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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996 Commission File No. 0-24072
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MEDISENSE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2728017
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
266 Second Avenue, Waltham, Massachusetts 02154
(Address, including zip code, of principal executive offices)
(617) 895-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. /X/
The aggregate market value of Voting Stock held by non-affiliates of the
Registrant was approximately $7,335,135 based on the June 10, 1996 closing price
of the Common Stock on the Nasdaq National Market as reported in The Wall Street
Journal.
The number of shares outstanding of each of the Registrant's classes of common
stock as of June 10, 1996 was:
Class Outstanding
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Common Stock, $.01 par value per share 20,024,084
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MEDISENSE, INC.
TABLE OF CONTENTS
PAGE(S)
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PART I
Item 1. BUSINESS 3-12
Item 2. PROPERTIES 13
Item 3. LEGAL PROCEEDINGS 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS 14
Item 6. SELECTED FINANCIAL DATA 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15-19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 19
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 20-21
Item 11. EXECUTIVE COMPENSATION 22-24
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 25
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 27
EXHIBIT INDEX 28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
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PART I
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ITEM 1. BUSINESS
MediSense, Inc. (the Company or MediSense) is a Massachusetts
corporation formed in 1981. The Company and its subsidiaries develop,
manufacture and market blood glucose monitoring systems that enable people with
diabetes to manage their disease more effectively. The Company believes that its
ExacTech(R), MediSense(R) 2 and recently introduced Precision
Q-I-D(TM) meters and disposable test strips are among the most
technologically advanced personal blood glucose monitoring systems available.
MediSense's monitoring systems are based on MediSense's proprietary biosensor
technology and are compact, fast and easy-to-use. The Company's products are
sold in 55 countries by its sales and marketing organization, and are
manufactured in facilities located in Abingdon, England and Waltham,
Massachusetts. Approximately 98.4% of MediSense's Common Stock on a fully
diluted basis was purchased by Abbott Laboratories on May 2, 1996.
DIABETES
Diabetes is a chronic, life threatening disease for which there is no
known cure. It is the fourth leading cause of death by disease in the United
States. Over 16 million people in the United States (one in 20) have diabetes
and more than 650,000 new cases are diagnosed each year. It is estimated that
there are at least 90 million people with diabetes worldwide. Type I (or
juvenile) diabetes, the most severe form of the disease, comprises 10% of
diabetes cases in the United States and requires daily treatment with insulin to
sustain life. Type II (or adult onset) diabetes comprises the other 90% of
diabetes cases in the United States and is usually managed by diet and exercise
but may require treatment with insulin or other medication.
Diabetes affects the body's ability to control naturally the level of
blood glucose. Normally, the carbohydrates in food are broken down into glucose
which is circulated in the bloodstream to the cells of the body. The cells then
convert this glucose into energy. The concentration of glucose in the
bloodstream must be controlled within a relatively tight range to maintain
normal health. Insulin, which is secreted by the pancreas, is the primary
regulatory mechanism by which the body reduces blood glucose levels. A normal
pancreas produces the amount of insulin required to maintain a person's blood
glucose at proper levels. In Type I diabetes, an autoimmune reaction in the body
destroys insulin-producing cells, which results in uncontrolled blood glucose.
In Type II diabetes, the body may have defects in the insulin-producing cells, a
reduced number of those cells, a resistance to insulin by the recipient cells or
various combinations of these factors.
BLOOD GLUCOSE MONITORING
According to the American Diabetes Association, people with Type I
diabetes must have daily treatment with insulin to control blood glucose levels.
A person's blood glucose level will vary depending upon food intake, insulin
availability, exercise, stress and illness. Blood glucose testing several times
a day enables people with diabetes to manage their disease better by keeping
their blood glucose levels in a narrow range. This may be accomplished through
diet, physical activity and insulin dosage. Prior to the availability of
personal blood glucose monitoring systems, people with diabetes relied on urine
glucose testing to monitor their status and make appropriate adjustments to
their treatment. Because glucose appears in the urine only after a significant
period of elevated blood glucose, urine tests are inadequate for tight control
of blood glucose. Patients were also able to obtain an occasional blood glucose
test after referral by a healthcare provider to a clinical laboratory. These
tests were ordered infrequently as part of a physician office visit, and results
were typically not available for immediate discussion and intervention.
