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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 1, 2000
INVERNESS MEDICAL TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 0-20871 04-3164127
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(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
200 PROSPECT STREET, WALTHAM, MASSACHUSETTS 02453
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(781) 647-3900
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Certain matters discussed in this Current Report on Form 8-K contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, as amended. Actual results may materially differ due to numerous
factors, including without limitation, the competitive environment for the
glucose monitoring market, the efficacy and safety of products, the content
and timing of submissions to and decisions by regulatory authorities, the
ability to manufacture sufficient quantities of product for development and
commercialization activities, the ability of the Registrant to successfully
commercialize products and the risks and uncertainties described in the
Registrant's reports filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, including without limitation
those risks and uncertainties described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Factors
Affecting Future Results" in our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, as filed with the Securities and Exchange
Commission.
ITEM 5. OTHER EVENTS.
(a) Set forth below is a description of the Registrant's "Business"
as previously included in Amendment No. 1 to the Registration Statement on
Form S-3 (#333-48510) filed with the Securities and Exchange Commission on
November 21, 2000 (the "Registration Statement"), pursuant to which the
Registrant and certain stockholders offered shares of the Registrant's common
stock, which Registration Statement included updates to the Business section
as it was originally filed in the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999:
BUSINESS
OVERVIEW
We develop, manufacture and market innovative products focused primarily on
diabetes self-management. Our principal products are advanced electrochemical
blood glucose monitoring systems that are used by people with diabetes to
determine their glucose levels in order to manage their disease. Our systems are
accurate, small, fast and easy to use. They utilize our proprietary biosensor
test strips, which quickly draw blood into the strip, require only a small
sample and provide users with the option of sampling from the forearm, thus
avoiding the need for finger sticking. We believe that the increased convenience
and comfort offered by our systems will encourage more frequent blood glucose
testing, an essential element of effective diabetes self-management. Our systems
focus on the more than $3 billion worldwide blood glucose monitoring market. We
introduced our first generation electrochemical system in early 1998 and have
shipped over 1.4 million meters. Meter shipments for this system more than
doubled in the nine months ended September 30, 2000 as compared to the same
period in 1999. We believe that meter placements form the base for future sales
of our electrochemical test strips, thus providing us with a source of recurring
revenue. Our net sales of diabetes products were $80.0 million during the first
three quarters of 2000, an increase of approximately 64% from the first three
quarters of 1999.
We recently received FDA clearance for our second generation electrochemical
system, which we expect to begin shipping in the fourth quarter of 2000. This
system utilizes our latest proprietary test strip with a reduced blood sample
requirement of just one microliter, and features the fastest test time of any
commercially available system at five seconds, providing enhanced convenience
and comfort. We use our diabetes expertise to design and manufacture low cost
alternative test strips for use in leading brand glucose meters made by other
manufacturers. We also market a full family of ancillary diabetes supplies such
as syringes, lancets, glucose tablets, and specialty skin creams. In addition to
our diabetes products, we sell women's health products, including home pregnancy
detection tests, ovulation prediction tests and a line of nutritional
supplements.
We seek to maximize market penetration of our products through strategic
partnerships and through our wholesale and retail distribution networks. We have
a global distribution agreement with LifeScan, a subsidiary of Johnson &
Johnson, under which we develop and manufacture, and LifeScan markets, our
electrochemical blood glucose monitoring systems. Our first and second
generation electrochemical systems are being marketed by LifeScan as the ONE
TOUCH-Registered Trademark- FastTAKE-Registered Trademark- and ONE
TOUCH-Registered Trademark- Ultra. LifeScan is a leader in the worldwide blood
glucose monitoring market. LifeScan leads the North American blood glucose
monitoring market with a 38% market share. We believe that currently,
approximately 85% of LifeScan's strip sales are based on photometric technology
and 15% are electrochemical. By contrast, electrochemical systems now account
for 60% of the total world market for blood glucose monitoring systems, rising
from 33% five years ago. LifeScan has recently announced a shift in its
marketing focus to electrochemical blood glucose monitors from its historical
marketing efforts focused on photometric monitors. ONE
TOUCH-Registered Trademark- FastTAKE-Registered Trademark- electrochemical test
strips, which we supply to LifeScan, accounted for 5% of the strips sold in
drugstores throughout the United States during the six months ended June 2000.
Accordingly, we believe that our systems, which are the only electrochemical
systems offered by LifeScan, are well positioned to capture an increasing market
share. In addition, our agreement with LifeScan contemplates that we will
develop and manufacture, and LifeScan will market, additional electrochemical
blood glucose monitoring systems.
Our objective is to become the leading provider of innovative products that
provide a fully integrated and comprehensive approach to the self-management of
diabetes. Consistent with this objective, we continue to focus on the
development of pain-free, non-disruptive, continuous blood glucose monitoring
systems and other complementary diabetes self-management products. For example,
we signed a definitive agreement, in October 2000, to purchase Integ
Incorporated, a company with
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proprietary interstitial fluid sampling technology. We believe that this
acquisition will supplement and accelerate our existing efforts to develop
glucose monitoring systems that do not require blood samples. More recently, we
entered into a development and license agreement with Debiotech, S.A. pursuant
to which Debiotech will develop an externally-worn insulin pump using its
patented Micro Electro-Mechanical Systems technology.
INDUSTRY OVERVIEW
OVERVIEW OF DIABETES
Diabetes is a chronic, life-threatening disease, for which there is no known
cure. Diabetes is not a single disease, but a cluster of disorders that share
certain common features, the most characteristic of which is elevated blood
sugar levels. Under normal conditions, the body responds to an increase in blood
glucose by releasing the hormone insulin. Insulin stimulates the storage and
metabolism of glucose, helping to return glucose levels toward normal. The two
most common forms of the disease are referred to simply as Type 1 and Type 2
diabetes.
Type 1 diabetes is an auto-immune disease in which the body does not produce
insulin. As a result, individuals with Type 1 diabetes require daily injections
of insulin to survive. Type 1 diabetes usually begins in childhood or early
adulthood, and thus was formerly called juvenile-onset diabetes, but recent
research has shown that it can occur at any age. Over 13,000 new cases of Type 1
diabetes are diagnosed each year in the U.S. in children and young adults under
age 20. Type 1 accounts for 5% to 10% of diabetes worldwide.
Type 2 diabetes is a metabolic disorder resulting from the body's inability
to make enough insulin or properly use insulin. Type 2 accounts for 90% to 95%
of diabetes, and is increasing at an alarming rate worldwide, approaching
epidemic proportions. This form of the disease is due in part to increasing
longevity, increasing obesity, a more sedentary lifestyle, and increased levels
of diagnosis. The form of the disease was thought to begin after the age of 40
and was formerly called adult-onset diabetes, but is now increasingly common
even in childhood, especially in minority populations.
There are also many other forms of diabetes. Gestational diabetes mellitus
occurs in 2% to 5% of pregnant women, mainly as a result of resistance to the
action of insulin created by the hormones produced during pregnancy. Up to 50%
of these women will develop Type 2 diabetes later in life. In addition, diabetes
can develop as part of the pattern created by other hormonal diseases, specific
genetic defects, or as a secondary effect of various stresses, including
infection, surgery, or drugs.
All of these different types of diabetes can produce similar dire
consequences including blindness, kidney failure, changes in the ability of the
nerves to function normally, heart attacks, strokes, peripheral vascular
insufficiency, and even periodontal disease and tooth loss.
In the United States, diabetes currently affects between 6% and 7% of the
population or about 16 million people, and the annual cost of treatment is
$44 billion. Of those affected, one-third do not even know they have the
disease. The number of individuals diagnosed with diabetes continues to grow by
nearly 800,000 persons per year in the United States and will reach 23 million
in just 10 years. According to the Centers for Disease Control, the percentage
of the population found to have diabetes jumped 33% nationally to 6.5% between
1990 and 1998. This percentage increased 70% amongst people in their 30's.
IMPORTANCE OF GLUCOSE MONITORING
Every person's glucose level varies during the course of a day depending
upon factors such as diet, insulin availability, exercise, stress and illness.
Normal blood glucose levels fluctuate between 80 and 120 milligrams per
deciliter, or mg/dL. For people with diabetes, these levels can fluctuate
dramatically from less than 20 mg/dL to more than 1,000 mg/dL. To successfully
manage glucose levels within the
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normal range, a person with diabetes must first measure his or her glucose level
and then manage this level by adjusting insulin intake, oral medication, diet
and exercise.
Today, the availability of compact, easy-to-use monitoring systems that
provide fast and accurate blood glucose measurements give people with diabetes a
tool to manage the disease more effectively, improve their quality of life, and
minimize the risk of long-term complications. The blood glucose monitoring
market, consisting of both glucose meters and test strips, is estimated to be
more than $3 billion worldwide and is expected to grow to more than $5 billion
by 2005.
The landmark multi-year study, Diabetes Control and Complications Trial, or
DCCT, sponsored by the National Institutes of Health showed that the onset or
progression of eye, kidney and nerve disease in people with Type 1 diabetes can
be slowed by intensive therapy to maintain blood glucose levels as close to
normal as possible. Studies in the United Kingdom and Japan found similar
results in people with Type 2 diabetes. These studies indicate that control of
blood glucose is the first step towards reducing diabetes-related complications.
The American Diabetes Association, or the ADA, recommends that people with
diabetes test their blood glucose as frequently as four times per day.
LIMITATIONS OF EXISTING GLUCOSE MONITORING PRODUCTS
Despite the proven benefits of frequent monitoring and intensive management
of glucose levels, a significant number of people with diabetes fail to test at
the recommended frequency, or at all. We believe that people with diabetes test,
on average, slightly more than once per day, compared to the recommended four
tests per day. We believe this under-testing is due to the limitations of
existing products including:
- DISRUPTION OF LIFESTYLE. The process of measuring glucose levels causes
significant disruption to the daily lifestyle of people with diabetes. To
obtain a sample, users are generally required to stick one of their
fingertips with a lancing device, which typically consists of a
spring-loaded needle that penetrates a measured distance into the finger.
Users must then draw a sample of blood from the finger, which often
requires squeezing of the fingertips and may require another finger stick
if a sufficient volume of blood is not obtained the first time. After
drawing a blood sample, users generally are required to apply the blood
sample on a disposable test strip. Blood glucose meters typically take
between 20 and 40 seconds to display the test result. In addition, the
need to obtain a large sample of blood from the user's fingertips is
inconvenient and causes discomfort. The length of time required to conduct
the test and the complexity of existing glucose systems discourage users
from frequent testing resulting in poor compliance.
- PERCEIVED PAIN AND SORE FINGERTIPS. Although fingertips provide a good
site to obtain a blood sample, they also contain many specialized sensory
nerve endings that experience pain from both the lancing and the
manipulation of the finger. Most of the blood glucose meters require users
to draw a sample size of between 2 and 10 microliters to accurately
measure blood glucose levels. The larger the blood sample required, the
more likely a user will require wider or deeper lancing in order to
successfully draw the sample, leading to more contact with sensitive nerve
endings and resulting in increased pain. Drawing a large enough sample of
blood may require squeezing the fingertips and cause incremental
discomfort. The level of pain and discomfort is compounded by the fact
that fingertips offer limited surface area, and therefore, tests are often
conducted in areas that are sore from repeated daily tests. Users may also
suffer pain or discomfort after the test is complete when the wound caused
by the lancing device is touched or disturbed during normal daily
activities. Additionally, many frequent testers develop calluses on their
fingertips that cause a loss of sensation, are unattractive and make
subsequent testing more difficult.
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We believe that blood glucose monitoring systems that provide increased
convenience and comfort will lead to significant growth in the frequency of
daily testing and will capture an increased share of the growing blood glucose
monitoring market.
OTHER SELF-TEST MARKETS
The market for women's health self-test products is comprised mostly of home
pregnancy detection tests, which represent 90% of the market, and ovulation
prediction tests, which represent 10% of the market.
There are numerous pregnancy self-tests on the market, which are typically
urine-based tests and provide results in less than five minutes. Pregnancy
self-tests are sensitive enough to indicate pregnancy within one or two days of
a missed menstrual period. Determinations of fertility are generally made using
ovulation prediction tests, most notably those based on the luteinizing hormone.
Approximately 15% of couples in the United States experience fertility problems.
