<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 September 30, 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
INVERNESS MEDICAL TECHNOLOGY, INC.
(FORMERLY 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 October 30, 2000 was 25,145,447.
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
<PAGE>
INVERNESS MEDICAL TECHNOLOGY, INC.
(FORMERLY SELFCARE, INC.)
FORM 10-Q
For the Quarterly Period Ended September 30, 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 Inverness Medical Technology, Inc. (the
Company or Inverness Medical) 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 16 of this Form 10-Q.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
a) Consolidated Statements of Operations for the three months ended September 30, 2000 and
1999 and the nine months ended September 30, 2000 and 1999 3
b) Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 4
c) Consolidated Statements of Cash Flows for the nine months ended September 30, 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 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVERNESS MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY SELFCARE, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net product sales $42,922,672 $33,047,073 $121,070,826 $89,004,945
Grants and other revenue 90,827 99,159 246,959 641,750
------ ------ ------- -------
Net revenues 43,013,499 33,146,232 121,317,785 89,646,695
Cost of sales 25,160,358 21,804,818 70,595,222 60,957,161
---------- ---------- ---------- ----------
Gross profit 17,853,141 11,341,414 50,722,563 28,689,534
---------- ---------- ---------- ----------
Operating Expenses:
Research and development 3,290,551 1,773,577 9,478,396 4,356,715
Selling, general and administrative 9,882,019 9,390,001 28,910,281 26,839,432
--------- --------- ---------- ----------
Total operating expenses 13,172,570 11,163,578 38,388,677 31,196,147
---------- ---------- ---------- ----------
Operating income (loss) 4,680,571 177,836 12,333,886 (2,506,613)
Interest, including non-cash interest expense relating to
issuance of warrants and amortization of original issue
discount (1,579,262) (1,997,458) (5,731,109) (5,697,752)
Other income (expense) (Note 5) 171,999 57,064 2,255,798 (135,300)
------- ------ --------- ---------
Income (loss) before dividends and accretion on mandatorily
redeemable preferred stock of a subsidiary 3,273,308 (1,762,558) 8,858,575 (8,339,665)
Dividends and accretion on mandatorily redeemable preferred
stock of a subsidiary (47,651) (56,868) (383,314) (169,513)
-------- -------- --------- ---------
Income (loss) before extraordinary loss and income taxes 3,225,657 (1,819,426) 8,475,261 (8,509,178)
Extraordinary loss on modification of notes payable (Notes 4
and 6) -- -- (799,729) (306,092)
-- -- --------- ---------
Income (loss) before income taxes 3,225,657 (1,819,426) 7,675,532 (8,815,270)
Provision for income taxes 147,355 14,895 434,761 348,516
------- ------ ------- -------
Net income (loss) $3,078,302 $(1,834,321) $ 7,240,771 $(9,163,786)
========== ============ =========== ============
Net income (loss) per common share - basic $0.12 $(0.11) $0.30 $(0.64)
===== ======= ===== =======
Net income (loss) per common share - diluted $0.11 $(0.11) $0.26 $(0.64)
===== ======= ===== =======
Weighted average shares - basic 24,957,114 17,282,270 22,618,417 16,503,290
========== ========== ========== ==========
Weighted average shares - diluted 28,904,142 17,282,270 27,346,752 16,503,290
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
INVERNESS MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY SELFCARE, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,139,848 $ 5,233,594
Accounts receivable, net of reserves of $5,771,000 and $2,623,000 in 2000 and 1999,
respectively 25,150,308 20,557,573
Inventories (Note 3) 13,430,146 12,367,265
Prepaid expenses and other current assets 1,565,276 1,573,509
--------- ---------
Total current assets 46,285,578 39,731,941
PROPERTY, PLANT AND EQUIPMENT, NET 12,371,581 9,779,498
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET 59,473,407 63,281,897
DEFERRED FINANCING COSTS AND OTHER ASSETS, NET 1,725,885 2,043,218
--------- ---------
$119,856,451 $114,836,554
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 33,966,158 $ 21,483,140
Accounts payable 14,643,718 16,550,984
Accrued expenses and other current liabilities 13,864,305 10,119,326
Current portion of deferred revenue 356,536 251,447
------- -------
Total current liabilities 62,830,717 48,404,897
---------- ----------
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion 305,912 204,770
Other long-term liabilities 139,000 161,000
Notes payable, net of current portion 18,894,535 38,892,273
---------- ----------
Total long-term liabilities 19,339,447 39,258,043
---------- ----------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE PREFERRED STOCK OF A SUBSIDIARY 4,327,561 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 - 74,041 shares in 1999 -- 7,912,447
Common stock, $0.001 par value:
Authorized - 40,000,000 shares
Issued - 25,831,654 and 18,952,960 shares in 2000 and 1999, respectively 25,832 18,953
Additional paid-in capital 131,247,747 113,794,227
Less - Treasury stock, at cost, 743,678 shares (3,724,900) (3,724,900)
Accumulated deficit (93,338,312) (100,205,500)
Accumulated other comprehensive income (851,641) 324,299
--------- -------
Total stockholders' equity 33,358,726 18,119,526
---------- ----------
$119,856,451 $114,836,554
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
INVERNESS MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY SELFCARE, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,240,771 $(9,163,786)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Accretion on preferred stock of a subsidiary 383,314 169,513
Noncash interest expense related to amortization of original issue discount and
issuance of warrants 387,409 250,990
Noncash portion of extraordinary loss on modification of notes payable 485,485 227,997
Noncash compensation expense related to issuance of and modifications made to common
stock options 429,430 --
Gain on sale of investment in Theratase plc (1,757,229) --
Amortization of deferred revenue (244,544) (614,720)
Depreciation and amortization 4,470,382 4,764,936
Changes in assets and liabilities:
Accounts receivable (5,565,345) (2,560,373)
Inventories (1,585,867) (2,538,109)
Prepaid expenses and other current assets 200,381 43,889
Accounts payable (963,950) 4,914,531
Accrued expenses and other current liabilities 6,101,040 (228,464)
--------- ---------
Net cash provided by (used in) operating activities 9,581,277 (4,733,596)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,103,294) (2,646,753)
Cash received from affiliated company as repayment of loan -- 403,875
Cash received from sale of investment in Theratase plc 3,328,464 --
Increase in other assets (9,200) (5,012)
------- -------
Net cash used in investing activities (1,784,030) (2,247,890)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and preferred stock 2,427,964 2,908,528
Proceeds from borrowings under notes payable 6,820,781 10,901,810
Repayments of notes payable (15,273,271) (8,315,058)
Increase in deferred revenue 541,644 --
Cash paid for deferred financing cost (571,924) (74,647)
--------- --------
Net cash (used in) provided by financing activities (6,054,806) 5,420,633
----------- ---------
FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS (836,187) (327,296)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 906,254 (1,888,149)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,233,594 9,199,630
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,139,848 $ 7,311,481
=========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for -
Interest $ 5,218,022 $ 4,044,578
=========== ============
Income taxes $ 573,551 $ 313,500
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
INVERNESS MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY SELFCARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION OF FINANCIAL INFORMATION
The accompanying consolidated financial statements of Inverness Medical
Technology, Inc. and its subsidiaries (the Company or Inverness Medical) 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
September 30, 2000, the Company's cash equivalents consisted of money market
funds.
