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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K/A

(Amendment No. 3)

 

 

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

Commission file number 000-16789

 

 

 

 

LOGO

ALERE INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   04-3565120

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

51 Sawyer Road, Suite 200, Waltham, Massachusetts   02453
(Address of principal executive offices)   (Zip Code)

(781) 647-3900

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange Act”):

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.001 per share par value

Series B Convertible Perpetual Preferred

Stock, $0.001 per share par value

 

New York Stock Exchange

New York Stock Exchange

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  ¨    No  x

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  ¨    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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 registrant’s 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.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the common stock held by non-affiliates of the registrant based on the closing price of the registrant’s common stock on the New York Stock Exchange on June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) was $2,918,891,906.

As of November 11, 2015, the registrant had 86,256,820 shares of common stock, par value $0.001 per share, outstanding.

 

 

 


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Explanatory Note

In the Quarterly Report on Form 10-Q of Alere Inc. (the “Company”) filed with the Securities and Exchange Commission (the “SEC”) on November 9, 2015, the Company disclosed that, during the quarter ended September 30, 2015, management identified and corrected out-of-period errors in that quarter relating to U.S. taxes on foreign earnings for the year ended December 31, 2014. The Company disclosed that management had concluded that these errors were the result of a material weakness in that the Company did not maintain a sufficient complement of resources with adequate experience and expertise in accounting for income taxes. Accordingly, the Company stated that it was revising its previous description of the material weakness that existed as of December 31, 2014.

This Amendment No. 3 (“Amendment No. 3”) on Form 10-K/A to the Annual Report on Form 10-K of the Company for the year ended December 31, 2014, as originally filed with the SEC on March 5, 2015 (the “Original Report”) and as amended on April 30, 2015 (“Amendment No. 1”) and May 28, 2015 (“Amendment No. 2”), is being filed to restate Item 9A, “Controls and Procedures,” and the “Report of Independent Registered Public Accounting Firm” (which is included in Item 8, “Financial Statements and Supplementary Data”) in order to revise the description of the material weakness that existed as of December 31, 2014 and related matters, including the Company’s remediation plans. Other than the restated “Report of Independent Registered Public Accounting Firm” on page F-2, no changes have been made to the Company’s consolidated financial statements or the notes thereto that were included in Amendment No. 2.

In order to preserve the nature and character of the disclosures set forth in the Original Report, as amended by Amendment No. 1 and Amendment No. 2, this Form 10-K/A speaks as of the date of the filing of the Original Report, March 5, 2015, and the disclosures contained in this Form 10-K/A have not been updated to reflect events occurring subsequent to that date, other than those associated with (a) the restatement described in Amendment No. 2 and (b) the revised description of the material weakness that existed as of December 31, 2014.

Currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer are attached to this Form 10-K/A as Exhibits 31.1, 31.2 and 32.1. This Form 10-K/A should be read in conjunction with Amendment No. 1 and Amendment No. 2 to the Original Report and the Company’s other filings with the SEC.

 

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ALERE INC.

FORM 10-K/A

(Amendment No. 3)

For The Fiscal Year Ended December 31, 2014

 

          Page  
PART II   

ITEM 8.

   Financial Statements and Supplementary Data      4   

ITEM 9A.

   Controls and Procedures      6   
PART IV   

ITEM 15.

   Exhibits and Financial Statement Schedules      9   

Signature

     14   

 

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PART II

 

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(1) and have been filed as part of this report on the pages indicated.

As described in Note 2 of our accompanying consolidated financial statements, we have restated our financial statements for each of the three months ended September 30 and December 31, 2014 and have revised our financial statements for each of the three-month periods ended in 2013 and each of the three months ended March 31 and June 30, 2014. We have also revised the selected quarterly financial data for the quarters presented below to correct the intra-period tax allocations between continuing operations and discontinued operations.

On October 10, 2014, we completed the sale of ACS, and on January 9, 2015, we completed the sale of our health management business. The results of ACS and the health management business are included in income (loss) from discontinued operations, net of tax, for all periods presented in the selected quarterly financial data below. See Note 3 to our accompanying consolidated financial statements for more information about these divestitures and discontinued operations.

The following table presents selected quarterly financial data for each of the quarters in the years ended December 31, 2014 and 2013 (in thousands, except per share data):

 

     2014  
     First
Quarter(2)
     Second
Quarter(3)
     Third
Quarter(4)
(Restated)
     Fourth
Quarter(5)
(Restated)
 

Net revenue

   $ 625,239       $ 647,398       $ 649,210       $ 666,857   

Gross profit

   $ 310,358       $ 298,693       $ 301,622       $ 308,264   

Loss from continuing operations

   $ (2,850    $ (57,941    $ (84,289    $ (30,948

Income (loss) from discontinued operations, net of tax

   $ (2,596    $ 12,915       $ (14,401    $ 142,400   

Net income (loss) available to common stockholders(1)

   $ (10,804    $ (50,397    $ (103,751    $ 105,919   

Basic and diluted net income (loss) per common share attributable to Alere Inc. and Subsidiaries:

           

Loss per common share from continuing operations

   $ (0.10    $ (0.77    $ (1.08    $ (0.44

Income (loss) per common share from discontinued operations

   $ (0.03    $ 0.16       $ (0.17    $ 1.71   

Net income (loss) per common share(1)

   $ (0.13    $ (0.61    $ (1.25    $ 1.27   

 

     2013  
     First
Quarter(6)
     Second
Quarter(7)
     Third
Quarter(8)
     Fourth
Quarter(9)
 

Net revenue

   $ 633,989       $ 659,839       $ 650,648       $ 671,888   

Gross profit

   $ 318,938       $ 337,132       $ 320,495       $ 340,490   

Income (loss) from continuing operations

   $ (803    $ (42,126    $ (17,156    $ 4,478   

Income (loss) from discontinued operations, net of tax

   $ 14,333       $ (24,746    $ (1,916    $ (3,797

Net income (loss) available to common stockholders(1)

   $ 8,305       $ (72,448    $ (24,798    $ (5,061

Basic and diluted net income (loss) per common share attributable to Alere Inc. and Subsidiaries:

           

Net income (loss) per common share from continuing operations

   $ (0.08    $ (0.59    $ (0.28    $ (0.01

Net income (loss) per common share from discontinued operations

   $ 0.18       $ (0.30    $ (0.02    $ (0.05

Net income (loss) per common share(1)

   $ 0.10       $ (0.89    $ (0.30    $ (0.06

 

(1) Net income (loss) available to common stockholders and basic and diluted net income (loss) per common share are computed consistent with the annual per share calculations described in Notes 4(o) and 13 of our consolidated financial statements included elsewhere in this report.

 

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(2) Included in net loss from continuing operations for the first quarter of 2014 is $4.4 million of restructuring charges, $5.7 million of stock-based compensation expense, $0.3 million of acquisition-related costs, $1.4 million of expense recorded for fair value adjustments to acquisition-related contingent consideration, $3.0 million of costs associated with potential business dispositions, $0.4 million of interest expense recorded in connection with fees paid for certain debt modifications, $0.4 million in compensation charges and $0.1 million of related interest accretion associated with acquisition-related contingent consideration obligations.
(3) Included in net loss from continuing operations for the second quarter of 2014 is $15.4 million of restructuring charges, $0.1 million of acquisition-related costs, $16.7 million of expense recorded for fair value adjustments to acquisition-related contingent consideration, $11.6 million of costs associated with potential business dispositions, $0.4 million of interest expense recorded in connection with fees paid for certain debt modifications, a $0.6 million loss associated with the disposition of a component of our Alere Informatics business, $0.6 million in compensation charges and $0.1 million of related interest accretion associated with acquisition-related contingent consideration obligations, offset by the reversal of $1.1 million of stock-based compensation expense.
(4) Included in net loss from continuing operations for the third quarter of 2014 is $79.4 million of valuation allowance establishment against deferred tax assets associated with our U.S. foreign tax credit carryforwards, $17.3 million of restructuring charges, $3.2 million of stock-based compensation expense, $0.3 million of acquisition-related costs, $6.2 million of costs associated with potential business dispositions, $0.4 million of interest expense recorded in connection with fees paid for certain debt modifications, $0.7 million in compensation charges and $0.1 million of related interest accretion associated with acquisition-related contingent consideration obligations, $0.4 million loss on the sale of our equity investment in Vedalab S.A., offset by the reversal of $5.5 million of expense recorded for fair value adjustments to acquisition-related contingent consideration.
(5) Included in net loss from continuing operations for the fourth quarter of 2014 is $60.8 million of amortization, $21.6 million of restructuring charges, $4.7 million of stock-based compensation expense, $0.2 million of acquisition-related costs, $5.8 million of costs associated with potential business dispositions, $0.4 million of interest expense recorded in connection with fees paid for certain debt modifications, $0.2 million in compensation charges and $0.1 million of related interest accretion associated with acquisition-related contingent consideration obligations and $7.1 million in impairment and gain (loss) on dispositions, net, offset by the reversal of $4.8 million of expense recorded for fair value adjustments to acquisition-related contingent consideration.
(6) Included in net income from continuing operations for the first quarter of 2013 is $2.0 million related to restructuring charges associated with the decision to close various facilities, acquisition-related costs in the amount of $0.9 million, $9.3 million of expense recorded in connection with fair value adjustments to acquisition-related contingent consideration obligations in accordance with ASC 805, Business Combinations, $1.0 million of interest expense recorded in connection with fees paid for certain debt modifications and the termination of our former senior secured credit facility, $4.1 million of non-cash stock-based compensation expense, $0.7 million in compensation charges associated with acquisition-related contingent consideration obligations, a $0.5 million charge associated with the write-up to fair market value of inventory acquired in connection with the acquisition of Epocal Inc. and $0.2 million of expense associated with the extinguishment of debt.
(7) Included in net loss from continuing operations for the second quarter of 2013 is $2.1 million related to restructuring charges associated with the decision to close various facilities, acquisition-related costs in the amount of $0.4 million, $5.2 million of expense recorded in connection with fair value adjustments to acquisition-related contingent consideration obligations in accordance with ASC 805, Business Combinations, $35.6 million of loss in connection with the repurchase of our 9% senior subordinated notes, $8.1 million of bargain purchase gain associated with our acquisition of the Liberty business, $5.1 million of non-cash write-off of an investment, $0.8 million of interest expense recorded in connection with fees paid for certain debt modifications and the termination of our former senior secured credit facility, $4.7 million of non-cash stock-based compensation expense, $0.5 million in compensation charges and $0.2 million of related interest accretion associated with acquisition-related contingent consideration obligations, and a $0.7 million charge associated with the write-up to fair market value of inventory acquired in connection with the acquisition of Epocal Inc.
(8)

Included in net loss from continuing operations for the third quarter of 2013 is $6.1 million related to restructuring charges associated with the decision to close various facilities, acquisition-related costs in the amount of $0.5 million, $1.8 million of expense recorded in connection with fair value adjustments to acquisition-related contingent consideration obligations in accordance with ASC 805, Business Combinations, $5.5 million of costs associated with the conduct of a contested proxy solicitation, $5.9 million of loss on disposition of our Spinreact operations, $0.4 million of interest expense recorded in connection with fees paid for certain debt modifications,

 

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  $5.7 million of non-cash stock-based compensation expense, $0.8 million in compensation charges and $0.1 million of related interest accretion associated with acquisition-related contingent consideration obligations, and a $0.7 million charge associated with the write-up to fair market value of inventory acquired in connection with the acquisition of Epocal Inc.
(9) Included in net loss from continuing operations for the fourth quarter of 2013 is amortization of $70.5 million, $4.2 million of restructuring charges, $6.7 million of stock-based compensation expense, $1.3 million of acquisition-related costs, $6.1 million of costs associated with potential business dispositions, $0.4 million of interest expense recorded in connection with fees paid for certain debt modifications, $0.8 million in compensation charges and $0.1 million of related interest accretion associated with acquisition-related contingent consideration obligations, a $0.6 million charge associated with the write-up to fair market value of inventory acquired in connection with the acquisition of Epocal Inc., $0.1 million of costs associated with the proxy contest, offset by an $0.8 million reduction in the loss on disposition of our Spinreact, S.A. subsidiary located in Spain and $1.6 million of income recorded for fair value adjustments to acquisition-related contingent consideration.

 

ITEM 9A. CONTROLS AND PROCEDURES

Management’s Conclusions Regarding the Effectiveness of Our Disclosure Controls and Procedures

In connection with the filing of the Original Report on March 5, 2015, our management evaluated, with the participation of our Chief Executive Officer (CEO) and our then-serving 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 (the “Exchange Act”)) as of the end of the period covered by the Original Report. Based on that evaluation, our CEO and then-serving CFO concluded in the Original Report that, because of the material weakness related to our accounting for deferred taxes related to dispositions described below our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, or that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The conclusion reached in the Original Report has not changed as of the filing of this report as our CEO and current CFO have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.

Management’s Annual Report on Internal Control over Financial Reporting (Restated)

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our 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 our receipts and expenditures 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 our financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In “Management’s Annual Report on Internal Control over Financial Reporting” included in our Original Report, our management, including our CEO and then-serving CFO, concluded that we did not maintain effective internal control over financial reporting as of December 31, 2014 because of a material weakness related to ineffective controls in assessing the accounting for deferred taxes which become recognizable as a result of dispositions. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a

 

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timely basis. The material weakness identified by management in the Original Report resulted in adjustments to our deferred tax assets and income from discontinued operations, which were reflected in our consolidated financial statements for the year ended December 31, 2014 included in the Original Report. Subsequent to the filing of the Original Report, the material weakness also resulted in the restatement of the consolidated financial statements for the three and nine months ended September 30, 2014 and the year ended December 31, 2014.

In connection with the preparation of our Quarterly Report on Form 10-Q for the three months ended September 30, 2015, management identified and corrected out-of-period errors in that quarter relating to U.S. taxes on foreign earnings for the year ended December 31, 2014 and concluded that these errors were the result of a material weakness in that we did not maintain a sufficient complement of resources with adequate experience and expertise in accounting for income taxes. As a result, we are restating our Annual Report on Internal Control over Financial Reporting to revise the description of the material weakness as follows: we did not maintain a sufficient complement of resources with adequate experience and expertise in accounting for income taxes, as a result of which our controls did not operate at a level of precision to identify errors in the calculation of tax balances resulting from dispositions and U.S. taxes on foreign earnings. This revision of the description of the material weakness did not alter management’s previous conclusion that we did not maintain effective internal control over financial reporting as of December 31, 2014.

Additionally, as initially reported in Amendment No. 2, management concluded that this material weakness could result in misstatements of our income tax accounts and related disclosures that could result in a material misstatement of the consolidated financial statements that would not be prevented or detected. This conclusion has not changed as of the date of the filing of this report.

The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

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 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Plan for Remediation of Material Weakness in Internal Control over Financial Reporting

With the oversight of senior management and the audit committee, we have been taking steps to remediate the material weakness described above and plan to take additional actions to remediate the underlying cause of this material weakness, primarily through:

 

  (1) supplementing our accounting and tax professionals with additional personnel with expertise in accounting for the income tax effects of dispositions and other complex transactions. Since May 1, 2015, we have hired a Vice President, Global Tax, a Senior Director, International Tax, a Director, Global Tax Accounting and Senior Manager, Global Tax Accounting, all of whom have experience working on tax provisions of multinational companies;

 

  (2) enhancing our income tax controls to include specific activities to assess the accounting for deductible outside basis differences that could reverse as a result of transactions to dispose of components of the company;

 

  (3) enhancing our controls over the income tax provision process to include specific controls over the determination of U.S. taxes on foreign earnings; and

 

  (4) holding training for our accounting and tax professionals, specifically related to accounting for income taxes relating to transactions to dispose of components of the company.

These actions are subject to ongoing review by our senior management, as well as oversight by the audit committee of our board of directors. Although we plan to complete this remediation process as quickly as possible, we cannot, at this time, estimate when such remediation may occur, and our initiatives may not prove successful in remediating this material weakness. Management may determine to enhance other existing controls and/or implement additional controls as the implementation progresses. It will take time to determine whether the additional controls we are implementing will be sufficient to accomplish their intended purpose; accordingly, the material weakness may continue for a period of time.

The remedial measures we are taking may not be adequate to prevent additional misstatements or avoid other control deficiencies or material weaknesses. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including judgments used in decision making, the nature and complexity of the transactions we

 

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undertake, assumptions about the likelihood of future events, the soundness of our systems, the adequacy of training and experience, the possibility of human error, cost limitations and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. As a result, our financial statements may contain one or more material misstatements and may not be available on a timely basis, any of which could cause investors to lose confidence in us and lead to, among other things, unanticipated legal, accounting and other expenses, delays in filing required financial disclosures, enforcement actions by government authorities, fines, penalties, the delisting of our securities, a decline in the prices of our securities, liabilities arising from stockholder litigation and defaults under our secured credit facility and notes indentures.

 

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PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

  1. Financial Statements.

The financial statements listed below have been filed as part of this report on the pages indicated:

 

Report of Independent Registered Public Accounting Firm

     F-2  

Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012

     F-4  

Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2014, 2013 and 2012

     F-5  

Consolidated Balance Sheets as of December 31, 2014 and 2013

     F-6  

Consolidated Statements of Equity for the Years Ended December 31, 2014, 2013 and 2012

     F-7  

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012

     F-10   

Notes to Consolidated Financial Statements

     F-11   

 

  2. Financial Statement Schedules.

All schedules for which provision is made in the applicable accounting regulations 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.

 

  3. Exhibits.

Some of the agreements filed as exhibits to this report contain representations and warranties that were made solely for the benefit of the parties to the agreement. These representations and warranties:

 

    may have been qualified by disclosures that were made to the other party or parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;

 

    may apply standards of materiality that differ from those of investors;

 

    may have constituted an allocation of risk and responsibility among the parties rather than statements of fact; and

 

    were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.

 

Exhibit

No.

  

Description

***2.1

   Membership Interest Purchase Agreement dated October 27, 2014, by and among Alere Inc., Alere Health, LLC and OptumHealth Care Solutions, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, event date October 27, 2014, filed October 28, 2014)

      3.1

   Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014)

      3.2

   Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, event date August 21, 2014, filed with the SEC on August 26, 2014)

      4.1

   Indenture, dated May 14, 2007, between the Company and U.S. Bank Trust National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, event date May 9, 2007, filed on May 15, 2007)

      4.2

   Indenture dated as of May 12, 2009 between Inverness Medical Innovations, Inc., as issuer, and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, event date May 12, 2009, filed on May 12, 2009)

      4.3

   Ninth Supplemental Indenture dated September 21, 2010 to Indenture date as of May 12, 2009 among Alere Inc., as issuer, the subsidiary guarantors named therein, as guarantors, and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, event date September 15, 2010, filed with the SEC on September 21, 2010)

 

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Exhibit

No.

  

Description

      4.4

   Eleventh Supplemental Indenture to Indenture dated as of May 12, 2009 (relating to the Record Date Amendments and Waivers) dated as of June 16, 2011, among the Company, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, event date June 16, 2011, filed on June 22, 2011)

      4.5

   Thirteenth Supplemental Indenture to Indenture dated as of May 12, 2009 (relating to the Restricted Payments Amendments and Waivers) dated as of June 16, 2011, among the Company, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K, event date June 16, 2011, filed on June 22, 2011)

      4.6

   Fifteenth Supplemental Indenture to Indenture dated as of May 12, 2009 (to add the guarantees of Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc.) dated as of April 3, 2013 among Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc., as guarantors, the Company as issuer, the other guarantor subsidiaries named therein, as guarantors, and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2013)

      4.7

   Seventeenth Supplemental Indenture to Indenture dated as of May 12, 2009 (relating to the BBI Transaction) dated as of June 5, 2014, among the Company, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, event date May 30, 2014, filed on June 5, 2014)

    *4.8

   Nineteenth Supplemental Indenture to Indenture dated as of May 12, 2009 (to add the guarantees of NewCo SS, LLC, Newco AA, Inc., Newco RD, LLC, Newco RD2, LLC, and Alere Holdco, Inc.) dated October 30, 2014 among NewCo SS, LLC, Newco AA, Inc., Newco RD, LLC, Newco RD2, LLC, and Alere Holdco, Inc., as guarantors, the Company as issuer, the other guarantor subsidiaries named therein, as guarantors, and U.S. Bank National Association, as trustee

      4.9

   Sixteenth Supplemental Indenture dated as of May 24, 2013 to Indenture dated as of May 12, 2009, by and among the Company, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, event date May 23, 2013, filed May 30, 2013)

      4.10

   Eighteenth Supplemental Indenture to Indenture dated as of May 12, 2009 (relating to the BBI Transaction) dated as of June 5, 2014, among the Company, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, event date May 30, 2014, filed on June 5, 2014)

    *4.11

   Twentieth Supplemental Indenture to Indenture dated as of May 12, 2009 (to add the guarantees of NewCo SS, LLC, Newco AA, Inc., Newco RD, LLC, Newco RD2, LLC, and Alere Holdco, Inc.) dated October 30, 2014 among NewCo SS, LLC, Newco AA, Inc., Newco RD, LLC, Newco RD2, LLC, and Alere Holdco, Inc., as guarantors, the Company as issuer, the other guarantor subsidiaries named therein, as guarantors, and U.S. Bank National Association, as trustee

      4.12

   Indenture dated as of August 11, 2009 between Inverness Medical Innovations, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, event date August 11, 2009, filed on August 11, 2009)

      4.13

   Fifteenth Supplemental Indenture dated as of December 11, 2012 to Indenture dates as of August 11, 2009, by and among the Company, the subsidiary guarantors named therein and Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, event date December 11, 2012, filed on December 14, 2012)

 

10


Table of Contents

Exhibit

No.

  

Description

      4.14

   Sixteenth Supplemental Indenture, dated April 3, 2013 (to add the guarantees of Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc.) to Indenture dated as of August 11, 2009 among Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc., as guarantors, the Company as issuer, the other guarantor subsidiaries named therein, as guarantors, and Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.6 of the Company’s Registration Statement on Form S-4 (File No. 333-187776))

      4.15

   Seventeenth Supplemental Indenture to Indenture dated as of August 11, 2009 (relating to the BBI Transaction) dated as of June 5, 2014, among the Company, the subsidiary guarantors party thereto and Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, event date May 30, 2014, filed on June 5, 2014)

    *4.16

   Eighteenth Supplemental Indenture to Indenture dated as of August 11, 2009 (to add the guarantees of NewCo SS, LLC, Newco AA, Inc., Newco RD, LLC, Newco RD2, LLC, and Alere Holdco, Inc.) dated October 30, 2014 among NewCo SS, LLC, Newco AA, Inc., Newco RD, LLC, Newco RD2, LLC, and Alere Holdco, Inc., as guarantors, the Company as issuer, the other guarantor subsidiaries named therein, as guarantors, and Bank of New York Mellon Trust Company, N.A., as trustee

      4.17

   Registration Rights Agreement, dated as of December 11, 2012, by and among the Company, the guarantors named therein, and Jefferies & Company, Inc., Goldman, Sachs & Co., and Credit Suisse Securities (USA) LLC, as representatives of the Initial Purchasers (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K, event date December 11, 2012, filed on December 14, 2012)

      4.18

   Registration Rights Agreement, dated as of May 24, 2013, by and among the Company, the guarantors named therein, and Goldman, Sachs & Co., Jefferies LLC and Credit Suisse Securities (USA) LLC, as representatives of the Initial Purchasers (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, event date May 23, 2013, filed May 30, 2013)

  +10.1

   BNP Assay Development, Manufacture and Supply Agreement between Biosite Incorporated and Beckman Coulter, Inc. effective June 24, 2003 (incorporated by reference to Exhibit 10.22 to Annual Report of Biosite Incorporated on Form 10-K, filed on March 12, 2007)

  +10.2

   Shareholder Agreement dated as of May 17, 2007 among Inverness Medical Switzerland GmbH, Procter & Gamble International Operations, SA and SPD Swiss Precision Diagnostics GmbH (incorporated by reference to Exhibit 10.12 to Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2007)

  ‡10.3

   Inverness Medical Innovations, Inc. 2001 Stock Option and Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s Proxy Statement filed on Schedule 14A as filed with the SEC on April 30, 2009)

  ‡10.4

   Alere Inc. 2010 Stock Option and Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s Proxy Statement filed on Schedule 14A as filed with the SEC on July 17, 2014)

  ‡10.5

   Rules of Alere Inc. HM Revenue and Customs Approved Share Option Plan (2007), as amended (authorized for use under the Alere Inc. 2001 Stock Option and Incentive Plan and the Alere Inc. 2010 Stock Option and Incentive Plan) (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2010)

  ‡10.6

   Summary of Terms of Award Agreements under Alere Inc. Stock Option Plans (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, for the period ended September 30, 2014)

  ‡10.7

   Form of Change of Control Agreement between the Company and each of its executive officers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date October 25, 2014, filed on October 28, 2014)

  ‡10.8

   Summary of Non-Employee Director Compensation (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2010)

 

11


Table of Contents

Exhibit

No.

  

Description

  ‡10.9

   Alere Inc. 2001 Employee Stock Purchase Plan, as amended (incorporated by reference to Appendix B to the Company’s Proxy Statement filed on Schedule 14A as filed with the SEC on July 17, 2014)

  ‡10.10

   Restricted Stock Unit Agreement, dated December 30, 2012, between Alere Inc. and Namal Nawana (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K, for the year ended December 31, 2012)

    10.11

   Purchase Agreement dated November 28, 2012 among Alere Inc., the subsidiary guarantors named therein and Jefferies & Company, Inc., Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC, as Representatives of the Initial Purchasers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date November 28, 2012, filed with the SEC on November 30, 2012)

  ‡10.12

   Summary of Arrangement with Chairman of the Board Regarding Expense Reimbursement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q ,for the quarter ended June 30, 2014)

    10.13

   Purchase Agreement dated May 13, 2013 among Alere Inc., the subsidiary guarantors named therein and Goldman, Sachs & Co., Jefferies LLC and Credit Suisse Securities (USA) LLC, as Representatives of the Initial Purchasers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date May 10, 2013, filed May 16, 2013)

    10.14

   Credit Agreement dated as of June 30, 2011 among Alere Inc., as Borrower, the Lenders and L/C Issuers party thereto, General Electric Capital Corporation, as Administrative Agent, Jefferies Finance LLC, as Syndication Agent, and Credit Suisse Securities (USA) LLC, Goldman Sachs Bank USA, DnB Nor Bank ASA and SunTrust Bank, as Co-Documentation Agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date June 30, 2011, filed on July 7, 2011)

    10.15

   Guaranty and Security Agreement dated as of June 30, 2011 among Alere Inc., as Borrower, and each Grantor party thereto and General Electric Capital Corporation, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, event date June 30, 2011, filed on July 7, 2011)

    10.16

   First Amendment to Credit Agreement dated as of July 27, 2011 among Alere Inc., as Borrower, the Lenders and L/C Issuers party thereto, General Electric Capital Corporation, as Administrative Agent, Jefferies Finance LLC, as Syndication Agent, and Credit Suisse Securities (USA) LLC, Goldman Sachs Bank USA, DnB Nor Bank ASA and SunTrust Bank, as Co-Documentation Agents (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011)

    10.17

   Second Amendment to Credit Agreement dated as of December 7, 2011 among Alere Inc., as Borrower, the Lenders party thereto, and General Electric Capital Corporation, as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, event date December 7, 2011, filed on December 9, 2011)

    10.18

   Third Amendment to Credit Agreement dated as of March 28, 2012 among Alere Inc., as Borrower, the Lenders party thereto, and General Electric Capital Corporation, as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date March 28, 2012, filed on April 2, 2012)

    10.19

   Fourth Amendment to Credit Agreement, dated as of March 22, 2013, among Alere Inc., as Borrower, each of the Guarantors (as defined therein), the Lenders party thereto, and General Electric Capital Corporation, as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2013)

    10.20

   Fifth Amendment to Credit Agreement, dated as of May 30, 2014, among Alere Inc., as Borrower, each of the Guarantors (as defined therein), the Lenders party thereto, and General Electric Capital Corporation, as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, event dated May 30, 2014, filed June 5, 2014)

  *10.21

   Sixth Amendment to Credit Agreement, dated as of December 1, 2014, among Alere Inc., as Borrower, each of the Guarantors (as defined therein), the Lenders party thereto, and General Electric Capital Corporation, as Administrative Agent

  *21.1

   List of Subsidiaries of the Company as of March 5, 2015

 

12


Table of Contents

Exhibit

No.

  

Description

  **23.1

   Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm

  **31.1

   Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

  **31.2

   Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

  **32.1

   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act

  *101

   Interactive Data Files regarding (a) our Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012, (b) our Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2013 and 2012 (c) our Consolidated Balance Sheets as of December 31, 2014 and 2013, (d) our Consolidated Statements of Equity for the Years Ended December 31, 2014, 2013 and 2012, (e) our Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012 and (f) the Notes to such consolidated financial statements.

 

* Previously filed.
** Filed herewith.
*** The Company agrees to furnish supplementally to the Securities and Exchange Commission (“the Commission”) a copy of any omitted schedule or exhibit to this agreement upon request by the Commission.
+ We have omitted portions of this exhibit which have been granted confidential treatment.
Management contract or compensatory plan or arrangement, or amendment thereto.

 

13


Table of Contents

SIGNATURE

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.

 

    ALERE INC.
Date: November 13, 2015     By:  

/s/ Namal Nawana

      Namal Nawana
      Chief Executive Officer and President

 

14


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2  

Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012

     F-4  

Consolidated Statements of Comprehensive Loss for the Years Ended December 31,  2014, 2013 and 2012

     F-5  

Consolidated Balance Sheets as of December 31, 2014 and 2013

     F-6  

Consolidated Statements of Equity for the Years Ended December 31, 2014, 2013 and 2012

     F-7  

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012

     F-10  

Notes to Consolidated Financial Statements

     F-11  

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Alere Inc.,

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive loss, of equity and of cash flows present fairly, in all material respects, the financial position of Alere Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.

Management and we previously concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2014, because of a material weakness related to the accounting for deferred taxes related to dispositions. However, management has subsequently determined that the Company did not maintain a sufficient complement of resources with adequate experience and expertise in accounting for income taxes. As a result, the description of the material weakness for accounting for deferred taxes related to dispositions at December 31, 2014 was revised to state: The Company did not maintain a sufficient complement of resources with adequate experience and expertise in accounting for income taxes, which resulted in controls that did not operate at a level of precision to identify errors in the calculation of tax balances resulting from dispositions and U.S. taxes on foreign earnings. Accordingly, our opinion on the effectiveness of internal control over financial reporting has been restated to include this revised material weakness. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting relating to lack of a sufficient complement of resources with adequate experience and expertise in accounting for income taxes, which resulted in controls that did not operate at a level of precision to identify errors in the calculation of tax balances resulting from dispositions and U.S. taxes on foreign earnings existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2014 consolidated financial statements to correct errors.

As discussed in Notes 3 and 4 to the consolidated financial statements, effective October 1, 2014, the Company changed the manner in which it accounts for discontinued operations.