We believe that increased awareness of the incidence of infertility, as well as
a desire on the part of couples to plan conception with more certainty, has led
to increasing demand for ovulation prediction tests. Ovulation prediction
urine-based tests are generally easy to use and are becoming widely accepted by
professional fertility care providers and the general public.
OUR STRATEGY
Our objective is to be the leading provider of innovative diabetes
self-management products that provide a fully-integrated and comprehensive
approach to self-management of diabetes. The key elements of our strategy for
achieving this goal are to:
CONTINUE TO DEVELOP SUPERIOR BLOOD GLUCOSE MONITORING PRODUCTS. We will
continue to focus our research and development efforts to expand our expertise
in diabetes management. These efforts enable us to improve upon our existing
monitoring systems which will result in increased convenience and comfort. Since
early 1998, we have introduced two generations of electrochemical systems that
are accurate, small, fast and easy to use. Both of these systems utilize our
proprietary test strips that provide users with the option of alternate site,
off-finger testing. We plan to continue to introduce new products as we strive
to achieve our goal of introducing pain-free, non-disruptive, continuous glucose
monitoring systems.
MAXIMIZE MARKET PENETRATION OF OUR PRODUCTS THROUGH STRATEGIC PARTNERSHIPS
AND THROUGH OUR WHOLESALE AND RETAIL DISTRIBUTION NETWORKS. We intend to build
upon our worldwide distribution relationship with LifeScan, in order to increase
our existing 5% share of the United States blood glucose test strip market, and
to gain significant market share in other countries. LifeScan presently has 38%
of the blood glucose test strip market in North America. Currently, 85% of the
test strips sold by LifeScan are photometric based and 15% are electrochemical.
Recently, LifeScan announced a shift in its marketing focus to electrochemical
blood glucose monitors from its historical marketing efforts based on
photometric monitors. We are currently the sole supplier of electrochemical
systems to LifeScan. We believe that the combination of our superior systems and
LifeScan's well-established "ONE TOUCH-Registered Trademark-" brand name,
promoted and sold by its 1,000 person global sales force, combined with its
worldwide distribution capabilities, provides a significant opportunity to
increase our market penetration. In addition, we market our low-cost alternative
blood glucose test strips for use in leading brand meters made by other
manufacturers through other strategic relationships with companies such as
Menarini Industrie Farmaceutical Riunite S.R.L. of Florence, Italy, B. Braun
Melsungen AG of Germany and Azupharma GmbH & Co., a unit of Novartis. Our other
products are sold primarily through our own wholesale and retail distribution
networks.
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DEVELOP OR ACQUIRE A COMPREHENSIVE AND INTEGRATED ARRAY OF PRODUCTS FOR
DIABETES SELF-MANAGEMENT. We believe that we are well positioned to draw on our
industry knowledge, technical capabilities and market position to develop
additional innovative tools that people with diabetes can use to more
effectively manage their disease. We recently agreed to acquire Integ, which has
developed a proprietary sampling technology to extract interstitial fluid from
the top layers of the skin. In addition, we recently entered into a development
and license agreement with Debiotech, S.A. pursuant to which Debiotech will
develop an externally-worn insulin pump using Debiotech's patented Micro
Electro-Mechanical Systems technology. Through these and other selected
acquisitions and strategic partnerships, as well as our own ongoing research and
development efforts, we intend to develop and introduce products which will
offer people with diabetes and their health care professionals a comprehensive
and integrated approach to management of the disease and generate recurring
revenues for us.
CONTINUE TO MANUFACTURE HIGH-QUALITY PRODUCTS IN MASS VOLUMES AT LOW
COST. One of the most significant contributors to our growth has been and will
continue to be the build-up of manufacturing capacity for our proprietary
electrochemical blood glucose test strips. We have fully internalized this
aspect of our business by establishing and growing our high-quality, low-cost
and large-volume strip manufacturing capabilities at our Inverness, Scotland
facility. Currently, we have identified, and will continue to seek, those
portions of our operations that are outside of this core competency and will
continue to outsource those portions when appropriate.
OUR PRODUCTS
Our products consist of self-diagnostic tests which target diabetes
management and women's health, as well as nutritional supplements which are
targeted primarily to women.
DIABETES MANAGEMENT PRODUCTS
We develop, manufacture and market electrochemical blood glucose monitoring
systems, which include meters and associated test strips. The following chart
compares some of the characteristics of our first generation system, the ONE
TOUCH-Registered Trademark- FastTAKE-Registered Trademark-, relative to other
widely available electrochemical blood glucose monitoring systems being sold
today:
<TABLE>
COMPANY LIFESCAN, INC. ROCHE DIAGNOSTICS
<S> <C> <C>
CHARACTERISTIC/SYSTEM ONE Accu-Check-Registered Trademark-
TOUCH-Registered Trademark- Advantage-Registered Trademark-
FastTAKE-Registered Trademark-
Alternate site testing Yes No
(off-finger)
Sample size 4 (Comfort
(microliters) 1.5 Curve-TM- Strip)
9
(Advantage-Registered Trademark-
Strip)
Test time (seconds) 15 40
<S> <C> <C>
COMPANY BAYER DIAGNOSTICS BAYER DIAGNOSTICS
Glucometer-Registered Trademark-
CHARACTERISTIC/SYSTEM Elite-Registered Trademark-/Elite Glucometer-Registered Trademark-
XL-Registered Trademark- DEX-Registered Trademark-
Alternate site testing No No
(off-finger)
Sample size
(microliters) 2/2 3-4
Test time (seconds) 30/30 30
<S> <C>
COMPANY MEDISENSE
CHARACTERISTIC/SYSTEM Precision
Q.I.D.-Registered Trademark-
Alternate site testing No
(off-finger)
Sample size
(microliters) 3.5
Test time (seconds) 20
</TABLE>
Our recently introduced second generation system, marketed by LifeScan as
the ONE TOUCH-Registered Trademark- Ultra, improves upon some of ONE
TOUCH-Registered Trademark- FastTAKE-REGISTERED TRADEMARK-'S industry leading
characteristics by offering even smaller sample sizes (one microliter) and
quicker test results (five seconds). In addition, ONE
TOUCH-Registered Trademark- Ultra, like ONE TOUCH-Registered Trademark-
FastTAKE-Registered Trademark-, provides alternate site, off-finger testing.
Both the ONE TOUCH-Registered Trademark- FastTAKE-Registered Trademark- and
ONE TOUCH-Registered Trademark- Ultra systems consist of an electrochemical
meter, with a large, easy to read visual display, and associated biosensor test
strips. To operate these systems, the strip is inserted into the meter, which
automatically activates in a standby
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mode. The user then applies a small blood sample to the end of the test strip,
which automatically initiates the test and displays results. Both systems
feature internal memory and data downloading capabilities to provide people with
diabetes information to more effectively manage their disease, either
individually or with their health care professionals. The ONE
TOUCH-Registered Trademark- FastTAKE-Registered Trademark- system has accounted
for the majority of our recent growth, and we expect the ONE
TOUCH-Registered Trademark- Ultra system will further enhance this growth.
We also produce and sell low-cost alternative blood glucose test strips for
use in other leading brand meters, such as our Excel-Registered Trademark- G
strips for use in the Bayer Glucometer-Registered Trademark-
Elite-Registered Trademark-. We distribute these low-cost alternative strips in
the United States and Europe. In addition, we distribute a comprehensive line of
ancillary diabetes care products, including lancets, glucose tablets, syringes
and specialty skin creams in the United States. Many of these products are sold
under store brand labels of retail drug store chains and mass merchandisers.
WOMEN'S HEALTH PRODUCTS
We market a variety of women's health products including pregnancy detection
and ovulation prediction tests, as well as nutritional supplement products, most
of which are marketed primarily to women.
Our pregnancy detection tests enable women to detect pregnancy at home
through urine sampling. These tests display visual results in approximately
three minutes. Substantially all of our pregnancy detection tests are
manufactured at our Galway, Ireland facility and are generally sold
over-the-counter by drug store chains and mass merchandisers under their own
store brand label, and increasingly we also market these products under our own
brand.
Our ovulation prediction tests, marketed as the Early Ovulation Predictor
under our brand name and under various store brand labels of retail drug chains
and mass merchandisers, are used by women to test for ovulation in their own
home as an aid to family planning and provide 24 to 48 hour notice of when
ovulation is likely to occur. Our tests are easy-to-use and provide clinically
accurate results in approximately three minutes. Substantially all of our
ovulation prediction tests are manufactured at our Galway facility.
We market a line of nutritional supplements through retail drug store chains
and mass merchandisers. Our nutritional supplement product line includes
SoyCare-TM-, Stresstabs-Registered Trademark-,
Ferro-Sequels-Registered Trademark- and Posture-Registered Trademark-.
MARKETING AND SALES
ELECTROCHEMICAL BLOOD GLUCOSE MONITORING SYSTEMS
All of our electrochemical blood glucose monitoring systems are marketed,
sold and distributed by LifeScan under our worldwide distribution agreement. We
established our relationship with LifeScan in 1995 and introduced our first
generation system in early 1998. LifeScan primarily markets, sells and
distributes our systems in North America and Europe and is expanding into
additional international markets, including Japan. LifeScan presently maintains
a global sales force of approximately 1,000 professionals who are focused
entirely on marketing their ONE TOUCH-Registered Trademark- family of blood
glucose monitoring systems, including ONE TOUCH-Registered Trademark-
FastTAKE-Registered Trademark- and ONE TOUCH-Registered Trademark- Ultra.
LifeScan has recently announced that it has shifted the primary focus of its
sales and marketing efforts to electrochemical based systems as part of its
broader strategy to increase market share. We are currently the sole supplier of
such systems to LifeScan.
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LOW COST ALTERNATIVE BLOOD GLUCOSE TEST STRIPS FOR USE IN LEADING BRAND
METERS MADE BY OTHER MANUFACTURERS
We market and sell Excel-Registered Trademark- G, our low-cost alternative
test strip, for use in Bayer's Glucometer-Registered Trademark-
Elite-Registered Trademark- in the United States through our own wholesale and
retail distribution networks. In Europe, we market Excel-Registered Trademark- G
through a strategic partnership with Azupharma, a unit of Novartis. We also
utilize other strategic partnerships to market and sell additional alternative
test strips in Europe. We believe that these strategic partnerships allow us to
leverage the brand name, marketing and distribution strength of our partners in
their respective geographic area in order to enhance market penetration. For
example, we have a strategic partnership with Menarini under which Menarini
markets and sells test strips for use in its own electrochemical meter. We have
a similar arrangement with B. Braun which distributes another of our test strips
for use in its electrochemical meter.
OTHER ANCILLARY DIABETES CARE PRODUCTS
We market and sell our ancillary diabetes care products in the United
States, including lancets, glucose tablets, syringes and specialty skin creams.
We sell these products under our own brand names, as well as under store brands
of retail drug store chains, including CVS, Eckerd Drug, Walgreens and Rite-Aid,
and mass merchandisers, including Wal-Mart, Kmart and Target.
WOMEN'S HEALTH PRODUCTS
We market and sell our women's health products, including nutritional
supplements, under our own brand names, as well as under store brands of retail
drug store chains and mass merchandisers.
MANUFACTURING
Our principal manufacturing facilities are in Inverness, Scotland, where we
produce our electrochemical blood glucose test strips, and Galway, Ireland,
where we produce our pregnancy detection and ovulation prediction tests. In
addition, we utilize contract manufacturers to produce our electrochemical blood
glucose monitoring meters, ancillary diabetes care products, nutritional
supplements and other women's health products.
Since we opened our Inverness, Scotland facility in December 1995, we have
devoted substantial efforts to developing a technologically advanced production
facility that we believe gives us a competitive advantage. Our Inverness
facility is an FDA registered establishment which has been configured for highly
automated, low-cost production of advanced electrochemical biosensor test
strips. Currently consisting of 103,000 square feet, this facility integrates
manufacturing closely with our research and development efforts, to allow us to
produce mass volumes of test strips to the technical specifications set out by
our development teams. Our sophisticated manufacturing systems allow us to
automatically produce, cut and pack test strips in vials that consistently meet
the quality control standards which regulate our operation. These production
efforts permit us to commercialize and deliver innovative technology in a
consistent, high-quality and cost-effective manner. Although our existing
capacity at Inverness is sufficient to satisfy our contractual obligations, we
are currently expanding our production capacity to meet anticipated demand.