3) INVENTORIES
Inventories are comprised of the following:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
(unaudited)
Raw materials $ 4,074,310 $ 3,223,461
Work-in-process 2,434,563 1,675,700
Finished goods 6,921,273 7,468,104
---------- ---------
$13,430,146 $12,367,265
=========== ===========
4) NON-CASH EXPENSES
For the nine months ended September 30, 2000, the Company recognized a $800,000
extraordinary loss, of which $485,000 was noncash, related to the refinancing of
its subordinated revenue royalty notes (see Note 6). Also, for the nine months
ended September 30, 2000, the Company recognized $387,000 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 nine months ended September 30, 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 nine
months ended September 30, 1999, the Company recognized $251,000 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) SALE OF INVESTMENT IN THERATASE PLC
On June 28, 2000, the Company sold its holding of 8,561,381 shares in Theratase
plc (formerly Enviromed plc), a manufacturer of diagnostic enzymes based in the
United Kingdom, for $3.3 million in cash. As a result, the Company recorded a
gain on sale of investments of $1.8 million, which was included in other income
(expense) in the accompanying Consolidated Statements of Operations. Prior to
the sale of the Theratase shares, the Company held a 29.9% interest in Theratase
plc.
6
<PAGE>
INVERNESS MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY SELFCARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) SUBORDINATED NOTES
During June 2000, the Company entered into a securities purchase agreement
pursuant to which it sold units (the Units) having an aggregate purchase price
of $19.3 million primarily for the purpose of retiring its outstanding $10.2
million two-year subordinated promissory notes (Two-year Subordinated Notes) and
$7.5 million subordinated revenue royalty notes (Revenue Royalty Notes). Each
Unit consists of (i) $25,000 in principal amount of a subordinated promissory
note (the New Subordinated Promissory Note) and (ii) a warrant (Warrant) to
acquire 123 shares of the Company's common stock. In the aggregate, the Company
issued Warrants to purchase 119,350 shares of its common stock with exercise
prices ranging from $7.94 to $15.38. The New Subordinated Promissory Notes were
sold on various closing dates in accordance with the maturity dates and
prepayment dates of the securities being retired and are due on the first
anniversary of their date of issuance. The Warrants may be exercised at any time
on or prior to the tenth anniversary of their date of issuance. Upon issuance of
the New Subordinated Promissory Notes and Warrants the Company allocated a total
of $971,000 of the proceeds to the Warrants and is amortizing such original
issuance discount and the related deferred financing costs (as described below)
over the one-year life of the New Subordinated Promissory Notes.
The New Subordinated Promissory Notes bear interest at a rate equal to 12.5% per
year, payable quarterly on the first day of each quarter beginning on October 1,
2000. The Company may prepay the New Subordinated Promissory Notes in whole or
in part at any time subject to a prepayment premium.
U.S. Boston Capital Corporation (U.S. Boston), the majority shareholder of which
is a director of the Company, acted as the placement agent for the offering of
the New Subordinated Promissory Notes. As compensation for its services as
placement agent, U.S. Boston received cash commissions and a non-accountable
expense allowance totaling $356,000, which the Company recorded as deferred
financing costs. On June 26, 2000, the first closing date (as described below),
U.S. Boston received a Warrant to acquire 10,000 shares of the Company's common
stock on terms identical to those of the Warrants issued to the subscribers in
that closing. The value of this Warrant was $82,500 and was recorded as deferred
financing costs.
Pear Tree Royalty Company, Inc. (Pear Tree), as the authorized representative of
the holders of the New Subordinated Promissory Notes, received Warrants to
purchase 14,262 shares of the Company's common stock on terms identical to those
of the Warrants issued to the subscribers. A director of the Company is also a
director and shareholder of Pear Tree. The value of these Warrants was $154,000
and was recorded as deferred financing costs.
Among the holders of the New Subordinated Promissory Notes were three directors
of the Company who purchased Units with an aggregate purchase price of $781,000.
In connection with the above transactions, the Company notified holders of the
Revenue Royalty Notes on June 29, 2000 of its intention to prepay those notes on
July 31, 2000 according to their applicable terms and conditions. In so doing,
the Company effectively made a binding commitment to prepay such notes. As a
result, the Company followed the provisions of Emerging Issues Task Force (EITF)
Issue No. 96-19, DEBTOR'S ACCOUNTING FOR A MODIFICATION OR EXCHANGE OF DEBT
INSTRUMENTS, and recorded an extraordinary loss of $800,000 in June 2000 since
the refinancing resulted in a "substantial modification" to the Company's
indebtedness, as this term is defined in EITF 96-19. The extraordinary loss
includes $485,000 in write-offs of unamortized deferred financing costs related
to the Revenue Royalty Notes and $314,000 in additional premium incurred as a
result of prepaying the Revenue Royalty Notes. On July 31, 2000, the Company
retired all of its outstanding Revenue Royalty Notes.
7) 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 ratio. As of March 10, 2000, all
of the remaining Series B Preferred Stock were converted into shares of the
Company's common stock.
7
<PAGE>
INVERNESS MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY SELFCARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8) SERIES C, D AND E PREFERRED STOCK
On January 8, 1999, the Company sold in a private placement 57,842 shares of
Series C convertible preferred stock (Series C Preferred Stock), 3,030 shares of
Series D convertible preferred stock (Series D Preferred Stock) and 13,169
shares of Series E convertible preferred stock (Series E Preferred Stock)
(collectively, the Preferred Shares) to investors at an aggregate purchase price
of $7,404,100. Each Preferred Share accrued a dividend of 7% per annum. The
actual number of shares of common stock issued upon conversion of a Preferred
Share was equal to the aggregate stated value per share (i.e., $100), plus any
accrued and unpaid dividends through the date of such conversion, divided by a
conversion price equal to $1.8125 per share for the Series C Preferred Stock,
$2.00 per share for the Series D Preferred Stock and $3.028 per share for the
Series E Preferred Stock. As of May 9, 2000, all of the Series C, D and E
Preferred Stock were converted into shares of the Company's common stock.
9) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) $ 3,078,302 $(1,834,321) $ 7,240,771 $(9,163,786)
Premium on Series B convertible preferred stock -- -- (196,827) (808,453)
Dividends on Series C, D and E convertible preferred stock -- (130,636) (176,756) (590,260)
----------------- --------------- ---------------- --------------
Numerator for basic earnings (loss) per share - income
(loss) available to common shareholders 3,078,302 (1,964,957) 6,867,188 (10,562,499)
Effect of dilutive securities:
Dividends on Series C, D and E convertible preferred
stock -- -- 176,756 --
----------------- --------------- ---------------- --------------
Numerator for diluted earnings (loss) per share income
(loss) available to common shareholders after
assuming conversion $ 3,078,302 $(1,964,957) $ 7,043,944 $(10,562,499)
================= =============== ================ ==============
DENOMINATOR:
Denominator for basic earnings (loss) per share -
weighted average shares 24,957,114 17,282,270 22,618,417 16,503,290
Effect of dilutive securities:
Employee stock options 3,542,784 -- 2,597,744 --
Warrants 404,244 -- 282,636 --
Series C, D and E convertible preferred stock -- -- 1,847,955 --
----------------- --------------- ----------------- --------------
Dilutive potential common shares 3,947,028 -- 4,728,335 --
----------------- --------------- ---------------- --------------
Denominator for diluted earnings (loss) per share -
adjusted weighted-average shares and assumed
conversions 28,904,142 17,282,270 27,346,752 16,503,290
================= =============== ================= ==============
BASIC EARNINGS (LOSS) PER SHARE $ 0.12 $ (0.11) $ 0.30 $ (0.64)
================= =============== ================= ==============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.11 $ (0.11) $ 0.26 $ (0.64)
================= =============== ================= ==============
</TABLE>
Options and warrants to purchase an aggregate of 29,822 and 500,790 shares of
the Company's common stock at exercise prices ranging from $15.383 to $18.500
and $9.938 to $18.500 per share were outstanding during the three and nine
months ended September 30, 2000, respectively, 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 in the respective periods, and therefore the effect would have been
antidilutive.
8
<PAGE>
INVERNESS MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY SELFCARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9) EARNINGS PER SHARE (CONTINUED)
During the nine months ended September 30, 2000, the Company had Series B
convertible preferred stock (the Series B Preferred Stock) outstanding that
could have resulted in 332,017 shares of the Company's common stock, 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
Preferred Stock was not included in the computation of diluted earnings per
share because the effect of the inclusion of such potential common stock and the
related dividends of $196,827 would have been antidilutive.
During the three and nine months ended September 30, 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 shares of the Company's common stock. The
Potential Common Stock was not included in the calculation of diluted net loss
per share since the inclusion thereof would have been antidilutive.
10) COMPREHENSIVE INCOME
The Company's only item of comprehensive income relates to foreign currency
translation adjustments. Comprehensive income for the three months ended
September 30, 2000 and 1999 was approximately $489,000 and $556,000 more than
reported net income, respectively, and for the nine months ended September 30,
2000 and 1999 was approximately $1,176,000 less and $97,000 more than reported
net income, respectively, due to foreign currency translation adjustments.
11) 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
and nine months ended September 30, 2000 and 1999, respectively, is as follows:
<TABLE>
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Net product sales from external customers $29,436,179 $10,943,493 $2,543,000 $ - $ 42,922,672
Grant and other revenue - - - 90,827 90,827
-------------------------------------------------------------------------------------
Total net revenue $29,436,179 $10,943,493 $2,543,000 $ 90,827 $ 43,013,499
EBITDA $ 5,334,555 $ 2,299,419 $ 130,000 $(1,427,048) $ 6,336,926
NINE MONTHS ENDED SEPTEMBER 30, 2000
Net product sales from external customers $79,991,668 $33,304,158 $7,775,000 $ - $121,070,826
Grant and other revenue - - - 246,959 246,959
-------------------------------------------------------------------------------------
Total net revenue $79,991,668 $33,304,158 $7,775,000 $ 246,959 $121,317,785
EBITDA $13,299,802 $ 8,119,838 $ 548,000 $(4,312,840) $ 17,654,800
Assets $61,826,547 $45,691,495 $5,603,551 $ 6,734,858 $119,856,451
AT DECEMBER 31, 1999
Assets $55,257,241 $44,397,523 $5,698,264 $ 9,483,526 $114,836,554
</TABLE>
9
<PAGE>
INVERNESS MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY SELFCARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11) FINANCIAL INFORMATION BY SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net product sales from external customers $19,138,661 $11,424,412 $2,484,000 $ - $ 33,047,073
Grant and other revenue - - - 99,159 99,159
-------------------------------------------------------------------------------------
Total net revenue $19,138,661 $11,424,412 $2,484,000 $ 99,159 $ 33,146,232
EBITDA $ 893,928 $ 2,276,162 $ (286,576) $(1,210,839) $ 1,672,675
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net product sales from external customers $48,906,798 $31,757,445 $8,340,702 $ - $ 89,004,945
Grant and other revenue 316,441 - - 325,309 641,750
-------------------------------------------------------------------------------------
Total net revenue $49,223,239 $31,757,445 $8,340,702 $ 325,309 $ 89,646,695
EBITDA $ 44,086 $ 5,316,855 $ 165,838 $(3,846,337) $ 1,680,442
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- -----------------------------------
Reconciliation of EBITDA to Net Income (Loss) 2000 1999 2000 1999
-------------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
EBITDA $ 6,336,926 $ 1,672,675 $17,654,800 $ 1,680,442
Depreciation and amortization expense (1,416,902) (1,521,090) (4,470,382) (4,764,936)
Amortization of deferred revenue 89,272 98,384 244,544 614,720
Interest expense (1,629,643) (2,145,803) (5,898,187) (6,002,891)
Income taxes (147,355) (14,895) (434,761) (348,516)
Other noncash or non-recurring items (153,996) 76,408 144,757 (342,605)
-------------------------------------- -----------------------------------
Net income (loss) $ 3,078,302 $(1,834,321) $ 7,240,771 $(9,163,786)
====================================== ===================================
</TABLE>
12) SUBSEQUENT EVENTS
PENDING ACQUISITION OF INTEG INCORPORATED
On October 3, 2000, the Company entered into a definitive agreement (the
Integ Agreement) to acquire Integ Incorporated (Integ), a publicly traded
development stage company based in Minnesota. Integ has developed a
proprietary sampling technology to extract interstitial fluid from the top
layers of the skin eliminating the need to draw blood for the continuous
blood glucose monitoring self-management system. Under the terms of the Integ
Agreement, the Company will issue 1.9 million shares of its common stock in
exchange for all of Integ's common equity and make payments of approximately
$5.5 million in cash to redeem shares of Integ's preferred stock. The Company
will account for this acquisition as a purchase of assets. The Company
expects to record a significant amount of intangible assets in connection
with this acquisition and 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. Subject to various closing conditions,
including approval by Integ's stockholders, the Company anticipates closing
the acquisition in the first quarter of 2001.