A company’s 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 company’s 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 the assets of the company; (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 the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

F-2


Table of Contents

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.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 5, 2015, except for the effects of the restatement and revision discussed in Note 2 to the consolidated financial statements, as to which the date is May 28, 2015, and except with respect to our opinion on internal control over financial reporting insofar as it relates to the matter described in the fourth paragraph of Management’s Annual Report on Internal Control over Financial Reporting as to which the date is November 13, 2015

 

F-3


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Year Ended December 31,  
     2014
(Restated)
    2013     2012  

Net product sales

   $ 2,035,666      $ 2,056,519      $ 1,899,913   

Services revenue

     531,988        532,616        465,882   
  

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     2,567,654        2,589,135        2,365,795   

License and royalty revenue

     21,050        27,229        28,576   
  

 

 

   

 

 

   

 

 

 

Net revenue

     2,588,704        2,616,364        2,394,371   
  

 

 

   

 

 

   

 

 

 

Cost of net product sales

     1,069,422        1,017,501        920,617   

Cost of services revenue

     294,753        274,045        220,510   
  

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     1,364,175        1,291,546        1,141,127   

Cost of license and royalty revenue

     5,592        7,763        7,354   
  

 

 

   

 

 

   

 

 

 

Cost of net revenue

     1,369,767        1,299,309        1,148,481   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,218,937        1,317,055        1,245,890   

Operating expenses:

      

Research and development

     144,828        159,053        181,735   

Sales and marketing

     513,801        566,137        556,594   

General and administrative

     453,988        435,199        347,379   

Impairment and (gain) loss on dispositions, net

     7,742        5,124        —     
  

 

 

   

 

 

   

 

 

 

Operating income

     98,578        151,542        160,182   

Interest expense, including amortization of original issue discounts and deferred financing costs

     (209,191     (255,346     (240,397

Other income (expense), net

     (731     (11,260     11,137   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before provision (benefit) for income taxes

     (111,344     (115,064     (69,078

Provision (benefit) for income taxes

     82,193        (42,014     (10,742
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before equity earnings of unconsolidated entities, net of tax

     (193,537     (73,050     (58,336

Equity earnings of unconsolidated entities, net of tax

     17,509        17,443        13,245   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (176,028     (55,607     (45,091

Income (loss) from discontinued operations, net of tax

     138,318        (16,126     (33,126
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     (37,710     (71,733     (78,217

Less: Net income attributable to non-controlling interests

     30        976        275   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Alere Inc. and Subsidiaries

     (37,740     (72,709     (78,492

Preferred stock dividends

     (21,293     (21,293     (21,293
  

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

   $ (59,033   $ (94,002   $ (99,785
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share attributable to Alere Inc. and Subsidiaries:

      

Loss from continuing operations

   $ (2.38   $ (0.95   $ (0.83

Income (loss) from discontinued operations

     1.67        (0.20     (0.41
  

 

 

   

 

 

   

 

 

 

Net loss per common share

   $ (0.71   $ (1.15   $ (1.24
  

 

 

   

 

 

   

 

 

 

Weighted-average shares — basic and diluted

     82,938        81,542        80,587   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

 

     Year Ended December 31,  
     2014
(Restated)
    2013     2012  

Net income (loss)

   $ (37,710   $ (71,733   $ (78,217
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

      

Changes in cumulative translation adjustment

     (166,448     (50,166     54,642   

Unrealized losses on available for sale securities

     (17     —          (216

Unrealized gains on hedging instruments

     38        39        388   

Minimum pension liability adjustment

     (169     (415     (1,042
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     (166,596     (50,542     53,772   

Income tax provision (benefit) related to items of other comprehensive income (loss)

     (173     (106     (372
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (166,423     (50,436     54,144   
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (204,133     (122,169     (24,073

Less: Comprehensive income attributable to non-controlling interests

     30        976        275   
  

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Alere Inc. and Subsidiaries

   $ (204,163   $ (123,145   $ (24,348
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

     As of December 31,  
     2014
(Restated)
    2013  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 378,461      $ 355,431   

Restricted cash

     37,571        3,458   

Marketable securities

     259        858   

Accounts receivable, net of allowances of $76,163 and $69,146 at December 31, 2014 and December 31, 2013, respectively

     466,106        487,377   

Inventories, net

     365,165        365,267   

Deferred tax assets

     112,573        48,858   

Prepaid expenses and other current assets

     132,413        125,645   

Assets held for sale

     315,515        380,483   
  

 

 

   

 

 

 

Total current assets

     1,808,063        1,767,377   

Property, plant and equipment, net

     453,570        466,497   

Goodwill

     2,926,666        3,006,997   

Other intangible assets with indefinite lives

     43,651        56,702   

Finite-lived intangible assets, net

     1,276,444        1,557,426   

Restricted cash

     —          29,370   

Deferred financing costs, net, and other non-current assets

     67,832        83,497   

Investments in unconsolidated entities

     91,693        86,830   

Deferred tax assets

     8,569        7,389   

Non-current income tax receivable

     2,468        —     
  

 

 

   

 

 

 

Total assets

   $ 6,678,956      $ 7,062,085   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Short-term debt and current portion of long-term debt

   $ 88,875      $ 64,112   

Current portion of capital lease obligations

     4,241        5,962   

Accounts payable

     213,592        181,642   

Accrued expenses and other current liabilities

     375,494        381,894   

Liabilities related to assets held for sale

     78,843        133,242   
  

 

 

   

 

 

 

Total current liabilities

     761,045        766,852   
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, net of current portion

     3,621,385        3,757,788   

Capital lease obligations, net of current portion

     10,560        13,242   

Deferred tax liabilities

     214,639        285,034   

Other long-term liabilities

     161,582        161,031   
  

 

 

   

 

 

 

Total long-term liabilities

     4,008,166        4,217,095   
  

 

 

   

 

 

 

Commitments and contingencies (Notes 10, 11 and 12)

    

Stockholders’ equity:

    

Series B preferred stock, $0.001 par value (liquidation preference: $709,763 at December 31, 2014 and 2013); Authorized: 2,300 shares; Issued: 2,065 shares at December 31, 2014 and 2013; Outstanding: 1,774 shares at December 31, 2014 and 2013

     606,468        606,468   

Common stock, $0.001 par value; Authorized: 200,000 shares; Issued: 91,532 shares and 89,666 shares at December 31, 2014 and 2013, respectively; Outstanding: 83,853 shares and 81,987 shares at December 31, 2014 and 2013, respectively

     92        90   

Additional paid-in capital

     3,355,672        3,319,168   

Accumulated deficit

     (1,679,552     (1,641,812

Treasury stock, at cost, 7,679 shares at December 31, 2014 and 2013

     (184,971     (184,971

Accumulated other comprehensive loss

     (192,110     (25,687
  

 

 

   

 

 

 

Total stockholders’ equity

     1,905,599        2,073,256   

Non-controlling interests

     4,146        4,882   
  

 

 

   

 

 

 

Total equity

     1,909,745        2,078,138   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,678,956      $ 7,062,085   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

 

   

 

 

 

Preferred Stock

   

 

 

Common Stock

    Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Compre-
hensive
Income
(Loss)
    Treasury Stock,
at cost
    Total
Stockholders’
Equity
    Non-
controlling
Interest
    Total
Equity
    Redeemable
Non-
controlling
Interest
 
    Number of
Shares
    $0.001
Par
Value
                 
  Number of
Shares
    Amount               Number of
Shares
    Value          

BALANCE, DECEMBER 31, 2011

    1,774      $ 606,468        87,647      $ 88      $ 3,324,710      $ (1,490,611   $ (29,395     7,679      $ (184,971   $ 2,226,289      $ 2,340      $ 2,228,629      $ 2,497   

Exercise of common stock options, warrants and shares issued under employee stock purchase plan

    —          —          862        1        14,923        —          —          —          —          14,924        —          14,924        —     

Issuance of common stock for settlement of an acquisition-related contingent consideration obligation

    —          —          67        —          1,243        —          —          —          —          1,243        —          1,243        —     

Preferred stock dividends

    —          —          —          —          (21,293     —          —          —          —          (21,293     —          (21,293     —     

Stock-based compensation expense

    —          —          —          —          15,665        —          —          —          —          15,665        —          15,665        —     

Excess tax benefits on exercised stock options

    —          —          —          —          (234     —          —          —          —          (234     —          (234     —     

Minimum pension liability adjustment, net of tax

    —          —          —          —          —          —          (756     —          —          (756     —          (756     —     

Changes in cumulative translation adjustment, net of tax

    —          —          —          —          —          —          54,642        —          —          54,642        —          54,642        —     

Unrealized gain on hedging instruments, net of tax

    —          —          —          —          —          —          388        —          —          388        —          388        —     

Unrealized loss on available-for-sale securities, net of tax

    —          —          —          —          —          —          (130     —          —          (130     —          (130     —     

Purchase of subsidiary shares from non-controlling interest

    —          —          —          —          (35,079     —          —          —          —          (35,079     —          (35,079     (2,434

Non-controlling interest dividend

    —          —          —          —          —          —          —          —          —          —          (396     (396     —     

Net income (loss)

    —          —          —          —          —          (78,492     —          —          —          (78,492     338        (78,154     (63
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, DECEMBER 31, 2012

    1,774      $ 606,468        88,576      $ 89      $ 3,299,935      $ (1,569,103   $ 24,749        7,679      $ (184,971   $ 2,177,167      $ 2,282      $ 2,179,449      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-7


Table of Contents
   

 

 

 

Preferred Stock

   

 

 

Common Stock

    Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Compre-
hensive
Income
(Loss)
    Treasury Stock,
at cost
    Total
Stockholders’
Equity
    Non-
controlling
Interest
    Total
Equity
 
      Number of
Shares
    $0.001
Par
Value
               
    Number of
Shares
    Amount               Number of
Shares
    Value        

BALANCE, DECEMBER 31, 2012

    1,774      $ 606,468        88,576      $ 89      $ 3,299,935      $ (1,569,103   $ 24,749        7,679      $ (184,971   $ 2,177,167      $ 2,282      $ 2,179,449   

Issuance of common stock under employee compensation plans

    —          —          1,090        1        20,714        —          —          —          —          20,715        —          20,715   

Preferred stock dividends

    —          —          —          —          (21,293     —          —          —          —          (21,293     —          (21,293

Stock-based compensation expense

    —          —          —          —          21,210        —          —          —          —          21,210        —          21,210   

Excess tax benefits on exercised stock options

    —          —          —          —          (1,398     —          —          —          —          (1,398     —          (1,398

Minimum pension liability adjustment, net of tax

    —          —          —          —          —          —          (309     —          —          (309     —          (309

Changes in cumulative translation adjustment, net of tax

    —          —          —          —          —          —          (50,166     —          —          (50,166     —          (50,166

Unrealized gain on hedging instruments, net of tax

    —          —          —          —          —          —          39        —          —          39        —          39   

Non-controlling interest from acquisition

    —          —          —          —          —          —          —          —          —          —          1,788        1,788   

Non-controlling interest dividend

    —          —          —          —          —          —          —          —          —          —          (164     (164

Net income (loss)

    —          —          —          —          —          (72,709     —          —          —          (72,709     976        (71,733
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, DECEMBER 31, 2013

    1,774      $ 606,468        89,666      $ 90      $ 3,319,168      $ (1,641,812   $ (25,687     7,679      $ (184,971   $ 2,073,256      $ 4,882      $ 2,078,138   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-8


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY (Continued) (Restated)

(in thousands)

 

   

 

 

 

Preferred Stock

   

 

 

Common Stock

    Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Compre-
hensive
Loss
    Treasury Stock,
at cost
    Total
Stockholders’
Equity
    Non-
controlling
Interest
    Total
Equity
 
      Number of
Shares
    $0.001
Par
Value
               
    Number of
Shares
    Amount               Number of
Shares
    Value        

BALANCE, DECEMBER 31, 2013

    1,774      $ 606,468        89,666      $ 90      $ 3,319,168      $ (1,641,812   $ (25,687     7,679      $ (184,971   $ 2,073,256      $ 4,882      $ 2,078,138   

Issuance of common stock under employee compensation plans

    —          —          1,866        2        51,553        —          —          —          —          51,555        —          51,555   

Preferred stock dividends

    —          —          —          —          (21,293     —          —          —          —          (21,293     —          (21,293

Stock-based compensation expense

    —          —          —          —          12,452        —          —          —          —          12,452        —          12,452   

Excess tax benefits on exercised stock options

    —          —          —          —          (6,208     —          —          —          —          (6,208     —          (6,208

Minimum pension liability adjustment, net of tax

    —          —          —          —          —          —          4        —          —          4        —          4   

Changes in cumulative translation adjustment, net of tax

    —          —          —          —          —          —          (166,448     —          —          (166,448     —          (166,448

Unrealized gain on hedging instruments and marketable securities, net of tax

    —          —          —          —          —          —          21        —          —          21        —          21   

Non-controlling interest share purchase

    —          —          —          —          —          —                 —          —          —          (766     (766

Net income (loss)

    —          —          —          —                 (37,740            —          —          (37,740     30        (37,710
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, DECEMBER 31, 2014

    1,774      $ 606,468        91,532      $ 92      $ 3,355,672      $ (1,679,552   $ (192,110     7,679      $ (184,971   $ 1,905,599      $ 4,146      $ 1,909,745   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-9


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     For The Year Ended December 31,  
     2014
(Restated)
    2013     2012  

Cash Flows from Operating Activities:

      

Net income (loss)

   $ (37,710   $ (71,733   $ (78,217

Income (loss) from discontinued operations, net of tax

     138,318        (16,126     (33,126
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (176,028     (55,607     (45,091

Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:

      

Non-cash interest expense, including amortization of original issue discounts and deferred financing costs

     16,233        17,839        21,346   

Depreciation and amortization

     335,833        374,473        383,900   

Non-cash charges for sale of inventories revalued at the date of acquisition

     —          2,504        4,681   

Non-cash stock-based compensation expense

     12,452        21,210        15,665   

Tax benefit related to discontinued operations retained by Alere Inc.

     9,845        7,882        4,888   

Impairment of inventory

     3,124        337        290   

Impairment of long-lived assets

     7,019        5,818        1,037   

Impairment of intangible assets

     —          686        —     

(Gain) loss on disposition of fixed assets

     6,545        1,471        (3,134

Gain on sales of marketable securities

     —          —          (751

Equity earnings of unconsolidated entities, net of tax

     (17,509     (17,443     (13,245

Deferred income taxes

     (6,982     (129,687     (57,909

Loss on extinguishment of debt

     —          35,603        23,235   

Loss related to impairment and net gain on dispositions

     7,742        5,124        —     

Bargain purchase gain

     —          (8,023     —     

Other non-cash items

     4,965        10,450        7,367   

Changes in assets and liabilities, net of acquisitions:

      

Accounts receivable, net

     (689     (46,672     (19,810

Inventories, net

     (61,110     (82,710     (16,893

Prepaid expenses and other current assets

     (51,998     (11,310     (5,360

Accounts payable

     47,851        17,750        (11,672

Accrued expenses and other current liabilities

     63,689        57,158        41,025   

Other non-current liabilities

     9,150        (20,525     (39,775

Cash paid for contingent consideration

     (22,077     (11,660     (10,317
  

 

 

   

 

 

   

 

 

 

Net cash provided by continuing operations

     188,055        174,668        279,477   

Net cash provided by discontinued operations

     43,468        69,232        40,204   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     231,523        243,900        319,681   
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

      

(Increase) decrease in restricted cash

     (5,446     (31,164     5,911   

Purchases of property, plant and equipment

     (100,562     (99,908     (109,097

Proceeds from sale of property, plant and equipment

     1,486        3,618        21,646   

Cash received from disposition, net of cash divested

     45,076        29,000        —     

Cash paid for business acquisitions, net of cash acquired

     (75     (176,131     (419,987

Cash received from investments

     198        —          —     

Proceeds from sale of equity investment

     9,526        —          —     

Cash received from sales of marketable securities

     580        41        3,056   

Cash received from (paid for) equity method investments

     —          29,338        12,707   

(Increase) decrease in other assets

     986        14,723        (56,355
  

 

 

   

 

 

   

 

 

 

Net cash used in continuing operations

     (48,231     (230,483     (542,119

Net cash used in discontinued operations

     (8,972     (26,963     (32,070
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (57,203     (257,446     (574,189
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

      

Cash paid for financing costs

     (1,528     (9,845     (10,139

Cash paid for contingent purchase price consideration

     (32,902     (40,079     (20,132

Cash paid for dividends

     (21,293     (21,293     (21,293

Proceeds from issuance of common stock, net of issuance costs

     51,555        20,863        14,924   

Proceeds from issuance of short-term debt

     806        —          —     

Proceeds from issuance of long-term debt

     58        458,962        648,535   

Payments on short-term debt

     —          —          (6,240

Payments on long-term debt

     (65,122     (470,557     (311,312

Net (payments) proceeds under revolving credit facilities

     (42,522     138,963        14,272   

Excess tax benefits on exercised stock options

     972        461        504   

Principal payments on capital lease obligations

     (6,085     (6,533     (6,731

Purchase of non-controlling interest

     (623     (165     (2,972

Other

     —          (18,953     (12,267
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

     (116,684     51,824        287,149   

Net cash provided by (used in) discontinued operations

     (1,471     (2,833     (1,406
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (118,155     48,991        285,743   
  

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     (16,312     (1,871     (2,064
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     39,853        33,574        29,171   

Cash and cash equivalents, beginning of period – continuing operations

     355,431        316,479        287,541   

Cash and cash equivalents, beginning of period – discontinued operations

     6,477        11,855        11,622   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

     401,761        361,908        328,334   

Less: Cash and cash equivalents of discontinued operations, end of period

     23,300        6,477        11,855   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents of continuing operations, end of period

   $ 378,461      $ 355,431      $ 316,479   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-10


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Description of Business and Basis of Presentation of Financial Information

Alere Inc. delivers reliable and actionable health information through rapid diagnostic tests, resulting in better clinical and economic healthcare outcomes globally. A leading global provider of point-of-care diagnostics and services, we have developed a strong commercial presence in cardiometabolic disease, infectious disease, toxicology, and diabetes.

Our business is organized into three operating segments: (i) professional diagnostics, (ii) patient self-testing and (iii) consumer diagnostics. The professional diagnostics segment includes an array of innovative rapid diagnostic test products and other in vitro diagnostic tests marketed to medical professionals and laboratories for detection of diseases and conditions within our areas of focus identified above. The patient-self testing segment provides services designed to provide physicians with actionable data that allow them to make more effective decisions in real time, deliver quality care, and put the individuals they treat on a pathway to better health. The consumer diagnostics segment consists primarily of manufacturing operations related to our role as the exclusive manufacturer of products for SPD Swiss Precision Diagnostics, or SPD, our 50/50 joint venture with The Procter & Gamble Company, or P&G. SPD has significant operations in the worldwide over-the-counter pregnancy and fertility/ovulation test market.

Acquisitions have historically been an important part of our growth strategy. When we acquired businesses, we sought to complement existing products and services, enhance or expand our product lines and/or expand our customer base. We determined what we were willing to pay for each acquisition partially based upon our expectation that we could cost effectively integrate the products and services of the acquired companies into our existing infrastructure. In addition, we utilized existing infrastructure of the acquired companies to cost effectively introduce our products to new geographic areas. All of these factors contributed to the acquisition prices of acquired businesses that were in excess of the fair value of net assets acquired, resulting in goodwill (Note 6).

The consolidated financial statements include the accounts of Alere 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 non-controlling 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. These reclassifications had no effect on net income or equity.

Certain amounts presented may not recalculate directly, due to rounding.

(2)  Restatement and Revision of Previously Reported Consolidated Financial Statements

In connection with the preparation of our consolidated financial statements for the three months ended March 31, 2015, we determined that, in 2014, we had incorrectly accounted for income taxes associated with two divestitures. We determined that, for the three months ended December 31, 2014, we incorrectly accounted for the deferred taxes related to the divestiture of our health management business. The adjustment to correct this error resulted in a decrease to deferred tax assets and to income from discontinued operations of $30.3 million. In addition, for the three months ended September 30, 2014, we incorrectly accounted for deferred taxes in connection with the ACS Companies divestiture. The adjustment to correct this error resulted in an increase to deferred tax

 

F-11


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2)  Restatement and Revision of Previously Reported Consolidated Financial Statements (Continued)

 

liabilities of $7.0 million, an increase in income taxes payable of $0.3 million and a decrease in income from discontinued operations of $7.3 million. In the quarter ended December 31, 2014 we recorded a $2.1 million adjustment to decrease income from discontinued operations.

The impact of these errors was determined to be material to our fiscal year 2014 consolidated financial statements and, accordingly, we have restated our consolidated financial statements and related footnotes for the year ended December 31, 2014 and for the three months ended September 30, 2014. We also corrected additional errors in the three months ended September 30 and December 31, 2014 as part of these restatements to correct out-of-period adjustments that were previously determined to be immaterial. In the three months ended September 30, 2014, we recorded a $3.4 million adjustment to increase the provision for income taxes and increase income taxes payable related to an audit settlement. For the three months ended December 31, 2014, we recorded a $5.6 million adjustment to increase the provision for income taxes and increase income taxes payable related to a non-creditable withholding tax on an intercompany dividend. In addition to these adjustments, we are correcting certain other out-of-period adjustments for the three months ended September 30 and December 31, 2014. Those adjustments, in the aggregate, increased the provision for income taxes by $2.9 million and increase the loss from continuing operations before provision (benefit) for income taxes by an additional $0.1 million for the three months ended December 31, 2014. Those adjustments, in the aggregate, increased the provision for income taxes by $0.1 million and decreased loss from continuing operations before provision (benefit) for income taxes by $1.3 million for the three months ended September 30, 2014.

In connection with those restatements, we corrected additional errors in 2012, 2013 and 2014 and in each of the three-month periods ended in 2013 and in each of the three-month periods ended March 31, 2014 and June 30, 2014. We concluded that the correction of these errors was not material individually, or in the aggregate, to our previously issued financial statements. Accordingly, we have revised our consolidated financial statements and related footnotes for the years ended December 31, 2012 and 2013 and for each of the three-month periods ended March 31, 2014 and June 30, 2014 and each of the three-month periods ended in 2013. The adjustments in these periods are all corrections to out-of-period adjustments. The adjustments recorded in connection with the revisions include:

 

   

A $4.6 million decrease in general and administrative expense related to our contingent consideration obligations in the three months ended March 31, 2014.

 

   

A $4.2 million adjustment to reverse the benefit from certain foreign tax credits, which decreased the benefit for income taxes in the three months ended March 31, 2014.

 

   

Additional adjustments to the three months ended March 31, 2014 and June 30, 2014 that, in the aggregate, decreased the loss from continuing operations before provision (benefit) for income taxes by $2.6 million and increased the benefit for income taxes by $0.7 million.

 

   

A $4.6 million increase in general and administrative expense related to our contingent consideration obligations in the three months ended December 31, 2013.

 

   

A $4.2 million adjustment to record the benefit from certain foreign tax credits, which increased the benefit from income taxes in the three months ended December 31, 2013, the period in which this adjustment originated.

 

   

A $4.0 million adjustment to record additional income taxes payable related to various foreign subsidiaries in the three months ended December 31, 2013, which decreased the benefit from income taxes.

 

   

A $5.4 million adjustment to reverse a valuation allowance against state deferred tax assets in the three months ended December 31, 2013, which increased the benefit from income taxes by $5.4 million.

 

F-12


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2)  Restatement and Revision of Previously Reported Consolidated Financial Statements (Continued)

 

   

Additional adjustments to the three-month periods ended March 31, June 30, September 30 and December 31, 2013 that, in the aggregate for the year, increased the loss from continuing operations before provision (benefit) for income taxes by $4.2 million and increased the benefit from income taxes by $1.3 million.

 

   

A $39.6 million adjustment to increase accrued expenses and other current liabilities and decrease liabilities related to assets held for sale as of December 31, 2013.

 

   

A $15.0 million adjustment to increase short-term debt and current portion of long-term debt and decrease long-term debt, net of current portion as of December 31, 2013.

 

   

A $8.7 million adjustment to increase assets held for sale and decrease goodwill as of December 31, 2014.

 

   

A $5.4 million adjustment to record a valuation allowance against state deferred tax assets which decreased the benefit from income taxes in the year ended December 31, 2012, the period in which this adjustment originated.

 

   

Additional adjustments to the year ended December 31, 2012 that, in the aggregate, decreased the loss from continuing operations before provision (benefit) for income taxes by $1.2 million and increased the benefit from income taxes by $4.4 million.

Adjustments recorded in periods prior to December 31, 2011 had the cumulative effect of increasing the opening 2012 accumulated deficit by $3.8 million. In addition, we corrected the disclosure of cash paid for interest for the year ended December 31, 2014 from $102.3 million, as previously reported, to $192.1 million.

The following schedules reconcile the amounts as previously reported in the applicable financial statement to the corresponding restated or revised amounts:

 

    Year Ended December 31, 2014  

Restated Consolidated

Statement of Operations

(in thousands)

  As Previously
Reported, Giving
Effect to the
Impact  of
Discontinued

Operations
    Restatement
Adjustment
    As
Restated
 

Net product sales

  $   2,033,651      $ 2,015      $   2,035,666   

Net product sales and services revenue

  $ 2,565,639      $ 2,015      $ 2,567,654   

Net revenue

  $ 2,586,689      $ 2,015      $ 2,588,704   

Cost of net product sales

  $ 1,070,268      $ (846   $ 1,069,422   

Cost of service revenue

  $ 288,925      $ 5,828      $ 294,753   

Cost of net product sales and services revenue

  $ 1,359,193      $ 4,982      $ 1,364,175   

Cost of net revenue

  $ 1,364,785      $ 4,982      $ 1,369,767   

Gross profit

  $ 1,221,904      $ (2,967   $ 1,218,937   

General and administrative

  $ 462,108      $ (8,120   $ 453,988   

Operating income

  $ 93,425      $ 5,153      $ 98,578   

Other income (expense), net

  $ (2,733   $ 2,002      $ (731

Loss from continuing operations before benefit for income taxes

  $ (118,499   $ 7,155      $ (111,344

Provision for income taxes

  $ 67,022      $     15,171      $ 82,193   

 

F-13


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2)  Restatement and Revision of Previously Reported Consolidated Financial Statements (Continued)

 

    Year Ended December 31, 2014  

Restated Consolidated

Statement of Operations

(in thousands)

  As Previously
Reported, Giving
Effect to the
Impact  of
Discontinued

Operations
    Restatement
Adjustment
    As
Restated
 

Loss from continuing operations before equity earnings of unconsolidated entities, net of tax

  $ (185,521   $ (8,016   $ (193,537

Loss from continuing operations

  $ (168,012   $ (8,016   $ (176,028

Net income from discontinued operations, net of tax

  $ 177,960      $ (39,642   $ 138,318   

Net income (loss)

  $ 9,948      $ (47,658   $ (37,710

Net income (loss) attributable to Alere Inc. and Subsidiaries

  $ 9,918      $ (47,658   $ (37,740

Net loss available to common stockholders

  $ (11,375   $ (47,658   $ (59,033

Basic and diluted net income (loss) per common share: Loss from continuing operations

  $ (2.28   $ (0.10   $ (2.38

Income from discontinued operations

  $ 2.14      $ (0.47   $ 1.67   

Basic and diluted net income (loss) per common share: Net income (loss) per common share

  $ (0.14   $ (0.57   $ (0.71
    Year Ended December 31, 2013  

Revised Consolidated

Statement of Operations

(in thousands)

  As Previously
Reported,  Giving

Effect to the
Impact of
Discontinued
Operations
    Revision
Adjustment
    As Revised  

Net product sales

  $   2,058,534      $ (2,015   $   2,056,519   

Services revenue

  $ 534,099      $ (1,483   $ 532,616   

Net product sales and services revenue

  $ 2,592,633      $ (3,498   $ 2,589,135   

Net revenue

  $ 2,619,862      $ (3,498   $ 2,616,364   

Cost of net product sales

  $ 1,017,632      $ (131   $ 1,017,501   

Cost of service revenue

  $ 272,089      $ 1,956      $ 274,045   

Cost of net product sales and services revenue

  $ 1,289,721      $ 1,825      $ 1,291,546   

Cost of net revenue

  $ 1,297,484      $ 1,825      $ 1,299,309   

Gross profit

  $ 1,322,378      $ (5,323   $ 1,317,055   

General and administrative

  $ 431,666      $ 3,533      $ 435,199   

Operating income

  $ 160,398      $ (8,856   $ 151,542   

Loss from continuing operations before benefit for income taxes

  $ (106,208   $ (8,856   $ (115,064

Benefit for income taxes

  $ (35,167   $ (6,847   $ (42,014

Loss from continuing operations before equity earnings of unconsolidated entities, net of tax

  $ (71,041   $ (2,009   $ (73,050

Loss from continuing operations

  $ (53,598   $ (2,009   $ (55,607

Loss from discontinued operations, net of tax

  $ (16,680   $ 554      $ (16,126

Net loss

  $ (70,278   $ (1,455   $ (71,733

Net loss attributable to Alere Inc. and Subsidiaries

  $ (71,254   $ (1,455   $ (72,709

Net loss available to common stockholders

  $ (92,547   $ (1,455   $ (94,002

Basic and diluted loss per common share: Loss from continuing operations

  $ (0.92   $ (0.03   $ (0.95

Loss from discontinued operations

  $ (0.21   $ 0.01      $ (0.20

Basic and diluted loss per common share: Net loss per common share

  $ (1.13   $ (0.02   $ (1.15

 

F-14


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2)  Restatement and Revision of Previously Reported Consolidated Financial Statements (Continued)

 

     Year Ended December 31, 2012  

Revised Consolidated

Statement of Operations

(in thousands)

   As Previously
Reported, Giving
Effect to the

Impact of
Discontinued
Operations
    Revision
Adjustment
    As Revised  

Services revenue

   $ 464,637      $     1,245      $ 465,882   

Net product sales and services revenue

   $   2,364,550      $ 1,245      $   2,365,795   

Net revenue

   $ 2,393,126      $ 1,245      $ 2,394,371   

Cost of net product sales

   $ 920,385      $ 232      $ 920,617   

Cost of service revenue

   $ 221,228      $ (718   $ 220,510   

Cost of net product sales and services revenue

   $ 1,141,613      $ (486   $ 1,141,127   

Cost of net revenue

   $ 1,148,967      $ (486   $ 1,148,481   

Gross profit

   $ 1,244,159      $ 1,731      $ 1,245,890   

Sales and marketing

   $ 556,724      $ (130   $ 556,594   

General and administrative

   $ 348,817      $ (1,438   $ 347,379   

Operating income

   $ 156,883      $ 3,299      $ 160,182   

Loss from continuing operations before benefit for income taxes

   $ (72,377   $ 3,299      $ (69,078

Benefit for income taxes

   $ (12,880   $ 2,138      $ (10,742

Loss from continuing operations before equity earnings of unconsolidated entities, net of tax

   $ (59,497   $ 1,161      $ (58,336

Loss from continuing operations

   $ (46,252   $ 1,161      $ (45,091

Net loss from discontinued operations, net of tax

   $ (31,655   $ (1,471   $ (33,126

Net loss

   $ (77,907   $ (310   $ (78,217

Net loss attributable to Alere Inc. and Subsidiaries

   $ (78,182   $ (310   $ (78,492

Net loss available to common stockholders

   $ (99,475   $ (310   $ (99,785

Basic and diluted net loss per common share: Loss from continuing operations

   $ (0.85   $ 0.02      $ (0.83

Loss from discontinued operations

   $ (0.38   $ (0.03   $ (0.41

Basic and diluted net loss per common share: Net loss per common share

   $ (1.23   $ (0.01   $ (1.24

 