We produce our pregnancy detection and ovulation prediction tests at our
Galway, Ireland facility. Our Galway facility is an FDA registered establishment
which employs modern production techniques to produce consistent, high-quality
components that are assembled on-site and subsequently packaged by a third party
in the United States.
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STRATEGIC TRANSACTIONS
An important part of our business strategy is to enter into strategic
alliances and licensing arrangements with third parties, primarily medical
product companies, for the development and distribution of certain products. We
also pursue a strategy of selective acquisitions of companies, assets and
technologies which we believe will enhance our ability to deliver innovative
products to the marketplace at low cost.
WORLDWIDE DISTRIBUTION AGREEMENT WITH LIFESCAN
In 1995, we entered into an exclusive worldwide distribution agreement with
LifeScan, a subsidiary of Johnson & Johnson, which was amended in June 1999.
Under the terms of the agreements with LifeScan, we develop and manufacture, and
LifeScan distributes, our electrochemical blood glucose monitoring system, and
any new systems consisting of new meters and electrochemical strips to which we
and LifeScan agree. We commenced shipments of ONE TOUCH-Registered Trademark-
FastTAKE-Registered Trademark- in early 1998. We recently received FDA clearance
for our second generation electrochemical system which LifeScan is marketing as
the ONE TOUCH-Registered Trademark- Ultra and which we expect to begin shipping
in the fourth quarter of 2000. Our distribution agreement is scheduled to remain
in effect through December 31, 2010 and may be extended by LifeScan indefinitely
if its sales meet certain targets. The agreement also provides that we will be
LifeScan's exclusive supplier of the components of our electrochemical systems,
subject to certain rights of LifeScan to make or obtain components from others
if we fail to meet our supply obligations. The distribution agreement provides
for periodic forecasts by LifeScan of its planned purchases.
The price per test strip varies under the distribution agreement depending
on the volumes purchased by LifeScan. The price for certain meters is based upon
an agreed to schedule, which is volume and time dependent. The price for the
components other than test strips and these meters is our cost, including
appropriate allocations of overhead. If our sale of test strips to LifeScan
ceases to be profitable, the agreement provides that the price of test strips
will be increased to provide us with an amount that gives us a commercially
reasonable profit. If LifeScan's purchases of test strips fall below a certain
level following calendar year 2001, we may terminate the distribution agreement.
The distribution agreement does not otherwise require LifeScan to make any
purchases from us.
As part of our relationship, we are prohibited from selling components of a
complete electrochemical system to measure blood glucose, consisting of test
strips, instruments and related components. While LifeScan is not restricted
from selling other systems, including electrochemical systems, for blood glucose
monitoring, if LifeScan either (i) introduces such a system not sourced from us
prior to the end of 2001, or (ii) fails to purchase specified minimum annual
levels of test strips, we are released from our restriction from selling
complete electrochemical glucose measurement systems. If this restriction on us
terminates as a result of LifeScan's failure to purchase specified minimum
annual volumes of test strips, we will remain prohibited from supplying products
to any self-test business which has sales in excess of certain specified
amounts. Under certain circumstances, if we fail to supply products in the
volumes forecasted and ordered by LifeScan, LifeScan will automatically become
entitled to produce the products itself.
If we make a Section 510(k) Notification with respect to any electrochemical
system for the measurement of glucose in humans which does not use test strips
or which does not measure an in vitro fluid sample, we are required to provide
LifeScan with the opportunity to enter into a distribution agreement with us
with respect to the system in accordance with general terms previously agreed to
in connection with the existing arrangements.
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AGREEMENT WITH MENARINI
In August 1996, we entered into an agreement with Menarini pursuant to which
we became a principal supplier of blood glucose test strips for blood glucose
meters distributed or to be distributed by Menarini in selected markets in
Europe and certain countries in other parts of the world. Under the agreement,
Menarini is subject to certain minimum purchases of products from us, and we
have agreed not to supply any third party with such products in the selected
markets for the term of the agreement. A significant part of the existing
business of Menarini is the supply of blood glucose test strips and meters.
Shipments under this agreement commenced in the second half of 1997. The blood
glucose test strips supplied to Menarini pursuant to this agreement are
manufactured at our Inverness, Scotland facility.
PENDING ACQUISITION OF INTEG INCORPORATED
On October 3, 2000, we entered into a definitive agreement to acquire Integ
Incorporated, a publicly traded development stage company. Integ has developed a
proprietary sampling technology to extract interstitial fluid from the top
layers of the skin. We may be able to use Integ's technology, supplemented by
our additional research and development efforts, to develop glucose monitoring
systems that do not require blood.
The purchase price for Integ consists of approximately 1.9 million shares of
our common stock in exchange for all of Integ's outstanding common equity and
cash to redeem shares of Integ's preferred stock. We will record a significant
amount of intangible assets in connection with this acquisition and will incur a
significant charge in the quarter in which the acquisition is completed to write
off a portion of the purchase price as in-process research and development. We
anticipate that the acquisition will close early in the first quarter of 2001.
However, our acquisition of Integ is subject to various closing conditions,
including approval by Integ's stockholders, and may not be completed by this
date, if at all.
DEVELOPMENT AND LICENSE AGREEMENT WITH DEBIOTECH, S.A.
On October 14, 2000, we entered into a development and license agreement
with Debiotech, S.A. pursuant to which Debiotech will seek to develop an
externally-worn insulin pump using its patented Micro Electro-Mechanical System
technology (MEMS). We have agreed to pay Debiotech a $10 million development and
license fee by December 30, 2000 and have received the exclusive right to
commercialize products using Debiotech's MEMS technology for the diagnosis,
prevention and treatment of diabetes. Under the terms of the agreement,
Debiotech is solely responsible for all expenditures necessary to complete the
development of the externally-worn insulin pump, and is obligated to assist us
in establishing large scale manufacturing of the pump. The development efforts
to be undertaken by Debiotech will be significant and we are uncertain when and
if a product which can be commercialized by us will emerge from these efforts.
The agreement also provides that we will pay Debiotech a royalty on future
sales of the externally-worn insulin pump that Debiotech has undertaken to
develop. We may, however, at any time after making the initial payment to
Debiotech, give notice to terminate our rights and obligations under the
license, which will then terminate six months after the delivery of the notice.
Under the agreement, we have the option to enter into a second agreement with
Debiotech to develop an insulin pump to be implanted under the skin. Debiotech
must give notice to us that it intends to commence a development program for the
implantable insulin pump, and we may then enter into an agreement with Debiotech
to develop and license the implantable pump on similar terms as the externally
worn pump.
RESEARCH AND DEVELOPMENT
We are focusing our research and development efforts primarily on the
development of our diabetes self-test diagnostic products, including
electrochemical blood glucose monitoring systems,
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alternative low-cost test strips and non-invasive and continuous blood glucose
measurement technologies. In addition, we devote a lesser degree of resources to
the development of new products and enhanced features for our line of women's
health products. Most of our research and development activities are carried out
in Inverness, Scotland, Waltham, Massachusetts, Galway, Ireland, and Yavne,
Israel. We supplement our internal research and development efforts with third
parties' efforts either through co-development or licensing arrangements, or
through product or technology acquisitions. In connection with our
co-development or licensing activities, we may provide financial development
assistance to these parties and may also utilize our own research and
development resources to design certain portions of such products.
Total research and development expenses for the nine months ended
September 30, 2000 and the years ended December 31, 1999 and 1998 were
$9.5 million, $6.9 million and $7.4 million, respectively. Portions of our
research and development expenditures were reimbursed by LifeScan through
milestone payments. We expect that we will spend a significant and increasing
amount on research and development efforts during the balance of 2000 and in
2001.
PATENTS AND PROPRIETARY TECHNOLOGY; TRADEMARKS
The medical products industry, including the diagnostic testing industry,
places considerable importance on obtaining patent and trade secret protection
for new technologies, products and processes. Our success will depend, in part,
on our ability to obtain patent protection for our products and manufacturing
processes, to preserve our trade secrets and to operate without infringing the
proprietary rights of third parties.
We hold certain patent rights, have certain patent applications pending and
expect to seek additional patents in the future. However, we can not assure you
as to the success or timeliness in obtaining any such patents or as to the
breadth or degree of protection that any such patents will afford us. The patent
position of medical products and diagnostic testing firms is often highly
uncertain and usually involves complex legal and factual questions. There is a
substantial backlog of patents at the United States Patent and Trademark Office.
No consistent policy has emerged regarding the breadth of claims covered in
medical product patents. Accordingly, we can not assure you that patent
applications relating to our products or technology will result in patents being
issued; that, if issued, such patents will afford adequate protection to our
products; or, if patents are issued to us, that our competitors will not be able
to design around such patents. In general, patents in blood glucose monitoring
have offered protection in the form of delaying competitors in their efforts to
develop and produce competitive systems rather than completely foreclosing a
competitor's ability to design, develop and produce a product that is
competitive. In that regard, a company's research and development efforts,
supplemented by the timing protection afforded by protective patents, are what
leads to a competitive advantage.
We believe our research and development efforts, supplemented by our patent
and other intellectual property protection efforts, have given us a competitive
advantage in the development of our innovative electrochemical blood glucose
monitoring products. Accordingly, although we have several significant patents
and patent applications covering relevant portions of our electrochemical blood
glucose monitoring technology, we believe that our continued research and
development efforts, and our intellectual property protection efforts for newly
developed technology, are most significant in achieving and maintaining a
position of technology and commercial leadership. In that regard, we have
recently agreed to acquire Integ which has developed technology to test glucose
through interstitial fluid samples. We believe that this technology is
innovative and may be viable for commercialization, although our continued
research and development efforts will be needed to move towards
commercialization. Although Integ's patents offer some protection from
competition, our further efforts will be required to realize the potential
benefits from these patents, which are also subject to certain third-party
licensing rights granted to another company that is in the diabetes management
business.
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The medical products industry, including the diagnostic testing industry,
historically has been characterized by extensive litigation regarding patents,
licenses and other intellectual property rights. We could and have incurred
substantial costs in defending ourself against patent infringement claims and in
asserting such claims against others, and will likely continue to do so. Under
our arrangements with LifeScan, we have agreed to indemnify LifeScan for any
claims that our electrochemical blood glucose monitoring products that they
market, sell and distribute infringes any patents. To determine the priority of
inventions, we may also have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office, which could also result in substantial
costs to us. If the outcome of any such litigation is adverse to us, our
business could be materially adversely affected.
In addition, we are sometimes required to obtain licenses to patents or
other proprietary rights of third parties to market our products. We can not
assure you that licenses required under any such patents or proprietary rights
would be made available on terms acceptable to us, if at all. If we do not
obtain such licenses, we could encounter delays in product market introductions
while we attempt to design around such patents or other rights, or we may be
unable to develop, manufacture or sell such products in certain countries, or at
all.
We also seek to protect our proprietary technology, including technology
that may not be patented or patentable, in part through confidentiality
agreements and, if applicable, inventors' rights agreements with our
collaborators, advisors, employees and consultants. We can not assure you that
these agreements will not be breached, that we will have adequate remedies for
any breach or that our trade secrets will not otherwise be disclosed to, or
discovered by, competitors. Moreover, we may from time to time conduct research
through academic advisors and collaborators who are prohibited by their academic
institutions from entering into confidentiality or inventors' rights agreements.
Finally, we believe that certain of our trademarks in the nutritional
supplements product line are valuable assets and are important to the marketing
of the nutritional supplements. Substantially all of these trademarks have been
registered with the U.S. Patent and Trademark Office. We can not assure you,
however, that registrations will afford adequate protection to us and not be
challenged as unenforceable or invalid, or not be infringed. In addition, we
could incur substantial costs in defending suits brought against us or in
prosecuting suits in which we asserted rights under such registrations.
GOVERNMENT REGULATION
Our research, development and clinical programs, as well as our
manufacturing and marketing operations, are subject to extensive regulation by
numerous governmental authorities in the United States and other countries. Most
of our self-test products, require governmental approvals for commercialization.
