EX-99.1 3 b66066bbexv99w1.htm EX-99.1 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS exv99w1
 

Exhibit 99.1
INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OVERVIEW
     On June 29, 2007, we completed our acquisition of Biosite Incorporated (“Biosite”) for a preliminary aggregate purchase price of $1.79 billion, including $1.76 billion of cash share acquisition costs and related transaction expenses and $25.9 million of fair value associated with the outstanding fully vested Biosite employee stock options which were converted to options to acquire our common stock as part of the transaction. Biosite is a global medical diagnostic company utilizing a biotechnology approach to create products for the diagnosis of critical diseases and conditions. Biosite’s primary business goal is to leverage its research and development advances and installed base of existing customers to deliver first-in-class blood tests that provide diagnostic information not readily available to physicians treating acute diseases and conditions.
     In addition to the acquisition of Biosite, on June 4, 2007, we entered into an Agreement and Plan of Reorganization (the “Merger Agreement”), pursuant to which we agreed to acquire Cholestech Corporation (“Cholestech”) through the merger of our wholly owned subsidiary, Iris Merger Sub, Inc., with and into Cholestech (the “Merger”). Cholestech is a leading provider of diagnostic tools and information for immediate risk assessment and therapeutic monitoring of heart disease and inflammatory disorders. The completion of the Merger is subject to various closing conditions, including obtaining the approval of Cholestech stockholders and receiving antitrust approvals (including under the Hart-Scott-Rodino Antitrust Improvements Act). The Merger is intended to qualify as a reorganization for United States federal income tax purposes and is expected to close during the third quarter of 2007.
     The accompanying unaudited pro forma condensed combined financial statements (the “Financial Statements”) are based on the respective historical consolidated financial statements and the notes thereto of Inverness and Biosite and reflect the related financing activities noted below. The Financial Statements also reflect our probable acquisition of Cholestech. The Financial Statements also reflect our previous acquisitions of Instant Technologies, Inc. (“Instant”) and the Innovacon business, including the ABON facility (“Innovacon”). All acquisitions are reflected using the purchase method of accounting and assumptions and adjustments described below and in the notes to the Financial Statements. Actual operating results of the previous acquisitions are included in Inverness’ historical financial results only from the respective dates of the several acquisitions.
     The Financial Statements also reflect our previous transfer of our consumer diagnostic products assets to a 50/50 joint venture with The Procter & Gamble Company (“P&G”), the elimination of the historical results of operations of our consumer diagnostic products business, and the impact of the new manufacturing agreement with the joint venture on our historical results of operations.
     The historical Biosite and Cholestech financial information included in the accompanying unaudited pro forma condensed combined statements of operations for the year ended December 31, 2006 and the three months ended March 31, 2007 are the pre-acquisition results of Biosite and Cholestech. The historical Instant financial information included in the accompanying unaudited pro forma condensed combined statements of operations for the year ended December 31, 2006 and for the three months ended March 31, 2007 includes results of operations for the pre-acquisition period ended March 12, 2007, which represent the historical pre-acquisition results of Instant. The historical Innovacon financial information included in the accompanying unaudited pro forma condensed combined statements of operations for the year ended December 31, 2006 includes results of operations for the pre-acquisition period ended March 31, 2006, which represent the historical pre-acquisition results of Innovacon.
     For purposes of preparing the Financial Statements, the historical financial information for both Inverness and Cholestech are based on the year ended December 31, 2006 and the three months ended March 31, 2007. These periods differ from the fiscal periods that Cholestech uses for financial reporting purposes, and accordingly the following historical financial information for Cholestech does not match Cholestech’s historical financial statements filed with the SEC and is unaudited.

 

 

