<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2000
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________ to
_______________
COMMISSION FILE NUMBER 0-20871
SELFCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3164127
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 PROSPECT STREET
WALTHAM, MASSACHUSETTS 02453
(Address of principal executive offices)
(781) 647-3900
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
The number of shares outstanding of the registrant's common stock as
of May 1, 2000 was 20,660,736.
Transitional Small Business Disclosure Format (check one):
YES ___ NO _X_
<PAGE>
SELFCARE, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2000
This Form 10-Q contains 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. Actual results of Selfcare, Inc. and its subsidiaries (the
Company or Selfcare) could differ materially from those set forth in the
forward-looking statements. Factors that might cause such a difference are
discussed in the section entitled "Certain Factors Affecting Future Results"
beginning on page 11 of this Form 10-Q and in the Company's 1999 Annual Report
to Shareholders, portions of which were filed as an exhibit to the Company's
Form 10-K filed for the year ended December 31, 1999.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements (unaudited):
a) Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 3
b) Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 4
c) Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Net product sales $37,634,316 $28,777,147
Grants and other revenue 62,994 420,815
------ -------
Net revenues 37,697,310 29,197,962
Cost of sales 21,900,886 20,068,985
---------- ----------
Gross profit 15,796,424 9,128,977
---------- ---------
Operating Expenses:
Research and development 3,168,226 1,224,709
Selling, general and administrative 9,120,886 9,286,689
--------- ---------
Total operating expenses 12,289,112 10,511,398
---------- ----------
Operating income (loss) 3,507,312 (1,382,421)
Interest expense, including non-cash interest expense relating to issuance of
warrants and amortization of original issue discount (2,150,328) (1,881,267)
Interest income 56,889 81,434
Other income (expense) 11,932 (132,907)
------ ---------
Income (loss) before dividends and accretion on mandatorily redeemable preferred
stock of a subsidiary 1,425,805 (3,315,161)
Dividends and accretion on mandatorily redeemable preferred stock of a subsidiary (55,346) (56,767)
-------- --------
Income (loss) before extraordinary loss and income taxes 1,370,459 (3,371,928)
Extraordinary loss on modification of notes payable -- (306,092)
-- ---------
Income (loss) before income taxes 1,370,459 (3,678,020)
Provision for income taxes 135,154 244,303
------- -------
Net income (loss) $ 1,235,305 $ (3,922,323)
=========== =============
Net income (loss) per common share - basic $0.05 $(0.32)
===== =======
Net income (loss) per common share - diluted $0.04 $(0.32)
===== =======
Weighted average shares - basic 19,603,176 15,651,965
========== ==========
Weighted average shares - diluted 25,457,088 15,651,965
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,840,009 $ 5,233,594
Accounts receivable, net of reserves of $2,830,000 and $2,623,000 in 2000 and 1999,
respectively 18,311,989 20,557,573
Inventories (Note 3) 14,700,732 12,367,265
Prepaid expenses and other current assets 1,754,211 1,573,509
--------- ---------
Total current assets 40,606,941 39,731,941
PROPERTY, PLANT AND EQUIPMENT, NET 10,166,279 9,779,498
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET 62,496,952 63,281,897
DEFERRED FINANCING COSTS AND OTHER ASSETS, NET 1,959,991 2,043,218
--------- ---------
$115,230,163 $114,836,554
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 23,407,412 $ 21,483,140
Accounts payable 17,263,153 16,550,984
Accrued expenses and other current liabilities 12,035,121 10,119,326
Current portion of deferred revenue 377,582 251,447
------- -------
Total current liabilities 53,083,268 48,404,897
---------- ----------
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion 547,753 204,770
Other long-term liabilities 155,000 161,000
Notes payable, net of current portion 33,138,786 38,892,273
---------- ----------
Total long-term liabilities 33,841,539 39,258,043
---------- ----------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE PREFERRED STOCK OF A SUBSIDIARY 3,999,593 3,944,247
--------- ---------
SERIES B CONVERTIBLE PREFERRED STOCK, $0.001 par value:
Authorized and issued - 8,000 shares
Outstanding - 3,580 shares in 1999 -- 5,109,841
-- ---------
STOCKHOLDERS' EQUITY:
Series C, D and E preferred stock, $0.001 par value:
Authorized - 88,500 shares
Issued - 74,041 shares
Outstanding - 73,861 and 74,041 shares in 2000 and 1999, respectively 8,021,765 7,912,447
Common stock, $0.001 par value:
Authorized - 40,000,000 shares
Issued - 21,361,914 and 18,952,960 shares in 2000 and 1999, respectively 21,362 18,953
Additional paid-in capital 119,233,415 113,794,227
Less - Treasury stock, at cost, 743,678 shares (3,724,900) (3,724,900)
Accumulated deficit (99,295,779) (100,205,500)
Accumulated other comprehensive income 49,900 324,299
------ -------
Total stockholders' equity 24,305,763 18,119,526
---------- ----------
$115,230,163 $114,836,554
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
SELFCARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,235,305 $ (3,922,323)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Accretion on preferred stock of a subsidiary 55,346 56,767
Noncash interest expense related to amortization of original issue discount and
issuance of warrants 76,134 83,064
Noncash portion of extraordinary loss on modification of notes payable -- 227,997
Amortization of deferred revenue (62,552) (417,644)
Depreciation and amortization 1,614,107 1,685,245
Minority interest in subsidiary's loss -- (1,092)
Changes in assets and liabilities:
Accounts receivable 2,040,216 422,638
Inventories (2,446,615) (1,667,009)
Prepaid expenses and other current assets (114,495) (2,693,880)
Accounts payable 935,820 6,483,630
Accrued expenses and other current liabilities 1,959,910 (577,187)
--------- ---------
Net cash provided by (used in) operating activities 5,293,176 (319,794)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,247,288) (1,761,508)
Cash received from affiliated company as repayment of loan -- 244,875
Decrease in other assets 3,300 --
----- --