New products may require pre-clinical and clinical trials. Manufacturing and
marketing of many of our products are subject to the rigorous testing and
approval process of the United States Food and Drug Administration and
corresponding foreign regulatory authorities. The regulatory process, which
includes pre-clinical and clinical testing of many of our products to establish
their safety and effectiveness, can take many years and require the expenditure
of substantial financial and other resources. Data obtained from pre-clinical
and clinical activities are susceptible to varying interpretations that could
delay, limit or prevent regulatory approval. In addition, delays or rejection
may be encountered based upon changes in, or additions to, regulatory policies
for device marketing authorization during the period of product development and
regulatory review. Delays in obtaining such approvals could adversely affect the
marketing of products developed by us and our ability to generate commercial
product revenues.
In addition, we are required to meet regulatory requirements in countries
outside the United States, which can change rapidly with relatively short
notice, resulting in our products being banned in certain countries with
consequent loss of revenues and income. Foreign regulatory agencies can also
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introduce test format changes which, if not quickly addressed by us, can result
in restrictions on sales of our products. Such changes are not uncommon due to
advances in basic research.
The manufacturing, processing, formulation, packaging, labeling and
advertising of our nutritional supplements is subject to regulation by one or
more federal agencies, including the FDA, the Federal Trade Commission (FTC) and
the Consumer Product Safety Commission. These activities are also regulated by
various agencies of the states, localities and foreign countries in which our
nutritional supplements are now sold or may be sold in the future. In
particular, the FDA regulates the safety, manufacturing, labeling and
distribution of dietary supplements, including vitamins, minerals and herbs, as
well as food additives, over-the-counter (OTC) and prescription drugs and
cosmetics. The Good Manufacturing Practices promulgated by the FDA are different
for nutritional supplement, drug and device products. In addition, the FTC has
overlapping jurisdiction with the FDA to regulate the promotion and advertising
of dietary supplements, OTC drugs, cosmetics and foods.
THIRD-PARTY REIMBURSEMENT
Self-monitoring of blood glucose is a standard of care in the United States
and other developed countries. The costs associated with the purchase of blood
glucose monitoring products such as meters and test strips are generally
reimbursed. Users of our systems are currently being reimbursed by Medicare,
Medicaid and a wide array of preferred provider organizations in the United
States. Currently, forty states have implemented legislation that requires
private health insurers and health maintenance organizations to reimburse people
with diabetes for the costs of blood glucose monitoring systems and supplies.
Reimbursement and health care payment systems in international markets vary
significantly by country, and include both government-sponsored health care and
private insurance.
COMPETITION
DIABETES MANAGEMENT PRODUCTS
The medical products industry, including the self-test industry, is rapidly
evolving and developments are expected to continue at a rapid pace. Competition
in this industry is intense and we expect it to increase as new products and
technologies become available and new competitors enter the market. Our
competitors in the United States and abroad are numerous and include, among
others, diagnostic testing and medical products companies, universities and
other research institutions. Our success depends, in part, upon developing and
maintaining a competitive position in the development of products and
technologies in our area of focus. Our competitors may succeed in developing
technologies and products that are more effective than those that have been or
are being developed by us or that render our technologies or products obsolete
or noncompetitive. Our competitors may also succeed in obtaining patent
protection or other intellectual property rights that would prevent us from
developing our potential products, or in obtaining regulatory approval for the
commercialization of their products more rapidly or effectively than us.
Finally, many of our existing or potential competitors have or may have
substantially greater research and development capabilities, clinical,
manufacturing, regulatory and marketing experience and financial and managerial
resources than us.
We market low cost alternative test strips that are used in other
manufacturers' electrochemical blood glucose monitoring systems. If we succeed
in the alternative strip market, others may attempt to enter this market with
similar products. In addition, the introduction of lower-priced alternative test
strips could lead the manufacturers of the systems, with which our low cost
alternative test strips are compatible, to lower their own test strip prices,
thereby reducing or eliminating our price advantage.
We are also aware of several of our competitors who are attempting to
develop non-invasive blood glucose monitoring technologies. Non-invasive blood
glucose monitoring involves methods for measuring blood glucose levels without
the need to draw blood and, in certain proposed configurations, without the need
to utilize disposable components, such as test strips. We and several other
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manufacturers are pursuing a number of different technological approaches to
non-invasive blood glucose monitoring. These include near-infrared spectroscopy,
which involves shining a beam of near-infrared light to penetrate the skin and
determine the amount of glucose in the blood, and reverse iontophoresis, which
utilizes a "patch" system to extract glucose through the skin for measurement by
an external meter. In addition, we and several other manufacturers are pursuing
minimally invasive approaches to glucose monitoring such as interstitial fluid
testing. The development and successful introduction of any such products by our
competitors could harm our business.
Four major medical products companies, Bayer Diagnostics, LifeScan, the
MediSense division of Abbott Laboratories and Roche Diagnostics, currently
account for more than 90% of worldwide sales of all blood glucose monitoring
systems. In addition, several smaller companies are in the process of developing
and rolling out blood glucose monitoring systems. We believe that people with
diabetes currently consider the following factors in selecting a blood glucose
monitoring system:
- brand name;
- recommendations by health care professionals;
- level of pain in use;
- size of the meter;
- ease and convenience of use;
- test time;
- accuracy and consistency;
- availability, cost and reimbursement status; and
- memory and data management.
In the ancillary diabetes care industry, which includes lancets, glucose
tablets, syringes, and specialty skin creams, competition is based principally
upon brand name recognition, price, quality of products, customer service and
marketing support. There are numerous companies in this industry selling
products to retailers. A number of these companies, particularly manufacturers
of nationally advertised brand name products, are substantially larger than us
and have greater financial resources.
WOMEN'S HEALTH PRODUCTS
Competition in the pregnancy detection and ovulation prediction market is
intense. Our competitors in the United States are numerous and include, among
others, large medical and consumer products companies as well as private label
manufacturers. For brand name companies, competition principally centers around
brand name recognition. For private label manufacturers, competition is based
primarily on delivering products with substantially the same features and
performance as brand name products, at a lower price. Many of our competitors
have substantially greater financial, production, marketing and distribution
resources than us. In the women's health market, we believe that we have
developed a significant market penetration with our private label and branded
pregnancy detection and ovulation prediction tests. We believe that we can
continue to compete effectively in the women's health market based on our
research and development capabilities, advanced manufacturing expertise and
established wholesale and retail distribution networks.
In the nutritional supplements industry, competition is based principally
upon brand name recognition, price, quality of products, customer service and
marketing support. There are numerous companies in this industry selling
products to retailers. A number of these companies, particularly manufacturers
of nationally advertised brand name products, are substantially larger than us
and have greater financial resources.
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EMPLOYEES
As of September 30, 2000, we had a total of 772 full-time employees, of
which 66 were located in the United States. In addition, we utilize the services
of a number of consultants specializing in research and development in our
targeted markets, regulatory compliance, strategic planning, marketing and legal
matters.
LEGAL PROCEEDINGS
ABBOTT LABORATORIES AND ABBOTT LABORATORIES, LIMITED V. LIFESCAN CANADA LTD.,
LIFESCAN, INC. AND SELFCARE, INC.
On November 23, 1999, Abbott Laboratories and Abbott Laboratories, Limited
(Abbott) commenced a lawsuit against us, LifeScan Canada Ltd. (LifeScan Canada)
and LifeScan in the Canadian Federal Court, Trial Division, Court No. T-2061-99.
The Statement of Claim alleges that LifeScan Canada sells electrode strips for
use in the ONE TOUCH-Registered Trademark- FastTAKE-Registered Trademark- blood
glucose monitoring system supplied by us to LifeScan. It is also alleged that
the sale of such electrode strips in Canada infringes Canadian Patent
No. 1,226,036 issued to Genetics International, Inc., an alleged predecessor in
title of Abbott. Abbott is seeking an injunction against the manufacture,
importing, offering for sale and selling of ONE TOUCH-Registered Trademark-
FastTAKE-Registered Trademark- electrode strips in Canada, as well as damages or
the profits of the defendants arising from the sales of such electrode strips in
Canada. In our Statement of Defense and Counterclaim, we deny infringement and
attack the validity of the patent on a number of grounds. Abbott has not filed a
defense to our Counterclaim, and the parties have not yet commenced documentary
discovery. At this stage of the litigation, it is not possible to predict the
outcome of the action. A final ruling adverse to us could have a material
adverse impact on our sales, operations or financial performance in Canada.
ABBOTT LABORATORIES V. LIFESCAN, INC. AND SELFCARE, INC.
In late October 1998, Abbott commenced a lawsuit against us and LifeScan in
the United States District Court for the District of Massachusetts. The
complaint alleges that the disposable test strips used in the ONE
TOUCH-Registered Trademark- FastTAKE-Registered Trademark- blood glucose
monitoring system supplied by us to LifeScan infringe U.S. Patent No. 5,820,551
(the Test Strip Patent) issued to Abbott on October 13, 1998. Abbott is seeking
damages and an injunction against sales in the United States. Abbott also sought
to enjoin LifeScan and us from the manufacture, use and sale of these blood
glucose test strips in the United States during the pendency of the infringement
litigation. On February 22, 1999, the court denied Abbott's motion for a
preliminary injunction and stated "...that Abbott is unlikely to succeed on the
merits of its claim of patent infringement...". Discovery in the case is
continuing. Although a final ruling against us could have a material adverse
impact on our sales, operations or financial performance, based on a review of
the Abbott claims by patent counsel and the aforementioned court ruling, we
believe that the ONE TOUCH-Registered Trademark- FastTAKE-Registered Trademark-
test strips do not infringe the Test Strip Patent and that Abbott's claims will
be proven to be without merit.
ABBOTT LABORATORIES V. SELFCARE, INC. AND PRINCETON BIOMEDITECH CORPORATION
In April 1998, Abbott commenced a lawsuit against us and Princeton
BioMeditech Corporation (PBM), which manufactured certain products for us, in an
action filed in the United States District Court for the District of
Massachusetts (District Court), asserting patent infringement arising from our
and PBM's manufacture, use and sale of products that Abbott claims are covered
by one or more of the claims of U.S. Patent Nos. 5,073,484 and 5,654,162 (the
Pregnancy Test Patents), to which Abbott asserts that it is the exclusive
licensee. Abbott claims that certain of our products relating to pregnancy
detection and ovulation prediction infringe the Pregnancy Test Patents. Abbott
is seeking an order finding that we and PBM infringe the Pregnancy Test Patents,
an order permanently enjoining us and
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PBM from infringing the Pregnancy Test Patents, compensatory damages to be
determined at trial, treble damages, costs, prejudgment and post-judgment
interest on Abbott's compensatory damages, attorneys' fees, and a recall of all
existing of our or PBM products found to infringe the Pregnancy Test Patents. On
August 5, 1998, the court denied Abbott's motion for a preliminary injunction.
On March 31, 1999, the District Court granted a motion by us, PBM, and
PBM-Selfcare LLC (the LLC), the joint venture between the two companies, filed
to amend their counterclaim against Abbott, asserting that Abbott is infringing
U.S. Patent Nos. 5,559,041 (the 041 patent) and 5,728,587 (the 587 patent),
which are owned by the LLC, and seeking a declaration that Abbott infringes the
patents, permanent injunctive relief, money damages and attorneys' fees. On
November 5, 1998, Abbott filed suit in the United States District Court for the
Northern District of Illinois seeking a declaratory judgment of
non-infringement, unenforceability and invalidity of the 041 patent and 587
patent. The Illinois court granted our motion to transfer the aforementioned
Illinois action to Massachusetts. We and our co-defendant moved for summary
judgment on our defense that the Abbott patents are invalid and on
September 29, 2000 the court granted partial summary judgment, holding that
certain key claims in Abbott's patents are invalid as a matter of law. The court
refused to grant summary judgment on Abbott's claims of infringement or our
remaining claims of invalidity, which will now go forward to trial. We believe
that we have strong defenses against the claims and will continue to defend the
case vigorously; however, a final ruling against us would have a material
adverse impact on our sales, operations or financial performance.
ABBOTT LABORATORIES ET ANOTHER V. CORBRIDGE GROUP PTY LTD AND SELFCARE PTY LTD.