     Year Ended December 31, 2014  

Restated Consolidated

Statement of Comprehensive Loss

(in thousands)

   As Previously
Reported, Giving

Effect to the
Impact of
Discontinued
Operations
    Restatement
Adjustment
    As Restated  

Net income (loss)

   $ 9,948      $ (47,658   $ (37,710

Comprehensive loss

   $ (156,475   $ (47,658   $ (204,133

Comprehensive loss attributable to Alere Inc. and Subsidiaries

   $ (156,505   $ (47,658   $   (204,163

 

F-15


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2)  Restatement and Revision of Previously Reported Consolidated Financial Statements (Continued)

 

     Year Ended December 31, 2013  

Revised Consolidated

Statement of Comprehensive Loss

(in thousands)

   As Previously
Reported, Giving
Effect to the
Impact of
Discontinued
Operations
    Revision
Adjustment
    As
Revised
 

Net loss

   $ (70,278   $ (1,455   $ (71,733

Comprehensive loss

   $ (120,714   $ (1,455   $ (122,169

Comprehensive loss attributable to Alere Inc. and Subsidiaries

   $ (121,690   $ (1,455   $   (123,145
     Year Ended December 31, 2012  

Revised Consolidated

Statement of Comprehensive Loss

(in thousands)

   As Previously
Reported, Giving
Effect to the
Impact of
Discontinued
Operations
    Revision
Adjustment
    As
Revised
 

Net loss

   $ (77,907   $ (310   $ (78,217

Comprehensive loss

   $ (23,763   $ (310   $ (24,073

Comprehensive loss attributable to Alere Inc. and Subsidiaries

   $ (24,038   $ (310   $ (24,348

 

     As of December 31, 2014  

Restated Consolidated

Balance Sheet

(In thousands)

   As Previously
Reported,  Giving

Effect to the
Impact of
Discontinued
Operations
    Restatement
Adjustment
    As Restated  

Deferred tax assets

   $ 146,812      $ (34,239   $ 112,573   

Prepaid expenses and other current assets

   $ 131,554      $ 859      $ 132,413   

Assets held for sale

   $ 306,865      $ 8,650      $ 315,515   

Total current assets

   $ 1,832,793      $ (24,730   $ 1,808,063   

Property, plant and equipment

   $ 456,767      $ (3,197   $ 453,570   

Goodwill

   $ 2,936,581      $ (9,915   $     2,926,666   

Deferred tax assets

   $ 9,812      $ (1,243   $ 8,569   

Total assets

   $ 6,718,041      $ (39,085   $ 6,678,956   

Accrued expenses and other current liabilities

   $ 365,954      $ 9,540      $ 375,494   

Liabilities related to assets held for sale

   $ 70,752      $ 8,091      $ 78,843   

Total current liabilities

   $ 743,414      $ 17,631      $ 761,045   

Deferred tax liabilities

   $ 215,274      $ (635   $ 214,639   

Other long-term liabilities

   $ 164,925      $ (3,343   $ 161,582   

Total long-term liabilities

   $ 4,012,144      $ (3,978   $ 4,008,166   

Accumulated deficit

   $ (1,625,939   $ (53,613   $ (1,679,552

Accumulated other comprehensive loss

   $ (192,985   $ 875      $ (192,110

Total stockholders’ equity

   $ 1,958,337      $ (52,738   $ 1,905,599   

Total equity

   $ 1,962,483      $ (52,738   $ 1,909,745   

Total liabilities and equity

   $ 6,718,041      $ (39,085   $ 6,678,956   

 

F-16


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2)  Restatement and Revision of Previously Reported Consolidated Financial Statements (Continued)

 

     As of December 31, 2013  

Revised Consolidated

Balance Sheet

(In thousands)

   As Previously
Reported, Giving
Effect to the
Impact of
Discontinued
Operations
    Revision
Adjustment
    As Revised  

Accounts receivable, net of allowances

   $ 489,392      $ (2,015   $ 487,377   

Inventories, net

   $ 362,167      $ 3,100      $ 365,267   

Deferred tax assets

   $ 48,085      $ 773      $ 48,858   

Prepaid expenses and other current assets

   $ 123,598      $ 2,047      $ 125,645   

Assets held for sale

   $ 371,291      $ 9,192      $ 380,483   

Total current assets

   $ 1,754,280      $ 13,097      $ 1,767,377   

Property, plant and equipment

   $ 468,232      $ (1,735   $ 466,497   

Goodwill

   $ 3,016,518      $ (9,521   $ 3,006,997   

Deferred tax assets

   $ 7,959      $ (570   $ 7,389   

Total assets

   $ 7,060,814      $ 1,271      $     7,062,085   

Short-term debt and current portion of long-term debt

   $ 49,112      $ 15,000      $ 64,112   

Accounts payable

   $ 179,565      $ 2,077      $ 181,642   

Accrued expenses and other current liabilities

   $ 341,076      $ 40,818      $ 381,894   

Liabilities related to assets held for sale

   $ 172,799      $ (39,557   $ 133,242   

Total current liabilities

   $ 748,514      $ 18,338      $ 766,852   

Long-term debt, net of current portion

   $ 3,772,788      $ (15,000   $ 3,757,788   

Deferred tax liabilities

   $ 293,370      $ (8,336   $ 285,034   

Other long-term liabilities

   $ 150,081      $ 10,950      $ 161,031   

Total long-term liabilities

   $ 4,229,481      $ (12,386   $ 4,217,095   

Accumulated deficit

   $ (1,636,256   $ (5,556   $ (1,641,812

Accumulated other comprehensive loss

   $ (26,562   $ 875      $ (25,687

Total stockholders’ equity

   $ 2,077,937      $ (4,681   $ 2,073,256   

Total equity

   $ 2,082,819      $ (4,681   $ 2,078,138   

Total liabilities and equity

   $ 7,060,814      $ 1,271      $ 7,062,085   

 

Revised Consolidated

Statement of Equity

(in thousands)

   As Previously
Reported, Giving
Effect to the
Impact of
Discontinued
Operations
    Adjustment     As Revised  

Accumulated deficit, Balance at December 31, 2011

   $ (1,486,791   $ (3,820   $ (1,490,611

Net loss

   $ (78,182   $ (310   $ (78,492

Accumulated deficit, Balance at December 31, 2012

   $ (1,564,973   $ (4,130   $ (1,569,103

Total stockholders’ equity, Balance at December 31, 2011

   $ 2,229,234      $ (2,945   $     2,226,289   

Net loss

   $ (78,182   $ (310   $ (78,492

Total stockholders’ equity, Balance at December 31, 2012

   $ 2,180,422      $ (3,255   $ 2,177,167   

Total equity, Balance at December 31, 2011

   $ 2,234,071      $ (2,945   $ 2,231,126   

Net loss

   $ (78,182   $ (310   $ (78,492

Total equity, Balance at December 31, 2012

   $ 2,182,704      $ (3,255   $ 2,179,449   

 

F-17


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2)  Restatement and Revision of Previously Reported Consolidated Financial Statements (Continued)

 

Revised Consolidated

Statement of Equity

(in thousands)

   As Previously
Reported, Giving
Effect to the
Impact of
Discontinued
Operations
    Adjustment     As Revised  

Accumulated deficit, Balance at December 31, 2012

   $ (1,564,973   $ (4,130   $ (1,569,103

Net loss

   $ (71,254   $ (1,455   $ (72,709

Accumulated deficit, Balance at December 31, 2013

   $ (1,636,256   $ (5,556   $ (1,641,812

Total stockholders’ equity, Balance at December 31, 2012

   $ 2,180,422      $ (3,255   $     2,177,167   

Net loss

   $ (71,254   $ (1,455   $ (72,709

Total stockholders’ equity, Balance at December 31, 2013

   $ 2,077,937      $ (4,681   $ 2,073,256   

Total equity, Balance at December 31, 2012

   $ 2,182,704      $ (3,255   $ 2,179,449   

Net loss

   $ (70,278   $ (1,455   $ (71,733

Total equity, Balance at December 31, 2013

   $ 2,082,819      $ (4,681   $ 2,078,138   

 

Restated Consolidated

Statement of Equity

(in thousands)

   As Previously
Reported, Giving
Effect to the
Impact of
Discontinued
Operations
    Adjustment     As Restated  

Accumulated deficit, Balance at December 31, 2013

   $ (1,636,256   $ (5,556   $ (1,641,812

Net income (loss)

   $ 9,948      $ (47,658   $ (37,710

Accumulated deficit, Balance at December 31, 2014

   $ (1,625,939   $ (53,613   $ (1,679,552

Total stockholders’ equity, Balance at December 31, 2013

   $ 2,077,937      $ (4,681   $     2,073,256   

Net income (loss)

   $ 9,948      $ (47,658   $ (37,710

Total stockholders’ equity, Balance at December 31, 2014

   $ 1,958,337      $ (52,738   $ 1,905,599   

Total equity, Balance at December 31, 2013

   $ 2,082,819      $ (4,681   $ 2,078,138   

Net income (loss)

   $ 9,948      $ (47,658   $ (37,710

Total equity, Balance at December 31, 2014

   $ 1,962,483      $ (52,738   $ 1,909,745   

 

     Year Ended December 31, 2014  

Restated Consolidated

Statement of Cash Flows

(In thousands)

   As Previously
Reported, Giving
Effect to the
Impact of
Discontinued
Operations
    Restatement
Adjustment
    As
Restated
 

Net income (loss)

   $ 9,948      $ (47,658   $ (37,710

Income from discontinued operations, net of tax

   $ 177,960      $ (39,642   $     138,318   

Loss from continuing operations

   $ (168,012   $ (8,016   $ (176,028

Impairment of long-lived assets

   $ 7,865      $ (846   $ 7,019   

Deferred income taxes

   $ (11,947   $ 4,965      $ (6,982

Accounts receivable, net

   $ 1,326      $ (2,015   $ (689

Prepaid expenses and other current assets

   $ (47,997   $ (4,001   $ (51,998

Accrued expenses and other current liabilities

   $ 55,271      $ 8,418      $ 63,689   

Other non-current liabilities

   $ 9,964      $ (814   $ 9,150   

Purchases of property, plant and equipment

   $ (102,870   $ 2,308      $ (100,562

Net cash used in continuing operations – investing activities

   $ (50,539   $ 2,308      $ (48,231

Net cash used in investing activities

   $ (59,511   $ 2,308      $ (57,203

 

F-18


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2)  Restatement and Revision of Previously Reported Consolidated Financial Statements (Continued)

 

     Year Ended December 31, 2013  

Revised Consolidated

Statement of Cash Flows

(in thousands)

   As Previously
Reported, Giving
Effect to the
Impact of
Discontinued
Operations
    Revision
Adjustment
    As Revised  

Net loss

   $ (70,278   $ (1,455   $ (71,733

Loss from discontinued operations, net of tax

   $ (16,680   $ 554      $ (16,126

Loss from continuing operations

   $ (53,598   $ (2,009   $ (55,607

Impairment of long-lived assets

   $ 5,949      $ (131   $ 5,818   

Deferred income taxes

   $ (117,938   $ (11,749   $ (129,687

Accounts receivable, net

   $ (50,170   $ 3,498      $ (46,672

Inventories, net

   $ (79,610   $ (3,100   $ (82,710

Prepaid expenses and other current assets

   $ (6,121   $ (5,189   $ (11,310

Accounts payable

   $ 15,673      $ 2,077      $ 17,750   

Accrued expenses and other current liabilities

   $ 50,112      $ 7,046      $ 57,158   

Other non-current liabilities

   $ (27,443   $ 6,918      $ (20,525

Net cash provided by continuing operations – operating activities

   $ 177,319      $ (2,651   $     174,668   

Net cash provided by discontinued operations – operating activities

   $ 67,470      $ 1,762      $ 69,232   

Purchases of property, plant and equipment

   $ (100,797   $ 889      $ (99,908

Net cash used in continuing operations – investing

   $ (231,372   $ 889      $ (230,483

Net cash used in investing activities

   $ (258,335   $ 889      $ (257,446

 

     Year Ended December 31, 2012  

Revised Consolidated

Statement of Cash Flows

(in thousands)

   As Previously
Reported, Giving
Effect to the
Impact of
Discontinued
Operations
    Revision
Adjustment
    As Revised  

Net loss

   $ (77,907   $ (310   $ (78,217

Loss from discontinued operations, net of tax

   $ (31,655   $ (1,471   $ (33,126

Loss from continuing operations

   $ (46,252   $ 1,161      $ (45,091

Impairment of long-lived assets

   $ 805      $ 232      $ 1,037   

Deferred income taxes

   $ (63,565   $ 5,656      $ (57,909

Accounts receivable, net

   $ (18,327   $ (1,483   $ (19,810

Accrued expenses and other current liabilities

   $ 43,547      $ (2,522   $     41,025   

Other non-current liabilities

   $ (36,730   $ (3,045   $ (39,775

The Company has also reflected these corrections as applicable in its consolidated financial statements and also in the consolidating financial statements presented in Note 26 Guarantor Financial Information.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(3)  Discontinued Operations

On October 10, 2014, we completed the sale of our ACS subsidiary to ACS Acquisition, LLC (the “Purchaser”), pursuant to the terms of a Membership Interest Purchase Agreement with the Purchaser and Sumit Nagpal. In connection with the sale of ACS, we also agreed to sell our subsidiary Wellogic ME FZ – LLC (“Wellogic,” together with ACS, the “ACS Companies”) to the Purchaser, subject to the satisfaction of routine requirements of Dubai law relating to the transfer of equity. The ACS Companies were included in our patient self-testing segment. The purchase price for the ACS Companies consisted of cash proceeds of $2.00 at closing and contingent consideration of up to an aggregate of $7.0 million, consisting of (i) payments based on the gross revenues of the ACS Companies, (ii) payments to be made in connection with financing transactions by the Purchaser or the ACS Companies and (iii) payments to be made in connection with a sale by the Purchaser of the ACS Companies. In connection with the sale, we agreed to reimburse the Purchaser for up to $750,000 of the Purchaser’s and the ACS Companies’ transitional expenses. We accounted for our divestiture of the ACS Companies in accordance with ASC 205, Presentation of Financial Statements.

On January 9, 2015, we completed the sale of our health management business to OptumHealth Care Solutions for a purchase price of approximately $600.1 million, subject to a customary post-closing working capital adjustment. We used the net cash proceeds of the sale to repay $575.0 million in aggregate principal amount of outstanding indebtedness under our senior secured credit facility.

We accounted for our divestiture of the health management business in accordance with ASU No. 2014-08. See Note 4. The following assets and liabilities associated with the health management business have been segregated and classified as assets held for sale and liabilities related to assets held for sale, as appropriate, in the consolidated balance sheets as of December 31, 2014 and 2013, respectively (in thousands):

 

      December 31, 2014
(Restated)
     December 31, 2013  

Assets

     

Cash and cash equivalents

   $ 23,300       $ 6,477   

Restricted cash

     361         2,915   

Accounts receivable, net of allowances of $5,882 and $7,497 at December 31, 2014 and 2013, respectively

     50,902         59,337   

Inventories, net

     1,656         2,018   

Deferred tax assets – current

     6,939         12,604   

Prepaid expenses and other current assets

     3,857         6,074   

Property, plant and equipment, net

     57,595         76,932   

Goodwill

     82,665         86,365   

Finite-lived intangible assets, net

     82,428         127,185   

Deferred tax assets – non-current

     3,347           

Other non-current assets

     2,465         576   
  

 

 

    

 

 

 

Total assets held for sale

   $ 315,515       $ 380,483   
  

 

 

    

 

 

 

Liabilities

     

Current portion of capital lease obligations

   $ 799       $ 893   

Accounts payable

     5,654         7,806   

Accrued expenses and other current liabilities

     32,822         49,243   

Capital lease obligations, net of current portion

     365         1,165   

Deferred tax liabilities – non-current

     27,453         35,879   

Other long-term liabilities

     11,750         38,256   
  

 

 

    

 

 

 

Total liabilities related to assets held for sale

   $ 78,843       $ 133,242   
  

 

 

    

 

 

 

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3)  Discontinued Operations (Continued)

 

The following summarized financial information related to the businesses of the ACS Companies and health management business, which were previously included in our patient self-testing reporting segment, has been segregated from continuing operations and has been reported as discontinued operations in our consolidated statements of operations (in thousands):

 

     For The Years Ended December 31,  
     2014
(Restated)
    2013     2012  

Net revenue

   $ 359,496      $ 409,579      $ 425,938   

Cost of net revenue

     (203,115     (229,310     (243,111

Research and development

            (1,750     (1,266

Sales and marketing

     (56,808     (73,700     (86,829

General and administrative

     (99,383     (129,565     (145,387

Interest expense

     (506     (310     (164

Other income (expense), net

     (1,799     (1,860     (1,179
  

 

 

   

 

 

   

 

 

 

Loss from discontinued operations before provision (benefit) for income taxes

     (2,115     (26,916     (51,998

Provision (benefit) for income taxes

     (140,433     (10,790)        (18,872
  

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations, net of tax

   $ 138,318      $ (16,126   $ (33,126
  

 

 

   

 

 

   

 

 

 

(4)  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, judgments and assumptions that may affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from such estimates under different assumptions or conditions.

(b)  Foreign Currencies

In general, the functional currencies of our foreign subsidiaries are the local currencies. For the 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 (loss) (Note 16) within stockholders’ equity. The revenue and expenses of our foreign subsidiaries are translated using the average of the rates of exchange in effect during each fiscal month.

Net realized and unrealized foreign currency exchange transaction losses of $12.8 million, $4.0 million and $7.9 million during 2014, 2013 and 2012, respectively, are included as a component of other income (expense), net in the accompanying consolidated statements of operations.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

(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, 2014 and 2013.

(d)  Restricted Cash

We had restricted cash of $37.6 million and $32.8 million as of December 31, 2014 and 2013, respectively. As of December 31, 2013, $29.4 million was classified as non-current on our consolidated balance sheet, as it secures a foreign bank loan arrangement that we entered into during the third quarter of 2013 and, under the terms of the loan agreement, is required to remain on deposit for two years.

(e)  Marketable Securities

Securities classified as available-for-sale or trading are carried at fair value, as determined by quoted market prices at the balance sheet date. Realized gains and losses on securities are included in other income (expense), net, on a specific identification basis. Unrealized holding gains and losses (except for other than temporary impairments) on securities classified as available-for-sale, are reported in accumulated other comprehensive income (loss), net of related tax effects. Marketable securities that are held indefinitely are classified in our accompanying consolidated balance sheets as long-term marketable securities.

(f)  Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and are made up of raw material, work-in-process and finished goods. The cost elements of work-in-process and finished goods inventory consist of raw material, direct labor and manufacturing overhead. Where finished goods inventory is purchased from third-party manufacturers, the costs of finished goods inventory recorded in the financial statements represent the costs to acquire such inventory.

(g)  Property, Plant and Equipment

We record property, plant and equipment at historical cost or, in the case of a business combination, at fair value on the date of the business combination. Depreciation is computed using the straight-line method based on the following estimated useful lives of the related assets: machinery, laboratory equipment and tooling, 1-15 years; buildings, 7-61 years; leasehold improvements, lesser of the remaining term of the lease or estimated useful life of the asset; computer software and equipment, 1-10 years and furniture and fixtures, 2-16 years. Land is not depreciated. Depreciation expense related to property, plant and equipment amounted to $97.5 million, $94.2 million and $84.5 million in 2014, 2013 and 2012, respectively. Fully-depreciated property, plant and equipment that are still in use remain on the books until disposal or retirement. When property, plant and equipment are retired or disposed of, the cost and respective accumulated depreciation are removed from the books. Any gain or loss on disposal is recorded in the income statement. Expenditures for repairs and maintenance are expensed as incurred.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

(h)  Goodwill and Other Intangible Assets with Indefinite Lives

Goodwill relates to amounts that arose in connection with our various business combinations and represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the acquisition method of accounting. Goodwill is not amortized, but is subject to periodic review for impairment.

We test goodwill and other intangible assets with indefinite lives at the reporting unit level for impairment on an annual basis and between annual tests, if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business and an adverse action or assessment by a regulator.

In performing the annual goodwill impairment test, we utilize the two-step approach. The first step, or Step 1, requires a comparison of the carrying value of each reporting unit to its estimated fair value. To estimate the fair value of our reporting units for Step 1, we use a combination of the income approach, the market comparable approach and the market transaction approach. The income approach is based on a discounted cash flow analysis, or DCF approach, and calculates the fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value, using a risk-adjusted discount rate. Assumptions used in the DCF approach require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates and the amount and timing of expected future cash flows. The forecasted cash flows are based on our most recent budget and for years beyond the budget, our estimates are based on assumed growth rates. We believe our assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent in future cash flow projections, used in the DCF approach are based on estimates of the weighted-average cost of capital, or WACC, of market participants relative to each respective reporting unit. The market approaches consider comparable and transactional market data based on multiples of revenue or earnings before interest, taxes, depreciation and amortization, or EBITDA based on trading multiples of selected guidelines companies and deal multiples of selected target companies.

If the carrying value of a reporting unit exceeds its estimated fair value, we are required to perform the second step, or Step 2, of the annual goodwill impairment test to measure the amount of impairment loss, if any. Step 2 of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying value. The implied fair value of goodwill is calculated as the difference between the fair value of the reporting unit and the estimated fair value of its assets and liabilities. To the extent this amount is below the carrying value of goodwill, an impairment charge is recorded to write down the carrying value to its implied value.

Impairment charges related to goodwill have no impact on our cash balances or on compliance with financial covenants under our Amended and Restated Credit Agreement.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

2014 Annual Goodwill Impairment Test

We conducted our 2014 annual goodwill impairment test for our reporting units during the fourth quarter of 2014. For our patient self-testing reporting unit, we utilized the purchase price for the sale of our health management business as the estimated fair value of the health management business and combined that with the estimated fair value of the remaining patient self-testing reporting unit which was determined using a combination of the income approach, the market comparable approach and the market transaction approach to arrive at the total estimated fair value of the patient self-testing business. Key assumptions (which vary by reporting unit) used in determining fair value under the DCF approach included discount rates ranging from 10.5% to 15.5%, projected compound average revenue growth rates of 3.0% to 11.0% and terminal value growth rates of 3.0% to 4.0%. In determining the appropriate discount rate, we considered the WACC for each reporting unit, which among other factors considers the cost of common equity capital and the marginal cost of debt of market participants. Key assumptions (which again vary by reporting unit) used in determining fair value under the market approaches were based on observed market multiples of enterprise value to revenue and EBITDA for both comparable publicly-traded companies and recent merger and acquisition transactions involving similar companies to estimate appropriate controlling basis multiples to apply to each of the reporting units. Based on the multiples implied by this market data, we selected multiples of revenue of 1.2 to 2.9 times and multiples of EBITDA of 7.1 to 11.8 times. In assessing the reasonableness of our estimated fair values of the reporting units, management compared the results of the valuation analyses against our then-current market capitalization to imply a control premium. Based on this analysis, the implied control premium was within the range of comparable industry transactions.

The Step 1 impairment test indicated the estimated fair value of the professional diagnostics, patient self-testing and consumer diagnostics reporting units exceeded the carrying value of their reporting unit’s net assets as follows: by $2.2 billion, $515.6 million and $86.8 million, respectively, or 42.4%, 162.1% and 38.0%, respectively.

As discussed in Note 3, our health management business met the criteria for assets held for sale as of December 31, 2014 and the sale was subsequently completed on January 9, 2015. Accordingly, we performed a Step 1 impairment test on the goodwill remaining in the patient self-testing reporting unit at December 31, 2014. The Step 1 impairment test indicated that the estimated fair value of the remaining patient self-testing reporting unit exceeded the carrying value of the reporting unit’s net assets by 67%.

The estimate of fair value requires significant judgment. We based our fair value estimates on assumptions that we believe to be reasonable but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our business units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environment or anticipated growth rates are not correct, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment testing or earlier, if an indicator of an impairment is present before our next annual evaluation.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

2013 Annual Goodwill Impairment Test

We conducted our 2013 annual goodwill impairment test for our reporting units during the fourth quarter of 2013. Key assumptions (which vary by reporting unit) used in determining fair value under the DCF approach included discount rates ranging from 11.0% to 14.0%, projected compound average revenue growth rates of 4.0% to 11.4% and terminal value growth rates of 3.0% to 4.0%. The factors considered in determining the appropriate discount rate and the key assumptions were the same as those in the 2014 annual goodwill impairment test described above. Based on the multiples implied by this market data, we selected multiples of revenue of 0.8 to 2.9 times and multiples of EBITDA of 6.4 to 10.6 times. In assessing the reasonableness of our estimated fair values of the reporting units, management compared the results of the valuation analyses against our then-current market capitalization to imply a control premium. Based on this analysis, the implied control premium was within the range of comparable industry transactions.

The Step 1 impairment test indicated the estimated fair value of the professional diagnostics, patient self-testing and consumer diagnostics reporting units exceeded the carrying value of their reporting unit’s net assets as follows: by $1.6 billion, $34.7 million and $92.7 million, respectively, or 30.3%, 8.5% and 45.5%, respectively.

2012 Annual Goodwill Impairment Test

We conducted our 2012 annual goodwill impairment test for our reporting units during the fourth quarter of 2012. Key assumptions (which vary by reporting unit) used in determining fair value under the DCF approach included discount rates ranging from 11.0% to 15.0%, projected compound average revenue growth rates of 3.0% to 8.1% and terminal value growth rates of 3.0% to 4.0%. The factors considered in determining the appropriate discount rate and the key assumptions were the same as those in the 2014 annual goodwill impairment test described above. Based on the multiples implied by this market data, we selected multiples of revenue of 0.9 to 2.4 times and multiples of EBITDA of 6.1 to 8.9 times. In assessing the reasonableness of our estimated fair values of the reporting units, management compared the results of the valuation analyses against our then-current market capitalization to imply a control premium. Based on this analysis, the implied control premium was within the range of comparable industry transactions.

The Step 1 impairment test indicated the estimated fair value of the professional diagnostics, patient self-testing and consumer diagnostics reporting units exceeded the carrying value of their reporting unit’s net assets as follows: by $399.2 million, $45.2 million and $53.9 million, respectively, or 7.9%, 10.2% and 27.2%, respectively.

(i)  Impairment of Other Long-lived Tangible and Intangible Assets

Our intangible assets consist primarily of core technology, in-process research and development, patents, trademarks, trade names, customer relationships, distribution rights and non-competition agreements. The majority of our intangible assets were recorded in connection with our various business combinations. Our intangible assets are recorded at fair value at the time of their acquisition. We amortize intangible assets over their estimated useful lives.

The estimated useful lives of the individual categories of intangible assets were based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the shorter of the

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

respective lives of the agreement or the period of time the intangible assets are expected to contribute to future cash flows. We amortize our finite-lived intangible assets based on patterns on which the respective economic benefits are expected to be realized.

We evaluate long-lived tangible and intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment are present with respect to long-lived tangible and intangible assets used in operations and undiscounted future cash flows are not expected to be sufficient to recover the assets’ carrying amount, additional analysis is performed as appropriate and the carrying value of the long-lived assets is reduced to the estimated fair value, if this is lower, and an impairment loss is charged to expense in the period the impairment is identified.

(j)  Acquired In-process Research and Development (IPR&D)

Acquired IPR&D represents the fair value assigned to research and development assets that we acquire as part of business combinations, and which have not been completed at the date of acquisition. The acquired IPR&D is capitalized as an intangible asset and tested for impairment at least annually until commercialization, after which time the IPR&D is amortized over its estimated useful life. We utilize a discounted probable future cash flow model on a project-by-project basis to value acquired IPR&D. Significant assumptions used in the model include the period in which material net cash inflows from significant projects are expected to commence, anticipated material changes from historical pricing, margins and expense levels and an appropriate risk adjusted discount rate applied to the project’s cash flows.

(k)  Business Acquisitions

Our business acquisitions have historically been made at prices above the fair value of the assets acquired and liabilities assumed, resulting in goodwill, based on our expectations of synergies and other benefits of combining the businesses. These synergies and benefits include elimination of redundant facilities, functions and staffing; use of our existing commercial infrastructure to expand sales of the products of the acquired businesses; and use of the commercial infrastructure of the acquired businesses to expand product sales in a cost-efficient manner.

Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management, but are inherently uncertain.

We generally employ the income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers to entry, a brand’s relative market position and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.

Net assets acquired are recorded at their fair value and are subject to adjustment upon finalization of the fair value analysis. We are not aware of any information that indicates the final fair value analysis will differ materially from the preliminary estimates.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

During 2014, 2013 and 2012, we expensed acquisition-related costs of $0.9 million, $3.1 million and $9.7 million, respectively, in general and administrative expense.

(l)  Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized in the future (Note 17).

We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position.

(m)  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 or determinable and (4) collection is reasonably assured.

The majority of our revenue is derived from product sales. We recognize revenue upon transfer of the title 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 management’s analyses and judgments regarding certain conditions. Should future changes in conditions prove management’s conclusions and judgments on previous analyses to be incorrect, revenue recognized for any reporting period could be adversely affected.

For products that include installation, and if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and installation revenue is recognized when the installation is complete. For sales that include customer-specified acceptance criteria, revenue is recognized after the acceptance criteria have been met. Certain of our products require specialized installation. Revenue for these products is deferred until installation is completed. Revenue from services is deferred and recognized over the contractual period, or as services are rendered and accepted by the customer. When arrangements include multiple elements, we use objective evidence of fair value to allocate revenue to the elements, and recognize revenue when the criteria for revenue recognition have been met for each element, in accordance with authoritative guidance on multiple-element arrangements.

Additionally, with respect to our health management business which is included in discontinued operations, we generate services revenue in connection with contracts with health plans (both commercial and governmental) and self-insured employers, whereby we provide clinical expertise through fee-based arrangements. Revenue for fee-based arrangements is recognized over the period in which the services are provided. Some contracts provide that a portion of our fees are at risk if our

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

customers do not achieve certain financial cost savings or we do not achieve certain other clinical and operational metrics, over a period of time, typically one year. Revenue subject to refund is not recognized if (i) sufficient information is not available to calculate performance measurements or (ii) interim performance measurements indicate that we are not meeting performance targets. If either of these two conditions exists, we record the amounts as other current liabilities in the consolidated balance sheet, deferring recognition of the revenue until we establish that we have met the performance criteria. However, revenue recognized for fees subject to refund before the end of the contract period is realizable under the termination provisions or other provisions of the contract. If we do not meet the performance targets at the end of the contractual period, we are obligated under the contract to refund some or all of the at-risk fees.

We also receive license and royalty revenue from agreements with third-party licensees. Revenue from license and royalty agreements is recognized on a straight-line basis over the obligation period of the related license agreements, or at the time when we have no further obligations. 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.