Net cash used in investing activities (1,243,988) (1,516,633)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and preferred stock 115,490 2,739,774
Proceeds from borrowings under notes payable 56,629 63,000
Repayments of notes payable (3,803,578) (3,713,162)
Increase in deferred revenue 541,644 --
Cash paid for deferred financing cost (103,750) --
--------- --
Net cash used in financing activities (3,193,565) (910,388)
----------- ---------
FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS (249,208) (36,823)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 606,415 (2,783,638)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,233,594 9,199,630
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,840,009 $ 6,415,992
=========== =============
Supplemental Disclosures of Cash Flow Information:
Cash paid for -
Interest $ 1,826,029 $ 1,438,943
=========== =============
Income taxes $ 425,456 $ 191,000
============= ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION OF FINANCIAL INFORMATION
The accompanying consolidated financial statements of Selfcare, Inc. and its
subsidiaries (the Company or Selfcare) are unaudited. In the opinion of
management, the unaudited consolidated financial statements contain all
adjustments considered normal and recurring necessary for their fair
presentation. Interim results are not necessarily indicative of results to be
expected for the year. These interim financial statements have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include all
information and footnotes necessary for a complete presentation of operations,
financial position, and cash flows of the Company in conformity with generally
accepted accounting principles. The Company filed audited consolidated financial
statements, which included information and footnotes necessary for such
presentation for the year ended December 31, 1999, as an exhibit to its Form
10-K filed with the Securities and Exchange Commission. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 1999 included as an exhibit to the Company's Form 10-K.
2) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid cash investments with maturities of
three months or less at the date of acquisition to be cash equivalents. At March
31, 2000, the Company's cash equivalents consisted of money market funds.
3) INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(unaudited)
<S> <C> <C>
Raw materials $ 4,421,418 $ 3,223,461
Work-in-process 2,069,186 1,675,700
Finished goods 8,210,128 7,468,104
---------- ---------
$14,700,732 $12,367,265
=========== ===========
</TABLE>
4) NONRECURRING AND NON-CASH EXPENSES
For the three months ended March 31, 2000, the Company recognized $76,000 of
noncash interest expense which represents the amortization of the original issue
discount and the issuance of warrants related to its subordinated promissory
notes.
For the three months ended March 31, 1999, the Company recognized a $306,000
extraordinary loss, of which $228,000 was noncash, related to the modification
of its senior subordinated convertible notes in January 1999. Also, for the
three months ended March 31, 1999, the Company recognized $83,000 of noncash
interest expense, most of which represents the amortization of the original
issue discount and the issuance of warrants related to its subordinated
promissory notes.
5) SERIES B PREFERRED STOCK
On August 26, 1997, the Company sold to investors in a private placement an
aggregate of 8,000 shares of Series B redeemable convertible preferred stock
(the Series B Preferred Stock) and warrants (the Warrants) to purchase an
aggregate of 114,628 shares of its common stock for gross proceeds of
$8,000,000. The terms of the Series B Preferred Stock were amended on January
22, 1999; the amendments provided for the payments by the Company of a one-time
premium of 15% and a change in the conversion factor. During the three months
ended March 31, 2000, all of the remaining Series B Preferred Stock were
converted into shares of the Company's common stock.
6
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
NUMERATOR:
Net income (loss) $1,235,305 $(3,922,323)
Premium on Series B convertible preferred stock (196,827) (808,453)
Dividends on Series C, D and E convertible preferred stock (128,757) (277,270)
----------------- -----------------
Numerator for basic earnings (loss) per share - income (loss)
available to common shareholders 909,721 (5,008,046)
Effect of dilutive securities:
Dividends on Series C and D convertible preferred stock 105,944 --
------------------ ----------------
Numerator for diluted earnings (loss) per share - income (loss)
available to common shareholders after assuming conversion $1,015,665 $(5,008,046)
================= =================
DENOMINATOR:
Denominator for basic earnings (loss) per share - weighted average
shares 19,603,176 15,651,965
Effect of dilutive securities:
Employee stock options 2,071,131 --
Warrants 210,560 --
Series C and D convertible preferred stock 3,572,221 --
----------------- -----------------
Dilutive potential common shares 5,853,912 --
----------------- -----------------
Denominator for diluted earnings (loss) per share - adjusted
weighted-average shares and assumed conversions 25,457,088 15,651,965
================= =================
BASIC EARNINGS (LOSS) PER SHARE $ 0.05 $ (0.32)
================= =================
DILUTED EARNINGS (LOSS) PER SHARE $ 0.04 $ (0.32)
================= =================
</TABLE>
Options and warrants to purchase an aggregate of 1,396,825 shares of the
Company's common stock at exercise prices ranging from $6.875 to $15.375 per
share were outstanding during the three months ended March 31, 2000, but were
not included in the computation of diluted earnings per share because the
exercise prices of the options and warrants were greater than the average market
price of the common stock, and therefore, the effect would be antidilutive.
During the three months ended March 31, 2000, the Company had Series B and E
convertible preferred stock (the Series B and E Preferred Stock) outstanding
that could have resulted in 999,699 and 462,585 shares of the Company's common
stock, respectively, assuming conversion at the beginning of the period
according to Statement of Financial Accounting Standard (SFAS) No. 128, EARNINGS
PER SHARE. However, the Series B and E Preferred Stock were not included in the
computation of diluted earnings per share because the effect of the inclusion of
such potential common stock and the related respective dividends of $196,827 and
$22,813 would be antidilutive.