DEVELOPMENT AND LICENSE AGREEMENT WITH DEBIOTECH, S.A.
On October 14, 2000, the Company entered into a development and license
agreement (the Debiotech Agreement) with Debiotech, S.A. (Debiotech), a
privately owned Swiss company. Under the Debiotech Agreement, Debiotech will
seek to develop an externally-worn insulin pump using its patented Micro
Electro-Mechanical Systems (MEMS) technology and the Company will make a $10
million development and license fee payment prior to December 30, 2000 to obtain
the exclusive right to commercialize products using Debiotech's MEMS technology.
In addition, the Company will pay a royalty ranging from 6.5% to 10% of sales
depending upon various factors. The Company 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.
10
<PAGE>
INVERNESS MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY SELFCARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12) SUBSEQUENT EVENTS (CONTINUED)
PROPOSED PUBLIC OFFERING
On October 24, 2000, the Company filed a registration statement with the U.S.
Securities and Exchange Commission relating to its proposed public offering (the
Offering) of 3,600,000 shares of its common stock, of which 3,350,000 shares
will be offered by the Company and 250,000 shares will be offered by selling
stockholders. The Company and selling stockholders have granted the underwriters
an option to purchase up to an additional 540,000 shares of common stock, of
which 150,000 shares will be offered by the Company and 390,000 shares will be
offered by selling stockholders solely to cover any over-allotments.
The Company intends to use the net proceeds from the Offering to repay certain
indebtedness, to fund its acquisition of Integ (see description above), to pay
Debiotech's development and license fee (see description above), to fund the
redemption of the preferred stock of a subsidiary and for working capital and
other general corporate purposes, including other possible acquisitions.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 tables,
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 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.
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 it he quarter in which the acquisition is
completed to write off of 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.
12
<PAGE>
RESULTS OF OPERATIONS
NET REVENUES. Net revenues increased $9.9 million, or 30%, to $43.0 million
for the three months ended September 30, 2000 from $33.1 million for the three
months ended September 30, 1999. 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 diabetes product sales, especially the
One Touch-Registered Trademark- FaSTTAke-Registered Trademark- blood glucose
monitoring system, which is distributed by LifeScan, Inc. (LifeScan), a Johnson
& Johnson company. One Touch-Registered Trademark- FaSTTAke-Registered
Trademark- sales were driven by strong market acceptance. In addition, the
introduction of 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 in the fourth
quarter of 1999 contributed to the increased diabetes sales in 2000. Net product
sales from our diabetes management segment were $29.4 million for the three
months ended September 30, 2000, an increase of $10.3 million or 54% as compared
to net diabetes product sales of $19.1 million for the three months ended
September 30, 1999. Likewise, 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 68% and 66%
of net revenues for the three and nine months ended September 30, 2000,
respectively, compared to 58% and 55% of net revenues for the three and nine
months ended September 30, 1999, respectively. Net product sales from our
women's health segment were $10.9 million for the three months ended September
30, 2000, a decreaseof $481,000 or 4% as compared to net women's health product
sales of $11.4 million for the three months ended September 30, 1999. However,
net women's health product sales were $33.3 million for the nine months ended
September 30, 2000, an increase of $1.5 million or 5% as compared to net women's
health product sales of $31.8 million for the nine months ended September 30,
1999. The decrease in net women's health product sales comparing the third
quarters of 2000 and 1999, respectively, resulted from decreased sales in our
nutritional product lines. The primary factor in the year-to-date increased
sales of our women's health products was an increase in sales of branded and
private label pregnancy and ovulation tests. Net women's health product sales
accounted for 25% and 27% of total net revenues for the three and nine months
ended September 30, 2000, respectively, compared to 34% and 35% of total net
revenues for the three and nine months ended September 30, 1999, respectively,
as a result of the significant increase in diabetes product sales. Net sales of
clinical diagnostic products increased slightly by $59,000 for the three months
ended September 30, 2000 as compared to the three months ended September 30,
1999 while decreased 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 $91,000 and $247,000 for the three and nine months ended September 30,
2000, respectively, compared to $99,000 and $642,000 for the three and nine
months ended September 30, 1999, respectively.
GROSS PROFIT. Gross profit increased by $6.5 million or 57% to $17.9 million
for the three months ended September 30, 2000 from $11.3 million for the three
months ended September 30, 1999. Similarly, 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 41% and 42% for the three and nine months ended
September 30, 2000, respectively, compared to 34% and 32% for the three and nine
months ended September 30, 1999, respectively. The significant improvements in
gross profit and gross margin of net product sales primarily resulted from the
increase in sales of FastTAKE 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 $1.5 million or 86% for the three months ended September 30, 2000 to $3.3
million from $1.8 million for the three months ended September 30, 1999. For the
nine months ended September 30, 2000, 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 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. Selling, general and
administrative expense increased by $492,000 or 5% to $9.9 million for the three
months ended September 30, 2000 from $9.4 million for the three months ended
September 30, 1999. 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
year-to-date increase in selling, general and administrative expense resulted
from higher marketing expenditures related to sales of our Excel-TM-G product
and diabetes supplies, increased legal fees related to the defense of the Abbott
lawsuits against us and a one-time noncash compensation charge of $429,000
related to stock options granted to consultants. Selling, general and
administrative expense as a percentage of net revenues was 23% and 24% for the
three and nine months ended September 30, 2000, respectively, compared to 28%
and 30% for the three and nine months ended September 30, 1999, respectively.
INTEREST. Interest expense, net of interest income, decreased by $418,000 or
21% to $1.6 million for the three months ended September 30, 2000 from $2.0
million for the three months ended September 30, 1999. Net interest expense
remained unchanged for the nine months ended September 30, 2000 compared to the
nine months ended September 30, 1999. Comparing the third quarters of 2000 and
1999, net interest expense decreased as a result of a lower total average
outstanding debt balance during these periods.