     The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2006 and the three months ended March 31, 2007 assume that the acquisition of Biosite, the pending acquisition of Cholestech, the previous acquisitions of Instant and Innovacon and the consummation of the 50/50 joint venture with P&G occurred on January 1, 2006. The unaudited pro forma condensed combined balance sheet assumes that the acquisition of Biosite and the related financing transactions, the pending acquisition of Cholestech and the consummation of the 50/50 joint venture with P&G occurred on March 31, 2007. The historical Inverness balance sheet as of March 31, 2007 reflects Instant and Innovacon.
     The Financial Statements are presented for illustrative purposes only and do not purport to be indicative of the results of operations or financial position for future periods or the results that actually would have been realized had we consummated the 50/50 joint venture or the acquisitions as of January 1, 2006 or March 31, 2007. The pro forma adjustments are based upon available information and certain estimates and assumptions as described in the notes to the Financial Statements that management of Inverness believes are reasonable in the circumstances.
     The Financial Statements and accompanying notes should be read in conjunction with the historical consolidated financial statements and notes thereto of Inverness included in our Annual Report on Form 10-K for the year ended December 31, 2006, as amended, our Quarterly Report on Form 10-Q for the three months ended March 31, 2007 and in previously filed Forms 8-K.
     The following is a more complete explanation of the transactions reflected in the unaudited pro forma condensed combined financial statements.
ACQUISITION OF BIOSITE
     On June 29, 2007, we completed our acquisition of Biosite for a preliminary aggregate purchase price of $1.79 billion, including $1.76 billion of cash share acquisition costs and related transaction expenses and $25.9 million of fair value associated with the outstanding fully vested Biosite employee stock options which were converted to options to acquire our common stock as part of the transaction.
     To finance the acquisition, we entered into a secured First Lien Credit Agreement with certain lenders, General Electric Capital Corporation as administrative agent and collateral agent, and certain other agents and arrangers, a secured Second Lien Credit Agreement with certain lenders, General Electric Capital Corporation as administrative agent and collateral agent, and certain other agents and arrangers, and certain related guaranty and security agreements. The First Lien Credit Agreement provides for term loans in the aggregate amount of $900.0 million and, subject to our continued compliance with the First Lien Credit Agreement, a $150.0 million revolving line of credit. The Second Lien Credit Agreement provides for term loans in the aggregate amount of $250.0 million. To finance the acquisition, we drew the full amount of the term loans under the two Credit Agreements and approximately $73.1 million under the revolver.
     A portion of the acquisition was also financed from the proceeds of our May 2007 sale of $150 million principal amount of 3% convertible senior subordinated notes due 2016 (the “Convertible Notes”) in a private placement to qualified institutional buyers. The Convertible Notes pay interest semi-annually at a rate of 3.00% per annum and are convertible into our common stock at a conversion price of approximately $52.30 per share, representing a 30% conversion premium based on the closing price of $40.23 per share on May 9, 2007. At the initial conversion price, the Convertible Notes are convertible into an aggregate of 2,868,120 shares of our common stock. The conversion price is subject to adjustment one year from the date of sale if the 30 day volume-weighted average trading price of our common stock as of such date is lower than $40.23, subject to a floor of $40.23, or from time to time in the event of stock splits, stock dividends, recapitalizations and other similar events.
     Simultaneously with our entry into the Credit Agreements, we terminated our existing third amended and restated credit agreement dated June 30, 2005 (the “Existing Credit Agreement”). We had no outstanding loans under the Existing Credit Agreement at the time it was terminated, but had unamortized deferred financing costs totalling $2.3 million which were written off as part of the termination.
     In addition, on June 26, 2007, we also fully repaid our 8.75% senior subordinated notes due 2012 (the “Notes”). The total amount repaid, including principal of $150.0 million and a prepayment premium of $9.3 million, was $159.3 million. Accrued interest of $4.8 million was also paid as part of the final settlement of

 

 

these Notes and unamortized deferred financing costs of $3.5 million were written off as a result of the repayment.
PROPOSED ACQUISITION OF CHOLESTECH
     On June 4, 2007, we entered into the Merger Agreement with Cholestech, pursuant to which we agreed to acquire Cholestech through the Merger. The completion of the Merger is subject to various closing conditions, including obtaining the approval of Cholestech stockholders and receiving antitrust approvals (including under the Hart-Scott-Rodino Antitrust Improvements Act). The Merger is intended to qualify as a reorganization for United States federal income tax purposes and is expected to close during the third quarter of 2007.
     At the effective time of the Merger (the “Effective Time”), by virtue of the Merger and without any action on the part of the holders of any capital stock of Cholestech, each share of common stock of Cholestech issued and outstanding immediately prior to the Effective Time will be converted into the right to receive 0.43642 (the “Exchange Ratio”) of a share of common stock of Inverness (each full share, an “Inverness Share”). Based on Cholestech’s outstanding shares as of the date of the Merger Agreement and the Exchange Ratio, approximately 6.8 million Inverness Shares would have been issued to effect the Merger.
     Pursuant to the Merger Agreement, each option to purchase shares of Cholestech common stock granted under employee and director stock plans of Cholestech that is outstanding as of immediately prior to the Effective Time, whether vested or unvested, shall be converted into a right to acquire Inverness Shares on the same terms and conditions as were applicable to such option prior to the Effective Time, provided that the number of Inverness Shares receivable and the exercise price of the option shall be adjusted to reflect the Exchange Ratio. All other Cholestech equity-based awards outstanding as of the Effective Time will remain in effect but will be denominated in Inverness Shares, with applicable adjustments to reflect the Exchange Ratio.
JOINT VENTURE WITH P&G
     On May 17, 2007, we completed our previously announced transaction to form a 50/50 joint venture with P&G for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products, outside the cardiology, diabetes and oral care fields. At the closing, Inverness and P&G entered into material definitive agreements, pursuant to which we transferred our consumer diagnostic net assets, other than our manufacturing and core intellectual property assets, to the joint venture, and P&G acquired its interest in the joint venture for a cash payment to us of approximately $325.0 million.
     As part of the consummation of the joint venture, we entered into a stockholder agreement with P&G, setting forth each party’s rights and obligations with respect to the joint venture. We also entered into an option agreement with P&G, pursuant to which P&G has the right, after four years, to require us to acquire all of P&G’s interest in the joint venture at fair market value, and P&G has the right, upon certain material breaches by us of our obligations to the joint venture, to acquire all of our interest in the joint venture at fair market value. Furthermore, we also entered into a manufacturing agreement with P&G, whereby we will manufacture consumer diagnostic products and sell these products to the joint venture entity.
     Upon completion of the transaction to form the joint venture, we ceased to consolidate the operating results of our consumer diagnostic products business and began to account for our 50% interest in the results of the joint venture under the equity method of accounting. In our capacity as the manufacturer of products for the joint venture, we supply products to the joint venture and record revenue on those sales. No gain on the proceeds that we received from P&G through the formation of the joint venture will be recognized in our financial statements until P&G’s option to require us to purchase its interest in the joint venture expires. As a result, all income tax effects as a result of this transaction have also been deferred.
ACQUISITION OF INSTANT
     On March 12, 2007, we acquired 75% of the issued and outstanding capital stock of Instant Technologies, Inc., a privately-owned Virginia corporation located in Norfolk, Virginia, for a preliminary aggregate purchase price of $43.8 million, consisting of approximately $30.7 million in cash, including approximately $0.1 million of direct acquisition costs, plus 313,888 shares of our common stock with a fair value of approximately $13.1 million. Instant primarily distributes rapid drugs of abuse diagnostic products that are used in the workplace, criminal justice or other testing markets.