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Beginning in the late 1970s, the availability of compact, easy-to-use
monitoring systems that provided fast and accurate blood glucose measurements
gave people with diabetes a tool to manage the disease more effectively and to
improve the quality of care. Worldwide sales of personal blood glucose
monitoring systems have increased dramatically. According to Boston Biomedical
Consultants, the worldwide market for blood glucose monitoring products grew
from approximately $860 million in 1990 to an estimated $1.8 billion in 1995. In
the United States, the market for blood glucose monitoring products grew from
approximately $470 million in 1990 to an estimated $1.1 billion in 1995.
The Diabetes Control and Complications Trial ("DCCT"), the results of
which were published in 1993 in The New England Journal of Medicine, has
confirmed that management of glucose to near normal levels can prevent the onset
and the progression of complications from diabetes. This landmark trial,
sponsored by the National Institutes of Health at a cost of $165 million over a
nine-year period, studied more than 1,400 people with Type I diabetes. The
intent of the trial was to determine whether control of blood glucose levels
would prevent the onset or slow the progression of eye, kidney and nerve
complications from diabetes.
The study demonstrated that maintaining blood glucose levels as close
as possible to normal reduces by approximately 60% the risk for development and
progression of diabetes complications. The results of the study were so
compelling that the study was terminated, earlier than planned, because those
conducting the study felt that to continue conventional treatment for the
control group would deprive its participants of the benefits of the study's
findings. Because the intensive therapy that the DCCT study recommends involves
testing at least four times a day, the Company believes that the DCCT has
increased awareness among people with diabetes of the benefits of frequent
testing and will be a key factor in changing diabetes management. The Company
estimates that people with diabetes, on average, test their blood glucose
levels less than once per day. Although the DCCT included only people with Type
I diabetes, the American Diabetes Association has stated that there is no
reason to believe the effects of better control of blood glucose levels would
not apply to people with Type II diabetes.
HOME BLOOD GLUCOSE MONITORING TECHNOLOGIES
Currently available personal blood glucose monitoring systems are
generally based on either photometric or the more recently introduced biosensor
technology. Both photometric and biosensor technologies generally employ a
disposable reagent test strip in conjunction with a battery-powered,
microprocessor-controlled meter. With either system, the user must obtain a
small amount of blood to conduct the test, typically by using a lancet to prick
the finger to produce a drop of blood. The blood is then applied directly from
the finger onto the test strip. Test strips are designed for use with the
particular meter or meters.
Photometric Technology
The earliest efforts to adapt laboratory equipment for use in personal
blood glucose monitoring systems employed photometric technology, which remains
the primary technology used by the Company's competitors. With photometric
technology, the blood migrates into a reaction layer located on the test strip.
Some photometric systems then require the user to blot the blood away and wait
approximately 45 seconds for the reagents in the test strip to react with
glucose to produce a color change. The portion of the test strip containing the
blood sample is then inserted into the meter, which analyzes the color change to
measure the blood glucose level. The meter then displays the result. Prior to
1988, all commercially available personal blood glucose monitoring systems
employed photometric technology.
Biosensor Technology
MediSense introduced biosensor technology to the personal blood glucose
monitoring market in 1988. Biosensor technology uses electrical currents to
measure blood glucose. One end of the test strip is inserted into the meter and
a drop of blood is placed on the other end of the test strip. Once the blood is
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placed on the test strip, a biochemical reaction begins that generates a small
electrical current. The amount of electrical current is directly proportional to
the amount of glucose in the blood. After the test is completed, the meter
measures the amount of electrical current and displays the blood glucose level.
In 1988, the Company introduced its first personal blood glucose
monitoring system based on biosensor technology and has shipped approximately
2.1 million meters to date. The Company is aware of only two other companies
that market personal blood glucose monitoring systems based on biosensor
technology. A third company has announced its intention to develop and market a
new biosensor system. The Company estimates that, while it accounts for less
than 10% of worldwide personal blood glucose monitoring system sales, it has
substantially higher sales than any other company in the market for blood
glucose monitoring systems that employ biosensor technology.
Noninvasive Technology
The goal of noninvasive glucose monitoring is to measure glucose levels
without drawing blood. Research in this area has focused primarily on infrared
spectroscopy. To date, no personal glucose monitor using this technology is in
commercial use and the chief obstacle to successful commercial introduction
appears to be analytical performance and calibration. However, two companies
have announced instruments in this area, and in 1995 one of these companies made
a 510(k) submission to the FDA to have the product approved for commercial use.