13
<PAGE>
OTHER INCOME (EXPENSE). We recorded other income of $172,000 for the three
months ended September 30, 2000 and $2.3 million for the nine months ended
September 30, 2000. For the three months ended September 30, 2000, we recorded
other income of $57,000 and for the nine months ended September 30, 1999 we
incurred other expense of $135,000. Generally, other income or expense
represents foreign currency exchange transaction gains and losses. During the
three and nine months ended September 30, 2000, we recognized $112,000 and
$562,000, respectively, in foreign exchange gain as a result of the strong U.S.
Dollar versus the British Pound Sterling on the loans received from LifeScan (as
described below in the "Liquidity and Capital Resources" section), which is
denominated in British Pound 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 (see Note 5 of the
accompanying "Notes to Consolidated Financial Statements").
DIVIDENDS AND ACCRETION ON MANDATORILY REDEEMABLE PREFERRED STOCK OF A
SUBSIDIARY. Inverness Medical Limited, our subsidiary in Inverness, Scotland,
accrued $48,000 and $383,000 for the three and nine months ended September 30,
2000, respectively, representing dividends payable and accretion on the
outstanding cumulative redeemable preference shares, as compared to $57,000 and
$170,000 for the three and nine months ended September 30, 1999, respectively.
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 (see discussion below in the "Liquidity and Capital Resources"
section).
EXTRAORDINARY LOSS. In the second quarter of 2000, we recorded an
extraordinary loss of $800,000 ($486,000 of which was noncash expense) for the
refinancing of our subordinated revenue royalty notes (see Note 6 of the
accompanying "Notes to Consolidated Financial Statements"). In the first quarter
of 1999, we recorded an extraordinary loss of $306,000 ($228,000 of which was
noncash expense) for the modification of our then outstanding senior
subordinated convertible notes.
INCOME TAXES. For the three and nine months ended September 30, 2000, we
recorded provisions of $147,000 and $435,000, respectively, for income taxes
compared to $15,000 and $349,000 for the three and nine months ended September
30, 1999, respectively. Substantially all of the income tax provisions reflect
certain state income taxes relating to our subsidiaries in the United States.
NET INCOME (LOSS). For the three months ended September 30, 2000, we
realized a net income of $3.1 million compared to a net loss of $1.8 million for
the three months ended September 30, 1999. The basic and diluted earnings per
common share for the three months ended September 30, 2000 were $0.12 and $0.11,
respectively, compared to a basic and diluted loss per common share of $0.11 for
the three months ended September 30, 1999. For the nine months ended September
30, 2000, we realized a net income of $7.2 million compared to a net loss of
$9.2 million for the nine months ended September 30, 1999. The 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. See Note 9 of the
accompanying "Notes to Consolidated Financial Statements". The results for the
nine-month periods ending September 30, 2000 and 1999 included significant
non-recurring, noncash charges and income as detailed above. Excluding the
nonrecurring and noncash charges and income, net income for the nine months
ended September 30, 2000 was $6.7 million compared to net losses of $8.9 million
for the nine months ended September 30, 1999. Excluding the nonrecurring and
noncash 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 nine
months ended September 30, 1999.
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 shares 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 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.
14
<PAGE>
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.
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
(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 of up to (pound)8,125,000 (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
(pound)2,031,250 (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 (pound)0.0125 (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 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 revenue royalty notes and subordinated promissory notes that were
issued in 1997 and 1998, respectively. 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.
On October 24, 2000, the Company filed a registration statement with the
U.S. Securities and Exchange Commission relating to its proposed public offering
(the Offering) of 3,600,000 shares of its common stock, of which 3,350,000
shares will be offered by the Company and 250,000 shares will be offered by
selling stockholders. The Company and selling stockholders have granted the
underwriters an option to purchase up to an additional 540,000 shares of common
stock, of which 150,000 shares will be offered by the Company and 390,000 shares
will be offered by selling stockholders solely to cover any over-allotments. The
Company intends to use the net proceeds from the Offering to repay certain
indebtedness, to fund its acquisition of Integ (see Note 12 of the "Notes to
Consolidated Financial Statements"), to pay Debiotech's development and license
fee (see Note 12 of the "Notes to Consolidated Financial Statements"), to fund
the redemption of the preferred stock of a subsidiary and for working capital
and other general corporate purposes, including other possible acquisitions.
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 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.
15
<PAGE>
Based upon our operating plans, we believe that our existing and planned
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 the
Offering (as described above), 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, including the aforementioned transactions
with Integ and Debiotech, 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.
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 beginning
on page 22.
WE DEPEND ON OUR RELATIONSHIP WITH LIFESCAN TO DISTRIBUTE CERTAIN OF OUR
EXISTING PRODUCTS, AS WELL AS FUTURE PRODUCTS.
We depend on our relationship with LifeScan to distribute certain of our
existing products, as well as future products. In 1995, we entered into a
worldwide distribution agreement with LifeScan, which was amended in June
1999. Under the terms of our agreements with LifeScan, we develop and
manufacture, and LifeScan distributes our electrochemical blood glucose
monitoring systems. Our first and second generation electrochemical systems
are being marketed by LifeScan under its brands, One Touch-Registered
Trademark- FastTake-Registered Trademark- and One Touch-Registered Trademark-
Ultra. We commenced shipments of One Touch-Registered Trademark-
FastTake-Registered Trademark- in early 1998. One Touch-Registered Trademark-
FastTake-Registered Trademark- is currently the most successful product in
our diabetes line of business. LifeScan has exclusive rights to market One
Touch-Registered Trademark-FastTake-Registered Trademark- and One
Touch-Registered Trademark- Ultra, as well as any new electrochemical blood
glucose monitoring systems that we develop. However, LifeScan is not
restricted from selling other systems, including electrochemical systems, for
blood glucose monitoring. Accordingly, our future results of operations
depend to a substantial degree on LifeScan's continued marketing of our
electrochemical systems. Although the One Touch-Registered Trademark-
FastTake-Registered Trademark- product appears to be gaining acceptance, we
cannot assure you that the market will fully accept One Touch-Registered
Trademark- FastTake-Registered Trademark- or that any such acceptance will
continue. Additionally, under the terms of the agreement with LifeScan,
LifeScan has made and may continue to make additional funding available 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 available to us. Any failure by us to produce, or
failure by LifeScan to market and distribute our electrochemical systems
successfully, could have a material adverse effect on our business, financial
condition and results of operations.
WE RELY UPON OUR MANUFACTURING FACILITIES AS WELL AS FOREIGN CONTRACT
MANUFACTURING ARRANGEMENTS, AND MANUFACTURING PROBLEMS OR DELAYS COULD SEVERELY
AFFECT OUR BUSINESS.