(n)  Employee Stock-Based Compensation Arrangements

We account for share-based payments in accordance with Accounting Standards Codification, or ASC 718, Compensation — Stock Compensation. Compensation expense associated with stock options includes amortization based on the grant-date fair value estimated in accordance with the provisions of ASC 718. In addition, we record expense over the offering period in connection with shares issued under our employee stock purchase plan. Compensation expense for stock-based compensation awards includes an estimate for forfeitures and is recognized over the vesting period of the options using the straight-line method. It is our policy to recognize, through additional paid in capital, the excess or windfall tax benefits on stock option deductions, as those deductions are recognized on tax returns.

Our stock option plans provide for grants of options to employees to purchase common stock at or above the fair market value of such shares on the grant date of the award. The options generally vest over a four-year period, beginning on the date of grant, with a graded vesting schedule of 25% at the end of each of the four years. The fair value of each option grant is estimated on the date of grant primarily using a Black-Scholes option-pricing method. We use historical data to estimate the expected price volatility and the expected forfeiture rate. The contractual term of our stock option awards is ten years. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant with a remaining term equal to the expected term of the option. We have not made any dividend payments to common shareholders nor do we have plans to pay dividends in the foreseeable future.

(o)  Net Loss per Common Share

Net loss per common 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).

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

(p)  Other Operating Expenses

We expense advertising costs as incurred. In 2014, 2013 and 2012, advertising costs amounted to $8.0 million, $10.6 million and $22.0 million, respectively, and are included in sales and marketing expenses in the accompanying consolidated statements of operations.

Shipping and handling costs are included in cost of net revenue in the accompanying consolidated statements of operations. When we charge our customers for shipping and handling costs, these costs are recorded along with product revenues.

(q) Concentration of Credit Risk, Off-Balance Sheet Risks and Other Risks and Uncertainties

Financial instruments that potentially subject us to concentration of credit risk primarily consist of cash and cash equivalents and accounts receivable. We invest our excess cash primarily in high quality securities and limit the amount of our credit exposure to any one financial institution. We do not require collateral or other securities to support customer receivables; however, we perform on-going credit evaluations of our customers and maintain allowances for potential credit losses.

At December 31, 2014 and 2013, no individual customer’s accounts receivable balance was more than 10% of our aggregate accounts receivable. During 2014, 2013 and 2012, no one customer represented more than 10% of our net revenue.

We rely on a number of third parties to manufacture certain of our products. If any of our third-party manufacturers cannot, or will not, manufacture our products in the required volumes, on a cost-effective basis, in a timely manner, or at all, we will have to secure additional manufacturing capacity. Any interruption or delay in manufacturing could have a material adverse effect on our business and operating results.

(r)  Financial Instruments and Fair Value of Financial Instruments

Our primary financial instruments at December 31, 2014 and 2013 consisted of cash equivalents, restricted cash, marketable securities, accounts receivable, accounts payable and debt. We apply fair value measurement accounting to value our financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

Described below are the three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

(s)  Software for Internal Use and for Resale

We may capitalize certain costs associated with the development of internal-use software, including direct materials and services. Capitalized software is amortized on a straight-line basis over its estimated useful life and is included in computer software and equipment within property, plant and equipment.

We also develop software for resale or lease to external parties and expense the costs of developing software for resale or lease incurred before establishment of technological feasibility of the underlying software. The costs incurred from establishment of technological feasibility until general release of the software are capitalized, and the capitalized software is amortized over its estimated useful life. Capitalized software for resale or lease is included in computer software and equipment within property, plant and equipment.

(t)  Research and Development

Our research and development programs focus on the development of cardiometabolic, infectious disease and toxicology products. Research and development costs are expensed as incurred. Payments received from external parties to fund our research and development activities reduce the recorded research and development expenses.

(u)  Leases

We lease certain facilities and equipment from external parties under operating leases. Rent expense related to operating leases is recorded in the income statement as incurred. We also lease machinery, laboratory equipment, tooling and other equipment under capital leases. In determining whether a lease is a capital or an operating lease, we estimate the expected term of the lease, which includes certain renewable options as required by lease accounting guidance. Rent deferrals, landlord incentives and rent escalations are included in calculation of minimum lease payments when performing the capital lease tests and when calculating the rent expense for operating leases.

Leased property, plant and equipment that meet the capital lease criteria are capitalized at the lower of the present value of the minimum lease payments or the fair value of the underlying asset at the inception date of the lease. Assets under capital leases are depreciated on a straight-line basis over the lease term.

Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the remainder of the expected term of the lease.

(v)  Recent Accounting Pronouncements

Recently Issued Standards

In August 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for fiscal years ending after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the potential impacts of the new standard on our consolidated financial statements.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4)  Summary of Significant Accounting Policies (Continued)

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation — Stock Compensation (Topic 718) — Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, or ASU 2014-12. ASU 2014-12 requires that a performance target which affects vesting and which could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-12 on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09. ASU 2014-09 requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. Early adoption is not permitted. We are currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial statements.

We believe that there were no other accounting standards recently issued that had or are expected to have a material impact on our consolidated financial statements.

Recently Adopted Standards

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 requires that only disposals representing a strategic shift in operations which has a major effect on the organization’s operations and financial results, such as a disposal of a major geographic area, a major line of business, or a major equity method investment, should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. ASU 2014-08 is effective in the first quarter of 2015 with early adoption permitted. Effective October 1, 2014, we adopted ASU 2014-08. As a result of our early adoption of this standard, we reported our divestiture of BioNote, Inc., or BioNote, as a gain on disposition within operating income from continuing operations. See Note 3 and Note 24.

In November 2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting, or ASU 2014-17. ASU 2014-17 provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. ASU 2014-17 is effective on November 18, 2014. Effective November 18, 2014, we adopted ASU 2014-17. The adoption of this standard had no material impact on our consolidated financial statements.

Effective January 1, 2014, we adopted ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. The adoption of this standard had no material impact on our consolidated financial statements.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(5)  Other Balance Sheet Information

Components of selected captions in the consolidated balance sheets consist of (in thousands):

 

     December 31,  
     2014
(Restated)
     2013  

Inventories, net:

     

Raw materials

   $ 122,886       $ 121,671   

Work-in-process

     82,724         79,559   

Finished goods

     159,555         164,037   
  

 

 

    

 

 

 
   $ 365,165       $ 365,267   
  

 

 

    

 

 

 

Property, plant and equipment, net:

     

Machinery, laboratory equipment and tooling

   $ 431,255       $ 418,416   

Land and buildings

     172,773         182,547   

Leasehold improvements

     55,788         53,488   

Computer software and equipment

     154,566         127,011   

Furniture and fixtures

     35,656         31,539   
  

 

 

    

 

 

 
     850,038         813,001   

Less: Accumulated depreciation

     (396,468      (346,504
  

 

 

    

 

 

 
   $ 453,570       $ 466,497   
  

 

 

    

 

 

 

Accrued expenses and other current liabilities:

     

Compensation and compensation-related

   $ 88,546       $ 87,437   

Royalty obligations

     23,072         25,321   

Deferred revenue

     22,479         20,686   

Income taxes payable and deferred tax liabilities

     32,922         25,088   

Other taxes payable

     31,491         18,185   

Acquisition-related obligations

     69,779         95,759   

Other

     107,205         109,418   
  

 

 

    

 

 

 
   $ 375,494       $ 381,894   
  

 

 

    

 

 

 

(6)   Business Combinations

Acquisitions are accounted for using the acquisition method and the acquired companies’ results have been included in the accompanying consolidated financial statements from their respective dates of acquisition. During 2014, 2013 and 2012, we recorded acquisition-related costs of $0.9 million, $3.1 million and $9.7 million, respectively, in general and administrative expense.

Our business acquisitions have historically been made at prices above the fair value of the assets acquired and liabilities assumed, resulting in goodwill, based on our expectations of synergies and other benefits of combining the businesses. These synergies and benefits include elimination of redundant facilities, functions and staffing; use of our existing commercial infrastructure to expand sales of the products of the acquired businesses; and use of the commercial infrastructure of the acquired businesses to expand product sales in a cost-efficient manner.

Net assets acquired are recorded at their fair value and are subject to adjustment upon finalization of the fair value analysis. The estimated useful lives of the individual categories of intangible assets were based on the nature of the applicable intangible asset and the expected future cash flows to be

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(6)   Business Combinations (Continued)

 

derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the shorter of the respective lives of the agreement or the period of time the intangible assets are expected to contribute to future cash flows. We amortize our finite-lived intangible assets based on patterns on which the respective economic benefits are expected to be realized.

(a)  Acquisitions in 2013

(i)  Epocal

On February 1, 2013, we acquired Epocal, Inc., or Epocal, located in Ottawa, Canada, a provider of technologies that support blood gas and electrolyte testing at the point of care. The aggregate purchase price was approximately $248.5 million, which consisted of $151.4 million in cash, a $22.1 million settlement of a pre-existing arrangement and a contingent consideration obligation with an aggregate acquisition date fair value of $75.0 million. The operating results of Epocal are included in our professional diagnostics reporting unit and business segment. The amount allocated to goodwill from this acquisition is not deductible for tax purposes.

(ii)  Other acquisitions in 2013

During the year ended December 31, 2013, we acquired the following businesses for an aggregate purchase price of $57.6 million, which included cash payments totaling $28.2 million, a $17.5 million settlement of a pre-existing arrangement, contingent consideration obligations with an aggregate acquisition date fair value of $1.3 million, deferred purchase price consideration with an acquisition date fair value of $0.8 million and an $8.0 million bargain purchase gain.

 

   

certain assets of PT Mega Medika Mandiri, or Mega Medika, located in South Jakarta, Indonesia, a distributor of infectious disease products to the Indonesian marketplace as well as materials for vaccines to a pharmaceutical customer (Acquired January 2013)

 

   

Discount Diabetic, LLC, or Discount Diabetic, located in Phoenix, Arizona, a provider of blood glucose monitoring products, including diabetes testing systems and test strips and other products (Acquired April 2013)

 

   

the Medicare fee-for-service assets of Liberty Medical, or the Liberty business, located in Port St. Lucie, Florida, a leading mail order provider of diabetes testing supplies serving the needs of both Type 1 and Type 2 diabetic patients (Acquired April 2013)

 

   

51% share in Cardio Selfcare B.V., subsequently renamed Alere Health Services B.V., or Alere Health Services, located in Ede, the Netherlands, a developer of innovative software for the healthcare industry that develops and licenses software and sells medical devices to enable patients to perform medical self-care, including thrombosis self-care (Acquired May 2013)

 

   

74.9% interest in Pantech Proprietary Limited, or Pantech, located in Durban, South Africa, a supplier of rapid diagnostic test kits, including HIV, malaria, syphilis, drugs of abuse, 10 parameter urine sticks, glucometers and glucose sticks (Acquired July 2013)

 

   

Certain assets of Simplex Healthcare, Inc. and its subsidiaries, or Simplex, located in Tennessee, a provider of home delivery of diabetes-related medical supplies and products (Acquired November 2013)

The operating results of Mega Medika, Discount Diabetic, the Liberty business, Alere Health Services, Pantech, and Simplex are included in our professional diagnostics reporting unit and business segment.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(6)   Business Combinations (Continued)

 

Our consolidated statement of operations for the year ended December 31, 2013 included revenue totaling approximately $83.0 million related to these businesses. Goodwill has been recognized in the Mega Medika, Alere Health Services, Pantech, and Simplex acquisitions and amounted to approximately $2.4 million. The goodwill related to the Mega Medika and Simplex acquisitions is deductible for tax purposes, but the goodwill related to the Pantech and Alere Health Services acquisitions is not.

With respect to our acquisition of the Liberty business, the purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired, with the excess of the fair value of assets acquired over the purchase price recorded as a bargain purchase gain. The $8.0 million bargain purchase gain has been recorded in other income (expense), net in our consolidated statement of operations and is not recognized for tax purposes. The bargain purchase gain resulted from our operating cost structure which we believe will allow us to operate this business more cost effectively than the sellers.

A summary of the fair values of the net assets acquired for the acquisitions consummated in 2013 is as follows (in thousands):

 

     Epocal      Other      Total  

Current assets(1)

   $ 12,535       $ 13,623       $ 26,158   

Property, plant and equipment

     1,267         1,731         2,998   

Goodwill

     100,419         2,447         102,866   

Intangible assets

     164,400         51,180         215,580   

Other non-current assets

     18,158         29         18,187   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     296,779         69,010         365,789   
  

 

 

    

 

 

    

 

 

 

Current liabilities

     2,701         5,398         8,099   

Non-current liabilities

     45,542         6,062         51,604   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     48,243         11,460         59,703   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

     248,536         57,550         306,086   

Less:

        

Contingent consideration

     75,000         1,264         76,264   

Settlement of pre-existing arrangements

     22,088         17,500         39,588   

Non-controlling interest

             1,774         1,774   

Bargain purchase gain

             8,023         8,023   

Deferred purchase price consideration

             768         768   
  

 

 

    

 

 

    

 

 

 

Cash paid

   $ 151,448       $ 28,221       $ 179,669   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes approximately $3.3 million of acquired cash.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(6)   Business Combinations (Continued)

 

The following are the intangible assets acquired in 2013 and their respective fair values and weighted-average useful lives (dollars in thousands):

 

     Epocal      Other      Total      Weighted-
average
Useful Life
 

Core technology and patents

   $ 119,700       $       $ 119,700         20.0 years   

Software

             2,154         2,154         5.7 years   

Trademarks and trade names

     20,500         80         20,580         19.1 years   

License agreements

             620         620         1.5 years   

Customer relationships

             42,510         42,510         11.5 years   

Other

             5,816         5,816         3.0 years   

In-process research and development

     24,200                 24,200         N/A   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 164,400       $ 51,180       $ 215,580      
  

 

 

    

 

 

    

 

 

    

(b)  Acquisitions in 2012

(i)  eScreen

On April 2, 2012, we acquired eScreen, Inc., or eScreen, headquartered in Overland Park, Kansas, a technology-enabled provider of employment drug screening solutions for hiring and maintaining healthier and more efficient workforces. The aggregate purchase price was approximately $295.0 million, which consisted of $271.4 million in cash and a contingent consideration obligation with an aggregate acquisition date fair value of $23.6 million. Included in our consolidated statements of operations for the year ended December 31, 2012 is revenue totaling approximately $116.7 million related to eScreen. The operating results of eScreen are included in our professional diagnostics reporting unit and business segment. The amount allocated to goodwill from this acquisition is not deductible for tax purposes.

(ii)  Other acquisitions in 2012

During 2012, we acquired the following businesses for an aggregate purchase price of $199.5 million, which included cash payments totaling $147.5 million and contingent consideration obligations with aggregate acquisition date fair values of $52.0 million.

 

   

Reatrol Comercializacao De Produtos De Saude, LDA, subsequently renamed Alere Lda, located in Vila Nova de Gaia, Portugal, a distributor of products for drugs of abuse testing (Acquired January 2012)

 

   

Kullgren Holding AB, or Kullgren, located in Gensta, Sweden, a company that manufactures and distributes high-quality intimacy and pharmaceutical products (Acquired February 2012)

 

   

Wellogic ME FZ-LLC, or Wellogic UAE, located in Dubai, United Arab Emirates, a company that provides development services to Alere Wellogic, LLC, which acquired the assets of Method Factory, Inc. (d/b/a Wellogic), or Wellogic, in December 2011 (Acquired February 2012)

 

   

certain assets, primarily including customer and patient lists, of AmMed Direct LLC, or AmMed, located near Nashville, Tennessee, a privately-owned mail-order provider of home-diabetes testing products and supplies (Acquired March 2012)

 

   

MedApps Holding Company, Inc., or MedApps, headquartered in Scottsdale, Arizona, a developer of innovative remote health monitoring solutions that deliver efficient cost-effective connectivity between patient, care provider and electronic medical records (Acquired July 2012)

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(6)   Business Combinations (Continued)

 

   

Amedica Biotech, Inc., or Amedica, located in Hayward, California, a company focused on the development and manufacture of in vitro diagnostic tests (Acquired July 2012)

 

   

DiagnosisOne, Inc., or DiagnosisOne, located in Lowell, Massachusetts, a software company that provides clinical analytics technology and data-driven content to hospitals, physician groups, insurers and governments (Acquired July 2012)

 

   

Seelen Care Laege-og & Hospitalsartikler ApS, or Seelen, located in Holstebro, Denmark, a distributor of consumables, instruments and equipment to doctors, specialists and physiotherapists (Acquired August 2012)

 

   

certain assets of Diagnostik Nord, or Diagnostik, located in Schwerin, Germany, a company focused on the sale of drug screening and in vitro diagnostic medical devices and a provider of diagnostic solutions (Acquired September 2012)

 

   

Healthcare Connections Limited, or HCC, located in Buckinghamshire, United Kingdom, an occupational health provider specializing in employment medical programs, preventative health schemes and drug and alcohol sample collection services (Acquired November 2012)

 

   

the diagnostic division of Medial spol. s.r.o., subsequently renamed Alere s.r.o., located in Prague, Czech Republic, a distributor of laboratory diagnostic devices, devices operating in the point-of-care testing regime, diagnostic kits and tests for biochemistry, hematology, and microbiology (Acquired November 2012)

 

   

certain assets of Quantum Diagnostics, or Quantum Australia, located in Australia, an on-line medical supply company that provides a range of affordable drug and alcohol tests for personal, business and professional medical use. (Acquired November 2012)

 

   

certain assets of NationsHealth, Inc., or NationsHealth, headquartered in Sunrise, Florida, a privately-owned mail-order provider of diabetes home-testing products and supplies, and a share acquisition of NationsHealth’s subsidiary in the Philippines, or NationsHealth Philippines (Acquired December 2012)

 

   

Branan Medical Corporation, or Branan, headquartered in Irvine, California, a manufacturer of drugs of abuse testing products (Acquired December 2012)

The operating results of Alere Lda, AmMed, MedApps, Amedica, Seelen, Diagnostik, HCC, Alere s.r.o., Quantum Australia, NationsHealth and Branan are included in our professional diagnostics reporting unit and business segment. The operating results DiagnosisOne are included in our patient self-testing reporting unit and business segment. The operating results of Kullgren are included in our consumer diagnostics reporting unit and business segment. The operating results of Wellogic UAE are reflected in discontinued operations.

Our consolidated statements of operations for the year ended December 31, 2012 included revenue totaling approximately $44.6 million related to these businesses. Goodwill has been recognized in all of these acquisitions and amounted to approximately $94.2 million. Goodwill related to the acquisitions of AmMed, Diagnostik and the US-based assets of NationsHealth, which totaled $8.8 million, is deductible for tax purposes. The goodwill related to the remaining 2012 acquisitions is not deductible for tax purposes.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(6)   Business Combinations (Continued)

 

A summary of the fair values of the net assets acquired for the acquisitions consummated in 2012 is as follows (in thousands):

 

     eScreen      Other      Total  

Current assets(1)

   $ 33,690       $ 13,615       $ 47,305   

Property, plant and equipment

     5,806         3,223         9,029   

Goodwill

     144,522         94,219         238,741   

Intangible assets

     204,000         121,223         325,223   

Other non-current assets

     9,783         9,363         19,146   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     397,801         241,643         639,444   
  

 

 

    

 

 

    

 

 

 

Current liabilities

     22,865         5,452         28,317   

Non-current liabilities

     79,945         36,659         116,604   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     102,810         42,111         144,921   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

     294,991         199,532         494,523   

Less:

        

Contingent consideration

     23,600         52,020         75,620   
  

 

 

    

 

 

    

 

 

 

Cash paid

   $ 271,391       $ 147,512       $ 418,903   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes approximately $3.8 million of acquired cash.

The following are the intangible assets acquired and their respective fair values and weighted-average useful lives (dollars in thousands):

 

     eScreen      Other      Total      Weighted-
average
Useful Life
 

Core technology and patents

   $ 93,200       $ 54,903       $ 148,103         18.7 years   

Trademarks and trade names

     17,300         2,090         19,390         18.3 years   

Customer relationships

     79,600         56,885         136,485         18.1 years   

Non-competition agreements

             1,118         1,118         5.1 years   

Other

     13,900         1,327         15,227         9.2 years   

In-process research and development

             4,900         4,900         N/A   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 204,000       $ 121,223       $ 325,223      
  

 

 

    

 

 

    

 

 

    

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(7)  Goodwill and Other Intangible Assets

The following is a summary of goodwill and other intangible assets as of December 31, 2014 (dollars in thousands):

 

     Gross
Carrying
Amount
     Accumulated
Amortization and
Impairment Losses
     Net
Carrying
Value
     Weighted-
average
Useful Life
 

Amortized intangible assets:

           

Core technology and patents

   $ 969,993       $ 417,119       $ 552,874         15.2 years   
  

 

 

    

 

 

    

 

 

    

Other intangible assets:

           

Supplier relationships

     17,975         16,188         1,787         9.2 years   

Trademarks and trade names

     256,014         161,945         94,069         11.0 years   

License agreements

     11,670         11,511         159         6.8 years   

Customer relationships

     1,504,078         930,533         573,545         16.6 years   

Manufacturing know-how

     21,540         11,595         9,945         8.9 years   

Other

     108,792         64,727         44,065         8.7 years   
  

 

 

    

 

 

    

 

 

    

Total other intangible assets

     1,920,069         1,196,499         723,570      
  

 

 

    

 

 

    

 

 

    

Total intangible assets with finite lives

   $ 2,890,062       $ 1,613,618       $ 1,276,444      
  

 

 

    

 

 

    

 

 

    

Intangible assets with indefinite lives:

           

Goodwill

   $ 2,926,666            

Other intangible assets(1)

     43,651            
  

 

 

          

Total intangible assets with indefinite lives

   $  2,970,317            
  

 

 

          

 

(1) Primarily includes in-process research and development assets recorded in connection with certain acquisitions.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(7)  Goodwill and Other Intangible Assets (Continued)

 

The following is a summary of goodwill and other intangible assets as of December 31, 2013 (dollars in thousands):

 

     Gross
Carrying
Amount
     Accumulated
Amortization and
Impairment Losses
     Net
Carrying
Value
     Weighted-
average
Useful Life
 

Amortized intangible assets:

           

Core technology and patents

   $ 990,911       $ 348,394       $ 642,517         15.4 years   
  

 

 

    

 

 

    

 

 

    

Other intangible assets:

           

Supplier relationships

     18,388         16,087         2,301         9.3 years   

Trademarks and trade names

     260,900         137,918         122,982         11.0 years   

License agreements

     11,584         11,323         261         6.8 years   

Customer relationships

     1,546,281         824,447         721,834         16.6 years   

Manufacturing know-how

     17,349         10,684         6,665         10.8 years   

Other

     121,393         60,527         60,866         8.8 years   
  

 

 

    

 

 

    

 

 

    

Total other intangible assets

     1,975,895         1,060,986         914,909      
  

 

 

    

 

 

    

 

 

    

Total intangible assets with finite lives

   $ 2,966,806       $ 1,409,380       $ 1,557,426      
  

 

 

    

 

 

    

 

 

    

Intangible assets with indefinite lives:

           

Goodwill

   $ 3,006,997            

Other intangible assets(1)

     56,702            
  

 

 

          

Total intangible assets with indefinite lives

   $ 3,063,699            
  

 

 

          

 

(1) Primarily includes in-process research and development assets recorded in connection with certain acquisitions.

The estimated useful lives of the individual categories of intangible assets were based on the nature of the applicable intangible assets and the expected future cash flows to be derived from those intangible assets. Amortization of intangible assets with finite lives is recognized over the shorter of the respective lives of the underlying license agreements, if applicable, or the period of time the assets are expected to contribute to future cash flows. We amortize our finite-lived intangible assets on patterns in which the economic benefits are expected to be realized. Amortization expense of intangible assets, which in the aggregate amounted to $237.2 million, $280.0 million and $299.4 million in 2014, 2013 and 2012, respectively, is included in cost of net revenue, research and development, sales and marketing and general and administrative expenses 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, 2014 (in thousands):

 

2015

   $  192,721   

2016

   $ 177,636   

2017

   $ 158,323   

2018

   $ 148,412   

2019

   $ 112,713   

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(7)  Goodwill and Other Intangible Assets (Continued)

 

During the fourth quarter, we perform our annual impairment tests of the carrying value of our goodwill by reporting unit. For further discussion see Note 4(h).

Goodwill amounts for our professional diagnostics, patient self-testing and consumer diagnostics reporting units are summarized as follows (in thousands):

 

     Professional
Diagnostics
    Patient
Self-
testing
    Consumer
Diagnostics
    Total  

Goodwill at December 31, 2012(1)

   $  2,867,422      $  34,363      $  57,125      $  2,958,910   

Acquisitions(2)

     88,613        (3,551            85,062   

Dispositions(3)

     (14,786                   (14,786

Other(4)

     (25,832     2,733        910        (22,189
  

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill at December 31, 2013

   $ 2,915,417      $ 33,545      $ 58,035      $ 3,006,997   

Acquisitions(2)

     (546     (25            (571

Dispositions(3)

     (16,517                   (16,517

Other(4)

     (59,549     (650     (3,044     (63,243
  

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill at December 31, 2014 (Restated)

   $ 2,838,805      $ 32,870      $ 54,991      $ 2,926,666   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The December 31, 2012 balance for the patient self-testing reporting unit reflects an allocation of goodwill related to our condition management, case management, wellbeing, wellness, and women’s and children’s health businesses, or collective, our health management business, which was held for sale at this date.

 

(2) Includes initial purchase price allocation, purchase accounting adjustments recorded to the acquired entities’ opening balance sheet and additional payments made for earn-outs and milestones achieved.

 

(3) Reflects write-off related to the dispositions of Spinreact in 2013 and BioNote in 2014.

 

(4) These amounts relate primarily to adjustments resulting from fluctuations in foreign currency exchange rates.

We generally expense costs incurred for the internal development of 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, 2014 and 2013, we had approximately $9.5 million and $9.6 million, respectively, of costs capitalized, net of amortization, in connection with establishing patents and trademarks which are included in other intangible assets, net, in the accompanying consolidated balance sheets. Upon the initial filing 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.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(8)  Long-term Debt

We had the following long-term debt balances outstanding (in thousands) as of December 31, 2014 and December 31, 2013, respectively:

 

     December 31,
2014
(Restated)
     December 31,
2013
 

A term loans(1)(2)

   $ 785,938       $ 832,188   

B term loans(1)(3)

     1,330,810         1,344,238   

Revolving line of credit(1)

     127,000         170,000   

7.25% Senior notes

     450,000         450,000   

6.5% Senior subordinated notes

     425,000         425,000   

8.625% Senior subordinated notes

     400,000         400,000   

3% Convertible senior subordinated notes

     150,000         150,000   

Other lines of credit

     684         355   

Other

     40,828         50,119   
  

 

 

    

 

 

 
     3,710,260         3,821,900   

Less: Short-term debt and current portion

     (88,875      (64,112
  

 

 

    

 

 

 
   $ 3,621,385       $ 3,757,788   
  

 

 

    

 

 

 

 

(1) Incurred under our secured credit facility.

 

(2) Includes “A” term loans and “Delayed Draw” term loans under our secured credit facility.

 

(3) Includes term loans previously referred to as “Incremental B-1” term loans and “Incremental B-2” term loans under our secured credit facility, which term loans have been converted into and consolidated with the “B” term loans under our secured credit facility.

In connection with our significant long-term debt issuances, we recorded interest expense, including amortization and write-offs of deferred financing costs and original issue discounts, in our accompanying consolidated statements of operations for 2014, 2013 and 2012, respectively, as follows (in thousands):

 

     2014
(Restated)
     2013     2012  

Secured credit facility(1)

   $ 99,399       $ 104,159      $ 104,916   

7.25% Senior notes

     34,098         33,906        1,994   

7.875% Senior notes

             137 (2)      44,994 (3) 

6.5% Senior subordinated notes

     29,057         17,384          

8.625% Senior subordinated notes

     37,092         37,093        37,096   

9% Senior subordinated notes

             54,043 (4)      41,474   

3% Convertible senior subordinated notes

     4,984         4,984        4,984   
  

 

 

    

 

 

   

 

 

 
   $ 204,630       $ 251,706      $ 235,458   
  

 

 

    

 

 

   

 

 

 

 

(1) Includes “A” term loans, including the “Delayed-Draw” term loans; “B” term loans, including the term loans previously referred to as “Incremental B-1” term loans and “Incremental B-2” term loans, which term loans have been converted into and consolidated with the “B” term loans; and revolving line of credit loans. For 2014, 2013 and 2012, the amounts include $1.5 million, $2.6 million and $5.0 million, respectively, related to the amortization of fees paid for certain debt modifications.

 

(2) Amount includes an approximate $0.2 million loss recorded in connection with the repurchase of our 7.875% senior notes.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8)  Long-term Debt (Continued)

 

(3) Amount includes an approximate $23.2 million loss recorded in connection with the repurchase of substantially all of our 7.875% senior notes. Included in the $23.2 million is a $12.3 million make-whole payment which has been classified within cash flow from financing activities in our consolidated statement of cash flows.

 

(4) Amount includes an approximate $35.6 million loss recorded in connection with the repurchase of our 9% senior subordinated notes. Included in the $35.6 million is $19.0 million related to tender offer consideration and call premium which has been classified within cash flow from financing activities in our consolidated statement of cash flows.

The following describes each of the debt instruments listed above:

(a)  Secured Credit Facility

On June 30, 2011, we entered into a Credit Agreement, or secured credit facility, with certain lenders, General Electric Capital Corporation as administrative agent and collateral agent, and certain other agents and arrangers, and, along with certain of our subsidiaries, a related guaranty and security agreement. On December 7, 2011, we entered into an amendment to our secured credit facility to provide an additional term loan facility for “Incremental B-1” term loans (all of which we borrowed on that date). On March 28, 2012, we entered into a further amendment to provide an additional term loan facility for “Incremental B-2” term loans (all of which we borrowed on that date). On May 30, 2014, we entered into a further amendment pursuant to which (among other changes) the “Incremental B-1” term loans and the “Incremental B-2” term loans were converted into and consolidated with the “B” term loans thereunder. The secured credit facility, as so amended (and before the repayments of loans pursuant to the amendment described in the immediately following paragraph), comprises credit facilities totaling $2.55 billion in aggregate original principal amount, consisting of term loans in the aggregate original principal amount of $2.3 billion (consisting of “A” term loans (including “Delayed Draw” term loans) in the aggregate original principal amount of $925.0 million and “B” term loans in the aggregate original principal amount of $1.375 billion (including the respective $250.0 million and $200.0 million aggregate original principal amounts of the “Incremental B-1” term loans and “Incremental B-2” term loans, which were converted into “B” term loans as described above), all of which we have fully drawn, and, subject to our continued compliance with the secured credit facility, a $250.0 million revolving line of credit (which includes a $50.0 million sublimit for the issuance of letters of credit).

In December 2014, we used the net cash proceeds of our sale of the BioNote business to repay revolving credit loans in the aggregate amount of $43.0 million. We may reborrow the amounts repaid under the $250.0 million revolving credit facility, subject to compliance with the terms of the secured credit facility.