The FDA withheld approval pending additional data that demonstrates the
performance of the device. The Company believes that a commercially successful
personal product using this technology will be at least several years away. The
Company currently conducts active research in noninvasive technology. See
" -- Research and Development."
Other companies have announced research in minimally invasive
techniques involving measuring glucose in interstitial fluid. The Company
believes that products utilizing this technique are also several years away.
BUSINESS STRATEGY
Since fiscal 1992, the Company has assembled a new senior management
team with extensive experience in the healthcare and consumer products
industries. The Company has implemented the following market-driven business
strategies to increase revenue and improve the Company's margins and operating
income:
- PLACE METERS WITH PEOPLE WHO ACTIVELY TEST THEIR BLOOD GLUCOSE LEVELS
The Company seeks to place its meters with active testers, in order to
promote long-term and frequent usage of the Company's test strips. The
Company targets active testers through referring physicians and other
healthcare professionals and its retail marketing efforts.
- INCREASE AWARENESS OF THE ADVANTAGES OF MEDISENSE'S PRODUCTS
MediSense seeks to make its customers and potential customers aware of
the reliability, speed, discreteness and convenience of its products.
The Company believes that its products offer significant advantages
relative to both photometric blood glucose monitoring systems and
biosensor-based blood glucose monitors made by other manufacturers.
MediSense believes that the convenience and simplicity of its products
facilitate more frequent testing and are significant factors in
keeping the user as a loyal MediSense customer with sustained strip
usage.
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- INCREASE FREQUENCY OF TESTING AMONG CURRENT USERS OF MEDISENSE'S
PRODUCTS
MediSense currently receives through its toll-free service more than
3,300 calls per week from customers whom the Company advises with
regard to its monitoring systems and their appropriate use in the
management of their condition. The Company is now beginning to use its
substantial experience in communicating directly with people with
diabetes to initiate regular contact with its customers to educate
them about the benefits of frequent testing. Currently, over 1,000
out-bound calls to customers are made each week. The Company believes
that frequent contact with end-users, consisting of education and
encouragement, will improve their compliance with established diabetes
management protocols. The Company believes that frequent testing by
people with diabetes will lead to better care and better results at
lower costs.
- EXPAND THE USE OF MEDISENSE'S PRODUCTS IN PROFESSIONAL ENVIRONMENTS
The Company seeks to increase the use of its products in professional
healthcare environments, such as in physicians' offices, hospitals and
long-term care facilities. The Company believes that promoting the use
of its products in such settings will not only increase sales of its
strips to professional healthcare organizations, but will also
increase product referrals by healthcare professionals.
- PENETRATE NEW GEOGRAPHIC MARKETS
The Company has recently expanded its direct sales force both in the
United States and other major markets throughout the world. The
Company intends to continue to expand distribution of its products
into new geographic markets, particularly East Asia and, to a lesser
extent, Eastern Europe and other emerging markets.
- MAINTAIN LEADERSHIP IN BIOSENSOR TECHNOLOGY
The Company is the leader in the application of biosensor technology
to personal blood glucose monitoring. The Company introduced its first
personal blood glucose monitoring systems based on biosensor
technology three to five years ahead of its competitors. MediSense
seeks to maintain this leadership through continued enhancement of the
functionality, convenience and performance of its existing products.
Additionally, the Company is focusing its research and development
activities on adapting its existing biosensor technology to additional
tests for use by people with diabetes.
MEDISENSE'S PRODUCTS
MediSense develops, manufactures and markets home blood glucose
monitoring systems that enable people with diabetes to quickly determine their
blood glucose levels. The Company's monitoring systems, ExacTech(R),
MediSense(R) 2 and Precision Q-I-D(TM) meters, all with disposable test strips,
are compact, fast and easy-to-use. These factors give the Company's systems
important competitive advantages. In order to support its presence among
healthcare providers, the Company also offers blood glucose monitoring products
for the professional market.
Home Blood Glucose Systems
The Company's home blood glucose monitoring systems consist of a meter
and disposable test strips that are designed to be used with that meter. The
strips consist of three areas: the target area where the blood is placed and the
chemical reaction occurs, the electrode tracks that carry the electrons to the
meter, and the contact bars that are inserted into the meter. The systems are
typically sold in a kit that includes the meter, a box of 10 or 25 test strips,
a lancing device, lancets, a user's manual and a carrying
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case. MediSense's meters have a warranted four-year life. Each box of test
strips contains a strip with which the user can quickly calibrate the meter for
the entire box of test strips. The Company also offers a control solution that
allows the user to confirm that the meter and test strips are functioning
properly.
