country by country basis in the
future. 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.
Manufacturing
Consumer Diagnostic Products. We manufacture
nearly all of our disposable consumer diagnostic products at our
facilities in Shanghai, China and Bedford, England. These
facilities are ISO certified and registered with the United
States Food and Drug Administration, or the FDA. We use our
Bedford facility to manufacture the diagnostic test portion of
our Clearblue Easy Digital products, and the non-digital and
digital e.p.t pregnancy tests for Johnson & Johnson. We
purchase the electronic portion of our digital pregnancy and
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ovulation prediction tests, our Clearblue Easy Fertility Monitor
and Persona to our specifications from third party suppliers in
Europe and China. Because most components of our consumer
diagnostic products are produced to our specifications, some of
our suppliers are single source suppliers with few, if any,
alternative sources immediately available.
Vitamins and Nutritional Supplements. 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. Our Freehold
facility manufactures in full compliance with Good Manufacturing
Practices, or GMP, standards recently proposed by the FDA for
the dietary supplement industry. Our Irvington facility
manufactures to GMP standards applicable to drug makers and is
registered with both the United States Drug Enforcement Agency,
or the DEA, and the FDA.
Professional Diagnostic
Products. Approximately 40% of the professional
diagnostic products that we sell, based on net product sales for
the fiscal year ended December 31, 2006 were manufactured
by third parties. We manufacture the remainder, including
substantially all of our BinaxNOW, BioStar OIA, Clearview,
Signify, SureStep and Inverness Medical TestPack products,
ourselves at our facilities in Hangzhou and Shanghai, China;
Bedford, UK; Yavne, Israel; Scarborough, Maine and Louisville,
Colorado. We also manufacture our Determine HIV products,
acquired from Abbott Laboratories in June 2005, at Abbotts
facility in Matsudo, Japan in space rented from Abbott under a
manufacturing and support services agreement entered into in
connection with the acquisition.
Research
and Development
A significant portion our budget for research and development
currently is allocated to the development of cardiovascular
disease management products. On February 25, 2005, we
entered into a 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 focused on
identifying novel biomarkers and near-patient and home use tests
for cardiovascular and other diseases. We agreed to invest
£37.5 million in these programs over three years and
we established a new research center in Stirling, Scotland where
we conduct most of the funded research and development
activities and where we will ultimately commercialize products
arising from these efforts. ITI and Stirling will have exclusive
rights to developed technology in their respective fields of use.
The remainder of our research and development efforts is focused
on expanding our range of product offerings and enhanced
features for our lines of consumer and professional diagnostic
products. Our other research and development activities are
carried out in Bedford, England; Jena, Germany; Scarborough,
Maine; and Yavne, Israel.
Foreign
Operations
Our business relies heavily on our foreign operations. Five of
our nine current manufacturing facilities are outside the United
States, including our facility in Hangzhou, China, our primary
consumer diagnostic products manufacturing facilities in
Bedford, England and Shanghai, China, and our manufacturing
operation in Matsudo, Japan. Since late 2005, we have also
focused significant effort on expanding our worldwide
distribution network supporting our professional diagnostics
business by acquiring distribution operations in Spain,
Australia, Germany, Japan, Italy and Canada. Approximately 41%
of our net revenues were generated from outside of the United
States during 2006. Our Clearblue products, pregnancy tests in
particular, have historically been much stronger brands outside
the United States, with 64% of our net product sales of
Clearblue products coming from outside the United States during
2006. Our Inverness Medical TestPack and Determine product lines
are sold exclusively outside the United States.
Competitive
Conditions
Consumer Diagnostic Products. Competition in
the pregnancy detection and fertility/ovulation prediction
market is intense. Our competitors in the United States, and
worldwide, are numerous and include, among others, large medical
and consumer products companies with substantially greater
resources than we
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have. However, we believe that we can continue to compete
effectively in the consumer diagnostics market based on our
research and development capabilities, advanced manufacturing
expertise, diversified product positioning, global market
presence and established wholesale and retail distribution
networks. Our competitors for the sale of pregnancy test
products worldwide include Church & Dwight,
Johnson & Johnson, Omega Pharma, Princeton BioMeditech,
Arax and Rohto, among others, although we currently supply
Johnson & Johnson and others with their pregnancy test
products. Our competitors for the sale of fertility/ovulation
prediction tests include Church & Dwight and Princeton
BioMeditech, among others. For both pregnancy and
fertility/ovulation tests worldwide, we also face growing
competition from manufacturers located in Asia. Competition
among branded consumer diagnostic products is based on brand
recognition and price. Products sold under well-established or
premium brand names can demand higher prices and
maintain high market shares due to brand loyalty. Our Clearblue
brand qualifies as a premium brand worldwide with respect to
both pregnancy tests and fertility/ovulation prediction
products. Our Clearblue pregnancy tests are market leaders
outside of the United States, as is our Crystal Clear brand in
Australia, and our Clearblue fertility/ovulation prediction
products are market leaders both in the United States and
globally. Our Fact plus and Accu-Clear branded consumer products
compete based on price and do not attempt to compete based on
brand recognition. For private label manufacturers, competition
is based primarily on the delivery of products at lower prices
that have substantially the same features and performance as
brand name products. The Clearblue Fertility Monitor and Persona
are unique products and their competitors or markets are not
easily defined. Our recently acquired First Check tests compete
against over-the-counter diagnostic tests sold primarily by
Phamatech, Inc., but also by other smaller competitors.
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, Pharmavite and Leiner Health Products, 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.
Professional Diagnostic Products. In the rapid
membrane market, our main competitors are Becton Dickinson,
Quidel and Genzyme Diagnostics. Some competitors in this market,
such as Becton Dickinson, are large companies with substantially
greater resources than we have. Other competitors in some
product segments, particularly drugs of abuse, are smaller yet
aggressive companies. These competitors include WHPM and
Princeton BioMeditech. Some automated immunoassay systems can be
considered competitors when labor shortages force laboratories
to automate or when the costs of such systems are lower. Such
systems are provided by Abbott, Bayer, Roche Diagnostics,
Beckman Coulter and other large diagnostic companies. In the
infectious disease area, new technologies utilizing
amplification techniques for analyzing molecular DNA gene
sequences from companies such as Abbott, Roche and Gen-Probe are
making in-roads into this market. Competition in this market is
intense and is primarily based on price, breadth of line and
distribution capabilities.
Our competitors in the ELISA diagnostics market include large
corporations, such as Abbott Laboratories and Diagnostic
Products Corporation, which manufacture
state-of-the-art
automated immunoassay systems and a wide array of diagnostic
products designed for processing on those systems. These
entities benefit from economies of scale and have the resources
to design and manufacture
state-of-the-art
automated equipment. Other competitors in this market, DiaSorin
and Diamedics in particular, are more similar in size to us and
compete with us 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.
8
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 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.
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.
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. Through acquisitions and strategic
licensing, we have obtained rights to the major patent families
in this area of technology. We believe that these intellectual
property rights give us a distinct advantage over our
competitors and underpin our continuing success in this area. In
addition, 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. We believe that our recent successes in
enforcing our intellectual property rights in the United States
and abroad demonstrate our resolve in enforcing our intellectual
property rights, the strength of our intellectual property
portfolio and the competitive advantage that we have in this
area. We have incurred substantial costs, both in asserting
infringement claims against others and in defending ourselves
against patent infringement claims, and may 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 consumer
and professional products. 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, places considerable importance on obtaining and
enforcing patent and trade secret protection for new
technologies, products and processes. Trademark protection is an
important factor in the success of certain of our consumer and
professional diagnostic product lines. 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 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 11 through 24 of this report.
Government
Regulation
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 U.S. Food and Drug
Administration, or the FDA. All of our diagnostic
9
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 U.S. Drug Enforcement Administration, or DEA, the FTC
and the Consumer Product Safety Commission. These activities are
also regulated by various agencies of the states, localities and
foreign countries in which our nutritional supplements are now
sold or may be sold in the future. In particular, the FDA
regulates the safety, manufacturing, labeling and distribution
of dietary supplements, including vitamins, minerals and herbs,
as well as food additives,
over-the-counter
and prescription drugs and cosmetics. The 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.
Employees
As of January 31, 2007, we had approximately 2,561
employees, of which 1,056 employees are located in the United
States. In addition, we utilize the services of temporary and
contract employees, including approximately 1,000 contract
employees leased from agencies in connection with our Chinese
operations, as well as a number of consultants specializing in
areas such as research and development, risk management,
regulatory compliance, strategic planning and marketing.
10
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 30 of this report.
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 we will likely continue to have, a
substantial amount of indebtedness. As of December 31,
2006, we had approximately $203.0 million in aggregate
principal indebtedness outstanding, of which $53.0 million
is secured indebtedness, and $110.0 million of additional
borrowing capacity under the revolving portions of our credit
facilities. In addition, subject to restrictions in our credit
facilities and the indenture governing our $150.0 million
in outstanding 8.75% senior subordinated notes, or the
senior subordinated notes, we may incur additional indebtedness.
During the fiscal years ended December 31, 2006 and 2005,
we recorded $26.6 million and $21.8 million,
respectively, of interest expense related to our indebtedness,
which included $4.2 million and $2.3 million,
respectively, in non-cash interest primarily related to
amortization of debt origination costs.
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 notes, our 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 notes, our
senior credit facility and our other debt from cash flow from
our operations and from additional loans under our senior credit
facility, subject to continued covenant compliance, and
potentially from other debt or equity offerings. Our ability to
meet our expenses thus depends on our future performance, which
will be affected by financial, business, economic and other
factors. We will not be able to control many of these factors,
such as economic conditions in the markets in which we operate
and pressure from competitors. We cannot be certain that our
cash flow will be sufficient to allow us to pay principal and
interest on our debt and meet our other obligations. If our cash
flow and capital resources prove inadequate, we could face
substantial liquidity problems and might be required to dispose
of material assets or operations, restructure or refinance our
debt, including the notes, seek additional equity capital or
borrow more money. We cannot guarantee that we will be able to
do so on terms acceptable to us. In addition, the terms of
existing or future debt agreements, including the credit
agreement governing our senior credit facility and the indenture
governing the senior subordinated notes, may restrict us from
adopting any of these alternatives.
11
We have
entered into agreements governing our indebtedness that subject
us to various restrictions that may limit our ability to pursue
business opportunities.
The agreements governing our indebtedness, including the credit
agreement governing our senior credit facility and the indenture
governing the senior subordinated notes, subject us to various
restrictions on our ability to engage in certain activities,
including, among other things, our ability to:
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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 our 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. In particular, all acquisitions of
other businesses, other than very small acquisitions, will
require us to obtain our lenders consent under our senior
credit facility. We have been required to obtain, and have
obtained, our lenders consent under our senior credit
facility in order to complete many of our acquisitions,
including the Wampole Division of MedPointe Inc., or Wampole;
Ostex International, Inc., or Ostex; Applied Biotech, Inc., or
ABI; the rapid diagnostics business that we acquired from Abbott
Laboratories, or the Abbott rapid diagnostics business;
Ischemia, Inc., or Ischemia; Binax, Inc., or Binax; the
Determine/DainaScreen business that we acquired from Abbott
Laboratories in 2005, or the Determine business; Thermo BioStar
Inc, or BioStar; and the rapid diagnostics business that we
acquired from ACON Laboratories, Inc., or the Innovacon business.
Our
senior 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 senior credit facility subject us
to various financial and other covenants with which we must
comply on an ongoing or periodic basis. These include covenants
pertaining to fixed charge coverage, capital expenditures,
various leverage ratios, minimum EBITDA and minimum cash
requirements. If we violate any of these covenants, we may
suffer a material adverse effect. Most notably, our outstanding
debt under our senior credit facility could become immediately
due and payable, our lenders could proceed against any
collateral securing such indebtedness, and our ability to borrow
additional funds in the future may be limited.
A default
under any of our agreements governing our indebtedness could
result in a default and acceleration of indebtedness under other
agreements.
The agreements governing our indebtedness, including our senior
credit facility and the indenture governing the senior
subordinated notes, contain cross-default provisions whereby a
default under one agreement could result in a default and
acceleration of our repayment obligations under other
agreements. If a cross-default were to occur, we may not be able
to pay our debts or borrow sufficient funds to refinance them.
Even if new financing were available, it may not be on
commercially reasonable terms or terms that are acceptable to
us. If some or all of our indebtedness is in default for any
reason, our business, financial condition and results of
operations could be materially and adversely affected.
12
We may
not be able to satisfy our debt obligations upon a change of
control, which could limit our opportunity to enter into a
change of control transaction.
Upon the occurrence of a change of control, as
defined in the indenture governing the senior subordinated
notes, each holder of our senior subordinated notes will have
the right to require us to purchase the notes at a price equal
to 101% of the principal amount, together with any accrued and
unpaid interest. Our failure to purchase, or give notice of
purchase of, the senior subordinated notes would be a default
under the indenture, which would in turn be a default under our
senior credit facility. In addition, a change of control may
constitute an event of default under our senior credit facility.
A default under our senior credit facility would result in an
event of default under our 10% subordinated notes and, if
the lenders accelerate the debt under our senior credit
facility, the indenture governing the senior subordinated notes,
and may result in the acceleration of any 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 notes, we may be
limited in the 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 attempted to integrate, or we are in the process of
integrating, into our operations Unipath Limited and its
associated companies and assets, or the Unipath business, IVC
Industries, Inc. (now doing business as Inverness Medical
Nutritionals Group, or IMN), Wampole, Ostex, ABI, the Abbott
rapid diagnostics business, Ischemia, Binax, the Determine
business, BioStar, the Innovacon business and other smaller
acquisitions. We have also made a number of smaller
acquisitions. The ultimate success of all of our acquisitions
depends, in part, on our ability to realize the anticipated
synergies, cost savings and growth opportunities from
integrating these businesses or 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 and research and development
operations, 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;
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establishing or expanding manufacturing, sales, distribution and
marketing functions in order to accommodate newly acquired
businesses or product lines;
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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
ongoing 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 our current operations to the integration effort
and any difficulties encountered in combining operations could
prevent us from realizing the full benefits anticipated to
result from these acquisitions and adversely affect our other
businesses. Additionally, the costs associated with the
integration of our acquisitions can 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 its purchase
price.
13
If we
choose to acquire or invest in new and complementary businesses,
products or technologies instead of developing them ourselves,
such acquisitions or investments could disrupt our business and,
depending on how we finance these acquisitions or investments,
could result in the use of significant amounts of
cash.
Our success depends in part on our ability to continually
enhance and broaden our product offerings in response to
changing technologies, customer demands and competitive
pressures. Accordingly, from time to time we may seek to acquire
or invest in businesses, products or technologies instead of
developing them ourselves. Acquisitions and investments involve
numerous risks, including:
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the inability to complete the acquisition or investment;
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disruption of our ongoing 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;
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unfavorable financing terms;
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large one-time expenses; and
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the creation of certain intangible assets, including goodwill,
the write-down of which may result in significant charges to
earnings.
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We may
not complete our pending joint venture transaction with
P&G.
In December 2006, we announced that we had signed a definitive
agreement with P&G to form a joint venture for the
development, acquisition, manufacturing, marketing and sale of
existing and to-be-developed consumer diagnostic products
outside of the fields of cardiology and diabetes. The
transaction is expected to close in the first half of 2007,
subject to the satisfaction of customary closing and other
conditions, such as that there be no material adverse change in
our consumer diagnostics business, that the transaction be
permitted under the indenture governing our senior subordinated
notes or that we repay all of our outstanding senior
subordinated notes and that we receive favorable tax rulings
from the Swiss tax authorities, the receipt of regulatory
approvals, and obtaining certain third-party consents to the
transaction. There can be no assurance that all of these
conditions will be satisfied. If these conditions are not
satisfied or waived, we may be unable to complete the joint
venture. In addition, in connection with the regulatory approval
process or the FTCs ongoing investigation relating to our
acquisition of the Innovacon business, the terms of the joint
venture may require modification, in which event we may not
realize all of the benefits of the joint venture that we expect
or the joint venture may not be completed at all.
Even if we complete the P&G joint venture transaction, we
may not realize all of its intended benefits.
If we complete the P&G joint venture transaction, we may
experience:
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difficulties in integrating the respective corporate cultures
and business objectives of Inverness and P&G into the new
joint venture;
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14
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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 costs of integration at the joint venture than we
anticipated;
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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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For any of these reasons or as a result of other factors, we may
not realize the anticipated benefits of the joint venture.
P&G will retain an option to require us to purchase its
interest in the joint venture at fair market value during the
60-day
period beginning on the fourth anniversary of the closing.
Additionally, in connection with the completion of the joint
venture, we will transfer or sell substantially all of the
assets of our consumer diagnostics business, other than our
manufacturing and core intellectual property assets, in exchange
for $325.0 million in cash and a 50% interest in the joint
venture. Our management will have broad discretion over the use
and investment of this cash. Cash flow that we derive from the
combination of any reinvestment of the $325.0 million we
received in cash in connection with the transaction and our 50%
interest in the joint venture may be less than the cash flow we
derived from the disposed of assets.
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 certain of our
acquisitions, including the Unipath business, Wampole, Ostex,
ABI, the Abbott rapid diagnostics product lines, Ischemia,
Binax, the Determine business, BioStar, and the Innovacon
business, we have recorded a significant amount of goodwill and
other intangible assets. Under current accounting guidelines, we
must assess, at least annually and potentially more frequently,
whether the value of goodwill and other intangible assets has
been impaired. Any reduction or impairment of the value of
goodwill or other intangible assets will result in a charge
against earnings which could materially adversely affect our
reported results of operations in future periods.
We may
experience manufacturing problems or delays, which could result
in decreased revenues 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 diagnostic products business, and our
private label and bulk nutritional supplements business in
particular, rely on operational efficiency to mass produce
products at low margins per unit. We also rely on numerous third
parties to supply production materials and in some cases there
may not be alternative sources immediately available.
In addition, during 2006 we closed two manufacturing facilities
and are shifting the production of products from these
facilities to China. We have shifted the production of
additional 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 approximately ten
significant third-party manufacturers, as well as numerous other
less significant manufacturers, to produce many of our
professional diagnostic products and certain components of our
consumer diagnostic products. In addition, we manufacture the
products acquired with the Determine business from a facility in
Matsudo, Japan that is made available to us by Abbott
Laboratories, from whom we also receive support services related
to this facility. Any event which negatively impacts our
manufacturing facilities, our manufacturing systems or
equipment, or our contract manufacturers or suppliers,
including,
15
without limitation, 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 we were able to restore our production
processes or put in place alternative contract manufacturers or
suppliers. Even though we carry business interruption insurance
policies, we may suffer losses as a result of business
interruptions that exceed the coverage available under our
insurance policies.
We may
experience difficulties that may delay or prevent our
development, introduction or marketing of new or enhanced
products.
We intend to continue to invest in product and technology
development. The development of new or enhanced products is a
complex and uncertain process. We may experience research and
development, manufacturing, marketing and other difficulties
that could delay or prevent our development, introduction or
marketing of new products or enhancements. We cannot be certain
that:
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any of the products under development will prove to be effective
in clinical trials;
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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 that are in
development or contemplated;
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any of such products can be manufactured at acceptable cost and
with appropriate quality; or
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any such products, 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 launches. In addition, we cannot assure
you that the market will accept these products. Accordingly,
there is no assurance that our overall revenues will increase if
and when new products are launched.
Our
failure to meet strict regulatory requirements could require us
to pay fines, incur other costs or even close our
facilities.
Our facilities and manufacturing techniques generally must
conform to standards that are established by government
agencies, including those of European and other foreign
governments, as well as the FDA, and, to a lesser extent, the
U.S. Drug Enforcement Administration and local health
agencies. These regulatory agencies may conduct periodic audits
of our facilities or our processes to monitor our compliance
with applicable regulatory standards. If a regulatory agency
finds that we fail to comply with the appropriate regulatory
standards, it may impose fines on us, delay or withdraw
pre-market clearances or other regulatory approvals or if such a
regulatory agency determines that our non-compliance is severe,
it may close our facilities. Any adverse action by an applicable
regulatory agency could impair our ability to produce our
products in a cost-effective and timely manner in order to meet
our customers demands. We may also be required to bear
other costs or take other actions that may have a negative
impact on our future sales and profits.
Regulatory agencies may also impose new or enhanced standards
that would increase our costs as well as the risks associated
with non-compliance. For example, we anticipate that the FDA may
soon finalize and implement good manufacturing
practice, or GMP, regulations for nutritional supplements.
GMP regulations would require supplements to be prepared,
packaged and held in compliance with certain rules, and might
require quality control provisions similar to those in the GMP
regulations for drugs. While our manufacturing facilities for
nutritional supplements have been subjected to, and passed,
third party inspections against anticipated GMP standards, the
ongoing compliance required in the event that GMP regulations
are adopted would involve additional costs and would present new
risks associated with any failure to comply with the regulations
in the future.
16
If we
deliver products with defects, our credibility may be harmed,
market acceptance of our products may decrease and we may be
exposed to liability in excess of our product liability
insurance coverage.
The manufacturing and marketing of consumer and professional
diagnostic products involve an inherent risk of product
liability claims. In addition, our product development and
production are extremely complex and could expose our products
to defects. Any defects could harm our credibility and decrease
market acceptance of our products. In addition, our marketing of
vitamins and nutritional supplements may cause us to be
subjected to various product liability claims, including, among
others, claims that the vitamins and nutritional supplements
have inadequate warnings concerning side effects and
interactions with other substances. Potential product liability
claims may exceed the amount of our insurance coverage or may be
excluded from coverage under the terms of the policy. In the
event that we are held liable for a claim for which we are not
indemnified, or for damages exceeding the limits of our
insurance coverage, that claim could materially damage our
business and our financial condition.
Our sales
of branded nutritional supplements have been trending downward
since 1998 due to the maturity of the market segments they serve
and the age of that product line and we may experience further
declines in sales of those products.
Our 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 2006, 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 our 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 impacted 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 impact individual brands. Conversely, news
that challenges individual segments or products can have a
negative impact on the industry overall as well as on sales of
the challenged segments or products. Most of our vitamin and
nutritional supplements products serve well-established market
segments and, absent unforeseen new developments or trends, are
not expected to benefit from rapid growth. A few of our vitamin
and nutritional products are newer products that are more likely
to be the subject of new scientific studies or announcements,
which could be either positive or negative. News or other
developments that challenge the safety or effectiveness of these
products could negatively impact the profitability of our
vitamin and nutritional supplements business.
We could
suffer monetary damages, incur substantial costs or be prevented
from using technologies important to our products as a result of
a number of pending legal proceedings.
We are involved in various legal proceedings arising out of our
consumer diagnostics, nutritional supplements and professional
diagnostics business. Because of the nature of our business, we
may be subject at any particular time to commercial disputes,
consumer product claims or various other lawsuits arising in the
ordinary course of our business, including employment matters,
and expect that this will continue to be the case in the future.
Such lawsuits generally seek damages, sometimes in substantial
amounts, for 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
17
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
profitability of our consumer products businesses may suffer if
we are unable to establish and maintain close working
relationships with our customers.
For the years ended December 31, 2006 and 2005,
approximately 46% and 58%, respectively, of our net product
sales were derived from our consumer products business, which
consists of our consumer diagnostic products and vitamin and
nutritional supplements segments. These businesses rely to a
great extent on close working relationships with our customers
rather than long-term exclusive contractual arrangements.
Customer concentration in these businesses is relatively high,
especially in our vitamin and nutritional supplements segment
where two customers accounted for approximately 63% of sales
during 2006. In addition, customers of our branded and private
label consumer products businesses purchase products through
purchase orders only and are not obligated to make future
purchases. We therefore rely on our ability to deliver quality
products on time in order to retain and generate customers. If
we fail to meet our customers needs or expectations,
whether due to manufacturing issues that affect quality or
capacity issues that result in late shipments, we will harm our
reputation and customer relationships and likely lose customers.
Additionally, if we are unable to maintain close working
relationships with our customers, sales of all of our products
and our ability to successfully launch new products could
suffer. The loss of a major customer and the failure to generate
new accounts could significantly reduce our revenues or prevent
us from achieving projected growth.
The
profitability of our consumer products businesses may suffer if
Johnson & Johnson, who recently acquired the consumer
healthcare business of Pfizer, Inc., is unable to successfully
market and sell its e.p.t pregnancy tests.
Under the terms of a manufacturing, packaging and supply
agreement, with Johnson & Johnson, or JNJ, JNJ purchases its
non-digital e.p.t pregnancy tests from us through June 6,
2009. Additionally, pursuant to the terms of a five-year supply
agreement entered into in December 2003, as amended on
June 1, 2005, we currently supply JNJ with a digital
version of its e.p.t brand pregnancy tests on an exclusive
basis. The amount of revenues or profits that we generate under
these agreements will depend on the volume of orders that we
receive from JNJ. As a result, if JNJ is unable to successfully
market and sell its e.p.t pregnancy tests, or if other events
adversely affect the volume of JNJ sales of its e.p.t pregnancy
tests, then our future revenues and profit may be adversely
affected.
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, 2006 and 2005, provided
approximately 13% and 16%, 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. The
resulting margin erosion in our nutritionals business has
resulted in a reduction in our overall gross margin over the
last several years and contributed to our losses in 2006.
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Our
financial condition or results of operations may be adversely
affected by international business risks.
Approximately 41% and 42% of our net revenue was generated from
outside the United States for the year ended December 31,
2006 and 2005, respectively. A significant number of our
employees, including manufacturing, sales, support and research
and development personnel, are located in foreign countries,
including England, Scotland, Japan, China, and Israel.
Conducting business outside of 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 our
sales, support and research and development operations across
many countries;
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lost revenues resulting from difficulties associated with
enforcing agreements and collecting receivables through foreign
legal systems;
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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 affects 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 ability to
convert currencies may negatively affect our financial condition
and results of operations.
Our business relies heavily on our foreign operations. Five of
our manufacturing operations are conducted outside the United
States, in Bedford, England; Hangzhou and Shanghai, China;
Matsudo, Japan and Yavne, Israel. We have consolidated much of
our cardiovascular related research and development in Scotland
and we intend to establish a significant manufacturing operation
there. Approximately 41% and 42% of our net revenue was
generated from outside the United States for the years ended
December 31, 2006 and 2005, respectively. Our Clearblue
pregnancy test product sales have historically been much
stronger outside the United States, with 64% of net product
sales of these products coming from outside the United States
during the year ended December 31, 2006. In addition, the
Abbott rapid diagnostics business generates a majority of its
sales outside the United States, and all of the revenues of the
Determine business are derived outside of the United States.
Because of our foreign operations and foreign sales, we face
exposure to movements in foreign currency exchange rates. Our
primary exposures are related to the operations of our European
subsidiaries 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 impact 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 consumer
diagnostics and professional diagnostics businesses, is intense
and expected to increase as new products and technologies become
available and new competitors enter the market. Our competitors
in the United States and abroad are numerous and include, among
others, diagnostic testing and medical products companies,
universities and other research institutions.
19
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 our potential
products; or
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obtain regulatory approval for the commercialization of their
products more rapidly or effectively than we do.
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Also, the possibility of patent disputes with competitors
holding foreign patent rights may limit or delay expansion
possibilities for our diagnostics businesses in certain foreign
jurisdictions. In addition, many of our existing or potential
competitors have or may have substantially greater research and
development capabilities, clinical, manufacturing, regulatory
and marketing experience and financial and managerial resources.
The market for the sale of vitamins and nutritional supplements
is also highly competitive. This competition is based
principally upon price, quality of products, customer service
and marketing support. There are numerous companies in the
vitamins and nutritional supplements industry selling products
to retailers such as mass merchandisers, drug store chains,
independent drug stores, supermarkets, groceries and health food
stores. As most of these companies are privately held, we are
unable to obtain the information necessary to assess precisely
the size and success of these competitors. However, we believe
that a number of our competitors, particularly manufacturers of
nationally advertised brand name products, are substantially
larger than we are and have greater financial resources.
The
rights we rely upon to protect the intellectual property
underlying our products may not be adequate, which could enable
third parties to use our technology and would reduce our ability
to compete in the market.
Our success will depend in part on our ability to develop or
acquire commercially valuable patent rights and to protect our
intellectual property. Our patent position is generally
uncertain and involves complex legal and factual questions. The
degree of present and future protection for our proprietary
rights is uncertain.
The risks and uncertainties that we face with respect to our
patents and other proprietary rights include the following:
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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, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual
property rights. Nevertheless, these measures may not be
adequate to safeguard the technology underlying our products. If
they do not protect our rights, third parties could use our
technology and our ability to compete in the market would be
reduced. In addition, employees, consultants and others who
participate in the development of our products may breach their
agreements with us regarding our intellectual property and we
may not have adequate remedies for the breach. We also may not
be able to effectively protect our intellectual property rights
in some foreign countries. For a variety of reasons, we may
decide not to file for patent, copyright or trademark protection
or
20
prosecute potential infringements of our patents. We also
realize that our trade secrets may become known through other
means not currently foreseen by us. Despite our efforts to
protect our intellectual property, our competitors or customers
may independently develop similar or alternative technologies or
products that are equal or superior to our technology and
products without infringing on any of our intellectual property
rights or design around our proprietary technologies.
Claims by
other companies that our products infringe on their proprietary
rights could adversely affect our ability to sell our products
and increase our costs.
Substantial litigation over intellectual property rights exists
in both the consumer and professional diagnostic industries. We
expect that our products and products in these industries could
be increasingly subject to third party infringement claims as
the number of competitors grows and the functionality of
products and technology in different industry segments overlaps.
Third parties may currently have, or may eventually be issued,
patents on which our products or technology may infringe. Any of
these third parties might make a claim of infringement against
us. Any litigation could result in the expenditure of
significant financial resources and the diversion of
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 shipment delays or require us to develop non-infringing
technology, make substantial payments to third parties, or enter
into royalty or license agreements, which may not be available
on acceptable terms, or at all. If a successful claim of
infringement was made against us and we could not develop
non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our revenue may
decrease and we could be exposed to legal actions by our
customers.
We have
initiated, and may need to further initiate, lawsuits to protect
or enforce our patents and other intellectual property rights,
which could be expensive and, if we lose, could cause us to lose
some of our intellectual property rights, which would reduce our
ability to compete in the market.
We rely on patents to protect a portion of our intellectual
property and our competitive position. In order to protect or
enforce our patent rights, we may initiate patent litigation
against third parties, such as infringement suits or
interference proceedings. Litigation may be necessary to:
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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 who we believe to be selling products that infringe
our proprietary rights. These current lawsuits and any other
lawsuits that we initiate could be expensive, take significant
time and divert 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.
21
In
December 2005, we learned that the Securities and Exchange
Commission, or the SEC, had issued a formal order of
investigation in connection with the previously disclosed
revenue recognition matter at one of our diagnostic divisions.
We cannot predict what the outcome of this investigation will
be.
In December 2005, we learned that the SEC had issued a formal
order of investigation in connection with the previously
disclosed revenue recognition matter at one of our diagnostic
divisions, and we subsequently received a subpoena for
documents. We believe that we fully responded to the subpoena
and we have continued to fully cooperate with the SECs
investigation. We cannot predict whether the SEC will seek
additional information or what the outcome of its investigation
will be.
In March
2006, the Federal Trade Commission, or the FTC, opened a
preliminary, non-public investigation into our acquisition of
the Innovacon business to determine whether this acquisition may
be anticompetitive. We cannot predict what the outcome of this
investigation will be.
In March, 2006, the FTC opened a preliminary, non-public
investigation into our then pending acquisition of the Innovacon
business we acquired from ACON Laboratories to determine whether
this acquisition may be anticompetitive, and we subsequently
received a Civil Investigative Demand and a subpoena requesting
documents. We believe that we have fully responded to the Civil
Investigative Demand and we are continuing to produce documents
in connection with the subpoena and to otherwise cooperate with
the FTCs investigation. We cannot predict whether the FTC
will seek additional information or what the outcome of this
investigation will be. The FTC generally has the power to
commence administrative or federal court proceedings seeking
injunctive relief or divestiture of assets. In the event that an
order were to be issued requiring divestiture of significant
assets or imposing other injunctive relief, our business,
financial condition and results of operations could be
materially adversely affected.
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 cannot
pursue opportunities in the field of diabetes.
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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changes in manufacturing costs or other expenses;
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competitive pricing pressures;
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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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the 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
our future performance by viewing our 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, including our significant
acquisitions of IVC Industries, Inc. in March 2002, Wampole in
September 2002, Ostex in June 2003, ABI in August 2003, the
Abbott rapid diagnostics product lines in September 2003, Binax
and Ischemia in March 2005, the Determine business in June 2005,
BioStar in September 2005, and the Innovacon business in March
2006.
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.
Our stock
price may fluctuate significantly and stockholders who buy or
sell our common stock may lose all or part of the value of their
investment, depending on the price of our common stock from time
to time.
Our common stock has only been listed on the American Stock
Exchange since November 23, 2001 and we have a limited
market capitalization. As a result, we are currently followed by
only a few market analysts and a portion of the investment
community. Limited trading of our common stock may therefore
make it more difficult for you to sell your shares.
In addition, our share price may be volatile due to our
operating results, as well as factors beyond our control. It is
possible that in some future periods the results of our
operations will be below the expectations of the public market.
In any such event, the market price of our common stock could
decline. Furthermore, the stock market may experience
significant price and volume fluctuations, which may affect the
market price of our common stock for reasons unrelated to our
operating performance. The market price of our common stock may
be highly volatile and may be affected by factors such as:
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our quarterly and annual operating results, including our
failure to meet the performance estimates of securities analysts;
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changes in financial estimates of our revenues and operating
results or buy/sell recommendations by securities analysts;
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the timing of announcements by us or our competitors of
significant products, contracts or acquisitions or publicity
regarding actual or potential results or performance thereof;
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changes in general conditions in the economy, the financial
markets or the health care industry;
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government regulation in the health care industry;
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changes in other areas such as tax laws;
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sales of substantial amounts of common stock or the perception
that such sales could occur;
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changes in investor perception of our industry, our businesses
or our prospects;
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the loss of key employees, officers or directors; or
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other developments affecting us or our competitors.
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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 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 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 our 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.
Because
we do not intend to pay dividends on our common stock, you will
benefit from an investment in our common stock only if it
appreciates in value.
We currently intend to retain our future earnings, if any, to
finance the expansion of our business and do not expect to pay
any cash dividends on our common stock in the foreseeable
future. In addition, our senior credit facility currently
prohibits the payment of dividends and the indenture governing
the terms of our senior subordinated notes restricts the amount
of any dividends that we may pay. As a result, the success of
your investment in our common stock will depend entirely upon
any future appreciation. There is no guarantee that our common
stock will appreciate in value or even maintain the price at
which you purchased your shares.
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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 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, 2008.
Our European consumer and professional diagnostics operations
are currently administered from a 150,000 square foot
facility located in Bedford, England. We also manufacture
products for these operations
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and conduct research and development activity at the Bedford
facility. Our lease for this facility expires on
September 27, 2021.
We also have manufacturing operations in Hangzhou and Shanghai,
China; Scarborough, Maine; Louisville, Colorado; Yavne, Israel;
Matsudo, Japan; Freehold and Irvington, New Jersey. We currently
manufacture a portion of our professional diagnostic products,
and some consumer diagnostic products, out of a newly
constructed manufacturing facility of approximately
300,000 square feet in Hangzhou, China, which we own. We
acquired this facility from ACON Laboratories, Inc. in May 2006.
We currently manufacture a portion of our consumer diagnostic
products out of approximately 25,000 square feet of space
in Shanghai, China made available by our joint venture partner
with the remainder manufactured at our Bedford, England
facility. We manufacture certain of our professional diagnostic
products out of a 64,000 square foot facility that we lease
in Scarborough, Maine and out of a 75,000 square foot
facility that we lease in Louisville, Colorado, portions of
which we sublease to third parties. We house the development,
manufacturing, administrative and marketing operations related
to our Orgenics professional diagnostic products in a leased
facility of approximately 10,000 square feet in Yavne,
Israel. The products that we acquired from Abbott in June 2005
are manufactured by us in Matsudo, Japan in 19,000 square
feet of space rented from Abbott under a manufacturing and
support services agreement entered into in connection with the
acquisition. 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. Consistent with our previously announced
timeline, we have recently ceased manufacturing operations at
our manufacturing facility in San Diego, California.
We also have leases or other arrangements for administrative or
sales offices, lab space and warehouses in various locations
worldwide.
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ITEM 3.
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LEGAL
PROCEEDINGS
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We currently are not a party to any material pending legal
proceedings.