We must repay the “A” term loans (excluding the “Delayed Draw” term loans) in eighteen consecutive quarterly installments, which began on December 31, 2011 and continue through March 31, 2016, in the amount of $7,812,500 each and a final installment on June 30, 2016, in the amount of $484,375,000. We must repay the “Delayed-Draw” term loans included within the “A” term loans in fifteen consecutive quarterly installments, which began on September 30, 2012, and continue through March 31, 2016, in the amount of $3,750,000 each and a final installment on June 30, 2016, in the amount of $243,750,000. We must repay the “B” term loans (including the amounts thereof converted from the previously outstanding “Incremental B-1” term loans and “Incremental B-2” term loans as described above) in twenty-two consecutive quarterly installments, which began on

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8)  Long-term Debt (Continued)

 

December 31, 2011 and continue through March 31, 2017, each remaining payment in the amount of $3,437,500 with a final installment due on June 30, 2017 in the amount of $1,301,000,000. We have paid in full all installments of all term loans due on or before December 31, 2014. We may repay any borrowings under the revolving line of credit at any time without premium or penalty, but we must repay all such borrowings in no event later than June 30, 2016. Notwithstanding the foregoing, and subject to certain exceptions provided for in the Credit Agreement, in the event that any of our existing 3% convertible senior subordinated notes remain outstanding on November 15, 2015, then all of the term loans and revolving credit loans under the secured credit facility shall instead mature in full on such prior date.

The “A” term loans (including the “Delayed Draw” term loans) and our borrowings under the revolving credit facility bear interest at a rate per annum of, at our option, either (i) the Base Rate, as defined in the Credit Agreement, plus an applicable margin, which varies within a range from 1.75% to 2.50% depending on our consolidated secured leverage ratio, or (ii) the Eurodollar Rate, as defined in the Credit Agreement, plus an applicable margin, which varies within a range from 2.75% to 3.50% depending on our consolidated secured leverage ratio. On March 22, 2013, we entered into an amendment to the secured credit facility that provided for (among other changes) 50 basis point reductions in the interest rate margins applicable to the “B” term loans (which reductions also applied to the “Incremental B-1” term loans and the “Incremental B-2” term loans then outstanding). Under the secured credit facility as amended, the “B” term loans (including the amounts thereof converted from the previously outstanding “Incremental B-1” term loans and “Incremental B-2” term loans as described above) bear interest at a rate per annum of, at our option, either (i) the Base Rate, as defined in the Credit Agreement, plus an applicable margin, which varies within a range from 2.00% to 2.75% depending on our consolidated secured leverage ratio, or (ii) the Eurodollar Rate, as defined in the Credit Agreement, plus an applicable margin, which varies within a range from 3.00% to 3.75% depending on our consolidated secured leverage ratio. Interest on “B” term loans (including the amounts thereof converted from the previously outstanding “Incremental B-1” term loans and “Incremental B-2” term loans as described above) based on the Eurodollar Rate is subject to a 1.00% floor with respect to the base Eurodollar Rate. We are required to pay a fee on the unused portion of the revolving credit facility at a rate per annum of 0.50%. As of December 31, 2014, the “A” term loans (including the “Delayed-Draw” term loans), the “B” term loans (including the amounts thereof converted from the previously outstanding “Incremental B-1” term loans and “Incremental B-2” term loans as described above) and the revolving line of credit loans bore interest at the rates of 3.17%, 4.25% and 3.17%, respectively, per annum.

We must comply with various customary financial and non-financial covenants under the Credit Agreement. The primary financial covenants consist of a maximum consolidated secured leverage ratio, a minimum consolidated interest coverage ratio and a limit on capital expenditures; we were in compliance with all such financial covenants as of December 31, 2014. The primary non-financial covenants limit our ability to pay dividends or other distributions on our capital stock, to repurchase our capital stock, to conduct mergers or acquisitions, to make investments and loans, to incur future indebtedness, to place liens on assets, to prepay certain other indebtedness, to alter our capital structure and to sell assets. The covenants are subject to certain important exceptions and qualifications, which are set forth in the Credit Agreement.

The lenders under the Credit Agreement are entitled to terminate the revolving line of credit and accelerate repayment of all loans outstanding under the Credit Agreement upon the occurrence of any of various customary events of default.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8)  Long-term Debt (Continued)

 

As of December 31, 2014, accrued interest related to the secured credit facility amounted to $0.2 million.

(b)  7.25% Senior Notes

On December 11, 2012, we sold a total of $450.0 million aggregate principal amount of 7.25% senior notes due 2018, or the 7.25% senior notes, in a private placement to initial purchasers, who agreed to resell the notes only to qualified institutional buyers and to persons outside the United States; we sold the 7.25% senior notes at an initial offering price of 100%. Net proceeds from this offering amounted to $443.2 million, which was net of the underwriters’ commissions and offering expenses totaling $6.8 million. These notes were subsequently exchanged for new notes having substantially the same terms in an exchange offer registered under the Securities Act. We used $267.4 million of the net proceeds to purchase $248.2 million outstanding principal amount of the 7.875% senior notes as described below and $170.0 million to pay down a portion of the outstanding balance under our revolving line of credit.

The 7.25% senior notes were issued under a supplemental indenture dated as of August 11, 2009, as amended or supplemented, or the 7.25% Indenture. The 7.25% senior notes accrue interest at the rate of 7.25% per annum. Interest on the 7.25% senior notes is payable semi-annually on June 15 and December 15, beginning on June 15, 2013. The 7.25% senior notes mature on July 1, 2018, unless earlier redeemed.

We may redeem the 7.25% senior notes, in whole or part, at any time on or after December 15, 2015, by paying the principal amount of the notes being redeemed plus a declining premium, plus accrued and unpaid interest to, but excluding, the redemption date. The premium declines from 3.625% during the twelve months on and after December 15, 2015 to 1.813% during the six months on and after December 15, 2016 to zero on and after June 15, 2017. At any time prior to December 15, 2015, we may redeem up to 35% of the aggregate principal amount of the 7.25% senior notes with money that we raise in certain equity offerings, so long as (i) we pay 107.25% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date; (ii) we redeem the notes within 90 days of completing such equity offering; and (iii) at least 65% of the aggregate principal amount of the 7.25% senior notes remains outstanding afterwards. In addition, at any time prior to December 15, 2015, we may redeem some or all of the 7.25% senior notes by paying the principal amount of the notes being redeemed plus a make-whole premium, plus accrued and unpaid interest to, but excluding, the redemption date.

If a change of control occurs, subject to specified conditions, we must give holders of the 7.25% senior notes an opportunity to sell their notes to us at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest to, but excluding, the date of the purchase.

If we, or our subsidiaries, engage in asset sales, we, or they, generally must either invest the net cash proceeds from such sales in our or their businesses within a specified period of time, prepay certain indebtedness or make an offer to purchase a principal amount of the 7.25% senior notes equal to the excess net cash proceeds, subject to certain exceptions. The purchase price of the notes would be 100% of their principal amount, plus accrued and unpaid interest.

The 7.25% Indenture provides that we and our subsidiaries must comply with various customary covenants. These covenants limit our ability, and the ability of our subsidiaries, to, among other things, incur additional debt; pay dividends on capital stock or redeem, repurchase or retire capital stock or

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8)  Long-term Debt (Continued)

 

subordinated debt; make certain investments; create liens on assets; transfer or sell assets; engage in transactions with affiliates; create restrictions on the ability of subsidiaries to pay dividends or make loans, asset transfers or other payments to us and our subsidiaries; issue capital stock of subsidiaries; engage in any business, other than our or their existing businesses and related businesses; enter into sale and leaseback transactions; incur layered indebtedness; and consolidate or merge with any person (other than certain affiliates) or transfer all or substantially all of our assets or the aggregate assets of us and our subsidiaries. These covenants are subject to certain important exceptions and qualifications, which are set forth in the 7.25% Indenture. At any time the 7.25% senior notes are rated investment grade, certain covenants will be suspended with respect to them.

The 7.25% Indenture contains customary events of default entitling the trustee or the holders of the 7.25% senior notes to declare all amounts owed pursuant to the 7.25% senior notes immediately payable if any such event of default occurs.

The 7.25% senior notes are our senior unsecured obligations and are equal in right of payment to all of our existing and future senior debt, including our borrowings under our secured credit facility. Our obligations under the 7.25% senior notes and the 7.25% Indenture are fully and unconditionally guaranteed, jointly and severally, on an unsecured senior basis by certain of our domestic subsidiaries, and the obligations of such domestic subsidiaries under their guarantees are equal in right of payment to all of their existing and future senior debt. See Note 26 for guarantor financial information.

As of December 31, 2014, accrued interest related to the 7.25% senior notes amounted to $1.4 million.

(c)  7.875% Senior Notes

During the third quarter of 2009, we sold a total of $250.0 million aggregate principal amount of 7.875% senior notes due 2016, or the 7.875% senior notes, in two separate transactions on August 11, 2009 and September 28, 2009. The 7.875% senior notes were issued under a supplemental indenture dated as of August 11, 2009, as amended or supplemented, or the 7.875% Indenture. The 7.875% senior notes accrued interest from the dates of their respective issuances at the rate of 7.875% per annum. Interest on the notes was payable semi-annually on February 1 and August 1, commencing on February 1, 2010. The terms of the notes provided that they matured on February 1, 2016, unless earlier redeemed.

In December 2012, we used $267.4 million of the net proceeds of our sale of the 7.25% senior notes to purchase $248.2 million outstanding principal amount of the 7.875% senior notes. The purchased 7.875% senior notes represented 99.3% of the total then-outstanding principal amount of the 7.875% senior notes. In February 2013, we redeemed the remaining $1.8 million outstanding principal amount of the 7.875% senior notes pursuant to our optional redemption right under the 7.875% Indenture, and we subsequently terminated the 7.875% Indenture.

(d)  6.5% Senior Subordinated Notes

In May 2013, we sold a total of $425.0 million aggregate principal amount of 6.5% senior subordinated notes due 2020, or the 6.5% senior subordinated notes, in a private placement to initial purchasers, who agreed to resell the notes only to qualified institutional buyers and to persons outside the United States. We sold the 6.5% senior subordinated notes at an initial offering price of 100%. Net

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8)  Long-term Debt (Continued)

 

proceeds from this offering amounted to $417.7 million, which were net of the underwriters’ commissions and offering expenses totaling approximately $7.3 million. These notes were subsequently exchanged for new notes having substantially the same terms in an exchange offer registered under the Securities Act. In May 2013, we used $200.6 million of the net proceeds of our sale of the 6.5% senior subordinated notes to purchase $190.6 million outstanding principal amount of our 9% senior subordinated notes pursuant to our tender offer for these notes. In June 2013, we redeemed the remaining $209.4 million outstanding principal amount of the 9% senior subordinated notes pursuant to our optional redemption right under the indenture for those notes, and we subsequently terminated that indenture.

The 6.5% senior subordinated notes were issued under a supplemental indenture dated as of May 24, 2013, or the 6.5% Indenture. The 6.5% senior subordinated notes accrue interest at the rate of 6.5% per annum. Interest on the 6.5% senior subordinated notes is payable semi-annually on June 15 and December 15, beginning on December 15, 2013. The 6.5% senior subordinated notes mature on June 15, 2020, unless earlier redeemed.

We may, at our option, redeem the 6.5% senior subordinated notes, in whole or part, at any time (which may be more than once) on or after June 15, 2016, by paying the principal amount of the notes being redeemed plus a declining premium, plus accrued and unpaid interest to (but excluding) the redemption date. The premium declines from 3.250% during the twelve months on and after June 15, 2016 to 1.625% during the twelve months on and after June 15, 2017 to zero on and after June 15, 2018. In addition, we may, at our option, at any time (which may be more than once) before May 24, 2015, redeem up to 10% of the aggregate principal amount of the 6.5% senior subordinated notes in each of the two twelve-month periods preceding May 24, 2015 at a redemption price of 103% of the principal amount thereof plus accrued and unpaid interest to (but excluding) the redemption date. In addition, at any time (which may be more than once) prior to June 15, 2016, we may, at our option, redeem up to 35% of the aggregate principal amount of the 6.5% senior subordinated notes with money that we raise in certain equity offerings, so long as (i) we pay 106.5% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to (but excluding) the redemption date; (ii) we redeem the 6.5% senior subordinated notes within 90 days of completing such equity offering; and (iii) at least 65% of the aggregate principal amount of the 6.5% senior subordinated notes remains outstanding afterwards. In addition, at any time (which may be more than once) prior to June 15, 2016, we may, at our option, redeem some or all of the 6.5% senior subordinated notes by paying the principal amount of the 6.5% senior subordinated notes being redeemed plus a make-whole premium, plus accrued and unpaid interest to (but excluding) the redemption date.

If a change of control occurs, subject to specified conditions, we must give holders of the 6.5% senior subordinated notes an opportunity to sell their notes to us at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest to (but excluding) the date of the purchase.

If we or our subsidiaries engage in asset sales, we or they generally must either invest the net cash proceeds from such sales in our or their businesses within a specified period of time, repay senior indebtedness or make an offer to purchase a principal amount of the 6.5% senior subordinated notes (on a pro rata basis with respect to the 6.5% senior subordinated notes and our 8.625% senior subordinated notes) equal to the excess net cash proceeds, subject to certain exceptions. The purchase price of the 6.5% senior subordinated notes would be 100% of their principal amount, plus accrued and unpaid interest.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8)  Long-term Debt (Continued)

 

The 6.5% Indenture provides that we and our subsidiaries must comply with various customary covenants. These covenants limit our ability, and the ability of our subsidiaries, to, among other things, incur additional debt; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated debt; make certain investments; create liens on assets; transfer or sell assets; engage in transactions with affiliates; create restrictions on the ability of subsidiaries to pay dividends or make loans, asset transfers or other payments to us and our subsidiaries; issue capital stock of subsidiaries; engage in any business, other than our or their existing businesses and related businesses; enter into sale and leaseback transactions; incur layered indebtedness; and consolidate or merge with any person (other than certain affiliates) or transfer all or substantially all of our assets or the aggregate assets of us and our subsidiaries. These covenants are subject to certain important exceptions and qualifications, which are set forth in the 6.5% Indenture. At any time the 6.5% senior subordinated notes are rated investment grade, certain covenants will be suspended with respect to them.

The 6.5% Indenture contains customary events of default entitling the trustee or the holders of the 6.5% senior subordinated notes to declare all amounts owed pursuant to the 6.5% senior subordinated notes immediately payable if any such event of default occurs.

The 6.5% senior subordinated notes are our senior subordinated unsecured obligations, are subordinated in right of payment to all of our existing and future senior debt, including our borrowings under our secured credit facility and our 7.25% senior notes, and are equal in right of payment with our 8.625% senior subordinated notes and our 3% convertible senior subordinated notes. Our obligations under the 6.5% senior subordinated notes and the 6.5% Indenture are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated unsecured basis by certain of our domestic subsidiaries, and the obligations of such domestic subsidiaries under their guarantees are subordinated in right of payment to all of their existing and future senior debt. See Note 26 for guarantor financial information.

As of December 31, 2014, accrued interest related to the 6.5% senior subordinated notes amounted to $1.3 million.

(e)  8.625% Senior Subordinated Notes

In September 2010, we sold $400.0 million aggregate principal amount of 8.625% senior subordinated notes due 2018, or the 8.625% senior subordinated notes. These notes were subsequently exchanged for new notes having substantially the same terms in an exchange offer registered under the Securities Act.

The 8.625% senior subordinated notes were issued under a supplemental indenture dated as of September 21, 2010, as amended or supplemented, or the 8.625% Indenture. The 8.625% senior subordinated notes accrue interest at the rate of 8.625% per annum. Interest on the 8.625% notes is payable semi-annually on April 1 and October 1, beginning on April 1, 2011. The 8.625% subordinated notes mature on October 1, 2018, unless earlier redeemed.

We may redeem the 8.625% senior subordinated notes, in whole or part, at any time (which may be more than once) on or after October 1, 2014, by paying the principal amount of the notes being redeemed plus a declining premium, plus accrued and unpaid interest to, but excluding, the redemption date. The premium declines from 4.313% during the twelve months on and after October 1, 2014 to 2.156% during the twelve months on and after October 1, 2015 to zero on and after October 1, 2016.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8)  Long-term Debt (Continued)

 

If a change of control occurs, subject to specified conditions, we must give holders of the 8.625% senior subordinated notes an opportunity to sell their notes to us at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest to, but excluding, the date of the purchase.

If we, or our subsidiaries, engage in asset sales, we, or they, generally must either invest the net cash proceeds from such sales in our or their businesses within a specified period of time, prepay senior debt or make an offer to purchase a principal amount of the 8.625% senior subordinated notes (on a pro rata basis with respect to the 8.625% senior subordinated notes and the 6.5% senior subordinated notes) equal to the excess net cash proceeds, subject to certain exceptions. The purchase price of the senior subordinated notes would be 100% of their principal amount, plus accrued and unpaid interest.

The 8.625% Indenture provides that we and our subsidiaries must comply with various customary covenants. These covenants limit our ability, and the ability of our subsidiaries, to, among other things, incur additional debt; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated debt; make certain investments; create liens on assets; transfer or sell assets; engage in transactions with affiliates; create restrictions on the ability of subsidiaries to pay dividends or make loans, asset transfers or other payments to us or our subsidiaries; issue capital stock of subsidiaries; engage in any business, other than our or their existing businesses and related businesses; enter into sale and leaseback transactions; incur layered indebtedness; and consolidate or merge or transfer all or substantially all of our assets or the aggregate assets of us and our subsidiaries. These covenants are subject to certain important exceptions and qualifications, which are set forth in the 8.625% Indenture. At any time the 8.625% senior subordinated notes are rated investment grade, certain covenants will be suspended with respect to them.

The 8.625% Indenture contains customary events of default entitling the trustee or the holders of the 8.625% senior subordinated notes to declare all amounts owed pursuant the 8.625% senior subordinated notes immediately payable if any such event of default occurs.

The 8.625% senior subordinated notes are our senior subordinated unsecured obligations, are subordinated in right of payment to all of our existing and future senior debt, including our borrowings under our secured credit facility and our 7.25% senior notes, and equal in right of payment with our 6.5% senior subordinated notes and our 3% convertible senior subordinated notes. Our obligations under the 8.625% senior subordinated notes and the 8.625% Indenture are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated unsecured basis by certain of our domestic subsidiaries, and the obligations of such domestic subsidiaries under their guarantees are subordinated in right of payment to all of their existing and future senior debt. See Note 26 for guarantor financial information.

As of December 31, 2014, accrued interest related to the 8.625% senior subordinated notes amounted to $8.6 million.

(f)  9% Senior Subordinated Notes

On May 12, 2009, we sold $400.0 million aggregate principal amount of 9% senior subordinated notes due 2016, or the 9% senior subordinated notes. The 9% senior subordinated notes were issued under a supplemental indenture dated as of May 12, 2009, as amended or supplemented, or the 9% Indenture. The 9% senior subordinated notes accrued interest from the date of their issuance at the

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8)  Long-term Debt (Continued)

 

rate of 9% per annum. Interest on the 9% senior subordinated notes was payable semi-annually on May 15 and November 15, commencing on November 15, 2009. The terms of the 9% senior subordinated notes provided that they matured on May 15, 2016, unless earlier redeemed.

On May 24, 2013, we used $200.6 million of the net proceeds of our sale of the 6.5% senior subordinated notes to purchase $190.6 million outstanding principal amount of our 9% senior subordinated notes pursuant to our tender offer for these notes. The purchased 9% senior subordinated notes represented approximately 47.7% of the total then-outstanding principal amount of the 9% senior subordinated notes. On June 24, 2013, we redeemed the remaining $209.4 million outstanding principal amount of the 9% senior subordinated notes pursuant to our optional redemption right under the 9% Indenture, and we subsequently terminated the 9% Indenture.

(g)  3% Convertible Senior Subordinated Notes

On May 14, 2007, we sold $150.0 million principal amount of 3% convertible senior subordinated notes due 2016, or the 3% convertible senior subordinated notes. The 3% convertible senior subordinated notes are convertible into approximately 3.4 million shares of our common stock at a conversion price of $43.98. Interest accrues at 3% per annum, compounded daily, on the outstanding principal amount of the 3% convertible senior subordinated notes and is payable in arrears on May 15th and November 15th of each year, beginning on November 15, 2007.

We may not redeem the 3% convertible senior subordinated notes prior to their stated maturity. In the event of certain fundamental changes (as defined in the indenture governing the 3% convertible senior subordinated notes) or a termination of trading of our common stock (as described in such indenture), we may be required to repurchase the 3% convertible senior subordinated notes for cash at a price equal to 100% of the unconverted principal amount thereof plus any accrued but unpaid interest. The 3% convertible senior subordinated notes are unsecured and are subordinated in right of payment to all of our existing and future senior debt, including borrowings under our secured credit facility and our senior notes, and equal in right of payment to our senior subordinated notes. The indenture governing the 3% convertible senior subordinated notes contains customary events of default entitling the trustee or the holders thereof to declare all amounts owed pursuant to the 3% convertible senior subordinated notes immediately payable if any such event of default occurs.

As of December 31, 2014, accrued interest related to the 3% convertible senior subordinated notes amounted to $0.6 million.

(h)  Lines of Credit

Some of our subsidiaries maintain local lines of credit for short-term advances. Total available credit under the local lines of credit as of December 31, 2014 is approximately $267.8 million, of which $127.7 million was borrowed and outstanding as of that date.

(i)  Other Debt

Included in other debt as of December 31, 2014 are borrowings by certain of our subsidiaries from various financial institutions. The borrowed funds are primarily used to fund capital expenditures and working capital requirements. Interest expense on these borrowings was $3.3 million for 2014.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8)  Long-term Debt (Continued)

 

(j)  Maturities of Long-Term Debt

The following is a summary of the maturities of long-term debt, including the current portions thereof, outstanding on December 31, 2014 (in thousands):

 

2015

   $ 88,875   

2016

     1,038,257   

2017

     1,305,272   

2018

     850,822   

2019

     790   

Thereafter

     427,371   
  

 

 

 
     3,711,387   

Less: Original issue discounts

     (1,127
  

 

 

 
   $ 3,710,260   
  

 

 

 

(9)  Fair Value Measurements

We apply fair value measurement accounting to value our financial assets and liabilities. Fair value measurement accounting provides a framework for measuring fair value under U.S. GAAP and requires expanded disclosures regarding fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

Described below are the three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(9)  Fair Value Measurements (Continued)

 

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2014 and 2013, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

 

Description

  December 31,
2014
    Quoted Prices in
Active Markets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Unobservable
Inputs
(Level 3)
 

Assets:

       

Marketable securities

  $ 259      $          259      $          —      $   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 259      $ 259      $      $   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Contingent consideration obligations(1)

  $ 139,671      $      $      $ 139,671   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 139,671      $      $      $ 139,671   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Description

  December 31,
2013
    Quoted Prices in
Active Markets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Unobservable
Inputs
(Level 3)
 

Assets:

       

Marketable securities

  $ 858      $          858      $          —      $   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 858      $ 858      $      $   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Contingent consideration obligations(1)

  $ 218,569      $      $      $ 218,569   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 218,569      $      $      $ 218,569   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We determine the fair value of the contingent consideration obligations based on a probability-weighted approach derived from earn-out criteria estimates and a probability assessment with respect to the likelihood of achieving the various earn-out criteria. The measurement is based upon significant inputs not observable in the market. Significant increases or decreases in any of these inputs could result in a significantly higher or lower fair value measurement. Changes in the fair value of these contingent consideration obligations are recorded as income or expense within operating income in our consolidated statements of operations. See Note 12 for additional information on the valuation of our contingent consideration obligations.

Changes in the fair value of our Level 3 contingent consideration obligations during the year ended December 31, 2014 were as follows (in thousands):

 

Fair value of contingent consideration obligations, December 31, 2013

   $ 218,569   

Payments

     (60,019

Present value accretion and adjustments (Restated)

     7,677   

Reversal of Method Factory Inc., now known as ACS obligation(1)

     (26,321

Foreign currency adjustments

     (235
  

 

 

 

Fair value of contingent consideration obligations, December 31, 2014 (Restated)

   $ 139,671   
  

 

 

 

 

(1) ACS was divested in October 2014 and, in connection with this transaction, the contingent consideration obligation was terminated. See Note 12.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(9)  Fair Value Measurements (Continued)

 

At December 31, 2014 and 2013, the carrying amounts of cash and cash equivalents, restricted cash, receivables, accounts payable and other current liabilities approximated their estimated fair values.

The carrying amount and estimated fair value of our long-term debt were both $3.7 billion at December 31, 2014. The carrying amount and estimated fair value of our long-term debt were $3.8 billion and $3.9 billion, respectively, at December 31, 2013. The estimated fair value of our long-term debt was determined using information derived from available market sources (Level 2 in the fair value hierarchy) and may not be representative of actual values that could have been or will be realized in the future.

(10)  Capital Leases

The following is a schedule of the future minimum lease payments under capital leases, together with the present value of such payments as of December 31, 2014 (in thousands):

 

2015

   $ 4,241   

2016

     4,150   

2017

     2,891   

2018

     1,546   

2019

     922   

Thereafter

     1,051   
  

 

 

 

Total future minimum lease payments

     14,801   

Less: Imputed interest

       
  

 

 

 

Present value of future minimum lease payments

     14,801   

Less: Current portion

     (4,241
  

 

 

 
   $ 10,560   
  

 

 

 

At December 31, 2014, the capitalized amounts of the building, machinery and equipment and computer equipment under capital leases were as follows (in thousands):

 

Machinery, laboratory equipment and tooling

   $ 31,105   

Computer equipment

     4,065   

Furniture and fixtures

     738   

Vehicles

     144   

Leasehold improvements

       
  

 

 

 
     36,052   

Less: Accumulated amortization

     (11,823
  

 

 

 
   $ 24,229   
  

 

 

 

The amortization expense of assets recorded under capital leases is included in depreciation and amortization expense of property, plant and equipment.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(11)  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 $9.2 million, $9.4 million and $8.8 million in 2014, 2013 and 2012, respectively.

(b)  U.K. Pension Plans

Our subsidiary in England, Unipath Ltd., or Unipath, has a defined benefit pension plan established for certain of its employees.

Changes in benefit obligations, plan assets, funded status and amounts recognized on the accompanying balance sheet as of and for the years ended December 31, 2014 and 2013, for our Defined Benefit Plan were as follows (in thousands):

 

     2014     2013  

Change in projected benefit obligation

    

Benefit obligation at beginning of year

   $ 21,572      $ 18,340   

Interest cost

     938        754   

Actuarial loss

     1,830        2,202   

Benefits paid

     (300     (232

Foreign exchange impact

     (1,480     508   
  

 

 

   

 

 

 

Benefit obligation at end of year

   $ 22,560      $ 21,572   

Change in plan assets

    

Fair value of plan assets at beginning of year

   $ 17,226      $ 14,043   

Actual return on plan assets

     1,429        2,084   

Employer contribution

     953        904   

Benefits paid

     (300     (232

Foreign exchange impact

     (1,188     427   
  

 

 

   

 

 

 

Fair value of plan assets at end of year

   $ 18,120      $ 17,226   
  

 

 

   

 

 

 

Funded status

   $ (4,440   $ (4,346
  

 

 

   

 

 

 

Accumulated benefit obligation

   $ 22,560      $ 21,572   
  

 

 

   

 

 

 

The net amounts recognized in the accompanying consolidated balance sheets are shown in long-term liabilities and were $4.4 million and $4.3 million, respectively, for years ended December 31, 2014 and 2013.

The following represents the amounts recognized in other comprehensive income (loss) for the year ended December 31, 2014 (in thousands):

 

Amortization of net loss

     (267

Amortization of prior service cost

     (438

New actuarial loss

     (1,423

Foreign exchange impact

     2,230   
  

 

 

 

Total

   $ 102   
  

 

 

 

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(11)  Postretirement Benefit Plans (Continued)

 

The amortization of prior service cost is expected to be approximately $0.4 million in 2015.

Amounts recognized in accumulated other comprehensive loss for the years ending December 31, 2014 and 2013 are as follows:

 

     2014      2013  

Net actuarial loss

   $ 5,635       $ 4,846   

Prior service cost

     3,718         4,404   
  

 

 

    

 

 

 

Net amount recognized

   $ 9,353       $ 9,250   
  

 

 

    

 

 

 

The measurement dates used to determine plan assets and benefit obligations for the Defined Benefit Plan were December 31, 2014 and 2013.

The following table provides the weighted-average actuarial assumptions:

 

     2014     2013  

Assumptions used to determine benefit obligations(1):

    

Discount rate

     3.55     4.40

Rate of compensation increase

     3.85     4.15

Assumptions used to determine net periodic benefit cost(2):

    

Discount rate

     4.40     4.30

Expected long-term return on plan assets

     5.95     5.15

Rate of compensation increase

     4.15     3.65

 

(1) The actuarial assumptions used to compute the unfunded status for the plan are based upon information available as of December 31, 2014 and 2013.

 

(2) The actuarial assumptions used to compute the net periodic pension benefit cost are based upon the information available as of the beginning of the presented year.

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, and was calculated using a weighted-average of the expected returns for each asset class held by the Plan. The long-term expected return on assets is net of investment expenses.

The annual net periodic benefit costs of the Defined Benefit Plan are as follows (in thousands):

 

     2014     2013     2012  

Service cost

   $      $      $   

Interest cost

     938        754        742   

Expected return on plan assets

     (1,022     (713     (636

Amortization of net loss

     267        199        114   

Amortization of prior service cost

     438        416        422   

Curtailment loss (gain)

                     
  

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 621      $ 656      $ 642   
  

 

 

   

 

 

   

 

 

 

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(11)  Postretirement Benefit Plans (Continued)

 

The plan assets of the Defined Benefit Plan comprise a mix of stocks and fixed income securities and other investments. At December 31, 2014, these stocks and fixed income securities represented 72% and 28%, respectively, of the market value of the pension assets. We expect to contribute approximately £0.6 million (or $0.9 million at December 31, 2014) to the Defined Benefit Plan in 2015. We expect that the benefits to be paid to plan participants will range between approximately $0.3 million and $0.5 million per year for each of the next five years and that benefits totaling $0.5 million will be paid annually for the five years thereafter.

Our overall investment strategy is to ensure the investments are spread across a range of investments varying by both investment class and geographical location which is achieved by investing largely in equity and fixed income funds. Spreading the investments in this manner reduces the risk of a decline in a particular market having a substantial impact on the whole fund. The target allocation for the plan assets is a 70% holding in equities (both in the U.K. and overseas), with the remaining assets invested in investment grade corporate bonds.

The fair values of our pension plan assets at December 31, 2014 and 2013 by asset category are presented in the following table (Level 2 in the fair value hierarchy).

 

     Plan Assets at
December 31,
 

Asset Category

   2014      2013  

Equity securities:

     

U.K. equities

   $ 6,136       $ 6,000   

Overseas equities

     3,105         2,995   

U.S. equities

     3,631         3,003   

Debt securities — corporate bonds

     5,048         4,402   

Other — cash

     200         826   
  

 

 

    

 

 

 

Total plan assets

   $ 18,120       $ 17,226   
  

 

 

    

 

 

 

The table above presents the fair value of our plan’s assets in accordance with the fair value hierarchy. The pension plan assets are measured using net asset value per share (or its equivalent) and are reported as a Level 2 investment above due to our ability to redeem the investment either at the balance sheet date or within limited time restrictions.