The Company currently sells three home blood glucose monitoring
systems. The ExacTech(R) system was the Company's first system. The ExacTech
Card meter is the approximate size and shape of a thick credit card and has a
large screen on which test results are displayed. After the user has placed the
blood on the test strip, the test is initiated by pushing a button on the meter.
The meter displays a 30-second countdown and then silently presents the user's
blood glucose result. The meter turns off automatically after an additional 30
seconds. During the measurement, the meter continuously checks the progress of
the test and displays a specific error message should a problem occur. The
ExacTech system can also recall the user's last test reading.
Introduced in 1991, the MediSense(R) 2 (formerly known as Companion 2)
is the Company's second generation of home blood glucose monitors and represents
improvements on the basic technology incorporated in the ExacTech System.
Although similar in function to the ExacTech product, the MediSense 2 is
available in two models. The Card, which is similar to the ExacTech Card and the
Pen model, which is the size and shape of a pen, incorporate a number of
enhanced features. The MediSense 2 system performs a test in 20 seconds (versus
30 seconds for ExacTech), making it one of the fastest home blood glucose
monitoring systems currently on the market. The MediSense 2 has an automatic
start feature: the test is initiated as soon as the blood is applied to the
target area on the end of the test strip. MediSense 2 uses a biosensor test
strip with three electrodes that can measure a wider range of glucose
concentration while requiring less blood than the ExacTech models. MediSense 2
stores the last ten test readings for review by the user at a later time.
In June, 1995 in the United States and July, 1995 in Europe, MediSense
started shipping the Precision Q-I-D(TM) system, a hand-held blood glucose
monitor, and a MICROFLO(TM) test strip. The Precision Q-I-D system delivers
enhanced accuracy and convenience. This new hand-held blood glucose monitor with
MICROFLO test strips allows patient testing that is unaffected by movement or
touch. It was designed and developed to promote compliance with current
treatment recommendations.
MediSense's unique 3-electrode technology limits interference from
uric acid, ascorbic acid, and therapeutic doses of aspirin and acetaminophen to
provide accurate blood glucose readings. This means accurate performance of the
Precision Q-I-D system in the presence of disease conditions such as gout and in
the presence of therapeutic doses of many medicines currently used to treat Type
II diabetes, arthritis and the common cold.
Professional Products
Blood glucose is the most frequently ordered test in hospitals,
clinics, physicians' offices and alternate care centers. The recently introduced
Precision G and the SensorLink Blood Glucose Testing Systems specifically
address the needs of healthcare professionals. The Precision G and SensorLink
Systems deliver data management capabilities in small (approximately 10" x 4" x
6"), portable systems designed for multi-user testing. The glucose measurement
technology used in the Precision G and Sensor Link Systems is similar to that
used in the Company's MediSense 2 home glucose meter. Both systems provide
printouts of test results (up to 300), operator and patient identification
numbers and test strip lot number, along with the date and time of the tests.
The Company believes that although not a significant part of total sales, the
professional products are important to support its presence among healthcare
providers.
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SALES
The Company sells its products through a sales organization of 294
individuals in 16 countries: the United States, Canada, Japan, Germany, Great
Britain, France, The Netherlands, Belgium, Sweden, Norway, Denmark, Finland,
Austria, Switzerland, Australia and Spain. Direct sales efforts are targeted to
the needs and requirements of each market. In addition to its direct sales
force, the Company uses independent distributors in over 40 foreign markets
including Italy, Taiwan, Korea, Israel, Greece, Portugal, Turkey, Malaysia,
Singapore, and the United Arab Emirates. The Company is planning a Latin
American introduction in late 1996 or early 1997. Technical support services
located in Abingdon, England and Waltham, Massachusetts support worldwide sales
by providing technical training to sales representatives and product
specialists.
In the United States, the Company's sales organization consist of 119
individuals. The sales force is divided into two groups: the Medical
Professional and the Corporate Account Sales Groups. The primary focus of the
Medical Professional Sales Group is on healthcare professionals who recommend
blood glucose monitoring systems, and whose acceptance of the Company's products
can affect sales at the retail pharmacy. This group calls primarily on general
practitioners, family practitioners, internists, diabetes nurse educators and
diabetologists, who in the aggregate treat and diagnose 83% of all people with
diabetes and who the Company believes exert significant influence in the buying
decision. The Corporate Account Group focuses on sales to large chain drug
stores, food and drug combination stores, mass merchandisers and wholesalers.