During the three months ended March 31, 1999, the Company had outstanding
options and warrants, Series B Preferred Stock and senior subordinated
convertible notes (collectively, the Potential Common Stock), that were
exercisable or convertible into 5,670,188, 3,218,720 and 2,126,074 shares of the
Company's common stock, respectively. The Potential Common Stock was not
included in the calculation of diluted net loss per share since the inclusion
thereof would be antidilutive.
7
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7) COMPREHENSIVE INCOME
The Company's only item of other comprehensive income relates to foreign
currency translation adjustments. Comprehensive income for the three months
ended March 31, 2000 and 1999 was approximately $274,000 and $391,000 less than
reported net income, respectively, due to foreign currency translation
adjustments.
8) FINANCIAL INFORMATION BY SEGMENT
Under SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, operating segments are defined as components of an enterprise,
about which separate financial information is available, that is evaluated
regularly by the chief operating decision maker or decision making group in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision making group is composed of the Chief Executive Officer
and members of Senior Management. The Company's reportable operating segments
are Diabetes, Women's Health, Clinical Diagnostics and Other.
The Company evaluates performance based on earnings before interest expense,
taxes, depreciation and amortization (EBITDA). Segment information for the three
months ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
- ---------------------------------
Net product sales to external customers $23,581,717 $11,485,599 $2,567,000 $ - $ 37,634,316
Grant and other revenue - - - 62,994 62,994
-------------------------------------------------------------------------------------
Total net revenue $23,581,717 $11,485,599 $2,567,000 $ 62,994 $ 37,697,310
EBITDA $ 3,648,243 $ 2,952,933 $ 26,000 $(1,499,488) $ 5,127,688
Assets $56,860,204 $45,710,415 $5,604,526 $ 7,055,018 $115,230,163
AT DECEMBER 31, 1999
- --------------------
Assets $55,257,241 $44,397,523 $5,698,264 $ 9,483,526 $114,836,554
THREE MONTHS ENDED MARCH 31, 1999
- ---------------------------------
Net product sales to external customers $15,019,287 $10,771,874 $2,985,986 $ $ 28,777,147
-
Grant and other revenue 316,441 - - 104,374 420,815
-------------------------------------------------------------------------------------
Total net revenue $15,335,728 $10,771,874 $2,985,986 $ 104,374 $ 29,197,962
EBITDA $ 90,119 $ 1,743,706 $ (483,309) $(1,517,901) $ (167,385)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
Reconciliation of EBITDA to Net Income (Loss) 2000 1999
----------------------------------
<S> <C> <C>
EBITDA $ 5,127,688 $ (167,385)
Depreciation and amortization expense (1,614,107) (1,685,245)
Amortization of deferred revenue 62,552 417,644
Interest expense (2,150,328) (1,881,267)
Income taxes (135,154) (244,303)
Other non-cash items (55,346) (361,767)
----------------------------------
Net income (loss) $ 1,235,305 $(3,922,323)
==================================
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Selfcare, Inc. and its subsidiaries are engaged in the development,
manufacturing and marketing of self-test diagnostic products for the diabetes,
women's health and, to a lesser extent, infectious disease markets. We also
market nutritional supplement products, several of which are targeted primarily
at the women's health market. Our existing and planned products are targeted at
the two largest existing self-care diagnostics markets, diabetes management and
women's health, in the United States and Europe. An important part of our
business strategy is to enter into strategic alliances, joint ventures and
licensing arrangements with third parties, primarily medical products companies,
for the development, manufacture, and distribution of certain products. We have
from time to time pursued a strategy of selective acquisitions of companies,
assets and technologies, which we believe will enhance our ability to deliver
innovative diagnostic products to the marketplace at a low cost.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues increased $8.5 million or 29% to $37.7 million
for the three months ended March 31, 2000 from $29.2 million for the three
months ended March 31, 1999. The primary reason for the increase in revenues
was the increased sale of products for diabetes management, especially the
FastTAKE-Registered Trademark- Blood Glucose Monitoring System, which is
distributed by LifeScan, Inc. (LifeScan), a Johnson & Johnson company.
FastTAKE sales were driven by strong market acceptance worldwide. Net product
sales from our diabetes management segment were $23.6 million for the three
months ended March 31, 2000, an increase of $8.6 million or 57% as compared
to net diabetes product sales of $15.0 million for the three months ended
March 31, 1999. The net product sales for diabetes management accounted for
63% of our net revenues for the three months ended March 31, 2000 compared to
51% of net revenues for the three months ended March 31, 1999. Net sales from
our women's health segment were $11.5 million for the three months ended
March 31, 2000, an increase of $714,000 or 7% as compared to $10.8 million
for the three months ended March 31, 1999. Although the net sales of women's
health products increased as compared to the prior period, they only
accounted for 30% of net revenues for the three months ended March 31, 2000
as compared to 37% of net revenues for the three months ended March 31, 1999
as a result of the significant increase in diabetes management product sales.
The increase in women's health product sales resulted from increased sales of
branded and private label pregnancy and ovulation tests, partially offset by
a decrease in sales of certain nutritional supplement products. Net sales of
clinical diagnostic products for the three months ended March 31, 2000 were
$2.6 million, a decrease of $419,000 or 14% from net sales of $3.0 million
for the three months ended March 31, 1999. Grant and other revenue was
$63,000 for the three months ended March 31, 2000 compared to $421,000 for
the three months ended March 31, 1999. During the three months ended March
31, 1999, we recognized the remaining $316,000 of revenue related to a $7.0
million success fee received from LifeScan in October 1996. The remainder of
the deferred revenue mostly relates to certain development and capital grants
for our facility in Inverness, Scotland.