TEST STRIPS
Our electrochemical blood glucose test strips are produced exclusively in
our manufacturing facility in Inverness, Scotland. Sales of these test strips
accounted for a significant portion of our net revenues for the six months
ended June 30, 2000. Sales of test strips are expected to be our largest
source of revenues for the forseeable future. Our Inverness facility contains
highly specialized equipment and utilizes complicated manufacturing processes
developed over a number of years that would be difficult and time-consuming
to duplicate. Our ability to manufacture test strips could be disrupted
wholly or in part by technical problems, labor or raw material shortages,
labor relations problems, natural disasters, fire, sabotage or business
accidents, among other factors. Any prolonged disruption in the operations of
our Inverness manufacturing facility would seriously harm our ability to
satisfy customer orders for test strips. If we cannot deliver our test strips
in a timely manner or in sufficient quantities, our revenues will suffer and
our reputation may be harmed. In particular, LifeScan, under certain
circumstances, would automatically become entitled to produce the
electrochemical test strips itself. Even though we carry manufacturing
interruption insurance policies, we may suffer losses as a result of business
interruptions that exceed the coverage available under our insurance
policies. In addition, our test strip revenues depend in part upon our
manufacturing yields. We believe that we currently have sufficient test strip
manufacturing capacity to satisfy contractual obligations although we
anticipate that actual demand will exceed these obligations. We are currently
expanding our production capacity to meet projected demand. If we fail to
complete these expansion efforts in a timely manner, our relationships with
our customers or our reputation in the marketplace could be severely harmed.
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BLOOD GLUCOSE METERS
We purchase all of the meters for our electrochemical blood glucose systems
from a contract manufacturer in the People's Republic of China. Our business
would likely be harmed if production at, or deliveries by, our contract
manufacturer were disrupted for a material amount of time or if the cost of
meters were significantly increased. Such disruptions or cost increases could
occur as the result of social or political strife, unforeseen economic or
production regulations, import, licensing or trade restrictions, natural
disasters or war or other unforeseen circumstances. If this supply relationship
were disrupted, we would need to identify other third-party contract
manufacturers and verify and validate the production processes used in the
manufacture of our electrochemical blood glucose meters. We cannot assure you
that we will be able to identify adequate substitute manufacturers to replace
the meters matching our specifications affected by such a disruption in a timely
manner or at comparable prices, if at all.
PREGNANCY AND OVULATION TESTS
We produce our pregnancy detection and ovulation prediction tests in our
manufacturing facilities located in Galway, Ireland. To produce these tests, we
rely significantly on our manufacturing facility in Galway, Ireland. Our
production processes are complex and require specialized and expensive
equipment. Even though we carry business interruption insurance policies, we may
suffer losses as a result of business interruptions that exceed the coverage
available under our insurance policies. Any event impacting our Galway facility
could have a significant negative impact on our operations and our revenues from
pregnancy detection and ovulation prediction tests would decline until such time
as we are able to put in place alternative contract manufacturers.
IF WE FAIL TO MEET STRICT REGULATORY REQUIREMENTS, WE COULD BE REQUIRED TO
PAY FINES OR EVEN CLOSE OUR FACILITIES.
Our facilities and manufacturing techniques generally must conform to
standards that are established by government agencies, including those of
European governments, as well as the United States Food and Drug Administration
(FDA). These regulatory agencies may conduct periodic inspections of our
facilities to monitor our compliance with applicable regulatory standards. If a
regulatory agency finds that we fail to comply with the appropriate regulatory
standards, it may impose fines on us or if such a regulatory agency determines
that our non-compliance is severe, it may close our facilities. Any adverse
action by an applicable regulatory agency would have a negative impact on our
operations.
WE RECENTLY INTRODUCED SOME NEW PRODUCTS AND CANNOT BE CERTAIN THAT THEY
WILL GAIN MARKET ACCEPTANCE.
On September 17, 1999, we received notification of FDA clearance for our low
cost alternative electrochemical blood glucose monitoring test strip,
Excel-Registered Trademark- G for use with Glucometer-Registered Trademark-
Elite-Registered Trademark- meters sold by Bayer Diagnostics. We commenced
shipments of Excel-Registered Trademark- G in October 1999. Our future results
of operations depend to some extent on our ability to market and sell
Excel-Registered Trademark- G. Additionally, we cannot assure you that the
market will fully accept Excel-Registered Trademark- G.
In addition, in August 2000, we announced that we had received notification
of FDA clearance for the One Touch-Registered Trademark- Ultra electrochemical
blood glucose monitoring system to be marketed, sold and distributed by
LifeScan. We expect to commence shipment in the fourth quarter of 2000 and we
cannot assure you that the market will accept this new system or that any such
acceptance will not dilute market acceptance of our other electrochemical blood
glucose monitoring system.
IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY MAY BE HARMED, MARKET
ACCEPTANCE OF OUR PRODUCTS MAY DECREASE AND WE MAY BE EXPOSED TO LIABILITY IN
EXCESS OF OUR PRODUCT LIABILITY INSURANCE COVERAGE.
The manufacturing and marketing of medical diagnostic devices, such as our
blood glucose monitoring systems, involve an inherent risk of product liability
claims. In addition, our product development and production are extremely
complex and could expose our products to defects. Any such defects could harm
our credibility and decrease market acceptance of our products. LifeScan has
found through a limited number of customer comments that meters programmed for
millimole measurement of blood glucose concentration occasionally exhibit a
display error. Millimole is the measurement used in Canada and most European
countries. We are currently working 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 recalls of these meters, but we may
choose to exchange some or all of them, and we cannot assure you that corrective
action with respect to this product, or any of our other products, will not
result in material cost to us or loss or damage to the reputation of our
products. In addition, our marketing of nutritional supplements may cause us to
be subjected to various product liability claims, including, among others,
claims that the nutritional supplements have inadequate warnings concerning side
effects and interactions with other substances. Potential product liability
claims may exceed the amount of our insurance coverage or may be excluded from
coverage under the terms of the policy. In the event that we are held liable for
a claim for which we are not indemnified, or for damages exceeding the limits of
our insurance coverage, such a claim could materially damage our business and
our financial condition.
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WE HAVE HAD OPERATING LOSSES FOR MOST OF OUR HISTORY AND HAVE ONLY RECENTLY
GENERATED A PROFIT.
We had an accumulated deficit of approximately $93.3 million as of September
30, 2000. We incurred losses from our inception until the quarter ended December
31, 1999. We will in the future incur significant sales and marketing, research
and development and general and administrative expenses, and may not have
sufficient revenues to generate net income in light of these expenditures.