 

 

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 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 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. Subsequently, 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 Innovacon business and ABON facility financial information included in the accompanying unaudited pro forma condensed combined statement of operations for the year ended December 31, 2006 includes results of operations for the pre-acquisition period ended March 31, 2006, which represent the historical pre-acquisition results of these entities.

 

 

Inverness Medical Innovations, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statements of Operations
For the twelve months ended December 31, 2006
(in thousands, except per share amounts)
                                                                                                                                 
            Pro forma Adjustments            
            Completed Transactions                 Pending Transaction            
            Innovacon     Innovacon         Instant     Instant         Disposition of         Formation of         Biosite     Biosite         Pro forma     Cholestech     Cholestech         Pro forma  
    Inverness     Historical     Adjustments         Historical     Adjustments         CD Business         Joint Venture         Historical     Adjustments         Combined Company     Historical     Adjustments         Combined Company  
Net product sales
   $ 552,130     $ 13,447     $ —         $ 23,595     $ (12,782 )   E   $ (177,219 )   J   $ 94,803     L   $ 303,261     $ —         $ 797,235     $ 69,070     $ —         $ 866,305  
Research and license revenues
     17,324       —       —           —       —           —           —           5,331       —           22,655       —       —           22,655  
 
                                                                                                      
Net revenues
     569,454       13,447       —           23,595       (12,782 )         (177,219 )         94,803           308,592       —           819,890       69,070       —           888,960  
Cost of sales
     340,231       4,786       1,634     A     12,092       (12,782 )   E     (90,289 )   J     90,289     L     94,228       6,000     O     453,812       23,459       1,600     T     480,886  
 
                     1,037     B                                                         6,586     P                     2,015     U        
 
                                                                                                      
Gross profit
     229,223       8,661       (2,671 )         11,503       —           (86,930 )         4,514           214,364       (12,586 )         366,078       45,611       (3,615 )         408,074  
Operating expenses:
                                                                                                                                
Research and development
     53,666       322       —           —       —           (5,171 )   J     —           53,043       —           101,860       6,276       —           108,136  
Sales and marketing
     94,445       2,897       770     B     5,301       1,985     F     (36,654 )   J     —           69,952       30,402     O     169,098       14,597       2,444     T     186,139  
General and administrative
     71,243       625       (1,026 )   C     1,325       —           (14,696 )   J     —           30,288       45,221     P     132,980       12,876       —           145,856  
Loss on dispositions
     3,498       —       —           —       —           —           —           —       —           3,498       —       —           3,498  
 
                                                                                                      
Total operating expenses
     222,852       3,844       (256 )         6,626       1,985           (56,521 )         —           153,283       75,623           407,436       33,749       2,444           443,629  
 
                                                                                                      
Operating income
     6,371       4,817       (2,415 )         4,877       (1,985 )         (30,409 )         4,514           61,081       (88,209 )         (41,358 )     11,862       (6,059 )         (35,555 )
Interest and other income (expense), net
     (17,486 )     (11 )     —           (450 )     (509 )   G,H     —           11,653     M     4,244       (105,955 )   Q,R     (108,514 )     1,834       —           (106,680 )
 
                                                                                                      
(Loss) Income before income taxes
     (11,115 )     4,806       (2,415 )         4,427       (2,494 )         (30,409 )         16,167           65,325       (194,164 )         (149,872 )     13,696       (6,059 )         (142,235 )
Income tax provision
     5,727       —       —           —       —           (7,880 )   K     6,802     N     25,331       (25,331 )   S     4,649       5,530       (5,530 )   V     4,649  
 
                                                                                                      
Net (loss) income
   $ (16,842 )   $ 4,806     $ (2,415 )       $ 4,427     $ (2,494 )       $ (22,529 )       $ 9,365         $ 39,994     $ (168,833 )       $ (154,521 )   $ 8,166     $ (529 )       $ (146,884 )
 
                                                                                                      
Net loss per common share:
                                                                                                                                
Basic and diluted
   $ (0.49 )                                                                                       $ (4.36 )                       $ (3.47 )
 
                                                                                                                          
Weighted average shares — basic and diluted
     34,109               1,008     D             314     I                 0                   0           35,431               6,844     W     42,275  
 
                                                                                                                
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

 

 

Inverness Medical Innovations, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statements of Operations
For the three months ended March 31, 2007
(in thousands, except per share amounts)
                                                                                                                                 