Because of the nature of our business, we may be subject at any
particular time to consumer product claims or various other
lawsuits arising in the ordinary course of our business,
including employment matters, and expect that this will continue
to be the case in the future. Such lawsuits generally seek
damages, sometimes in substantial amounts, for personal injuries
or other commercial or employment claims. 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.
In December 2005, we learned that the SEC had issued a formal
order of investigation in connection with the previously
disclosed revenue recognition matter at one of our diagnostic
divisions, and we subsequently received a subpoena for
documents. We believe that we fully responded to the subpoena
and we will continue to fully cooperate with the SECs
investigation. We cannot predict whether the SEC will seek
additional information or what the outcome of its investigation
will be.
In March, 2006, the FTC opened a preliminary, non-public
investigation into our then pending acquisition of the business
we acquired from ACON Laboratories to determine whether this
acquisition may be anticompetitive, and we subsequently received
a Civil Investigative Demand and a subpoena requesting
documents. We believe that we have fully responded to the Civil
Investigative Demand and we are continuing to produce documents
in connection with the subpoena and to otherwise cooperate with
the FTCs investigation. We cannot predict whether the FTC
will seek additional information or what the outcome of this
investigation will be. The FTC generally has the power to
commence administrative or federal court proceedings seeking
injunctive relief or divestiture of assets. In the event that an
order were to be issued requiring divestiture of significant
assets or imposing other injunctive relief, our business,
financial condition and results of operations could be
materially adversely affected.
25
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
At a special meeting of stockholders held on December 15,
2006, the stockholders approved the matters set forth below. The
stockholders approved and adopted (i) a proposal to
increase the total number of shares of common stock that we are
authorized to issue by 50,000,000 shares from 50,000,000
shares to 100,000,000 shares, and (ii) a proposal to
increase the maximum number of shares of common stock available
for issuance under the Inverness Medical Innovations, Inc. 2001
Stock Option and Incentive Plan from 6,074,081 to
8,074,081 shares.
The following table summarizes the votes for, against or
withheld, with regard to each matter voted upon:
|
|
|
|
|
|
|
|
|
|
|
|
|
Matter
|
|
For
|
|
|
Against
|
|
|
Withheld
|
|
|
Proposal to increase total number
of authorized shares of common stock:
|
|
|
23,091,744
|
|
|
|
1,196,816
|
|
|
|
45,066
|
|
Proposal to increase maximum
number of shares of common stock available for issuance under
option plan:
|
|
|
23,298,081
|
|
|
|
1,005,265
|
|
|
|
30,280
|
|
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our common stock trades 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 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
41.50
|
|
|
$
|
34.01
|
|
Third Quarter
|
|
$
|
36.02
|
|
|
$
|
25.99
|
|
Second Quarter
|
|
$
|
32.00
|
|
|
$
|
24.60
|
|
First Quarter
|
|
$
|
29.00
|
|
|
$
|
23.63
|
|
Fiscal 2005
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
27.01
|
|
|
$
|
21.90
|
|
Third Quarter
|
|
$
|
29.51
|
|
|
$
|
24.70
|
|
Second Quarter
|
|
$
|
29.99
|
|
|
$
|
21.25
|
|
First Quarter
|
|
$
|
25.87
|
|
|
$
|
20.49
|
|
On February 26, 2007, there were 921 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 senior credit facility
and the indenture governing the terms of the senior subordinated
notes currently prohibit the payment of cash or stock dividends.
26
Stock
Performance Graph
The following line graph compares the change in the cumulative
total stockholder return on our common stock from
December 31, 2001 through December 31, 2006. This
graph assumes an investment of $100 on December 31, 2001 in
our common stock, and compares its performance with the AMEX US
Total Return Index and the AMEX Health Products &
Services Total Return Index (the Current Indices).
We currently pay no dividends. 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, 2001 and the last trading day of each
subsequent fiscal quarter through December 31, 2006.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
12/31/01
|
|
|
12/31/02
|
|
|
12/31/03
|
|
|
12/31/04
|
|
|
12/30/05
|
|
|
12/29/06
|
|
IMA
|
|
$
|
100.00
|
|
|
$
|
72.85
|
|
|
$
|
120.66
|
|
|
$
|
139.06
|
|
|
$
|
131.36
|
|
|
$
|
214.40
|
|
AMEX US Total Return
Index
|
|
$
|
100.00
|
|
|
$
|
81.74
|
|
|
$
|
110.63
|
|
|
$
|
127.83
|
|
|
$
|
138.33
|
|
|
$
|
160.48
|
|
AMEX Health Products &
Services
Total Return Index
|
|
$
|
100.00
|
|
|
$
|
69.12
|
|
|
$
|
121.08
|
|
|
$
|
124.55
|
|
|
$
|
107.72
|
|
|
$
|
138.96
|
|
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.
27
|
|
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, 2006 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.
The selected consolidated financial data as of December 31,
2006 and 2005 and for each of the three years in the period
ended December 31, 2006 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, independent registered
public accounting firm. The selected consolidated financial data
as of December 31, 2004, 2003 and 2002 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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002(2)
|
|
|
|
(in thousands, except per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
552,130
|
|
|
$
|
406,457
|
|
|
$
|
365,432
|
|
|
$
|
285,430
|
|
|
$
|
200,399
|
|
License and royalty revenue
|
|
|
17,324
|
|
|
|
15,393
|
|
|
|
8,559
|
|
|
|
9,728
|
|
|
|
6,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
569,454
|
|
|
|
421,850
|
|
|
|
373,991
|
|
|
|
295,158
|
|
|
|
206,804
|
|
Cost of sales
|
|
|
340,231
|
|
|
|
269,538
|
|
|
|
226,987
|
|
|
|
167,641
|
|
|
|
114,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
229,223
|
|
|
|
152,312
|
|
|
|
147,004
|
|
|
|
127,517
|
|
|
|
92,151
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
53,666
|
|
|
|
30,992
|
|
|
|
31,954
|
|
|
|
24,367
|
|
|
|
14,508
|
|
Sales and marketing
|
|
|
94,445
|
|
|
|
72,103
|
|
|
|
57,957
|
|
|
|
52,504
|
|
|
|
39,570
|
|
General and administrative
|
|
|
71,243
|
|
|
|
59,990
|
|
|
|
52,707
|
|
|
|
35,812
|
|
|
|
38,628
|
|
Loss on dispositions, net
|
|
|
3,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge related to asset impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
6,371
|
|
|
|
(10,773
|
)
|
|
|
4,386
|
|
|
|
14,834
|
|
|
|
(13,237
|
)
|
Interest expense and other
expenses, net
|
|
|
(17,486
|
)
|
|
|
(1,617
|
)
|
|
|
(18,707
|
)
|
|
|
(3,270
|
)
|
|
|
(5,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations before provision for income taxes
|
|
|
(11,115
|
)
|
|
|
(12,390
|
)
|
|
|
(14,321
|
)
|
|
|
11,564
|
|
|
|
(19,192
|
)
|
Provision for income taxes
|
|
|
5,727
|
|
|
|
6,819
|
|
|
|
2,275
|
|
|
|
2,911
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations
|
|
$
|
(16,842
|
)
|
|
$
|
(19,209
|
)
|
|
$
|
(16,596
|
)
|
|
$
|
8,653
|
|
|
$
|
(22,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations available to common stockholdersbasic and
diluted(1)
|
|
$
|
(16,842
|
)
|
|
$
|
(19,209
|
)
|
|
$
|
(17,345
|
)
|
|
$
|
7,695
|
|
|
$
|
(34,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.87
|
)
|
|
$
|
0.49
|
|
|
$
|
(3.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted(1)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.87
|
)
|
|
$
|
0.44
|
|
|
$
|
(3.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
71,104
|
|
|
$
|
34,270
|
|
|
$
|
16,756
|
|
|
$
|
24,622
|
|
|
$
|
30,668
|
|
Working capital
|
|
$
|
133,313
|
|
|
$
|
84,523
|
|
|
$
|
62,615
|
|
|
$
|
44,693
|
|
|
$
|
27,685
|
|
Total assets
|
|
$
|
1,085,771
|
|
|
$
|
791,166
|
|
|
$
|
568,269
|
|
|
$
|
540,529
|
|
|
$
|
356,495
|
|
Total debt
|
|
$
|
202,976
|
|
|
$
|
262,504
|
|
|
$
|
191,224
|
|
|
$
|
176,181
|
|
|
$
|
104,613
|
|
Redeemable convertible preferred
stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,185
|
|
|
$
|
9,051
|
|
Total stockholders equity
|
|
$
|
714,138
|
|
|
$
|
397,308
|
|
|
$
|
271,416
|
|
|
$
|
265,173
|
|
|
$
|
161,849
|
|
|
|
|
(1) |
|
(Loss) income available to common stockholders and basic and
diluted (loss) income per common share are computed as described
in Notes 2(m) and 13 of our consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K. |
|
(2) |
|
Upon the adoption of Statement of Financial Accounting
Standards, SFAS, No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002, we recorded an
impairment charge of $12.1 million, or $1.22 per basic
and diluted share, and accounted for the charge as a cumulative
effect of a change in accounting principle which was subtracted
from loss before provision for income taxes to arrive at net
loss. Consequently, net loss available to common stockholders in
2002 was $46.7 million, or $4.70 per basic and diluted
share. |
29
|
|
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 our
expectations with respect to our pending joint venture with The
Procter & Gamble Company, or P&G, the impact of our
expanded distribution network, the impact of the consolidation
of our manufacturing facilities on margins, the impact of
improved margins on operating cash flow, new product
introductions, research and development expenditures,
anticipated growth in our professional diagnostics business, 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 11 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
As a leading global manufacturer and supplier of rapid
diagnostic products for consumer and professional markets, we
are continually exploring new opportunities for our proprietary
electrochemical and other technologies in a variety of
professional diagnostic and consumer-oriented applications,
including immuno-diagnostics with a focus on womens
health, cardiology and infectious disease. As part of this
strategy, we are focused on opportunities, including
acquisitions and strategic partnerships, aimed at expanding both
our product offerings and our distribution capability in the
rapid diagnostic marketplace. Our 2006 acquisition of 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,
Australia, Japan and most of western Europe, or the Innovacon
business, not only expanded our product offerings but had an
immediate positive impact on our operating results. We have also
continued to expand the worldwide distribution network
supporting our professional diagnostics segment which will
ultimately enable us to get our future cardiology diagnostic
products to the professional users critical to market
acceptance. Since the beginning of the fourth quarter of 2005,
we have acquired distributors in Spain, Australia, Canada,
Germany, Italy and Japan.
We are also focused on improving our margins through
consolidation of certain of our manufacturing operations at
lower cost facilities. Our acquisition of the Innovacon business
also represents a key component of this strategy. To date we
have benefited from the higher margins that this business
enjoys. These margins result from the lower costs associated
with manufacturing at the new 300,000 square foot
manufacturing facility located in Hangzhou, China, or the ABON
facility, which we acquired in May 2006 as part of the
transaction with ACON Laboratories. In 2007, we expect to begin
to see improved margins on some of our existing products as we
move production of certain products from higher costs facilities
to the ABON facility.
Our agreement with P&G to form a 50/50 joint venture for the
development, manufacturing, marketing and sale of existing and
to-be-developed consumer diagnostic products outside of the
fields of cardiology and diabetes presents us an exciting and
unique opportunity. By leveraging P&Gs marketing and
distribution capabilities, we expect this partnership to
simultaneously expand the reach of our
over-the-counter
diagnostic
30
products, while enabling enhanced focus on our rapidly growing
professional diagnostics segment and, in particular, on our
cardiology development programs.
We also continue to emphasize new product development. This
requires substantial investment and involves significant
inherent risk. We intend to continue to devote substantial
resources to research and development activities. We will also
continue to aggressively defend our substantial intellectual
property portfolio, which underlies our emphasis on new product
development, against potential infringers.
2006
Financial Highlights
Net revenue in 2006 of $569.5 million increased by
$147.6 million, or 35%, from $421.9 million in 2005
primarily as a result of our acquisition of the Innovacon
business and businesses acquired during 2005, most notably Binax
and the Determine business acquired from Abbott Laboratories,
higher license and royalty revenue and, to a lesser extent,
organic growth.
Gross profit increased by $76.9 million, or 50%, to
$229.2 million in 2006 from $152.3 million in 2005
principally as a result of increased license and royalty revenue
and from gross profit earned on incremental revenue from
acquired businesses, primarily in our professional diagnostic
business. Gross profit from our nutritional supplements business
also increased in 2006, principally as a result of improved
factory utilization as a result of increasing revenue and cost
reduction initiatives in our private label manufacturing
business. Offsetting these increases were a variety of charges
totaling $9.8 million associated with the closures of our
ABI operation in San Diego, California and our
manufacturing facility in Galway, Ireland and non-cash
stock-based compensation expense. Gross profit in 2005 was
adversely impacted by $8.1 million associated with the
closing of our Galway, Ireland manufacturing facility and with
charges associated with excess inventories and a product recall.
We continue to invest aggressively in research and development
of new products and technologies as evidenced by our increased
research and development expense of $53.7 million in 2006
from $31.0 million in 2005. Expenditures in 2006 and 2005
are reported net of $16.6 million and $17.2 million,
respectively, arising from the co-development funding
arrangement that we entered into with ITI Scotland in February
2005. Research and development expense before considering the
co-development funding was $70.3 million in 2006 and
$48.2 million in 2005, an increase of $22.1 million.
The increase in spending resulted in part from expenditures of
$8.9 million associated with our acquisitions of Clondiag
and the Innovacon business, including a $5.0 million charge
related to the write-off of in-process research and development
projects that had not achieved technical feasibility as of the
date of our acquisition of Clondiag. The remaining research and
development spending primarily related to our continued
significant investment in the development of products in the
field of cardiology. Our co-development funding arrangement with
ITI Scotland expires in March 2008 and we expect to receive
approximately £10 million (or $19.6 million at
December 31, 2006) of aggregate additional funding through
the end of the arrangement.
Results
of Operations
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Net Product Sales. Net product sales increased
by $145.7 million, or 36%, to $552.1 million in 2006
from $406.5 million in 2005. Excluding the unfavorable
impact of currency translation, net product sales in 2006 grew
by approximately $143.5 million, or 35%, over 2005. Of the
currency adjusted increase, revenue increased as a result of our
acquisitions of: (i) Binax in March 2005, which contributed
revenue of $9.6 million, (ii) the Determine business
in June 2005, which contributed revenue of $15.9 million,
(iii) BioStar in September 2005, which contributed revenue
of $21.0 million, (iv) IDT in September 2005, which
contributed $10.4 million, (v) the Innovacon business
in March 2006, which contributed $54.9 million, and
(vi) various less significant acquisitions, which
contributed an aggregate of $1.9 million of such increase.
31
Net Product Sales by Business Segment. Net
product sales by business segment for 2006 and 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
% Increase
|
|
|
|
(in thousands)
|
|
|
Consumer diagnostic products
|
|
$
|
171,607
|
|
|
$
|
161,695
|
|
|
|
6%
|
|
Vitamins and nutritional
supplements
|
|
|
82,051
|
|
|
|
75,411
|
|
|
|
9%
|
|
Professional diagnostic products
|
|
|
298,472
|
|
|
|
169,351
|
|
|
|
76%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
552,130
|
|
|
$
|
406,457
|
|
|
|
36%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Diagnostic Products
The currency adjusted increase in net product sales from our
consumer diagnostic products was $8.3 million, or 5.1%,
comparing 2006 to 2005. Of the currency adjusted increase,
$7.4 million resulted from our acquisition of the Innovacon
business in March 2006.
Vitamins
and Nutritional Supplements
Our vitamins and nutritional supplements net product sales
increased by $6.6 million, or 9%, comparing 2006 to 2005.
The increase was driven primarily by our private label business.
Professional
Diagnostic Products
The currency adjusted increase in net product sales from our
professional diagnostic products was $128.6 million, or
75.9%, comparing 2006 to 2005. Of the currency adjusted
increase, revenue increased as a result of our acquisitions of:
(i) Binax in March 2005, which contributed revenue of
$9.6 million, (ii) the Determine business in June
2005, which contributed revenue of $15.9 million,
(iii) BioStar in September 2005, which contributed revenue
of $21.0 million, (iv) IDT in September 2005, which
contributed revenue of $10.4 million, (v) the
Innovacon business in March 2006, which contributed
$47.5 million and (vi) various less significant
acquisitions, which contributed an aggregate of
$1.9 million of such increase. Organic growth, particularly
from our highly differentiated respiratory products, also
contributed to the growth.
Net Product Sales by Geographic Location. Net
product sales by geographic location for 2006 and 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
% Increase
|
|
|
|
(in thousands)
|
|
|
United States
|
|
$
|
323,046
|
|
|
$
|
234,229
|
|
|
|
38%
|
|
Europe
|
|
|
134,528
|
|
|
|
108,981
|
|
|
|
23%
|
|
Other
|
|
|
94,556
|
|
|
|
63,247
|
|
|
|
50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
552,130
|
|
|
$
|
406,457
|
|
|
|
36%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales of $323.0 million and $234.2 million
generated in the United States were approximately 59% and 58% of
total net product sales for the year ended December 31,
2006 and 2005, respectively. The growth in net product sales in
all geographic regions resulted from the various acquisitions
discussed above, and organic growth.
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 $1.9 million, or
13%, to $17.3 million in 2006 from $15.4 million in
2005. The increase primarily relates to royalty revenue received
as a result of the settlement and licensing arrangements that we
entered into with Quidel Corporation in April 2005 and Vedalab
in November 2006.
Gross Profit and Margin. Gross profit
increased by $76.9 million, or 50%, to $229.2 million
in 2006 from $152.3 million in 2005. Gross profit during
2006 benefited from higher than average margins earned on
32
revenue from our recently acquired businesses and from favorable
product mix. Included in cost of sales 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 sales during
2006 also included a $0.4 million charge for stock-based
compensation related to our January 1, 2006 adoption of
SFAS
No. 123-R,
Share-Based Payment. Cost of sales during 2005 included:
(i) the inclusion in cost of sales of a $4.1 million
charge principally associated with our decision to close our
Galway, Ireland manufacturing facility, (ii) a charge of
$2.4 million associated with a reserve established during
the second quarter of 2005 at our Wampole subsidiary for excess
quantities of certain raw materials and finished goods,
including certain finished goods held at distributors but
subject to rights of return, and (iii) a $1.6 million
provision for returns and inventory reserve which was
established as a result of our recall of the drugs of abuse
diagnostic products during the first quarter of 2005, offset in
part by the gross profit earned on increased professional
diagnostics products revenue, as discussed above.
Cost of sales included amortization expense of
$11.2 million and $7.2 million in 2006 and 2005,
respectively.
Overall gross margin was 40% in 2006 compared to 36% in 2005.
Overall gross margin in 2006 was adversely affected by the
$9.5 million restructuring charge and $0.4 million
stock-based compensation charge discussed above. Overall gross
margin in 2005 was adversely affected by the $4.1 million
charge associated with the CDIL closing, the $2.4 million
Wampole inventory reserve, and the $1.6 million returns and
inventory reserve associated with the drugs of abuse product
recalls discussed above.
Gross Profit from Net Product Sales by Business
Segment. Gross profit from net product sales
represents total gross profit less gross profit associated with
license and royalty revenue. Gross profit from net product sales
increased by $75.8 million to $217.3 million in 2006
from $141.5 million in 2005. Gross profit from net product
sales by business segment for 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
% Increase
|
|
|
|
(in thousands)
|
|
|
Consumer diagnostic products
|
|
$
|
82,658
|
|
|
$
|
76,515
|
|
|
|
8%
|
|
Vitamins and nutritional
supplements
|
|
|
5,037
|
|
|
|
2,738
|
|
|
|
84%
|
|
Professional diagnostic products
|
|
|
129,636
|
|
|
|
62,252
|
|
|
|
108%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from net product sales
|
|
$
|
217,331
|
|
|
$
|
141,505
|
|
|
|
54%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Diagnostic Products
Gross profit from our consumer diagnostic product sales
increased $6.1 million, or 8%, comparing 2006 to 2005. Cost
of sales for 2006 included restructuring charges totaling
$2.2 million related to the closure of our CDIL
manufacturing facility and a $0.4 million charge for
stock-based compensation. Included in cost of sales for 2005,
and adversely effecting gross profit, was a $4.1 million
charge principally associated with our decision to close our
CDIL manufacturing facility.
As a percentage of our consumer diagnostic net product sales,
gross profit was 48% for 2006 compared to 47% in 2005. The
increase in gross profit from our consumer diagnostic product
sales resulted from a change in product mix.
Vitamins
and Nutritional Supplements
Gross profit in our vitamins and nutritional supplements
business increased $2.3 million, or 84%, comparing 2006 to
2005. The increase is primarily the result of improved factory
utilization and our cost reduction initiatives in our private
label manufacturing business.
As a percentage of vitamin and nutritional supplements net
product sales, gross profit for our vitamins and nutritional
supplements business was 6% in 2006 compared to 4% in 2005.
33
Professional
Diagnostic Products
Gross profit from our professional diagnostic products increased
by $67.4 million, or 108%, comparing 2006 to 2005,
principally as a result of gross profit earned on revenue from
acquired businesses, as discussed above, offset by a
$7.2 million restructuring charge to cost of sales
associated with managements decision to close our ABI
operations in San Diego, California. Reducing gross profit
for 2005 were a charge of $2.4 million associated with a
reserve established during the second quarter of 2005 at our
Wampole subsidiary for excess quantities of certain raw
materials and finished goods, including certain finished goods
held at distributors but subject to rights of return, and a
$1.6 million provision for returns and inventory reserve
which were established as a result of our recall of the drugs of
abuse diagnostic products during the first quarter of 2005.
As a percentage of our professional diagnostic net product
sales, gross profit from our professional diagnostic product
sales was 43% in 2006, compared to 37% in 2005.
Research and Development Expense. Research and
development expense increased by $22.7 million, or 73%, to
$53.7 million in 2006 from $31.0 million in 2005.
Research and development expense in 2006 and 2005 is reported
net of co-development funding of $16.6 million and
$17.2 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,
$8.9 million of spending related to our 2006 acquisitions,
a $2.9 million charge related to the write-off of fixed
assets impacted by our restructuring plans and a
$1.4 million charge for stock-based compensation related to
our January 1, 2006 adoption of
SFAS No. 123-R.
Included in the $8.9 million of additional spending related
to recent acquisitions is a $5.0 million charge related to
the write-off of in-process research and development projects
that had not achieved technical feasibility as of the date of
our acquisition of Clondiag.
Amortization expense of $3.3 million and $2.3 million
was included in research and development expense for 2006 and
2005, respectively.
Research and development expense as a percentage of net product
sales increased to 10% for 2006, from 8% for 2005.
Sales and Marketing Expense. Sales and
marketing expense increased by $22.3 million, or 31%, to
$94.4 million in 2006, from $72.1 million in 2005. The
increase in sales and marketing expense is primarily attributed
to our expanded sales and marketing infrastructure to support
the growth in our professional diagnostics business, with
additional expense of approximately $16.0 million related
to our acquisitions of Binax, the Determine business, BioStar
and IDT during 2005 and our acquisitions of Clondiag and the
Innovacon business during 2006. Approximately $1.3 million
of the increase in sales and marketing expense resulted from our
increased advertising efforts to promote our premium consumer
diagnostic products in 2006. Sales and marketing for 2006 also
included a charge of $0.7 million for stock-based
compensation related to our January 1, 2006 adoption of
SFAS No. 123-R.
Amortization expense of $6.8 million and $2.9 million
was included in sales and marketing expense for 2006 and 2005,
respectively.
Sales and marketing expense as a percentage of net product sales
decreased to 17% for 2006, from 18% for 2005.
General and Administrative Expense. General
and administrative expense increased by $11.3 million, or
19%, to $71.2 million in 2006, from $60.0 million in
2005. Of the increase in general and administrative expense,
approximately $12.2 million resulted from additional
spending related to our acquisitions of Binax, the Determine
business, BioStar and IDT which were completed during 2005 and
to our 2006 acquisitions of Clondiag and the Innovacon business.
The increase in general and administrative expense during 2006
was partially offset by a decrease in legal expenses of
$4.7 million. Also included in general and administrative
expense is a $3.0 million charge for stock-based
compensation related to our January 1, 2006 adoption of
SFAS No. 123-R.
34
Amortization expense included in general and administrative
expense was $0.4 million for both 2006 and 2005.
General and administrative expense as a percentage of net
revenue decreased to 13% for 2006, from 14% for 2005.
Loss on Dispositions, Net. During 2006, we
recorded a net loss on dispositions of $3.5 million.
Included in this charge is a loss of $4.9 million
associated with managements decision to dispose of our
Scandinavian Micro Biodevices ApS, or SMB, research operation.
The $4.9 million charge includes a loss of
$2.0 million on impaired assets, most of which represents
goodwill associated with SMB, and a $2.9 million loss on
the sale of SMB, which was finalized during the fourth quarter
of 2006. The $4.9 million loss is offset by a
$1.4 million gain on the sale of an idle manufacturing
facility in Galway, Ireland, as a result of our 2005
restructuring plan.
Interest Expense. 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 for 2005 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,
and the change in market value of our interest rate swap
agreement of $0.7 million which did not qualify as a hedge
for accounting purposes. Interest expense increased by
$4.8 million, or 22%, to $26.6 million in 2006, from
$21.8 million in 2005. 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. In addition to the
$1.3 million charge, higher applicable interest rates on
the senior credit facility during 2006, compared to 2005, and an
increase in the amortization of deferred financing costs related
to the debt refinancings that occurred later in 2005 and during
the first quarter of 2006, also contributed to the increase in
interest expense for 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:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Interest income
|
|
$
|
1,693
|
|
|
$
|
1,035
|
|
Foreign exchange gains (losses),
net
|
|
|
2,643
|
|
|
|
(340
|
)
|
Other
|
|
|
4,748
|
|
|
|
19,483
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
9,084
|
|
|
$
|
20,178
|
|
|
|
|
|
|
|
|
|
|
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 relating to periods prior to 2006.
Other income (expense), net for 2005 includes the following
items: (i) $15.0 million in other income, being the
portion of our settlement with Quidel relating to periods prior
to 2005, (ii) an $8.4 million gain from a legal
settlement of class action suit against several raw material
suppliers in our vitamins and nutritional supplements business
(iii) $2.6 million of income related to the value of
an option received under a licensing arrangement, (iv) a
$2.7 million charge related to a legal settlement of a
nutritional segment commercial dispute arising from a
distribution arrangement entered into in September 1996, and
(v) a $4.3 million charge related to a legal
settlement with Princeton BioMeditech Corporation, or PBM.
Provision for Income Taxes. Provision for
income taxes decreased by $1.1 million, or 16%, to
$5.7 million in 2006, from $6.8 million in 2005. The
effective tax rate in 2006 was (52)%, compared to (55)% in 2005.
The decrease in the provision for income taxes from 2005 to 2006
is primarily related to taxes on foreign income. The primary
components of the 2006 provision for income taxes 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. The amount related to the U.S. deferred
35
tax liabilities is approximately $3.4 million. The primary
components of the 2005 provision for income taxes 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. The amount related to the U.S. deferred tax
liabilities is approximately $2.9 million.
Net (Loss) Income. We incurred a net loss of
$16.8 million in 2006, while we incurred a net loss of
$19.2 million in 2005. Net loss per common share available
to common stockholders was $0.49 per basic and diluted
common share in 2006, as compared to net loss of $0.79 per
basic and diluted common share in 2005. The net loss in 2006 and
2005 resulted from the various factors as discussed above. See
Note 13 of our consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K
for the calculation of net (loss) income per share.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Net Product Sales. Net product sales increased
by $41.0 million, or 11%, to $406.5 million in 2005,
from $365.4 million in 2004. Excluding the unfavorable
impact of currency translation, net product sales in 2005 grew
by approximately $41.8 million, or 11%, over 2004. Revenue
increased as a result of our acquisitions in 2005:
(i) Binax, acquired in March 2005, contributed
$18.4 million of such increase, (ii) the Determine
rapid diagnostics business, acquired in June 2005, contributed
revenues of $17.2 million, (iii) BioStar, acquired in
September 2005, contributed revenues of $6.9 million, and
(iv) various less significant acquisitions contributed an
aggregate of $9.7 million of such increase.
Net Product Sales by Business Segment. Net
product sales by business segment for 2005 and 2004 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
|
(in thousands)
|
|
|
Consumer diagnostic products
|
|
$
|
161,695
|
|
|
$
|
158,706
|
|
|
|
2
|
%
|
Vitamins and nutritional
supplements
|
|
|
75,411
|
|
|
|
77,923
|
|
|
|
(3
|
)%
|
Professional diagnostic products
|
|
|
169,351
|
|
|
|
128,803
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
406,457
|
|
|
$
|
365,432
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Diagnostic Products
The currency adjusted increase in net product sales from our
consumer diagnostic products was $3.5 million, or 2%,
comparing 2005 to 2004. Of the currency adjusted increase,
$1.9 million resulted from our acquisition of the consumer
pregnancy test business of Advanced Clinical Systems Pty Ltd, or
ACS, in January 2005. Organic growth, principally in the U.S.,
accounted for the remaining growth.
Vitamins
and Nutritional Supplements
Net product sales of our vitamins and nutritional supplements
decreased by $2.5 million, or 3%, comparing 2005 to 2004.
The decrease was primarily due to our brand name nutritional
business. 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 on an annual basis over the past several years. 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.
Professional
Diagnostic Products
The currency adjusted increase in net product sales from our
professional diagnostic products was $40.8 million, or 31%,
comparing 2005 to 2004. Of the currency adjusted increase,
revenue increased as a result of our acquisitions in 2005:
(i) Binax contributed $18.4 million of such increase,
(ii) the Determine rapid diagnostics business contributed
revenues of $17.2 million, (iii) BioStar contributed
revenues of $6.9 million, and (iv) various less
significant acquisitions contributed an aggregate of
$7.8 million of such increase.
36
Net Product Sales by Geographic Location. Net
product sales by geographic location for 2005 and 2004 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
% Increase
|
|
|
|
(in thousands)
|
|
|
United States
|
|
$
|
234,229
|
|
|
$
|
218,251
|
|
|
|
7%
|
|
Europe
|
|
|
108,981
|
|
|
|
98,136
|
|
|
|
11%
|
|
Other
|
|
|
63,247
|
|
|
|
49,045
|
|
|
|
29%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
406,457
|
|
|
$
|
365,432
|
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The growth in net product sales in all geographic regions
resulted from the various acquisitions discussed above.
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 $6.8 million, or
80%, to $15.4 million in 2005, from $8.6 million in
2004. The increase primarily related to royalty revenues
received as a result of the settlement and licensing arrangement
that we entered into with Quidel Corporation in April 2005.
Gross Profit and Margin. Gross profit
increased by $5.3 million, or 4%, to $152.3 million in
2005 from $147.0 million in 2004. The increase in gross
profit was attributable to higher gross margins on the increased
license and royalty revenue discussed above. Offsetting this
increase was: (i) the inclusion in cost of sales of a
$4.1 million charge principally associated with our
decision to close our CDIL manufacturing facility, (ii) a
charge of $2.4 million associated with a reserve
established during the second quarter of 2005 at our Wampole
subsidiary for excess quantities of certain raw materials and
finished goods, including certain finished goods held at
distributors but subject to rights of return, and (iii) a
$1.6 million provision for returns and inventory reserve
which was established as a result of our recall of the drugs of
abuse diagnostic products during the first quarter of 2005,
offset in part by the gross profit earned on increased
professional diagnostics products revenue, as discussed above.
Gross profit from our nutritional supplements business decreased
$6.0 million from $8.8 million in 2004 to
$2.7 million in 2005. Our private label nutritional
supplements business suffered from excess capacity in the
industry and increasing price competition.
Cost of sales included amortization expense of $7.2 million
and $5.5 million in 2005 and 2004, respectively.
Overall gross margin was 36% in 2005, compared to 39% in 2004.
Overall gross margin in 2005 was adversely affected by the
$4.1 million charge associated with the CDIL closing, the
$2.4 million Wampole inventory reserve, and the
$1.6 million returns and inventory reserve associated with
the drugs of abuse product recalls discussed above. Excluding
these charges, gross margin was 38% for 2005.
Gross Profit from Net Product Sales by Business
Segment. Gross profit from net product sales
represents total gross profit less gross profit associated with
license and royalty revenue. Gross profit from total net product
sales decreased by $0.3 million to $141.5 million in
2005, from $141.8 million in 2004. Gross profit from net
product sales by business segment for 2005 and 2004 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
|
(in thousands)
|
|
|
Consumer diagnostic products
|
|
$
|
76,515
|
|
|
$
|
82,909
|
|
|
|
(8
|
)%
|
Vitamins and nutritional
supplements
|
|
|
2,738
|
|
|
|
8,775
|
|
|
|
(69
|
)%
|
Professional diagnostic products
|
|
|
62,252
|
|
|
|
50,079
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from net product sales
|
|
$
|
141,505
|
|
|
$
|
141,763
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from our consumer diagnostic product sales
decreased by $6.4 million, or 8%, comparing 2005 to 2004.
Included in cost of sales, and adversely effecting gross profit,
was a $4.1 million charge principally associated with our
decision to close our CDIL manufacturing facility.
37
Consumer
Diagnostic Products
Gross profit from our consumer diagnostic product sales was 47%
for 2005, compared to 52% in 2004. Excluding the
$4.1 million CDIL closure charge discussed above, gross
margin from our consumer diagnostic products segment was 50% in
2005. The remaining decrease in gross margin from our consumer
diagnostic product sales resulted from a change in product mix.
Vitamins
and Nutritional Supplements
Gross profit in our vitamins and nutritional supplements
business decreased by $6.0 million, or 69%, comparing 2005
to 2004. Our private label nutritional supplements business
suffered from excess capacity in the industry which led to
increasing price competition and generally decreasing margins.
Revenue decreases in our brand named nutritional products also
contributed to lower gross profit in 2005 than 2004.
Professional
Diagnostic Products
Gross profit from our professional diagnostic products increased
by $12.2 million, or 24%, comparing 2005 to 2004,
principally as a result of gross profit earned on revenues from
acquired businesses, as discussed above. Reducing gross margin
for 2005 were a charge of $2.4 million associated with a
reserve established during the second quarter of 2005 at our
Wampole subsidiary for excess quantities of certain raw
materials and finished goods, including certain finished goods
held at distributors but subject to rights of return, and a
$1.6 million provision for returns and inventory reserve
which were established as a result of our recall of the drugs of
abuse diagnostic products during the first quarter of 2005.
Excluding these charges, gross profit from our professional
diagnostic products segment increased by $16.2 million
comparing 2005 to 2004.
Gross margin from our professional diagnostic product sales was
37% in 2005, compared to 39% in 2004. Excluding the
$2.4 million Wampole inventory reserve and the
$1.6 million drugs of abuse charge discussed above, gross
margin from our professional diagnostic product sales was 39%
for 2005.
Research and Development Expense. Research and
development expense decreased by $1.0 million, or 3%, to
$31.0 million in 2005 from $32.0 million in 2004.
Research and development expense in 2005 is reported net of
co-development funding of $17.2 million arising from the
co-development funding arrangement that we entered into with ITI
Scotland in February 2005. Research and development expense
before considering the co-development funding was
$48.2 million in 2005, an increase of $16.2 million
from 2004.
The increase in spending resulted in part from expenditures of
$5.0 million in our professional diagnostics business
associated with our acquisitions of Binax, BioStar and Ischemia.
The remaining research and development spending primarily
related to our continued significant investment in the
development of products in the field of cardiology.
Amortization expense of $2.3 million and $0.8 million
was included in research and development expense for 2005 and
2004, respectively.
Research and development expense as a percentage of net product
sales is 8% and 9% for 2005 and 2004, respectively.
Sales and Marketing Expense. Sales and
marketing expense increased by $14.1 million, or 24%, to
$72.1 million in 2005 from $58.0 million in 2004.
Acquisitions completed during 2005 accounted for
$8.3 million of the increase. Approximately
$1.8 million of the increase in sales and marketing expense
resulted from our increased advertising efforts to promote our
premium consumer diagnostic products in 2005. The remaining
increase in sales and marketing expense resulted from our
expanded sales and marketing infrastructure to support the
anticipated growth in our professional diagnostics business.
Amortization expense of $2.9 million and $3.9 million
was included in sales and marketing expense for 2005 and 2004,
respectively.