Further, although we generated net income in each of the last three quarters, we
may not be able to sustain or increase profitability on a quarterly or annual
basis in the future.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We expect to continue to experience significant growth in demand for our
products, the number of our employees and customers and the scope of our
operations. This growth may continue to place a significant strain on our
management and operations. Our ability to manage this growth will depend upon
our ability to attract, hire and retain skilled employees. Our success will also
depend on the ability of our officers and key employees to continue to implement
and improve our operational and other systems, to manage multiple, concurrent
customer relationships and to hire, train and manage our employees. Our future
success is heavily dependent upon growth and acceptance of new products. If we
cannot scale our business appropriately or otherwise adapt to anticipated growth
and new product introductions, a key part of our strategy may not be successful.
OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED
BY INTERNATIONAL BUSINESS RISKS.
A significant number of our employees, including sales, support and research
and development personnel, are located outside of the United States. Conducting
business outside of the United States is subject to numerous risks, including:
o decreased liquidity resulting from longer accounts receivable
collection cycles typical of foreign countries;
o decreased revenues on foreign sales resulting from possible foreign
currency exchange and conversion issues;
o lower productivity resulting from difficulties managing our sales,
support and research and development operations across many countries;
o lost revenues resulting from difficulties associated with enforcing
agreements and collecting receivables through foreign legal systems;
o lost revenues resulting from the imposition by foreign governments of
trade protection measures; and
o higher cost of sales resulting from import or export licensing
requirements.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE OR LIMIT OUR ABILITY TO
INCREASE MARKET SHARE, WHICH COULD IMPAIR THE SALES OF OUR PRODUCTS AND HARM OUR
FINANCIAL PERFORMANCE.
The medical products industry is rapidly evolving and developments are
expected to continue at a rapid pace. Competition in this industry 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 in doing 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.
In addition, the market for the sale of 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 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.
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THE RIGHTS WE RELY UPON TO PROTECT THE INTELLECTUAL PROPERTY UNDERLYING OUR
PRODUCTS MAY NOT BE ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO USE OUR
TECHNOLOGY AND WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.
Our success will depend in part on our ability to obtain commercially
valuable patent claims and to protect our intellectual property. Our patent
position is generally uncertain and involves complex legal and factual
questions. The degree of future protection for our proprietary rights is
uncertain.
The risks and uncertainties that we face with respect to our patents and
other proprietary rights include the following:
o the pending patent applications we have filed or to which we have
exclusive rights may not result in issued patents or may take longer
than we expect to result in issued patents;
o the claims of any patents which are issued may not provide meaningful
protection;
o we may not be able to develop additional proprietary technologies that
are patentable;
o the patents licensed or issued to us or our customers may not provide a
competitive advantage;
o other companies may challenge patents licensed or issued to us or our
customers;
o patents issued to other companies may harm our ability to do business;
and
o other companies may design around technologies we have licensed or
developed.
In addition to patents, we rely on a combination of trade secrets,
nondisclosure agreements and other contractual provisions and technical measures
to protect our intellectual property rights. Nevertheless, these measures may
not be adequate to safeguard the technology underlying our products. If they do
not protect our rights, third parties could use our technology, and our ability
to compete in the market would be reduced. In addition, employees, consultants
and others who participate in the development of our products may breach their
agreements with us regarding our intellectual property, and we may not have
adequate remedies for the breach. We also may not be able to effectively protect
our intellectual property rights in some foreign countries. For a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
or prosecute potential infringements of our patents. We also realize that our
trade secrets may become known through other means not currently foreseen by us.
Despite our efforts to protect our intellectual property, our competitors or
customers may independently develop similar or alternative technologies or
products that are equal or superior to our technology and products without
infringing on any of our intellectual property rights or design around our
proprietary technologies.
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE ON THEIR PROPRIETARY
RIGHTS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR
COSTS.
Substantial litigation over intellectual property rights exists in our
industry. Our products are currently the subject of litigation alleging that we
are infringing on the intellectual property rights of others. We expect that our
products and 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 on which our products
or technology may infringe. Any of these third parties might make a claim of
infringement against us. Any litigation could result in the expenditure of
significant financial resources and the diversion of 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.
WE MAY NEED TO INITIATE LAWSUITS TO PROTECT OR ENFORCE OUR PATENTS AND OTHER
INTELLECTUAL PROPERTY RIGHTS, WHICH WOULD BE EXPENSIVE AND, IF WE LOSE, COULD
CAUSE US TO LOSE SOME OF OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WOULD REDUCE
OUR ABILITY TO COMPETE IN THE MARKET.
We rely on patents to protect a large part of our intellectual property and
our competitive position. In order to protect or enforce our patent rights, we
may initiate patent litigation against third parties, such as infringement suits
or interference proceedings. Litigation may be necessary to:
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o assert claims of infringement;
o enforce our patents;
o protect our trade secrets or know-how; or
o determine the enforceability, scope and validity of the proprietary
rights of others.
Lawsuits could be expensive, take significant time and divert management's
attention from other business concerns. Litigation would put our patents at risk
of being invalidated or interpreted narrowly and our patent applications at risk
of not issuing. We may also provoke third parties to assert claims against us.
Patent law relating to the scope of claims in the technology fields in which we
operate is still evolving and, consequently, patent positions in our industry
are generally uncertain. We cannot assure you that we will prevail in any of
these suits or that the damages or other remedies awarded, if any, will be
commercially valuable. During the course of these suits, there may be public
announcements of the results of hearings, motions and other interim proceedings
or developments in the litigation. If securities analysts or investors perceive
any of these results to be negative, our stock price could decline.
OUR PENDING ACQUISITION OF INTEG AND OUR DEVELOPMENT AND LICENSING
ARRANGEMENTS WITH DEBIOTECH MAY NOT YIELD PRODUCTS OR TECHNOLOGY THAT CAN BE
COMMERCIALIZED.
On October 3, 2000, we entered into a definitive agreement to acquire
Integ, a development stage enterprise. We may not complete the acquisition.
On October 14, 2000, we entered into a development and license agreement with
Debiotech. The value of Integ to us may not be greater than or equal to the
purchase price which we have agreed to pay. Similarly, the amounts that we
have agreed to pay to Debiotech may not be equal to the ultimate value of the
rights that we have under our agreement with it. If we are unable to
effectively integrate the technologies of Integ and Debiotech into our
research and development efforts, our research and development efforts may
suffer. Further, we cannot guarantee that we will realize any of the benefits
or strategic objectives we are seeking to obtain by acquiring Integ or
licensing technology from Debiotech. In that regard, Integ has granted to a
third party certain rights in its intellectual property that survive our
acquisition, which will permit this third party to utilize the technology
that we will acquire to further its future development efforts. In connection
with accounting for the acquisition of Integ, we will record a significant
amount of intangible assets, the amortization of which will adversely affect
our results of operations in future periods. In addition, we will also record
a significant charge for the write-off of a portion of the purchase price as
in-process research and development.