            Pro forma Adjustments                
            Completed Transactions     Pending Transaction                
            Instant     Instant             Disposition of             Formation of             Biosite     Biosite             Pro forma     Cholestech     Cholestech             Pro forma  
    Inverness     Historical     Adjustments             CD Business             Joint Venture             Historical     Adjustments             Combined Company     Historical     Adjustments             Combined Company  
Net product sales
   $ 153,749     $ 5,381     $ (544 )     E     $ (49,985 )     J     $ 24,464       L     $ 82,480     $ —             $ 215,545     $ 18,032     $ —             $ 233,577  
Research and license revenues
     5,230       —       —               —               —               1,269       —               6,499       —       —               6,499  
 
                                                                                                          
Net revenues
     158,979       5,381       (544 )             (49,985 )             24,464               83,749       —               222,044       18,032       —               240,076  
Cost of sales
     80,641       3,143       (544 )     E       (23,299 )     J       23,299       L       25,565       1,500       O       110,305       5,936       400       T       116,641  
 
                                                                                                          
Gross profit
     78,338       2,238       —               (26,686 )             1,165               58,184       (1,500 )             111,739       12,096       (400 )             123,435  
Operating expenses:
                                                                                                                                
Research and development
     12,009       —       —               (4,237 )     J       —               13,568       —               21,340       1,586       —               22,926  
Sales and marketing
     28,331       1,014       351       F       (11,316 )     J       —               19,465       6,502       O       44,347       3,898       545       T       48,790  
General and administrative
     22,659       254       —               (4,902 )     J       —               7,087       —               25,098       3,641       —               28,739  
Loss on dispositions
     —       —       —               —               —               —       —               —       —       —               —  
 
                                                                                                          
Total operating expenses
     62,999       1,268       351               (20,455 )             —               40,120       6,502               90,785       9,125       545               100,455  
 
                                                                                                          
Operating income
     15,339       970       (351 )             (6,231 )             1,165               18,064       (8,002 )             20,954       2,971       (945 )             22,980  
Interest and other income (expense), net
     (3,155 )     (169 )     (86 )     G,H       —               2,280       M       693       (22,197 )     Q       (22,634 )     630       —               (22,004 )
 
                                                                                                          
(Loss) Income before income taxes
     12,184       801       (437 )             (6,231 )             3,445               18,757       (30,199 )             (1,680 )     3,601       (945 )             976  
Income tax provision
     5,879       —       36               (1,519 )     K       564       N       7,472       (7,472 )     S       4,960       256       (256 )     V       4,960  
 
                                                                                                          
Net (loss) income
   $ 6,305     $ 801     $ (473 )           $ (4,712 )           $ 2,881             $ 11,285     $ (22,727 )           $ (6,640 )   $ 3,345     $ (689 )           $ (3,984 )
 
                                                                                                          
Net (loss) income per common share:
                                                                                                                                
Basic
   $ 0.14                                                                                     $ (0.15 )                           $ (0.08 )
 
                                                                                                                          
Diluted
   $ 0.14                                                                                     $ (0.15 )                           $ (0.08 )
 
                                                                                                                          
Weighted average shares — basic
     44,446               262                               —                       —               44,708               6,844               51,552  
 
                                                                                                                  
Weighted average shares — diluted
     46,198               262                               —                       812       W       47,272               7,176       W       54,448  
 
                                                                                                                  
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

 

Inverness Medical Innovations, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 2007
(in thousands)
                                                                                         
            Pro Forma Adjustments            
            Completed Transactions                 Pending Transaction            
    Inverness     Disposition of         Formation of         Biosite     Biosite         Pro forma     Cholestech     Cholestech         Pro forma  
    Historical     CD Business         Joint Venture         Historical     Adjustments         Combined Company     Historical     Adjustments         Combined Company  
ASSETS
                                                                                        
Current assets:
                                                                                        
Cash and short-term investments
   $ 180,941     $ —         $ 325,000     Y   $ 98,857     $ (548,083 )   EE   $ 56,715     $ 49,687     $ —         $ 106,402  
Accounts receivable, net of allowances
     99,876       (27,255 )   X     —           33,157       —           105,778       7,114       —           112,892  
Inventory
     87,331       (14,374 )   X     —           32,729       6,586     P     112,272       9,102       2,015     U     123,389  
Deferred tax assets
     5,416       —           —           3,553       —           8,969       1,835       —           10,804  
Prepaid expenses and other current assets
     36,656       (2,112 )   X     —           10,147       —           44,691       1,773       —           46,464  
 
                                                                      
Total current assets
     410,220       (43,741 )         325,000           178,443       (541,497 )         328,425       69,511       2,015           399,951  
Property, plant and equipment, net
     81,330       (1,574 )   X     —           157,658       —           237,414       6,882       —           244,296  
Goodwill, trademarks and other intangible assets, net
     750,771       (45,510 )   X     —           8,873       1,571,887     O     2,286,021       414       258,024     T     2,544,459  
Investment in joint venture
     —       70,731     X     (12,368 )   Z,BB     —       —           58,363       —       —           58,363  
Deferred financing costs, net, and other assets
     97,015       —           —           4,750       (38,913 )   FF     90,785       13,560       —           104,345  
 