Sales and marketing expense as a percentage of net product sales
increased to 18% in 2005, from 16% in 2004. The increase in
sales and marketing expense as a percentage of net product sales
primarily resulted from
38
our investment in advertising efforts for our premium consumer
diagnostic products and sales and marketing infrastructure to
support our anticipated growth in the professional diagnostics
business.
General and Administrative Expense. General
and administrative expense increased by $7.3 million, or
14%, to $60.0 million in 2005, from $52.7 million in
2004. Acquisitions completed during 2005 accounted for
$4.2 million of the increase. The remaining increase in
general and administrative expense resulted from an increase in
consulting and legal spending, due to the formal order of
investigation in connection with the previously disclosed
revenue recognition matter at Wampole and our active pursuits
and defenses in litigations, including our lawsuits and
settlements with Quidel and PBM.
Amortization expense of $0.4 million and $0.2 million
was included in general and administrative expense for 2005 and
2004, respectively.
General and administrative expense as a percentage of net
revenue was consistent in 2005 and 2004 at 14%.
Interest Expense. Interest expense 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, and the change in
market value of our interest rate swap agreement of
$0.7 million which did not qualify as a hedge for
accounting purposes. Interest expense decreased by
$0.3 million, or 1%, to $21.8 million in 2005, from
$22.1 million in 2004. In 2004, we recorded a charge of
$3.8 million representing the write-off of deferred
financing costs and prepayment fees and penalties related to the
repayment of borrowings under our primary senior credit facility
and certain subordinated notes with the proceeds from our
$150.0 million bond offering in February 2004. Excluding
such charge, interest expense increased $3.5 million in
2005. Such increase was primarily due to a higher average
outstanding debt balance which was $215.3 million during
2005, compared to $194.4 million during 2004, primarily as
a result of the borrowings to finance various acquisitions and
operations, offset in part by funds raised from our sale of
common stock in August 2005. Additionally, the 8.75% interest
rate on the $150.0 million bonds, together with its
50 basis points interest penalty during a portion of the
first quarter of 2005 due to the late registration of the
related exchange offer, coupled with the impact of the increase
in short-term interest rates which effected the borrowings under
our senior credit facility, increased our average cash interest
rate to 9.0% for 2005 from 8.8% for 2004. The bonds, which are
due in 2012, provide us with a long-term fixed rate on a
significant portion of our indebtedness, as compared to the
variable rates under our senior credit facility.
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:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Interest income
|
|
$
|
1,035
|
|
|
$
|
1,050
|
|
Foreign exchange (losses) gains,
net
|
|
|
(340
|
)
|
|
|
(720
|
)
|
Other
|
|
|
19,483
|
|
|
|
3,077
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
20,178
|
|
|
$
|
3,407
|
|
|
|
|
|
|
|
|
|
|
Included in other income (expense), net, for 2005 are the
following items: (i) $15.0 million in income, being
the portion of our settlement with Quidel relating to periods
prior to 2005, (ii) an $8.4 million gain from a legal
settlement of class action suit against several raw material
suppliers in our vitamins and nutritional supplements business
(iii) $2.6 million of income related to the value of
an option received under a licensing arrangement, (iv) a
$2.7 million charge related to a legal settlement of a
nutritional segment commercial dispute arising from a
distribution arrangement entered into in September 1996, and
(v) a $4.3 million charge related to a legal
settlement with PBM.
Included in other income (expense), net, for 2004 are the
following items: (i) $0.5 million in income, of
royalties received attributable to periods prior to 2004
associated with a license arrangement that had historically been
underpaid, (ii) $0.9 million in release of a
pre-acquisition legal contingency reserve upon reaching and
signing a settlement agreement, and (iii) $0.5 million
in litigation settlement gain.
39
Provision for Income Taxes. Provision for
income taxes increased by $4.5 million, or 200%, to
$6.8 million in 2005 from $2.3 million in 2004. The
effective tax rate in 2005 was (55)%, compared to (16)% in 2004.
The increase in the provision for income taxes from 2004 to 2005
is primarily related to taxes on foreign income. The primary
components of the 2005 provision for income taxes 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. The amount related to the U.S. deferred tax
liabilities is approximately $2.9 million. In 2004, we
recognized $0.8 million of benefit from the reduction of
the valuation allowance related to net operating loss, or NOL,
carryforward of two of our foreign subsidiaries due to our
assessment that we would more likely than not realize the
benefit of these NOLs.
Net (Loss) Income. We incurred a net loss of
$19.2 million in 2005, while we incurred a net loss of
$16.6 million in 2004. After taking into account charges
for redemption interest and amortization of a beneficial
conversion feature related to our Series A redeemable
convertible preferred stock, we had a net loss available to
common stockholders of $17.3 million in 2004. Net loss per
common share available to common stockholders was $0.79 per
basic and diluted common share in 2005 as compared to net loss
of $0.87 per basic and diluted common share in 2004. The
net loss in 2005 and 2004 resulted from the various factors as
discussed above. See Note 13 of our consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K
for the calculation of net (loss) income per share.
Liquidity
and Capital Resources
Based upon our current working capital position, current
operating plans and expected business conditions, we believe
that our existing capital resources, credit facilities and
expected funding resulting from our co-development funding
agreement with ITI will be adequate to fund our operations,
including our outstanding debt and other commitments, as
discussed below, for the next 12 months. In the long run we
expect to fund our working capital needs and other commitments
primarily through our operating cash flow, which we expect to
improve as we improve our operating margins and grow our
business through new product introductions and by continuing to
leverage our strong intellectual property position. We also
expect to rely on our credit facilities and the capital markets
to fund a portion of our capital needs and other commitments. If
we raise additional funds by issuing equity or convertible
securities, dilution to then existing stockholders may result.
Summary
of Changes in Cash Position
As of December 31, 2006, we had cash and cash equivalents
of $71.1 million, a $36.8 million increase from
December 31, 2005. Our primary sources of cash during 2006,
included $235.0 million in proceeds from the issuance of
our common stock, including common stock issues under employee
stock option and stock purchase plans, $14.7 million in
proceeds from the repayment of notes receivable and
$34.3 million from operating activities during 2006. Our
investing activities during 2006 used $178.8 million of
cash and consisted primarily of $131.5 million of cash used
for acquisitions, $12.6 million used for the purchase of
available-for-sale
securities, $13.2 million used for minority interest and
other investments, $19.7 million used for capital equipment
purchases, offset by $2.2 million of net proceeds from the
sale of our Galway, Ireland facility and sales of capital
equipment, and a $4.1 million decrease in other assets. Our
non-equity financing activities, primarily related to our senior
credit facility and the 10% subordinated promissory notes,
used cash of $70.6 million during 2006. Fluctuations in
foreign currencies favorably impacted our cash balance by
$2.4 million during 2006.
Cash
Flows from Operating Activities
Net cash provided by operating activities during 2006 was
$34.3 million, an increase of $7.7 million over the
prior year. Our net loss during 2006 of $16.8 million was
funded by our net cash from operating activities, along with a
$10.3 million increase in working capital as offset by
$39.4 million of depreciation and amortization and
$22.0 million of other non-cash items. The
$10.3 million increase in working capital was primarily
driven by an increase in our accounts receivable over prior year.
40
Cash
Flows from Investing Activities
During 2006, we paid $131.5 million in cash for
acquisitions and transaction-related costs, net of cash
acquired, primarily with respect to our acquisitions of Clondiag
and the Innovacon business.
On February 28, 2006, we acquired 67.45% ownership of
Clondiag, a privately-held company located in Jena in Germany
which has developed a multiplexing technology for nucleic acid
and immunoassay-based diagnostics and, on August 31, 2006,
we acquired the remaining 32.55%. The aggregate purchase price
for Clondiag was $24.4 million, consisting of
$17.7 million in cash, 243,398 shares of our common stock
valued at $6.5 million, $0.1 million direct
acquisition costs and a $0.1 million remaining obligation. The
terms of the Clondiag acquisition also provide for
$8.9 million of contingent consideration, consisting of
224,316 shares of our common stock and approximately
$3.0 million of cash or stock in the event that four
specified products are developed on Clondiags platform
technology during the three years following the acquisition date.
On March 31, 2006, we acquired the Innovacon business,
although this acquisition involved several stages and payments
during 2006. The aggregate purchase price for the acquisition of
the Innovacon business, including the acquisition of the ABON
facility in May 2006, was $184.1 million, consisting of cash
payments totaling $112.0 million, 1,871,250 shares of
our common stock valued at $53.0 million, $9.1 million
in estimated direct acquisition costs and an additional
liability of $10.0 million payable to the sellers on a
deferred payment date. In connection with this acquisition, we
also entered into an agreement for the purchase of ACON
Laboratories lateral flow immunoassay sales and
distribution business in all territories not included as part of
the Innovacon business acquired during 2006. 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.
In addition, on February 5, 2007, we acquired substantially
all of the assets of First Check Diagnostics LLC, or First
Check, a privately-held diagnostics company, for approximately
$24.5 million in cash. In addition, we are obligated 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.
During 2006, we purchased $12.6 million worth of marketable
equity securities which we intend to hold indefinitely and
therefore carry on our consolidated balance sheet as
available-for-sale securities. These securities were recorded at
their fair market value as of December 31, 2006.
Other cash investments made during 2006 include a
40% investment in 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.
Under the terms of the agreement, we also settled an on-going
patent infringement claim with Vedalab, resulting in a
settlement payment to us of $5.1 million.
Cash
Flows from Financing Activities
On February 8 and 9, 2006, we sold an aggregate 3,400,000
shares of our common stock at $24.41 per share to funds
affiliated with 14 accredited institutional investors in a
private placement. Proceeds from the private placement were
approximately $79.3 million, net of issuance costs of
$3.7 million. Of this amount, we repaid principal and
interest outstanding under our senior credit facility of $74.1
million, with the remainder of the net proceeds retained for
general corporate purposes.
On August 23, 2006, we sold an aggregate 5,000,000 shares
of our common stock at $30.25 per share to funds affiliated
with 17 accredited institutional investors in a private
placement. Proceeds from the private placement were
approximately $145.5 million, net of issuance costs of
$5.7 million. Of this amount, we used $41.3 million
for payments related to our ABON acquisition, $5.3 million to
purchase the remaining 32.55% of Clondiag, repaid principal
outstanding under our senior credit facility of
$54.0 million and repaid principal
41
and interest outstanding, along with a prepayment penalty, under
our 10% subordinated promissory notes of $20.8 million,
with the remainder of the net proceeds retained for general
corporate purposes.
On January 31, 2007, we sold an aggregate 6,000,000 shares
of our common stock at $39.65 per share through an
underwritten public offering, and on February 5, 2007, our
underwriters exercised in full an option to purchase an
additional 900,000 shares to cover over-allotments. Proceeds
from the offering were approximately $261.3 million, net of
issuance costs of $12.3 million, which include deductions
for underwriting discounts and commissions and take into effect
the reimbursement by the underwriters of a portion of our
offering expenses. Of this amount, we used $44.9 million to
repay all principal and accrued interest owing on the term loan
under our senior credit facility, with the remainder of the net
proceeds retained for working capital and other general
corporate purposes.
In December 2006, we signed a definitive agreement with P&G
to form a 50/50 joint venture for the development,
manufacturing, marketing and sale of existing and
to-be-developed consumer diagnostic products outside of the
fields of cardiology and diabetes. In connection with this
agreement, we will contribute our related consumer diagnostic
and monitoring assets, other than manufacturing and core
intellectual property assets, to a new joint venture entity, and
P&G will acquire its interest in the joint venture in
consideration for a cash payment of $325.0 million. Our primary
role in the collaboration will be to develop and manufacture
consumer diagnostic products, while P&Gs primary role
will be to market, sell, and distribute existing and
to-be-developed products. We will retain all rights with respect
to the development and sale of cardiology diagnostic products
and our professional point of care diagnostic businesses.
Following the completion of the transaction and the formation of
the joint venture, we will cease to consolidate the operating
results of our formerly wholly-owned consumer diagnostics
business and instead will account for our 50% interest in the
results of the joint venture under the equity method. In
addition, because we will share control of the joint venture
with P&G we may not have access to cash generated through
the operations of the joint venture and, in certain
circumstances, we could be required to provide working capital
to the joint venture. Under the terms of our agreement with
P&G, P&G can require us to repurchase its interest in
the joint venture at market value after the fourth anniversary
of the closing.
Our primary senior credit facility with a group of banks, as
amended, consists of a $45.0 million U.S. term loan
and revolving lines of credit in the aggregate amount of up to
$110.0 million, subject to continuing covenant compliance.
Our aggregate indebtedness under the senior credit facility was
$44.8 million as of December 31, 2006, outstanding
under the U.S. term loan. On February 1, 2007, we paid all
remaining principal and accrued interest owing under our senior
credit facility.
We may repay any future borrowings under the revolving lines of
credit at any time but in no event later than March 31,
2008. We are required to make mandatory prepayments under our
primary senior credit facility if we meet certain cash flow
thresholds, issue equity securities or subordinated debt, or
sell assets not in the ordinary course of our business above
certain thresholds.
Borrowings under the revolving lines of credit bear interest at
either (1) the London Interbank Offered Rate, or LIBOR, as
defined in the credit agreement, plus applicable margins or, at
our option, (2) a floating Index Rate, as defined in the credit
agreement, plus applicable margins. Applicable margins if we
choose to use the LIBOR or the Index Rate can range from 2.75%
to 3.75% or 1.50% to 2.50%, respectively, depending on the
quarterly adjustments that are based on our consolidated
financial performance. As of December 31, 2006, the
applicable interest rate under the revolving lines of credit,
including the applicable margin, ranged from 6.85% to 9.35%.
Borrowings under our primary senior credit facility are secured
by the stock of our U.S. and European subsidiaries,
substantially all of our intellectual property rights and the
assets of our businesses in the U.S. and Europe, excluding those
assets of our subsidiaries in Israel, China, Japan, Australia
and Sweden, and the stock of Orgenics and certain smaller
subsidiaries. Under the senior credit agreement, as amended, we
must comply with various financial and non-financial covenants.
The primary financial covenants pertain to, among other things,
fixed charge coverage ratio, capital expenditures, various
leverage ratios, earnings before interest, taxes, depreciation
and amortization, or EBITDA, and a minimum cash requirement.
Additionally, the senior credit
42
agreement currently prohibits us from paying dividends. We are
currently in compliance with the covenants, as amended.
In February 2004, we completed the sale of $150.0 million of
8.75% senior subordinated notes, or bonds, due 2012 in a private
placement to qualified institutional buyers. These bonds accrue
interest from the date of their issuance, or February 10, 2004,
at the rate of 8.75% per year. Interest on the bonds are
payable semi-annually in arrears on each February 15 and August
15. As of December 31, 2006, accrued interest related to
the bonds amounted to $4.9 million.
The bonds are unsecured and are subordinated in right of payment
to all of our existing and future senior debt, including our
guarantee of all borrowings under our primary senior credit
facility. The bonds are effectively subordinated to all existing
and future liabilities, including trade payables, of those of
our subsidiaries that do not guarantee the bonds.
The bonds are guaranteed by all of our domestic subsidiaries
that are guarantors or borrowers under our primary senior credit
facility. The guarantees are general unsecured obligations of
the guarantors and are subordinated in right of payment to all
existing and future senior debt of the applicable guarantors,
which includes their guarantees of, and borrowings under our
primary senior credit facility.
The indenture governing the bonds contains covenants that will
limit our ability and the ability of our subsidiaries to, among
other things, incur additional indebtedness in the aggregate,
subject to our interest coverage ratio, pay dividends or make
other distributions or repurchase or redeem our stock, make
investments, sell assets, incur liens, enter into agreements
restricting our subsidiaries ability to pay dividends,
enter into transactions with affiliates and consolidate, merge
or sell all or substantially all of our assets. These covenants
are subject to certain exceptions and qualifications.
As of December 31, 2006, we had an aggregate of $1.0
million in outstanding capital lease obligations which are
payable through 2009.
Income
Taxes
As of December 31, 2006, we had approximately
$188.2 million of domestic net operating loss carryforwards
and $45.9 million of foreign net operating loss, or NOL,
carryforwards, respectively, which either expire on various
dates through 2026 or can be carried forward indefinitely. These
losses are available to reduce federal and foreign taxable
income, if any, in future years. These losses are also subject
to review and possible adjustments by the applicable taxing
authorities. In addition, the domestic operating loss
carryforward amount at December 31, 2006 included
approximately $70.5 million of pre-acquisition losses at
IMN, Ischemia, Ostex and ADC. The future benefit of these losses
will be 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. Also included in our
domestic NOL carryforwards at December 31, 2006 was
approximately $2.6 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 net operating losses and certain of our other deferred
tax assets to reflect uncertainties that might affect the
realization of such deferred tax assets, as these assets can
only be realized via profitable operations.
Off-Balance
Sheet Arrangements
We had no material off-balance sheet arrangements as of
December 31, 2006.
43
Contractual
Obligations
The following table summarizes our principal contractual
obligations as of December 31, 2006 and the effects such
obligations are expected to have on our liquidity and cash flow
in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
2007
|
|
|
2008-2009
|
|
|
2010-2011
|
|
|
Thereafter
|
|
|
|
|
|
|
(in thousands)
|
|
|
Long-term debt obligations(1)
|
|
$
|
201,977
|
|
|
$
|
51,830
|
|
|
$
|
147
|
|
|
$
|
|
|
|
$
|
150,000
|
|
|
|
|
|
Capital lease obligations(2)
|
|
|
1,066
|
|
|
|
643
|
|
|
|
415
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Operating lease obligations(3)
|
|
|
67,803
|
|
|
|
10,454
|
|
|
|
16,146
|
|
|
|
10,441
|
|
|
|
30,762
|
|
|
|
|
|
Long-term and other liabilities(4)
|
|
|
6,442
|
|
|
|
3,103
|
|
|
|
1,992
|
|
|
|
1,347
|
|
|
|
|
|
|
|
|
|
Minimum royalty obligations
|
|
|
260
|
|
|
|
220
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligationscapital
expenditure
|
|
|
8,813
|
|
|
|
8,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligationsother(5)
|
|
|
48,044
|
|
|
|
47,566
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
obligationsInnovacon business(6)
|
|
|
17,158
|
|
|
|
17,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on debt(7)
|
|
|
67,828
|
|
|
|
13,128
|
|
|
|
26,256
|
|
|
|
26,256
|
|
|
|
2,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
419,391
|
|
|
$
|
152,915
|
|
|
$
|
45,474
|
|
|
$
|
38,052
|
|
|
$
|
182,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 7 of our consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K. |
|
(3) |
|
See Note 10(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
$1.0 million in technology license payment obligations and
$5.4 million in pension obligations. |
|
(5) |
|
Other purchase obligations relate to inventory purchases and
other operating expense commitments. |
|
(6) |
|
In connection with our acquisition of the Innovacon business, we
are obligated to make a $6.0 million payment for the
remaining first territory business and a $1.1 million
payment related to one European customer that has continued to
take supply from the seller. Additionally, we are required to
make a $10.0 million payment payable to the sellers on the
deferred payment date. |
|
(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. |
As of December 31, 2006, we had outstanding material
contingent contractual obligations related to our acquisitions
of Binax and Clondiag. 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.
With respect to the acquisition of Clondiag, the terms of the
acquisition agreement provide for $8.9 million of
contingent consideration, consisting of 224,316 shares of
our common stock and approximately $3.0 million of cash or
stock in the event that four specified products are developed on
Clondiags platform technology during the three years
following the acquisition date. The contingent considerations
will be accounted for as increases in the aggregate purchase
prices if and when the contingencies occur.
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
44
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, 2006
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 sales. 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, as discussed below in the critical accounting policy
Use of Estimates for Sales Returns and Other Allowances
and Allowance for Doubtful Accounts. Should future changes
in conditions prove managements conclusions and judgments
on previous analyses to be incorrect, revenue recognized for any
reporting period could be adversely affected.
In connection with the acquisition of the Abbott rapid
diagnostics business in September 2003 and the Determine
business in June 2005 from Abbott Laboratories, we entered into
a transition services agreement with Abbott, whereby Abbott
would continue to distribute certain of the acquired products
for a period of up to 18 months following each acquisition,
subject to certain extensions. 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 the Company records 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
$52.8 million, $51.2 million and $55.2 million,
or 10%, 13% and 15%, respectively, of net product sales in 2006,
2005 and 2004, 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
45
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 $100.4 million and
$70.5 million, net of allowances for doubtful accounts of
$8.4 million and $9.7 million, as of December 31,
2006 and December 31, 2005, 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 sales may prove our forecasts to be inaccurate, in which
case we may have underestimated or overestimated the provision
required for excess and obsolete inventory. If, in future
periods, our inventory is determined to be overvalued, we would
be required to recognize the excess value as a charge to our
cost of sales at the time of such determination. Likewise, if,
in future periods, our inventory is determined to be
undervalued, we would have over-reported our cost of sales, or
understated our earnings, at the time we recorded the excess and
obsolete provision. Our inventory balance was $78.3 million
and $71.2 million, net of a provision for excess and
obsolete inventory of $8.2 million and $7.7 million,
as of December 31, 2006 and 2005, 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, 2006, the balances of property,
plant and equipment, goodwill and other intangible assets, net
of accumulated depreciation and amortization, were
$82.3 million, $439.4 million and $239.6 million,
respectively.
Goodwill and other intangible assets are initially created as a
result of business combinations or acquisitions of intellectual
property. The values we record for goodwill and other intangible
assets represent fair values calculated by 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: (i) future expected cash flows from
product sales, customer contracts and acquired developed
technologies and patents, (ii) expected costs to complete
any in-process research and development projects and
commercialize viable products and estimated cash flows from
sales of such products, (iii) the acquired companies
brand awareness and market position, (iv) assumptions about
the period of time over which we will continue to use the
acquired brand, and (v) discount rates. These estimates and
assumptions may be incomplete or inaccurate because
unanticipated events and circumstances may occur. If estimates
and assumptions used to initially value goodwill and intangible
assets prove to be inaccurate, ongoing reviews of the carrying
values of such goodwill and intangible assets, as discussed
below, may indicate impairment which will require us to record
an impairment charge in the period in which we identify the
impairment.
Where we believe that property, plant and equipment and
intangible assets have finite lives, we depreciate and amortize
those assets over their estimated useful lives. For purposes of
determining whether there are any impairment losses, as further
discussed below, our management has historically examined the
carrying value of our identifiable long-lived tangible and
intangible assets and goodwill, including their useful lives
where we believe such assets have finite lives, when indicators
of impairment are present. In addition, SFAS No. 142
requires that impairment reviews be performed on the carrying
values of all goodwill on at least an annual basis. For all
long-lived tangible and intangible assets and goodwill, if an
impairment loss is identified based on the fair value of the
asset, as compared to the carrying value of the asset, such loss
would be charged to expense in the period we identify the
impairment. Furthermore, if our review of the carrying values of
the long-lived tangible and intangible assets with finite lives
indicates impairment of such assets, we may
46
determine that shorter estimated useful lives are more
appropriate. In that event, we will be required to record
additional depreciation and amortization in future periods,
which will reduce our earnings.
Valuation
of Goodwill
We have goodwill balances related to our consumer diagnostics
and professional diagnostics reporting units, which amounted to
$86.0 million and $353.4 million, respectively, as of
December 31, 2006. As of September 30, 2006, we
performed our annual impairment review on the carrying values of
such goodwill using the discounted cash flows approach. Based
upon this review, we do not believe that the goodwill related to
our consumer diagnostics and professional diagnostics reporting
units were impaired. Because future cash flows and operating
results used in the impairment review are based on
managements projections and assumptions, future events can
cause such projections to differ from those used at
September 30, 2006, which could lead to significant
impairment charges of goodwill in the future. No events or
circumstances have occurred since our review as of
September 30, 2006, that would require us to reassess
whether the carrying values of our goodwill have been impaired.
Valuation
of Other Long-Lived Tangible and Intangible Assets
Factors we generally consider important which could trigger an
impairment review on the carrying value of other long-lived
tangible and intangible assets include the following:
(1) significant underperformance relative to expected
historical or projected future operating results;
(2) significant changes in the manner of our use of
acquired assets or the strategy for our overall business;
(3) underutilization of our tangible assets;
(4) discontinuance of product lines by ourselves or our
customers; (5) significant negative industry or economic
trends; (6) significant decline in our stock price for a
sustained period; (7) significant decline in our market
capitalization relative to net book value; and (8) goodwill
impairment identified during an impairment review under
SFAS No. 142. Although we believe that the carrying
value of our long-lived tangible and intangible assets was
realizable as of December 31, 2006, future events could
cause us to conclude otherwise.
Stock-Based
Compensation
As of January 1, 2006, 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 behavior. 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. We have chosen to utilize the simplified method to
calculate the expected life of options which averages an
awards weighted average vesting period and its contractual
term. 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.
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
47
deferred tax assets will be recovered through future taxable
income and, to the extent we believe that recovery is not
likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in
a period, we must include an expense within our tax provision.
Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net
deferred tax assets. We have recorded a valuation allowance of
$107.6 million as of December 31, 2006 due to
uncertainties related to the future benefits, if any, from our
deferred tax assets related primarily to our
U.S. businesses and certain foreign net operating losses
and tax credits. The valuation allowance is based on our
estimates of taxable income by jurisdiction in which we operate
and the period over which our deferred tax assets will be
recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods, we may
need to establish an additional valuation allowance or reduce
our current valuation allowance which could materially impact
our tax provision.
In accordance with SFAS No. 109, Accounting for
Income Taxes, and SFAS No. 5, Accounting for
Contingencies, we established reserves for tax contingencies
that reflect our best estimate of the transactions and
deductions that we may be unable to sustain or that we could be
willing to concede as part of a broader tax settlement. 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 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, 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.
Recent
Accounting Pronouncements
Recently
Issued Standards
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments, which amends
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS No. 155
simplifies the accounting for certain derivatives embedded in
other financial instruments by allowing them to be accounted for
as a whole if the holder elects to account for the whole
instrument on a fair value basis. SFAS No. 155 also
clarifies and amends certain other provisions of
SFAS No. 133 and SFAS No. 140.
SFAS No. 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement event
occurring in fiscal years beginning after September 15,
2006. Earlier adoption is permitted, provided we have not yet
issued financial statements, including for interim periods, for
that fiscal year. We do not expect the adoption of
SFAS No. 155 to have a material impact on our
financial position, results of operations or cash flows.
48
In June 2006, the FASB ratified the consensus on EITF Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement. The scope of EITF Issue
No. 06-03
includes any tax assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but is not limited to,
sales, use, value added, Universal Service Fund
(USF) contributions and some excise taxes. The Task
Force affirmed its conclusion that entities should present these
taxes in the income statement on either a gross or a net basis,
based on their accounting policy, which should be disclosed
pursuant to APB Opinion No. 22, Disclosure of Accounting
Policies. If such taxes are significant, and are presented
on a gross basis, the amounts of those taxes should be
disclosed. The consensus on Issue
No. 06-03
will be effective for interim and annual reporting periods
beginning after December 15, 2006. We are currently
evaluating the impact of EITF
No. 06-03.
Should we need to change the manner in which we record gross
receipts, it is not expected that the change would have a
material impact on total operating revenue and expenses and
operating income and net income would not be affected.
In June 2006, the FASB issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
TaxesAn Interpretation of FASB Statement No. 109,
which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006 and we will
be adopting the provisions of FIN 48 beginning with the
first quarter of 2007. We continue to evaluate the impact that
the adoption of FIN 48 will have, if any, on our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. 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. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. Earlier application is encouraged. We
continue to evaluate the impact that the adoption of
SFAS No. 157 will have, if any, on our consolidated
financial statements.
In December 2006, the FASB issued FASB Staff Position
(FSP) No. EITF
00-19-2,
Accounting for Registration Payment Arrangements. This
FSP specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as separate
agreement or included as a provision of a financial instrument
or other agreement, should be separately recognized and measured
in accordance with FASB Statement No. 5, Accounting for
Contingencies. The guidance in this FSP amends
FASB Statement No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities, and
No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity and
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others to include scope exceptions for
registration payment arrangements. This FSP is effective
immediately for registration payment arrangements and the
financial instruments subject to those arrangements that are
entered into or modified subsequent to the date of issuance of
this FSP. For registration payment arrangements and financial
instruments subject to those arrangements that were entered into
prior to the issuance of this FSP, this guidance shall be
effective for financial statements issued for fiscal years
beginning after December 15, 2006, and interim periods
within those fiscal years. We do not believe the adoption of
EITF 00-19-2
will have a material impact on our consolidated financial
statements.
Recently
Adopted Standards
In November 2004, the FASB issued SFAS No. 151,
Inventory CostsAn Amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage). In
addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on
normal capacity of production facilities. As
49
required by SFAS No. 151, we adopted this new
accounting standard on January 1, 2006. The adoption of
SFAS No. 151 did not have a material impact on our
financial position, results of operations or cash flows.
In December 2004, the FASB issued
SFAS No. 123-R,
Share-Based Payment, which addresses the accounting for
transactions in which a company receives employee services in
exchange for (a) equity instruments of the company or
(b) liabilities that are based on the fair value of the
companys equity instruments or that may be settled by the
issuance of such equity instruments. As required by
SFAS No. 123-R
and the SEC, we adopted
SFAS No. 123-R
on January 1, 2006 (Note 15).
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error CorrectionsA Replacement
of APB Opinion No. 20 and FASB Statement No. 3,
which replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. The statement
requires a voluntary change in accounting principle be applied
retrospectively to all prior period financial statements so that
those financial statements are presented as if the current
accounting principle had always been applied. APB Opinion
No. 20 previously required most voluntary changes in
accounting principle to be recognized by including in net income
of the period of change the cumulative effect of changing to the
new accounting principle. In addition, SFAS No. 154
carries forward, without change, the guidance contained in APB
Opinion No. 20 for reporting a correction of an error in
previously issued financial statements and a change in
accounting estimate. SFAS No. 154 was effective for
accounting changes and corrections of errors made after
January 1, 2006. The adoption of SFAS No. 154 had
no impact on our financial statements.
In September 2006, the SEC issued SEC Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements to provide guidance on the
consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a
materiality assessment. Under SAB No. 108, companies
should evaluate a misstatement based on its impact on the
current year income statement, as well as the cumulative effect
of correcting such misstatements that existed in prior years
existing in the current years ending balance sheet.
SAB No. 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB No. 108
did not have a material impact on our financial position,
results of operations or cash flows.
Effective December 31, 2006, we adopted the recognition
provisions of SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
PlansAn Amendment of FASB Statements No. 87, 88, 106,
and 132(R). This Statement requires employers to recognize
in their balance sheets the overfunded or underfunded status of
defined benefit postretirement plans, measured as the difference
between the fair value of plan assets and the benefit obligation
(the projected benefit obligation for pension plans and the
accumulated postretirement benefit obligation for other
post-retirement plans). Employers must recognize the change in
the funded status of the plan in the year in which the change
occurs through other comprehensive income. This Statement also
requires plan assets and obligations to be measured as of the
employers balance sheet date. The measurement provision of
this Statement will be effective for years beginning after
December 15, 2008, with early application encouraged. We
have not yet adopted the measurement provisions of this
Statement and are in the process of determining the impact of
the adoption on our consolidated financial statements.
Prior to the adoption of the recognition provisions of
SFAS No. 158, we accounted for our defined benefit
post-retirement plans under SFAS No. 87,
Employers Accounting for Pensions.
SFAS No. 87 required that a liability (minimum pension
liability) be recorded when the accumulated benefit obligation
liability exceeded the fair value of plan assets. Any adjustment
is recorded as a non-cash charge to accumulated other
comprehensive income in stockholders equity. Under
SFAS No. 87, changes in the funded status were not
immediately recognized, rather they were deferred and recognized
ratably over future periods. Upon adoption of the recognition
provisions of SFAS No. 158, we recognized the amounts
of prior changes in the funded status of our postretirement
benefit plans through accumulated other comprehensive income. As
a result, we
50
recognized the following adjustments in individual line items of
our consolidated balance sheet as of December 31, 2006:
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As
|
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Prior to
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Effect of
|
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Reported at
|
|
|
|
Application of
|
|
|
Adopting
|
|
|
December 31,
|
|
|
|
SFAS No. 158
|
|
|
SFAS No. 158
|
|
|
2006
|
|
|
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(in thousands)
|
|
|
Deferred tax asset, current portion
|
|
$
|
4,435
|
|
|
$
|
897
|
|
|
$
|
5,332
|
|
Deferred tax asset, long-term
|
|
$
|
(29
|
)
|
|
$
|
107
|
|
|
$
|
78
|
|
Other long-term liabilities
|
|
$
|
6,043
|
|
|
$
|
4,487
|
|
|
$
|
10,530
|
|
Accumulated other comprehensive
income
|
|
$
|
17,919
|
|
|
$
|
(3,738
|
)
|
|
$
|
14,181
|
|
The adoption of SFAS No. 158 had no effect on our
consolidated statement of operations for the year ended
December 31, 2006, or for any prior period presented.
As of December 31, 2006, included in accumulated other
comprehensive income was unrecognized prior service costs of
$6.8 million and unrecognized actuarial gain of
$2.3 million. The estimated prior service cost and
actuarial loss that will be recognized in net periodic
postretirement benefit obligation expense during 2007 is
$0 million and $0.1 million, respectively.
|
|
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, 2006, our short-term investments approximated
market value.
At December 31, 2006, we had revolving lines of credit
available to us of up to $110.0 million and a term loan of
$44.8 million, under our primary senior credit facility. As
of December 31, 2006, no borrowings were outstanding under
the line of credit. We may repay any future borrowings under the
revolving lines of credit at any time but in no event later than
March 31, 2008. Borrowings under the revolving lines of
credit bear interest at either (i) the London Interbank
Offered Rate, or LIBOR, as defined in the credit agreement, plus
applicable margins or, at our option, (ii) a floating Index
Rate, as defined in the agreement, plus applicable margins.
Applicable margins if we choose to use the LIBOR or the Index
Rate can range from 2.75% to 3.75% or 1.50% to 2.50%,
respectively, depending on the quarterly adjustments that are
based on our consolidated financial performance. On
February 1, 2007, we paid the remaining principal balance
outstanding of $44.8 million and accrued interests under
our senior credit facility.
As of December 31, 2006, the LIBOR and Index rates
applicable under our primary senior credit facility were 9.35%
and 11%, respectively. Assuming no changes in our leverage
ratio, which would affect the margin of the interest rate under
the senior credit agreement, the effect of interest rate
fluctuations on outstanding
51
borrowings under the revolving lines of credit as of
December 31, 2006 over the next twelve months is quantified
and summarized as follows:
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
Increase
|
|
|
|
(in thousands)
|
|
|
Interest rates increase by
1 basis point
|
|
$
|
448
|
|
Interest rates increase by
2 basis points
|
|
$
|
896
|
|
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 2006, the net impact
of foreign currency changes on transactions was a loss of
$2.7 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. However, during 2005 we entered into forward
exchange contracts totaling $24.9 million with monthly
maturity dates of January 18, 2005 to February 15,
2006. Maturing forward exchange contracts were used to lock in
U.S. dollar to British Pound Sterling (GBP) or
U.S. dollar to Euro exchange rates and hedge anticipated
intercompany sales. The change in value of the derivative was
analyzed quarterly for changes in the spot and forward rates
based on rates given by the issuing financial institution for
each quarter end date. The effective portion of the gain or loss
on the derivative is reported in other comprehensive income
(OCI) during the period prior to the forecasted
purchase or sale. For forecasted sales on credit, the amount of
income ascribed to each forecasted period was reclassified from
OCI to income or expense on the date of the sale. The income or
cost ascribed to each period encompassed within the periods of
the recognized foreign-currency-denominated receivable or
payable was reclassified from OCI to income or expense at the
end of each reporting period. The changes in the derivative
instruments fair values from inception of the hedge were
compared to the cumulative change in the hedged items fair
value attributable to the risk hedged. Effectiveness was based
on the change in the spot rates.
Gross margins of products we manufacture at our European plants
and sell in U.S. dollar are also affected by foreign
currency exchange rate movements. Our gross margin on total net
product sales was 39% in 2006. If the U.S. dollar had been
stronger by 1%, 5% or 10%, compared to the actual rates during
2006, our gross margin on total net product sales would have
been 39.5%, 39.8% and 40.3%, respectively.