GROSS PROFIT. Gross profit increased by $6.7 million or 73% to $15.8 million
for the three months ended March 31, 2000 from $9.1 million for the three months
ended March 31, 1999. Gross margin of net product sales increased to 42% for the
three months ended March 31, 2000 from 30% for the three months ended March 31,
1999. The increase in gross margin of net product sales primarily resulted from
the increase in sales of FastTAKE systems and a reduction in manufacturing costs
attributed to lower material costs, improved yields and volume related
efficiency at our diabetes product manufacturing facility in Inverness,
Scotland, and our women's health product manufacturing plant in Galway, Ireland.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased
by $1.9 million or 159% for the three months ended March 31, 2000 to $3.2
million from $1.2 million for the three months ended March 31, 1999. The
increase in research and development expense resulted primarily 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, and specifically blood glucose monitoring, throughout the
remainder of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased by $166,000 or 2% to $9.1 million for the three
months ended March 31, 2000 from $9.3 million for the three months ended March
31, 1999. The decrease in selling, general and administrative expense primarily
resulted from the successful reduction of expenses at Orgenics Limited
(Orgenics), our subsidiary in Israel, and Cambridge Diagnostics Ireland Limited
(Cambridge Diagnostics), our subsidiary in Ireland. The decrease in selling,
general and administrative expense was slightly offset by higher marketing
expenditures by our subsidiary Can-Am Care Corporation (Can-Am) in the diabetes
business segment. Selling, general and administrative expense as a percentage of
net revenues, was 24% and 32% for the three months ended March 31, 2000 and
1999, respectively.
INTEREST INCOME. For the three months ended March 31, 2000, we earned
interest income of $57,000 compared to $81,000 for the three months ended March
31, 1999. The decrease in interest income resulted from the lower cash balance
outstanding during the three months ended March 31, 2000 compared to the three
months ended March 31, 1999.
9
<PAGE>
INTEREST EXPENSE. For the three months ended March 31, 2000, we incurred
$2.2 million in interest expense compared to $1.9 million for the three months
ended March 31, 1999. The interest expense increase resulted primarily from
interest expense incurred on the LifeScan loan which the Company received in
June 1999. Interest expense related to the LifeScan loan amounted to $261,000
for the three months ended March 31, 2000.
OTHER INCOME (EXPENSE). We incurred other income of $12,000 for the three
months ended March 31, 2000 compared to other expense of $133,000 for the three
months ended March 31, 1999. Other income and expense primarily relate to gains
and losses on foreign currency transactions. Substantially all of our foreign
sales are paid in the functional currency of the selling entity. Other income
generated during the three months ended March 31, 2000 resulted primarily from
the effect of the strong U.S. Dollar versus the British Pound Sterling on the
Initial LifeScan Loan (as defined below in the "Liquidity and Capital Resources"
section), which is denominated in British Pound Sterling. Other expense incurred
during the three months ended March 31, 1999 resulted mostly from the effect of
the significant fluctuations in the Brazilian Real on income of Orgenics'
Brazilian subsidiary.
DIVIDENDS AND ACCRETION ON MANDATORILY REDEEMABLE PREFERRED STOCK OF A
SUBSIDIARY. Inverness Medical Limited (Inverness), our subsidiary in Inverness,
Scotland, accrued $55,000 for the three months ended March 31, 2000,
representing a 6% dividend payable and accretion on the outstanding cumulative
redeemable preference shares, as compared to $57,000 for the three months ended
March 31, 1999.
EXTRAORDINARY LOSS. In the first quarter of 1999, we recorded an
extraordinary loss of approximately $306,000 ($228,000 of which was non-cash
expense) for the modification of the then outstanding senior subordinated
convertible notes.
INCOME TAXES. For the three months ended March 31, 2000, we recorded
provisions of $135,000 for income taxes compared to $244,000 for the three
months ended March 31, 1999. Substantially all of the income tax provisions
reflect certain state income taxes relating to Inverness Medical, Inc. (IMI),
our subsidiary in the United States, and Can-Am.
NET INCOME (LOSS). For the three months ended March 31, 2000, we realized a
net income of $1.2 million compared to a net loss of $3.9 million for the three
months ended March 31, 1999. Our basic and diluted earnings per common share for
the three months ended March 31, 2000 were $0.05 and $0.04, respectively,
compared to the basic and diluted net loss per common share of $0.32 for the
three months ended March 31, 1999. See Note 6 of the accompanying "Notes to
Consolidated Financial Statements".
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2000, our subsidiary, Inverness,
received approximately $542,000 in capital grants from Inverness & Nairn Local
Enterprise Company (INLEC), a development agency funded by the government of the
United Kingdom. These capital grants were funded to Inverness for the purpose of
providing training for the Inverness work force and outfitting the facility with
required equipment.
On June 7, 1999, we entered into amendments of our product development and
distribution agreements (the Amended Agreements) with LifeScan. Under the
Amended Agreements, we are to 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 (the Initial LifeScan
Loan) of (pound)6,250,000 (approximately $9,900,000) to fund the increased costs
related to the anticipated production levels. LifeScan has also committed to
make additional loans (the Additional LifeScan Loans) of up to (pound)8,125,000
(approximately $13,000,000) to us upon the accomplishment of certain milestones
relating to the new products we are to develop for LifeScan. Interest on both
the Initial LifeScan Loan and Additional LifeScan Loans accrues at 11% per annum
and is payable quarterly. The aggregate principal amount of the Initial LifeScan
Loan and Additional LifeScan Loans will be repaid by deducting (pound)0.0125
(approximately $0.02) from the invoice price of each unit of product we sell to
LifeScan commencing on the date of the Initial LifeScan Loan. On March 31, 2000,
the balance of the outstanding Initial LifeScan Loan was approximately $7.0
million; we have not yet received any of the Additional LifeScan Loans from
LifeScan. Further, LifeScan has agreed to provide credit enhancements, related
to the anticipated increase in production levels, for our further borrowings of
up to $10,000,000 from a commercial bank to fund additional manufacturing
capacity for the products covered by the Amended Agreements.