                                             34,625     GG                                    
 
                                             (6,692 )   R                                    
Deferred tax assets
     1,038       —           —           10,557       —           11,595       10,334       —           21,929  
 
                                                                      
Total assets
   $ 1,340,374     $ (20,094 )       $ 312,632         $ 360,281     $ 1,019,410         $ 3,012,603     $ 100,701     $ 260,039         $ 3,373,343  
 
                                                                      
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                                                        
Current liabilities:
                                                                                        
Current portion of long-term debt
   $ 8,876     $ —         $ —         $ —     $ —         $ 8,876     $ —     $ —         $ 8,876  
Current portion of capital lease obligations
     597       —           —           5,429       —           6,026       —       —           6,026  
Accounts payable
     42,898       (4,168 )   X     —           13,271       —           52,001       2,880       —           54,881  
Accrued expenses and other current liabilities
     70,701       (15,904 )   X     45,338     AA,CC     21,093       —           121,228       3,606       —           124,834  
 
                                                                      
Total current liabilities
     123,072       (20,072 )         45,338           39,793       —           188,131       6,486       —           194,617  
 
                                                                      
Long-term liabilities:
                                                                                        
Long-term debt
     150,132       —           —           —       150,000     Q     1,373,297       —       —           1,373,297  
 
                                             (150,000 )   Q                                    
 
                                             900,000     Q                                    
 
                                             73,165     Q                                    
 
                                             250,000     Q                                    
Capital lease obligations
     259       —           —           4,052       —           4,311       —       —           4,311  
Deferred tax liabilities
     28,588       —           —           3,880       98,634     HH     131,102       —       14,006     HH     145,108  
Deferred gain on joint venture
     —                   267,294     DD     —       —           267,294       —       —           267,294  
Other long-term liabilities
     11,644       (22 )   X     —           5,542       —           17,164       —       —           17,164  
 
                                                                      
Total long-term liabilities
     190,623       (22 )         267,294           13,474       1,321,799           1,793,168       —       14,006           1,807,174  
 
                                                                      
Stockholders’ equity:
                                                                                        
Preferred stock
     —       —           —           —       —           —       —       —           —  
Common stock
     47       —           —           161       (161 )   II     47       —       68     KK     115  
Additional paid-in capital
     1,105,837       —           —           107,404       (107,404 )   II     1,171,668       103,948       (103,948 )   LL     1,511,848  
 
                                             65,831     JJ                     340,180     KK,MM        
Accumulated deficit
     (120,764 )     —           —           198,897       (198,897 )   II     (181,970 )     (9,692 )     9,692     LL     (181,970 )
 
                                             (61,206 )   R,P                                    
Accumulated other comprehensive income
     41,559       —           —           552       (552 )   II     41,559       (41 )     41     LL     41,559  
 
                                                                      
Total stockholders’ equity
     1,026,679       —           —           307,014       (302,389 )         1,031,304       94,215       246,033           1,371,552  
 
                                                                      
Total liabilities and stockholders’ equity
   $ 1,340,374     $ (20,094 )       $ 312,632         $ 360,281     $ 1,019,410         $ 3,012,603     $ 100,701     $ 260,039         $ 3,373,343  
 
                                                                      
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

 

 

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 — BASIS OF PRESENTATION, ACQUISITIONS AND JOINT VENTURE
     The accompanying unaudited pro forma condensed combined statements of operations for the year ended December 31, 2006 and the three months ended March 31, 2007 include the historical results of Inverness, Biosite and Cholestech, our previous acquisitions of Instant and Innovacon, the elimination of the historical results of operations for our consumer diagnostic products business and the impact of our new manufacturing agreement with the joint venture on our historical results of operations as if these transactions had occurred on January 1, 2006. The historical results of operations for Instant have been derived from the supplemental information contained in the combined financial statements of Instant Technologies and Affiliates for the year ended December 31, 2006, as certain entities included within those combined financial statements were not acquired by Inverness.
     The accompanying unaudited pro forma condensed combined balance sheet assumes that the acquisition of Biosite and the related financing transactions, the pending acquisition of Cholestech and the consummation of the 50/50 joint venture with P&G occurred on March 31, 2007.
ACQUISITION OF BIOSITE
     On June 29, 2007, we completed our acquisition of Biosite for a preliminary aggregate purchase price of $1.79 billion, including $1.76 billion of cash share acquisition costs and related transaction expenses and $25.9 million of fair value associated with the outstanding fully vested Biosite employee stock options which were converted to options to acquire our common stock as part of the transaction.
     The preliminary aggregate purchase price for Biosite, as discussed above, will be allocated based on the closing balance sheet of Biosite as of the date of acquisition, when available. On a preliminary basis, for purposes of the accompanying unaudited pro forma condensed combined balance sheet, the purchase price was allocated based on the March 31, 2007 balance sheet of Biosite as follows:
         
    (IN THOUSANDS)  
Cash and short term investments
   $ 98,857  
Accounts receivable
     33,157  
Inventory
     39,315  
Deferred tax assets
     14,110  
Other current assets
     10,147  
Property and equipment
     157,658  
Customer relationships
     150,000  
Core technology
     60,000  
Trademarks
     30,000  
Goodwill and other intangibles
     1,340,760  
Other assets
     4,750  
Accounts payable and accrued expenses
     (34,364 )
Capital lease obligations
     (9,481 )
Other liabilities
     (5,542 )
Deferred tax liability
     (102,514 )
 
      
 
   $ 1,786,853  
 
      
     The above values for the assets acquired and liabilities assumed are based on preliminary management estimates due to the timing of the acquisition. The final purchase price allocation will include an evaluation of whether certain in-process research and development projects have yet reached technical feasibility.