In addition, because a substantial portion of our earnings is
generated by our foreign subsidiaries, whose functional
currencies are other than the U.S. dollar (in which we
report our consolidated financial results), our earnings could
be materially impacted by movements in foreign currency exchange
rates upon the translation of the earnings of such subsidiaries
into the U.S. dollar. If the U.S. dollar had been
stronger by 1%, 5% or 10%, compared to the actual average
exchange rates used to translate the financial results of our
foreign subsidiaries, our net revenue and net income would have
been lower by approximately the following amounts:
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
Approximate
|
|
|
|
Decrease in
|
|
|
Increase in
|
|
(in thousands)
|
|
Net Revenue
|
|
|
Net Loss
|
|
|
If, during 2006, the
U.S. dollar was stronger by:
|
|
|
|
|
|
|
|
|
1%
|
|
$
|
1,700
|
|
|
$
|
136
|
|
5%
|
|
$
|
8,500
|
|
|
$
|
323
|
|
10%
|
|
$
|
17,000
|
|
|
$
|
557
|
|
|
|
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.
52
The following table presents selected quarterly financial data
for each of the quarters in the years ended December 31,
2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter(2)
|
|
|
Quarter(3)
|
|
|
Quarter(4)
|
|
|
Quarter(5)
|
|
|
|
(in thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
127,821
|
|
|
$
|
139,713
|
|
|
$
|
144,912
|
|
|
$
|
157,008
|
|
Gross profit
|
|
$
|
52,254
|
|
|
$
|
48,496
|
|
|
$
|
61,145
|
|
|
$
|
67,328
|
|
Net (loss) income
|
|
$
|
(2,630
|
)
|
|
$
|
(10,556
|
)
|
|
$
|
(9,683
|
)
|
|
$
|
6,027
|
|
Net (loss) income per common
sharebasic(1)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
0.15
|
|
Net (loss) income per common
sharediluted(1)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter(6)
|
|
|
Quarter(7)
|
|
|
Quarter(8)
|
|
|
Quarter(9)
|
|
|
Net revenue
|
|
$
|
91,920
|
|
|
$
|
102,271
|
|
|
$
|
106,294
|
|
|
$
|
121,365
|
|
Gross profit
|
|
$
|
32,189
|
|
|
$
|
34,713
|
|
|
$
|
39,635
|
|
|
$
|
45,775
|
|
Net (loss) income
|
|
$
|
(7,802
|
)
|
|
$
|
2,503
|
|
|
$
|
(6,572
|
)
|
|
$
|
(7,338
|
)
|
Net (loss) income per common
sharebasic(1)
|
|
$
|
(0.37
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.27
|
)
|
Net (loss) income per common
sharediluted(1)
|
|
$
|
(0.37
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
(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(m) and 13 of our consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K. |
|
(2) |
|
Included in net loss in the first quarter of 2006 is a
$0.9 million charge related to the closure of our
manufacturing facility in Galway, Ireland, a $1.2 million
unrealized foreign exchange loss associated with the closure our
Galway, Ireland facility and $1.3 million of non-cash
stock-based compensation expense. |
|
(3) |
|
Included in net loss in the second quarter of 2006 is a
$4.4 million restructuring charge, including
$9.9 million primarily related to the closure of our ABI
operation in San Diego, California, offset by income of
$5.5 million related to a foreign exchange gain associated
with the final closure of our manufacturing facility in Galway,
Ireland, a $3.2 million net loss on disposition resulting
from a $4.6 million loss associated with managements
decision to dispose of our Scandinavian research operation,
offset by a $1.4 million gain on the sale of an idle
manufacturing facility and $1.2 million of non-cash
stock-based compensation expense. |
|
(4) |
|
Included in net loss in the third quarter of 2006 is a
$5.0 million charge for the write-off of in-process
research and development acquired in connection with the
Clondiag acquisition, a $1.2 million restructuring charge
related to the closure of our ABI operation, along with the
write-off of fixed assets at other facilities impacted by our
restructuring plans and $1.3 million of non-cash
stock-based compensation expense. |
|
(5) |
|
Included in net income in the fourth quarter of 2006 is a
$1.2 million restructuring charge associated with the
closure of our ABI operation, a $0.3 million net loss on
disposition resulting from the finalization of our disposition
of our Scandinavian research operation and $1.6 million of
non-cash stock-based compensation expense. |
|
(6) |
|
Included in net loss in the first quarter of 2005 is a charge of
$1.6 million associated with a recall of certain drugs of
abuse products and an $8.4 million gain from a legal
settlement in our nutritionals business. |
|
(7) |
|
Included in net income in the second quarter of 2005 is a charge
of $2.4 million associated with a reserve for excess
quantities of certain raw materials and finished goods, a charge
of $3.5 million associated with our decision to cease
operations at our facility in Galway, Ireland, a charge of
$4.2 million related to a legal settlement with PBM, and a
$15.0 million gain related to an intellectual property
settlement with Quidel relating to periods prior to 2005. |
53
|
|
|
(8) |
|
Included in net loss in the third quarter of 2005 is a charge of
$0.7 million associated with our decision to cease
operations at our facility in Galway, Ireland. |
|
(9) |
|
Included in net loss in the fourth quarter of 2005 is a charge
of $0.9 million principally associated with our decision to
cease operations at our facility in Galway, Ireland. |
|
|
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.
Management assessed the effectiveness of our companys
internal control over financial reporting as of
December 31, 2006. In making this assessment, management
used the criteria established in Internal
ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
54
(COSO). Based on managements assessment and those
criteria, management determined that the Company maintained
effective internal control over financial reporting as of
December 31, 2006.
In conducting managements evaluation of the effectiveness
of our companys internal control over financial reporting,
management excluded the acquisitions which were completed in
2006. The contribution from these acquisitions represented
approximately 10.0% and 5.2% of net revenue and total assets,
respectively, as of and for the year ended December 31,
2006. Refer to Note 4 of the accompanying consolidated
financial statements for further discussion of our acquisitions
and their impact on our consolidated financial statements.
As indicated in its Attestation Report included below, BDO
Seidman, LLP, the independent registered public accounting firm
that audited the financial statements included in this report,
has attested to our managements assessments regarding the
effectiveness of our internal control over financial reporting
as of December 31, 2006.
55
REPORT OF
THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Inverness Medical Innovations, Inc. and Subsidiaries:
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting appearing under Item 9a, that
Inverness Medical Innovations, Inc. and subsidiaries maintained
effective internal control over financial reporting as of
December 31, 2006 based on the criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Inverness Medical Innovations, Inc. and
subsidiaries management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of Inverness Medical Innovations, Inc. and
subsidiaries 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, evaluating
managements assessment, testing and evaluating the design
and operation effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with 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, managements
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of acquisitions completed in 2006 which are included in
the 2006 consolidated financial statements of Inverness Medical
Innovations, Inc. and subsidiaries and constituted approximately
10.0% and 5.2% of consolidated net revenue and consolidated
total assets, respectively, as of and for the year ended
December 31, 2006. Management did not assess the
effectiveness of internal control over financial reporting at
these entities because Inverness Medical Innovations, Inc. and
subsidiaries acquired these entities during 2006. Refer to
Note 4 of the accompanying consolidated financial
statements for further discussion of these acquisitions and
their impact on Inverness Medical Innovations, Inc. and
subsidiaries consolidated financial statements. Our audit
of internal control over financial reporting of Inverness
Medical Innovations, Inc. and subsidiaries also did not include
an evaluation of the internal control over financial reporting
of the entities referred to above.
In our opinion, managements assessment that Inverness
Medical Innovations, Inc. and subsidiaries maintained effective
internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material
respects, is based on the criteria established in Internal
ControlIntegrated Framework issued by the
56
COSO. Also, in our opinion, Inverness Medical Innovations, Inc.
and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2006, based on the criteria established in
Internal ControlIntegrated Framework issued by the
COSO.
We have also audited, in accordance with the standards of the
Public Accounting Oversight Board (United States) the
consolidated financial statements of Inverness Medical
Innovations, Inc. and subsidiaries and our report therein dated
March 1, 2007 expressed an unqualified opinion.
Boston, MA
March 1, 2007
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 2006
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not applicable.
57
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 2007 Annual Meeting of Shareholders (the Proxy Statement) is
incorporated herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information regarding executive compensation included in the
Proxy Statement is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN 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:
2. Financial Statement Schedules.
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 herein.
58
3. Exhibits.
|
|
|
2.1
|
|
Sale Agreement, dated
December 20, 2001, between Inverness Medical Innovations,
Inc. (the Company) and Unilever U.K. Holdings
Limited (incorporated by reference to Exhibit 2.1 to the
Companys Current Report on
Form 8-K
dated December 20, 2001)
|
2.2
|
|
Stock Purchase Agreement, dated as
of July 30, 2003, by and among Inverness Medical
Innovations, Inc., Applied Biotech, Inc. and Erie Scientific
Company (incorporated by reference to Exhibit 2.1 to the
Companys Current Report of
Form 8-K
dated August 27, 2003)
|
2.3
|
|
Asset Purchase Agreement, as of
September 30, 2003, by and among Abbott Laboratories and
Inverness Medical Innovations, Inc. and Inverness Medical
Switzerland GmbH, Morpheus Acquisition Corp. and Morpheus
Acquisition LLC. (incorporated by reference to Exhibit 2.1
to the Companys Current Report of
Form 8-K
dated September 30, 2003)
|
2.4
|
|
Agreement and Plan of Merger,
dated February 8, 2005, by and among Inverness Medical
Innovations, Inc., a Delaware corporation to be formed as a
wholly-owned subsidiary of Inverness Medical Innovations, Inc.,
Binax, Inc., Roger N. Piasio and Myron C. Hamer, and Roger N.
Piasio, as stockholder representative (incorporated by reference
to Exhibit 99.1 to the Companys Current Report of
Form 8-K
dated February 9, 2005)
|
2.5
|
|
Agreement and Plan of Merger,
dated February 15, 2005, by and among Inverness Medical
Innovations, Inc., a Delaware corporation to be formed as a
wholly-owned subsidiary of Inverness Medical Innovations, Inc.,
and Ischemia Technologies, Inc. (incorporated by reference to
Exhibit 99.1 to the Companys current report on
form 8-K
dated February 15, 2005)
|
2.6
|
|
Asset Purchase Agreement, dated as
of May 28, 2005 by and among Abbott Laboratories, Abbott
Cardiovascular, Inc., Abbott Japan, Co., Ltd., Inverness Medical
Innovations, Inc., Inverness Medical Switzerland GmbH and
Inverness Medical Japan, Ltd. (incorporated by reference to
Exhibit 2.1 to the Companys Current Report of
Form 8-K
dated June 30, 2005)
|
2.7
|
|
Stock Purchase Agreement, dated
September 16, 2005, by and between Inverness Medical
Innovations, Inc., Thermo Electron Corporation and Thermo
Bioanalysis Corporation (incorporated by reference to
Exhibit 2.7 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
2.8
|
|
Acquisition Agreement, dated
February 24, 2006, by and among Inverness Medical
Innovations, Inc., ACON Laboratories, Inc., AZURE Institute,
Inc., LBI, Inc., Oakville Hong Kong Co., Ltd., ACON Biotech
(Hangzhou) Co., Ltd. And Karsson Overseas Ltd. (incorporated by
reference to Exhibit 99.1 to the Companys Current
Report of
Form 8-K
dated February 24, 2006)
|
2.9
|
|
Share Purchase Agreement, dated
February 28, 2006, by and between Inverness Medical
Switzerland Gmbh, Inverness Medical Innovations, Inc., CLONDIAG
Beteiligungs-Gesellschaft GmbH, Eugen Ermantraut,
Dr. Stefan Wölfl, Dr. Torsten Schulz, Prof.
Dr. Albert Hinnen, Karl Fusseis, Prof. Dr. Michael
Köhler and Thomas Ellinger (incorporated by reference to
Exhibit 2.9 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
*2.10
|
|
Asset Purchase Agreement, dated
December 22, 2006, by and between Inverness Medical
Switzerland GmbH, Procter & Gamble International
Operations, and IMJV GmbH
|
*2.11
|
|
Contribution Agreement, dated
December 22, 2006, by and between Inverness Medical
Switzerland GmbH, Procter & Gamble International
Operations, and IMJV GmbH
|
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
|
|
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)
|
3.3
|
|
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)
|
*3.4
|
|
Amended and Restated Certificate
of Incorporation of the Company
|
*3.5
|
|
Certificate of Correction to
Amended and Restated Certificate of Incorporation of the Company
|
59
|
|
|
4.1
|
|
Indenture, dated as of
February 10, 2004, between Inverness Medical Innovations,
Inc., the Guarantors named therein and U.S. Bank Trust
National Association (incorporated by reference to
Exhibit 4.3 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2004)
|
4.2
|
|
First Supplemental Indenture,
dated as of June 15, 2004, among Inverness Medical
Innovations, Inc., the Guarantors, Advantage Diagnostics
Corporation and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2004)
|
4.3
|
|
Second Supplemental Indenture,
dated as of October 20, 2004, among Inverness Medical
Innovations, Inc., the Guarantors, IVC Industries, Inc. and
U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2004)
|
4.4
|
|
Third Supplement Indenture, dated
as of March 16, 2005, among Inverness Medical Innovations,
Inc., the Guarantors, Ischemia Technologies, Inc. and
U.S. Bank Trust National Association as Trustee
(incorporated by reference to Exhibit 4.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended March 31, 2005)
|
4.5
|
|
Fourth Supplement Indenture, dated
as of March 31, 2005, among Inverness Medical Innovations,
Inc., the Guarantors, Binax, Inc. and U.S. Bank Trust
National Association, as Trustee (incorporated by reference to
Exhibit 4.2 to the Companys Quarterly Report on
Form 10-Q
for the period ended March 31, 2005)
|
4.6
|
|
Fifth Supplemental Indenture,
dated as of September 30, 2005, among Inverness Medical
Innovations, Inc., the Guarantors, Thermo BioStar Inc. and
U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2005)
|
10.1
|
|
Post-Closing Covenants Agreement,
dated as of November 21, 2001, by and among
Johnson & Johnson, IMT, the Company, certain
subsidiaries of IMT and certain subsidiaries of the Company
(incorporated by reference to Exhibit 10.1 to the
Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2001)
|
10.2
|
|
Supply of Goods Agreement, dated
July 28, 1998, between Schleicher & Schuell GmbH
and Unipath Limited (incorporated by reference to
Exhibit 10.3 to the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2001)
|
10.3
|
|
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))
|
10.4
|
|
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))
|
10.5
|
|
Inverness Medical Innovations,
Inc. 2001 Employee Stock Purchase PlanFirst 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)
|
10.6
|
|
Inverness Medical Innovations,
Inc. 2001 Employee Stock Purchase PlanSecond 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)
|
10.7
|
|
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)
|
+10.8
|
|
Research and Development
Agreement, dated February 25, 2005, among ITI Scotland
Limited and Inverness Medical Innovations, Inc., Stirling
Medical Innovations Limited and Inverness Medical Switzerland
GmbH (incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on
Form 10-Q
for the period ended March 31, 2005)
|
10.9
|
|
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)
|
60
|
|
|
10.10
|
|
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)
|
10.11
|
|
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)
|
10.12
|
|
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)
|
10.13
|
|
Licensing Agreement, dated
March 14, 1988, between Unilever Plc and Behringwerke AG
(incorporated by reference to Exhibit 10.37 to the
Companys Annual Report on
Form 10-K,
as amended, for the period ended December 31, 2001)
|
10.14
|
|
Supplemental Agreement, dated
October 16, 1994, between Unilever Plc, Unilever NV and
Behringwerke AG (incorporated by reference to Exhibit 10.38
to the Companys Annual Report on
Form 10-K,
as amended, for the period ended December 31, 2001)
|
10.15
|
|
Supply of Goods Agreement, dated
December 19, 1994, between AFC Worldwide and Unipath
Limited (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q,
as amended, for the period ended March 30, 2002)
|
10.16
|
|
Amendment to Supply of Goods
Agreement, dated March 14, 2002, between
Schleicher & Schuell GmbH and Unipath Limited
(incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on
Form 10-Q,
as amended, for the period ended March 30, 2002)
|
10.17
|
|
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))
|
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 September 20, 2002)
|
10.19
|
|
Third Amended and Restated Credit
Agreement, dated as of June 30, 2005 by and among Wampole
Laboratories, LLC and Inverness Parties Signatory thereto, as
Credit Parties, the Lenders Signatory thereto from time to time,
as Lenders, General Electric Capital Corporation, as
administrative agent, Merrill Lynch Capital, a division of
Merrill Lynch Business Financial Services Inc., as documentation
agent, a co-syndication agent and a co-lead arranger, UBS
Securities LLC, as a co-syndication agent and GECC Capital
Markets Group, Inc., as a co-lead arranger (incorporated by
reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K,
event date June 30, 2005, filed on July 7, 2005)
|
10.20
|
|
First Amendment and Consent to
Third Amended and Restated Credit Agreement, dated as of
September 29, 2005, to the Third Amended and Restated
Credit Agreement, dated as of June 30, 2005, by and among
General Electric Capital Corporation, as Agent, Inverness
Medical Innovations, Inc., Wampole Laboratories, LLC and
Inverness Medical (UK) Holdings Limited, as borrowers, the other
Credit Parties signatory thereto, Merrill Lynch Capital, a
division of Merrill Lynch Business Financial Services Inc., as
documentation agent, a co-syndication agent and lender, UBS
Securities LLC, as a co-syndication agent, and the lenders
signatory thereto from time to time (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on
Form 8-K,
event date September 29, 2005, filed on October 4,
2005)
|
10.21
|
|
Second Amendment to Third Amended
and Restated Credit Agreement, dated as of November 8,
2005, to the Third Amended and Restated Credit Agreement, dated
as of June 30, 2005, by and among General Electric Capital
Corporation, as Agent, Inverness Medical Innovations, Inc.,
Wampole Laboratories, LLC and Inverness Medical (UK) Holdings
Limited, as borrowers, the other Credit Parties signatory
thereto, Merrill Lynch Capital, a division of Merrill Lynch
Business Financial Services Inc., as documentation agent, a
co-syndication agent and lender, UBS Securities LLC, as a
co-syndication agent, and the lenders signatory thereto from
time to time (incorporated by reference to Exhibit 10.2 to
the Companys Quarterly Report on
Form 10-Q,
as amended, for the period ended September 30, 2005)
|
61
|
|
|
10.22
|
|
Third Amendment to Third Amended
and Restated Credit Agreement, dated as of November 22,
2005, to the Third Amended and Restated Credit Agreement, dated
as of June 30, 2005, by and among General Electric Capital
Corporation, as Agent, Inverness Medical Innovations, Inc.,
Wampole Laboratories, LLC and Inverness Medical (UK) Holdings
Limited, as borrowers, the other Credit Parties signatory
thereto, Merrill Lynch Capital, a division of Merrill Lynch
Business Financial Services Inc., as documentation agent, a
co-syndication agent and lender, UBS Securities LLC, as
co-syndication agent, and the lenders signatory thereto from
time to time (incorporated by reference to Exhibit 10.35 to
the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
10.23
|
|
Fourth Amendment and Consent to
Third Amended and Restated Credit Agreement, dated as of
February 27, 2006, to the Third Amended and Restated Credit
Agreement, dated as of June 30, 2005, by and among General
Electric Capital Corporation, as Agent, Inverness Medical
Innovations, Inc., Wampole Laboratories, LLC and Inverness
Medical (UK) Holdings Limited, as borrowers, the other Credit
Parties signatory thereto, Merrill Lynch Capital, a division of
Merrill Lynch Business Financial Services Inc., as documentation
agent, a co-syndication agent and lender, UBS Securities LLC, as
co-syndication agent, and the lenders signatory thereto from
time to time (incorporated by reference to Exhibit 10.36 to
the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 30, 2006)
|
10.24
|
|
Fifth Amendment and Consent to
Third Amended and Restated Credit Agreement, dated as of
March 31, 2006, to the Third Amended and Restated Credit
Agreement, dated as of June 30, 2005 (as amended,
supplemented or otherwise modified from time to time), by and
among General Electric Capital Corporation, as Agent, Inverness
Medical Innovations, Inc., Wampole Laboratories, LLC and
Inverness Medical (UK) Holdings Limited, as Borrowers, the other
Credit Parties signatory thereto, Merrill Lynch Capital, a
division of Merrill Lynch Business Financial Services Inc., as
documentation agent, co-syndication agent and lender, UBS
Securities LLC, as co-syndication agent, and the Lenders
signatory thereto from time to time (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on
Form 8-K,
event date September 29, 2005, filed on October 4,
2005)
|
10.25
|
|
Sixth Amendment and Consent to
Third Amended and Restated Credit Agreement, dated as of
May 3, 2006, to the Third Amended and Restated Credit
Agreement, dated as of June 30, 2005 (as amended,
supplemented or otherwise modified from time to time), by and
among General Electric Capital Corporation, as Agent, Inverness
Medical Innovations, Inc., Wampole Laboratories, LLC and
Inverness Medical (UK) Holdings Limited, as Borrowers, the other
Credit Parties signatory thereto, Merrill Lynch Capital, a
division of Merrill Lynch Business Financial Services Inc., as
documentation agent, co-syndication agent and lender, UBS
Securities LLC, as co-syndication agent, and the Lenders
signatory thereto from time to time (incorporated by reference
to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2006)
|
10.26
|
|
Seventh Amendment and Consent to
Third Amended and Restated Credit Agreement, dated as of
October 6, 2006, to the Third Amended and Restated Credit
Agreement, dated as of June 30, 2005 (as amended,
supplemented or otherwise modified from time to time), by and
among General Electric Capital Corporation, as Agent, Inverness
Medical Innovations, Inc., Wampole Laboratories, LLC and
Inverness Medical (UK) Holdings Limited, as Borrowers, the other
Credit Parties signatory thereto, Merrill Lynch Capital, a
division of Merrill Lynch Business Financial Services Inc., as
documentation agent, co-syndication agent and lender, UBS
Securities LLC, as co-syndication agent, and the Lenders
signatory thereto from time to time (incorporated by reference
to Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2006)
|
10.27
|
|
Eighth Amendment and Consent to
Third Amended and Restated Credit Agreement, dated as of
October 30, 2006, to the Third Amended and Restated Credit
Agreement, dated as of June 30, 2005 (as amended,
supplemented or otherwise modified from time to time), by and
among General Electric Capital Corporation, as Agent, Inverness
Medical Innovations, Inc., Wampole Laboratories, LLC and
Inverness Medical (UK) Holdings Limited, as Borrowers, the other
Credit Parties signatory thereto, Merrill Lynch Capital, a
division of Merrill Lynch Business Financial Services Inc., as
documentation agent, co-syndication agent and lender, UBS
Securities LLC, as co-syndication agent, and the Lenders
signatory thereto from time to time (incorporated by reference
to Exhibit 10.3 to the Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2006)
|
62
|
|
|
*10.28
|
|
Ninth Amendment and Consent to
Third Amended and Restated Credit Agreement, dated as of
November 10, 2006, to the Third Amended and Restated Credit
Agreement, dated as of June 30, 2005 (as amended,
supplemented or otherwise modified from time to time), by and
among General Electric Capital Corporation, as Agent, Inverness
Medical Innovations, Inc., Wampole Laboratories, LLC and
Inverness Medical (UK) Holdings Limited, as Borrowers, the other
Credit Parties signatory thereto, Merrill Lynch Capital, a
division of Merrill Lynch Business Financial Services Inc., as
documentation agent, co-syndication agent and lender, UBS
Securities LLC, as co-syndication agent, and the Lenders
signatory thereto from time to time
|
10.29
|
|
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))
|
10.30
|
|
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)
|
10.31
|
|
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)
|
10.32
|
|
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)
|
10.33
|
|
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)
|
10.34
|
|
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)
|
+10.35
|
|
Manufacturing and Support Services
Agreement, dated June 30, 2005, by and among Abbott Japan
Co., Ltd., Abbott Laboratories, Inverness Medical Innovations,
Inc., Inverness Medical Switzerland GmbH and Inverness Medical
Japan, Ltd. (incorporated by reference to Exhibit 10.8 to
Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2005)
|
+10.36
|
|
Manufacturing, Packaging and
Supply Agreement, dated as of June 6, 2003, among Inverness
Medical Innovations, Inc., Inverness Medical Switzerland GmbH,
Unipath, Ltd. and Warner-Lambert Company LLC (incorporated by
reference to Exhibit 10.45 to Amendment No. 2 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2004)
|
+10.37
|
|
Reagent Supply Agreement, dated
June 30, 2005, by and between Abbott Laboratories,
Inverness Medical Innovations, Inc. and Inverness Medical Japan,
Ltd (incorporated by reference to Exhibit 10.9 to
Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2005)
|
10.38
|
|
Investor Rights Agreement, dated
March 31, 2006, by and among Inverness Medical Innovations,
Inc., Ron Zwanziger, ACON Laboratories, Inc., AZURE Institute,
Inc., LBI, Inc., Oakville Hong Kong Co., Ltd., ACON Biotech
(Hangzhou) Co., Ltd., Karsson Overseas Ltd., Manfield Top
Worldwide Ltd., Overseas Square Ltd., Jixun Lin and Feng Lin
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
event date September 29, 2005, filed on October 4,
2005)
|
10.39
|
|
Second Territory Letter Agreement,
dated March 31, 2006, by and among Inverness Medical
Innovations, Inc., ACON Laboratories, Inc., AZURE Institute,
Inc., LBI, Inc., Oakville Hong Kong Co., Ltd., ACON Biotech
(Hangzhou) Co., Ltd., Karsson Overseas Ltd., Jixun Lin and Feng
Lin (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
event date September 29, 2005, filed on October 4,
2005)
|
*10.40
|
|
Subunderlease, dated
15 February 2007, between the Landlord, Unilever U.K.
Central Resources Limited, the Tenant, Unipath Limited, and the
Surety, Inverness Medical Innovations, Inc.
|
*10.41
|
|
Amendment No. 4 to Inverness
Medical Innovations, Inc. 2001 Stock Option and Incentive Plan
|
*10.42
|
|
Amendment No. 5 to Inverness
Medical Innovations, Inc. 2001 Stock Option and Incentive Plan
|
63
|
|
|
10.43
|
|
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)
|
*14.50
|
|
Inverness Medical Innovations
Business Conduct Guidelines
|
*21.1
|
|
List of Subsidiaries of the
Company as of March 1, 2007
|
*23.1
|
|
Consent of BDO Seidman, LLP
|
*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. |
64
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: March 1, 2007
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)
|
|
March 1, 2007
|
|
|
|
|
|
/s/ David
Teitel
David
Teitel
|
|
Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
|
|
March 1, 2007
|
|
|
|
|
|
/s/ Carol
R. Goldberg
Carol
R. Goldberg
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ Robert
P.
Khederian
Robert
P. Khederian
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ John
F. Levy
John
F. Levy
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ Jerry
McAleer
Jerry
McAleer
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ John
A. Quelch
John
A. Quelch
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ David
Scott
David
Scott
|
|
Director
|
|
March 1 2007
|
|
|
|
|
|
/s/ Peter
Townsend
Peter
Townsend
|
|
Director
|
|
March 1, 2007
|
|
|
|
|
|
/s/ Alfred
M. Zeien
Alfred
M. Zeien
|
|
Director
|
|
March 1, 2007
|
65
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
Table of
Contents
|
|
|
|
|
Page
|
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-8
|
|
|
F-11
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Inverness Medical Innovations, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Inverness Medical Innovations, Inc. and Subsidiaries (the
Company) as of December 31, 2006 and 2005, and
the related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for each of the three years in the period ended
December 31, 2006. 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. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 2006 and
2005, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2006, 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
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Our report dated
March 1, 2007, expressed an unqualified opinion on
managements assessment on the effectiveness of internal
control over financial reporting and an unqualified opinion on
the effectiveness of internal control over financial reporting.
Boston, Massachusetts
March 1, 2007
F-2
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net product sales
|
|
$
|
552,130
|
|
|
$
|
406,457
|
|
|
$
|
365,432
|
|
License and royalty revenue
|
|
|
17,324
|
|
|
|
15,393
|
|
|
|
8,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
569,454
|
|
|
|
421,850
|
|
|
|
373,991
|
|
Cost of sales
|
|
|
340,231
|
|
|
|
269,538
|
|
|
|
226,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
229,223
|
|
|
|
152,312
|
|
|
|
147,004
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
(Note 11)
|
|
|
53,666
|
|
|
|
30,992
|
|
|
|
31,954
|
|
Sales and marketing
|
|
|
94,445
|
|
|
|
72,103
|
|
|
|
57,957
|
|
General and administrative
|
|
|
71,243
|
|
|
|
59,990
|
|
|
|
52,707
|
|
Loss on dispositions, net
(Note 22)
|
|
|
3,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
|
6,371
|
|
|
|
(10,773
|
)
|
|
|
4,386
|
|
Interest expense, including
amortization of original issue discounts and write-off of
deferred financing costs (Note 6)
|
|
|
(26,570
|
)
|
|
|
(21,795
|
)
|
|
|
(22,114
|
)
|
Other income (expense), net
|
|
|
9,084
|
|
|
|
20,178
|
|
|
|
3,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for
income taxes
|
|
|
(11,115
|
)
|
|
|
(12,390
|
)
|
|
|
(14,321
|
)
|
Provision for income taxes
|
|
|
5,727
|
|
|
|
6,819
|
|
|
|
2,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,842
|
)
|
|
$
|
(19,209
|
)
|
|
$
|
(16,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common
stockholdersbasic and diluted (Note 13)
|
|
$
|
(16,842
|
)
|
|
$
|
(19,209
|
)
|
|
$
|
(17,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
sharebasic (Notes 2(m) and 13)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
sharediluted (Notes 2(m) and 13)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
sharesbasic
|
|
|
34,109
|
|
|
|
24,358
|
|
|
|
19,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
sharesdiluted
|
|
|
34,109
|
|
|
|
24,358
|
|
|
|
19,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
71,104
|
|
|
$
|
34,270
|
|
Accounts receivable, net of
allowances of $8,401 and $9,748 at December 31, 2006 and
2005, respectively
|
|
|
100,388
|
|
|
|
70,476
|
|
Inventories, net
|
|
|
78,322
|
|
|
|
71,209
|
|
Deferred tax assets
|
|
|
5,332
|
|
|
|
844
|
|
Prepaid expenses and other current
assets
|
|
|
20,398
|
|
|
|
17,534
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
275,544
|
|
|
|
194,333
|
|
Property, plant and equipment, net
|
|
|
82,312
|
|
|
|
72,211
|
|
Goodwill
|
|
|
439,369
|
|
|
|
322,210
|
|
Other intangible assets with
indefinite lives
|
|
|
68,107
|
|
|
|
63,742
|
|
Core technology and patents, net
|
|
|
87,732
|
|
|
|
64,050
|
|
Other intangible assets, net
|
|
|
83,794
|
|
|
|
60,489
|
|
Deferred financing costs, net, and
other non-current assets
|
|
|
13,218
|
|
|
|
13,013
|
|
Other investments and available for
sale securities
|
|
|
35,617
|
|
|
|
456
|
|
Deferred tax assets
|
|
|
78
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,085,771
|
|
|
$
|
791,166
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
7,504
|
|
|
$
|
2,367
|
|
Current portion of capital lease
obligations
|
|
|
584
|
|
|
|
542
|
|
Accounts payable
|
|
|
46,342
|
|
|
|
42,155
|
|
Accrued expenses and other current
liabilities
|
|
|
87,801
|
|
|
|
64,746
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
142,231
|
|
|
|
109,810
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current
portion
|
|
|
194,473
|
|
|
|
258,617
|
|
Capital lease obligations, net of
current portion
|
|
|
415
|
|
|
|
978
|
|
Deferred tax liabilities
|
|
|
23,984
|
|
|
|
18,881
|
|
Other long-term liabilities
|
|
|
10,530
|
|
|
|
5,572
|
|
|
|
|
|
|
|
|
|
|
Total long-term
liabilities
|
|
|
229,402
|
|
|
|
284,048
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Notes 7, 8 and
10)
|
|
|
|
|
|
|
|
|
Series A redeemable
convertible preferred stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
Authorized: 2,667 shares
|
|
|
|
|
|
|
|
|
Issued: 2,527 shares at
December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
Outstanding: none at
December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value
|
|
|
|
|
|
|
|
|
Authorized: 2,333 shares
|
|
|
|
|
|
|
|
|
Issued: none
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
|
|
|
|
|
|
|
|
|
Authorized: 100,000 shares
|
|
|
|
|
|
|
|
|
Issued and outstanding:
39,215 shares at December 31, 2006 and
27,497 shares at December 31, 2005
|
|
|
39
|
|
|
|
27
|
|
Additional paid-in capital
|
|
|
826,987
|
|
|
|
515,147
|
|
Notes receivable from stockholders
|
|
|
|
|
|
|
(14,691
|
)
|
Accumulated deficit
|
|
|
(127,069
|
)
|
|
|
(110,227
|
)
|
Accumulated other comprehensive
income
|
|
|
14,181
|
|
|
|
7,052
|
|
|
|
|
|
|
|
|
|
|
Total stockholders
equity
|
|
|
714,138
|
|
|
|
397,308
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,085,771
|
|
|
$
|
791,166
|
|
|
|
|
|
|
|
|
|
|
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 INCOME
(LOSS)
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Notes
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.001
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid-in
|
|
|
from
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Income (Loss)
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2003
|
|
|
19,640
|
|
|
$
|
20
|
|
|
$
|
341,704
|
|
|
$
|
(14,691
|
)
|
|
$
|
(73,673
|
)
|
|
$
|
11,813
|
|
|
$
|
265,173
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in
connection with acquisitions, net of issuance costs of $88
|
|
|
156
|
|
|
|
|
|
|
|
2,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,914
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options
and warrants and shares issued under employee stock purchase plan
|
|
|
153
|
|
|
|
|
|
|
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,998
|
|
|
|
|
|
|
|
|
|
Conversion of series A
redeemable convertible preferred stock to common stock
(Note 14(b))
|
|
|
416
|
|
|
|
1
|
|
|
|
6,933
|
|
|
|
|
|
|
|
(739
|
)
|
|
|
|
|
|
|
6,195
|
|
|
|
|
|
|
|
|
|
Redemption interest related to
series A redeemable convertible preferred stock
(Note 14(b))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
Conversion of convertible
subordinated promissory notes to common stock (Note 6(d))
|
|
|
346
|
|
|
|
|
|
|
|
6,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,034
|
|
|
|
|
|
|
|
|
|
Other (Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
33
|
|
|
$
|
33
|
|
|
|
|
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434
|
|
|
|
434
|
|
|
|
434
|
|
|
|
|
|
Changes in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,241
|
|
|
|
5,241
|
|
|
|
5,241
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,596
|
)
|
|
|
|
|
|
|
(16,596
|
)
|
|
|
(16,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2004
|
|
|
20,711
|
|
|
$
|
21
|
|
|
$
|
359,583
|
|
|
$
|
(14,691
|
)
|
|
$
|
(91,018
|
)
|
|
$
|
17,521
|
|
|
$
|
271,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 INCOME (LOSS)
(Continued)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Notes
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.001
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid-in
|
|
|
From
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Loss
|
|
|
BALANCE, DECEMBER 31, 2004
|
|
|
20,711
|
|
|
$
|
21
|
|
|
$
|
359,583
|
|
|
$
|
(14,691
|
)
|
|
$
|
(91,018
|
)
|
|
$
|
17,521
|
|
|
$
|
271,416
|
|
|
|
|
|
Issuance of common stock in
connection with acquisitions and equity offering, net of
issuance costs of $2,481
|
|
|
6,391
|
|
|
|
6
|
|
|
|
150,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,216
|
|
|
|
|
|
Exercise of common stock options
and warrants and shares issued under employee stock purchase plan
|
|
|
395
|
|
|
|
|
|
|
|
5,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,185
|
|
|
|
|
|
Stock-based compensation related to
grants of common stock options
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
Changes in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,300
|
)
|
|
|
(10,300
|
)
|
|
$
|
(10,300
|
)
|
Reclassification of gain related to
sale of available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(169
|
)
|
|
|
(169
|
)
|
|
|
(169
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,209
|
)
|
|
|
|
|
|
|
(19,209
|
)
|
|
|
(19,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(29,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2005
|
|
|
27,497
|
|
|
$
|
27
|
|
|
$
|
515,147
|
|
|
$
|
(14,691
|
)
|
|
$
|
(110,227
|
)
|
|
$
|
7,052
|
|
|
$
|
397,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 INCOME (LOSS)
(Continued)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Notes
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.001
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid-in
|
|
|
From
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Income (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
|
|
|
|
|
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,738
|
)
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-7
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,842
|
)
|
|
$
|
(19,209
|
)
|
|
$
|
(16,596
|
)
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense related to
amortization and write-off of non-cash original issue discount,
non-cash
beneficial conversion feature and deferred financing costs
|
|
|
4,158
|
|
|
|
2,345
|
|
|
|
4,929
|
|
Non-cash loss (income) related to
currency hedge and interest rate swap agreements
|
|
|
(217
|
)
|
|
|
217
|
|
|
|
(695
|
)
|
Non-cash stock-based compensation
expense
|
|
|
5,455
|
|
|
|
169
|
|
|
|
|
|
Charge for in-process research and
development
|
|
|
4,960
|
|
|
|
|
|
|
|
|
|
Non-cash value on settlement of
litigation
|
|
|
|
|
|
|
(2,593
|
)
|
|
|
(495
|
)
|
Impairment of long-lived assets
|
|
|
9,573
|
|
|
|
1,740
|
|
|
|
|
|
(Gain) loss on sale of fixed assets
|
|
|
(1,528
|
)
|
|
|
263
|
|
|
|
|
|
Interest in minority investments
|
|
|
(635
|
)
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
39,362
|
|
|
|
27,756
|
|
|
|
23,500
|
|
Deferred income taxes
|
|
|
(409
|
)
|
|
|
5,969
|
|
|
|
2,232
|
|
Other non-cash items
|
|
|
714
|
|
|
|
141
|
|
|
|
(36
|
)
|
Changes in assets and liabilities,
net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(13,846
|
)
|
|
|
10,404
|
|
|
|
(4,095
|
)
|
Inventories, net
|
|
|
167
|
|
|
|
(4,047
|
)
|
|
|
(11,073
|
)
|
Prepaid expenses and other current
assets
|
|
|
(86
|
)
|
|
|
(7,598
|
)
|
|
|
2,116
|
|
Accounts payable
|
|
|
210
|
|
|
|
6,201
|
|
|
|
(6,897
|
)
|
Accrued expenses and other current
liabilities
|
|
|
3,294
|
|
|
|
4,496
|
|
|
|
15,049
|
|
Other non-current liabilities
|
|
|
(60
|
)
|
|
|
339
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
34,270
|
|
|
|
26,593
|
|
|
|
8,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(19,717
|
)
|
|
|
(20,233
|
)
|
|
|
(20,389
|
)
|
Proceeds from sale of property,
plant and equipment
|
|
|
2,244
|
|
|
|
241
|
|
|
|
385
|
|
Cash paid for purchase of Ischemia
Technologies, Inc., net of cash acquired
|
|
|
(99
|
)
|
|
|
(4,096
|
)
|
|
|
|
|
Cash paid for purchase of Binax,
Inc., net of cash acquired
|
|
|
|
|
|
|
(7,972
|
)
|
|
|
|
|
Cash paid for purchase of the
Determine business
|
|
|
|
|
|
|
(58,102
|
)
|
|
|
|
|
Cash paid for purchase of Thermo
BioStar, Inc.