In November 1999, Abbott Laboratories (Abbott) commenced a lawsuit against
our Australian subsidiary, Selfcare Pty Ltd. and Corbridge, its Australian
distributor, in the Federal Court of Australia. The complaint alleged that the
Selfcare-Registered Trademark- Excel-Registered Trademark- ET disposable test
strips (ET Test Strips) supplied by us to Corbridge infringe Australian Patent
No. 572,138 (the Test Strip Patent) issued to Abbott's predecessor in title on
May 5, 1988 (and assigned to Abbott only a few weeks prior to commencement of
the proceedings). These test strips are marketed in Australia for use with
Abbott's ExacTech brand sensor device. Abbott is seeking damages and an
injunction against supply of the test strips in Australia. Abbott also sought to
enjoin the defendants from the importation and supply of these blood glucose
test strips in Australia during the pendency of the infringement litigation. On
November 29, 1999, the court denied Abbott's motion for a preliminary injunction
and on December 17, 1999, ordered an unusually fast track preparation for a
final trial which commenced on April 26, 2000 in Sydney, Australia and was
completed in September 2000.
It is unlikely that any ruling against the Australian defendants could have
an adverse impact on our sales, operations or financial performance elsewhere in
the world, and based on a review of the Abbott claims by Australian counsel and
counsel's analysis of the course of the trial, including the judge's comments
and questions, we believe that the ET Test Strips are unlikely to be found to
infringe the Test Strip Patent and that Abbott's claims will be dismissed.
Furthermore, the Australian defendants have counterclaimed against Abbott
seeking revocation of the Test Strip Patent as well as damages and injunctive
relief for breaches of Australian antitrust law and misleading conduct
prohibitions. We continue to believe that its counter claims have good prospects
of success and that, under Australian law, Abbott will be required to pay a
large portion of the defendants' legal costs incurred in the proceedings.
We are now awaiting judgment on the issues of infringement, misleading
conduct and validity, with the hearing of our antitrust claims, and Abbott's
damages claim, deferred pending judgment on the issues that are the subject of
the initial trial.
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BECTON, DICKINSON AND COMPANY V. SELFCARE, INC. ET. AL.
On January 3, 2000, Becton, Dickinson and Company (Becton Dickinson) filed
suit against us in the U.S. District Court for the District of Delaware (Case
No: 00-001) alleging that certain pregnancy and ovulation test kits sold by us
infringe U.S. Patent Nos. 4,703,017 and 5,591,645. We were served with Becton
Dickinson's complaint in April 2000 and filed our answer on May 30, 2000.
Because both patents are currently involved in proceedings before the patent
office, we have moved to stay the litigation until those proceedings are
complete. That motion is pending without decision. While a final ruling against
us could have a material adverse impact on our sales, operations or financial
performance, we believe that we have strong defenses and intend to defend this
litigation vigorously.
CAMBRIDGE BIOTECH CORPORATION AND CAMBRIDGE AFFILIATE CORPORATION V. RON
ZWANZIGER, SELFCARE, INC., CAMBRIDGE DIAGNOSTICS IRELAND, LTD., TRINITY BIOTECH,
PLC AND PASTEUR SANOFI DIAGNOSTICS
On January 22, 1999, Cambridge Biotech Corporation (CBC) and Cambridge
Affiliate Corporation (CAC) filed suit (Civil Action No. 99-378) in the
Middlesex County Massachusetts Superior Court against us, our President, Ron
Zwanziger, Cambridge Diagnostics Ireland, Ltd. (Cambridge Diagnostics), Trinity
Biotech plc (Trinity) and Pasteur Sanofi Diagnostics (Pasteur). The complaint
alleges, among other things, that actions taken by Mr. Zwanziger as President of
CAC in connection with the sale by Cambridge Diagnostics of its diagnostics
business to Trinity were not properly authorized and that, as a result of the
actions, CBC may lose the benefit of valuable patent licenses from Pasteur.
CBC's requested relief is to have the CAC/Trinity manufacturing and sales
agreements declared null and void, the license between Pasteur and CBC declared
to be in full force, to recover damages allegedly caused by us and Mr.
Zwanziger, and to recover damages due to Pasteur's actions. CBC moved for a
preliminary injunction, seeking to enjoin us, Cambridge Diagnostics,
Mr. Zwanziger, and Trinity from acting pursuant to the CAC/Trinity agreements
and to enjoin Pasteur from terminating its license agreements with CBC.
Following a hearing on January 25, 1999, the Court denied CBC's motion.
Thereafter, Pasteur successfully moved for dismissal on grounds that the issues
between it and CBC should be litigated in France. The plaintiffs' appeal from
that ruling is pending. Trinity has moved for dismissal on grounds that the
issues between it and CBC should be litigated in Ireland or, instead, should be
arbitrated. The Court denied Trinity's motion. The parties are currently
conducting discovery. We believe that CBC's complaint against us, Mr. Zwanziger,
and Cambridge Diagnostics is without merit and intends to defend the action
vigorously. We have filed an Answer denying the material allegations of the
Complaint along with a Counterclaim to declare its actions lawful and valid and
to redress harm that may result if the court invalidates the sale of Cambridge
Diagnostics' diagnostics business to Trinity despite CBC's representations to us
that it had the right to make such a sale. We do not believe that an adverse
outcome would have a material impact on our sales, operations or financial
performance.
INTERVENTION, INC V. SELFCARE, INC. AND COMPANION CASES
In May 1999, Intervention, Inc., a California corporation, filed separate
suits in California Contra Costa County Superior Court against us, four of our
private label customers and its major competitors and their private label
customers alleging that, under Section 17200 of the California Business and
Professions Code, the defendants' labeling on their home pregnancy tests is
misleading as to the level of accuracy under certain conditions. The plaintiff
seeks restitution of profits on behalf of the general public, injunctive relief
and attorneys' fees. We are defending our private label customers under
agreement and believes that the actions are without merit and intend to defend
them vigorously. We do not believe that an adverse ruling against us would have
a material adverse impact on our sales, operations or financial performance.
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MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. V. SELFCARE, INC., INVERNESS
MEDICAL, INC. AND CAN-AM CARE CORPORATION
On March 2, 2000, Matsushita Electric Industrial Co., Ltd. (Matsushita)
filed suit (Case Number 00-143) in the United States District Court for the
District of Delaware against us and two of our subsidiaries. The complaint
alleges patent infringement of a patent used in connection with the manufacture
and distribution of our Excel-Registered Trademark- G test strips for use with
the Bayer Glucometer Elite-Registered Trademark- meter. We intend to defend the
action vigorously. Although a final ruling against us could have a material
adverse impact on the our sales, operations or financial performance, based on a
review of the Matsushita patent by our outside patent counsel, we believe that
its Excel-Registered Trademark- G test strips do not infringe the Matsushita
Patent. Matsushita has recently indicated that it may expand its suit to cover
an additional patent against an additional product but has yet to file
pleadings.
ROCHE DIAGNOSTICS CORPORATION VS. SELFCARE, INC. D/B/A INVERNESS MEDICAL
TECHNOLOGY, INC. ET. AL.
On July 6, 2000, we were served with a complaint filed in the federal court
in Indianapolis, Indiana by Roche Diagnostics Corporation against us and several
of our subsidiaries for patent infringement. The complaint alleges that the
Excel-Registered Trademark- G blood glucose test strips designed for use with
test meters marketed by Bayer Corporation infringe a United States patent owned
by Roche. We believe that the Excel-Registered Trademark- G strips do not
infringe the patent at issue but, because the case was only recently filed, have
not yet completed our testing and analysis. A final ruling against us could have
a material adverse impact on our sales, operations or financial performance.
In addition, we are party to certain other legal proceedings in the ordinary
course of our business, the outcome of which we do not expect will harm our
business, financial condition or results of operations.
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(b) Set forth below is a description of the Registrant's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as previously included in Amendment No. 1 to the Registration
Statement pursuant to which the Registrant and certain stockholders offered
shares of the Registrant's common stock, which Registration Statement
included updates to the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section as it was originally filed in
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
From 1997 through 1999, our total revenues have grown from $52.3 million to
$125.9 million, representing a compound annual growth rate of more than 55%.
Total revenues for the first nine months of 2000 were $121.3 million. For the
first nine months of 2000, our sales of diabetes management products accounted
for $80.0 million, or 66% of total revenues. Total revenues associated with the
sales of women's health products for the nine month period ended September 30,
2000 were $33.3 million. We expect that our revenue growth in the foreseeable
future will be derived primarily from increased sales of our electrochemical
blood glucose test strips.
We have a global distribution agreement with LifeScan, a subsidiary of
Johnson & Johnson, with respect to our electrochemical blood glucose monitoring
systems, which they market as the ONE TOUCH-Registered Trademark-
FastTAKE-Registered Trademark- and ONE TOUCH-Registered Trademark- Ultra.
LifeScan, a leader in the blood glucose monitoring market, has publicly
announced its intention to shift its focus from its older photometric-based
systems to electrochemical systems. Currently, we are the only supplier of such
systems to LifeScan. Accordingly, we anticipate a significant increase in unit
sales of our meters and test strips and we are continuing to increase capacity
in order to meet anticipated demand. Based upon this anticipated demand, we
expect that LifeScan will become eligible for its last scheduled volume-based
price reduction in the first quarter of 2001 under the terms of our distribution
agreement, resulting in a decrease in our earnings in that quarter as compared
to the fourth quarter of 2000. We market our other products to consumers through
our own established retail distribution networks, including Wal-Mart, CVS and
Walgreens.
We intend to continue to invest heavily in research and development both
internally, as well as through targeted acquisitions and strategic
relationships.
RECENT DEVELOPMENTS
PENDING ACQUISITION OF INTEG INCORPORATED
On October 3, 2000, we entered into a definitive agreement to acquire Integ
Incorporated, a publicly traded development stage company. Integ, which was
incorporated in 1990 and is headquartered in Minnesota, has developed a
proprietary sampling technology which extracts interstitial fluid from the top
layers of the skin. We may be able to use Integ's technology, supplemented by
our internal research and development efforts, to develop products that are
complementary to our current product offerings in the areas of diabetes
management and medical diagnostics.
The purchase price for Integ consists of 1.9 million shares of our common
stock in exchange for all of Integ's common equity and approximately
$5.5 million in cash to redeem shares of Integ's preferred stock. We will record
a significant amount of intangible assets in connection with this acquisition
and will incur a significant charge in the quarter in which the acquisition is
completed to write off a portion of the purchase price as in-process research
and development. We anticipate that the acquisition will close early in the
first quarter of 2001. However, our acquisition of Integ is subject to various
closing conditions, including approval by Integ's stockholders, and may not be
completed by this date, if at all.
DEVELOPMENT AND LICENSE AGREEMENT WITH DEBIOTECH, S.A.
On October 14, 2000, we entered into a development and license agreement
with Debiotech, S.A., pursuant to which Debiotech will seek to develop an
externally-worn insulin pump using its patented Micro Electro-Mechanical Systems
technology in exchange for a $10 million fee. We also received an option,
exercisable in certain circumstances for an additional fee, for the exclusive
right to commercialize an implantable insulin pump which Debiotech may seek to
develop using its technology.