 

 

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 — BASIS OF PRESENTATION, ACQUISITIONS AND JOINT VENTURE (CONTINUED)
     The value of projects which have not yet reached technical feasibility, if any, could be material and will be expensed as in-process research and development when quantified. We have estimated that approximately $240.0 million of the preliminary excess purchase price will be assigned to customer relationships, core technology and trademarks, having a useful life of ten to sixteen years. The final allocation of the excess of the purchase price over the fair value of the net assets acquired could differ materially.
PROPOSED ACQUISITION OF CHOLESTECH
     On June 4, 2007, we entered into the Merger Agreement, pursuant to which we agreed to acquire Cholestech through the Merger. The completion of the Merger is subject to various closing conditions, including obtaining the approval of Cholestech stockholders and receiving antitrust approvals (including under the Hart-Scott-Rodino Antitrust Improvements Act). The Merger is intended to qualify as a reorganization for United States federal income tax purposes and is expected to close during the third quarter of 2007.
     At the Effective Time, by virtue of the Merger and without any action on the part of the holders of any capital stock of Cholestech, each share of common stock of Cholestech issued and outstanding immediately prior to the Effective Time will be converted into the right to receive Inverness Shares based on the Exchange Ratio. Based on Cholestech’s outstanding shares as of the date of the Merger Agreement and the Exchange Ratio, approximately 6.8 million Inverness Shares would have been issued to effect the Merger.
     The preliminary aggregate purchase price for Cholestech, as discussed above, will be allocated based on the closing balance sheet of Cholestech as of the date of acquisition, when available. On a preliminary basis, for purposes of the accompanying unaudited pro forma condensed combined balance sheet, the purchase price was allocated based on the March 31, 2007 balance sheet of Cholestech as follows:
         
    (IN THOUSANDS)  
Cash and marketable securities
   $ 62,452  
Accounts receivable
     7,114  
Inventory
     11,117  
Deferred tax assets
     12,169  
Other current assets
     1,773  
Property and equipment
     6,882  
Customer relationships
     9,000  
Core technology
     16,000  
Trademarks
     8,000  
Goodwill and other intangibles
     225,438  
Other assets
     795  
Accounts payable and accrued expenses
     (6,486 )
Deferred tax liability
     (14,006 )
 
      
 
   $ 340,248  
 
      
     The above values for the assets acquired and liabilities assumed are based on preliminary management estimates due to the timing of the acquisition. We have estimated that approximately $33.0 million of the preliminary excess purchase price will be assigned to customer relationships, core technology and trademarks, having a useful life of ten to sixteen years. The final allocation of the excess of the purchase price over the fair value of the net assets acquired could differ materially.

 

 

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 — BASIS OF PRESENTATION, ACQUISITIONS AND JOINT VENTURE (CONTINUED)
JOINT VENTURE WITH P&G
     On May 17, 2007, we consummated a transaction 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 the cardiology, diabetes and oral care fields, whereby we contributed our consumer diagnostic assets, other than our manufacturing and core intellectual property assets, to the joint venture, and P&G acquired its interest in the joint venture for a cash payment to us of approximately $325.0 million. Under the terms of the joint venture agreement, we will continue to manufacture consumer diagnostic products and sell these products to the joint venture entity.
     Additionally, in conjunction with the joint venture, we entered into a transition services agreement with the joint venture entity, pursuant to which we will provide certain operational support services to the joint venture for a period of four years, subject to renewal or earlier termination under the terms of the agreement. Transitional services under such agreement will be provided for varying periods. As the final scope and periods of such arrangements are variable and not estimable, no profits from such services revenue have been assumed in the accompanying pro forma results.
     The historical financial results of the consumer business contributed to the joint venture include all direct and allocable costs associated with the business. Certain other costs not specifically attributable to the business, including corporate overhead expenses, interest income and expense, and certain other non-operating costs are not included in the historical results of the contributed consumer business.
ACQUISITION OF INSTANT
     On March 12, 2007, we acquired 75% of the issued and outstanding capital stock of Instant Technologies, Inc., a privately-owned Virginia corporation located in Norfolk, Virginia, for a preliminary aggregate purchase price of $43.9 million, consisting of approximately $30.7 million in cash, including approximately $0.1 million of direct acquisition costs, plus 313,888 shares of our common stock with a fair value of approximately $13.1 million.
     The preliminary aggregate purchase price for Instant, as discussed above, was allocated to the assets acquired and liabilities assumed at the date of acquisition as follows:
         
    (IN THOUSANDS)  
Cash
   $ 327  
Accounts receivable
     3,638  
Inventory
     4,448  
Other assets
     780  
Property and equipment
     141  
Customer relationships
     10,000  
Trademarks
     2,500  
Goodwill
     36,306  
Accounts payable and accrued expenses
     (4,279 )
Long-term debt
     (4,925 )
Deferred tax liability
     (5,000 )
 