Unipath contributed $0.4 million in 2014, $0.3 million in 2013 and $0.4 million in 2012 to the Defined Contribution Plan, which was recognized as an expense in the accompanying consolidated statement of operations.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(12)  Commitments and Contingencies

(a)  Operating Leases

We have operating lease commitments for certain of our facilities and equipment that expire on various dates through 2019. The following schedule outlines future minimum annual rental payments under these leases at December 31, 2014 (in thousands):

 

2015

   $ 37,565   

2016

     31,397   

2017

     25,389   

2018

     19,387   

2019

     15,125   

Thereafter

     27,135   
  

 

 

 
   $ 155,998   
  

 

 

 

Rent expense relating to operating leases was approximately $48.4 million, $46.0 million and $41.7 million during 2014, 2013 and 2012, respectively. The year-over-year increases in rent expense were the result of new leases entered into during the years.

(b)  Acquisition-related Contingent Consideration Obligations

We have contractual contingent purchase price consideration obligations related to certain of our acquisitions. We determine the acquisition date fair value of the contingent consideration obligations based on a probability-weighted approach derived from the overall likelihood of achieving certain performance targets, including product development milestones or financial metrics. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement, as defined in fair value measurement accounting. The resultant probability-weighted earn-out payments are discounted using a discount rate based upon the weighted-average cost of capital. At each reporting date, we revalue the contingent consideration obligations to the reporting date fair values and record increases and decreases in the fair values as income or expense in our consolidated statements of operations.

Increases or decreases in the fair values of the contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of earn-out criteria and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(12)  Commitments and Contingencies (Continued)

 

The following table summarizes our contractual contingent purchase price consideration obligations related to certain of our acquisitions, as follows (in thousands):

 

Acquisition

  Acquisition Date     Acquisition
Date Fair
Value
    Maximum
Remaining
Earn-out
Potential
as of
December 31,
2014
    Remaining
Earn-out
Period as
of
December 31,
2014
    Estimated
Fair Value as
of
December 31,
2014
    Estimated
Fair Value as
of
December 31,
2013
    Payments
Made
During
2014
 

TwistDx, Inc.(1)

    March 11, 2010      $ 35,600      $ 108,624        2015 – 2025 (10)    $ 41,100      $ 45,502      $ 15,403   

Ionian Technologies, Inc.(2)

    July 12, 2010      $ 24,500      $ 50,000        2015        24,500        29,000        7,500   

Laboratory Data Systems, Inc.(3)

    August 29, 2011      $ 13,000      $                    7,400        7,500   

Forensics Limited (ROAR)(4)

    September 22, 2011      $ 5,463      $                      2,484        3,398   

ACS(5)

    December 9, 2011      $ 18,900      $ (11)                   26,900        579   

MedApps(6)

    July 2, 2012      $ 13,100      $                      12,800        11,600   

Amedica Biotech, Inc.(7)

    July 3, 2012      $ 8,900      $                    7,500        8,055   

DiagnosisOne, Inc.(8)

    July 31, 2012      $ 22,300      $ 30,000        2015 – 2017        21,000        26,600        3,000   

Epocal(9)

    February 1, 2013      $ 75,000      $ 65,500        2015 – 2018        47,200        47,200         

Other

    Various      $ 43,854      $ 1,600        2015 – 2016        5,871        13,183        2,984   
         

 

 

   

 

 

   

 

 

 
          $ 139,671      $ 218,569      $ 60,019   
         

 

 

   

 

 

   

 

 

 

 

(1) The terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain revenue and product development targets through 2025.
(2) The terms of the acquisition agreement require us to pay earn-outs upon successfully meeting multiple product development milestones during the five years following the acquisition.
(3) The terms of the acquisition agreement required us to pay an earn-out upon successfully meeting certain revenue and operating income targets during each of the twelve-month periods ending June 30, 2012 and 2013.
(4) The terms of the acquisition agreement required us to pay an earn-out upon successfully meeting certain EBITDA targets during 2012 through 2014.
(5) The terms of the acquisition agreement required us to pay an earn-out upon successfully meeting certain operational and profit targets during 2012 through 2019. See also (11).
(6) The terms of the acquisition agreement required us to make earn-out payments upon achievement of certain technological and product development milestones through December 31, 2014.
(7) The terms of the acquisition agreement required us to make earn-out payments upon successfully meeting certain financial targets during each of the calendar years 2012 and 2013.
(8) The terms of the acquisition agreement require us to pay earn-outs upon successfully meeting certain financial targets within five years of the acquisition date.
(9) The terms of the acquisition agreement require us to pay earn-outs and management incentive payments upon successfully meeting certain product development and United States Food and Drug Administration regulatory approval milestones from the date of acquisition through December 31, 2018.
(10) The maximum earn-out period ends on the fifteenth anniversary of the acquisition date.
(11) The earn-out was comprised of three components, of which two components had an aggregate maximum remaining earn-out potential of $49.4 million. There was no dollar cap on the third earn-out component, however, the earn-out potential was limited to the remaining earn-out period. ACS was divested in October 2014 and these earn-outs were terminated in connection with the divestiture transaction. See Note 3.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(12)  Commitments and Contingencies (Continued)

 

(c)  Legal Proceedings

 

   

Matters Relating to our San Diego Facility

On October 9, 2012, we received a warning letter from the FDA referencing inspectional observations set forth in an FDA Form 483 received in June, 2012. The observations were the result of an inspection of our San Diego facility conducted earlier during 2012 relating to our Alere Triage products, which resulted in two recalls of certain Alere Triage products and revised release specifications for our Alere Triage meter-based products. We have submitted evidence of our completion of most of the actions we committed to in response to the FDA Form 483 and warning letter. In September 2014, as follow up to a further inspection of our San Diego facility, the FDA notified us that this most recent inspection was classified “voluntary action indicated,” meaning that the objectionable conditions or practices found in the inspection do not meet the threshold of significance requiring regulatory action, but that formal close-out of the October 2012 warning letter could not occur until after a future inspection.

In May 2012, we also received a subpoena from the Office of Inspector General of the Department of Health and Human Services, or the OIG, seeking documents relating primarily to the quality control testing and performance characteristics of Alere Triage products. We are cooperating with the OIG and have provided documents in response to the OIG under the subpoena.

We are unable to predict when these matters will be resolved or what further action, if any, the government will take in connection with them.

 

   

Matters Related to Theft of Laptop

In September 2012, a password-protected laptop containing personally identifiable information of approximately 116,000 patients was stolen from an employee of Alere Home Monitoring, or AHM. On January 24, 2013, a class action complaint was filed in the U.S. District Court for the Northern District of California against AHM, asserting claims for damages and other relief under California state law, including under California’s Confidentiality of Medical Information Act, or CMIA, arising out of this theft. On October 7, 2014, the class action was dismissed with leave to amend the complaint. On October 28, 2014, an amended complaint was filed, and on November 17, 2014 AHM responded by filing another motion to dismiss. On February 23, 2015, AHM’s motion to dismiss was granted in part, but denied as to the plaintiffs’ amended CMIA claims.

 

   

Claims in the Ordinary Course and Other Matters

We are not a party to any other pending legal proceedings that we currently believe could have a material adverse impact on our business. However, on December 10, 2014, we and our subsidiary, Avee Laboratories Inc., or Avee, received subpoenas from the United States Attorney for the District of New Jersey seeking marketing materials and other documents relating primarily to billing and marketing practices related to toxicology testing. We are cooperating with the investigation and have begun to provide documents responsive to the subpoenas. Our subsidiary, Arriva Medical, LLC, or Arriva, is also in the process of responding to a Civil Investigative Demand, or CID, from the United States Attorney for the Middle District of Tennessee in connection with an investigation of possible improper claims submitted to Medicare and Medicaid. The CID requests patient and billing records. Both investigations are in preliminary stages, and we cannot predict what effect, if any, the investigations, or any resulting claims, could have on Alere or its subsidiaries.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(12)  Commitments and Contingencies (Continued)

 

Our diabetes, toxicology and patient self-testing business areas are subject to audit and claims for reimbursement brought in the ordinary course by Zone Program Integrity Contractors, or ZPICs, and Medicare Administrative Contractors, or MACs, to monitor compliance with coverage and reimbursement rules and guidelines under Medicare and Medicaid. These types of audits often lead to determinations that certain claims should not have been paid by Medicare or Medicaid and the programs will seek to recoup or offset amounts they assert have been paid in error.

Our businesses may also be subject at any time to other commercial disputes, consumer product claims, negligence claims or various other lawsuits arising in the ordinary course of business, including infringement, employment or investor matters, and we expect that this will continue to be the case in the future. Such lawsuits or claims generally seek damages or reimbursement, sometimes in substantial amounts.

(13)  Net Loss Per Common Share

The following tables set forth the computation of basic and diluted net loss per common share (in thousands, except per share amounts):

 

     2014              
     (Restated)     2013     2012  

Basic and diluted net loss per common share:

      

Numerator:

      

Loss from continuing operations

   $      (176,028   $    (55,607   $ (45,091

Preferred stock dividends

     (21,293     (21,293     (21,293
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations attributable to common shares

     (197,321     (76,900     (66,384

Less: Net income attributable to non-controlling interest

     30        976        275   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations attributable to Alere Inc. and Subsidiaries

     (197,351     (77,876     (66,659

Income (loss) from discontinued operations

     138,318        (16,126     (33,126
  

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

   $ (59,033   $ (94,002   $ (99,785
  

 

 

   

 

 

   

 

 

 

Denominator:

      

Weighted-average common shares outstanding — basic and diluted

     82,938        81,542        80,587   
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share:

      

Loss from continuing operations attributable to Alere Inc. and Subsidiaries

   $ (2.38   $ (0.95   $ (0.83

Income (loss) from discontinued operations

     1.67        (0.20     (0.41
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share attributable to Alere Inc. and Subsidiaries

   $ (0.71   $ (1.15   $ (1.24
  

 

 

   

 

 

   

 

 

 

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(13)  Net Loss Per Common Share (Continued)

 

The following potential dilutive securities were not included in the calculation of diluted net loss per common share for our continuing operations because the inclusion thereof would be antidilutive (in thousands):

 

     2014      2013      2012  

Denominator:

        

Options to purchase shares of common stock

          7,140                10,879              10,234   

Warrants

     4         4         4   

Conversion shares related to 3% convertible senior subordinated notes

     3,411         3,411         3,411   

Conversion shares related to subordinated convertible promissory notes

     27         27         27   

Conversion shares related to Series B convertible preferred stock

     10,239         10,239         10,239   

Common stock equivalents related to the settlement of a contingent consideration obligation

             451           
  

 

 

    

 

 

    

 

 

 

Total number of antidilutive potentially issuable shares of common stock excluded from diluted common shares outstanding

     20,821         25,011         23,915   
  

 

 

    

 

 

    

 

 

 

(14)  Stockholders’ Equity

(a)  Common Stock

As of December 31, 2014, we had 200.0 million shares of common stock, $0.001 par value, authorized, of which 7.7 million shares were held in treasury and 83.9 million shares were outstanding, 10.2 million shares were reserved for issuance upon grant and exercise of equity awards under current equity compensation plans, 2.1 million shares were reserved for issuance under our employee stock purchase plan and 4,000 shares were reserved for issuance upon exercise of outstanding warrants. We also had shares of common stock reserved for issuance upon conversion of the following securities outstanding on December 31, 2014: $150.0 million in the aggregate principal amount of 3% convertible senior subordinated notes, convertible at $43.98 per share into 3.4 million shares of our common stock; $1.7 million of subordinated convertible promissory notes, convertible at $61.49 per share into 27,647 shares of our common stock; and 1.8 million shares of our Series B convertible preferred stock, with an aggregate liquidation preference of approximately $709.8 million, convertible under certain circumstances at $69.32 per share into 10.2 million shares of our common stock.

(b)  Preferred Stock

As of December 31, 2014, we had 5.0 million shares of preferred stock, $0.001 par value, authorized, of which 2.3 million shares were designated as Series B Convertible Perpetual Preferred Stock, or Series B preferred stock. In connection with our acquisition of Matria, we issued shares of the Series B preferred stock and through June 30, 2011 paid all dividends on outstanding shares of Series B preferred stock in additional shares of Series B preferred stock. Subsequent to June 30, 2011 all dividends on outstanding shares of Series B preferred stock were paid in cash. At December 31, 2014, there were 1.8 million shares of Series B preferred stock outstanding with a fair value of approximately $558.9 million.

Each share of Series B preferred stock, which has a liquidation preference of $400.00 per share, is convertible, at the option of the holder and only upon certain circumstances, into 5.7703 shares of

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14)  Stockholders’ Equity (Continued)

 

our common stock, plus cash in lieu of fractional shares. The initial conversion price is $69.32 per share, subject to adjustment upon the occurrence of certain events, but will not be adjusted for accumulated and unpaid dividends. Upon a conversion of shares of the Series B preferred stock, we may, at our option, satisfy the entire conversion obligation in cash or through a combination of cash and common stock. Series B preferred stock outstanding at December 31, 2014 would convert into 10.2 million shares of our common stock, which are reserved. There were no conversions as of December 31, 2014.

Generally, the shares of Series B preferred stock are convertible, at the option of the holder, if during any calendar quarter beginning with the second calendar quarter after the issuance date of the Series B preferred stock, if the closing sale price of our common stock for each of 20 or more trading days within any period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price per share of common stock in effect on the last trading day of the immediately preceding calendar quarter. In addition, the shares of Series B preferred stock are convertible, at the option of the holder, in certain other circumstances, including those relating to the trading price of the Series B preferred stock and upon the occurrence of certain fundamental changes or major corporate transactions. We also have the right, under certain circumstances relating to the trading price of our common stock, to force conversion of the Series B preferred stock. Depending on the timing of any such forced conversion, we may have to make certain payments relating to foregone dividends, which payments we can make, at our option, in the form of cash, shares of our common stock, or a combination of cash and shares of our common stock.

Each share of Series B preferred stock accrues dividends at $12.00, or 3%, per annum, payable quarterly on January 15, April 15, July 15 and October 15 of each year, commencing following the first full calendar quarter after the issuance date. Dividends on the Series B preferred stock are cumulative from the date of issuance. For the years ended December 31, 2014, 2013 and 2012, Series B preferred stock dividends amounted to $21.3 million, $21.3 million and $21.3 million respectively, which reduced earnings available to common stockholders for purposes of calculating net loss per common share in each of 2014, 2013 and 2012 (Note 14). Accrued dividends are payable only if declared by our board of directors and, upon conversion by the Series B preferred stockholder, holders will not receive any cash payment representing accumulated dividends. If our board of directors declares a dividend payable, we have the right to pay the dividends in cash, shares of common stock, additional shares of Series B preferred stock or a similar convertible preferred stock or any combination thereof. The Series B preferred stock dividends for each of the years ended December 31, 2014 and 2013 were paid in cash.

The holders of Series B preferred stock have liquidation preferences over the holders of our common stock and other classes of stock, if any, outstanding at the time of liquidation. Upon liquidation, the holders of outstanding Series B preferred stock would receive an amount equal to $400.00 per share of Series B preferred stock, plus any accumulated and unpaid dividends. As of December 31, 2014, the liquidation preference of the outstanding Series B preferred stock was $709.8 million. The holders of the Series B preferred stock have no voting rights, except with respect to matters affecting the Series B preferred stock (including the creation of a senior preferred stock).

We evaluated the terms and provisions of our Series B preferred stock to determine if it qualified for derivative accounting treatment. Based on our evaluation, these securities do not qualify for derivative accounting.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14)  Stockholders’ Equity (Continued)

 

(c)  Share Repurchases

During the first quarter of 2011, we repurchased in the open market and privately-negotiated transactions 183,000 shares of our Series B preferred stock, which were convertible into approximately 1.1 million shares of our common stock, at a cost of approximately $49.4 million, which we paid in cash. The repurchase of the preferred stock at an average cost of $269.84 per preferred share, an amount less than the weighted-average fair value of the preferred shares at issuance, resulted in the allocation of $13.7 million of income attributable to common stockholders. Also during the first quarter of 2011, and pursuant to the same repurchase program, we repurchased 16,700 shares of our common stock at a cost of approximately $0.6 million, which we paid in cash.

During the second quarter of 2011, we repurchased in the open market and privately-negotiated transactions, 174,788 shares of our Series B preferred stock, which were convertible into approximately 1.0 million shares of our common stock, at a cost of approximately $49.7 million, which we paid in cash. The repurchase of the preferred stock at an average cost of $284.28 per preferred share, an amount less than the weighted-average fair value of the preferred shares at issuance, resulted in the allocation of $10.2 million of income attributable to common stockholders. Also during the second quarter of 2011, and pursuant to the same repurchase program, we repurchased 8,300 shares of our common stock at a cost of approximately $0.3 million, which we paid in cash.

During the third quarter of 2011, we repurchased approximately 7.6 million shares of our common stock at a cost of approximately $183.9 million, which we paid in cash.

(d)  Stock Options and Awards

In 2010, we adopted the Alere Inc. 2010 Stock Option and Incentive Plan, or the 2010 Plan, which replaced our 2001 Stock Option and Incentive Plan, or the 2001 Plan. The 2010 Plan currently allows for the issuance of up to 9.2 million shares of common stock and other awards. The 2010 Plan is administered by the Compensation Committee of the Board of Directors, which selects the individuals eligible to receive awards, determines or modifies the terms and conditions of the awards granted, accelerates the vesting schedule of any award and generally administers and interprets the 2010 Plan. The 2010 Plan permits the granting of incentive and nonqualified stock options with terms of up to ten years and the granting of stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, performance share awards and dividend equivalent rights. The 2010 Plan also generally provides for automatic vesting acceleration of all options, and automatic removal of conditions and restrictions on all restricted stock awards, restricted stock units and performance share awards upon a change in control, as defined by the 2010 Plan. As of December 31, 2014 and 2013, there were 2.8 million and 1.1 million shares, respectively, available for future grant under the 2010 Plan.

The following summarizes all stock option activity during the year ended December 31, 2014 (in thousands, except exercise price):

 

     Options     Weighted-
average
Exercise Price
 

Outstanding at January 1,2014

     11,441      $ 37.66   

Granted

     1,287      $ 36.84   

Exercised

     (1,512   $ 28.29   

Canceled/expired/forfeited.

     (3,852   $ 46.68   
  

 

 

   

Outstanding at December 31, 2014

     7,364      $ 34.68   
  

 

 

   

Exercisable at December 31, 2014

     4,548      $ 36.72   
  

 

 

   

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14)  Stockholders’ Equity (Continued)

 

The aggregate intrinsic value of the options outstanding at December 31, 2014 was $42.8 million. The aggregate intrinsic value of the options exercisable at December 31, 2014 was $23.9 million. The aggregate intrinsic value of stock options exercised during 2014, 2013 and 2012 was $14.9 million, $4.5 million and $1.3 million, respectively.

On December 30, 2012, we granted a restricted stock unit, or RSU, award to one of our executive employees in the amount of 110,000 units. The RSU award vests over a three-year period, however, if the executive’s employment is involuntarily terminated, without cause, within three years, the RSU award will accelerate and fully vest. The RSU award will also accelerate and fully vest if the executive terminates his employment voluntarily after one year, other than in the presence of facts or circumstances which would constitute cause for termination by us. The fair value of the RSU award is $18.37 per unit, calculated based on the closing market price of our common stock on the date of grant. The aggregate fair value of the RSU award is expensed on a straight-line basis over the recipient’s service requirement completion period of one year. 10,000 of the units underlying the RSU award have vested as of December 31, 2014.

In addition, on August 31, 2014, October 31, 2014 and December 31, 2014, we granted 385,000, 50,000 and 4,000 RSUs, respectively, to various employees. The fair value of the RSU awards was $35.45 on August 31, 2014, $39.97 on October 31, 2014 and $38.00 on December 31, 2014. Vesting is one-third per year for three years. All of these RSU awards were outstanding on December 31, 2014.

Based on equity awards outstanding as of December 31, 2014, there was $47.4 million of unrecognized compensation costs related to unvested share-based compensation arrangements that are expected to vest. Such costs are expected to be recognized over a weighted-average period of 1.42 years.

(e)  Warrants

The following is a summary of all warrant activity during the three years ended December 31, 2014:

 

    Number of
Shares
    Exercise Price     Weighted-
average
Exercise Price
 
    (in thousands)              

Warrants outstanding and exercisable, December 31, 2011

            162      $ 13.54 - $50.00      $ 14.44   

Exercised

    (158   $ 13.54      $ 13.54   
 

 

 

     

Warrants outstanding and exercisable, December 31, 2012

    4      $ $50.00      $ 50.00   

Exercised

          
 

 

 

     

Warrants outstanding and exercisable, December 31, 2013

    4      $ 50.00      $ 50.00   

Exercised

          
 

 

 

     

Warrants outstanding and exercisable, December 31, 2014

    4      $ 50.00      $ 50.00   
 

 

 

     

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14)  Stockholders’ Equity (Continued)

 

The following table presents additional information related to warrants outstanding and exercisable at December 31, 2014:

 

     Outstanding and Exercisable  

Exercise Price

   Number of
Shares
     Weighted-
average
Remaining
Contract Life
     Weighted-
average
Exercise Price
 
     (in thousands)                

$50.00

             4         1.50       $ 50.00   

The warrants included in the table above were issued in connection with the acquisition of GeneCare. There were no warrants to purchase shares of our common stock outstanding that were issued to officers and directors of our company or entities controlled by these officers and directors at December 31, 2014. All outstanding warrants have been classified in equity.

(f)  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 5.0 million shares of common stock under this plan. At December 31, 2014, 2.9 million shares had been issued under this plan.

(15)  Stock-based Compensation

We recorded stock-based compensation expense in our consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012, respectively, as follows (in thousands):

 

     2014      2013      2012  

Cost of net revenue

   $ 1,180       $ 1,126       $ 1,063   

Research and development

     (41      4,053         3,150   

Sales and marketing

     3,940         3,698         3,464   

General and administrative

     7,373         12,333         7,988   
  

 

 

    

 

 

    

 

 

 
     12,452         21,210         15,665   

Benefit for income taxes

     (2,891      (4,190      (2,660
  

 

 

    

 

 

    

 

 

 

Stock-based compensation, net of tax

   $ 9,561       $ 17,020       $ 13,005   
  

 

 

    

 

 

    

 

 

 

In connection with the departure of three of our senior executives, we recorded a reversal of stock-based compensation expense in the amount of $5.6 million during the second quarter of 2014 relating to the termination of their stock option awards following their resignations. Of the $5.6 million reversal, $2.2 million was recorded through research and development and $3.4 million through general and administrative.

For the years ended December 31, 2014, 2013 and 2012, the presentation of our cash flows reports the excess tax benefits from the exercise of stock options as financing cash flows. For the years ended December 31, 2014, 2013 and 2012, excess tax benefits generated from option exercises amounted to $1.0 million, $0.5 million and $0.5 million, respectively.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(15)  Stock-based Compensation (Continued)

 

The following assumptions were used to estimate the fair value of options granted during the years ended December 31, 2014, 2013 and 2012, using a Black-Scholes option-pricing model:

 

     2014     2013     2012  

Risk-free interest rate

     1.77     1.47     0.83

Expected dividend yield

                     

Expected life

     5.78 years        5.74 years        5.60 years   

Expected volatility

     36     42     42

The weighted-average fair value under a Black-Scholes option pricing model of options granted to employees during 2014, 2013 and 2012 was $19.55, $15.22 and $7.37 per share, respectively. All options granted during these periods were granted at or above the fair market value on the date of grant.

For the year ended December 31, 2014, we recorded compensation expense of $2.6 million related to our Employee Stock Purchase Plan. The fair value of the option component of the Employee Stock Purchase Plan shares was estimated at the date of grant using a Black-Scholes option pricing model and assumed an expected volatility of 35% and 32%, a risk-free interest rate of 0.09% and 0.06% and an expected life of 181 days and 184 days, for each of the two respective offering periods. The 2014 charge is included in the employee’s respective cost classification in the table above.

For the year ended December 31, 2013, we recorded compensation expense of $2.6 million related to our Employee Stock Purchase Plan. The fair value of the option component of the Employee Stock Purchase Plan shares was estimated at the date of grant using a Black-Scholes option pricing model and assumed an expected volatility of 41% and 40%, a risk-free interest rate of 0.12% and 0.09% and an expected life of 181 days and 184 days, for each of the two respective offering periods. The 2013 charge is included in the employee’s respective cost classification in the table above.

For the year ended December 31, 2012, we recorded compensation expense of $2.7 million related to our Employee Stock Purchase Plan. The fair value of the option component of the Employee Stock Purchase Plan shares was estimated at the date of grant using a Black-Scholes option pricing model and assumed an expected volatility of 44% and 47%, a risk-free interest rate of 0.06% and 0.15% and an expected life of 182 days and 184 days, for each of the two respective offering periods. In the first half of 2012 we had a second offering period to accommodate employees of a recent acquisition. The fair value of the option component of the Employee Stock Purchase Plans shares for this offering was estimated at the grant date of March 1, 2012 using a Black-Scholes option pricing model and assumed an expected volatility of 40%, a risk-free rate of 0.10%, and an expected life of 122 days. The 2012 charge is included in the employee’s respective cost classification in the table above.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(16)  Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consisted of the following (in thousands):

 

     Cumulative
Translation
Adjustment
(Note 4(b))
    Pension
Liability
Adjustment
(Note 11(b))
    Other(1)     Accumulated
Other
Comprehensive
Income (Loss)
 

Balance at December 31, 2011

   $ (23,125   $ (5,952   $ (318   $ (29,395

Period change

     54,642        (756     258        54,144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     31,517        (6,708     (60     24,749   

Period change

     (50,166     (309     39        (50,436
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     (18,649     (7,017     (21     (25,687

Period change

     (166,448     4        21        (166,423
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014 (Restated)

   $ (185,097   $ (7,013   $ —        $ (192,110
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other represents unrealized gains (losses) on available-for-sale securities and hedging instruments.

(17)  Income Taxes

Income (loss) before provision (benefit) for income taxes consists of the following (in thousands):

Continuing Operations:

 

     2014
(Restated)
     2013      2012  

United States

   $ (185,560    $ (193,349    $ (106,242

Foreign

     74,216         78,285         37,164   
  

 

 

    

 

 

    

 

 

 
   $ (111,344    $ (115,064    $ (69,078
  

 

 

    

 

 

    

 

 

 

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(17)  Income Taxes (Continued)

 

Our primary temporary differences that give rise to deferred tax assets and liabilities are net operating loss, or NOL and capital loss carryforwards, tax credit carryforwards, nondeductible reserves and accruals, outside basis differences, differences in basis of the tangible and intangible assets. The income tax effects of these temporary differences, are as follows (in thousands):

     2014
(Restated)
    2013  

Deferred tax assets:

    

NOL and capital loss carryforwards

   $ 123,847      $ 133,205   

Outside basis differences

     211,880        -   

Tax credit carryforwards

     123,891        66,357   

Nondeductible reserves

     43,393        31,429   

Nondeductible accruals

     34,284        39,355   

Difference between book and tax bases of tangible assets

     881        2,698   

Difference between book and tax bases of intangible assets

     31,010        27,288   

Deferred revenue

     6,483        12,307   

All other

     18,698        17,563   
  

 

 

   

 

 

 

Gross deferred tax assets

     594,367        330,202   

Less: Valuation allowance

     (269,219     (84,315
  

 

 

   

 

 

 

Total deferred tax assets

     325,148        245,887   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Difference between book and tax bases of tangible assets

     26,260        29,927   

Difference between book and tax bases of intangible assets

     361,357        413,417   

Debt

     12,895        16,712   

Other

     18,150        15,234   
  

 

 

   

 

 

 

Total deferred tax liabilities

     418,662        475,290   
  

 

 

   

 

 

 

Net deferred tax liabilities

   $ 93,514      $ 229,403   
  

 

 

   

 

 

 

Reported as:

    

Deferred tax assets, current portion

   $ 112,573      $ 48,858   

Deferred tax assets, long-term

     8,569        7,389   

Deferred tax liabilities, current portion

     (17     (616

Deferred tax liabilities, long-term

     (214,639     (285,034
  

 

 

   

 

 

 

Net deferred tax liabilities

   $ (93,514   $ (229,403
  

 

 

   

 

 

 

As of December 31, 2014, we recorded a deferred tax asset for tax over book outside basis differences related to our health management business due to the anticipated realization of this deferred tax asset in the foreseeable future. A portion of this deferred tax asset is expected to be capital in nature and, therefore, a valuation allowance was recorded against this portion of the deferred tax asset as it is not more likely than not that these deferred tax assets will be realized. The recognition of this deferred tax asset resulted in recording tax benefit of $144.8 million that has been reflected in income from discontinued operations, net of tax.

As of December 31, 2014, we had $46.9 million of U.S. federal NOL carryforwards, $740.2 million of state NOL carryforwards and $244.8 million of foreign NOL and foreign capital loss carryforwards, which either expire on various dates through 2034 or can be carried forward indefinitely. As of December 31, 2014, we had $14.6 million of U.S. federal and state research and development credit, $108.0 million of U.S. foreign tax credit and $1.3 million of other foreign tax credit carryforwards which

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(17)  Income Taxes (Continued)

 

either expire on various dates through 2034 or can be carried forward indefinitely. These loss and tax credit carryforwards may be available to reduce future U.S. federal, state and foreign taxable income and taxes, if any, and are subject to review and possible adjustment by the appropriate tax authorities. Internal Revenue Code 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 certain ownership changes multiplied by the long-term tax exempt rate. Our U.S. federal NOLs are subject to various Section 382 limitations, however, we forecast we will fully utilize the NOLs before their expiration. Section 383 imposes an annual limitation on the use of credits to an amount equal to the value of the Company at the time of certain ownership changes multiplied by the long-term tax exempt rate. Our U.S. federal credits are subject to various Section 383 limitations. Additionally, certain state and foreign losses and credits may be subject to similar limitations based on local provisions.

During the year ended December 31, 2014, the provision for income taxes of $82.2 million primarily related to the establishment of a valuation allowance of $79.4 million against deferred tax assets associated with our U.S. foreign tax credit carryforwards. This valuation allowance was established as it is more likely than not that these deferred tax assets will not be realized. This decision was based on the weight of all available positive and negative evidence that existed at December 31, 2014.

We recorded a valuation allowance of $269.2 million as of December 31, 2014 due to uncertainties related to the future benefits and realization of our deferred tax assets related primarily to U.S. foreign tax credits, outside basis differences and certain state and foreign attribute carryforwards. This is an increase of $184.9 million from the valuation allowance of $84.3 million as of December 31, 2013. The increase is primarily related to our assessment of realizability related to U.S. foreign tax credits and outside basis differences. The valuation allowance is based on the weight of available positive and negative evidence, including our estimates of future income by the jurisdictions 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 December 2014, our Swiss subsidiary declared and paid a dividend of $43.5 million out of current year earnings to its U.S. parent for which we recorded estimated tax liabilities. The U.S. taxation of the dividend depends on the amount of earnings and profits as well as tax pools at the Swiss subsidiary, which involves numerous complex computations and intercompany transactions, and estimates, and final results could differ.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(17)  Income Taxes (Continued)

 

The estimated amount of undistributed earnings of our foreign subsidiaries is $294.8 million at December 31, 2014. 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 we would be subject to both U.S. income and foreign withholding taxes, subject to possible offset by U.S. foreign tax credits. 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.