|
|
|
|
|
|
|
(53,607
|
)
|
|
|
|
|
Cash paid for purchase of
Innogenetics Diagnostica Y Terapeutica, S.A.U, net of cash
acquired
|
|
|
(237
|
)
|
|
|
(20,030
|
)
|
|
|
|
|
Cash paid for purchase of CLONDIAG
chip technologies Gmbh, net of cash acquired
|
|
|
(17,576
|
)
|
|
|
|
|
|
|
|
|
Cash paid for purchase of ABON
BioPharm (Hangzhou) Co. Ltd. and ACON Laboratories, net of cash
acquired
|
|
|
(112,643
|
)
|
|
|
|
|
|
|
|
|
Cash paid for purchase of other
businesses and intellectual property
|
|
|
(910
|
)
|
|
|
(5,175
|
)
|
|
|
(12,409
|
)
|
Cash paid for investments in
minority interests and
available-for-sale
securities
|
|
|
(25,817
|
)
|
|
|
|
|
|
|
|
|
Decrease in other assets
|
|
|
(4,077
|
)
|
|
|
(1,787
|
)
|
|
|
(1,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(178,832
|
)
|
|
|
(170,761
|
)
|
|
|
(34,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for financing costs
|
|
|
(2,787
|
)
|
|
|
(2,873
|
)
|
|
|
(5,671
|
)
|
Proceeds from issuance of common
stock, net of issuance costs
|
|
|
234,961
|
|
|
|
97,440
|
|
|
|
1,905
|
|
Net (payments) proceeds under
revolving line of credit
|
|
|
(47,879
|
)
|
|
|
69,442
|
|
|
|
(30,830
|
)
|
Stock-based compensation excess tax
benefit
|
|
|
567
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of senior
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Proceeds from borrowings under
notes payable
|
|
|
|
|
|
|
269
|
|
|
|
|
|
Repayments of notes payable
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
(97,830
|
)
|
Repayments of notes receivable
|
|
|
14,691
|
|
|
|
|
|
|
|
|
|
Principal payments of capital lease
obligations
|
|
|
(546
|
)
|
|
|
(501
|
)
|
|
|
(477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
179,007
|
|
|
|
163,777
|
|
|
|
17,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on cash and
cash equivalents
|
|
|
2,389
|
|
|
|
(2,095
|
)
|
|
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
36,834
|
|
|
|
17,514
|
|
|
|
(7,866
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
34,270
|
|
|
|
16,756
|
|
|
|
24,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of year
|
|
$
|
71,104
|
|
|
$
|
34,270
|
|
|
$
|
16,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash
Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
22,686
|
|
|
$
|
19,268
|
|
|
$
|
13,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
8,841
|
|
|
$
|
4,106
|
|
|
$
|
3,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Supplemental Disclosure of
Non-cash Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 15, 2006, we acquired
ABON BioPharm (Hangzhou) Co. Ltd. and ACON Laboratories
(Note 4(a))
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
11,328
|
|
|
$
|
|
|
|
$
|
|
|
Inventories
|
|
|
4,814
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
10,274
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
160,116
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
(4,081
|
)
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
(18,125
|
)
|
|
|
|
|
|
|
|
|
Cash paid for purchase of ABON
BioPharm (Hangzhou) Co. Ltd. and ACON Laboratories, net of cash
acquired
|
|
|
(112,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued
|
|
$
|
53,052
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 28, 2006, we
acquired CLONDIAG chip technologies Gmbh (Note 4(a))
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
295
|
|
|
$
|
|
|
|
$
|
|
|
Inventories
|
|
|
90
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
556
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
22,901
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
(1,581
|
)
|
|
|
|
|
|
|
|
|
Cash paid for purchase of CLONDIAG
chip technologies Gmbh, net of cash acquired
|
|
|
(17,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued
|
|
$
|
6,475
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 30, 2005, we
acquired Thermo BioStar, Inc. (Note 4(b))
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
|
|
|
$
|
5,247
|
|
|
$
|
|
|
Inventories
|
|
|
|
|
|
|
2,046
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
1,510
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
795
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
49,083
|
|
|
|
|
|
Accrued exit costs
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
|
|
|
|
(4,991
|
)
|
|
|
|
|
Cash paid for purchase of Thermo
BioStar, Inc.
|
|
|
|
|
|
|
(53,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 30, 2005, we
acquired Innogenetics Diagnostica Y Terapeutica, S.A.U.
(Note 4(b))
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
|
|
|
$
|
10,913
|
|
|
$
|
|
|
Inventories
|
|
|
|
|
|
|
520
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
771
|
|
|
|
|
|
Prepaid expenses and Other assets
|
|
|
|
|
|
|
188
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
12,062
|
|
|
|
|
|
Accrued acquisition costs
|
|
|
237
|
|
|
|
(210
|
)
|
|
|
|
|
Accounts payable and Accrued
expenses
|
|
|
|
|
|
|
(3,164
|
)
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
(1,050
|
)
|
|
|
|
|
Cash paid for purchase of
Innogenetics Diagnostica Y Terapeutica, S.A.U., net of acquired
cash
|
|
$
|
(237
|
)
|
|
|
(20,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 30, 2005, we acquired
the Determine business from Abbott Laboratories
(Note 4(b))
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
|
|
|
$
|
3,412
|
|
|
$
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
56,913
|
|
|
|
|
|
Accounts payable and Accrued
expenses
|
|
|
|
|
|
|
(3,723
|
)
|
|
|
|
|
Cash paid for purchase of the
Determine business
|
|
|
|
|
|
|
(58,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
On March 31, 2005, we acquired
Binax, Inc. (Note 4(b))
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
|
|
|
$
|
5,264
|
|
|
$
|
|
|
Inventories
|
|
|
|
|
|
|
3,086
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
2,421
|
|
|
|
|
|
Prepaid expenses and Other assets
|
|
|
|
|
|
|
688
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
35,596
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
|
|
|
|
(2,076
|
)
|
|
|
|
|
Deferred tax liability, net
|
|
|
|
|
|
|
(1,794
|
)
|
|
|
|
|
Cash paid for purchase of Binax,
Inc., net of cash acquired
|
|
|
|
|
|
|
(7,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued
|
|
$
|
|
|
|
$
|
35,213
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 16, 2005, we acquired
Ischemia Technologies, Inc. (Note 4(b))
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
|
|
|
$
|
58
|
|
|
$
|
|
|
Inventories
|
|
|
|
|
|
|
40
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
288
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
26,932
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
99
|
|
|
|
|
|
Assumed liabilities
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
Accrued acquisition costs
|
|
|
99
|
|
|
|
(144
|
)
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
|
|
|
|
(377
|
)
|
|
|
|
|
Cash paid for purchase of Ischemia
Technologies, Inc., net of cash acquired
|
|
|
(99
|
)
|
|
|
(4,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued
|
|
$
|
|
|
|
$
|
22,750
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2006, 2005, 2004, 2003 and
2002, we acquired other businesses and
intellectual property
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
496
|
|
Inventories
|
|
|
455
|
|
|
|
|
|
|
|
875
|
|
Property, plant and equipment
|
|
|
3
|
|
|
|
|
|
|
|
(903
|
)
|
Intangible assets
|
|
|
346
|
|
|
|
4,971
|
|
|
|
14,493
|
|
Prepaid expenses and other assets
|
|
|
|
|
|
|
|
|
|
|
170
|
|
Accounts payable and accrued
expenses
|
|
|
(3
|
)
|
|
|
|
|
|
|
(2,827
|
)
|
Accrued acquisition costs
|
|
|
109
|
|
|
|
204
|
|
|
|
3,553
|
|
Net deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
(446
|
)
|
Cash paid for purchase of other
businesses and intellectual property
|
|
|
(910
|
)
|
|
|
(5,175
|
)
|
|
|
(12,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends, interest and
amortization of beneficial conversion feature related to
preferred stock (Notes 13 and 14(b))
|
|
$
|
|
|
|
$
|
|
|
|
$
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to
common stock (Note 14(b))
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of subordinated notes to
common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(1) Description
of Business and Basis of Presentation
Inverness Medical Innovations, Inc. and subsidiaries develop,
manufacture and market in vitro diagnostic products for the
over-the-counter
pregnancy and fertility/ovulation test market and the
professional rapid diagnostic test market worldwide. 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 three primary operating segments:
(i) consumer diagnostic products, (ii) vitamins and
nutritional supplements, and (iii) professional diagnostic
products. The consumer diagnostic products segment includes our
over-the-counter
pregnancy and fertility/ovulation tests. The vitamins and
nutritional supplements segment includes branded and private
label vitamins and nutritional supplements that are sold
over-the-counter.
The professional diagnostic products segment includes an array
of innovative rapid diagnostic test products and other
in vitro diagnostic tests marketed to medical professionals
and laboratories for detection of infectious diseases, drugs of
abuse and pregnancy.
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).
In December 2006, we signed a definitive agreement with The
Procter & Gamble Company (P&G) to form
a 50/50 joint venture for the development, acquisition,
manufacturing, marketing and sale of existing and
to-be-developed consumer diagnostic products outside of the
fields of cardiology and diabetes. Following the completion of
the transaction, we will contribute our related consumer
diagnostic and monitoring assets, other than manufacturing and
core intellectual property assets, to a new joint venture
entity, and P&G will acquire its interest in the joint
venture in consideration for a cash payment of
$325.0 million. P&G will retain an option to require us
to purchase its interest in the venture back at fair market
value during the 60-day period beginning on the fourth
anniversary of the closing. Our primary role in the
collaboration will be to develop and manufacture consumer
diagnostic products while P&Gs primary role will be to
market, sell, and distribute existing and to-be-developed
products. We will retain all rights with respect to the
development and sale of cardiology diagnostic products and its
professional
point-of-care
diagnostic businesses.
Following the completion of the transaction and the formation of
the joint venture, we will cease to consolidate the operating
results of our consumer diagnostics business, which represented
$171.6 million of net product revenue in 2006, and instead
will account for our 50% interest in the results of the joint
venture under the equity method. In our capacity as the
manufacturer of products for the joint venture, we will supply
product to the joint venture and will record revenue on those
sales. No gain on the proceeds that we receive 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 at market value
expires after the fourth anniversary of the closing.
The transaction is expected to close in the first half of 2007,
subject to the satisfaction of customary closing and other
conditions, such as that there be no material adverse change in
our consumer diagnostics business, that the transaction be
permitted under the indenture governing our senior subordinated
notes or that we repay all of our outstanding senior
subordinated notes and that we receive favorable tax rulings
from the Swiss tax authorities, the receipt of regulatory
approvals, and obtaining certain third-party consents to the
F-11
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Description of Business and Basis of Presentation
(Continued)
transaction. There can be no assurance that all of these
conditions will be satisfied. If these conditions are not
satisfied or waived, we may be unable to complete the joint
venture.
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.
(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 and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from such estimates.
(b) Foreign
Currencies
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 14).
The income and expense accounts of our foreign subsidiaries are
translated using the average rates of exchange during each
reporting period. Net realized and unrealized foreign currency
exchange transaction gains of $2.6 million during 2006, and
losses of $0.3 million and $0.7 million during 2005
and 2004, respectively, are included as a component of other
income, 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, 2006 and 2005.
(d) 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 costs 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.
F-12
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Summary of Significant Accounting Policies
(Continued)
(e) 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
tooling3-11 years,
buildings20-39 years,
leasehold improvementslesser of remaining term of lease or
estimated useful life of asset, computer software and
equipment3-5 years and furniture and
fixtures3-15 years.
Land is not depreciated. Depreciation expense related to
property, plant and equipment amounted to $17.6 million,
$14.9 million and $13.1 million in 2006, 2005 and
2004, respectively. Expenditures for repairs and maintenance are
expensed as incurred.
(f) Investment
in
Available-for-sale
Securities
Available-for-sale
securities include publicly-traded equity investments which are
classified as
available-for-sale
and recorded at fair value using the specific identification
method. Unrealized gains and losses (except for other than
temporary impairments) are recorded in other comprehensive
income (loss), which is reported as a component of
stockholders equity. We evaluate our investments on a
quarterly basis to determine if a potential other than temporary
impairment exists. Our evaluation considers the investees
specific business conditions, as well as general industry and
market conditions.
(g) Goodwill
We review the valuation of goodwill in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. Under the provisions of SFAS No. 142,
goodwill is required to be tested for impairment annually, in
lieu of being amortized, using a fair value approach at the
reporting unit level. Furthermore, goodwill is required to be
tested for impairment 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
exceeds its implied fair value. Impairment losses shall be
recognized in operations. Our valuation methodology for
assessing impairment 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, 2006 did not indicate that goodwill related
to our consumer diagnostic products or to our professional
diagnostic products reporting units was impaired.
(h) Impairment
of Other Long-Lived Tangible and Intangible Assets
We examine, in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, on a periodic basis the carrying value of our
long-lived tangible and intangible assets to determine whether
there are any impairment losses. If indicators of impairment
were present with respect to long-lived tangible and intangible
assets used in operations and undiscounted future cash flows
were not expected to be sufficient to recover the assets
carrying amount, an impairment loss would be charged to expense
in the period the impairment is identified based on the fair
value of the asset. We believe that the carrying values of our
other long-lived tangible and intangible assets were realizable
as of December 31, 2006.
(i) Business
Acquisitions
We account for our acquisitions using the purchase method of
accounting as defined under SFAS No. 141, Business
Combinations. Accordingly, the operating results of the
acquired company is included in our consolidated financial
statements of operations after the acquisition date as part of
reporting unit it relates to. Accounting for these acquisitions
has resulted in the capitalization of the cost in excess of fair
value of the net assets acquired in each of these acquisitions
as goodwill. We estimated the fair values of the assets acquired
in each acquisition as of the date of acquisition and these
estimates are subject to adjustment. We complete these
F-13
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Summary of Significant Accounting Policies
(Continued)
assessments within one year of the date of acquisition. 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. The estimated cost of these restructuring activities
are included as costs of the acquisition and are recorded as
additional purchase price consistent with the guidance of
Emerging Issue Task Force (EITF) Issue
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination. Any common stock issued with our
acquisitions is determined based on the average market price of
our common stock pursuant to Issue
No. 99-12,
Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business
Combination.
(j) 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
carry-forwards, to the extent that the realization of such
benefits is more likely than not. To the extent that it is not
likely that we will realize such benefits, we must establish a
valuation allowance against the related deferred tax assets
(Note 17).
(k) Revenue
Recognition
The majority of our revenues is derived from product sales. We
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. We recognize revenue
upon title transfer of the products to third-party customers,
less a reserve for estimated product returns and allowances.
Certain sale arrangements require us to accept product returns.
When a right of return exists, we record revenue when the right
of return is no longer applicable or is estimable. In connection
with the acquisitions of the Abbott rapid diagnostic business in
September 2003 and the Determine/Daina Screen assets (the
Determine business) in June 2005 (Note 4(b)) from
Abbott Laboratories, we entered into a transition services
agreement with Abbott, whereby Abbott would continue to
distribute certain of the acquired products sold for a period of
up to 18 months following each acquisition. During the
transition period, which ended in 2006, we recognized revenue on
sales of the products when title transferred from Abbott to
third-party customers.
Deferred revenue is recorded when payments are received in
advance of performing our service obligations and is recognized
ratably over the service period. Amounts related to deferred
revenue are included in Accrued expenses and other current
liabilities on our consolidated balance sheet.
To a lesser extent, 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 are calculated
based on the licensees sales 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.
(l) 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. Prior
to January 1, 2006, we accounted for stock options
according to the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, and
therefore no related compensation expense was recorded
F-14
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Summary of Significant Accounting Policies
(Continued)
for awards granted with no intrinsic value. 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 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.
For stock options granted prior to the adoption of
SFAS No. 123-R,
if expense for stock-based compensation had been determined
under the fair value method of the original SFAS 123 for
the year ended December 31, 2005 and 2004, our net loss per
common share would have been adjusted to the following
pro forma amounts:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands,
|
|
|
|
except for per share data)
|
|
|
Net lossas reported
|
|
$
|
(19,209
|
)
|
|
$
|
(16,596
|
)
|
Stock-based employee
compensationas reported
|
|
|
139
|
|
|
|
|
|
Pro forma stock-based employee
compensation
|
|
|
(6,366
|
)
|
|
|
(5,675
|
)
|
|
|
|
|
|
|
|
|
|
Net losspro forma
|
|
$
|
(25,436
|
)
|
|
$
|
(22,271
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common
sharebasic
|
|
|
|
|
|
|
|
|
Net lossas reported
|
|
$
|
(0.79
|
)
|
|
$
|
(0.87
|
)
|
Stock-based employee
compensationas reported
|
|
|
0.01
|
|
|
|
|
|
Pro forma stock-based employee
compensation
|
|
|
(0.26
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common sharepro
forma
|
|
$
|
(1.04
|
)
|
|
$
|
(1.15
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common
sharediluted
|
|
|
|
|
|
|
|
|
Net lossas reported
|
|
$
|
(0.79
|
)
|
|
$
|
(0.87
|
)
|
Stock-based employee
compensationas reported
|
|
|
0.01
|
|
|
|
|
|
Pro forma stock-based employee
compensation
|
|
|
(0.26
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common sharepro
forma
|
|
$
|
(1.04
|
)
|
|
$
|
(1.15
|
)
|
|
|
|
|
|
|
|
|
|
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
typically 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 the Black-Scholes
option-pricing method. We use historical data to estimate the
expected price volatility and the expected forfeiture rate. For
the year ended December 31, 2006, we have chosen to employ
the simplified method of calculating the expected option term,
which averages an awards weighted average vesting period
and its contractual term. 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.
F-15
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Summary of Significant Accounting Policies
(Continued)
(m) 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 13).
(n) Other
Operating Expenses
We expense advertising costs as incurred. In 2006, 2005 and
2004, advertising costs amounted to $23.0 million,
$21.7 million and $19.9 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 sales 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.
(o) 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 ongoing credit evaluations of
our customers and maintain allowances for potential credit
losses.
There were no individual customer accounts receivable balances
outstanding at December 31, 2006 and 2005 that were in
excess of 10% of the gross accounts receivable balance on those
dates. During 2006, no customers represented greater than 10% of
our net revenues. During 2005 and 2004, we had one customer that
represented 10% and 11%, respectively, of our net revenues, and
purchased both our consumer diagnostic products and vitamins and
nutritional supplements.
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.
(p) Financial
Instruments and Fair Value of Financial Instruments
Our primary financial instruments at December 31, 2006 and
2005 consisted of cash equivalents, accounts receivable,
accounts payable and debt. The estimated fair value of these
financial instruments approximates their carrying values at
December 31, 2006 and 2005. The estimated fair values have
been determined through information obtained from market
sources. Additionally, our subsidiary in England enters into
short-term foreign currency exchange forward contracts from time
to time to minimize its exposure to foreign currency exchange
fluctuations because a substantial portion of its business is
transacted in currencies other than its functional currency. 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. At
December 31, 2006, we had no outstanding foreign currency
exchange forward contracts. Changes of $0.2 million in the
market value of these contracts during 2006 were recorded to
other income (expense), net in our consolidated statements of
operations.
F-16
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Summary of Significant Accounting Policies
(Continued)
(q) Recent
Accounting Pronouncements
Recently
Issued Standards
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments, which amends
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS No. 155
simplifies the accounting for certain derivatives embedded in
other financial instruments by allowing them to be accounted for
as a whole if the holder elects to account for the whole
instrument on a fair value basis. SFAS No. 155 also
clarifies and amends certain other provisions of
SFAS No. 133 and SFAS No. 140.
SFAS No. 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement event
occurring in fiscal years beginning after September 15,
2006. Earlier adoption is permitted, provided we have not yet
issued financial statements, including for interim periods, for
that fiscal year. We do not expect the adoption of
SFAS No. 155 to have a material impact on our
financial position, results of operations or cash flows.
In June 2006, the FASB ratified the consensus on EITF Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement. The scope of EITF Issue
No. 06-03
includes any tax assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but is not limited to,
sales, use, value added, Universal Service Fund
(USF) contributions and some excise taxes. The Task
Force affirmed its conclusion that entities should present these
taxes in the income statement on either a gross or a net basis,
based on their accounting policy, which should be disclosed
pursuant to APB Opinion No. 22, Disclosure of Accounting
Policies. If such taxes are significant, and are presented
on a gross basis, the amounts of those taxes should be
disclosed. The consensus on Issue
No. 06-03
will be effective for interim and annual reporting periods
beginning after December 15, 2006. We are currently
evaluating the impact of EITF
No. 06-03.
Should we need to change the manner in which we record gross
receipts, it is not expected that the change would have a
material impact on total operating revenue and expenses and
operating income and net income would not be affected.
In June 2006, the FASB issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
TaxesAn Interpretation of FASB Statement No. 109,
which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006 and we will
be adopting the provisions of FIN 48 beginning with the
first quarter of 2007. We continue to evaluate the impact that
the adoption of FIN 48 will have, if any, on our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. 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. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. Earlier application is encouraged. We
continue to evaluate the impact that the adoption of
SFAS No. 157 will have, if any, on our consolidated
financial statements.
In December 2006, the FASB issued FASB Staff Position
(FSP) No. EITF
00-19-2,
Accounting for Registration Payment Arrangements. This
FSP specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as
F-17
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Summary of Significant Accounting Policies
(Continued)
separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized
and measured in accordance with FASB Statement No. 5,
Accounting for Contingencies. The guidance in
this FSP amends FASB Statement No. 133, Accounting for
Derivative Financial Instruments and Hedging Activities, and
No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity and
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others to include scope exceptions for
registration payment arrangements. This FSP is effective
immediately for registration payment arrangements and the
financial instruments subject to those arrangements that are
entered into or modified subsequent to the date of issuance of
this FSP. For registration payment arrangements and financial
instruments subject to those arrangements that were entered into
prior to the issuance of this FSP, this guidance shall be
effective for financial statements issued for fiscal years
beginning after December 15, 2006, and interim periods
within those fiscal years. We do not believe the adoption of
EITF 00-19-2
will have a material impact on our consolidated financial
statements.
Recently
Adopted Standards
In November 2004, the FASB issued SFAS No. 151,
Inventory CostsAn Amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage). In
addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on
normal capacity of production facilities. As required by
SFAS No. 151, we adopted this new accounting standard
on January 1, 2006. The adoption of SFAS No. 151
did not have a material impact on our financial position,
results of operations or cash flows.
In December 2004, the FASB issued
SFAS No. 123-R,
Share-Based Payment, which addresses the accounting for
transactions in which a company receives employee services in
exchange for (a) equity instruments of the company or
(b) liabilities that are based on the fair value of the
companys equity instruments or that may be settled by the
issuance of such equity instruments. As required by
SFAS No. 123-R
and the Securities and Exchange Commission (SEC), we
adopted
SFAS No. 123-R
on January 1, 2006 (Note 15).
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error CorrectionsA Replacement
of APB Opinion No. 20 and FASB Statement No. 3,
which replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. The statement
requires a voluntary change in accounting principle be applied
retrospectively to all prior period financial statements so that
those financial statements are presented as if the current
accounting principle had always been applied. APB Opinion
No. 20 previously required most voluntary changes in
accounting principle to be recognized by including in net income
of the period of change the cumulative effect of changing to the
new accounting principle. In addition, SFAS No. 154
carries forward, without change, the guidance contained in APB
Opinion No. 20 for reporting a correction of an error in
previously issued financial statements and a change in
accounting estimate. SFAS No. 154 was effective for
accounting changes and corrections of errors made after
January 1, 2006. The adoption of SFAS No. 154 had
no impact on our financial statements.
In September 2006, the SEC issued SAB No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
to provide guidance on the consideration of the effects of
prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. Under
SAB No. 108, companies should evaluate a misstatement
based on its impact on the current year income statement, as
well as the cumulative effect of correcting such misstatements
that existed in prior years existing in the current years
ending balance sheet. SAB No. 108 is effective for
fiscal years ending after November 15, 2006. The adoption
of SAB No. 108 did not have a material impact on our
financial position, results of operations or cash flows.
F-18
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Summary of Significant Accounting Policies
(Continued)
Effective December 31, 2006, we adopted the recognition
provisions of SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
PlansAn Amendment of FASB Statements No. 87, 88, 106,
and 132(R). This Statement requires employers to recognize
in their balance sheets the overfunded or underfunded status of
defined benefit postretirement plans, measured as the difference
between the fair value of plan assets and the benefit obligation
(the projected benefit obligation for pension plans and the
accumulated postretirement benefit obligation for other
post-retirement plans). Employers must recognize the change in
the funded status of the plan in the year in which the change
occurs through other comprehensive income. This Statement also
requires plan assets and obligations to be measured as of the
employers balance sheet date. The measurement provision of
this Statement will be effective for years beginning after
December 15, 2008, with early application encouraged. We
have not yet adopted the measurement provisions of this
Statement and are in the process of determining the impact of
the adoption on our consolidated financial statements.
Prior to the adoption of the recognition provisions of
SFAS No. 158, we accounted for our defined benefit
post-retirement plans under SFAS No. 87,
Employers Accounting for Pensions.
SFAS No. 87 required that a liability (minimum pension
liability) be recorded when the accumulated benefit obligation
liability exceeded the fair value of plan assets. Any adjustment
is recorded as a non-cash charge to accumulated other
comprehensive income in stockholders equity. Under
SFAS No. 87, changes in the funded status were not
immediately recognized, rather they were deferred and recognized
ratably over future periods. Upon adoption of the recognition
provisions of SFAS No. 158, we recognized the amounts
of prior changes in the funded status of our postretirement
benefit plans through accumulated other comprehensive income. As
a result, we recognized the following adjustments in individual
line items of our consolidated balance sheet as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
Prior to
|
|
|
Effect of
|
|
|
Reported at
|
|
|
|
Application of
|
|
|
Adopting
|
|
|
December 31,
|
|
|
|
SFAS No. 158
|
|
|
SFAS No. 158
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Deferred tax asset, current portion
|
|
$
|
4,435
|
|
|
$
|
897
|
|
|
$
|
5,332
|
|
Deferred tax asset, long-term
|
|
$
|
(29
|
)
|
|
$
|
107
|
|
|
$
|
78
|
|
Other long-term liabilities
|
|
$
|
6,043
|
|
|
$
|
4,487
|
|
|
$
|
10,530
|
|
Accumulated other comprehensive
income
|
|
$
|
17,919
|
|
|
$
|
(3,738
|
)
|
|
$
|
14,181
|
|
The adoption of SFAS No. 158 had no effect on our
consolidated statement of operations for the year ended
December 31, 2006, or for any prior period presented.
As of December 31, 2006, included in accumulated other
comprehensive income was unrecognized prior service costs of
$6.8 million and unrecognized actuarial gain of
$2.3 million. The estimated prior service cost and
actuarial loss that will be recognized in net periodic
postretirement benefit obligation expense during 2007 is
$0 million and $0.1 million, respectively.
F-19
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:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
29,372
|
|
|
$
|
25,488
|
|
Work-in-process
|
|
|
19,080
|
|
|
|
17,812
|
|
Finished goods
|
|
|
29,870
|
|
|
|
27,909
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,322
|
|
|
$
|
71,209
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net:
|
|
|
|
|
|
|
|
|
Machinery, laboratory equipment
and tooling
|
|
$
|
81,198
|
|
|
$
|
78,559
|
|
Land and buildings
|
|
|
18,582
|
|
|
|
8,942
|
|
Leasehold improvements
|
|
|
20,870
|
|
|
|
18,980
|
|
Computer software and equipment
|
|
|
11,063
|
|
|
|
8,811
|
|
Furniture and fixtures
|
|
|
4,515
|
|
|
|
3,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,228
|
|
|
|
119,274
|
|
Less: Accumulated depreciation and
amortization
|
|
|
(53,916
|
)
|
|
|
(47,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,312
|
|
|
$
|
72,211
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other
current liabilities:
|
|
|
|
|
|
|
|
|
Compensation and
compensation-related
|
|
$
|
13,395
|
|
|
$
|
8,959
|
|
Advertising and marketing
|
|
|
9,743
|
|
|
|
6,608
|
|
Professional fees
|
|
|
5,291
|
|
|
|
5,649
|
|
Interest payable
|
|
|
6,234
|
|
|
|
6,002
|
|
Royalty obligations
|
|
|
4,923
|
|
|
|
4,001
|
|
Deferred revenue
|
|
|
6,685
|
|
|
|
5,981
|
|
Taxes payable
|
|
|
8,864
|
|
|
|
6,023
|
|
Acquisition related obligations
|
|
|
17,655
|
|
|
|
2,200
|
|
Other
|
|
|
15,011
|
|
|
|
19,323
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,801
|
|
|
$
|
64,746
|
|
|
|
|
|
|
|
|
|
|
(4) Business
Combinations
(a) Significant
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 (the Innovacon business). The
preliminary aggregate purchase price was approximately
$93.9 million which consisted of $55.1 million in
cash, 711,676 shares of our common stock with an aggregate
fair value of $19.7 million, $9.1 million in estimated
F-20
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
direct acquisition costs and an additional liability of
$10.0 million payable to the sellers on the deferred
payment date, 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 (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 417,446 shares
of our 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.
Subsequent, between August and November 2006, we made cash
payments totaling $44.0 million and issued 742,128 shares
of our 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 $184.1 million.
The aggregate purchase price for the Innovacon business,
including the ABON facility discussed above, was allocated to
the assets acquired and liabilities assumed at the date of
acquisition as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Cash
|
|
$
|
8,403
|
|
Accounts receivable
|
|
|
11,328
|
|
Inventories
|
|
|
4,814
|
|
Property, plant and equipment, net
|
|
|
10,274
|
|
Goodwill
|
|
|
112,116
|
|
Trademarks
|
|
|
800
|
|
Customer relationships
|
|
|
27,700
|
|
Supply agreements
|
|
|
3,300
|
|
Core technology
|
|
|
16,200
|
|
Other assets
|
|
|
1,369
|
|
Accounts payable and accrued
expenses
|
|
|
(4,081
|
)
|
Long-term debt
|
|
|
(8,125
|
)
|
|
|
|
|
|
|
|
$
|
184,098
|
|
|
|
|
|
|
Goodwill generated from this acquisition is not deductible for
tax purposes. We estimate the useful lives of the trademarks,
customer relationships, supply agreements and product technology
to be 10 years, 16.8 years and 17.8 years,
1.8 years and 7 years, respectively, and have included
them in core technology and patents, net, and other intangible
assets, net, respectively, in the accompanying consolidated
balance sheets. The weighted average amortization period for the
acquired intangible assets with finite lives is 12.7 years.
The operating results of the Innovacon business are included in
our consumer and professional diagnostic products reporting
units and business segments.
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
F-21
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
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 (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 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, 218,502 shares
of our 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 24,896 shares of
our 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, 2006, 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 provide for
$8.9 million of contingent consideration, consisting of
224,316 shares of our common stock and approximately
$3.0 million of cash or stock in the event that four
specified products are developed on Clondiags platform
technology during the three years following the acquisition
date. This contingent consideration will be accounted for as an
increase in the aggregate purchase price if and when the
contingency occurs.
The aggregate purchase price was allocated to the assets
acquired and liabilities assumed at the date of acquisition as
follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
270
|
|
Accounts receivable
|
|
|
295
|
|
Inventories
|
|
|
90
|
|
Prepaid expenses and other current
assets
|
|
|
536
|
|
Property, plant and equipment
|
|
|
1,790
|
|
Goodwill
|
|
|
6,631
|
|
Patents
|
|
|
11,310
|
|
In-process research and development
|
|
|
4,960
|
|
Other assets
|
|
|
20
|
|
Accounts payable and accrued
expenses
|
|
|
(1,517
|
)
|
|
|
|
|
|
|
|
$
|
24,385
|
|
|
|
|
|
|
We estimate the useful lives of the acquired patents to be
20 years and have included them in core technology and
patents, net, in the accompanying consolidated balance sheet. We
have 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
F-22
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
December 31, 2006 was $5.0 million, and is included in
research and development expense in our consolidated statement
of operations.
The operating expenses of Clondiag, which consist principally of
research and development activities, have been included in our
corporate and other business segment. Goodwill generated from
this acquisition is not deductible for tax purposes.
(b) Significant
Acquisitions in 2005
(i) Acquisition
of BioStar
On September 30, 2005, we acquired Thermo BioStar, Inc.
(Biostar), a leading developer and manufacturer of
high-performance, rapid diagnostic tests, including tests for
the detection of infectious diseases. The aggregate purchase
price was $53.7 million, which consisted of
$53.1 million in cash, $0.5 million in estimated
direct acquisition costs and $0.1 million in estimated exit
costs.
The following is a summary of the allocation of the aggregate
purchase price to the assets acquired and the liabilities
assumed at the date of the acquisition:
|
|
|
|
|
|
|
(in thousands)
|
|
Accounts receivable
|
|
$
|
5,247
|
|
Inventories
|
|
|
1,911
|
|
Property, plant and equipment
|
|
|
1,695
|
|
Goodwill
|
|
|
30,836
|
|
Core technology
|
|
|
4,550
|
|
Customer relationships
|
|
|
6,760
|
|
Trade name
|
|
|
2,730
|
|
Trademarks
|
|
|
4,200
|
|
Other assets
|
|
|
745
|
|
Accounts payable and accrued
expenses
|
|
|
(5,023
|
)
|
|
|
|
|
|
|
|
$
|
53,651
|
|
|
|
|
|
|
Goodwill generated from this acquisition is fully deductible for
tax purposes over 15 years. The values allocated to the
acquired core technology, customer relationships and trade name
are being amortized on a straight-line basis over their
estimated useful lives of 10, 5 and 10 years,
respectively. The weighted average amortization period for the
acquired intangible assets with finite lives is 6.8 years.