We received $1.6 million in June 1995 as an investment by INLEC in 1,000,000
shares of 6% Cumulative Redeemable Preference Shares (the Inverness Preference
Shares) of Inverness to finance a portion of the start-up costs relating to the
facility in Inverness, Scotland. The Inverness Preference Shares held by INLEC
(including cumulative dividends) are reflected in the accompanying consolidated
balance sheets as mandatorily redeemable preferred stock of a subsidiary. We
must redeem all 1,000,000 Inverness Preference Shares by June 23, 2000, for
which we intend to use cash generated by Inverness's operating activities. If we
cannot legally redeem the Inverness Preference Shares on that date, we must
redeem the shares as soon as legally permissible at a price of approximately
$1.91 per share plus any accrued and unpaid dividends. Additionally, in October
1998, we received $1.7 million from INLEC, for another 1,000,000 Inverness
Preference Shares. The additional Inverness Preference Shares must be redeemed
in October 2003 and contain the same terms as the Inverness Preference Shares
that were issued in 1995.
10
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To fund the cash portion of the purchase price for Can-Am in February 1998,
our subsidiary, IMI, entered into a $42 million credit agreement with Chase
Manhattan Bank (Chase Credit Agreement). The Chase Credit Agreement consists of
a $37 million term loan and a $5 million revolving line of credit. IMI is
required to make quarterly principal payments on the term loan ranging from $1.2
million to $1.9 million through December 31, 2003. IMI must also make mandatory
prepayments on the term loan if it meets certain cash flow thresholds, sell
assets outside of the ordinary course of business, issue or sell indebtedness or
issue stock, as defined in the credit agreement. For the three months ended
March 31, 2000, IMI made a quarterly principal payment and a mandatory
prepayment totaling $2.5 million. At March 31, 2000, IMI estimates that it will
make additional mandatory prepayments in the amount of approximately $542,000
during the remainder of year 2000, which it intends to finance by drawing upon
the available revolving line of credit balance. At March 31, 2000, the unused
balance of the revolving line of credit was approximately $1,400,000.
The Chase Credit Agreement requires compliance with various financial and
non-financial covenants for both Selfcare and IMI. The primary financial
covenants pertain to, among other things, interest coverage, debt services
coverage, leverage, and earnings before interest, taxes, depreciation and
amortization (EBITDA). We were in compliance with such covenants at March 31,
2000.
On June 26, 1998, we entered into a securities purchase agreement to sell
Units (the Units) having an aggregate purchase price of $10.2 million. Each Unit
consists of (i) $25,000 in principal amount of a Subordinated Note (individually
a Note and collectively the Notes) and (ii) a warrant (individually a Warrant
and collectively the Warrants). Pursuant to that agreement on June 26, 1998, we
sold Units consisting of an aggregate of $4.9 million of Notes and Warrants
exercisable for 72,588 shares at $10.125 per share; on July 17, 1998, we sold
Units consisting of an aggregate of $2.45 million of Notes and Warrants
exercisable for 40,330 shares at $9.1125 per share; and on August 28, 1998, we
sold Units consisting of an aggregate of $2.85 million of Notes and Warrants
exercisable for 68,813 shares at $6.2125 per share. The Notes are due on the
second anniversary of their date of issuance and the Warrants may be exercised,
in whole or in part, at any time on or prior to the fifth anniversary of their
issuance.
The Notes bear interest at a rate equal to 13% per annum, which is
payable quarterly on the first day of each quarter. Interest or principal,
which is not paid when due shall bear interest at the rate of 18%, compounded
daily. Whenever we make a payment of principal under the Notes, we shall at
the same time pay a premium (the Premium) equal to 5% of the principal amount
then being paid. We may prepay the Notes, in whole or in part, at any time so
long as we at the same time pay the holder of the Notes the Premium with
respect to the principal amount then being prepaid. The total of the
principal and Premium due to be paid on the Notes between June 26 and
August 28, 2000 equals approximately $10.7 million, which we expect to
refinance.
At March 31, 2000, we had cash and cash equivalents of $5.8 million, a
$606,000 increase from December 31, 1999. During the three months ended March
31, 2000, we generated cash of $5.3 million from our operating activities due
partly to net income, adjusted for noncash items, of $2.9 million. Cash was also
provided for operations in part by the net effect of increases in accounts
payable, accrued expenses and other current liabilities, and a decrease in
accounts receivable, totaling approximately $4.9 million. Uses of cash in
operating activities included increases in inventory of approximately $2.4
million reflecting our working capital needs related to the increase in our
sales.
During the three months ended March 31, 2000, we used $1.2 million to
purchase property and equipment. Approximately $1.1 million of the purchased
property and equipment was for the Inverness facility.
During the three months ended March 31, 2000, we used cash of $3.2 million
for financing activities, including in particular our principal repayments on
loans from Chase Manhattan Bank and LifeScan, partially offset by the $542,000
capital grants received from INLEC.
We expect to meet all scheduled debt repayments through the use of
operating funds, committed financings from a major customer and other
financings currently under negotiation with a bank. However, there can be no
assurance that funds will be available from any or all of these sources or,
if available, will be available on attractive terms. If funds do not become
available from one or more of these sources, we may not be able to meet our
debt obligations when due or continue to pursue desirable research and
development programs.