      
 
   $ 43,936  
 
      

 

 

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 — BASIS OF PRESENTATION, ACQUISITIONS AND JOINT VENTURE (CONTINUED)
     Immediately subsequent to the acquisition, we repaid the outstanding principal and accrued interest balances related to the debt we assumed in the transaction, totaling approximately $4.9 million.
     The purchase price allocation for the acquisition of Instant is preliminary and is subject to adjustment upon finalization of the purchase accounting as of the date of consummation of the acquisition. We have estimated that approximately $12.5 million of the preliminary excess purchase price will be assigned to customer relationships and trademarks, both having a useful life of ten years. The final allocation of the excess of the purchase price over the fair value of the net assets acquired could differ materially.
THE INNOVACON BUSINESS, INCLUDING THE ABON FACILITY
     On March 31, 2006, we acquired Innovacon. 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 direct acquisition costs and an additional deferred payable of $10.0 million, which was paid to the sellers in May 2007, pursuant to the purchase agreement.
     On May 15, 2006, as part of the Innovacon business, we acquired a newly-constructed manufacturing facility in Hangzhou, China pursuant to the terms of our acquisition agreement with ACON Laboratories and its affiliates. In connection with the acquisition of the new facility, we acquired 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.
     Subsequently, between August and November 2006, we made cash payments totalling $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.

 

 

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 — BASIS OF PRESENTATION, JOINT VENTURE AND PURCHASE PRICES (CONTINUED)
     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.
NOTE 2 — PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
     The following describes the pro forma adjustments made to the accompanying unaudited pro forma condensed combined financial statements:
  A.   Reflects estimated cost increase for products supplied under a contractual supply agreement.
  B.   Reflects amortization expense of the value assigned to customer relationships, supply agreements and trademarks as discussed in Note 1, which intangible assets Inverness acquired in connection with the acquisition of Innovacon from ACON. The fair values of acquired intangible assets in connection with the acquisition of Innovacon and their respective useful lives are as follows:
                 
    FAIR VALUE     LIFE  
  (IN THOUSANDS)    
Goodwill
   $ 112,116     Indefinite
Trademarks
     800     10 years
Customer relationships
     27,700     16.8-17.8 years
Supply agreements
     3,300     1.8 years
Core technology
     16,200     7 years
 
              
Total intangibles
   $ 160,116          
 
              

 

 

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 — PRO FORMA ADJUSTMENTS AND ASSUMPTIONS (CONTINUED)
  C.   Reflects the reversal of legal fees incurred by ACON and Inverness in connection with pre-acquisition intellectual property litigation settled in connection with the acquisition.
 
  D.   Represents adjustment to the historical number of basic weighted average Inverness shares outstanding giving effect to the issuance of shares of Inverness common stock as part of the consideration to acquire and finance the Innovacon business, including the ABON facility, as if such transaction occurred on January 1, 2006.
 
  E.   Represents elimination of sales and related cost of sales between Innovacon and Instant.
 
  F.   Reflects the reversal of amortization expense recorded by Instant related to pre-acquisition intangible assets written off in connection with the acquisition of Instant, net of amortization related to estimated intangibles acquired.
 
  G.   Reflects the reversal of interest expense incurred by Instant related to pre-acquisition debt which was repaid by Inverness in connection with the acquisition of Instant.
 
  H.   Represents the recording of minority interest expense related to the 25% ownership in Instant not acquired by Inverness.
 
  I.   Represents the issuance of common stock by Inverness in connection with the acquisition of Instant.
 
  J.   Reflects elimination of the historical consumer diagnostic products business as a result of the consummation of our transaction to form a 50/50 joint venture with P&G.
 
  K.   Tax effect on the elimination of the historical consumer diagnostic products business as a result of the consummation of our transaction to form a 50/50 joint venture with P&G.
 
  L.   Reflects manufacturing revenue and related costs in conjunction with the manufacturing agreement entered into with the joint venture entity.
 
  M.   Represents our 50% investment income from the joint venture entity, which will be reported as equity earnings in unconsolidated subsidiaries, net of taxes.
 
  N.   Tax effect on the profit resulting from the formation of the joint venture and related disposition of the consumer diagnostic business.
 
  O.   Reflects amortization expense of the estimated value assigned to customer relationships, core technologies and trademarks as discussed in Note 1, acquired in connection with the acquisition of Biosite. The estimated fair values of acquired intangible assets in connection with the acquisition of Biosite and their respective useful lives are as follows:
                 
    FAIR VALUE     LIFE  
  (IN THOUSANDS)      
Goodwill
   $ 1,340,760     Indefinite
Customer relationships
     150,000     16 years
Core technology
     60,000     10 years
Trademarks
     30,000     10 years
 
              
Total intangibles
   $ 1,580,760          
 
              

 

 

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 — PRO FORMA ADJUSTMENTS AND ASSUMPTIONS (CONTINUED)
  P.   Reflects the expensing of the estimated write-up of inventory to fair value and the fair value of unvested options in connection with the acquisition of Biosite. Such unvested options were accelerated at closing in accordance with the terms of the merger agreement.
 