The trademarks, core technology, customer relationships and
trade name are allocated respectively to other intangible assets
with indefinite lives, core technology and patents, net and
other intangible assets, net on the accompanying consolidated
balance sheet at December 31, 2005.
The operating results of BioStar have been included in our
professional diagnostic products reporting unit.
(ii) Acquisition
of IDT
On September 30, 2005, we acquired Innogenetics Diagnostica
Y Terapeutica, S.A.U (IDT), a Spanish distributor of
diagnostic products. The aggregate purchase price was
$20.3 million, which consisted of $11.7 million in
cash, an $8.4 million working capital adjustment, which was
paid during the fourth quarter of fiscal year 2005, and
$0.2 million in estimated direct acquisition costs.
F-23
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
The following is a summary of the allocation of the aggregate
purchase price to the assets acquired and the liabilities
assumed at the date of the acquisition:
|
|
|
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
76
|
|
Accounts receivable
|
|
|
10,913
|
|
Inventories
|
|
|
520
|
|
Property, plant and equipment
|
|
|
771
|
|
Goodwill
|
|
|
7,991
|
|
Customer relationships
|
|
|
4,100
|
|
Other assets
|
|
|
188
|
|
Accounts payable and accrued
expenses
|
|
|
(3,165
|
)
|
Deferred tax liability
|
|
|
(1,050
|
)
|
|
|
|
|
|
|
|
$
|
20,344
|
|
|
|
|
|
|
Goodwill generated from this acquisition is not deductible for
tax purposes. We estimate the useful lives of the customer
relationships to be 5 years and have included them in other
intangible assets, net in the accompanying consolidated balance
sheets.
The operating results of IDT have been included in our
professional diagnostic products reporting unit.
(iii) Acquisition
of the Determine Business
On June 30, 2005, we acquired the Determine business which
produces diagnostic tests that are designed to provide rapid
qualitative results for detecting several diseases, including
hepatitis, HIV 1/2 and syphilis. The aggregate purchase
price was $58.1 million, which consisted of
$56.5 million in cash and $1.6 million in estimated
direct acquisition costs.
The following is a summary of the allocation of the aggregate
purchase price to the assets acquired and liabilities assumed at
the date of the acquisition:
|
|
|
|
|
|
|
(in thousands)
|
|
Inventories
|
|
$
|
2,912
|
|
Property, plant and equipment
|
|
|
1,500
|
|
Goodwill
|
|
|
32,113
|
|
Customer relationships
|
|
|
12,000
|
|
Trademark
|
|
|
8,500
|
|
Manufacturing know-how
|
|
|
4,300
|
|
Core technology
|
|
|
500
|
|
Accrued expenses
|
|
|
(3,723
|
)
|
|
|
|
|
|
|
|
$
|
58,102
|
|
|
|
|
|
|
We have assigned indefinite lives to the trademark and product
technology. Goodwill resulting from this acquisition is
deductible for tax purposes over lives varying from 10 to
25 years, depending on the tax jurisdiction. We estimate
the useful lives of the manufacturing know-how to be ten years
and the customer relationships asset to be six years and
included them in other intangible assets, net, in the
accompanying
F-24
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
consolidated balance sheets. The weighted average amortization
period for the acquired intangible assets with finite lives is
7.1 years.
The operating results of the Determine business have been
included in our professional diagnostic products reporting unit.
(iv) Acquisition
of Binax
On March 31, 2005, we acquired Binax, Inc.
(Binax), a privately-held developer, manufacturer
and distributor of rapid diagnostic products for infectious
disease testing, primarily related to the respiratory system.
The aggregate purchase price was $44.7 million, which
consisted of $9.0 million in cash, 1.4 million shares
of our common stock with an aggregate fair value of
$35.2 million and $0.5 million in estimated direct
acquisition costs. The terms of the acquisition agreement also
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. This contingent consideration will be
accounted for as an increase in the aggregate purchase price if
and when the contingency occurs.
The following is a summary of the allocation of the aggregate
purchase price to the assets acquired and the liabilities
assumed at the date of the acquisition:
|
|
|
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
1,556
|
|
Accounts receivable
|
|
|
5,304
|
|
Inventories
|
|
|
3,186
|
|
Property, plant and equipment
|
|
|
2,421
|
|
Goodwill
|
|
|
14,868
|
|
Customer relationships
|
|
|
11,700
|
|
Core technology
|
|
|
3,900
|
|
Trademark
|
|
|
4,500
|
|
Non-compete agreement
|
|
|
30
|
|
Other assets
|
|
|
1,146
|
|
Deferred tax asset
|
|
|
6,312
|
|
Accounts payable and accrued
expenses
|
|
|
(2,076
|
)
|
Deferred tax liability
|
|
|
(8,106
|
)
|
|
|
|
|
|
|
|
$
|
44,741
|
|
|
|
|
|
|
We have assigned indefinite lives to the trademarks. Goodwill
generated from this acquisition is not deductible for tax
purposes. We estimate the useful lives of the product
technology, customer relationships and the non-compete agreement
to be 7 years, 13 years and 7 years,
respectively, and have included them in core technology and
patents, net, and other intangible assets, net, respectively, in
the accompanying consolidated balance sheets. The weighted
average amortization period for the acquired intangible assets
with finite lives is 10.7 years.
The operating results of Binax have been included in our
professional diagnostic products reporting unit.
F-25
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
(v) Acquisition
of Ischemia
On March 16, 2005, we acquired Ischemia Technologies, Inc.
(Ischemia), a privately held, venture-backed company
that has developed, manufactured and marketed the only
FDA-cleared in vitro diagnostic test targeted on
cardiac ischemia. The aggregate purchase price was
$27.2 million, which consisted of 968,000 shares of
our common stock with an aggregate fair value of
$22.8 million, estimated exit costs of $1.5 million to
vacate Ischemias manufacturing and administrative
facilities estimated direct acquisition costs of
$2.4 million and $0.5 million in assumed debt.
The following is a summary of the allocation of the aggregate
purchase price to the assets acquired and the liabilities
assumed at the date of the acquisition:
|
|
|
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
115
|
|
Accounts receivable
|
|
|
58
|
|
Inventories
|
|
|
40
|
|
Property, plant and equipment
|
|
|
288
|
|
Goodwill
|
|
|
7,532
|
|
Patents
|
|
|
19,200
|
|
Customer relationships
|
|
|
200
|
|
Other assets
|
|
|
99
|
|
Deferred tax asset
|
|
|
7,760
|
|
Accounts payable and accrued
expenses
|
|
|
(377
|
)
|
Deferred tax liability
|
|
|
(7,760
|
)
|
|
|
|
|
|
|
|
$
|
27,155
|
|
|
|
|
|
|
Goodwill generated from this acquisition is not deductible for
tax purposes. We estimated the useful lives of the patents to be
from 9 to 15 years and customer related intangible asset to
be 11 years and included them in core technology and
patents, net, and other intangible assets, net, respectively, in
the accompanying consolidated balance sheets.
The operating results of Ischemia have been included in our
professional diagnostic products reporting unit.
(c) Recent
Acquisitions
In February 2007 we acquired substantially all of the assets of
First Check Diagnostics LLC (First Check), a
privately-held diagnostics company, for approximately
$24.5 million in cash. In addition, we will 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.
First Check is the market leader in the rapidly-growing field of
home testing for drugs of abuse, including marijuana, cocaine,
methamphetamines and opiates. In addition, it offers tests, also
sold through retail channels, for alcohol abuse, cholesterol
monitoring and colon cancer screening.
(d) Restructuring
Plans Related to Business Combinations
In connection with our acquisitions of BioStar, Ischemia, Ostex
International, Inc. (Ostex), IVC Industries, Inc.
(now operating as Inverness Medical Nutritionals Group or
IMN) and certain entities,
F-26
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
businesses and intellectual property of Unilever Plc (the
Unipath business), we recorded restructuring costs
as part of the respective aggregate purchase prices in
accordance with EITF
No. 95-3.
During 2005, we established a restructuring plan in connection
with our acquisition of BioStar and recorded restructuring costs
of $0.5 million, of which $0.4 million related to
impairment of fixed assets and $0.1 million related to
severance costs associated with a headcount reduction. The total
number of employees to be involuntarily terminated was nine, of
which all were terminated as of December 31, 2006. Of the
costs recorded during 2005, $10,000 remains unpaid as of
December 31, 2006. Although we believe our plan and
estimated exit costs are reasonable, actual spending for exit
activities may differ from current estimated exit costs.
In connection with our acquisition of Ischemia in March 2005, we
established a restructuring plan whereby we exited the current
facilities of Ischemia in Denver, Colorado and combined its
activities with our existing manufacturing and distribution
facilities during the third quarter of 2005. Total severance
costs associated with involuntarily terminated employees were
estimated to be $1.6 million, of which all has been paid as
of December 31, 2006. We estimated costs to vacate the
Ischemia facilities to be approximately $135,000, of which
$90,000 has been paid as of December 31, 2006. The total
number of involuntarily terminated employees was 17, of
which all were terminated as of December 31, 2006.
As a result of our acquisition of Ostex, 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. The
total number of employees to be involuntarily terminated under
the restructuring plan was 38, of which all were terminated as
of December 31, 2006. Total severance costs associated with
involuntarily terminated employees were $1.6 million, all
of which has been paid as of December 31, 2006. Costs to
vacate the Ostex facilities are $0.5 million, of which
$0.2 million has been paid as of December 31, 2006.
Additionally, the remaining costs to exit the operations,
primarily facilities lease commitments, were $1.9 million,
of which $1.5 million has been paid as of December 31,
2006. Total unpaid exit costs amounted to $0.7 million as
of December 31, 2006.
Immediately after the close of the acquisition, we reorganized
the business operations of IMN to improve efficiencies and
eliminate redundant activities on a company-wide basis. The
restructuring affected all cost centers within the organization,
but most significantly responsibilities at the sales and
executive levels, as such activities were combined with our
existing business operations. Also, as part of the restructuring
plan, we relocated one of IMNs warehouses to a closer
proximity of the manufacturing facility to improve efficiency.
Of the $1.6 million in total exit costs, which includes
severance costs for 47 involuntarily terminated employees and
costs to vacate the warehouse, $1.5 million has been paid
as of December 31, 2006.
As a result of the acquisition of the Unipath business from
Unilever Plc in 2001, we reorganized the operations of the
Unipath business for purposes of improving efficiencies and
achieving economies of scale on a company-wide basis. Such
reorganization affected all major cost centers at the operations
in England. Additionally, most business activities of the
U.S. division were merged into our existing
U.S. businesses. Total exit costs, which primarily related
to severance and early retirement obligations for 65
involuntarily terminated employees, were $4.1 million. As
of December 31, 2006, $1.5 million, adjusted for
foreign exchange effect, in exit costs remained unpaid.
(e) Pro
Forma Financial Information
The following table presents selected unaudited financial
information of our company, including Binax, Ischemia, the
Determine business, BioStar, IDT and the Innovacon business
including ABON as if the acquisitions of these entities had
occurred on January 1, 2005. Pro forma results exclude
adjustments for Advanced Clinical Systems Pty Ltd
(ACS) and Clondiag 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
F-27
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(4) |
Business Combinations (Continued)
|
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, 2005.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
(In thousands, except per share amounts)
|
|
(unaudited)
|
|
|
Pro forma net revenues
|
|
$
|
582,901
|
|
|
$
|
528,212
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss available to
common stockholdersbasic and diluted
|
|
$
|
(14,449
|
)
|
|
$
|
(2,972
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per common
sharebasic and diluted(1)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net loss per share amounts are computed as described in
Note 13. |
(5) Goodwill
and Other Intangible Assets
The following is a summary of goodwill and other intangible
assets as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Useful Life
|
|
|
|
(in thousands, except useful life)
|
|
|
Amortized intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology and patents
|
|
$
|
111,550
|
|
|
$
|
23,818
|
|
|
$
|
87,732
|
|
|
|
1-20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier relationships
|
|
|
14,320
|
|
|
|
6,093
|
|
|
|
8,227
|
|
|
|
10 years
|
|
Trademarks and trade names
|
|
|
18,440
|
|
|
|
7,867
|
|
|
|
10,573
|
|
|
|
5-25 years
|
|
License agreements
|
|
|
10,105
|
|
|
|
6,725
|
|
|
|
3,380
|
|
|
|
5-8.5 years
|
|
Customer relationships
|
|
|
72,190
|
|
|
|
14,338
|
|
|
|
57,852
|
|
|
|
1.5-17.8 years
|
|
Manufacturing know-how
|
|
|
7,800
|
|
|
|
4,076
|
|
|
|
3,724
|
|
|
|
10-15 years
|
|
Other
|
|
|
540
|
|
|
|
502
|
|
|
|
38
|
|
|
|
2-7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
123,395
|
|
|
|
39,601
|
|
|
|
83,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with
finite lives
|
|
$
|
234,945
|
|
|
$
|
63,419
|
|
|
$
|
171,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with
indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
439,369
|
|
|
$
|
|
|
|
$
|
439,369
|
|
|
|
|
|
Other intangible assets
|
|
|
68,107
|
|
|
|
|
|
|
|
68,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with
indefinite lives
|
|
$
|
507,476
|
|
|
$
|
|
|
|
$
|
507,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
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, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Useful Life
|
|
|
|
(in thousands, except useful life)
|
|
|
Amortized intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology and patents
|
|
$
|
79,163
|
|
|
$
|
15,113
|
|
|
$
|
64,050
|
|
|
|
1-20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier relationships
|
|
|
11,020
|
|
|
|
3,616
|
|
|
|
7,404
|
|
|
|
10 years
|
|
Trademarks and trade names
|
|
|
17,414
|
|
|
|
6,335
|
|
|
|
11,079
|
|
|
|
5-25 years
|
|
License agreements
|
|
|
9,967
|
|
|
|
5,297
|
|
|
|
4,670
|
|
|
|
5-8.5 years
|
|
Customer relationships
|
|
|
38,100
|
|
|
|
7,196
|
|
|
|
30,904
|
|
|
|
1.5-17.8 years
|
|
Manufacturing know-how
|
|
|
7,000
|
|
|
|
720
|
|
|
|
6,280
|
|
|
|
10-15 years
|
|
Other
|
|
|
490
|
|
|
|
338
|
|
|
|
152
|
|
|
|
2-7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
83,991
|
|
|
|
23,502
|
|
|
|
60,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with
finite lives
|
|
$
|
163,154
|
|
|
$
|
38,615
|
|
|
$
|
124,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with
indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
322,210
|
|
|
$
|
|
|
|
$
|
322,210
|
|
|
|
|
|
Other intangible assets
|
|
|
63,742
|
|
|
|
|
|
|
|
63,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with
indefinite lives
|
|
$
|
385,952
|
|
|
$
|
|
|
|
$
|
385,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $21.8 million,
$12.9 million and $10.4 million in 2006, 2005 and
2004, respectively, is included in cost of sales, research and
development and sales and marketing in the accompanying
consolidated statements 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, 2006:
|
|
|
|
|
|
|
(in thousands)
|
|
2007
|
|
$
|
23,907
|
|
2008
|
|
$
|
21,843
|
|
2009
|
|
$
|
19,942
|
|
2010
|
|
$
|
19,339
|
|
2011
|
|
$
|
18,153
|
|
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, 2006 did not indicate that goodwill related
to our consumer diagnostic products and professional diagnostic
products reporting units were
F-29
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(5) |
Goodwill and Other Intangible Assets (Continued)
|
impaired. The values assigned to the trade names that were
acquired as part of our acquisition have been assigned
indefinite lives and therefore, in accordance with
SFAS No. 142 are not being amortized.
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 consumer diagnostic products and
professional diagnostic products reporting units are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Professional
|
|
|
|
|
|
|
Diagnostic
|
|
|
Diagnostic
|
|
|
|
|
|
|
Products
|
|
|
Products
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Goodwill, at December 31, 2004
|
|
$
|
86,078
|
|
|
$
|
135,077
|
|
|
$
|
221,155
|
|
Acquisitions
|
|
|
|
|
|
|
103,815
|
|
|
|
103,815
|
|
Other(1)
|
|
|
(904
|
)
|
|
|
(1,856
|
)
|
|
|
(2,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, at December 31, 2005
|
|
|
85,174
|
|
|
|
237,036
|
|
|
|
322,210
|
|
Acquisitions
|
|
|
304
|
|
|
|
113,849
|
|
|
|
114,153
|
|
Other(1)
|
|
|
530
|
|
|
|
2,476
|
|
|
|
3,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2006
|
|
$
|
86,008
|
|
|
$
|
353,361
|
|
|
$
|
439,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts relate primarily to adjustments resulting from
fluctuations in foreign currency exchange rates. |
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, 2006, we had approximately
$3.8 million of costs capitalized 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.
(6) Long-term
Debt
We had the following long-term debt balances outstanding:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Senior credit facilities
|
|
$
|
44,775
|
|
|
$
|
89,000
|
|
8.75% Senior Subordinated
notes
|
|
|
150,000
|
|
|
|
150,000
|
|
10% Subordinated notes
|
|
|
|
|
|
|
20,000
|
|
Line of credit
|
|
|
6,785
|
|
|
|
2,212
|
|
Other
|
|
|
417
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201,977
|
|
|
|
261,528
|
|
Less: Unamortized original issue
discount
|
|
|
|
|
|
|
(544
|
)
|
Less: Current portion
|
|
|
(7,504
|
)
|
|
|
(2,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
194,473
|
|
|
$
|
258,617
|
|
|
|
|
|
|
|
|
|
|
F-30
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Long-term Debt (Continued)
The following describes each of the above listed debt
instruments:
(a) Senior
Credit Facilities
As of December 31, 2005, $89.0 million of borrowings
were outstanding under our senior credit facility. On February 8
and 9, 2006, we sold an aggregate 3.4 million shares
of our common stock at $24.41 per share to funds affiliated
with 14 accredited institutional investors in a private
placement. Proceeds from the private placement were
approximately $79.3 million, net of issuance costs of
$3.7 million. Of this amount, we repaid principal and
interest outstanding under our senior credit facility of
$74.1 million, with the remainder of the net proceeds
retained for general corporate purposes.
On February 27, 2006, we borrowed $13.0 million under
our European revolving line of credit to fund our acquisition of
Clondiag. In March 2006, we entered into an amendment to our
third amended and restated credit agreement. The amendment
increased the total amount of credit available to us under the
credit agreement to $155.0 million, from
$100.0 million, consisting of a new $45.0 million
U.S. term loan, a $40.0 million U.S. revolving
line of credit, reduced from $60.0 million under the credit
agreement prior to the amendment, and a $70.0 million
European revolving line of credit, increased from
$40.0 million under the credit agreement prior to the
amendment. On March 31, 2006, in connection with our
acquisition of the Innovacon business, we incurred
$58.0 million in indebtedness under the credit agreement
when we received the proceeds of the entire U.S. term loan
and drew an additional $13.0 million under the
U.S. revolving line of credit. On May 12, 2006, in the
connection with the acquisition of the ABON facility, we drew
$13.0 million under the U.S. revolving line of credit.
On August 23, 2006, we sold an aggregate 5.0 million
shares of our common stock at $30.25 per share to funds
affiliated with 17 accredited institutional investors in a
private placement. Proceeds from the private placement were
approximately $145.5 million, net of issuance costs of
$5.7 million. Of this amount, we repaid principal
outstanding on our revolving lines of credit under our senior
credit facility of $54.0 million.
We began repaying the U.S. term loan in seven consecutive
quarterly installments in October 2006, in an amount of
$112,500, which is equal to 0.25% of the aggregate
$45.0 million of U.S. term loan commitments. Our
aggregate indebtedness under the amended credit agreement was
$44.8 million as of December 31, 2006. On
February 1, 2007, using a portion of the proceeds from our
sale of 6.9 million shares of common stock in the first
quarter of 2007 (Note 14), we paid the remaining principal
balance outstanding and accrued interests under our senior
credit facility. In accordance with SFAS No. 6,
Classification of Short-Term Obligations Expected to Be
Refinanced, we did not reclassify our February 2007
prepayment on our U.S. term loan and continued to carry the
balance as long-term on our December 31, 2006 balance sheet.
Borrowings under the revolving lines of credit and term loan
bear 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. Applicable margins, if we choose to use the LIBOR or
the Index Rate, can range from 2.75% to 3.75% or 1.50% to 2.50%,
respectively, for our revolving lines of credit depending on the
quarterly adjustments that are based on our consolidated
financial performance, and 4.00% or 2.75%, respectively, on our
term loan. As of December 31, 2006, the interest rate under
the U.S. term loan bore interest per annum of 9.35%. We recorded
interest expense, including amortization of deferred financing
costs, under these senior credit facilities in the aggregate
amount of $8.9 million, $4.8 million and
$2.0 million in 2006, 2005 and 2004, respectively. As of
December 31, 2006, accrued interest related to the senior
credit facility amounted to $0.1 million.
Borrowings under the senior credit facility are secured by the
stock of certain of our U.S. and foreign subsidiaries,
substantially all of our intellectual property rights,
substantially all of the assets of our businesses in the U.S.
and a significant portion of the assets of our businesses
outside the U.S. Under the senior credit agreement, as amended,
we must comply with various financial and non-financial
covenants. The primary
F-31
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Long-term Debt (Continued)
financial covenants pertain to, among other things, fixed charge
coverage ratio, capital expenditure, various leverage ratios,
earnings before interest, taxes, depreciation and amortization
(EBITDA) and minimum cash requirement. Additionally,
the senior credit agreement currently prohibits us from paying
dividends. As of December 31, 2006, we were in compliance
with the covenants.
(b) Senior
Subordinated Notes, 8.75%, Principal Amount
$150.0 million
On February 10, 2004, we completed the sale of
$150.0 million of 8.75% Bonds due 2012 in a private
placement to qualified institutional buyers. Net proceeds from
this offering amounted to $145.9 million, which was net of
underwriters commissions of $4.1 million. Of the net
proceeds, we used $125.3 million to repay all of our
outstanding indebtedness and related financing fees under our
primary senior credit facility (Note 6(a)) and
$9.2 million to prepay our outstanding 9% subordinated
promissory notes and related prepayment penalties. The remaining
$11.4 million of proceeds was used for Bond offering
expenses and general corporate purposes.
The Bonds accrue interest from the date of their issuance, or
February 10, 2004, at the rate of 8.75% per year.
Interest on the Bonds are payable semi-annually in arrears on
each February 15 and August 15, which commenced on
August 15, 2004. In addition, under the related
registration rights agreement, we were to cause the registration
statement with the SEC with respect to a registered exchange
offer to exchange the notes underlying the Bonds for new notes,
to be declared effective under the Securities Act of 1933, as
amended, within 240 days after the date of the Bonds
issuance and consummate the exchange offer within 270 days
after the date of the Bonds issuance. As we were unable to
consummate the exchange offer until March 28, 2005,
interest on the bonds increased by 0.25% point per year for the
first 90-day
period immediately following the default (from November 7,
2004 to February 4, 2005) and an additional 0.25%
point per year until March 28, 2005. As of
December 31, 2006, accrued interest related to the bonds
amounted to $4.9 million.
We may redeem the Bonds, in whole or in part, at any time on or
after February 15, 2008, at redemption price equal to 100%
of the principal amount plus a premium declining ratably to par,
plus accrued and unpaid interest. In addition, prior to
February 15, 2007, we may redeem up to 35% of the aggregate
principal amount of the Bonds issued with the proceeds of
qualified equity offerings at a redemption price equal to
108.75% of the principal amount, plus accrued and unpaid
interest. If we experience a change of control, we may be
required to offer to purchase the Bonds at a purchase price
equal to 101% of the principal amount, plus accrued and unpaid
interest. We might not be able to pay the required price for
Bonds presented to us at the time of a change of control because
our primary senior credit facility or other indebtedness may
prohibit payment or we might not have enough funds at that time.
The Bonds are unsecured and are subordinated in right of payment
to all of our existing and future senior debt, including the
guarantee of all borrowings under our senior credit facilities.
The Bonds are effectively subordinated to all existing and
future liabilities, including trade payables, of those of our
subsidiaries that do not guarantee the Bonds.
The Bonds are guaranteed by all of our domestic subsidiaries
that are guarantors or borrowers under our primary senior credit
facility. The guarantees are general unsecured obligations of
the guarantors and are subordinated in right of payment to all
existing and future senior debt of the applicable guarantors,
which includes their guarantees of, and borrowings under our
primary senior credit facility. See Note 23 for guarantor
financial information.
The indenture governing the Bonds contains covenants that will
limit our ability and the ability of our subsidiaries to, among
other things, incur additional indebtedness in the aggregate,
subject to our interest coverage ratio, pay dividends or make
other distributions or repurchase or redeem our stock, make
F-32
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Long-term Debt (Continued)
investments, sell assets, incur liens, enter into agreements
restricting our subsidiaries ability to pay dividends,
enter into transactions with affiliates and consolidate, merge
or sell all or substantially all of our assets. These covenants
are subject to certain exceptions and qualifications.
(c) Subordinated
Promissory Notes, 10%, Principal Amount
$20.0 million
On September 20, 2002, we sold units (Units)
having an aggregate purchase price of $20.0 million to
private investors to help finance the Wampole acquisition. Each
Unit consisted of (i) a 10% subordinated promissory
note (a 10% Subordinated Note) in the principal
amount of $50,000 and (ii) a warrant to acquire
0.4 shares of our common stock at an exercise price of
$13.54 per share. In the aggregate, we issued fully vested
warrants to purchase 0.2 million shares of our common
stock, which may be exercised at any time on or prior to
September 20, 2012. All warrants issued in relation to this
debt have been classified in equity, pursuant to the provisions
of EITF
No. 96-13.
Among the purchasers of the 10% Subordinated Notes were
three directors and officers of our company and an entity
controlled by our chief executive officer, who collectively
purchased Units that aggregated $1.9 million in principal
amount and warrants to purchase an aggregate of
15,000 shares of our common stock.
On September 8, 2006, in connection with the August 2006
equity offering, we repaid the 10% Subordinated Notes which
were due to mature on September 20, 2008. The total payment
aggregated $20.8 million, which represented the principal
balance outstanding plus accrued and unpaid interest, as well as
a prepayment penalty of $0.4 million. The prepayment
penalty, along with the remaining unamortized deferred financing
cost and unamortized original interest discount write-offs,
aggregating $0.9 million, was charged to interest expense
for the year ended December 31, 2006.
(d) Maturities
of Long-term Debt
The following is a summary of the maturities of long-term debt
outstanding on December 31, 2006:
|
|
|
|
|
|
|
(in thousands)
|
|
2007
|
|
$
|
7,504
|
|
2008
|
|
|
44,469
|
|
2009
|
|
|
4
|
|
2010
|
|
|
|
|
2011
|
|
|
|
|
Thereafter
|
|
|
150,000
|
|
|
|
|
|
|
|
|
$
|
201,977
|
|
|
|
|
|
|
F-33
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) Capital
Leases
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, 2006:
|
|
|
|
|
|
|
(in thousands)
|
|
2007
|
|
$
|
643
|
|
2008
|
|
|
399
|
|
2009
|
|
|
16
|
|
2010
|
|
|
4
|
|
2011
|
|
|
4
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
1,066
|
|
Less: Imputed interest
|
|
|
(67
|
)
|
|
|
|
|
|
Present value of future minimum
lease payments
|
|
|
999
|
|
Less: Current portion
|
|
|
(584
|
)
|
|
|
|
|
|
|
|
$
|
415
|
|
|
|
|
|
|
At December 31, 2006, the capitalized amounts of the
building, machinery and equipment and computer equipment under
the capital leases were as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Machinery, laboratory equipment
and tooling
|
|
$
|
263
|
|
Buildings
|
|
|
2,186
|
|
|
|
|
|
|
|
|
|
2,449
|
|
Less: Accumulated amortization
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
|
$
|
699
|
|
|
|
|
|
|
The amortization expense of assets recorded under capital leases
is included in depreciation and amortization expense of
property, plant and equipment.
(8) 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 $0.8 million, $0.5 million and
$0.4 million in 2006, 2005 and 2004, respectively.
(b) UK
Pension Plans
Our subsidiary in England, Unipath
Ltd. (Unipath), adopted a pension plan (the
Unipath Pension Scheme) in December 2002. The
Unipath Pension Scheme consists of two parts: (i) the
defined benefit section (the Defined Benefit
Plan), and (ii) the defined contribution
section (the Defined Contribution Plan).
Employees of Unipath were allowed to join the Unipath Pension
Scheme starting on December 1, 2002.
F-34
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) Postretirement Benefit Plans (Continued)
As part of the purchase agreement of the Unipath business in
December 2001, we agreed to establish a new defined benefit
pension plan for the acquired employees based in England, who
are former participants of the Unilever pension plan (the
Acquired UK Employees), and to continue to
accumulate benefits under such plan for a period of at least
three years after the acquisition date of the Unipath business.
Consequently, the Defined Benefit Plan was established as part
of the Unipath Pension Scheme, which covers the Acquired UK
Employees during the last two years of the three year
post-acquisition period starting on December 1, 2002.
During the first year of the three year post-acquisition period
through November 2002, the Acquired UK Employees continued to
accumulate benefits under the Unilever pension plan, to which
Unipath contributed $1.9 million in that period.
At the time of the acquisition, pursuant to
SFAS No. 87, Employers Accounting for
Pensions, and SFAS No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, we recorded an
unfunded pension liability of $3.7 million as part of the
purchase price of the Unipath business (withdrawal obligation).
Such unfunded pension liability represented the excess of the
benefit obligation, or $20.5 million over the fair value of
the plan assets, or $16.8 million, initially allocated by
Unilever to the plan assets for the benefit of the Acquired UK
Employees. As some of the Acquired UK Employees were terminated
under our restructuring plan upon acquisition, the unfunded
pension liability initially recorded by us, or
$3.7 million, was reduced by the portion of these
employees severance pay-out that represented pension
benefits, or $1.1 million, which was reclassified to
severance costs for purposes of aggregating the purchase price
of the Unipath business.
Through November 2004, the Acquired UK Employees could elect, at
their option, to transfer contributions and benefits from the
Unilever pension plan to the Defined Benefit Plan. As required,
we had established the Defined Benefit Plan and believed that
the benefits available under this plan were no less favorable to
the Acquired UK Employees than Unilevers plan and we
maintained these benefits for the period required by the
acquisition agreement. Nevertheless, we were engaged in a
dispute with Unilever over the equity of benefits under the old
and new plans.
During May 2004, we entered into mediation with Unilever to
resolve the differences over the relative levels of benefits in
Unilevers Plan and the Defined Benefit Plan. The mediation
produced a settlement agreement between Unilever and us dated
August 17, 2004. This settlement agreement provided that we
would match certain benefits available in the Unilever plan to
ensure that the plan was viewed as being no less favorable than
the Unilever plan for employees considering whether to
transition in November of 2004. These changes increased the
benefits available to a retiree under the Defined Benefit Plan
to: (i) allow for retirees upon retirement to receive
unreduced benefits at age 60 rather than age 65; and
(ii) calculate the final pension benefit payable to
retirees based on the retirees salary at the date on which
pension benefits ceased accruing under the Unipath plan
(December 2004) plus 1% over inflation for each year of
service after December 2004 until retirement.
In November 2004, the final number of employees who elected to
transfer into the Defined Benefit Plan from the Unilever plan
was determined. Substantially fewer Acquired UK Employees
transferred into the Defined Benefit Plan than were previously
anticipated to transfer when the unfunded pension liability was
initially established in 2001. As a result, an actuarial gain of
$1.8 million was recorded and deferred as a component of
other comprehensive income in 2004.
As discussed in Note 2, we adopted the recognition
provisions of SFAS No. 158 as of December 31,
2006 and, accordingly recognized a liability for the unfunded
status of our pension plans of $4.5 million. We
F-35
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) Postretirement Benefit Plans (Continued)
also recognized in accumulated other comprehensive income (loss)
the prior service cost and net actuarial gain (loss) of this
plan. Future changes to the funded status of these plans will be
recognized in the year in which the change occurs through other
comprehensive income.
Prior to December 31, 2006, we accounted for our defined
benefit pension plan under SFAS No. 87. Accordingly,
we recognized a pension liability of $1.8 million. There
was no non-cash charge to accumulated other comprehensive income
(loss) within stockholders equity at December 31,
2005.
We do not expect any non-cash pension expense in 2007.
The following table sets forth an analysis of the changes in the
benefit obligation, the plan assets and the funded status of the
Defined Benefit Plan during 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Change in projected benefit
obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
11,144
|
|
|
$
|
11,646
|
|
Interest cost
|
|
|
586
|
|
|
|
583
|
|
Actuarial (gain) loss
|
|
|
(726
|
)
|
|
|
258
|
|
Benefits paid
|
|
|
(129
|
)
|
|
|
(122
|
)
|
Foreign exchange impact
|
|
|
1,495
|
|
|
|
(1,221
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
12,370
|
|
|
$
|
11,144
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated benefit
obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
8,141
|
|
|
$
|
8,304
|
|
Interest cost
|
|
|
586
|
|
|
|
583
|
|
Actuarial (gain) loss
|
|
|
(726
|
)
|
|
|
258
|
|
Benefits paid
|
|
|
(129
|
)
|
|
|
(122
|
)
|
Foreign exchange impact
|
|
|
1,087
|
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
8,959
|
|
|
$
|
8,141
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
6,436
|
|
|
$
|
5,327
|
|
Actual return on plan assets
|
|
|
403
|
|
|
|
1,316
|
|
Employer contribution
|
|
|
553
|
|
|
|
546
|
|
Benefits paid
|
|
|
(129
|
)
|
|
|
(122
|
)
|
Foreign exchange impact
|
|
|
926
|
|
|
|
(631
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
$
|
8,189
|
|
|
$
|
6,436
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(4,181
|
)
|
|
$
|
(4,708
|
)
|
Unrecognized net actuarial gain
|
|
|
|
|
|
|
(1,414
|
)
|
Unrecognized prior service cost
|
|
|
|
|
|
|
5,967
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(4,181
|
)
|
|
$
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
F-36
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) Postretirement Benefit Plans (Continued)
The net amount recognized in the accompanying consolidated
balance sheet that relates to the Defined Benefit Plan during
2006 and 2005 consists of:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Accrued benefit liability
|
|
$
|
(733
|
)
|
|
$
|
(1,672
|
)
|
Intangible asset
|
|
|
1,039
|
|
|
|
1,517
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
306
|
|
|
$
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
The measurement date used to determine plan assets and benefit
obligations for the Defined Benefit Plan was December 31,
2006 and 2005.
The following table provides the weighted-average actuarial
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Assumptions used to determine
benefit obligations:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.25
|
%
|
|
|
4.80
|
%
|
Rate of compensation increase
|
|
|
3.80
|
%
|
|
|
3.55
|
%
|
Assumptions used to determine
net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.80
|
%
|
|
|
5.30
|
%
|
Expected return on plan assets
|
|
|
6.63
|
%
|
|
|
6.84
|
%
|
Rate of compensation increase
|
|
|
3.55
|
%
|
|
|
3.55
|
%
|
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:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Interest cost
|
|
$
|
586
|
|
|
$
|
583
|
|
Expected return on plan assets
|
|
|
(461
|
)
|
|
|
(360
|
)
|
Amortization of net loss
|
|
|
(26
|
)
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
99
|
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
The plan assets of the Defined Benefit Plan comprise of a mix of
stocks and fixed income securities and other investments. At
December 31, 2006, these stocks and fixed income securities
represented 70% and 30%, respectively, of the market value of
the pension assets. We expect to contribute approximately
0.3 million British Pounds Sterling (or $0.6 million
at December 31, 2006) to the Defined Benefit Plan in
2007. 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 contributed $1.2 million, $1.1 million and
$0.3 million to the Defined Contribution Plan, which was
recognized as an expense in the accompanying consolidated
statement of operations, in 2006, 2005 and 2004, respectively.
F-37
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) Derivative
Instruments
We entered into an interest rate swap agreement with one of our
lenders, effective February 25, 2002, which was intended to
protect our long-term debt on which interest was charged at the
LIBOR against fluctuation in such rate. Under the interest rate
swap agreement, the LIBOR was set at a minimum of 3.36% and a
maximum of 5.00%. Because the interest rate swap agreement did
not qualify as a hedge for accounting purposes under
SFAS No. 133 and related amendments, we recorded
income of $0.7 million during 2004, to mark to market this
interest rate swap agreement. The adjustment to fair value of
the interest rate swap agreement was recorded as a component of
interest expense in the accompanying consolidated statements of
operations. The interest rate swap agreement expired on
December 30, 2004.