Major national accounts include wholesalers, such as Bergen Brunswig and
McKesson, drug store chains, such as Osco Drugs, Walgreens and Wal-Mart and
specialty providers such as Chronimed.
The European sales organization totals 152 individuals and is
organized by country and region. In Europe, MediSense focuses on key opinion
leaders in hospitals, among physicians and in pharmacy distributors according to
each country's reimbursement system. In Asia/Pacific, the Company focuses
primarily on hospital and pharmacy sectors which are currently the principal
sales volume markets.
See Note 8 of the Notes to Consolidated Financial Statements for the
year ended March 31, 1996 contained in Item 8 herein, for the Company's
geographic segment information.
MANUFACTURING
The Company's manufacturing activities involve the production of the
two major components of its blood glucose monitoring systems: meters and
single-use test strips. The Company manufactures the test strips at its facility
in Abingdon, England and assembles and tests the meters in its facility in
Waltham, Massachusetts. At March 31, 1996, the Company employed 408 people in
its manufacturing facilities, 317 of whom were in England and 91 of whom were in
the United States.
As a pioneer in the field of biosensor technology, the Company has
developed an innovative, high-volume, low-cost method for producing its test
strips in which a series of reagents and conductive inks are sequentially
layered onto a plastic substrate using a proprietary thick film deposition
process. The Company has invested significant resources in the development of
custom manufacturing equipment and process control systems. The Company
continually works to improve its manufacturing capabilities to reduce costs and
increase yield, and has significantly reduced the strip cost while increasing
output since the product was launched in 1988.
The Company optimizes its manufacturing capabilities through
just-in-time techniques, materials requirement planning, good manufacturing
practices and process quality teams. The Company employs quality control systems
and is actively engaged in a vendor quality program to assure compliance with
the Company's quality standards. Its manufacturing facilities and practices are
subject to regulatory requirements and periodic review by the FDA. See
"--Government Regulation."
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Of the numerous raw materials, parts and components purchased for use
in the Company's products, most are off-the-shelf items readily available from
alternate vendors. Several, however, are custom made for the Company to meet its
specifications and applications. Single source materials include a pair of
custom integrated circuits used in the MediSense(R) 2 and Precision Q-I-D(TM)
models and certain reagents and inks used in the production of the Company's
test strips. The Company believes that in most of these cases alternate sources
of supply are available or could be developed within a reasonable period of
time. To date, the Company has been able to obtain adequate supplies of all
materials and components from its suppliers. The Company maintains a strategic
inventory of certain key components and raw materials currently obtained from
single-source suppliers; however, there can be no assurance that such
inventories would be adequate to meet the Company's production needs during any
interruption of supply. The inability to develop alternate supply sources, if
required, or a reduction or stoppage in supply could adversely affect the
Company's operations.
RESEARCH AND DEVELOPMENT
The Company's research and development staff comprised 98 persons at
March 31, 1996. The largest group consists of 56 persons engaged in development
of test strips, located in Abingdon, England. The engineering group with 28
persons concentrates on meter development and is located in Waltham,
Massachusetts. The research group, also located in Waltham, has 14 persons
involved with research for new tests and improvements in blood glucose
monitoring technology. Although MediSense primarily relies on its own research
and development staff, the Company also works with consultants.
For fiscal 1996, 1995 and 1994, the Company's expenditures for
research and development were $11.7 million, $9.2 million and $6.5 million,
respectively. The Company expects to add approximately 15 persons to research
and development in fiscal 1997 with corresponding increases in expenditures over
fiscal 1996.
The Company is confident that it possesses the engineering and
manufacturing capabilities to deliver marketable products on a timely basis. The
Company's core biosensor expertise is complemented by staff members with
knowledge in spectroscopy, the science underlying noninvasive testing. All of
these resources are focused on a number of initiatives to enhance existing
products and develop new products. In particular, the Company is focusing on the
development of a next generation glucose biosensor with accuracy equivalent to
laboratory standards.