The following table presents the components of our provision (benefit) for income taxes (in thousands) for continuing operations:

 

     2014
(Restated)
     2013      2012  

Current:

        

Federal

   $ 33,673       $ 7,371       $ 9,704   

State

     487         (12      9,216   

Foreign

     53,923         58,772         30,922   
  

 

 

    

 

 

    

 

 

 
     88,083         66,131         49,842   
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal

     11,470         (71,904      (42,340

State

     (4,142      (6,513      (4,010

Foreign

     (13,218      (29,728      (14,234
  

 

 

    

 

 

    

 

 

 
     (5,890      (108,145      (60,584
  

 

 

    

 

 

    

 

 

 

Total provision (benefit) for income taxes

   $ 82,193       $ (42,014    $ (10,742
  

 

 

    

 

 

    

 

 

 

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(17)  Income Taxes (Continued)

 

The following table presents a reconciliation from the U.S. statutory tax rate to our effective tax rate:

 

     2014
(Restated)
    2013     2012  

Statutory rate

     35     35     35

Stock-based compensation

     (1     (3     (4

Rate differential on foreign earnings

     3        4        (4

Impact of foreign inclusion

     (2     (3     2   

U.S. federal research and development credit

     1        3        1   

State income taxes, net of federal benefit

     3        (2     2   

Acquisition costs

     —          —          (3

Contingent consideration

     (3     (3     11   

Rate changes

     (2     8        (3

Return to provision

     20        (3     6   

Other permanent items

     3        1        (2

Section 199 deduction

     1        2        —     

Bargain purchase

     —          3        —     

Change in valuation allowance

     (104     (1     (20

Foreign dividends, net

     (2     (3     —     

Uncertain tax positions

     (21     (1     (5

Withholding Taxes

     (5     —          —     
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     (74 )%      37     16
  

 

 

   

 

 

   

 

 

 

The impact on the rate in 2012 through 2014 relating to contingent consideration is due to fair value accounting used for contingent consideration on stock acquisitions with no corresponding basis for tax purposes.

Change in valuation allowances primarily relates to an increase in the valuation allowance attributable to U.S. foreign tax credits, as well as state and foreign losses where it is not more likely than not that these will be realized.

During the year ended December 31, 2014, we increased the gross liability for income taxes associated with uncertain tax positions by $20.8 million to a total of $51.2 million at December 31, 2014. The primary reason for the increase relates to changes in tax return positions on prior year returns.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(17)  Income Taxes (Continued)

 

We classify $47.9 million of income tax liabilities in other long-term liabilities on our consolidated balance sheet at December 31, 2014.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for uncertain tax positions excluding interest and penalties is as follows (in thousands):

 

     Amount  

Balance as of January 1, 2012

   $ 18,549   

Additions for tax positions related to prior years

     1,852   

Additions for tax positions related to current year

     4,775   

Reductions for tax positions related to prior years

     (208

Expiration of statutes of limitations or closure of tax audits

     (1,328
  

 

 

 

Balance as of December 31, 2012

     23,640   

Additions for tax positions related to prior years

     —     

Additions for tax positions related to current year

     7,654   

Reductions for tax positions related to prior years

     (900
  

 

 

 

Balance as of December 31, 2013

     30,394   

Additions for tax positions related to prior years

     20,797   

Additions for tax positions related to current year

     3,217   

Reductions for tax positions related to prior years

     (3,196
  

 

 

 

Balance as of December 31, 2014 (Restated)

   $ 51,212   
  

 

 

 

Included in the balance of unrecognized tax benefits as of December 31, 2014 is $48.9 million of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2014 is $2.3 million of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes. We do not anticipate material increases or decreases to our unrecognized tax benefits during 2015.

We do not anticipate material increases or decreases to our unrecognized tax benefits during 2015.

Interest and penalties related to income tax liabilities are included in income tax expense. The gross interest and penalties recorded in 2014, 2013 and 2012 amounted to $1.1 million, $1.3 million and $0.5 million, respectively. The net balance of accrued interest and penalties recorded on the consolidated balance sheet at December 31, 2014, 2013 and 2012 was $2.3 million, $1.9 million and $0.4 million, respectively.

We are subject to U.S. federal, state and foreign income tax audits by tax authorities for our open years which include 2007 through present. We are currently under income tax examination by a number of state and foreign tax authorities. We cannot currently estimate the impact of these audits due to the uncertainties associated with tax examinations. Management does not expect material changes in tax position as a result of these ongoing audits.

In December 2014, the Tax Increase Prevention Act of 2014 retroactively extended the U.S. federal research and development credit from January 1, 2014 through December 31, 2014. As a result, we recognized the retroactive benefit of the 2014 U.S. federal research and development credit of approximately $1.4 million as a discrete item in the fourth quarter of 2014, the period in which the legislation was enacted.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(18)  Financial Information by Segment

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. Our reportable operating segments are professional diagnostics, patient self-testing, consumer diagnostics and corporate and other. Our operating results include license and royalty revenue which are allocated to professional diagnostics and consumer diagnostics on the basis of the original license or royalty agreement.

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. Revenues are attributed to geographic areas based on where the customer is located. Segment information for 2014, 2013 and 2012 is as follows (in thousands):

 

2014 (Restated)

   Professional
Diagnostics
     Patient
Self-testing
    Consumer
Diagnostics
     Corporate
and
Other
    Total  

Net revenue

   $ 2,341,654       $ 137,096      $ 109,954       $      $ 2,588,704   

Operating income (loss)

   $ 170,631       $ (517   $ 21,389       $ (92,925   $ 98,578   

Depreciation and amortization

   $ 312,077       $ 19,189      $ 1,112       $ 3,455      $ 335,833   

Restructuring charge

   $ 44,273       $ 188      $       $ 14,235      $ 58,696   

Stock-based compensation

   $       $      $       $ 12,452      $ 12,452   

Assets

   $ 5,851,852       $ 472,092      $ 216,451       $ 138,561      $ 6,678,956   

Expenditures for property, plant and equipment

   $ 77,887       $ 1,247      $ 3,360       $ 18,068      $ 100,562   

 

2013

   Professional
Diagnostics
     Patient
Self-testing
    Consumer
Diagnostics
     Corporate
and
Other
    Total  

Net revenue

   $ 2,387,638       $ 123,647      $ 105,079       $      $ 2,616,364   

Operating income (loss)

   $ 247,989       $ (17,224   $ 12,122       $ (91,345   $ 151,542   

Depreciation and amortization

   $ 348,635       $ 20,374      $ 4,330       $ 1,134      $ 374,473   

Restructuring charge

   $ 12,606       $ 1,584      $       $      $ 14,190   

Stock-based compensation

   $       $      $       $ 21,210      $ 21,210   

Assets

   $ 5,746,021       $ 501,673      $ 197,458       $ 616,933      $ 7,062,085   

Expenditures for property, plant and equipment

   $ 86,415       $ 1,942      $ 1,645       $ 9,906      $ 99,908   

 

2012

   Professional
Diagnostics
     Patient
Self-testing
    Consumer
Diagnostics
     Corporate
and
Other
    Total  

Net revenue

   $ 2,191,375       $ 109,485      $ 93,511       $      $ 2,394,371   

Operating income (loss)

   $ 244,563       $ (23,865   $ 12,707       $ (73,223   $ 160,182   

Depreciation and amortization

   $ 355,957       $ 23,480      $ 3,455       $ 1,008      $ 383,900   

Restructuring charge

   $ 11,124       $ (80   $       $ (2   $ 11,042   

Stock-based compensation

   $       $      $       $ 15,665      $ 15,665   

Assets

   $ 6,215,595       $ 589,211      $ 192,748       $   67,161      $ 7,064,715   

Expenditures for property, plant and equipment

   $ 90,568       $ 13,664      $ 2,823       $ 2,042      $ 109,097   

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(18)  Financial Information by Segment (Continued)

 

The following tables summarize our net revenue from the professional diagnostics and patient self-testing reporting segments by groups of similar products and services for 2014, 2013 and 2012 (in thousands):

Professional Diagnostics Segment

 

    2014
(Restated)
    2013     2012  

Infectious disease

  $ 711,369      $ 721,754      $ 615,950   

Toxicology

    627,755        631,244        588,744   

Cardiometabolic

    442,742        462,725        503,534   

Diabetes

    197,476        225,488        144,441   

Other

    342,574        321,495        314,030   
 

 

 

   

 

 

   

 

 

 

Professional diagnostics net product sales

and services revenue

    2,321,916        2,362,706        2,166,699   

License and royalty revenue

    19,738        24,932        24,676   
 

 

 

   

 

 

   

 

 

 

Professional diagnostics net revenue

  $ 2,341,654      $ 2,387,638      $ 2,191,375   
 

 

 

   

 

 

   

 

 

 

Patient Self-testing Segment

 

    2014
(Restated)
    2013     2012  

Patient self-testing services

  $ 116,779      $ 102,919      $ 90,088   

Other

    20,317        20,728        19,397   
 

 

 

   

 

 

   

 

 

 

Patient self-testing services net revenue

  $    137,096      $    123,647      $    109,485   
 

 

 

   

 

 

   

 

 

 

As a result of the sales of our health management business in January 2015 and ACS in October 2014, our former health information solutions segment, now referred to as our patient self-testing segment, consists primarily of our Alere Home Monitoring patient self-testing services.

The following tables summarize our net revenue by geographic area for 2014, 2013 and 2012, respectively, and our long-lived tangible assets by geographic area as of December 31, 2014 and 2013, respectively (in thousands):

 

    2014
(Restated)
    2013     2012  

Revenue by Geographic Area:

     

United States

  $ 1,363,886      $ 1,447,762      $ 1,300,311   

Europe

    532,944        508,484        483,857   

Elsewhere(1)

    691,874        660,118        610,203   
 

 

 

   

 

 

   

 

 

 
  $ 2,588,704      $ 2,616,364      $ 2,394,371   
 

 

 

   

 

 

   

 

 

 

 

(1) Includes, among many others, the following countries: China, India, Japan, South Korea, Brazil, Canada, and Australia.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(18)  Financial Information by Segment (Continued)

 

     December 31,  
     2014
(Restated)
     2013  

Long-lived Tangible Assets by Geographic Area:

     

United States

   $ 251,731       $ 227,656   

United Kingdom

     28,092         39,599   

China

     29,505         30,285   

Elsewhere(1)

     144,242         168,957   
  

 

 

    

 

 

 
   $ 453,570       $ 466,497   
  

 

 

    

 

 

 

 

(1) Includes, among many others, the following countries: Germany, Norway, South Korea, Canada, and Brazil.

(19)  Other Arrangements

In September 2014, we entered into a contract with the U.S. Department of Health and Human Services’ Biomedical Advanced Research and Development Authority (BARDA) to develop diagnostic countermeasures for pandemic influenza. Under the terms of the 3.5 year contract, BARDA will provide up to $12.9 million to us to support the development of a rapid, molecular, low-cost influenza diagnostic device with PCR-like performance at the point-of-care. The project is designed to help support future preparedness and medical response to an influenza pandemic. Funding from BARDA is subject to successful completion of various interim feasibility and development milestones as defined in the agreement. As of December 31, 2014, we had incurred $0.4 million of qualified expenditures under the contract, for which we had received cash reimbursement from BARDA in the amount of $0.1 million, and $0.3 million was recorded as a receivable as of this date. Reimbursements of qualified expenditures under this contract are recorded as a reduction of our related qualified research and development expenditures.

In February 2013, we entered into an agreement with the Bill and Melinda Gates Foundation, or the Gates Foundation, whereby we were awarded a grant by the Gates Foundation in the amount of $21.6 million to support the development and commercialization of a validated, low-cost, nucleic-acid assay for clinical Tuberculosis, or TB, detection and drug-resistance test cartridges and adaptation of an analyzer platform capable of operation in rudimentary laboratories in low-resource settings. In connection with this agreement, we also entered into a loan agreement with the Gates Foundation, or the Gates Loan Agreement, which provides for the making of subordinated term loans by the Gates Foundation to us from time to time, subject to the achievement of certain milestones, in an aggregate principal amount of up to $20.6 million. Funding under the Gates Loan Agreement will be used in connection with the purchase of equipment for an automated high-throughput manufacturing line and other uses as necessary for the manufacture of the TB and HIV-related products. All loans under the Gates Loan Agreement are evidenced by promissory notes that we have executed and delivered to the Gates Foundation, bear interest at the rate of 3% per annum and, except to the extent earlier repaid by us, mature and are required to be repaid in full on December 31, 2019. As of December 31, 2014, we had borrowed no amounts under the Gates Loan Agreement. As of December 31, 2014, we had received approximately $17.4 million in grant-related funding from the Gates Foundation, which was recorded as restricted cash and deferred grant funding. The deferred grant funding is classified within accrued expenses and other current liabilities on our accompanying consolidated balance sheet. As qualified expenditures are incurred under the terms of the grant, we use the deferred funding to recognize a reduction of our related qualified research and development expenditures. For the year

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(19)  Other Arrangements (Continued)

 

ended December 31, 2014, we incurred approximately $9.5 million of qualified expenditures, for which we reduced our deferred grant funding balance and recorded an offset to our research and development expenses. For the year ended December 31, 2013, we incurred approximately $6.6 million of qualified expenditures, for which we reduced our deferred grant funding balance and recorded an offset to our research and development expenses.

(20)  Related Party Transactions

(a)  Divestiture of ACS Companies

On October 10, 2014, we completed the sale of our ACS subsidiary to ACS Acquisition, LLC (the “Purchaser”), pursuant to the terms of a Membership Interest Purchase Agreement with the Purchaser and Sumit Nagpal. In connection with the sale of ACS, we also agreed to sell our subsidiary Wellogic ME FZ – LLC (“Wellogic,” together with ACS, the “ACS Companies”) to the Purchaser, subject to the satisfaction of routine requirements of Dubai law relating to the transfer of equity. See Note 3.

Mr. Nagpal is a director of Wellogic and served as the chief executive officer and a director of ACS until his resignation on September 2, 2014. Mr. Nagpal was also the owner of Method Factory, Inc., the company that sold the business and assets of ACS to Alere in 2011 and that sold Wellogic to Alere in 2012.

(b)  SPD Joint Venture

In May 2007, we completed the formation of SPD Swiss Precision Diagnostics GmbH, or SPD, our 50/50 joint venture with Procter & Gamble, or P&G, for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products, outside the cardiometabolic, diabetes and oral care fields. Upon completion of the arrangement to form the joint venture, we ceased to consolidate the operating results of our consumer diagnostic products business related to the joint venture and instead account for our 50% interest in the results of the joint venture under the equity method of accounting.

We had a net payable to SPD of $4.0 million as of December 31, 2014 and a net receivable from SPD of $2.1 million as of December 31, 2013. Included in the $4.0 million payable balance as of December 31, 2014 is a receivable of approximately $1.6 million for costs incurred in connection with our 2008 SPD-related restructuring plans. Included in the $2.1 million receivable balance as of December 31, 2013 is approximately $1.8 million of costs incurred in connection with our 2008 SPD-related restructuring plans. We have also recorded a long-term receivable totaling approximately $10.9 million and $13.2 million as of December 31, 2014 and 2013, respectively, related to the 2008 SPD-related restructuring plans. Additionally, customer receivables associated with revenue earned after the formation of the joint venture was completed have been classified as other receivables within prepaid and other current assets on our consolidated balance sheets in the amount of $9.6 million and $12.4 million as of December 31, 2014 and 2013, respectively. In connection with the joint venture arrangement, the joint venture bears the collection risk associated with these receivables. Sales to the joint venture under our manufacturing agreement totaled $83.2 million, $78.0 million and $63.6 million during the years ended December 31, 2014, 2013 and 2012, respectively. Additionally, services revenue generated pursuant to the long-term services agreement with the joint venture totaled $1.3 million, $1.3 million and $1.1 million during the years ended December 31, 2014, 2013 and 2012, respectively. Sales under our manufacturing agreement and long-term services agreement are included in net product sales and services revenue, respectively, in our accompanying consolidated statements of operations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(20)  Related Party Transactions (Continued)

 

Under the terms of our product supply agreement, SPD purchases products from our manufacturing facilities in China. SPD in turn sells a portion of those tests back to us for final assembly and packaging. Once packaged, a portion of the tests are sold to P&G for distribution to third-party customers in North America. As a result of these related transactions, we have recorded $10.5 million and $9.4 million of trade receivables which are included in accounts receivable on our consolidated balance sheets as of December 31, 2014 and 2013, respectively, and $30.8 million and $18.8 million of trade accounts payable which are included in accounts payable on our consolidated balance sheets as of December 31, 2014 and 2013, respectively. During 2013, we received $28.0 million in cash from SPD as a return of capital.

The following table summarizes our related party balances with SPD within our consolidated balance sheets (in thousands):

 

Balance Sheet Caption

   As of December 31,  
   2014      2013  

Accounts receivable, net of allowances

   $ 10,465       $ 11,510   

Prepaid expenses and other current assets

   $ 9,635       $ 12,417   

Deferred financing costs, net, and other non-current assets

   $ 10,875       $ 13,249   

Accounts payable

   $ 34,816       $ 18,811   

(c)  Entrustment Loan Arrangement with SPD Shanghai

Alere (Shanghai) Diagnostics Co., Ltd., or Alere Shanghai, and SPD Trading (Shanghai) Co., Ltd., or SPD Shanghai, entered into an entrustment loan arrangement for a maximum of CNY 23 million (approximately $3.8 million at December 31, 2014), in order to finance the latter’s short-term working capital needs, with the Royal Bank of Scotland (China) Co., Ltd. Shanghai Branch, or RBS. The agreement governs the setting up of an Entrustment Loan Account with RBS, into which Alere Shanghai deposits certain monies. This restricted cash account provides a guarantee to RBS of amounts borrowed from RBS by SPD Shanghai. The Alere Shanghai RBS account is recorded as restricted cash on Alere Shanghai’s balance sheet and amounted to $1.7 million at December 31, 2014.

(21)  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 (in thousands):

 

     Balance at
Beginning of
Period
     Provision      Amounts
Charged
Against
Reserves
    Balance at
End of
Period
 

Year ended December 31, 2012

   $ 15,485       $ 39,206       $ (24,618   $ 30,073   

Year ended December 31, 2013

   $ 30,073       $ 65,643       $ (26,570   $ 69,146   

Year ended December 31, 2014

   $ 69,146       $ 42,477       $ (35,460   $ 76,163   

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(21)  Valuation and Qualifying Accounts (Continued)

 

We have established reserves against obsolete and slow-moving inventories. The activity in the table below includes all inventory reserves. Provisions for obsolete and slow-moving inventories are recorded as a component of cost of net product sales. The following table sets forth activities in our inventory reserve accounts (in thousands):

 

     Balance at
Beginning of
Period
     Provision      Amounts
Charged
Against
Reserves
    Balance at
End of
Period
 

Year ended December 31, 2012

   $ 13,609       $ 13,587       $ (5,374   $ 21,822   

Year ended December 31, 2013

   $ 21,822       $ 3,286       $ (3,671   $ 21,437   

Year ended December 31, 2014

   $ 21,437       $ 12,818       $ (6,907   $ 27,348   

We have established a valuation allowance against our deferred tax assets based on the weight of available positive and negative evidence, including our estimates of future income by the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. The following table sets forth activities in our deferred tax accounts (in thousands):

 

     Balance at
Beginning of
Period
     Additions
(Reversals)
     Amounts
Charged
Against
Other
Accounts
    Balance at
End of
Period
 

Year ended December 31, 2012

   $ 51,579       $ 27,418       $ (3,542   $ 75,455   

Year ended December 31, 2013

   $ 75,455       $ 5,598       $ 3,262      $ 84,315   

Year ended December 31, 2014 (Restated)

   $ 84,315       $ 184,040       $ 864      $ 269,219   

(22)  Restructuring Activities

The following table sets forth aggregate restructuring charges recorded in our consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012 (in thousands):

 

Statement of Operations Caption

   2014      2013      2012  

Cost of net revenue

   $ 11,760       $ 6,145       $ 2,330   

Research and development

     9,800         1,795         1,278   

Sales and marketing

     11,350         1,550         2,075   

General and administrative

     25,786         4,953         5,489   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     58,696         14,443         11,172   

Interest expense, including amortization of original issue discounts and deferred financing costs

     42         58         132   
  

 

 

    

 

 

    

 

 

 

Total charges

   $ 58,738       $ 14,501       $ 11,304   
  

 

 

    

 

 

    

 

 

 

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(22)  Restructuring Activities (Continued)

 

(a)  2014 Restructuring Plans

In 2014, management developed world-wide cost reduction plans to reduce costs and improve operational efficiencies within our professional diagnostics, patient self-testing and corporate and other business segments, primarily impacting our global sales and marketing, information technology, and research and development groups, as well as closing certain business locations in Europe and Asia. The following table summarizes the restructuring activities related to our 2014 restructuring plans for the year ended December 31, 2014 (in thousands):

 

     Professional
Diagnostics
     Patient
Self-testing
     Corporate
and Other
     Total  

Severance-related costs

   $ 27,618       $ 188       $ 2,901       $ 30,707   

Facility and transition costs

     3,460                11,335         14,795   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges

     31,078         188         14,236         45,502   

Fixed asset and inventory impairments

     10,952                       10,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 42,030       $ 188       $ 14,236       $ 56,454   
  

 

 

    

 

 

    

 

 

    

 

 

 

We anticipate incurring approximately $14.0 million in additional costs under our 2014 restructuring plans related to our professional diagnostics business segment, including in connection with the closure of our facility in Israel and several locations in Europe. We do not anticipate incurring significant additional costs under our existing 2014 restructuring plans relating to our corporate and other and patient self-testing business segments. As of December 31, 2014, $13.8 million in severance and transition costs arising under our 2014 restructuring plans remain unpaid.

(b)  2013 Restructuring Plans

In 2013, management developed cost reduction plans within our professional diagnostics business and patient self-testing business segments, impacting businesses in our U.S., Europe and Asia Pacific regions. The following tables summarize the restructuring activities in our professional diagnostics and patient self-testing business segments related to our 2013 restructuring plans for the years ended December 31, 2014 and 2013 and since inception (in thousands):

 

Professional Diagnostics

   2014      2013      Since
Inception
 

Severance-related costs

   $ 1,167       $ 7,126       $ 8,293   

Facility and transition costs

     614         2,581         3,195   
  

 

 

    

 

 

    

 

 

 

Cash charges

     1,781         9,707         11,488   

Fixed asset and inventory impairments

     39         743         782   
  

 

 

    

 

 

    

 

 

 

Total charges

   $ 1,820       $ 10,450       $ 12,270   
  

 

 

    

 

 

    

 

 

 

 

Patient Self-testing

   2014      2013      Since
Inception
 

Severance-related costs

   $       $ 88       $ 88   

Facility and transition costs

            241         241   
  

 

 

    

 

 

    

 

 

 

Cash charges

            329         329   

Fixed asset and inventory impairments

            800         800   
  

 

 

    

 

 

    

 

 

 

Total charges

   $       —       $   1,129       $   1,129   
  

 

 

    

 

 

    

 

 

 

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(22)  Restructuring Activities (Continued)

 

We do not anticipate incurring significant additional costs under our 2013 restructuring plans related to our professional diagnostics and patient self-testing business segments. As of December 31, 2014, $0.3 million in severance and facility costs arising under our 2013 restructuring plans remain unpaid.

(c)  Restructuring Plans Prior to 2013

In 2012, management developed cost reduction plans within our professional diagnostics business segment, including the integration of our businesses in Brazil, Europe and the United States. Additionally, management developed new plans to continue our efforts to reduce costs within our patient self-testing business segment.

In 2011, management also developed plans within our professional diagnostics business segment to consolidate operating activities among certain of our U.S., European and Asia Pacific subsidiaries, including transferring the manufacturing of our Panbio products from Australia to our Standard Diagnostics facility in South Korea and eliminating redundant costs among our newly-acquired Axis-Shield subsidiaries. Additionally, within our patient self-testing business segment, management executed plans to transfer the majority of our Quality Assured Services, Inc. operation in Orlando, Florida to our facility in Livermore, California.

In 2008, management developed and initiated plans to transition the business of Cholestech to our San Diego, California facility, which impacted our professional diagnostics business segment.

The following table summarizes the restructuring activities related to our active 2012, 2011 and 2008 restructuring plans for the years ended December 31, 2014, 2013, 2012 and since inception (in thousands):

 

Professional Diagnostics

   2014      2013      2012      Since
Inception
 

Severance-related costs (recoveries)

   $ 98       $ (253    $ 7,874       $ 24,290   

Facility and transition costs

     324         1,416         2,240         9,086   

Other exit costs

     42         58         132         798   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges

     464         1,221         10,246         34,174   

Fixed asset and inventory impairments

            308         1,008         6,922   

Intangible asset impairments

            686                686   

Other non-cash charges

                          64   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 464       $ 2,215       $ 11,254       $ 41,846   
  

 

 

    

 

 

    

 

 

    

 

 

 

Patient Self-testing

   2014      2013      2012      Since
Inception
 

Severance-related costs

   $      $ 707       $ 715       $ 2,120   

Facility and transition costs (recoveries)

                   (750      1,837   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges (recoveries)

            707         (35      3,957   

Fixed asset and inventory impairments

                   85         145   

Other non-cash recoveries

                          (51
  

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $      $ 707       $ 50       $ 4,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

We do not anticipate incurring significant additional costs under these plans related to our professional diagnostics and patient self-testing business segments. As of December 31, 2014, $0.7 million in cash charges remain unpaid, primarily related to facility lease obligations, which are anticipated to continue through 2017.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(22)  Restructuring Activities (Continued)

 

(d)  Restructuring Reserves

The following table summarizes our restructuring reserves related to the plans described above, of which $14.2 million is included in accrued expenses and other current liabilities and $0.5 million is included in other long-term liabilities on our consolidated balance sheets (in thousands):

 

     Severance-
related
Costs
    Facility and
Transition
Costs
    Other Exit
Costs
    Total  

Balance, December 31, 2011

   $ 3,171      $ 1,863      $ 366      $ 5,400   

Cash charges

     8,589        1,490        132        10,211   

Payments

     (9,735     (3,113     (83     (12,931

Currency adjustments

     (14     16               2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

     2,011        256        415        2,682   

Cash charges

     7,668        4,238        58        11,964   

Payments

     (8,573     (2,725     (106     (11,404

Currency adjustments

     (114     12               (102
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

     992        1,781        367        3,140   

Cash charges

     31,972        15,733        42        47,747   

Payments

     (27,394     (7,345     (119     (34,858

Currency adjustments

     (980     (301            (1,281
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

   $ 4,590      $ 9,868      $ 290      $ 14,748   
  

 

 

   

 

 

   

 

 

   

 

 

 

(23)  Equity Investments

We account for the results from our equity investments under the equity method of accounting in accordance with Accounting Standards Codification, or ASC, 323, Investments — Equity Method and Joint Ventures, based on the percentage of our ownership interest in the business. Our equity investments primarily include the following:

(a)  SPD

We recorded earnings of $16.2 million, $15.0 million and $10.7 million for the years ended December 31, 2014, 2013 and 2012, respectively, in equity earnings of unconsolidated entities, net of tax, in our consolidated statements of operations, which represented our 50% share of SPD’s net income for the respective periods.

(b)  TechLab

We own 49% of TechLab, Inc., or TechLab, a privately-held developer, manufacturer and distributor of rapid non-invasive intestinal diagnostics tests in the areas of intestinal inflammation, antibiotic-associated diarrhea and parasitology. We recorded earnings of $1.6 million, $2.0 million and $2.3 million for the years ended December 31, 2014, 2013 and 2012, respectively, in equity earnings of unconsolidated entities, net of tax, in our consolidated statements of operations, which represented our minority share of TechLab’s net income for the respective periods.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(23)  Equity Investments (Continued)

 

Summarized financial information for SPD and TechLab on a combined basis is as follows (in thousands):

Combined Condensed Results of Operations:

 

     For The Years Ended December 31,  
     2014      2013      2012  

Net revenue

   $ 211,370       $ 203,115       $ 212,955   
  

 

 

    

 

 

    

 

 

 

Gross profit

   $ 160,192       $ 152,698       $ 139,694   
  

 

 

    

 

 

    

 

 

 

Net income after taxes

   $ 35,646       $ 34,079       $ 26,056   
  

 

 

    

 

 

    

 

 

 

Combined Condensed Balance Sheets:

 

     As of December 31,  
     2014      2013  

Current assets

   $ 90,546       $ 63,985   

Non-current assets

     33,697         38,541   
  

 

 

    

 

 

 

Total assets

   $ 124,243       $ 102,526   
  

 

 

    

 

 

 

Current liabilities

   $ 35,954       $ 38,053   

Non-current liabilities

     5,884         6,175   
  

 

 

    

 

 

 

Total liabilities

   $ 41,838       $ 44,228   
  

 

 

    

 

 

 

(24)  Impairment and Gain (Loss) on Dispositions, Net

In December 2014, our management decided to close our Alere Connect, LLC subsidiary located in Scottsdale, Arizona. In connection with this decision, we recorded an impairment charge of $10.8 million, including write-offs of intangible assets of $7.3 million, inventories of $1.6 million and other assets of $0.5 million, and an accrual for divestiture-related commitments of $1.4 million.

In November 2014, we sold BioNote to the former owner of that company who was also its Chief Executive Officer while it was owned by Alere. We received cash consideration of KRW 48 billion (approximately $43.2 million at the date of disposition), resulting in a gain on disposition of $6.5 million.

In October 2014, we sold our subsidiary Mologic Ltd., located in the United Kingdom, to former owners of the company who were also members of management while it was owned by Alere. The consideration received was nominal, resulting in a loss on disposition of $2.8 million.

In April 2014, we sold the Glucostabilizer business of Alere Informatics, Inc., which was part of our professional diagnostics reporting unit and business segment, to Medical Decision Network, LLC, or MDN, for $1.1 million in cash proceeds and a $1.5 million note receivable, which we fully reserved for based on our assessment of collectability. As a result of this transaction, we recorded a loss on disposition of $0.6 million during the year ended December 31, 2014.

The financial results for the above businesses are immaterial to our consolidated financial results.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24)  Impairment and Gain (Loss) on Dispositions, Net (Continued)

 

In July 2013, we sold our Spinreact operations located in Spain, which was part of our professional diagnostics reporting unit and business segment, for approximately $33.4 million in proceeds and, as a result of this transaction, we recorded a loss on disposition of $5.1 million during 2013. The financial results for our Spinreact operations are immaterial to our consolidated financial results.

(25)  Supplemental Cash Flow Information

Cash Paid for Interest and Income Taxes:

During 2014, 2013 and 2012, we made cash payments for interest totaling $192.1 million, $206.3 million and $205.0 million, respectively.

During 2014, 2013 and 2012, total net cash paid for income taxes was $58.8 million, $49.1 million and $31.9 million, respectively.