During 2005, we entered into forward exchange contracts totaling
$24.9 million with monthly maturity dates of
January 18, 2005 to February 15, 2006. Maturing
forward exchange contracts were used to lock in U.S. dollar
to British Pound Sterling (GBP) or U.S. dollar to Euro
exchange rates and hedge anticipated intercompany sales.
The change in value of the derivative was analyzed quarterly for
changes in the spot and forward rates based on rates given by
the issuing financial institution for each quarter end date. The
effective portion of the gain or loss on the derivative is
reported in other comprehensive income (OCI) during
the period prior to the forecasted purchase or sale. For
forecasted sales on credit, the amount of income ascribed to
each forecasted period was reclassified from OCI to income or
expense on the date of the sale. The income or cost ascribed to
each period encompassed within the periods of the recognized
foreign-currency-denominated receivable or payable was
reclassified from OCI to income or expense at the end of each
reporting period. The changes in the derivative
instruments fair values from inception of the hedge were
compared to the cumulative change in the hedged items fair
value attributable to the risk hedged. Effectiveness was based
on the change in the spot rates.
At December 31, 2005, we had two forward exchange contracts
outstanding for $1.5 million each against the GBP. The
contracts matured during January and February 2006.
See Note 12(a) regarding our Chembio Diagnostics Inc.
(Chembio) warrant which is accounted for as a
derivative instrument.
(10) 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, 2006:
|
|
|
|
|
|
|
(in thousands)
|
|
2007
|
|
$
|
10,454
|
|
2008
|
|
|
9,042
|
|
2009
|
|
|
7,104
|
|
2010
|
|
|
5,254
|
|
2011
|
|
|
5,187
|
|
Thereafter
|
|
|
30,762
|
|
|
|
|
|
|
|
|
$
|
67,803
|
|
|
|
|
|
|
F-38
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) Commitments and Contingencies (Continued)
Rent expense relating to operating leases was approximately
$11.8 million, $10.0 million and $7.4 million
during 2006, 2005 and 2004, respectively.
(b) Capital
Expenditure Commitments
At December 31, 2006, we had total outstanding
non-cancelable equipment purchase commitments of
$8.8 million.
(c) Legal
Proceedings
We currently are not a party to any material pending legal
proceedings.
Because of the nature of our business, we may be subject at any
particular time to consumer product claims or various other
lawsuits arising in the ordinary course of our business,
including employment matters, and expect that this will continue
to be the case in the future. Such lawsuits generally seek
damages, sometimes in substantial amounts, for personal injuries
or other commercial or employment claims. 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.
In December 2005, we learned that the SEC had issued a formal
order of investigation in connection with the previously
disclosed revenue recognition matter at one of our diagnostic
divisions, and we subsequently received a subpoena for
documents. We believe that we fully responded to the subpoena
and we will continue to fully cooperate with the SECs
investigation. We cannot predict whether the SEC will seek
additional information or what the outcome of its investigation
will be.
In March, 2006, the U.S. Federal Trade Commission
(FTC) opened a preliminary, non-public investigation
into our then pending acquisition of the business we acquired
from ACON Laboratories to determine whether this acquisition may
be anticompetitive, and we subsequently received a Civil
Investigative Demand and a subpoena requesting documents. We
believe that we have fully responded to the Civil Investigative
Demand and we are continuing to produce documents in connection
with the subpoena and to otherwise cooperate with the FTCs
investigation. We cannot predict whether the FTC will seek
additional information or what the outcome of this investigation
will be. The FTC generally has the power to commence
administrative or federal court proceedings seeking injunctive
relief or divestiture of assets. In the event that an order were
to be issued requiring divestiture of significant assets or
imposing other injunctive relief, our business, financial
condition and results of operations could be materially
adversely affected.
(11) Other
Arrangements
(a) Co-development
Agreement with ITI Scotland Limited
On February 25, 2005, we entered into a co-development
agreement with ITI Scotland Limited (ITI), whereby
ITI agreed to provide us with £30 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
(Stirling), we established a new research center in
Stirling, Scotland, where we consolidated many of our 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 of December 31, 2006, we had received approximately
$40.9 million in funding from ITI. As qualified
expenditures are made under the co-development arrangement, we
recognize the fee earned during the period as a reduction of our
related
F-39
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Other Arrangements (Continued)
expenses, subject to certain limitations. For the fiscal years
ended December 31, 2006 and 2005, we recognized
$18.4 million and $18.1 million of reimbursements,
respectively, of which $16.6 million and
$17.2 million, respectively, offset our research and
development spending and $1.8 million and
$0.9 million, respectively, reduced our general,
administrative and marketing spending incurred by Stirling.
Funds received from ITI in excess of amounts earned are
considered deferred revenue and are included in accrued expenses
and other current liabilities, the balance of which was
$4.9 million as of December 31, 2006.
(b) Joint
Venture in China
In September 2004, we began manufacturing a small amount of
product in China through a third party. In February 2005, we
entered into a joint venture with this Chinese manufacturer and
acquired controlling ownership of the manufacturing facility.
(12) Other
Investments and Available-for-sale Securities
(a) 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 dividend yield,
expected volatility of 116%, risk-free rate of 4.9% and a
contractual term of 5 years. We mark to market the warrant
over the contractual term. As of December 31, 2006, the
warrant was valued at $0.4 million.
(b) Equity
Method Investments
In November 2006, we acquired 40% of Vedalab S.A.
(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 ongoing patent infringement claim with
Vedalab. Under the terms of the settlement, Vedalab paid to us
$5.1 million and agreed to pay 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 as its facility in Alencon, France. The payment
of $5.1 million has been included in as income 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, 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 May 2006, we acquired 49% of TechLab, Inc.
(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. For the year ended
December 31, 2006, we recorded
F-40
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$0.6 million in other income, which represented our
minority share of TechLabs profit in the respective
periods.
(c) Available-for-sale
Securities
Our investment in
available-for-sale
securities (long-term) consists of marketable equity securities
purchased in December 2006. We currently intend to hold these
investments indefinitely. On receipt, the shares were recorded
at their market value. At December 31, 2006, their fair
value was approximately $12.7 million, representing an
unrealized holding gain of approximately $0.1 million which
was recorded in other comprehensive income within
stockholders equity in our consolidated balance sheet.
(13) Loss
per Share
The following table sets forth the computation of basic and
diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,842
|
)
|
|
$
|
(19,209
|
)
|
|
$
|
(16,596
|
)
|
Dividends, redemption interest and
amortization of beneficial conversion feature related to
Series A Preferred Stock (Note 14(b))
|
|
|
|
|
|
|
|
|
|
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common
stockholdersbasic and diluted
|
|
$
|
(16,842
|
)
|
|
$
|
(19,209
|
)
|
|
$
|
(17,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and dilutive
loss per shareadjusted weighted average shares
|
|
|
34,109
|
|
|
|
24,358
|
|
|
|
19,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
sharebasic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 share in 2006 because the
inclusion thereof would be antidilutive.
We had the following potential dilutive securities outstanding
on December 31, 2005: (a) options and warrants to
purchase an aggregate of 4.7 million shares of our common
stock at a weighted average exercise price of $18.44 per
share and (b) 104,000 shares of common stock held in
escrow. Potential dilutive securities were not included in the
computation of diluted loss per share in 2005 because the
inclusion thereof would be antidilutive.
We had the following potential dilutive securities outstanding
on December 31, 2004: options and warrants to purchase an
aggregate of 4.3 million shares of our common stock at a
weighted average exercise price of $16.43 per share.
Potential dilutive securities were not included in the
computation of diluted loss per share in 2004 because the
inclusion thereof would be antidilutive.
F-41
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(14) Stockholders
Equity
(a) Common
Stock
As of December 31, 2006, we had 100.0 million shares
of common stock, $0.001 par value, authorized, of which
approximately 39.2 million shares were issued and
outstanding, 8.1 million shares were reserved for issuance
upon grant and exercise of stock options under current stock
option plans and 0.3 million shares were reserved for
issuance upon exercise of outstanding warrants.
In August 2005, we sold 4.0 million shares of our common
stock at $23.76 per share to funds affiliated with three
accredited institutional investors in a private placement.
Proceeds from the private placement were approximately
$92.8 million, net of issuance costs of $2.5 million.
Of this amount, we repaid principal and interest outstanding
under our senior credit facility of $84.4 million, with the
remainder of the net proceeds retained for general corporate
purposes.
In February 2006, we sold 3.4 million shares of our common
stock at $24.41 per share to funds affiliated with 14
accredited institutional investors in a private placement.
Proceeds from the private placement were approximately
$79.3 million, net of issuance costs of $3.7 million.
Of this amount, we repaid principal and interest outstanding
under our senior credit facility of $74.1 million, with the
remainder of the net proceeds retained for general corporate
purposes.
In August 2006, we sold an aggregate 5.0 million shares of
our common stock at $30.25 per share to funds affiliated
with 17 accredited institutional investors in a private
placement. Proceeds from the private placement were
approximately $145.5 million, net of issuance costs of
$5.7 million. Of this amount, we used $41.3 million
for payments related to our acquisition of the ABON facility,
$5.3 million to purchase the remaining 32.55% of Clondiag,
$54.0 million to repay principal outstanding under our
senior credit facility and $20.8 million to repay principal
and interest outstanding, along with a prepayment penalty, under
our 10% subordinated promissory notes, with the remainder
of the net proceeds retained for general corporate purposes.
In January 2007, we sold an aggregate 6.0 million shares of
our common stock at $39.65 per share through an
underwritten public offering and in February 2007, our
underwriters exercised in full an option to purchase an
additional 0.9 million shares to cover over-allotments.
Proceeds from the offering were approximately
$261.3 million, net of issuance costs of
$12.3 million, which include deductions for underwriting
discounts and commissions and take 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.
(b) Preferred
Stock
As of December 31, 2006, we had 5.0 million shares of
preferred stock, $0.001 par value, authorized, of which
2.7 million shares were designated as Series A
Preferred Stock, $0.001 par value. During 2004 and 2003,
0.2 million and 0.1 million shares of Series A
Preferred Stock, respectively, were converted into
0.4 million and 0.2 million shares of our common
stock, respectively. No shares of Series A Preferred Stock
were outstanding as of December 31, 2006.
(c) Stock
Options and Awards
In 2001, we adopted the 2001 Stock Option and Incentive Plan (as
amended, the 2001 Plan) which allows for the
issuance of up to 8.1 million shares of common stock and
other awards, as amended. The 2001 Plan is administered by the
Compensation Committee of the Board of Directors in order to
select the individuals eligible to receive awards, determine or
modify the terms and conditions of the awards granted,
F-42
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(14) Stockholders Equity (Continued)
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, 2006, there were
2.3 million 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
and $0.5 million for each of the years ended
December 31, 2005 and 2004. In August, 2006, the note and
accrued interest were paid in full (Note 19).
In August 2001, we granted two nonqualified 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 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 19).
Interest income recorded under these notes amounted to
$0.2 million for each year ended December 31, 2006,
2005 and 2004, respectively. Shares issued upon exercise vested
ratably over 36 months and were fully vested at
December 31, 2004.
The following summarizes all stock option activity during the
year ended December 31,:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Outstanding at January 1
|
|
|
3,902
|
|
|
$
|
18.82
|
|
|
|
3,619
|
|
|
$
|
16.58
|
|
|
|
3,398
|
|
|
$
|
15.85
|
|
Granted
|
|
|
666
|
|
|
$
|
31.88
|
|
|
|
809
|
|
|
$
|
26.67
|
|
|
|
394
|
|
|
$
|
21.75
|
|
Exercised
|
|
|
(510
|
)
|
|
$
|
17.30
|
|
|
|
(331
|
)
|
|
$
|
11.94
|
|
|
|
(90
|
)
|
|
$
|
10.40
|
|
Canceled/expired/forfeited
|
|
|
(283
|
)
|
|
$
|
21.81
|
|
|
|
(195
|
)
|
|
$
|
21.48
|
|
|
|
(83
|
)
|
|
$
|
18.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
3,775
|
|
|
$
|
21.11
|
|
|
|
3,902
|
|
|
$
|
18.82
|
|
|
|
3,619
|
|
|
$
|
16.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31
|
|
|
2,408
|
|
|
$
|
17.16
|
|
|
|
2,424
|
|
|
$
|
16.19
|
|
|
|
2,141
|
|
|
$
|
15.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the options outstanding at
December 31, 2006 was $66,664,961. The aggregate intrinsic
value of the options exercisable at December 31, 2006 was
$52,139,392.
F-43
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(14) Stockholders Equity (Continued)
The following represents additional information related to stock
options outstanding and exercisable at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
Exercise Price
|
|
Shares
|
|
|
Contract Life
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
(in thousands)
|
|
|
(in years)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
$1.25-$14.92
|
|
|
378
|
|
|
|
3.57
|
|
|
$
|
8.11
|
|
|
|
376
|
|
|
$
|
8.08
|
|
$15.35-$15.47
|
|
|
654
|
|
|
|
4.97
|
|
|
$
|
15.46
|
|
|
|
654
|
|
|
$
|
15.46
|
|
$15.55-$16.76
|
|
|
465
|
|
|
|
5.58
|
|
|
$
|
16.27
|
|
|
|
391
|
|
|
$
|
16.29
|
|
$16.95-$19.80
|
|
|
381
|
|
|
|
5.52
|
|
|
$
|
18.24
|
|
|
|
333
|
|
|
$
|
18.15
|
|
$19.85-$22.75
|
|
|
400
|
|
|
|
5.53
|
|
|
$
|
21.28
|
|
|
|
353
|
|
|
$
|
21.31
|
|
$22.78-$25.50
|
|
|
462
|
|
|
|
8.27
|
|
|
$
|
24.44
|
|
|
|
148
|
|
|
$
|
24.20
|
|
$25.64-$28.03
|
|
|
458
|
|
|
|
8.52
|
|
|
$
|
27.51
|
|
|
|
109
|
|
|
$
|
27.82
|
|
$28.10-$34.40
|
|
|
419
|
|
|
|
9.44
|
|
|
$
|
32.06
|
|
|
|
27
|
|
|
$
|
28.22
|
|
$35.29-$139.72
|
|
|
153
|
|
|
|
9.27
|
|
|
$
|
38.82
|
|
|
|
12
|
|
|
$
|
52.82
|
|
$165.96
|
|
|
5
|
|
|
|
.91
|
|
|
$
|
165.96
|
|
|
|
5
|
|
|
$
|
165.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.25-$165.96
|
|
|
3,775
|
|
|
|
6.53
|
|
|
$
|
21.11
|
|
|
|
2,408
|
|
|
$
|
17.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Warrants
The following is a summary of all warrant activity during the
three years ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Exercise Price
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Warrants outstanding and
exercisable,
December 31, 2003
|
|
|
712
|
|
|
$
|
3.81-$23.76
|
|
|
$
|
15.62
|
|
Exercised
|
|
|
(9
|
)
|
|
$
|
11.55-$14.17
|
|
|
$
|
13.03
|
|
Expired
|
|
|
(4
|
)
|
|
$
|
9.89-$18.25
|
|
|
$
|
14.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and
exercisable,
December 31, 2004
|
|
|
699
|
|
|
$
|
3.81-$23.76
|
|
|
$
|
15.66
|
|
Granted
|
|
|
75
|
|
|
$
|
24.00
|
|
|
$
|
24.00
|
|
Exercised
|
|
|
(7
|
)
|
|
$
|
5.50-$13.54
|
|
|
$
|
13.47
|
|
Expired
|
|
|
(9
|
)
|
|
$
|
14.15-$23.76
|
|
|
$
|
18.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(14) Stockholders Equity (Continued)
The following represents additional information related to
warrants outstanding and exercisable at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
3.48
|
|
|
$
|
3.87
|
|
$4.48-$4.57
|
|
|
1
|
|
|
|
3.54
|
|
|
$
|
4.54
|
|
$5.44-$5.57
|
|
|
4
|
|
|
|
3.58
|
|
|
$
|
5.53
|
|
$7.37-$7.55
|
|
|
2
|
|
|
|
3.66
|
|
|
$
|
7.48
|
|
$13.54-$18.12
|
|
|
220
|
|
|
|
4.97-5.72
|
|
|
$
|
14.40
|
|
$24.00
|
|
|
75
|
|
|
|
8.25
|
|
|
$
|
24.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306
|
|
|
|
6.16
|
|
|
$
|
16.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2006. The value of warrants issued in
connection with debt financings has yielded original issue
discounts and additional interest expense of $0.5 million
in 2006 and $0.2 million for both 2005 and 2004. All
outstanding warrants have been classified in equity, pursuant to
provision EITF
No. 00-19.
|
|
(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 0.5 million
shares of common stock under this plan. At December 31,
2006, 0.3 million shares had been issued under this plan.
F-45
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) Stock-based
compensation
In accordance with
SFAS No. 123-R,
our results of operations for the year ended December 31,
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
year ended December 31, 2006. Stock-based compensation
expense in the amount of $5.5 million ($4.9 million,
net of tax) was reflected in our consolidated statements of
operations for the year ended December 31, 2006, as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
|
Cost of sales
|
|
$
|
391
|
|
Research and development
|
|
|
1,390
|
|
Sales and marketing
|
|
|
682
|
|
General and administrative
|
|
|
2,992
|
|
|
|
|
|
|
|
|
$
|
5,455
|
|
|
|
|
|
|
Prior to our adoption of
SFAS No. 123-R,
all tax benefits resulting from the exercise of stock options
would have been reported as operating cash flows in our
consolidated statements of cash flows. In accordance with
SFAS No. 123-R,
for the year ended December 31, 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, 2006, excess tax benefits generated from
option exercises amounted to $0.6 million.
The following assumptions were used to estimate the fair value
of options granted during the year ended December 31, 2006,
2005 and 2004 using the Black-Scholes option-pricing model:
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Risk-free interest rate
|
|
4.00-4.67%
|
|
3.58-4.46%
|
|
2.80-3.95%
|
Expected dividend yield
|
|
|
|
|
|
|
Expected life
|
|
6.25 years
|
|
5 years
|
|
5 years
|
Expected volatility
|
|
41%
|
|
45%
|
|
47%
|
The weighted average fair value under the Black-Scholes option
pricing model of options granted to employees during 2006, 2005
and 2004 was $15.29, $11.85 and $9.86, respectively. All options
granted during these periods were granted at fair market value
on date of grants.
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.
F-46
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) 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,
2006 and in each of the three years then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
Pension
|
|
|
|
|
|
Accumulated
|
|
|
|
Translation
|
|
|
Liability
|
|
|
|
|
|
Other
|
|
|
|
Adjustment
|
|
|
Adjustment
|
|
|
|
|
|
Comprehensive
|
|
|
|
(Note 2(b))
|
|
|
(Note 8(b))
|
|
|
Other (i)
|
|
|
Income (ii)
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2003
|
|
$
|
12,111
|
|
|
$
|
(434
|
)
|
|
$
|
136
|
|
|
$
|
11,813
|
|
Period change
|
|
|
5,241
|
|
|
|
434
|
|
|
|
33
|
|
|
|
5,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
17,352
|
|
|
|
|
|
|
|
169
|
|
|
|
17,521
|
|
Period change
|
|
|
(10,300
|
)
|
|
|
|
|
|
|
(169
|
)
|
|
|
(10,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
Other represents (realization of) unrealized gains on
available-for-sale securities. |
|
|
|
(ii) |
|
All of the components of accumulated other comprehensive income
relate to our foreign subsidiaries except item (i), 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. |
(17) Income
Taxes
Our income tax provision in 2006, 2005 and 2004 mainly
represents those recorded by us and certain of our U.S.
subsidiaries and by our foreign subsidiaries Unipath Limited in
the United Kingdom, Inverness Medical Japan in Japan, and
Inverness Medical Switzerland GmbH in Switzerland. Loss before
provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
United States
|
|
$
|
(4,728
|
)
|
|
$
|
(40,582
|
)
|
|
$
|
(20,102
|
)
|
Foreign
|
|
|
(6,387
|
)
|
|
|
28,192
|
|
|
|
5,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,115
|
)
|
|
$
|
(12,390
|
)
|
|
$
|
(14,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our primary temporary differences that give rise to the deferred
tax asset and liability are net operating loss (NOL)
carryforwards, nondeductible reserves and accruals and
differences in bases of the tangible and intangible assets. The
income tax effects of these temporary differences are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
NOL and capital loss carryforwards
|
|
$
|
86,516
|
|
|
$
|
71,926
|
|
Tax credit carryforwards
|
|
|
3,515
|
|
|
|
833
|
|
Nondeductible reserves
|
|
|
7,385
|
|
|
|
8,721
|
|
Nondeductible accruals
|
|
|
16,741
|
|
|
|
10,199
|
|
Difference between book and tax
bases of tangible assets
|
|
|
1,624
|
|
|
|
932
|
|
Difference between book and tax
bases of intangible assets
|
|
|
9,125
|
|
|
|
5,616
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
124,906
|
|
|
|
98,227
|
|
Less: Valuation allowance
|
|
|
(107,622
|
)
|
|
|
(96,721
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
17,284
|
|
|
|
1,506
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Difference between book and tax
bases of tangible assets
|
|
|
7,068
|
|
|
|
2,171
|
|
Difference between book and tax
bases of intangible assets
|
|
|
28,790
|
|
|
|
16,710
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
35,858
|
|
|
|
18,881
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
18,574
|
|
|
$
|
17,375
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Deferred tax assets, current
portion
|
|
$
|
5,332
|
|
|
$
|
844
|
|
Deferred tax assets, long-term
|
|
|
78
|
|
|
|
662
|
|
Deferred tax liabilities, long-term
|
|
|
(23,984
|
)
|
|
|
(18,881
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(18,574
|
)
|
|
$
|
(17,375
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, we had approximately
$188.7 million of domestic NOL carryforwards and
$31.5 million of foreign NOL and foreign capital loss
carryforwards, which either expire on various dates through 2026
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
$70.6 million of pre-acquisition losses at IMN, Ischemia,
Ostex and ADC. These pre-acquisition losses 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 valuation allowance relates to our U.S. NOLs
and deferred tax assets and certain other foreign deferred tax
assets and is recorded based upon the uncertainty surrounding
their realizability, as these assets can only be realized via
profitable operations in the respective tax jurisdictions.
In accordance with SFAS No. 109, the accounting for
the tax benefits of acquired deductible temporary differences
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, 2006, $17.3 million of
our deferred tax asset pertains to acquired companies, the
future benefits of which will be applied first to
F-48
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reduce to zero any goodwill and other non-current intangible
assets related to the acquisitions, prior to reducing our income
tax expense. Included in the valuation allowance is
approximately $2.6 million related to certain NOL
carryforwards resulting from the exercise of employee stock
options, the tax benefit of which, when recognized, will be
accounted for as a credit to additional paid-in capital rather
than a reduction of income tax.
Our China based manufacturing subsidiaries qualify for an income
tax holiday. The tax holiday provides an income tax rate of 0%
in 2006 and 2007. The income tax rate is scheduled to increase
to 16% for 2008, 2009, and 2010, and then to the regular tax
rate of 32% for 2011 and future years.
The estimated amount of undistributed earnings of our foreign
subsidiaries is $38.7 million at December 31, 2006. 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.
In accordance with SFAS No. 109 and
SFAS No. 5, Accounting for Contingencies, we
established reserves for tax contingencies that reflect our best
estimate of the transactions and deductions that we may be
unable to sustain or that we could be willing to concede as part
of a broader tax settlement. 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.
The following table presents the components of our provision for
income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Current :
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
$
|
423
|
|
|
$
|
256
|
|
|
$
|
404
|
|
Foreign
|
|
|
5,315
|
|
|
|
575
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,738
|
|
|
|
831
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred :
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,152
|
|
|
|
2,650
|
|
|
|
2,341
|
|
State
|
|
|
289
|
|
|
|
247
|
|
|
|
209
|
|
Foreign
|
|
|
(3,452
|
)
|
|
|
3,091
|
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
5,988
|
|
|
|
2,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
5,727
|
|
|
$
|
6,819
|
|
|
$
|
2,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents reconciliation from the U.S.
statutory tax rate to our effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Effect of losses and expenses not
benefited
|
|
|
(28
|
)
|
|
|
1
|
|
|
|
1
|
|
Rate differential on foreign
earnings
|
|
|
(2
|
)
|
|
|
55
|
|
|
|
12
|
|
Research and development benefit
|
|
|
14
|
|
|
|
(12
|
)
|
|
|
8
|
|
State income taxes, net of federal
benefit
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Deferred tax on indefinite-lived
assets
|
|
|
(31
|
)
|
|
|
(24
|
)
|
|
|
(21
|
)
|
Accrual to return reconciliation
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(27
|
)
|
|
|
(108
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(52
|
)%
|
|
|
(55
|
)%
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18)
|
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 Consumer
Diagnostic Products, Vitamins and Nutritional Supplements,
Professional Diagnostic Products, and Corporate and Other. Our
allocation of certain expenditures benefiting multiple segments
has been refined during 2005 and applied on a consistent basis
for all period presented below. Included in the operating
results of Corporate and Other are non-allocable corporate
expenditures and expenses related to our research and
development activities in the area of cardiology, the latter of
which amounted to $30.2 million, $16.8 million and
$19.4 million in 2006, 2005 and 2004, respectively. With
respect to cardiology expenditures in 2006 and 2005, the amount
included in Corporate and Other is net of $16.6 million and
$17.2 million, respectively, of reimbursements received
from ITI Scotland as part of the co-development arrangement that
we entered into in February 2005. Total assets in the area of
cardiology, which are included in Corporate and Other in the
tables below, amounted to $51.6 million at
December 31, 2006 and $41.2 million at
December 31, 2005.
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 2006, 2005, and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Vitamins and
|
|
|
Professional
|
|
|
Corporate
|
|
|
|
|
|
|
Diagnostic
|
|
|
Nutritional
|
|
|
Diagnostic
|
|
|
and
|
|
|
|
|
2006
|
|
Products
|
|
|
Supplements
|
|
|
Products
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Net revenue to external customers
|
|
$
|
176,771
|
|
|
$
|
82,051
|
|
|
$
|
310,632
|
|
|
$
|
|
|
|
$
|
569,454
|
|
Operating income (loss)
|
|
$
|
26,975
|
|
|
$
|
(3,013
|
)
|
|
$
|
42,554
|
|
|
$
|
(60,145
|
)
|
|
$
|
6,371
|
|
Depreciation and amortization
|
|
$
|
5,062
|
|
|
$
|
3,270
|
|
|
$
|
27,030
|
|
|
$
|
4,000
|
|
|
$
|
39,362
|
|
Restructuring charge
|
|
$
|
2,921
|
|
|
$
|
|
|
|
$
|
7,625
|
|
|
$
|
2,587
|
|
|
$
|
13,133
|
|
Stock-based compensation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,455
|
|
|
$
|
5,455
|
|
Assets
|
|
$
|
314,815
|
|
|
$
|
49,896
|
|
|
$
|
625,560
|
|
|
$
|
95,500
|
|
|
$
|
1,085,771
|
|
Expenditures for property, plant
and equipment
|
|
$
|
1,807
|
|
|
$
|
475
|
|
|
$
|
9,905
|
|
|
$
|
7,530
|
|
|
$
|
19,717
|
|
F-50
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(18) |
Financial Information by Segment (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Vitamins and
|
|
|
Professional
|
|
|
Corporate
|
|
|
|
|
|
|
Diagnostic
|
|
|
Nutritional
|
|
|
Diagnostic
|
|
|
and
|
|
|
|
|
2005
|
|
Products
|
|
|
Supplements
|
|
|
Products
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Net revenue to external customers
|
|
$
|
166,928
|
|
|
$
|
75,411
|
|
|
$
|
179,511
|
|
|
$
|
|
|
|
$
|
421,850
|
|
Operating income (loss)
|
|
$
|
25,117
|
|
|
$
|
(7,010
|
)
|
|
$
|
2,179
|
|
|
$
|
(31,059)
|
|
|
$
|
(10,773
|
)
|
Depreciation and amortization
|
|
$
|
8,464
|
|
|
$
|
3,460
|
|
|
$
|
13,915
|
|
|
$
|
1,917
|
|
|
$
|
27,756
|
|
Restructuring charge
|
|
$
|
4,797
|
|
|
$
|
|
|
|
$
|
303
|
|
|
$
|
|
|
|
$
|
5,100
|
|
Stock-based compensation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
169
|
|
|
$
|
169
|
|
Assets
|
|
$
|
253,063
|
|
|
$
|
52,967
|
|
|
$
|
434,796
|
|
|
$
|
50,340
|
|
|
$
|
791,166
|
|
Expenditures for property, plant
and equipment
|
|
$
|
8,020
|
|
|
$
|
3,439
|
|
|
$
|
6,578
|
|
|
$
|
2,196
|
|
|
$
|
20,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Vitamins and
|
|
|
Professional
|
|
|
Corporate
|
|
|
|
|
|
|
Diagnostic
|
|
|
Nutritional
|
|
|
Diagnostic
|
|
|
and
|
|
|
|
|
2004
|
|
Products
|
|
|
Supplements
|
|
|
Products
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Net revenue to external customers
|
|
$
|
164,211
|
|
|
$
|
77,923
|
|
|
$
|
131,857
|
|
|
$
|
|
|
|
$
|
373,991
|
|
Operating income (loss)
|
|
$
|
29,160
|
|
|
$
|
(1,003
|
)
|
|
$
|
5,840
|
|
|
$
|
(29,611)
|
|
|
$
|
4,386
|
|
Depreciation and amortization
|
|
$
|
9,642
|
|
|
$
|
3,686
|
|
|
$
|
9,430
|
|
|
$
|
742
|
|
|
$
|
23,500
|
|
Restructuring charge
|
|
$
|
1,725
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,725
|
|
Assets
|
|
$
|
243,001
|
|
|
$
|
48,072
|
|
|
$
|
264,260
|
|
|
$
|
12,936
|
|
|
$
|
568,269
|
|
Expenditures for property, plant
and equipment
|
|
$
|
6,779
|
|
|
$
|
2,530
|
|
|
$
|
6,499
|
|
|
$
|
4,581
|
|
|
$
|
20,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Revenue by Geographic
Area:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
335,405
|
|
|
$
|
244,719
|
|
|
$
|
222,640
|
|
Europe
|
|
|
136,971
|
|
|
|
111,838
|
|
|
|
100,693
|
|
Other
|
|
|
97,078
|
|
|
|
65,293
|
|
|
|
50,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
569,454
|
|
|
$
|
421,850
|
|
|
$
|
373,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Long-lived Tangible Assets by
Geographic Area:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
27,039
|
|
|
$
|
33,810
|
|
United Kingdom
|
|
|
31,470
|
|
|
|
31,316
|
|
China
|
|
|
15,815
|
|
|
|
1,593
|
|
Other
|
|
|
7,988
|
|
|
|
5,492
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,312
|
|
|
$
|
72,211
|
|
|
|
|
|
|
|
|
|
|
F-51
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(19)
|
Related
Party Transactions
|
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
Vice President of our Consumer Diagnostics business unit.
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 14).
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 14).
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 14).
|
|
(20)
|
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, discounts and other allowances
are charged against net product sales. The following table sets
forth activities in our accounts receivable reserve accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Charged
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
|
|
|
Against
|
|
|
End of
|
|
|
|
Period
|
|
|
Provision
|
|
|
Reserves
|
|
|
Period
|
|
|
|
(in thousands)
|
|
|
Year ended December 31, 2004
|
|
$
|
7,492
|
|
|
$
|
27,908
|
|
|
$
|
(26,041
|
)
|
|
$
|
9,359
|
|
Year ended December 31, 2005
|
|
$
|
9,359
|
|
|
$
|
25,015
|
|
|
$
|
(24,626
|
)
|
|
$
|
9,748
|
|
Year ended December 31, 2006
|
|
$
|
9,748
|
|
|
$
|
22,914
|
|
|
$
|
(24,261
|
)
|
|
$
|
8,401
|
|
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 costs of sales. The
following table sets forth activities in our inventory reserve
accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Charged
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
|
|
|
Against
|
|
|
End of
|
|
|
|
Period
|
|
|
Provision
|
|
|
Reserves
|
|
|
Period
|
|
|
|
(in thousands)
|
|
|
Year ended December 31, 2004
|
|
$
|
2,089
|
|
|
$
|
6,761
|
|
|
$
|
(4,724
|
)
|
|
$
|
4,126
|
|
Year ended December 31, 2005
|
|
$
|
4,126
|
|
|
$
|
10,057
|
|
|
$
|
(6,441
|
)
|
|
$
|
7,742
|
|
Year ended December 31, 2006
|
|
$
|
7,742
|
|
|
$
|
6,661
|
|
|
$
|
(6,184
|
)
|
|
$
|
8,219
|
|
F-52
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(21)
|
Restructuring
Activities
|
The following table sets forth the aggregate restructuring
charges for 2006, 2005, and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Severance
|
|
$
|
2,886
|
|
|
$
|
2,229
|
|
|
$
|
1,725
|
|
Fixed asset and inventory write-off
|
|
|
6,989
|
|
|
|
2,259
|
|
|
|
|
|
Intangible asset write-off
|
|
|
2,722
|
|
|
|
|
|
|
|
|
|
Facility and other exit costs
|
|
|
536
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,133
|
|
|
$
|
5,100
|
|
|
$
|
1,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Recent
Restructuring Plans
|
On May 22, 2006, we committed to a plan to cease operations
at our manufacturing facility in San Diego, California and
to write off certain excess manufacturing equipment at other
impacted facilities. Additionally, on June 7, 2006, we
committed to a plan to reorganize the sales and marketing and
customer service functions in certain of our
U.S. professional diagnostic companies. As a result of
these restructuring plans, we recorded $12.1 million in
restructuring charges during the year ended December 31,
2006. The $12.1 million charge included $2.5 million
related to severance charges, $6.9 million related to
impairment charges on fixed assets and inventory and
$2.7 million related to an impairment charge on an
intangible asset. This restructuring charge consisted of
$8.8 million charged to cost of sales, $2.9 million
charged to research and development, $0.2 million charged
to sales and marketing expenses and $0.2 million charged to
general and administrative expenses, of which $1.9 million,
$7.6 million and $2.6 million were included in our
consumer diagnostic products, professional diagnostic products
and corporate and other business segments, respectively.
We expect to complete these plans during the first half of 2007.
Including the charges recorded through December 31, 2006,
we expect the total restructuring charge related to these plans
to be approximately $12.6 million, with additional charges
of $0.1 million relating to severance and $0.4 million
relating to facility exit and closure costs. The total number of
employees to be involuntarily terminated under these plans is
132, of which 86 have been terminated as of December 31,
2006. Of the $2.5 million related to severance charges,
$1.6 million remains unpaid as of December 31, 2006.
|
|
(b)
|
2005
Restructuring Plan
|
On May 9, 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 diagnostic products 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 is included in our corporate and other business
segment for these periods (Note 22).
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
F-53
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(21) |
Restructuring Activities (Continued)
|
$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, $5.9 million and $0.3 million were included in
our consumer diagnostic products and professional diagnostic
products business segments, respectively. The $4.3 million
and $1.4 million gains are included in our corporate and
other business segment. The plan of termination is substantially
complete as of December 31, 2006 and all 113 employees
under this plan have been involuntarily terminated. All costs
related to severance, early retirement, outplacement services
and facility closing costs have been paid as of
December 31, 2006.
|
|
(c)
|
2004
Restructuring Plan
|
In the third quarter of 2004, we completed a plan of
restructuring at our operations at Unipath, our manufacturing
facility in Bedford, England, to reduce operating expenses and
organizational complexities and increase overall accountability
at Unipath. As a result, we recorded a $1.7 million
restructuring charge in the third quarter of 2004, which is
included in cost of sales in the accompanying statements of
operations, to cover costs for severance, early retirement and
outplacement services. The total number of involuntarily
terminated employees was 18, all of whom were terminated in
2004. All restructuring costs have been paid.
|
|
(d)
|
Restructuring
Reserves
|
The following table summarizes our liabilities related to
restructuring activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
to the
|
|
|
Amounts
|
|
|
|
|
|
End of
|
|
|
|
of Period
|
|
|
reserve
|
|
|
Paid
|
|
|
Other (i)
|
|
|
Period
|
|
|
|
(in thousands)
|
|
|
Year ended December 31, 2004
|
|
$
|
|
|
|
$
|
1,725
|
|
|
$
|
(1,725
|
)
|
|
$
|
|
|
|
$
|
|
|
Year ended December 31, 2005
|
|
$
|
|
|
|
$
|
2,841
|
|
|
$
|
(1,892
|
)
|
|
$
|
|
|
|
$
|
949
|
|
Year ended December 31, 2006
|
|
$
|
949
|
|
|
$
|
3,422
|
|
|
$
|
(2,820
|
)
|
|
$
|
14
|
|
|
$
|
1,565
|
|
|
|
|
(i) |
|
Represents foreign currency translation adjustment. |
|
|
(22)
|
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
(SMB) research operation, which is part of our
professional diagnostic products 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 estimated 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 diagnostic products business segment.
|
|
(23)
|
Guarantor
Financial Information
|
We issued $150.0 million in Bonds to qualified
institutional buyers in reliance on Rule 144A under the
Securities Act of 1933, as amended (the Securities
Act), and outside the United States in compliance with
Regulation S of the Securities Act (Note 6(b)). Our
payment obligations under the Bonds are guaranteed by all of our
domestic subsidiaries (the Guarantor Subsidiaries)
as of December 31, 2006. The guarantee is full and
unconditional. Separate financial statements of the Guarantor
Subsidiaries are not presented because we
F-54
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
have determined that they would not be material to investors in
the Bonds. The following supplemental financial information sets
forth, on a consolidating basis, the statements of operations
and cash flows for each of the three years in the period ended
December 31, 2006 and the balance sheets as of
December 31, 2006 and 2005 for our company (the
Issuer), the Guarantor Subsidiaries and our other
subsidiaries (the Non-Guarantor Subsidiaries). The
supplemental financial information reflects our investments and
the Guarantor Subsidiaries investments in the Guarantor
and Non-Guarantor Subsidiaries using the equity method of
accounting.