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RESULTS OF OPERATIONS
The following table summarizes our consolidated statement of operations as a
percentage of net revenues:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
CONSOLIDATED STATEMENT OF OPERATIONS: 1995 1996 1997 1998 1999 1999 2000
------------------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................................ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales....................................... 76.9 57.5 50.3 65.3 66.1 68.0 58.2
------ ------ ------ ------ ------ ------ ------
Gross profit........................................ 23.1 42.5 49.7 34.7 33.9 32.0 41.8
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development.......................... 21.2 34.8 29.9 6.3 5.5 4.8 7.8
Selling, general, and administrative.............. 78.7 77.2 49.4 30.7 28.1 30.0 23.8
Other expenses.................................... -- 23.1 6.3 6.4 -- -- --
------ ------ ------ ------ ------ ------ ------
Total operating expenses.......................... 99.9 135.1 85.6 43.4 33.6 34.8 31.6
------ ------ ------ ------ ------ ------ ------
Operating (loss) income......................... (76.8) (92.6) (35.9) (8.7) 0.3 (2.8) 10.2
------ ------ ------ ------ ------ ------ ------
Interest expense, including amortization of original
issue
discount.......................................... (61.9) (60.6) (10.5) (8.1) (6.5) (6.4) (4.8)
Interest and other income (expense), net............ -- 3.9 0.8 1.5 (0.4) (0.1) 1.8
------ ------ ------ ------ ------ ------ ------
(Loss) income before dividends and accretion on
mandatorily redeemable preferred stock of a
subsidiary.................................... (138.7) (149.3) (45.6) (15.3) (6.6) (9.3) 7.2
Dividends and accretion on mandatorily redeemable
preferred stock of subsidiary..................... (0.8) (0.6) (0.2) (0.1) (0.2) (0.2) (0.3)
------ ------ ------ ------ ------ ------ ------
(Loss) income before extraordinary loss and
income taxes.................................. (139.5) (149.9) (45.8) (15.4) (6.8) (9.5) 6.9
Extraordinary loss on modification and early
extinguishment of debt............................ -- -- (1.1) -- (0.2) (0.3) (0.6)
------ ------ ------ ------ ------ ------ ------
(Loss) income before income taxes............... (139.5) (149.9) (46.9) (15.4) (7.0) (9.8) 6.3
Provision for income taxes.......................... -- -- 0.4 0.5 0.2 0.4 0.3
------ ------ ------ ------ ------ ------ ------
Net (loss) income............................... (139.5)% (149.9)% (47.3)% (15.9)% (7.2)% (10.2)% 6.0 %
====== ====== ====== ====== ====== ====== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
NET REVENUES. Net revenues increased $31.7 million, or 35%, to
$121.3 million for the nine months ended September 30, 2000 from $89.6 million
for the nine months ended September 30, 1999. The primary reason for the
increase in revenues was the increased sale of products for diabetes management,
especially the ONE TOUCH-Registered Trademark- FastTAKE-Registered Trademark-
blood glucose monitoring system, which is distributed by LifeScan. ONE
TOUCH-Registered Trademark- FastTAKE-Registered Trademark- sales were driven by
strong market acceptance. Net diabetes product sales were $80.0 million for the
nine months ended September 30, 2000, an increase of $31.1 million or 64% as
compared to net diabetes product sales of $48.9 million for the nine months
ended September 30, 1999. Net diabetes product sales accounted for 66% of net
revenues for the nine months ended September 30, 2000, compared to 55% of net
revenues for the nine months ended September 30, 1999. Net product sales from
our women's health segment increased $1.5 million or 5% to $33.3 million for the
nine months ended September 30, 2000 as compared to $31.8 million for the nine
months ended September 30, 1999. Although net women's health product sales
increased as compared to the prior periods, they only accounted for 27% of total
net revenues for the nine months ended September 30, 2000, compared to 35% of
total net revenues for the nine months ended September 30, 1999, as a result of
the significant increase in diabetes product sales. The primary factor in the
year-to-date increased sales of the women's health products was an increase in
sales of branded and private label pregnancy and ovulation tests. Net sales of
clinical diagnostic products decreased slightly by $566,000 for the nine months
ended September 30, 2000 as compared to the nine months ended September 30,
1999. Grant and other revenue were $247,000 for the nine months ended
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<PAGE>
September 30, 2000, respectively, compared to $642,000 for the nine months ended
September 30, 1999.
GROSS PROFIT. Gross profit increased by $22.0 million or 77% to
$50.7 million for the nine months ended September 30, 2000 from $28.7 million
for the nine months ended September 30, 1999. Gross margin of net product sales
increased to 42% for the nine months ended September 30, 2000, compared to 32%
for the nine months ended September 30, 1999. The significant improvements in
gross profit and gross margin of net product sales primarily resulted from the
increase in sales of ONE TOUCH-Registered Trademark-
FastTAKE-Registered Trademark- systems and reductions in per unit manufacturing
costs attributed to lower material costs, improved yields and volume related
efficiency at our diabetes product manufacturing facility in Inverness,
Scotland.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased by $5.1 million or 118% to $9.5 million from $4.4 million for the nine
months ended September 30, 1999. The increase in research and development
expense resulted from research programs directed towards blood glucose
monitoring systems. We expect to continue to spend significant amounts on
research and development in the area of diabetes management.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the nine months ended
September 30, 2000, selling, general and administrative expense increased by
$2.1 million or 8% to $28.9 million from $26.8 million for the nine months ended
September 30, 1999. The increase in selling, general and administrative expense
resulted from higher marketing expenditures related to sales of our
Excel-Registered Trademark-G product and diabetes supplies, increased legal fees
related to the defense of the Abbott lawsuits against us and a one-time non-cash
compensation charge of $429,000 related to stock options granted to consultants.
Selling, general and administrative expense as a percentage of net revenues was
24% for the nine months ended September 30, 2000 compared to 30% for the nine
months ended September 30, 1999.
INTEREST EXPENSE. For the nine months ended September 30, 2000, we incurred
$5.7 million in interest expense, net of interest income, compared to
$5.7 million for the nine months ended September 30, 1999.
OTHER INCOME (EXPENSE). We incurred other income of $2.3 million for the
nine months ended September 30, 2000, compared to other expense of $135,000 for
the nine months ended September 30, 1999. Generally, other income or expense
represents foreign currency exchange transaction gains and losses. During the
nine months ended September 30, 2000, we recognized $562,000 in foreign exchange
gain as a result of the strong U.S. Dollar versus the British Pound Sterling on
loans from LifeScan, that is denominated in British Pounds Sterling.
Additionally, during the nine months ended September 30, 2000, we also recorded
a gain of $1.8 million from the sale of our holding of 8.6 million shares in
Theratase plc.
DIVIDENDS AND ACCRETION ON MANDATORILY REDEEMABLE PREFERRED STOCK OF A
SUBSIDIARY. Inverness Medical Limited (Inverness Scotland), our subsidiary in
Inverness, Scotland, accrued $383,000 for the nine months ended September 30,
2000 representing dividends payable and accretion on the outstanding cumulative
redeemable preference shares, as compared to $170,000 for the nine months ended
September 30, 1999. In June 2000, we recorded a one-time 15% accretion, which
amounted to 150,000 British Pound Sterling ($227,000), because we elected not to
redeem the first issue of such preferred shares within five years of its
original issue date, or June 23, 2000.
EXTRAORDINARY LOSS. In the second quarter of 2000, we recorded an
extraordinary loss of $800,000 ($486,000 of which was non-cash expense) for the
refinancing of our subordinated revenue royalty notes. In the first quarter of
1999, we recorded an extraordinary loss of $306,000 ($228,000 of which was
non-cash expense) for the modification of our then outstanding senior
subordinated convertible notes.
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<PAGE>
INCOME TAXES. For the nine months ended September 30, 2000, we recorded
provisions of $435,000 for income taxes compared to $349,000 for the nine months
ended September 30, 1999. Substantially all of the income tax provisions reflect
certain state income taxes relating to our subsidiaries in the United States.
NET (LOSS) INCOME. For the nine months ended September 30, 2000, we
realized net income of $7.2 million compared to a net loss of $9.2 million for
the nine months ended September 30, 1999. Basic and diluted earnings per common
share for the nine months ended September 30, 2000 were $0.30 and $0.26,
respectively, compared to a basic and diluted loss per common share of $0.64 for
the nine months ended September 30, 1999. The results for the nine-month period
ending September 30, 2000 and 1999 included significant non-recurring, non-cash
charges and income as detailed above. Excluding the non-recurring and non-cash
charges and income, net income for the nine months ended September 30, 2000 was
$6.7 million compared to a net loss of $8.9 million for the nine months ended
September 30, 1999. Excluding non-recurring and non-cash charges and income,
basic and diluted earnings per common share were $0.28 and $0.24, respectively,
for the nine months ended September 30, 2000, compared to a basic and diluted
net loss per common share of $0.62 for the nine months ended September 30, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUES. Net revenues in 1999 increased $7.9 million or 7% to
$125.9 million from $118.0 million in 1998. The primary reason for the increase
in revenues was the increased sales of products for diabetes management,
especially the ONE TOUCH-Registered Trademark- FastTAKE-Registered Trademark-
blood glucose monitoring system. Net sales from our diabetes management segment
were $71.2 million in 1999, an increase of $14.0 million or 25% as compared to
net sales of $57.2 million in 1998. The net sales of products for diabetes
management accounted for 57% of our net revenues in 1999 compared to 48% of the
net revenues in 1998. Net sales from our women's health segment were
$42.8 million in 1999, an increase of $2.3 million or 6% as compared to
$40.5 million in 1998. Although the net sales of women's health products
increased from 1998, they accounted for the same percentage (34%) of our net
revenues due to the faster growth in the diabetes segment. The increase in the
women's health segment was attributable primarily to two factors. We experienced
a full year of sales of SoyCare-TM-, a line of nutritional supplements for
menopause and bone health introduced in July 1998. The second factor in the
increased net sales of the women's health segment was an increase in sales of
branded and private label pregnancy and ovulation tests. Other revenues were
derived from the net sales of clinical diagnostics products and the recognition
of deferred revenue. Net sales of the clinical diagnostic products for 1999 were
$11.1 million, a decrease of $4.8 million or 30% from net sales of
$15.9 million in 1998. The decrease in diagnostic product sales was primarily
due to our sale of the diagnostics business line of our wholly-owned subsidiary
in Ireland, Cambridge Diagnostics Ireland, Ltd. (Cambridge Diagnostics), in
September 1998. Additionally, a decline in sales of our wholly owned subsidiary
in Israel, Orgenics Ltd. (Orgenics), accounted for $2.1 million of the decline
in diagnostic product revenues. This was due primarily to a one time
non-recurring sale of HIV test kits for $1.6 million during 1998. Grant and
other revenue was approximately $742,000 in 1999, a decrease of $3.2 million or
81% from grant and other revenue of $3.9 million in 1998. In 1999, we recognized
$316,000 of revenue related to a $7.0 million success fee received from LifeScan
in October 1996, versus $2.7 million in 1998. The amortization of this success
fee was complete in March 1999. Approximately $398,000 of the revenues for 1999
was attributable to the amortization of deferred revenue associated with certain
development and capital grants relating to our manufacturing facility in
Inverness, Scotland. In 1998, we recognized $1.2 million revenue in connection
with development and capital grants, most of which related also to the Inverness
facility.
GROSS PROFIT. Total gross profit for 1999 increased $1.7 million or 4% to
$42.6 million from $40.9 million in 1998. However, gross profit on net product
sales for 1999 increased $4.9 million or
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<PAGE>
13% to $41.9 million from $37.0 million in 1998. The increase in gross profit
was primarily attributable to the increase in sales of ONE
TOUCH-Registered Trademark- FastTAKE-Registered Trademark-. Gross profit
percentage of net product sales increased to 33% in 1999 from 32% in 1998. Gross
profit on net sales of the diabetes management segment was $14.8 million or 21%
of the net sales of the diabetes management segment for 1999 compared to
$7.8 million or 14% of the net sales of the diabetes management segment for
1998. Gross profit on the women's health segment was $20.9 million or 49% of the
net sales of women's health products in 1999 compared to $20.2 million or 50% of
the net sales of women's health products in 1998. The profit increase was
primarily due to higher sales of pregnancy and ovulation tests. Gross profit
from net sales of clinical diagnostics and other products, and the recognition
of deferred revenue was $6.9 million in 1999 compared to $12.8 million in 1998.
The decrease was primarily attributable to the decrease in revenue recognized on
the aforementioned LifeScan success fee received in 1996 and the sale of
Cambridge Diagnostics' diagnostics business in September 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1999
decreased $474,000 or 6% to $6.9 million from $7.4 million in 1998. The decrease
was primarily due to our sale of the diagnostics business line of Cambridge
Diagnostics in September 1998. Research and development expenses related to
diabetes products at our subsidiary in Scotland, Inverness Medical Limited
(Inverness), increased by $1.0 million but were more than offset by a reduction
in research and development expenses of the clinical diagnostics business. We
expect to spend significant and increasing amounts on research and development
in the area of diabetes, and specifically glucose monitoring, throughout 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased $900,000 or 2% to $35.4 million from
$36.3 million in 1998. The decrease was primarily attributable to a reduction in
expenses associated with the clinical diagnostic business. Selling, general and
administrative expense as a percentage of net revenues decreased to 28% of net
revenues for 1999 from 31% of net revenues for 1998.
NET CHARGE ON BUSINESS DISPOSITION, ASSET IMPAIRMENT AND RESTRUCTURING
ACTIVITIES. There were no charges for business disposition, asset impairment or
restructuring activities in 1999. A loss on disposition of a business was
recorded in 1998 (See "Year Ended December 31, 1998 compared to Year Ended
December 31, 1997").