CERTAIN FACTORS AFFECTING FUTURE RESULTS
There are various risks, including those described below, which may
materially impact your investment in our Company or may in the future, and, in
some cases, already do, materially affect us and our business, financial
condition and results of operations. You should consider carefully these factors
with respect to your investment in our securities. This section includes or
refers to certain forward-looking statements; you should read the explanation of
the qualifications and limitations on such forward-looking statements on page
14.
11
<PAGE>
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO CONTINUE TO EXPAND OUR RESEARCH AND
DEVELOPMENT EFFORTS AND GROW OUR BUSINESS.
We anticipate that during the remainder of year 2000, we may need to raise
additional capital to help fund research and development of new technologies
(beyond the aforementioned activities related to LifeScan) through borrowing, or
the issuance of debt or equity securities, or in connection with agreements
which might be made with one or more collaborative partners. We are not certain
that such additional financing will be available, or, if available, that it will
be available on acceptable terms. For additional information on our liquidity
and capital needs, please see the section entitled "Liquidity and Capital
Resources" in this section "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
WE ONLY RECENTLY INTRODUCED NEW PRODUCTS AND WE CANNOT BE CERTAIN THAT THEY WILL
GAIN MARKET ACCEPTANCE.
On September 17, 1999, we received notification of Federal and Drug
Administration (FDA) clearance for our low cost alternative electrochemical
blood glucose monitoring test strip, Excel(TM) G (formerly, Excel(TM) GE),
for use with Glucometer Elite-Registered Trademark- meters sold by Bayer. We
commenced shipments of Excel G in October 1999. Our future results of
operations depend to some extent on our ability to market and sell Excel G.
Additionally, we cannot assure you that the market will fully accept Excel G.
WE DEPEND ON OUR RELATIONSHIP WITH LIFESCAN TO DISTRIBUTE CERTAIN OF OUR
EXISTING PRODUCTS, AS WELL AS FUTURE PRODUCTS, AND TO FUND CERTAIN NEW
PRODUCT INITIATIVES.
We depend on our relationship with LifeScan (as discussed below) to
distribute certain of our existing products, as well as future products, and for
funding certain new product initiatives.
In 1995, we entered into an exclusive worldwide alliance and distribution
agreement with LifeScan, which was amended in June 1999 (see the section
entitled "Liquidity and Capital Resources" in this section "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
Under the terms of the alliance with LifeScan, we develop and manufacture and
LifeScan distributes FastTAKE, our proprietary electrochemical blood glucose
monitoring system for the management of diabetes, and any new systems consisting
of new meters and disposable strips. We commenced shipments of FastTAKE in
December 1997 and the first upgrade of FastTAKE in July 1999. FastTAKE is
currently the most successful product in our diabetes line of business. Our
future results of operations depend to a substantial degree on LifeScan's
ability to market and sell FastTAKE as well as any other new systems. Although
the FastTAKE product appears to be gaining acceptance, we cannot assure you that
the market will fully accept FastTAKE or that any acceptance will continue.
Additionally, under the terms of the alliance with LifeScan, LifeScan is to make
additional funding to us when we reach certain milestones with our development
of future products for LifeScan. As we cannot assure the success of reaching
such milestones in the development of future products, we cannot guarantee that
LifeScan will make such additional funding to us. Any failure by us to develop
and produce or failure of LifeScan to market and distribute FastTAKE as well as
several additional new systems successfully could have a material adverse effect
on our business, financial condition and results of operations. It would also
affect our ability to repay loans received from LifeScan.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.
Obtaining patent and trade secret protection for new technologies, products
and processes is important in the medical products and diagnostic testing
industries. Our success depends, 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 others.
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR PROPRIETARY RIGHTS
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR
COSTS.
Substantial litigation over intellectual property rights exists in our
industry. We expect that products in our industry may be increasingly subject to
third-party infringement claims as the number of competitors grows and the
functionality of products and technology in different industry segments
overlaps. Third parties may currently have, or may eventually be issued, patents
that our products or technology may infringe. Any of these third parties might
make a claim of infringement against us. Any litigation could result in the
expenditure of significant financial resources and the diversion of management's
time and resources. In addition, litigation in which we are accused of
infringement may cause negative publicity, have an impact on prospective
customers, cause product shipment delays, require us to develop non-infringing
technology or enter into royalty or license agreements, which may not be
available on acceptable terms, or at all. If a successful claim of infringement
were made against us and we could not develop non-infringing technology or
license the infringed or similar technology on a timely and cost-effective
basis, our business could be significantly harmed and we could be exposed to
legal actions by our customers.
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<PAGE>
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE.
SELF-TEST PRODUCTS. The medical products industry is rapidly evolving and
developments are expected to continue at a rapid pace. Competition in this
industry is intense and expected to increase as new products and technologies
become available and new competitors enter the market. Our competitors in the
United States and abroad are numerous and include, among others, diagnostic
testing and medical products companies, universities and other research
institutions. Our future success depends upon our maintaining a competitive
position in the development of products and technologies in our areas of focus.
Competitors may be more successful in: (i) developing technologies and products
that are more effective than our products or that render our technologies or
products obsolete or noncompetitive; (ii) obtaining patent protection or other
intellectual property rights that would prevent us from developing our potential
products; or (iii) obtaining regulatory approval for the commercialization of
their products more rapidly or effectively than we are able to do so. Also, 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.