IF WE CHOOSE TO ACQUIRE NEW AND COMPLEMENTARY BUSINESSES, PRODUCTS OR
TECHNOLOGIES INSTEAD OF DEVELOPING THEM OURSELVES, WE MAY BE UNABLE TO COMPLETE
THESE ACQUISITIONS OR TO SUCCESSFULLY INTEGRATE AN ACQUIRED BUSINESS OR
TECHNOLOGY IN A COST-EFFECTIVE AND NON-DISRUPTIVE MANNER.
Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands and
competitive pressures. Accordingly, from time to time we have acquired
complementary businesses, products, or technologies instead of developing them
ourselves and may choose to do so in the future. We do not know if we will be
able to complete any acquisitions, or whether we will be able to successfully
integrate any acquired business, operate it profitably or retain its key
employees. Integrating any business, product or technology we acquire could be
expensive and time consuming, disrupt our ongoing business and distract our
management. In addition, in order to finance any acquisitions, we might need to
raise additional funds through public or private equity or debt financings. In
that event, we could be forced to obtain financing on terms that are not
favorable to us and, in the case of equity financing, that may result in
dilution to our shareholders. If we are unable to integrate any acquired
entities, products or technologies effectively, our business will suffer. In
addition, any amortization of goodwill or other assets or charges resulting from
the costs of acquisitions could harm our business and operating results.
DEVELOPMENT OF A CURE FOR DIABETES COULD MAKE OUR PRODUCTS OBSOLETE.
The medical devices industry, including the self-test industry, is subject
to rapid and substantial technological development and product innovations. To
be successful, we must be responsive to new products and technologies as well as
new applications of existing technologies in diabetes self-management. The
National Institute for Health and other supporters of diabetes research are
sponsoring significant programs to better understand the disease and to find
methods to prevent or cure it. If discovered and widely-available, any of these
methods would minimize or eliminate the need for our diabetes self-management
products and would require us to focus on other areas of our business, which
would have a material adverse effect on our financial condition and
profitability.
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WE MAY BE UNABLE TO HIRE, RETAIN OR MOTIVATE KEY PERSONNEL, UPON WHOM THE
SUCCESS OF OUR BUSINESS WILL DEPEND.
We are highly dependent upon certain members of our management and
scientific staff. We believe that our future success will depend in large part
upon our ability to attract and retain highly skilled scientific, managerial and
marketing personnel. We face significant competition for such personnel from
other companies, research and academic institutions, government entities and
other organizations. We cannot assure you that we will be able to retain our key
employees or attract, assimilate, retain or train other needed qualified
employees in the future. We do not have employment agreements with all of our
key employees. The loss of any of our key employees, including our scientists,
may have an adverse effect on our business.
WE MAY BE LIABLE FOR CONTAMINATION OR OTHER HARM CAUSED BY HAZARDOUS
MATERIALS THAT WE USE.
Our research and development processes involve the use of hazardous
materials. We are subject to federal, state and local regulation governing the
use, manufacture, handling, storage and disposal of hazardous materials. We
cannot completely eliminate the risk of contamination or injury resulting from
hazardous materials and we may incur liability as a result of any contamination
or injury. We may also incur expenses relating to compliance with environmental
laws. Such expenses or liability could have a significant negative impact on our
financial condition.
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) the availability and extent of reimbursement for our products;
(vii) increased research and development expenses; or (viii) 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, which has ranged from less than $3 to more than $28
during the last twelve months, 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; or (vi) other developments affecting us
or our competitors.
THE MARKET PRICE OF OUR COMMON STOCK WILL LIKELY FLUCTUATE IN RESPONSE TO A
NUMBER OF FACTORS, INCLUDING THE FOLLOWING:
o our failure to meet the performance estimates of securities analysts;
o changes in financial estimates of our revenues and operating results or
buy/sell recommendations by securities analysts;
o the timing of announcements by us or our competitors of significant
products, contracts or acquisitions or publicity regarding actual or
potential results or performance thereof; and
o general stock market conditions, other economic or external factors.
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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. You can identify these statements by
forward-looking words such as "may", "will", "expect", "anticipate", "believe",
"estimates" and "continue" or other words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or of our financial
condition, or state other "forward-looking" information. We believe that it is
important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict or
control and that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. Investors are
cautioned that all forward-looking statements involve risks and uncertainties,
and actual results may differ materially from those discussed as a result of
various factors, including those factors described in the "Certain Factors
Affecting Future Results" section of this Form 10Q Quarterly Report. Some
important additional factors that could cause our actual results to differ
materially from those projected in any such forward-looking statements are as
follows:
o 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;
o competitive factors, including technological advances achieved and
patents attained by competitors and generic competition;
o 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;
o 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;
o manufacturing interruptions or delays, or capacity constraints, or lack
of availability of alternative sources for components for our products,
that we may experience;
o 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;
o significant litigation adverse to us including product liability claims,
patent infringement claims, and antitrust claims;
o product efficacy or safety concerns resulting in product recalls or
declining sales;
o the impact of business combinations, including acquisitions and
divestitures, and organizational restructuring consistent with evolving
business strategies; and
o 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.
Readers should not place undue reliance on our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in the "Certain Factors Affecting Future Results"
section and elsewhere in this Form 10Q Quarterly Report could harm our business,
prospects, operating results and financial condition.
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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 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 three and nine months ended September 30, 2000, the net
impact of foreign currency changes was a gain of $173,000 and $516,000,
respectively. 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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PART II - OTHER INFORMATION
ITEM 1. 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(R) FastTake(R) 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(R) FastTake(R) 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(R)
FastTake(R) 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(R)
FastTake(R) 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(R) Excel(R) 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(R) G test strips for use with the Bayer Glucometer
Elite(R) 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(R) 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(R) 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(R) 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
EXHIBIT TITLE
NUMBER
2.1 Agreement and Plan of Merger by and among Inverness
Medical Technology, Inc., Terrier Acquisition Corp.,
and Integ Incorporated, dated October 3, 2000
(incorporated by reference to Exhibit 99.2 to the
Company's current report on Form 8-K filed on October
4, 2000)
10.1 Inverness Medical Technology, Inc. Amended and
Restated 2000 Stock Option and Grant Plan dated July
3, 2000
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
ending September 30, 2000.
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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.
INVERNESS MEDICAL TECHNOLOGY, INC.
Date: November 1, 2000 /s/ Duane L. James
--------------------------------------------------
Duane L. James
Vice President of Finance and an authorized officer
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