INTEREST EXPENSE. Interest expense decreased $1.5 million to $8.1 million
in 1999 from $9.6 million in 1998. In 1999, we recognized $327,000 of non-cash
interest expense for the amortization of the original issue discount on
convertible notes and warrants compared to $1.8 million of non-cash interest
expense recognized in 1998 for the amortization of the original issue discount
on convertible notes and warrants.
INTEREST AND OTHER (EXPENSE) INCOME, NET. Interest income decreased by
$222,000 to $363,000 in 1999 from $585,000 in 1998, primarily due to the
decrease in cash balances. In addition, we incurred realized and unrealized
losses totaling $853,000 in 1999 due to foreign currency fluctuation. In 1998,
we recognized $1.5 million of non-cash income related to 155,724 shares of our
Common Stock received into treasury in connection with the settlement agreement
dated March 6, 1998 by and among us, Trinity Biotech plc (Trinity), Flambelle
Limited and Eastcourt Limited. We also recognized a $237,000 gain in 1998
related to our 29.9% equity in the net profit of Enviromed plc.
DIVIDENDS AND MINORITY INTEREST. In 1999, our subsidiary, Inverness,
accrued $226,000 representing a 6% dividend payable on its outstanding
cumulative redeemable preference shares, as compared to $146,000 for 1998. In
October 1998, an additional 1,000,000 shares of 6% cumulative redeemable
preference stock of Inverness were issued to Inverness & Nairn Local Enterprise
Company (INLEC), a development agency funded by the government of the United
Kingdom, for approximately $1.7 million. Minority interest in certain of our
subsidiaries was less than $1,000 in 1999 compared to $100,000 in
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<PAGE>
1998. We now own 100% of Orgenics, either directly or indirectly, as compared to
our prior year's 99.8% ownership.
EXTRAORDINARY LOSS. In the first quarter of 1999, we recorded an
extraordinary loss of approximately $306,000 ($228,000 of which is non-cash
expense) for the modification of the terms of the Senior Subordinated
Convertible Notes issued during October 1997 (see Note 16 of the "Notes to
Consolidated Financial Statements").
INCOME TAXES. In 1999, we recorded provisions of $245,000 for income taxes
compared to $544,000 in 1998. The provisions predominately reflect certain state
income taxes relating to our subsidiaries, Inverness Medical, Inc. (IMI) and
Can-Am Care Corporation (Can-Am), as well as capital gains taxes in Ireland
relating to the business disposition of Cambridge Diagnostics. In 1999, we also
recognized a $300,000 benefit related to the establishment of a state deferred
tax asset. See the discussion of Income Taxes under "Liquidity and Capital
Resources" below.
NET LOSS. Net loss for 1999 was approximately $9.1 million or $0.66 per
common share as compared to $18.8 million or $1.55 per common share for 1998.
The net loss in 1999 and 1998 includes non-recurring, non-cash charges and
income as described above. Excluding the non-recurring, non-cash charges and
income results in a net loss of $8.4 million or $0.62 per common share in 1999
as compared to $10.9 million or $0.91 per common share in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues in 1998 increased $65.7 million or 126% to
$118.0 million from $52.3 million in 1997. The primary reason for the increase
in revenues was the addition of Can-Am acquired in February 1998 and the sales
of the ONE TOUCH-Registered Trademark- FastTAKE-Registered Trademark- system,
which we primarily started shipping in 1998. Net sales from our diabetes
management segment were $57.2 million in 1998, an increase of $56.8 million as
compared to net sales of $434,000 in 1997. The diabetes management net product
sales accounted for 48% of our net revenues in 1998 compared to just 1% of the
net revenues in 1997. Net sales from our women's health segment were
$40.5 million in 1998, an increase of $8.6 million or 27% as compared to
$31.8 million in 1997. Although the net sales of women's health products
increased from 1997, they accounted for a smaller percentage of our net revenues
due to the introduction of the diabetes management products. The women's health
product sales accounted for 34% of our total net revenues in 1998 compared to
61% of the total net revenues in 1997. The increase in the net sales in the
women's health segment is attributed primarily to three factors. First, in 1998,
we experienced the effect of a full year's net sales of our nutritional
supplements compared with 10 1/2 months of sales from the acquisition of this
product line in February, 1997. Secondly, we introduced SoyCare-TM-, a new line
of nutritional supplements for menopause and bone health, in July 1998. The
third factor in the increased net sales of the women's health segment was an
increase in sales of private label pregnancy and ovulation tests. Other revenues
were derived from the net sales of clinical diagnostics products and the
recognition of deferred revenue. Net sales of the clinical diagnostic products
for 1998 were $15.9 million, a decrease of $2.2 million or 13% from net sales of
$18.1 million in 1997. The decrease in diagnostic product sales was partly due
to our sale of the diagnostics business of Cambridge Diagnostics in
September 1998 in addition to a general decline in the sales of the clinical
diagnostics products. Grant and other revenue amounted to $3.9 million in 1998,
an increase of $2.5 million or 187% from grant and other revenue of
$1.4 million in 1997. In 1998, we recognized $2.7 million of revenue related to
a $7.0 million success fee received from LifeScan in October 1996. Approximately
$1.2 million of the revenues for 1998 were attributable to the amortization of
deferred revenue associated with certain development and capital grants relating
to the Inverness facility. In 1997, there was $1.1 million revenue recognized in
connection with the grants, most of which related to the Inverness facility.
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GROSS PROFIT. Gross profit for 1998 increased $14.9 million or 57% to
$40.9 million from $26.0 million in 1997. The increase in gross profit was
primarily attributable to the sales of ONE TOUCH-Registered Trademark-
FastTAKE-Registered Trademark- and the inclusion of the products sold by Can-Am
which we acquired in February 1998. Gross profit as a percentage of net revenues
decreased to 35% in 1998 from 50% in 1997. The decrease in the gross profit as a
percentage of net revenues is attributed to the sale of meters for the ONE
TOUCH-Registered Trademark- FastTAKE-Registered Trademark- system, which are
sold at cost. Gross profit on net sales of the diabetes management segment was
$7.8 million or 14% of the net sales of the diabetes management segment for
1998. Gross profit on the women's health segment was $20.2 million or 50% of the
net sales of women's health products in 1998 compared to $15.9 million or 50% of
the net sales of women's health products in 1997. The $4.3 million increase was
primarily due to increases in the sales of the nutritional supplements,
including sales of SoyCare-TM-, a new product introduced in 1998. Gross profit
from net sales of clinical diagnostics and other products, and the recognition
of deferred revenue was $12.8 million in 1998 compared to $10.4 million in 1997.
The increase was primarily attributable to the revenue recognized on the
aforementioned LifeScan success fee.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1998
decreased $8.2 million or 53% to $7.4 million from $15.6 million in 1997. The
decrease was primarily due to the transition in December 1997 of the ONE
TOUCH-Registered Trademark- FastTAKE-Registered Trademark- system from research
and development into production.
CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT. A portion of the purchase
price of our acquisition of Orgenics was allocated to in-process research and
development projects that did not achieve technological feasibility and did not
have future alternative uses. The total charge for in-process research and
development was $7.7 million of which $3.3 million was expensed in 1997. There
were no charges for in-process research and development in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $10.5 million or 41% to $36.3 million from
$25.8 million in 1997. The increase was primarily attributable to the
acquisition of Can-Am and marketing efforts and the hiring of additional staff
to support the sales of the women's health products, especially SoyCare-TM-.
Additionally, legal expenses were higher in 1998 due to litigation. Selling,
general and administrative expense as a percentage of net revenues decreased in
1998 from 1997. Selling, general and administrative expense was 31% of net
revenues for 1998 compared to 49% for 1997.
NET CHARGE ON BUSINESS DISPOSITION, ASSET IMPAIRMENT AND RESTRUCTURING
ACTIVITIES. On September 30, 1998, we sold the clinical diagnostics business of
our subsidiary, Cambridge Diagnostics, to Trinity for consideration of 555,731
shares of our Common Stock, which was then owned by Trinity, $230,000 in cash
and other consideration valued at approximately $43,000. We recorded a gain of
approximately $1.2 million as a result of the sale of the assets. In the fourth
quarter of 1998, we recorded impairment charges totaling $7.8 million reflecting
the change in the fair value of certain assets that were no longer expected to
contribute to our profitability. In 1998, we also recorded a $810,000
restructuring charge related to the discontinuance of development and
manufacture of diabetes management products at Cambridge Diagnostics.
INTEREST EXPENSE. Interest expense increased $4.1 million to $9.6 million
in 1998 from $5.5 million in 1997. In 1998, we recognized $1.8 million of
non-cash interest expense for the amortization of the original issue discount on
convertible notes and warrants. In 1997, we recognized $498,000 of non-cash
interest expense for the amortization of the original issue discount on
convertible notes and warrants. The increase in interest expense was due to new
financing activities in 1998 and also due to a full year of interest expense on
the Subordinated Revenue Royalty Notes issued in mid-1997.
INTEREST AND OTHER (EXPENSE) INCOME, NET. Interest income decreased by
$383,000 to $585,000 in 1998 from $968,000 in 1997, primarily due to the
decrease in cash balances. We also recognized
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$1.5 million of non-cash income related to 155,724 shares of our Common Stock
received into treasury in connection with the settlement agreement dated
March 6, 1998 by and among us, Trinity, Flambelle Limited and Eastcourt Limited.
We recognized a $237,000 gain in 1998 related to our 29.9% equity in the net
profit of Enviromed plc compared to a $327,000 loss recognized in 1997. We
incurred an unrealized loss of $717,000 in 1997 on the translation of
intercompany receivables. Fluctuations in foreign currency did not significantly
impact revenue performance measured in U.S. dollars for 1998. Substantially all
sales are paid in the functional currency of the selling entity.
DIVIDENDS AND MINORITY INTEREST. For 1998, our subsidiary, Inverness,
accrued $146,000 representing a 6% dividend payable on its outstanding
cumulative redeemable preference shares, as compared to $114,000 for 1997. In
October 1998, an additional 1,000,000 shares of 6% cumulative redeemable
preference stock of Inverness were issued to INLEC for approximately
$1.7 million. Minority interest in certain of our subsidiaries was $100,000 in
1998 and $181,000 in 1997.
EXTRAORDINARY LOSS. In 1997, we incurred a non-cash charge of $579,000 for
the extinguishment of debt related to the Cambridge Diagnostics Notes and EN PLC
Notes, which were exchanged for convertible notes.
INCOME TAXES. In 1998, we recorded provisions of $544,000 for income taxes
compared to $196,000 for 1997. The 1998 provision reflects certain state income
taxes relating to IMI and Can-Am, as well as capital gains taxes in Ireland
relating to the business disposition of Cambridge Diagnostics. Substantially all
of the 1997 provision relates to state income taxes.