NUTRITIONAL SUPPLEMENTS. The market for the sale of vitamins and nutritional
supplements is highly competitive. This competition is based principally upon
price, quality of products, customer service and marketing support. There are
numerous companies in the vitamin and nutritional supplement industry selling
products to retailers such as mass merchandisers, drug store chains, independent
drug stores, supermarkets and health food stores. As most of these companies are
privately held, we are unable to obtain the information necessary to assess
precisely the size and success of these competitors. However, we believe that a
number of our competitors, particularly manufacturers of nationally advertised
brand name products, are substantially larger than we are and have greater
financial resources.
VARIOUS FACTORS MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.
Factors relating to our business make our future operating results uncertain
and may cause them to fluctuate from period to period. Such factors include: (i)
the timing of new product announcements and introductions by us and our
competitors; (ii) market acceptance of new or enhanced versions of our products;
(iii) changes in manufacturing costs or other expenses; (iv) competitive pricing
pressures; (v) the gain or loss of significant distribution outlets or
customers; (vi) increased research and development expenses; or (vii) general
economic conditions.
OUR SHARE PRICE MAY BE VOLATILE DUE TO OUR OPERATING RESULTS, AS WELL AS FACTORS
BEYOND OUR CONTROL.
Our share price may be volatile due to our operating results, as well as
factors beyond our control. In addition, it is possible that in some future
periods the results of our operations will be below the expectations of the
public market. In any such event, the market price of our common stock could be
materially and adversely affected. Furthermore, the stock market may experience
significant price and volume fluctuations, which may affect the market price of
our common stock for reasons unrelated to our operating performance. The market
price of our common stock may be highly volatile and may be affected by factors
such as: (i) our quarterly operating results; (ii) changes in general conditions
in the economy, the financial markets, or the health care industry; (iii)
government regulation in the health care industry; (iv) changes in other areas
such as tax laws; (v) sales of substantial amounts of common stock or the
perception that such sales could occur, including as a result of the conversion
or potential conversion of convertible securities issued by us; or (vi) other
developments affecting us or our competitors.
YEAR 2000 COMPLIANCE COSTS AND RISKS ARE DIFFICULT TO ASSESS AND COULD IMPACT
OUR BUSINESS.
The Year 2000 problem arose as a result of the fact that many existing
computer programs and embedded chip technology systems were developed using only
the last two digits, rather than four, to define the applicable year. Thus, any
information technology (IT) systems with time-sensitive software might recognize
a date using "00" as the year 1900 rather than the year 2000, which could result
in miscalculations and system failures. In addition, companies were at risk from
Year 2000 failures on the part of third parties with which they interact.
Our Company uses a significant number of IT systems that are essential to
our operations. For this reason, we developed and implemented a four-phase plan
to address our Year 2000 issues and to insure that our IT systems would function
properly in the year 2000 and thereafter. We believe that we have successfully
rendered our IT systems Year 2000 compliant. Since January 1, 2000, we have not
experienced disruptions to our business operations as a result of Year 2000
compliance problems or otherwise and have not received reports of any material
Year 2000 compliance problems with any third parties with which we have material
interactions. Although we do not believe that we have continued exposure to the
Year 2000 issue, we cannot give assurances that we will not detect unanticipated
Year 2000 compliance issues in the future. Additionally, we have tested the
software in our product, the FastTAKE Blood Glucose Monitoring System, and
believe that it is Year 2000 compliant.
13
<PAGE>
The primary cost of our Year 2000 compliance to date, which has been
associated with assessment, remediation, and testing, has not been significant.
We believe that if there are additional costs, any such remaining costs will not
have a material adverse effect on our sales, operations or financial
performance. We expect to fund any remaining costs of addressing the Year 2000
issue from cash flows resulting from operations.
The preceding "Year 2000 Disclosure" contains various forward-looking
statements within the meaning of the private Securities Litigation Reform Act of
1995. These forward-looking statements represent our beliefs or expectations
regarding future events. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources; the ability to identify and remediate all date
sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment; and the actions of governmental agencies or other
third parties with respect to Year 2000 problems.
CAUTIONARY STATEMENT PURSUANT TO PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 - "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS
We may from time to time make certain forward-looking statements in publicly
released materials, both written and oral. Forward-looking statements do not
relate strictly to historical or current facts and may be identified by their
use of words like "plans", "expects", "will", "anticipates", "estimates" and
other words of similar meaning. Such statements may address, among other things,
our strategy for growth, product development, regulatory approvals, market
position, expenditures and financial results.
Forward-looking statements are based on current expectations of future
events. We cannot guarantee that expectations expressed in forward-looking
statements will be realized. Some important factors that could cause our actual
results to differ materially from those projected in any such forward-looking
statements are as follows:
- Economic factors, including inflation and fluctuations in interest rates
and foreign currency exchange rates and the potential effect of such
fluctuations on revenues, expenses and resulting margins;
- Competitive factors, including technological advances achieved and
patents attained by competitors and generic competition;
- Domestic and foreign healthcare changes resulting in pricing pressures,
including the continued consolidation among healthcare providers, trends
toward managed care and healthcare cost containment and government laws
and regulations relating to sales and promotion, reimbursement and
pricing generally;
- Government laws and regulations, affecting domestic and foreign
operations, including those relating to trade, monetary and fiscal
policies, taxes, price controls, regulatory approval of new products and
licensing;
- Difficulties inherent in product development, including the potential
inability to successfully continue technological innovation, complete
clinical trials, obtain regulatory approvals in the United States and
abroad, gain and maintain market approval of products and the possibility
of encountering infringement claims by competitors with respect to patent
or other intellectual property rights which can preclude or delay
commercialization of a product;
- Significant litigation adverse to our Company including product liability
claims, patent infringement claims, and antitrust claims;
- Product efficacy or safety concerns resulting in product recalls or
declining sales;
- The impact of business combinations, including acquisitions and
divestitures, and organizational restructuring consistent with evolving
business strategies; and
- Issuance of new or revised accounting standards by the American Institute
of Certified Public Accountants, the Financial Accounting Standards Board
or the Securities and Exchange Commission;
The foregoing list sets forth many, but not all, of the factors that could
impact our ability to achieve results described in any forward-looking
statements. Investors are cautioned not to place undue reliance on such
statements that speak only as of the date made. Investors also should understand
that it is not possible to predict or identify all such factors and that this
list should not be considered a complete statement of all potential risks and
uncertainties. Investors should also realize that if underlying assumptions
prove inaccurate or unknown risks or uncertainties materialize, actual results
could vary materially from our projections. We do not undertake any obligation
to update any forward-looking statements as a result of future events or
developments.