We have extensive transactions and relationships between various
members of the consolidated group. These transactions and
relationships include inter-company pricing agreements,
intellectual property royalty agreements and general and
administrative and research and development cost sharing
agreements. Because of these relationships, it is possible that
the terms of these transactions are not the same as those that
would result from transactions among wholly unrelated parties.
On October 20, 2004, our subsidiary IMN became a Guarantor
Subsidiary under the Bonds. Prior to this change, IMN was a
Non-Guarantor Subsidiary. As a result, we have included the
financial results of IMN in the results of the Guarantor
Subsidiaries in the following supplemental financial information
for all periods presented.
F-55
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net product sales
|
|
$
|
23,100
|
|
|
$
|
334,471
|
|
|
$
|
272,028
|
|
|
$
|
(77,469
|
)
|
|
$
|
552,130
|
|
License and royalty revenue
|
|
|
|
|
|
|
306
|
|
|
|
17,018
|
|
|
|
|
|
|
|
17,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
23,100
|
|
|
|
334,777
|
|
|
|
289,046
|
|
|
|
(77,469
|
)
|
|
|
569,454
|
|
Cost of sales
|
|
|
22,395
|
|
|
|
232,429
|
|
|
|
165,515
|
|
|
|
(80,108
|
)
|
|
|
340,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
705
|
|
|
|
102,348
|
|
|
|
123,531
|
|
|
|
2,639
|
|
|
|
229,223
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,750
|
|
|
|
7,705
|
|
|
|
44,211
|
|
|
|
|
|
|
|
53,666
|
|
Sales and marketing
|
|
|
4,096
|
|
|
|
48,684
|
|
|
|
41,665
|
|
|
|
|
|
|
|
94,445
|
|
General and administrative
|
|
|
21,345
|
|
|
|
18,999
|
|
|
|
30,899
|
|
|
|
|
|
|
|
71,243
|
|
Loss on dispositions, net
|
|
|
|
|
|
|
|
|
|
|
3,498
|
|
|
|
|
|
|
|
3,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
income
|
|
|
(26,486
|
)
|
|
|
26,960
|
|
|
|
3,258
|
|
|
|
2,639
|
|
|
|
6,371
|
|
Equity in earnings of
subsidiaries, net of tax
|
|
|
14,716
|
|
|
|
|
|
|
|
|
|
|
|
(14,716
|
)
|
|
|
|
|
Interest expense, including
amortization of original issue discounts and write-off of
deferred financing cost
|
|
|
(16,895
|
)
|
|
|
(6,206
|
)
|
|
|
(20,461
|
)
|
|
|
16,992
|
|
|
|
(26,570
|
)
|
Other income (expense), net
|
|
|
13,213
|
|
|
|
4,686
|
|
|
|
8,298
|
|
|
|
(17,113
|
)
|
|
|
9,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision
for income taxes
|
|
|
(15,452
|
)
|
|
|
25,440
|
|
|
|
(8,905
|
)
|
|
|
(12,198
|
)
|
|
|
(11,115
|
)
|
Provision for income taxes
|
|
|
1,390
|
|
|
|
2,012
|
|
|
|
1,935
|
|
|
|
390
|
|
|
|
5,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(16,842
|
)
|
|
$
|
23,428
|
|
|
$
|
(10,840
|
)
|
|
$
|
(12,588
|
)
|
|
$
|
(16,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2005
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net product sales
|
|
$
|
23,811
|
|
|
$
|
235,141
|
|
|
$
|
207,431
|
|
|
$
|
(59,926
|
)
|
|
$
|
406,457
|
|
License and royalty revenue
|
|
|
|
|
|
|
259
|
|
|
|
15,134
|
|
|
|
|
|
|
|
15,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
23,811
|
|
|
|
235,400
|
|
|
|
222,565
|
|
|
|
(59,926
|
)
|
|
|
421,850
|
|
Cost of sales
|
|
|
24,846
|
|
|
|
187,744
|
|
|
|
116,847
|
|
|
|
(59,899
|
)
|
|
|
269,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(1,035
|
)
|
|
|
47,656
|
|
|
|
105,718
|
|
|
|
(27
|
)
|
|
|
152,312
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
374
|
|
|
|
6,796
|
|
|
|
23,822
|
|
|
|
|
|
|
|
30,992
|
|
Sales and marketing
|
|
|
2,849
|
|
|
|
35,761
|
|
|
|
33,493
|
|
|
|
|
|
|
|
72,103
|
|
General and administrative
|
|
|
12,579
|
|
|
|
16,927
|
|
|
|
30,484
|
|
|
|
|
|
|
|
59,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
income
|
|
|
(16,837
|
)
|
|
|
(11,828
|
)
|
|
|
17,919
|
|
|
|
(27
|
)
|
|
|
(10,773
|
)
|
Equity in earnings of
subsidiaries, net of tax
|
|
|
13,537
|
|
|
|
|
|
|
|
|
|
|
|
(13,537
|
)
|
|
|
|
|
Interest expense, including
amortization of original issue discounts and write-off of
deferred financing cost
|
|
|
(16,502
|
)
|
|
|
(2,941
|
)
|
|
|
(7,839
|
)
|
|
|
5,487
|
|
|
|
(21,795
|
)
|
Other income (expense), net
|
|
|
1,461
|
|
|
|
6,762
|
|
|
|
17,442
|
|
|
|
(5,487
|
)
|
|
|
20,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision
for income taxes
|
|
|
(18,341
|
)
|
|
|
(8,007
|
)
|
|
|
27,522
|
|
|
|
(13,564
|
)
|
|
|
(12,390
|
)
|
Provision for income taxes
|
|
|
868
|
|
|
|
2,283
|
|
|
|
3,494
|
|
|
|
174
|
|
|
|
6,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(19,209
|
)
|
|
$
|
(10,290
|
)
|
|
$
|
24,028
|
|
|
$
|
(13,738
|
)
|
|
$
|
(19,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2004
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net product sales
|
|
$
|
20,842
|
|
|
$
|
214,132
|
|
|
$
|
180,685
|
|
|
$
|
(50,227
|
)
|
|
$
|
365,432
|
|
License and royalty revenue
|
|
|
|
|
|
|
114
|
|
|
|
8,445
|
|
|
|
|
|
|
|
8,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
20,842
|
|
|
|
214,246
|
|
|
|
189,130
|
|
|
|
(50,227
|
)
|
|
|
373,991
|
|
Cost of sales
|
|
|
20,182
|
|
|
|
164,383
|
|
|
|
92,713
|
|
|
|
(50,291
|
)
|
|
|
226,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
660
|
|
|
|
49,863
|
|
|
|
96,417
|
|
|
|
64
|
|
|
|
147,004
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
246
|
|
|
|
3,088
|
|
|
|
28,620
|
|
|
|
|
|
|
|
31,954
|
|
Sales and marketing
|
|
|
1,899
|
|
|
|
25,377
|
|
|
|
30,681
|
|
|
|
|
|
|
|
57,957
|
|
General and administrative
|
|
|
10,982
|
|
|
|
14,716
|
|
|
|
27,009
|
|
|
|
|
|
|
|
52,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
income
|
|
|
(12,467
|
)
|
|
|
6,682
|
|
|
|
10,107
|
|
|
|
64
|
|
|
|
4,386
|
|
Equity in earnings of
subsidiaries, net of tax
|
|
|
7,394
|
|
|
|
|
|
|
|
|
|
|
|
(7,394
|
)
|
|
|
|
|
Interest expense, including
amortization of original issue discounts and write-off of
deferred financing cost
|
|
|
(15,345
|
)
|
|
|
(5,699
|
)
|
|
|
(5,893
|
)
|
|
|
4,823
|
|
|
|
(22,114
|
)
|
Other income (expense), net
|
|
|
4,870
|
|
|
|
1,857
|
|
|
|
1,503
|
|
|
|
(4,823
|
)
|
|
|
3,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision
(benefit) for income taxes
|
|
|
(15,548
|
)
|
|
|
2,840
|
|
|
|
5,717
|
|
|
|
(7,330
|
)
|
|
|
(14,321
|
)
|
Provision (benefit) for income
taxes
|
|
|
1,048
|
|
|
|
1,276
|
|
|
|
(458
|
)
|
|
|
409
|
|
|
|
2,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(16,596
|
)
|
|
$
|
1,564
|
|
|
$
|
6,175
|
|
|
$
|
(7,739
|
)
|
|
$
|
(16,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
December 31, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,350
|
|
|
$
|
19,755
|
|
|
$
|
34,999
|
|
|
$
|
|
|
|
$
|
71,104
|
|
Accounts receivable, net of
allowances
|
|
|
2,538
|
|
|
|
53,544
|
|
|
|
44,306
|
|
|
|
|
|
|
|
100,388
|
|
Inventories, net
|
|
|
5,984
|
|
|
|
38,804
|
|
|
|
37,116
|
|
|
|
(3,582
|
)
|
|
|
78,322
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
5,332
|
|
|
|
|
|
|
|
5,332
|
|
Prepaid expenses and other current
assets
|
|
|
2,238
|
|
|
|
2,444
|
|
|
|
15,716
|
|
|
|
|
|
|
|
20,398
|
|
Intercompany receivables
|
|
|
57,748
|
|
|
|
67,589
|
|
|
|
8,542
|
|
|
|
(133,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
84,858
|
|
|
|
182,136
|
|
|
|
146,011
|
|
|
|
(137,461
|
)
|
|
|
275,544
|
|
Property, plant and equipment, net
|
|
|
2,098
|
|
|
|
24,710
|
|
|
|
55,504
|
|
|
|
|
|
|
|
82,312
|
|
Goodwill
|
|
|
71,136
|
|
|
|
109,116
|
|
|
|
259,117
|
|
|
|
|
|
|
|
439,369
|
|
Other intangible assets with
indefinite lives
|
|
|
|
|
|
|
21,120
|
|
|
|
46,987
|
|
|
|
|
|
|
|
68,107
|
|
Core technology and patents, net
|
|
|
18,496
|
|
|
|
13,304
|
|
|
|
55,932
|
|
|
|
|
|
|
|
87,732
|
|
Other intangible assets, net
|
|
|
14,321
|
|
|
|
31,098
|
|
|
|
38,375
|
|
|
|
|
|
|
|
83,794
|
|
Deferred financing costs, net, and
other non-current assets
|
|
|
6,314
|
|
|
|
2,277
|
|
|
|
4,627
|
|
|
|
|
|
|
|
13,218
|
|
Other investments and
available-for-sale securities
|
|
|
387,818
|
|
|
|
(778
|
)
|
|
|
10,835
|
|
|
|
(362,258
|
)
|
|
|
35,617
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
78
|
|
Intercompany notes receivable
|
|
|
355,074
|
|
|
|
56,267
|
|
|
|
|
|
|
|
(411,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
940,115
|
|
|
$
|
439,250
|
|
|
$
|
617,466
|
|
|
$
|
(911,060
|
)
|
|
$
|
1,085,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
|
$
|
450
|
|
|
$
|
7,054
|
|
|
$
|
|
|
|
$
|
7,504
|
|
Current portion of capital lease
obligations
|
|
|
|
|
|
|
551
|
|
|
|
33
|
|
|
|
|
|
|
|
584
|
|
Accounts payable
|
|
|
5,302
|
|
|
|
19,998
|
|
|
|
21,042
|
|
|
|
|
|
|
|
46,342
|
|
Accrued expenses and other current
liabilities
|
|
|
24,920
|
|
|
|
19,721
|
|
|
|
42,642
|
|
|
|
518
|
|
|
|
87,801
|
|
Intercompany payables
|
|
|
40,803
|
|
|
|
35,967
|
|
|
|
60,179
|
|
|
|
(136,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
71,025
|
|
|
|
76,687
|
|
|
|
130,950
|
|
|
|
(136,431
|
)
|
|
|
142,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current
portion
|
|
|
150,000
|
|
|
|
44,325
|
|
|
|
148
|
|
|
|
|
|
|
|
194,473
|
|
Capital lease obligations, net of
current portion
|
|
|
|
|
|
|
360
|
|
|
|
55
|
|
|
|
|
|
|
|
415
|
|
Deferred tax liabilities
|
|
|
4,903
|
|
|
|
8,149
|
|
|
|
10,932
|
|
|
|
|
|
|
|
23,984
|
|
Other long-term liabilities
|
|
|
49
|
|
|
|
305
|
|
|
|
10,176
|
|
|
|
|
|
|
|
10,530
|
|
Intercompany notes payable
|
|
|
|
|
|
|
85,983
|
|
|
|
322,275
|
|
|
|
(408,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
liabilities
|
|
|
154,952
|
|
|
|
139,122
|
|
|
|
343,586
|
|
|
|
(408,258
|
)
|
|
|
229,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
714,138
|
|
|
|
223,441
|
|
|
|
142,930
|
|
|
|
(366,371
|
)
|
|
|
714,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
940,115
|
|
|
$
|
439,250
|
|
|
$
|
617,466
|
|
|
$
|
(911,060
|
)
|
|
$
|
1,085,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
December 31, 2005
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,196
|
|
|
$
|
8,080
|
|
|
$
|
24,994
|
|
|
$
|
|
|
|
$
|
34,270
|
|
Accounts receivable, net of
allowances
|
|
|
2,344
|
|
|
|
34,834
|
|
|
|
33,298
|
|
|
|
|
|
|
|
70,476
|
|
Inventories, net
|
|
|
7,518
|
|
|
|
42,794
|
|
|
|
26,997
|
|
|
|
(6,100
|
)
|
|
|
71,209
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
844
|
|
|
|
|
|
|
|
844
|
|
Prepaid expenses and other current
assets
|
|
|
2,228
|
|
|
|
2,720
|
|
|
|
12,586
|
|
|
|
|
|
|
|
17,534
|
|
Intercompany receivables
|
|
|
38,919
|
|
|
|
34,346
|
|
|
|
19,974
|
|
|
|
(93,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
52,205
|
|
|
|
122,774
|
|
|
|
118,693
|
|
|
|
(99,339
|
)
|
|
|
194,333
|
|
Property, plant and equipment, net
|
|
|
2,632
|
|
|
|
31,164
|
|
|
|
38,415
|
|
|
|
|
|
|
|
72,211
|
|
Goodwill
|
|
|
72,787
|
|
|
|
109,637
|
|
|
|
139,786
|
|
|
|
|
|
|
|
322,210
|
|
Other intangible assets with
indefinite lives
|
|
|
8,700
|
|
|
|
12,420
|
|
|
|
42,622
|
|
|
|
|
|
|
|
63,742
|
|
Core technology and patents, net
|
|
|
28,269
|
|
|
|
5,556
|
|
|
|
30,225
|
|
|
|
|
|
|
|
64,050
|
|
Other intangible assets, net
|
|
|
20,321
|
|
|
|
18,429
|
|
|
|
21,739
|
|
|
|
|
|
|
|
60,489
|
|
Deferred financing costs, net, and
other non-current assets
|
|
|
6,696
|
|
|
|
2,051
|
|
|
|
4,266
|
|
|
|
|
|
|
|
13,013
|
|
Other investments
|
|
|
297,607
|
|
|
|
(866
|
)
|
|
|
160
|
|
|
|
(296,445
|
)
|
|
|
456
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
662
|
|
|
|
|
|
|
|
662
|
|
Intercompany notes receivable
|
|
|
130,001
|
|
|
|
43,066
|
|
|
|
|
|
|
|
(173,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
619,218
|
|
|
$
|
344,231
|
|
|
$
|
396,568
|
|
|
$
|
(568,851
|
)
|
|
$
|
791,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,367
|
|
|
$
|
|
|
|
$
|
2,367
|
|
Current portion of capital lease
obligations
|
|
|
|
|
|
|
508
|
|
|
|
34
|
|
|
|
|
|
|
|
542
|
|
Accounts payable
|
|
|
1,549
|
|
|
|
25,438
|
|
|
|
15,168
|
|
|
|
|
|
|
|
42,155
|
|
Accrued expenses and other current
liabilities
|
|
|
12,935
|
|
|
|
22,939
|
|
|
|
28,872
|
|
|
|
|
|
|
|
64,746
|
|
Intercompany payables
|
|
|
34,070
|
|
|
|
31,357
|
|
|
|
27,812
|
|
|
|
(93,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
48,554
|
|
|
|
80,242
|
|
|
|
74,253
|
|
|
|
(93,239
|
)
|
|
|
109,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current
portion
|
|
|
169,456
|
|
|
|
60,000
|
|
|
|
29,161
|
|
|
|
|
|
|
|
258,617
|
|
Capital lease obligations, net of
current portion
|
|
|
|
|
|
|
914
|
|
|
|
64
|
|
|
|
|
|
|
|
978
|
|
Deferred tax liabilities
|
|
|
3,900
|
|
|
|
5,964
|
|
|
|
8,889
|
|
|
|
128
|
|
|
|
18,881
|
|
Other long-term liabilities
|
|
|
|
|
|
|
278
|
|
|
|
5,294
|
|
|
|
|
|
|
|
5,572
|
|
Intercompany notes payable
|
|
|
|
|
|
|
42,331
|
|
|
|
130,736
|
|
|
|
(173,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
liabilities
|
|
|
173,356
|
|
|
|
109,487
|
|
|
|
174,144
|
|
|
|
(172,939
|
)
|
|
|
284,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
397,308
|
|
|
|
154,502
|
|
|
|
148,171
|
|
|
|
(302,673
|
)
|
|
|
397,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
619,218
|
|
|
$
|
344,231
|
|
|
$
|
396,568
|
|
|
$
|
(568,851
|
)
|
|
$
|
791,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(16,842
|
)
|
|
$
|
23,428
|
|
|
$
|
(10,840
|
)
|
|
$
|
(12,588
|
)
|
|
$
|
(16,842
|
)
|
Adjustments to reconcile net
(loss) income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of
subsidiaries, net of tax
|
|
|
(14,716
|
)
|
|
|
|
|
|
|
|
|
|
|
14,716
|
|
|
|
|
|
Interest expense related to
amortization and write-off of non-cash original issue discount,
non-cash beneficial conversion feature and deferred financing
costs
|
|
|
1,937
|
|
|
|
1,213
|
|
|
|
1,008
|
|
|
|
|
|
|
|
4,158
|
|
Non-cash loss related to currency
hedge and interest swap agreement
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(217
|
)
|
Non-cash stock-based compensation
expense
|
|
|
5,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,455
|
|
Charge for in-process research and
development
|
|
|
|
|
|
|
|
|
|
|
4,960
|
|
|
|
|
|
|
|
4,960
|
|
Non-cash value of settlement of
litigation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
5,646
|
|
|
|
3,927
|
|
|
|
|
|
|
|
9,573
|
|
(Gain) loss on sale of fixed assets
|
|
|
|
|
|
|
9
|
|
|
|
(1,537
|
)
|
|
|
|
|
|
|
(1,528
|
)
|
Interest in minority investments
|
|
|
(635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(635
|
)
|
Depreciation and amortization
|
|
|
4,989
|
|
|
|
13,378
|
|
|
|
20,995
|
|
|
|
|
|
|
|
39,362
|
|
Deferred income taxes
|
|
|
84
|
|
|
|
2,186
|
|
|
|
(2,551
|
)
|
|
|
(128
|
)
|
|
|
(409
|
)
|
Other non-cash items
|
|
|
159
|
|
|
|
|
|
|
|
555
|
|
|
|
|
|
|
|
714
|
|
Changes in assets and liabilities,
net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(194
|
)
|
|
|
(8,931
|
)
|
|
|
(4,721
|
)
|
|
|
|
|
|
|
(13,846
|
)
|
Inventories, net
|
|
|
1,534
|
|
|
|
5,533
|
|
|
|
(4,382
|
)
|
|
|
(2,518
|
)
|
|
|
167
|
|
Prepaid expenses and other current
assets
|
|
|
(10
|
)
|
|
|
740
|
|
|
|
(816
|
)
|
|
|
|
|
|
|
(86
|
)
|
Intercompany payable (receivable)
|
|
|
(12,998
|
)
|
|
|
(15,288
|
)
|
|
|
28,409
|
|
|
|
(123
|
)
|
|
|
|
|
Accounts payable
|
|
|
3,757
|
|
|
|
(5,652
|
)
|
|
|
2,105
|
|
|
|
|
|
|
|
210
|
|
Accrued expenses and other current
liabilities
|
|
|
2,510
|
|
|
|
(4,962
|
)
|
|
|
5,228
|
|
|
|
518
|
|
|
|
3,294
|
|
Other non-current liabilities
|
|
|
|
|
|
|
28
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(25,187
|
)
|
|
|
17,328
|
|
|
|
42,252
|
|
|
|
(123
|
)
|
|
|
34,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-61
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS (Continued)
For the Year Ended December 31, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(558
|
)
|
|
|
(3,332
|
)
|
|
|
(15,827
|
)
|
|
|
|
|
|
|
(19,717
|
)
|
Proceeds from sale of property,
plant and equipment
|
|
|
|
|
|
|
15
|
|
|
|
2,229
|
|
|
|
|
|
|
|
2,244
|
|
Cash paid for purchase of
Ischemia, net of cash acquired
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
Cash paid for purchase of IDT
Spain, net of cash acquired
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237
|
)
|
Cash paid for purchase of
Clondiag, net of cash acquired
|
|
|
(5,338
|
)
|
|
|
|
|
|
|
(12,238
|
)
|
|
|
|
|
|
|
(17,576
|
)
|
Cash paid for purchase of
Innovacon business including ABON, net of cash acquired
|
|
|
(64,128
|
)
|
|
|
|
|
|
|
(48,515
|
)
|
|
|
|
|
|
|
(112,643
|
)
|
Cash paid for purchase of other
businesses and intellectual property
|
|
|
(801
|
)
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
(910
|
)
|
Cash paid for investments in
minority interests and
available-for-sale
securities
|
|
|
(14,455
|
)
|
|
|
|
|
|
|
(11,362
|
)
|
|
|
|
|
|
|
(25,817
|
)
|
Increase in other assets
|
|
|
(933
|
)
|
|
|
(133
|
)
|
|
|
(3,011
|
)
|
|
|
|
|
|
|
(4,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(86,549
|
)
|
|
|
(3,559
|
)
|
|
|
(88,724
|
)
|
|
|
|
|
|
|
(178,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for financing costs
|
|
|
(79
|
)
|
|
|
(1,358
|
)
|
|
|
(1,350
|
)
|
|
|
|
|
|
|
(2,787
|
)
|
Proceeds from issuance of common
stock, net of issuance costs
|
|
|
234,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,961
|
|
Stock-based compensation tax
benefit
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
567
|
|
Net (payments) proceeds under
revolving line of credit
|
|
|
|
|
|
|
(15,225
|
)
|
|
|
(32,654
|
)
|
|
|
|
|
|
|
(47,879
|
)
|
Repayments of notes payable
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
Repayments of notes receivable
|
|
|
14,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,691
|
|
Principal payments of capital
lease obligations
|
|
|
|
|
|
|
(511
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
(546
|
)
|
Intercompany notes payable
(receivable)
|
|
|
(103,247
|
)
|
|
|
15,000
|
|
|
|
88,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
126,893
|
|
|
|
(2,094
|
)
|
|
|
54,208
|
|
|
|
|
|
|
|
179,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on cash
and cash equivalents
|
|
|
(3
|
)
|
|
|
|
|
|
|
2,269
|
|
|
|
123
|
|
|
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
15,154
|
|
|
|
11,675
|
|
|
|
10,005
|
|
|
|
|
|
|
|
36,834
|
|
Cash and cash equivalents,
beginning of year
|
|
|
1,196
|
|
|
|
8,080
|
|
|
|
24,994
|
|
|
|
|
|
|
|
34,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of year
|
|
$
|
16,350
|
|
|
$
|
19,755
|
|
|
$
|
34,999
|
|
|
$
|
|
|
|
$
|
71,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2005
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(19,436
|
)
|
|
$
|
(10,290
|
)
|
|
$
|
24,028
|
|
|
$
|
(13,511
|
)
|
|
$
|
(19,209
|
)
|
Adjustments to reconcile net
(loss) income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of
subsidiaries, net of tax
|
|
|
(13,310
|
)
|
|
|
|
|
|
|
|
|
|
|
13,310
|
|
|
|
|
|
Interest expense related to
amortization of original issue discount, non-cash beneficial
conversion feature and write-off of deferred financing costs
|
|
|
1,181
|
|
|
|
665
|
|
|
|
499
|
|
|
|
|
|
|
|
2,345
|
|
Non-cash loss related to currency
hedge and interest swap agreement
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217
|
|
Non-cash stock-based compensation
expense
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
Non-cash value of settlement of
litigation
|
|
|
|
|
|
|
|
|
|
|
(2,593
|
)
|
|
|
|
|
|
|
(2,593
|
)
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
1,740
|
|
|
|
|
|
|
|
1,740
|
|
(Gain) loss on sale of fixed assets
|
|
|
|
|
|
|
(13
|
)
|
|
|
276
|
|
|
|
|
|
|
|
263
|
|
Depreciation and amortization
|
|
|
3,877
|
|
|
|
10,178
|
|
|
|
13,701
|
|
|
|
|
|
|
|
27,756
|
|
Deferred income taxes
|
|
|
665
|
|
|
|
2,231
|
|
|
|
2,899
|
|
|
|
174
|
|
|
|
5,969
|
|
Other non-cash items
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
Changes in assets and liabilities,
net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
316
|
|
|
|
12,039
|
|
|
|
(1,951
|
)
|
|
|
|
|
|
|
10,404
|
|
Inventories, net
|
|
|
(1,558
|
)
|
|
|
3,530
|
|
|
|
(6,046
|
)
|
|
|
27
|
|
|
|
(4,047
|
)
|
Prepaid expenses and other current
assets
|
|
|
(950
|
)
|
|
|
815
|
|
|
|
(7,463
|
)
|
|
|
|
|
|
|
(7,598
|
)
|
Intercompany payable (receivable)
|
|
|
3,390
|
|
|
|
(9,143
|
)
|
|
|
5,055
|
|
|
|
698
|
|
|
|
|
|
Accounts payable
|
|
|
(3,066
|
)
|
|
|
4,914
|
|
|
|
4,353
|
|
|
|
|
|
|
|
6,201
|
|
Accrued expenses and other current
liabilities
|
|
|
(915
|
)
|
|
|
(2,092
|
)
|
|
|
7,503
|
|
|
|
|
|
|
|
4,496
|
|
Other non-current liabilities
|
|
|
|
|
|
|
(3
|
)
|
|
|
342
|
|
|
|
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(29,279
|
)
|
|
|
12,831
|
|
|
|
42,343
|
|
|
|
698
|
|
|
|
26,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-63
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS (Continued)
For the Year Ended December 31, 2005
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(613
|
)
|
|
|
(6,851
|
)
|
|
|
(12,769
|
)
|
|
|
|
|
|
|
(20,233
|
)
|
Proceeds from sale of property,
plant and equipment
|
|
|
|
|
|
|
81
|
|
|
|
160
|
|
|
|
|
|
|
|
241
|
|
Cash paid for purchase of
Ischemia, net of cash acquired
|
|
|
(4,211
|
)
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
(4,096
|
)
|
Cash paid for purchase of Binax,
net of cash acquired
|
|
|
(9,528
|
)
|
|
|
1,556
|
|
|
|
|
|
|
|
|
|
|
|
(7,972
|
)
|
Cash paid for purchase of the
Determine business
|
|
|
(1,602
|
)
|
|
|
|
|
|
|
(56,500
|
)
|
|
|
|
|
|
|
(58,102
|
)
|
Cash paid for purchase of BioStar
|
|
|
(53,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,607
|
)
|
Cash paid for purchase of IDT
Spain, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(20,030
|
)
|
|
|
|
|
|
|
(20,030
|
)
|
Cash paid for purchase of other
businesses and intellectual property
|
|
|
(63
|
)
|
|
|
(141
|
)
|
|
|
(4,971
|
)
|
|
|
|
|
|
|
(5,175
|
)
|
Increase in other assets
|
|
|
(128
|
)
|
|
|
(282
|
)
|
|
|
(1,377
|
)
|
|
|
|
|
|
|
(1,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(69,752
|
)
|
|
|
(5,522
|
)
|
|
|
(95,487
|
)
|
|
|
|
|
|
|
(170,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for financing costs
|
|
|
(148
|
)
|
|
|
(1,388
|
)
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
(2,873
|
)
|
Proceeds from issuance of common
stock, net of issuance costs
|
|
|
97,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,440
|
|
Net (payments) proceeds under
revolving line of credit
|
|
|
(77
|
)
|
|
|
40,000
|
|
|
|
29,519
|
|
|
|
|
|
|
|
69,442
|
|
Proceeds from issuance of notes
payable
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
269
|
|
Principal payments of capital
lease obligations
|
|
|
|
|
|
|
(488
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
(501
|
)
|
Intercompany notes payable
(receivable)
|
|
|
3,000
|
|
|
|
(41,000
|
)
|
|
|
38,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
100,215
|
|
|
|
(2,876
|
)
|
|
|
66,438
|
|
|
|
|
|
|
|
163,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on cash
and cash equivalents
|
|
|
|
|
|
|
96
|
|
|
|
(1,493
|
)
|
|
|
(698
|
)
|
|
|
(2,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
1,184
|
|
|
|
4,529
|
|
|
|
11,801
|
|
|
|
|
|
|
|
17,514
|
|
Cash and cash equivalents,
beginning of year
|
|
|
12
|
|
|
|
3,551
|
|
|
|
13,193
|
|
|
|
|
|
|
|
16,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of year
|
|
$
|
1,196
|
|
|
$
|
8,080
|
|
|
$
|
24,994
|
|
|
$
|
|
|
|
$
|
34,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-64
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2004
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash Flows from Operating
Activities:
|
Net (loss) income
|
|
$
|
(16,596
|
)
|
|
$
|
1,564
|
|
|
$
|
6,175
|
|
|
$
|
(7,739
|
)
|
|
$
|
(16,596
|
)
|
Adjustments to reconcile net
(loss) income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of
subsidiaries, net of tax
|
|
|
(7,394
|
)
|
|
|
|
|
|
|
|
|
|
|
7,394
|
|
|
|
|
|
Interest expense related to
amortization of non-cash original issue discount, non-cash
beneficial conversion feature and deferred financing costs
|
|
|
1,181
|
|
|
|
3,282
|
|
|
|
466
|
|
|
|
|
|
|
|
4,929
|
|
Non-cash gain related to currency
hedge and interest rate swap agreement
|
|
|
(695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(695
|
)
|
Non-cash value on settlement of
litigation
|
|
|
|
|
|
|
|
|
|
|
(495
|
)
|
|
|
|
|
|
|
(495
|
)
|
Depreciation and amortization
|
|
|
1,051
|
|
|
|
8,884
|
|
|
|
13,565
|
|
|
|
|
|
|
|
23,500
|
|
Deferred income taxes
|
|
|
1,056
|
|
|
|
1,497
|
|
|
|
(733
|
)
|
|
|
412
|
|
|
|
2,232
|
|
Other non-cash items
|
|
|
|
|
|
|
40
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
(36
|
)
|
Changes in assets and liabilities,
net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
1,255
|
|
|
|
(1,049
|
)
|
|
|
(4,301
|
)
|
|
|
|
|
|
|
(4,095
|
)
|
Inventories, net
|
|
|
(1,497
|
)
|
|
|
(7,686
|
)
|
|
|
(1,826
|
)
|
|
|
(64
|
)
|
|
|
(11,073
|
)
|
Prepaid expenses and other current
assets
|
|
|
86
|
|
|
|
(54
|
)
|
|
|
2,084
|
|
|
|
|
|
|
|
2,116
|
|
Intercompany payable (receivable)
|
|
|
10,082
|
|
|
|
(12,268
|
)
|
|
|
2,778
|
|
|
|
(592
|
)
|
|
|
|
|
Accounts payable
|
|
|
(2,773
|
)
|
|
|
(283
|
)
|
|
|
(3,841
|
)
|
|
|
|
|
|
|
(6,897
|
)
|
Accrued expenses and other current
liabilities
|
|
|
6,925
|
|
|
|
2,903
|
|
|
|
5,221
|
|
|
|
|
|
|
|
15,049
|
|
Other non-current liabilities
|
|
|
|
|
|
|
29
|
|
|
|
327
|
|
|
|
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(7,319
|
)
|
|
|
(3,141
|
)
|
|
|
19,344
|
|
|
|
(589
|
)
|
|
|
8,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-65
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Guarantor Financial Information (Continued)
INVERNESS
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS (Continued)
For the Year Ended December 31, 2004
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(1,635
|
)
|
|
|
(7,836
|
)
|
|
|
(10,918
|
)
|
|
|
|
|
|
|
(20,389
|
)
|
Proceeds from sale of property,
plant and equipment
|
|
|
|
|
|
|
244
|
|
|
|
141
|
|
|
|
|
|
|
|
385
|
|
Cash paid for purchase of other
businesses and intellectual property
|
|
|
(4,791
|
)
|
|
|
(1,624
|
)
|
|
|
(5,994
|
)
|
|
|
|
|
|
|
(12,409
|
)
|
(Increase) decrease in other assets
|
|
|
(1,069
|
)
|
|
|
79
|
|
|
|
(899
|
)
|
|
|
|
|
|
|
(1,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(7,495
|
)
|
|
|
(9,137
|
)
|
|
|
(17,670
|
)
|
|
|
|
|
|
|
(34,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for financing costs
|
|
|
(5,055
|
)
|
|
|
(430
|
)
|
|
|
(186
|
)
|
|
|
|
|
|
|
(5,671
|
)
|
Proceeds from issuance of common
stock, net of issuance costs
|
|
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,905
|
|
Net (repayments) proceeds under
revolving line of credit
|
|
|
77
|
|
|
|
(7,682
|
)
|
|
|
(23,225
|
)
|
|
|
|
|
|
|
(30,830
|
)
|
Proceeds from issuance of senior
subordinated notes
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Repayments of notes payable
|
|
|
(9,000
|
)
|
|
|
(78,817
|
)
|
|
|
(10,013
|
)
|
|
|
|
|
|
|
(97,830
|
)
|
Principal payments of capital
lease obligations
|
|
|
|
|
|
|
(473
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(477
|
)
|
Intercompany notes (receivable)
payable
|
|
|
(124,809
|
)
|
|
|
91,949
|
|
|
|
32,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
13,118
|
|
|
|
4,547
|
|
|
|
(568
|
)
|
|
|
|
|
|
|
17,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on cash
and cash equivalents
|
|
|
|
|
|
|
(33
|
)
|
|
|
488
|
|
|
|
589
|
|
|
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(1,696
|
)
|
|
|
(7,764
|
)
|
|
|
1,594
|
|
|
|
|
|
|
|
(7,866
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
1,708
|
|
|
|
11,315
|
|
|
|
11,599
|
|
|
|
|
|
|
|
24,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of year
|
|
$
|
12
|
|
|
$
|
3,551
|
|
|
$
|
13,193
|
|
|
$
|
|
|
|
$
|
16,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66