NET LOSS. Net loss for 1998 was approximately $18.8 million or $1.55 per
common share as compared to $24.7 million or $3.36 per common share in 1997. The
net loss in 1998 and 1997 includes non-recurring, non-cash charges and income as
described above. Excluding the non-cash charges and income results in a net loss
of $10.9 million or $0.91 per common share in 1998 as compared to $20.0 million
or $2.50 per common share for 1997. These losses reflect continued spending on
research and development, expansion of our sales and marketing efforts, the
hiring of additional staff to support our operations and significant interest
expense on our debts.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly consolidated operating
results for each of our last six quarters. We have prepared this information on
a basis consistent with our audited consolidated financial statements and
included all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of the data. These quarterly
results are not necessarily indicative of future results of operations. This
information should be read in conjunction with our consolidated financial
statements and notes included elsewhere in this prospectus.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA): 1999 1999 1999 1999 2000 2000 2000
-------------------------------------- --------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues................... $29,198 $27,303 $33,146 $36,226 $37,697 $40,607 $43,014
Cost of sales.................. 20,069 19,084 21,804 22,288 21,901 23,534 25,160
------- ------- ------- ------- ------- ------- -------
Gross profit................... 9,129 8,219 11,342 13,938 15,796 17,073 17,854
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development..... 1,225 1,358 1,774 2,550 3,168 3,020 3,291
Selling, general, and
administrative............. 9,286 8,163 9,390 8,551 9,121 9,907 9,882
Other expenses............... -- -- -- -- -- -- --
Total operating expenses..... 10,511 9,521 11,164 11,101 12,289 12,927 13,173
------- ------- ------- ------- ------- ------- -------
Operating (loss) income.... (1,382) (1,302) 178 2,837 3,507 4,146 4,681
------- ------- ------- ------- ------- ------- -------
Interest expense, including
amortization of original issue
discount..................... (1,800) (1,901) (1,997) (2,090) (2,150) (2,119) (1,462)
Interest and other (expense) income,
net.......................... (134) (59) 57 (700) 69 2,132 55
(Loss) income before dividends and
accretion on mandatorily
redeemable preferred stock of a
subsidiary............... (3,316) (3,262) (1,762) 47 1,426 4,159 3,274
Dividends and accretion on mandatorily
redeemable preferred stock of
subsidiary................... (56) (56) (57) (58) (55) (280) (48)
(Loss) income before extraordinary
loss and income taxes.... (3,372) (3,318) (1,819) (11) 1,371 3,879 3,226
Extraordinary loss on modification and
early extinguishment of debt... (306) -- -- -- -- (800) --
(Loss) income before income
taxes.................... (3,678) (3,318) (1,819) (11) 1,371 3,079 3,226
Provision (benefit) for income
taxes........................ 245 89 15 (102) 136 152 147
Net (loss) income.......... $(3,923) $(3,407) $(1,834) $ (91) $ 1,235 $ 2,927 $ 3,079
======= ======= ======= ======= ======= ======= =======
Net (loss) income per common and
potential common share:(1)
Basic...................... $ (0.32) $ (0.22) $ (0.11) $ (0.03) $ 0.05 $ 0.12 $ 0.12
======= ======= ======= ======= ======= ======= =======
Diluted.................... $ (0.32) $ (0.22) $ (0.11) $ (0.03) $ 0.04 $ 0.11 $ 0.11
======= ======= ======= ======= ======= ======= =======
</TABLE>
------------------------------
(1) Computed as described in our historical financial statements and related
notes incorporated by reference into this prospectus.
Our results of operations historically have fluctuated on a quarterly basis
and can be expected to continue to be subject to quarterly fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our business through operating cash flows,
proceeds from borrowings and the issuance of equity securities. During the first
nine months of 2000, we generated cash of $9.6 million from our operating
activities due primarily to net income of $11.4 million, adjusted for noncash
items. During the first nine months of 2000, we used cash of $1.8 million for
our investing activities, consisting of $5.1 million used primarily at Inverness
to purchase property and equipment offset by cash received of $3.3 million from
the sale of our investment in Theratase plc. During the first nine months of
2000, we used cash of $6.1 million for financing activities, including our
principal repayments on loans from Chase Manhattan Bank and LifeScan and net
proceeds paid for the refinancing of subordinated notes, which were partially
offset by a $542,000 capital grant received by us
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and $2.4 million in proceeds received from the issuance of common stock. Working
capital deficit was $(16.5) million at September 30, 2000 compared to
$(8.7) million at December 31, 1999.
In February 1998, we acquired Can-Am, a leading supplier of diabetes care
products, for a combination of cash, notes and shares of common stock. At the
time, we entered into a $42 million credit agreement with Chase Manhattan Bank
to fund the cash portion of the purchase price and to repay outstanding
indebtedness under a prior credit facility. The Chase credit agreement consists
of a $37 million term loan and a $5 million revolving line of credit. Borrowings
under the Chase credit agreement are secured by the capital stock of one of our
subsidiaries, our assets and the assets of our subsidiaries. Our subsidiary is
required to make quarterly principal payments on the term portion of the loan
ranging from $1.2 million to $1.8 million through December 31, 2003. Our
subsidiary must also make mandatory prepayments on the term loan if it meets
certain cash flow thresholds, sells assets outside of the ordinary course of
business, issues or sells indebtedness or issues stock. During the first nine
months of 2000, our subsidiary has made quarterly principal payments and
mandatory prepayments totaling $5.5 million. At September 30, 2000, the unused
balance of the revolving line of credit was approximately $2.1 million.
On January 8, 1999, we sold in a private placement 57,842 shares of
Series C convertible preferred stock, 3,030 shares of Series D convertible
preferred stock and 13,169 shares of Series E convertible preferred stock to
investors at an aggregate purchases price of $7.4 million. Of the gross
proceeds, we received approximately $4.9 million in advance during
December 1998.
We entered into amendments of our agreements with LifeScan in June 1999.
Under the amended agreements, we develop and supply to LifeScan additional
products for monitoring blood glucose in humans. Upon the execution of the
amended agreements, LifeScan provided us with an initial loan of L6,250,000
(approximately $9,900,000) to fund the increased costs related to the
anticipated production levels. LifeScan has also committed to make additional
loans of up to L8,125,000 (approximately $12,000,000) to us upon the
accomplishment of certain milestones relating to new products we are to develop
for LifeScan. Through September 30, 2000, we have received L2,031,250
(approximately $2,900,000) in additional loans from LifeScan. Interest on the
initial and additional loans accrues at 11% and is payable quarterly. The
aggregate principal amount of the initial and additional loans is to be repaid
by deducting L0.0125 (approximately $0.02) from the invoice price of each strip
we sell to LifeScan commencing on the date of the initial loan. On
September 30, 2000, the balance of the outstanding initial LifeScan loan and
additional LifeScan loans was approximately $6.6 million.
During June, July and August 2000, we sold units having an aggregate
purchase price of $19.3 million for the purpose of retiring certain outstanding
subordinated promissory notes and subordinated revenue royalty notes that were
issued in 1997 and 1998. Each unit consists of (i) $25,000 in principal amount
of a new subordinated promissory note and (ii) a warrant to acquire 123 shares
of our common stock. The new subordinated promissory notes were sold in
accordance with the maturity dates and prepayment dates of the notes being
retired. In the aggregate, we issued warrants to purchase 119,350 shares of our
common stock with exercise prices ranging from $7.94 to $15.38, calculated based
upon the average closing prices of our common stock for the ten days prior to
each closing. The new subordinated promissory notes are due on the first
anniversary of their date of issuance and the warrants may be exercised at any
time on or prior to the tenth anniversary of their date of issuance.
As of December 31, 1999, we had approximately $16.4 million and
$48.1 million of domestic and foreign net operating loss carryforwards,
respectively, and approximately $99,000 of research and development tax credit
carryforwards, which expire at various dates through 2019. These losses and tax
credits are available to reduce federal taxable income and federal income taxes,
respectively, in future years, if any. These losses and tax credits are subject
to review and possible adjustment by the Internal Revenue Service and may be
limited in the event of certain cumulative changes in ownership interests
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of significant shareholders over a three-year period in excess of 50%. We have
recorded a valuation allowance against substantially all of the deferred tax
asset to reflect uncertainties that might affect the realization of the deferred
tax asset.
Based upon our operating plans, we believe that our existing capital
resources will be adequate to fund our operations and scheduled debt obligations
for at least the next 12 months. We believe that we will be able to fund our
research and development activities related to products being designed and
developed for LifeScan out of existing funds and anticipated funding pursuant to
the Amended Agreements with LifeScan. Absent the proceeds from this offering, if
we were to encounter delays in achieving the milestones necessary for receiving
the funding from LifeScan, we would need to seek alternative financing
arrangements or delay the project spending. In addition, we may expand our
research and development of new technologies (beyond the aforementioned
activities related to LifeScan) and may pursue the acquisition of new products
and technologies, whether through licensing arrangements, business acquisitions,
or otherwise. No assurance can be given that additional capital will be
available, or, if available, that it will be available on acceptable terms. If
additional funds are raised by issuing equity securities, further dilution to
then existing stockholders will result. If adequate funds are not available, we
may not be able to pursue desirable research and development programs unless we
obtain funds through arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our technologies or products which
we would otherwise pursue on our own.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (as amended by SFAS No. 138),
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities, SFAS No. 133 has subsequently been amended by SFAS No. 137,
issued in June 1999, which delays the effective date for implementation of SFAS
No. 133 until fiscal quarters of fiscal years beginning after June 15, 2000.
Management does not anticipate that the adoption of SFAS No. 133 will have
material effect on our consolidated financial statements because we do not
presently utilize derivative investments or engage in hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. We are required to adopt SAB 101 in the
fourth quarter of 2000. Management does not expect the adoption of SAB 101 to
have material effect on our financial condition or results of operations.
In March 2000, the FASB issued FASB Interpretation (FIN) No. 44, "Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000 but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The application of FIN 44 has not had a material impact on our
financial position or results of operations.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
discussed in the forward-looking statements. We are exposed to market risks
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
INTEREST RATE RISK
We are exposed to market risks from changes in interest rates primarily
through our investing and borrowing activities. In addition, our ability to
finance future acquisition transactions may be impacted if we are not able to
obtain appropriate financing at acceptable rates. Our investing strategy, to
manage interest rate exposure, is to invest in short-term, highly liquid
investments. Currently, our short-term investments are in money market funds
with original maturities of 90 days or less. At September 30, 2000, the fair
value of our short-term investments approximated market value. In
February 1998, our subsidiary, IMI, entered into a $42 million credit agreement
with Chase. The Chase credit agreement consists of a $37 million term loan and a
$5 million revolving line of credit. The term loan and revolving line of credit
allow IMI to borrow funds at varying rates, including options to borrow at an
alternate base rate plus a spread from 0.50% to 2.00% or the LIBOR rate plus a
spread from 2.00% to 3.50%. The spreads depend on IMI's ratio of senior funded
debt to EBITDA. IMI entered into an interest rate swap agreement with an
effective date of March 31, 1998. This agreement protects approximately 50% of
IMI's term loan against LIBOR interest rates rising over 7.5%. This agreement is
effective through March 30, 2001. If the LIBOR rate increases one percentage
point, as compared to the rate at September 30, 2000, we estimate an increase in
our interest expense of approximately $148,000 in the next twelve months. If the
LIBOR rate increases two percentage points, as compared to the rate at
September 30, 2000, we estimate an increase in our interest expense of
approximately $249,000 in the next twelve months.
FOREIGN CURRENCY RISK
We face exposure to movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse effect on our business, financial condition and results of
operation. For the nine months ended September 30, 2000, the net impact of
foreign currency changes was a gain of $516,000. We do not use derivative
financial instruments or other financial instruments to hedge economic exposures
or for trading. Historically, our primary exposures have been related to the
operations of our European subsidiaries. However, the sales of FastTAKE, our
lead diabetes management product, are denominated in the currency in which the
manufacturing costs are incurred. The loans received from LifeScan in June 1999
and September 2000 are denominated in British Pounds Sterling and therefore we
are exposed to fluctuations between the British Pound and U.S. Dollar. The Euro
was introduced as a common currency for members of the European Monetary Union
in 1999. We believe that in the near term the Euro will have minimal impact on
foreign exposure. We intend to hedge against fluctuations in the Euro if this
exposure becomes material. At September 30, 2000, our assets related to
non-dollar-denominated currencies amounted to approximately $36.1 million.
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(c) As previously disclosed in our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000, LifeScan, a subsidiary of Johnson &
Johnson, which markets our electrochemical blood glucose monitoring systems,
has found through a limited number of customer comments that meters
programmed for millmole measurement of blood glucose concentration
occasionally exhibit a display error. Millmole is the measurement used in
Canada and most European countries. We continue to work with LifeScan in
implementing the appropriate corrective action for this occurrence. We do not
believe that it will be necessary to engage in any general recall of these
meters, but we may choose to exchange some or all of them. On November 28,
2000, LifeScan notified us that it intended to seek indemnification from us
for the display error under our distribution agreement with it and stated
that we are obligated under the agreement to repair or replace (at our
option) the meters within a reasonable period of time. On December 1, 2000,
we sent notice to LifeScan disclaiming responsibility to replace or repair
the meters at issue or to indemnify LifeScan with regard to the display
error. We cannot assure you that any corrective or other action that may be
required with respect to the display error will not result in material cost
to us or damage to the reputation of our products.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INVERNESS MEDICAL TECHNOLOGY, INC.
/s/ Duane L. James
Date: December 1, 2000 ---------------------------------
Duane L. James
Vice President of Finance
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