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ITEM 3. 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 risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
INTEREST RATE RISK
We are exposed to market risk from changes in interest rates primarily
through our investing and 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 March 31,
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 March 31, 2000, we estimate an
increase in our interest expense of approximately $229,000 in the next twelve
months. If the LIBOR rate increases two percentage points, as compared to the
rate at March 31, 2000, we estimate an increase in our interest expense of
approximately $381,000 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 three months ended March 31, 2000, the net impact of
foreign currency changes was a gain of approximately $20,000. 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 loan received
from LifeScan in June 1999 is 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 have not determined the impact, if any,
that the Euro will have on foreign exposure. We intend to hedge against
fluctuations in the Euro if this exposure becomes material. At March 31,
2000, our assets related to non-dollar-denominated currencies amounted to
approximately $30.5 million.
15
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ABBOTT LABORATORIES ET ANOTHER V. CORBRIDGE GROUP PTY LTD AND SELFCARE PTY LTD.
In November 1999, Abbott Laboratories (Abbott) commenced a lawsuit
against the Company's Australian subsidiary, Selfcare Pty Ltd. and Corbridge,
its Australian distributor, in the Federal Court of Australia. The complaint
alleges that the Selfcare-Registered Trademark- Excel ET disposable test
strips (ET Test Strips) supplied by the Company 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 which is continuing at the time of
this filing.
It is unlikely that any ruling against the Australian defendants could have
an adverse impact on the Company's sales, operations or financial performance
elsewhere in the world, and based on a review of the Abbott claims by Australian
counsel, the Company believes that the ET Test Strips do not 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. The Company
believes 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.
BAYER CORPORATION V. SELFCARE, INC., INVERNESS MEDICAL, INC. AND CAN-AM CARE
CORPORATION
On January 18, 2000, Bayer Corporation (Bayer) filed suit (Case No:
00CV0040) in the United States District Court for the Northern District of
Indiana (District Court) alleging claims in trademark infringement, trade
dress infringement and unfair competition arising out of the Company's
marketing in late 1999 of its new Excel GE (now known as Excel G) blood
glucose test strips intended for use with Bayer's Glucometer Elite-Registered
Trademark- meters. This matter has been settled through a Settlement
Agreement dated April 14, 2000, the terms and conditions of which will not
have a material adverse effect on the Company's sales, operations or
financial performance.
BECTON, DICKINSON AND COMPANY V. SELFCARE, INC. ET. AL.
On January 3, 2000, Becton, Dickinson and Company (Becton Dickinson) filed
suit against the Company in U.S. District Court for the District of Delaware
(Case No: 00-001) alleging that certain pregnancy and ovulation test kits sold
by the Company infringe U.S. Patent Nos. 4,703,017 and 5,591,645. The Company
was served with Becton Dickinson's complaint in April 2000. The Company intends
to defend this litigation vigorously and, in any event, does not believe that a
negative outcome would have a material adverse impact on the Company's sales,
operations or financial performance.
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 the Company and two of its subsidiaries. The
complaint alleges patent infringement of a patent used in connection with the
manufacture and distribution of the Company's Excel G test strips for use
with the Bayer Glucometer Elite-Registered Trademark- meter. The Company
intends to defend the action vigorously. Although a final ruling against the
Company could have a material adverse impact on the Company's sales,
operations or financial performance, based on a review of the Matsushita
patent by the Company's outside patent counsel, the Company believes that its
Excel G test strips do not infringe the Matsushita Patent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
EXHIBIT NUMBER TITLE
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K:
The Company filed no reports on Form 8-K during the three-month period
ended March 31, 2000.
16
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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 thereunto duly authorized.
SELFCARE, INC.
Date: May 12, 2000 /S/ Jeffrey A. Templer
--------------------------
Jeffrey A. Templer
Chief Financial Officer and an
authorized officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,840,009
<SECURITIES> 0
<RECEIVABLES> 21,141,989
<ALLOWANCES> 2,830,000
<INVENTORY> 14,700,732
<CURRENT-ASSETS> 40,606,941
<PP&E> 17,647,898
<DEPRECIATION> 7,481,619
<TOTAL-ASSETS> 115,230,163
<CURRENT-LIABILITIES> 53,083,268
<BONDS> 33,138,786
3,999,593
8,021,765
<COMMON> 21,362
<OTHER-SE> 16,262,636
<TOTAL-LIABILITY-AND-EQUITY> 115,230,163
<SALES> 37,634,316
<TOTAL-REVENUES> 37,697,310
<CGS> 21,900,886
<TOTAL-COSTS> 12,289,112
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,150,328
<INCOME-PRETAX> 1,370,459
<INCOME-TAX> 135,154
<INCOME-CONTINUING> 1,235,305
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,235,305
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.04
</TABLE>