  Q.   Reflects borrowings incurred in connection with the acquisition of Biosite, including borrowings of $900.0 million under the First Lien Credit Agreement, $73.2 million under the related revolving line of credit, $250.0 million under the Second Lien Credit Agreement and $150.0 million under the Convertible Notes, and related interest expense, net of interest saved from the repayment of the $150.0 million 8.75% senior subordinated notes.
 
  R.   Reflects a redemption premium of $9.3 million incurred in connection with the repayment of the $150.0 million 8.75% senior subordinated notes and the write-off of unamortized deferred financing costs as of January 1, 2006 totaling $7.9 million ($6.7 million as of March 31, 2007) in connection with the repayment of the senior subordinated notes and the Existing Credit Agreement.
 
  S.   Reflects the reversal of the historical tax provisions of Biosite as a result of pro forma pretax losses incurred.
 
  T.   Reflects amortization expense of the estimated value assigned to customer relationships, core technologies and trademarks as discussed in Note 1, expected to be acquired in connection with the proposed acquisition of Cholestech. The estimated fair values of acquired intangible assets in connection with the proposed acquisition of Cholestech and their respective useful lives are as follows:
                 
    FAIR VALUE   LIFE
    (IN THOUSANDS)  
Goodwill
   $ 225,438     Indefinite
Customer relationships
     9,000     16 years
Core technology
     16,000     10 years
Trademarks
     8,000     10 years
 
              
Total intangibles
   $ 258,438          
 
              
  U.   Reflects the expensing of the estimated write-up of inventory to fair value in connection with the proposed acquisition of Cholestech.
 
  V.   Reflects the reversal of the historical tax provisions of Cholestech as a result of overall pro forma pretax losses incurred.
 
  W.   Reflects estimated shares to be issued in connection with the proposed Cholestech acquisition and incremental diluted shares related to the acquisition of Biosite and the proposed acquisition of Cholestech. Such incremental dilutive shares represent the dilutive effect of options assumed and converted to Inverness options in connection with each transaction, computed on the treasury stock method.
 
  X.   Reflects the reclassification of the net assets of our consumer diagnostic products business to investment in joint venture.
 
  Y.   Reflects proceeds in the amount of $325.0 million received from the sale of 50% ownership in the joint venture entity to P&G, which has been recorded as a deferred gain. No interest income has been assumed on these proceeds in the accompanying statements of operations.
 
  Z.   Reflects reclassification of available for sale net assets retained by us totaling $23.7 million to other current assets.

 

 

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 — PRO FORMA ADJUSTMENTS AND ASSUMPTIONS (CONTINUED)
  AA.   Reflects a current note payable issued to the joint venture entity in the amount of $22.3 million, with an off-set to the deferred gain on the transaction.
 
  BB.   Represents the sale of 50% of our remaining available for sale consumer diagnostic net assets to the joint venture entity totaling $23.5 million, with an off-set to the deferred gain on the transaction, along with the reclassification of $23.7 million of available for sale net assets which were retained by us (see Note Z).
 
  CC.   Reflects the recording of income taxes payable and an off-set against the deferred gain on the transaction in the amount of $23.0 million.
 
  DD.   Represents a net deferred gain in the amount of $267.3 million which was recorded as a result of the joint venture transaction and which will be recognized in our financial statements upon expiration of P&G’s option to require us to purchase its interest in the joint venture. (See Notes Z, AA, BB and CC).
 
  EE.   Represents cash, including Biosite acquired cash, used to finance the acquisition of Biosite.
 
  FF.   Represents a reclassification of the cost of 750,000 shares of Biosite owned by Inverness as of March 31, 2007 as a result of the acquisition of Biosite.
 
  GG.   Represents deferred debt issuance costs incurred in connection with the issuance of debt under the First and Second Lien Credit Agreements and the Convertible Notes.
 
  HH.   Represents the deferred tax liability recorded on estimated intangible assets recorded on the acquisition of Biosite and the proposed acquisition of Cholestech.
 
  II.   Reflects the reversal of the historical equity accounts of Biosite.
 
  JJ.   Represents the fair value of options assumed in connection with the acquisition of Biosite and converted to Inverness options.
 
  KK.   Reflects the fair value of common stock to be issued in connection with the proposed acquisition of Cholestech.
 
  LL.   Reflects the reversal of the historical equity accounts of Cholestech.
 
  MM.   Represents the fair value of options to be assumed in connection with the proposed acquisition of Cholestech and converted to Inverness options.
NOTE 3 — PRO FORMA NET LOSS PER COMMON SHARE
     For the year ended December 31, 2006 and the three months ended March 31, 2007, the unaudited pro forma combined company basic and diluted net loss per common share amounts are calculated based on the weighted average number of Inverness common shares outstanding prior to the respective acquisitions plus the adjustments to such shares giving effect to the Inverness common shares issued or expected to be issued upon the closings of the respective acquisitions and the related financings, as if such transactions had occurred on January 1, 2006. Common stock equivalents resulting from the assumed exercise of Inverness’ stock options or warrants are not included in the pro forma combined company diluted net loss per common share calculation for the year ended December 31, 2006 and the three months ended March 31, 2007 because inclusion thereof would be antidilutive.