During 2012, we issued shares of our common stock in connection with the settlement of an acquisition-related contingent consideration obligation (dollars in thousands):

 

     Common Stock Issued  

Contingent Consideration Obligation

   Number of
Shares
     Fair Value of
Shares
 

Mologic

     66,666       $ 1,243   

(26)  Guarantor Financial Information

Our 7.25% senior notes due 2018, our 8.625% senior subordinated notes due 2018 and our 6.5% senior subordinated notes due 2020 are guaranteed by certain of our consolidated wholly owned subsidiaries, or the Guarantor Subsidiaries. The guarantees are full and unconditional and joint and several. The following supplemental financial information sets forth, on a consolidating basis, audited balance sheets as of December 31, 2014 and 2013, the related statements of operations, statements of comprehensive loss and cash flows for each of the three years in the period ended December 31, 2014, respectively, for Alere Inc., the Guarantor Subsidiaries and our other subsidiaries, or the Non-Guarantor Subsidiaries. The supplemental financial information reflects the investments of Alere Inc. and the Guarantor Subsidiaries 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 intercompany 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.

For comparative purposes, certain amounts for prior periods have been reclassified to conform to the current period classification.

 

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ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the Year Ended December 31, 2014 (Restated)

(in thousands)

 

    Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

  $      $ 853,056      $ 1,419,676      $ (237,066   $ 2,035,666   

Services revenue

           464,283        67,705               531,988   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

           1,317,339        1,487,381        (237,066     2,567,654   

License and royalty revenue

           13,477        19,846        (12,273     21,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

           1,330,816        1,507,227        (249,339     2,588,704   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

    5,328        472,567        804,208        (212,681     1,069,422   

Cost of services revenue

    261        288,288        33,388        (27,184     294,753   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and
services revenue

    5,589        760,855        837,596        (239,865     1,364,175   

Cost of license and royalty revenue

    40        199        17,625        (12,272     5,592   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

    5,629        761,054        855,221        (252,137     1,369,767   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (5,629     569,762        652,006        2,798        1,218,937   

Operating expenses:

         

Research and development

    23,190        61,862        59,776               144,828   

Sales and marketing

    7,598        232,406        273,797               513,801   

General and administrative

    93,952        155,794        204,242               453,988   

Impairment and (gain) loss on
dispositions, net

    4,236        11,393        (7,887            7,742   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (134,605     108,307        122,078        2,798        98,578   

Interest expense, including amortization of original issue discounts and deferred financing costs

    (205,919     (18,995     (18,629     34,352        (209,191

Other income (expense), net

    13,625        21,633        (1,573     (34,416     (731
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision (benefit) for income taxes

    (326,899     110,945        101,876        2,734        (111,344

Provision (benefit) for income taxes

    (12,330     44,155        49,347        1,021        82,193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before equity in earnings of subsidiaries and unconsolidated entities, net of tax

    (314,569     66,790        52,529        1,713        (193,537

Equity in earnings of subsidiaries, net of tax

    129,391                      (129,391       

Equity earnings of unconsolidated entities, net of tax

    1,717               15,928        (136     17,509   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (183,461     66,790        68,457        (127,814     (176,028

Income (loss) from discontinued operations, net of tax

    145,751        (27,839     20,400        6        138,318   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (37,710     38,951        88,857        (127,808     (37,710

Less: Net income attributable to non-controlling interests

                  30               30   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Alere Inc. and Subsidiaries

    (37,710     38,951        88,827        (127,808     (37,740

Preferred stock dividends

    (21,293                          (21,293
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

  $ (59,003   $ 38,951      $ 88,827      $ (127,808   $ (59,033
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the Year Ended December 31, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $      $ 880,713      $ 1,362,853      $ (187,047   $ 2,056,519   

Services revenue

            454,989        77,627               532,616   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

            1,335,702        1,440,480        (187,047     2,589,135   

License and royalty revenue

            20,611        19,657        (13,039     27,229   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

            1,356,313        1,460,137        (200,086     2,616,364   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     4,458        475,441        703,766        (166,164     1,017,501   

Cost of services revenue

     47        257,588        35,413        (19,003     274,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     4,505        733,029        739,179        (185,167     1,291,546   

Cost of license and royalty revenue

            69        20,732        (13,038     7,763   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     4,505        733,098        759,911        (198,205     1,299,309   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (4,505     623,215        700,226        (1,881     1,317,055   

Operating expenses:

          

Research and development

     21,971        65,752        71,330               159,053   

Sales and marketing

     6,340        255,949        303,848               566,137   

General and administrative

     76,076        141,877        217,246               435,199   

Loss on disposition

                   5,124               5,124   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (108,892     159,637        102,678        (1,881     151,542   

Interest expense, including amortization of original issue discounts and deferred financing costs

     (252,791     (25,582     (11,192     34,219        (255,346

Other income (expense), net

     (10,759     24,071        9,647        (34,219     (11,260
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision (benefit) for income taxes

     (372,442     158,126        101,133        (1,881     (115,064

Provision (benefit) for income taxes

     (164,618     81,187        42,038        (621     (42,014
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before equity in earnings (losses) of subsidiaries and unconsolidated entities, net of tax

     (207,824     76,939        59,095        (1,260     (73,050

Equity in earnings (losses) of subsidiaries, net of tax

     134,003        (2,948            (131,055       

Equity earnings of unconsolidated entities, net of tax

     1,890               15,470        83        17,443   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (71,931     73,991        74,565        (132,232     (55,607

Income (loss) from discontinued operations, net of tax

     198        (14,370     (1,954            (16,126
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (71,733     59,621        72,611        (132,232     (71,733

Less: Net income attributable to non-controlling interests

                   976               976   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Alere Inc. and Subsidiaries

     (71,733     59,621        71,635        (132,232     (72,709

Preferred stock dividends

     (21,293                          (21,293
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (93,026   $ 59,621      $ 71,635      $ (132,232   $ (94,002
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-84


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the Year Ended December 31, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $      $ 856,094      $ 1,187,054      $ (143,235   $ 1,899,913   

Services revenue

            400,989        64,893               465,882   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

            1,257,083        1,251,947        (143,235     2,365,795   

License and royalty revenue

            18,848        17,958        (8,230     28,576   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

            1,275,931        1,269,905        (151,465     2,394,371   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     6,040        409,889        639,183        (134,495     920,617   

Cost of services revenue

            195,564        30,363        (5,417     220,510   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     6,040        605,453        669,546        (139,912     1,141,127   

Cost of license and royalty revenue

            36        15,548        (8,230     7,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     6,040        605,489        685,094        (148,142     1,148,481   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (6,040     670,442        584,811        (3,323     1,245,890   

Operating expenses:

          

Research and development

     24,593        70,245        86,897               181,735   

Sales and marketing

     4,415        259,790        292,389               556,594   

General and administrative

     52,079        113,604        181,696               347,379   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (87,127     226,803        23,829        (3,323     160,182   

Interest expense, including amortization of original issue discounts and deferred financing costs

     (236,320     (39,411     (13,080     48,414        (240,397

Other income (expense), net

     (16,655     41,658        34,548        (48,414     11,137   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision (benefit) for income taxes

     (340,102     229,050        45,297        (3,323     (69,078

Provision (benefit) for income taxes

     (107,331     74,824        22,720        (955     (10,742
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before equity in earnings (losses) of subsidiaries and unconsolidated entities,
net of tax

     (232,771     154,226        22,577        (2,368     (58,336

Equity in earnings (losses) of subsidiaries, net of tax

     153,740        (1,574            (152,166       

Equity earnings of unconsolidated entities, net of tax

     2,205               10,952        88        13,245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (76,826     152,652        33,529        (154,446     (45,091

Loss from discontinued operations, net of tax

     (1,391     (29,011     (2,724            (33,126
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (78,217     123,641        30,805        (154,446     (78,217

Less: Net income attributable to non-controlling interests

                   275               275   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Alere Inc. and Subsidiaries

     (78,217     123,641        30,530        (154,446     (78,492

Preferred stock dividends

     (21,293                          (21,293
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (99,510   $ 123,641      $ 30,530      $ (154,446   $ (99,785
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-85


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Year Ended December 31, 2014 (Restated)

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (37,710   $ 38,951      $ 88,857      $ (127,808   $ (37,710
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss,
before tax:

          

Changes in cumulative translation adjustment

     (489     (516     (165,443            (166,448

Unrealized losses on available for sale securities

            (17                   (17

Unrealized gains on hedging instruments

                   38               38   

Minimum pension liability adjustment

                   (169            (169
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax

     (489     (533     (165,574            (166,596

Income tax benefit related to items of other comprehensive loss

                   (173            (173
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (489     (533     (165,401            (166,423
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (38,199   $ 38,418      $ (76,544     (127,808     (204,133

Less: Comprehensive income attributable to non-controlling interests

                   30               30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Alere Inc. and Subsidiaries

   $ (38,199   $ 38,418      $ (76,574   $ (127,808   $ (204,163
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-86


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Year Ended December 31, 2013

(in thousands)

 

    Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

  $ (71,733   $ 59,621      $ 72,611      $ (132,232   $ (71,733
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss,
before tax:

         

Changes in cumulative translation adjustment

    (550     (619     (48,998     1        (50,166

Unrealized gains on hedging instruments

                  39               39   

Minimum pension liability adjustment

                  (415            (415
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss,
before tax

    (550     (619     (49,374     1        (50,542

Income tax benefit related to items of other comprehensive loss

                  (106            (106
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss,
net of tax

    (550     (619     (49,268     1        (50,436
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

    (72,283     59,002        23,343        (132,231     (122,169

Less: Comprehensive income attributable to non-controlling interests

                  976               976   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Alere Inc. and Subsidiaries

  $ (72,283   $ 59,002      $ 22,367      $ (132,231   $ (123,145
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-87


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Year Ended December 31, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (78,217   $ 123,641      $ 30,805      $ (154,446   $ (78,217
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss),
before tax:

          

Changes in cumulative translation adjustment

     (834     (302     53,654        2,124        54,642   

Unrealized gains (losses) on available for sale securities

     (221     5                      (216

Unrealized gains on hedging instruments

     16               372               388   

Minimum pension liability adjustment

                   (1,042            (1,042
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     (1,039     (297     52,984        2,124        53,772   

Income tax benefit related to items of other
comprehensive loss

     (86            (286            (372
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (953     (297     53,270        2,124        54,144   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (79,170     123,344        84,075        (152,322     (24,073

Less: Comprehensive income attributable to non-controlling interests

                   275               275   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Alere Inc. and Subsidiaries

   $ (79,170   $ 123,344      $ 83,800      $ (152,322   $ (24,348
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-88


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING BALANCE SHEET

December 31, 2014 (Restated)

(in thousands)

 

    Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

         

Current assets:

         

Cash and cash equivalents

  $ 2,149      $ 69,154      $ 307,158      $      $ 378,461   

Restricted cash

    5,012               32,559               37,571   

Marketable securities

           259                      259   

Accounts receivable, net of allowances

           192,775        273,331               466,106   

Inventories, net

           191,323        195,606        (21,764     365,165   

Deferred tax assets

    36,347        44,961        31,265               112,573   

Prepaid expenses and other current assets…

    9,800        31,410        88,695        2,508        132,413   

Assets held for sale

    1,361        284,369        29,785               315,515   

Intercompany receivables

    404,990        888,688        55,923        (1,349,601       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    459,659        1,702,939        1,014,322        (1,368,857     1,808,063   

Property, plant and equipment, net

    30,547        218,613        204,188        222        453,570   

Goodwill

           1,795,663        1,131,003               2,926,666   

Other intangible assets with indefinite lives

           9,287        34,422        (58     43,651   

Finite-lived intangible assets, net

    6,104        742,760        527,580               1,276,444   

Deferred financing costs, net and other non-current assets

    40,992        5,334        21,541        (35     67,832   

Investments in subsidiaries

    3,740,004        179,315        58,067        (3,977,386       

Investments in unconsolidated entities

    13,987        14,765        49,608        13,333        91,693   

Deferred tax assets

                  8,569               8,569   

Non-current income tax receivable

    2,468                             2,468   

Intercompany notes receivables

    2,028,701        649,444        46,676        (2,724,821       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 6,322,462      $ 5,318,120      $ 3,095,976      $ (8,057,602   $ 6,678,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

         

Current liabilities:

         

Short-term debt and current portion of long-term
debt

  $ 61,700      $ 2      $ 27,173      $      $ 88,875   

Current portion of capital lease obligations

           1,045        3,196               4,241   

Accounts payable

    21,402        81,741        110,449               213,592   

Accrued expenses and other current liabilities

    (536,286     663,221        248,604        (45     375,494   

Liabilities related to assets held for sale

    1,094        77,749                      78,843   

Intercompany payables

    902,576        198,788        248,237        (1,349,601       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    450,486        1,022,546        637,659        (1,349,646     761,045   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term liabilities:

         

Long-term debt, net of current portion

    3,615,759               5,626               3,621,385   

Capital lease obligations, net of current portion

           4,097        6,463               10,560   

Deferred tax liabilities

    (107,844     252,944        69,457        82        214,639   

Other long-term liabilities

    42,762        46,865        71,988        (33     161,582   

Intercompany notes payables

    415,700        1,276,245        1,032,876        (2,724,821       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term liabilities

    3,966,377        1,580,151        1,186,410        (2,724,772     4,008,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity

    1,905,599        2,715,423        1,267,761        (3,983,184     1,905,599   

Non-controlling interests

                  4,146               4,146   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    1,905,599        2,715,423        1,271,907        (3,983,184     1,909,745   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 6,322,462      $ 5,318,120      $ 3,095,976      $ (8,057,602   $ 6,678,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-89


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING BALANCE SHEET

December 31, 2013

(in thousands)

 

          Guarantor     Non-Guarantor              
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

ASSETS

         

Current assets:

         

Cash and cash equivalents

  $ 14,801      $ 78,976      $ 261,654      $      $ 355,431   

Restricted cash

    2,221               1,237               3,458   

Marketable securities

           853        5               858   

Accounts receivable, net of allowances

           179,445        307,932               487,377   

Inventories, net

           169,141        219,892        (23,766     365,267   

Deferred tax assets

    4,418        9,483        31,451        3,506        48,858   

Prepaid expenses and other current assets

    517,311        (415,124     23,502        (44     125,645   

Assets held for sale

           380,414        69               380,483   

Intercompany receivables

    331,844        759,498        75,424        (1,166,766       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    870,595        1,162,686        921,166        (1,187,070     1,767,377   

Property, plant and equipment, net

    14,197        210,883        241,713        (296     466,497   

Goodwill

           1,753,498        1,253,499               3,006,997   

Other intangible assets with indefinite lives

           14,301        42,401               56,702   

Finite-lived intangible assets, net

    11,006        868,683        677,737               1,557,426   

Restricted cash

                  29,370               29,370   

Deferred financing costs, net and other non-current assets

    55,207        7,777        20,560        (47     83,497   

Investments in subsidiaries

    3,780,251        282,310        191,947        (4,254,508       

Investments in unconsolidated entities

    29,005               44,636        13,189        86,830   

Deferred tax assets

    (570            7,959               7,389   

Intercompany notes receivables

    2,197,576        630,627        60,441        (2,888,644       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 6,957,267      $ 4,930,765      $ 3,491,429      $ (8,317,376   $ 7,062,085   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

         

Current liabilities:

         

Short-term debt and current portion of long-term debt

  $ 60,000      $ 323      $ 3,789      $      $ 64,112   

Current portion of capital lease obligations

           2,859        3,103               5,962   

Accounts payable

    12,584        63,346        105,712               181,642   

Accrued expenses and other current liabilities

    68,581        117,937        195,412        (36     381,894   

Liabilities related to assets held for sale

           106,343        26,899               133,242   

Intercompany payables

    728,541        163,518        274,708        (1,166,767       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    869,706        454,326        609,623        (1,166,803     766,852   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term liabilities:

         

Long-term debt, net of current portion

    3,720,137        100        37,551               3,757,788   

Capital lease obligations, net of current portion

           4,773        8,469               13,242   

Deferred tax liabilities

    (49,190     246,178        88,038        8        285,034   

Other long-term liabilities

    21,038        47,008        93,032        (47     161,031   

Intercompany notes payables

    322,322        1,444,742        1,121,581        (2,888,645       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term liabilities

    4,014,307        1,742,801        1,348,671        (2,888,684     4,217,095   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity

    2,073,254        2,733,638        1,528,253        (4,261,889     2,073,256   

Non-controlling interests

                  4,882               4,882   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    2,073,254        2,733,638        1,533,135        (4,261,889     2,078,138   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 6,957,267      $ 4,930,765      $ 3,491,429      $ (8,317,376   $ 7,062,085   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-90


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2014 (Restated)

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

          

Net income (loss)

   $ (37,710   $ 38,951      $ 88,857      $ (127,808   $ (37,710

Income (loss) from discontinued operations, net of tax

     145,751        (27,839     20,400        6        138,318   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (183,461     66,790        68,457        (127,814     (176,028

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:

          

Equity in earnings of subsidiaries, net of tax

     (129,391                   129,391          

Non-cash interest expense, including amortization of original issue discounts and deferred financing costs

     15,780        42        411               16,233   

Depreciation and amortization

     8,783        177,347        149,688        15        335,833   

Non-cash stock-based compensation expense

     3,446        4,957        4,049               12,452   

Tax benefit related to discontinued operations retained by Alere Inc

            12,977        (3,132            9,845   

Impairment of inventory

                   3,124               3,124   

Impairment of long-lived assets

     1,019        (712     6,712               7,019   

Loss on disposition of fixed assets

     1        4,807        1,737               6,545   

Equity earnings of unconsolidated entities, net of tax

     (1,717            (15,928     136        (17,509

Deferred income taxes

     40,693        (32,750     (15,945     1,020        (6,982

(Gain) loss related to impairment and net gain on dispositions

     4,236        11,393        (7,887            7,742   

Other non-cash items

     1,418        3,726        (179            4,965   

Changes in assets and liabilities, net of acquisitions:

          

Accounts receivable, net

            (13,966     13,277               (689

Inventories, net

            (53,181     (5,784     (2,145     (61,110

Prepaid expenses and other current assets

     501,023        (474,115     (78,161     (745     (51,998

Accounts payable

     8,818        24,776        14,257               47,851   

Accrued expenses and other current liabilities

     (559,508     544,755        80,256        (1,814     63,689   

Other non-current liabilities

     127        3,601        2,851        2,571        9,150   

Cash paid for contingent consideration

     (21,867            (210            (22,077

Intercompany payable (receivable)

     428,340        (266,833     (161,507              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by continuing operations

     117,740        13,614        56,086        615        188,055   

Net cash provided by (used in) discontinued operations

     (671     44,060        79               43,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     117,069        57,674        56,165        615        231,523   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

          

Increase in restricted cash

     (2,791            (2,655            (5,446

Purchases of property, plant and equipment

     (21,680     (40,737     (41,862     3,717        (100,562

Proceeds from sale of property, plant and equipment

     726        845        4,165        (4,250     1,486   

Cash received from disposition, net of cash divested

            1,081        43,995               45,076   

Cash paid for business acquisitions, net of cash acquired

     (75                          (75

Cash received (paid) for investments

     477        (279              198   

Proceeds from sale of equity investment

                   9,526               9,526   

Cash received from sales of marketable securities

            576        4               580   

Decrease in other assets

     96        714        130        46        986   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

     (23,247     (37,800     13,303        (487     (48,231

Net cash used in discontinued operations

            (8,972                   (8,972
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (23,247     (46,772     13,303        (487     (57,203
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

          

Cash paid for financing costs

     (1,528                          (1,528

Cash paid for contingent purchase price consideration

     (32,467            (435            (32,902

Cash paid for dividends

     (21,293                          (21,293

Proceeds from issuance of common stock, net of issuance costs

     51,555                             51,555   

Proceeds from issuance of short-term debt

                   806               806   

Proceeds from issuance of long-term debt

                   58               58   

Payments on long-term debt

     (60,000     (271     (4,851            (65,122

Net proceeds (payments) under revolving credit facilities

     (43,000            478               (42,522

Excess tax benefits on exercised stock options

     460        422        90               972   

Principal payments on capital lease obligations

            (2,885     (3,200            (6,085

Purchase of non-controlling interest

                   (623            (623
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in continuing operations

     (106,273     (2,734     (7,677            (116,684

Net cash used in discontinued operations

            (893     (578            (1,471
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (106,273     (3,627     (8,255            (118,155
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     (201     (273     (15,710     (128     (16,312
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (12,652     7,002        45,503               39,853   

Cash and cash equivalents, beginning of period - continuing operations

     14,801        78,976        261,654               355,431   

Cash and cash equivalents, beginning of period - discontinued operations

            6,476        1               6,477   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

     2,149        92,454        307,158               401,761   

Less: Cash and cash equivalents of discontinued operations, end of period

            23,300                      23,300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents of continuing operations, end of period

   $ 2,149      $ 69,154      $ 307,158      $      $ 378,461   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-91


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2013

(in thousands)

 

    Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

         

Net income (loss)

  $ (71,733   $ 59,621      $ 72,611      $ (132,232   $ (71,733

Income (loss) from discontinued operations, net of tax

    198        (14,370     (1,954            (16,126
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (71,931     73,991        74,565        (132,232     (55,607

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:

         

Equity in earnings of subsidiaries, net of tax

    (134,003     2,948               131,055          

Non-cash interest expense, including amortization of original issue discounts and deferred financing costs

    17,704        59        76               17,839   

Depreciation and amortization

    5,864        189,325        179,403        (119     374,473   

Non-cash charges for sale of inventories revalued at the date of acquisition

                  2,504               2,504   

Non-cash stock-based compensation expense

    8,792        5,158        7,260               21,210   

Tax benefit related to discontinued operations retained by Alere Inc

           6,567        1,315               7,882   

Impairment of inventory

           26        311               337   

Impairment of long-lived assets

           4,581        1,237               5,818   

Impairment of intangible assets

                  686               686   

Loss on disposition of fixed assets

           326        1,145               1,471   

Equity earnings of unconsolidated entities, net of tax

    (1,890            (15,470     (83     (17,443

Deferred income taxes

    (41,807     (26,116     (61,144     (620     (129,687

Loss on extinguishment of debt

    35,603                             35,603   

Loss related to impairment and net gain on dispositions

                  5,124               5,124   

Bargain purchase gain

                  (8,023            (8,023

Other non-cash items

    5,202        1,617        3,631               10,450   

Changes in assets and liabilities, net of acquisitions:

         

Accounts receivable, net

           (8,598     (38,074            (46,672

Inventories, net

           (55,783     (28,981     2,054        (82,710

Prepaid expenses and other current assets

    (577,892     515,020        54,469        (2,907     (11,310

Accounts payable

    4,591        (4,541     17,700               17,750   

Accrued expenses and other current liabilities

    500,079        (427,864     (17,964     2,907        57,158   

Other non-current liabilities

    (14,271     (17,729     11,451        24        (20,525

Cash paid for contingent consideration

    (10,236            (1,424            (11,660

Intercompany payable (receivable)

    410,392        (251,389     (159,037     34          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by continuing operations

    136,197        7,598        30,760        113        174,668   

Net cash provided by (used in) discontinued operations

    (2,103     71,184        182        (31     69,232   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    134,094        78,782        30,942        82        243,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

         

Increase in restricted cash

    (2,221            (28,943            (31,164

Purchases of property, plant and equipment

    (11,400     (33,483     (69,920     14,895        (99,908

Proceeds from sale of property, plant and equipment

           5,183        12,876        (14,441     3,618   

Cash received from disposition, net of cash divested

                  29,000               29,000   

Cash paid for business acquisitions, net of cash acquired

    (166,772            (9,359            (176,131

Cash received from sales of marketable securities

           (66     107               41   

Cash received from (paid for) equity method investments

    1,960               27,384        (6     29,338   

(Increase) decrease in other assets

    15,269        (1,428     905        (23     14,723   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in continuing operations

    (163,164     (29,794     (37,950     425        (230,483

Net cash used in discontinued operations

           (26,936     (27            (26,963
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (163,164     (56,730     (37,977     425        (257,446
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

         

Cash paid for financing costs

    (9,845                          (9,845

Cash paid for contingent purchase price consideration

    (39,073            (1,006            (40,079

Cash paid for dividends

    (21,293                          (21,293

Proceeds from issuance of common stock, net of issuance costs

    20,863                             20,863   

Proceeds from issuance of long-term debt

    425,000               33,962               458,962   

Payments on long-term debt

    (461,845     (299     (8,413            (470,557

Net proceeds (payments) under revolving credit facilities

    147,500               (8,537            138,963   

Excess tax benefits on exercised stock options

    193        200        68               461   

Principal payments on capital lease obligations

           (3,278     (3,255            (6,533

Purchase of non-controlling interest

                  (165            (165

Other

    (18,953                          (18,953
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

    42,547        (3,377     12,654               51,824   

Net cash used in discontinued operations

    (2,299     (534                   (2,833
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    40,248        (3,911     12,654               48,991   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

           (618     (746     (507     (1,871
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

    11,178        17,523        4,873               33,574   

Cash and cash equivalents, beginning of period—continuing operations

    3,623        56,074        256,782               316,479   

Cash and cash equivalents, beginning of period—discontinued operations

           11,855                      11,855   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

    14,801        85,452        261,655               361,908   

Less: Cash and cash equivalents of discontinued operations, end of period

           6,476        1               6,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents of continuing operations, end of period

  $ 14,801      $ 78,976      $ 261,654      $      $ 355,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-92


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26)  Guarantor Financial Information (Continued)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2012

(in thousands)

 

    Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

         

Net income (loss)

  $ (78,217   $ 123,641      $ 30,805      $ (154,446   $ (78,217

Loss from discontinued operations, net of tax

    (1,391     (29,011     (2,724            (33,126
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (76,826     152,652        33,529        (154,446     (45,091

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:

         

Equity in (earnings) losses of subsidiaries, net of tax

    (153,740     1,574               152,166          

Non-cash interest expense, including amortization of original issue discounts and deferred financing costs

    21,213        133                      21,346   

Depreciation and amortization

    7,961        193,368        182,592        (21     383,900   

Non-cash charges for sale of inventories revalued at the date of acquisition

           1,400        3,281               4,681   

Non-cash stock-based compensation expense

    4,247        5,486        5,932               15,665   

Tax benefit related to discontinued operations retained by Alere Inc

           3,133        1,755               4,888   

Impairment of inventory

                  290               290   

Impairment of long-lived assets

           451        586               1,037   

(Gain) loss on disposition of fixed assets

    4        (3,656     518               (3,134

Gain on sales of marketable securities

    (751                          (751

Equity earnings of unconsolidated entities, net of tax

    (2,205            (10,952     (88     (13,245

Deferred income taxes

    26,156        (59,249     (23,854     (962     (57,909

Loss on extinguishment of debt

    23,235                             23,235   

Other non-cash items

    (1,001     940        7,428               7,367   

Changes in assets and liabilities, net of acquisitions:

         

Accounts receivable, net

           714        (20,524            (19,810

Inventories, net

           (6,103     (13,692     2,902        (16,893

Prepaid expenses and other current assets

    (454,780     355,041        (708     95,087        (5,360

Accounts payable

    1,289        2,085        (15,046            (11,672

Accrued expenses and other current liabilities

    342,165        (236,872     30,813        (95,081     41,025   

Other non-current liabilities

    (15,418     1,424        (25,711     (70     (39,775

Cash paid for contingent consideration

    (10,243     (74                   (10,317

Intercompany payable (receivable)

    413,479        (405,459     (6,858     (1,162       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by continuing operations

    124,785        6,988        149,379        (1,675     279,477   

Net cash provided by (used in) discontinued operations

    5,332        36,545        (1,673            40,204   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    130,117        43,533        147,706        (1,675     319,681   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

         

Decrease in restricted cash

           12        5,899               5,911   

Purchases of property, plant and equipment

    (2,061     (63,602     (109,396     65,962        (109,097

Proceeds from sale of property, plant and equipment

           22,115        65,748        (66,217     21,646   

Cash paid for business acquisitions, net of cash acquired

    (399,052     1,999        (22,934            (419,987

Cash received from sales of marketable securities

    2,784        269        3               3,056   

Cash received from equity method investments

    1,470               11,237               12,707   

Increase in other assets

    (53,189     (1,131     (2,105     70        (56,355
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in continuing operations

    (450,048     (40,338     (51,548     (185     (542,119

Net cash used in discontinued operations

    (4,500     (27,570                   (32,070
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (454,548     (67,908     (51,548     (185     (574,189
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

         

Cash paid for financing costs

    (10,139                          (10,139

Cash paid for contingent purchase price consideration

    (19,284     (788     (60            (20,132

Cash paid for dividends

    (21,293                          (21,293

Proceeds from issuance of common stock, net of issuance costs

    14,924                             14,924   

Proceeds from issuance of long-term debt

    648,000               535               648,535   

Payments on short-term debt

    (6,240                          (6,240

Payments on long-term debt

    (300,155     (234     (10,923            (311,312

Net proceeds (payments) under revolving credit facilities

    22,500        (2     (8,226            14,272   

Excess tax benefits on exercised stock options

    176        303        25               504   

Principal payments on capital lease obligations

           (2,076     (4,655            (6,731

Purchase of non-controlling interest

                  (2,972            (2,972

Other

    (12,267                          (12,267
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

    316,222        (2,797     (26,276            287,149   

Net cash used in discontinued operations

    (832     (574                   (1,406
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    315,390        (3,371     (26,276            285,743   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

    213        474        (4,611     1,860        (2,064
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    (8,828     (27,272     65,271               29,171   

Cash and cash equivalents, beginning of period - continuing operations

    12,451        83,579        191,511               287,541   

Cash and cash equivalents, beginning of period - discontinued operations

           11,622                      11,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

    3,623        67,929        256,782               328,334   

Less: Cash and cash equivalents of discontinued operations, end of period

           11,855                      11,855   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents of continuing operations, end of period

  $ 3,623      $ 56,074      $ 256,782      $      $ 316,479   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(27)  Subsequent Event

On January 9, 2015, we completed the sale of our health management business conducted by Alere Health and its subsidiaries to OptumHealth Care Solutions, Inc. At the closing of the sale, Optum paid Alere $600.1 million, which amount reflected an initial adjustment based on a preliminary determination of Alere Health’s working capital and net cash as of the closing date and is subject to post-closing adjustments based on the final determination of Alere Health’s working capital and net cash as of the closing date.

We used the net cash proceeds of the sale to repay $575.0 million in aggregate principal amount of indebtedness under our secured credit facility, consisting of the repayment of $127.0 million in aggregate principal amount of revolving credit loans outstanding thereunder, $166.3 million in aggregate principal amount of “A” term loans (including “Delayed Draw” term loans) outstanding thereunder and $281.7 million in aggregate principal amount of “B” term loans outstanding thereunder. Such repaid term loan amounts may not be reborrowed; such repaid revolving credit loan amount may be reborrowed, subject to compliance with the terms of the secured credit facility. If as a result of any purchase price adjustment we receive any additional net cash proceeds from the sale, we will be obligated to use such proceeds to make additional repayments of “A” term loans (including “Delayed Draw” term loans) and “B” term loans outstanding. See Note 8 for further information about our secured credit facility.

 

F-94