The Company is also developing additional biosensor-based personal
home healthcare analytical products. These new tests will monitor and thereby
help to manage chronic disorders related to diabetes by measuring the
concentration of substances other than glucose in human blood. One application
of biosensor technology currently under development by the Company is a test to
measure ketones, high levels of which may indicate the onset of diabetic
ketoacidosis ("DKA"). DKA, a life-threatening but reversible complication of
Type I diabetes, is considered a medical emergency requiring treatment in a
medical intensive care unit or equivalent setting. According to the American
Diabetes Association, there are 74,000 cases of DKA each year, 70% of which are
preventable. It is generally recommended that people with diabetes who are
pregnant or who have consistently high glucose levels check their ketone level
at least once per day.
Researchers have for many years pursued noninvasive monitoring of
glucose levels in people with diabetes. Noninvasive monitoring would reduce or
eliminate the need to draw blood to measure glucose concentration. In the last
several years, a great deal of research has been performed in this area. A
promising area of noninvasive research is the multivariate analysis of the
near-infrared (NIR) spectra obtained from transmission or reflectance from
blood-containing tissue. NIR spectroscopy involves illuminating body tissue
(e.g., through a finger) with NIR radiation. Some of this radiation is absorbed
by the tissue and that absorbency is related to the concentration of
constituents in the tissue. Different constituents will have different
absorbencies at different wavelengths. Using computer analysis of absorbency at
different wavelengths, it is possible to measure glucose concentration. This
measurement is
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difficult because many substances (e.g., water that makes up 50% of tissue)
interfere with the glucose measurement. Thus, complex computer analysis and
elaborate calibration (perhaps specific to each person) are required. The
Company continues to review relevant research in noninvasive monitoring and
believes that widespread noninvasive home monitoring remains at least several
years away. However, the demand for such a product is high and research shows
promise. The Company has ongoing internal research to explore and validate both
noninvasive and minimally invasive glucose monitoring techniques. It is also
funding an external research program to develop for commercialization a
noninvasive analyzer primarily for the diagnosis and treatment of diabetes and
related conditions. However, there can be no certainty that this research will
lead to a commercial product.
PATENTS AND PROPRIETARY RIGHTS
Patents are important to the Company's business. The Company also
relies heavily upon other proprietary rights including trade secrets and
know-how to develop and maintain its competitive position. The Company pursues,
owns and maintains patents on a worldwide basis. The Company's principal patents
in Europe and the United States relate to its electrode test strips and the use
of ferrocene mediator compounds in biosensor electrodes.
COMPETITION
The Company encounters significant competition from major companies
such as Johnson & Johnson, Boehringer Mannheim and Bayer/Miles in the sale of
its home blood glucose monitoring systems. These major competitors in the home
blood glucose monitoring market have extensive research, marketing and
manufacturing capabilities. Companies in the home blood glucose monitoring
market compete on the basis of ease of product use, price, product reliability,
innovative technology and healthcare professional and consumer acceptance. In
the market for meters, price competition involves marketing tactics such as
rebates, trade-in offers and volume purchase incentive programs. In the market
for test strips, a competitor has indicated an intent to sell a generic strip in
the United Sates for use with MediSense's ExacTech(R) meter, and this could
cause loss of market share.
The Company believes that its continued competitive success will
depend upon its ability to create and deliver advanced technology to expand its
product lines and markets, to develop unique products and to attract and retain
qualified personnel.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are
subject to regulation in the United States by the FDA and, in many instances,
by comparable agencies in foreign countries where these devices are
manufactured or distributed. Under the Federal Food, Drug, and Cosmetic Act, as
amended (the "FDC Act") and the Safe Medical Devices Act of 1990 (the "SMDA")
and subsequent amendments, manufacturers of medical devices must comply with
applicable provisions of these acts and certain associated regulations
governing the testing, manufacturing, labeling, marketing and distribution of
medical devices and the reporting of certain information regarding the safety
of medical devices. Both the FDC Act and the SMDA require certain clearances
from the FDA before medical devices, such as the Company's blood glucose
monitoring systems, may be legally marketed.
FDA permission to distribute a new device can be obtained in one of
two ways. If a new or significantly modified device is "substantially
equivalent" to an existing legally marketed device, the new device can be
commercially introduced after submission of a premarket notification (a "510(k)
Submission") to the FDA, and after the subsequent issuance by the FDA of an
order permitting commercial distribution. Changes to existing devices that do
not significantly affect safety or effectiveness can be made by the Company
without a 510(k) Submission.
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The second more comprehensive approval process applies to a new device
that is not substantially equivalent to an existing product. First, the Company
must conduct clinical trials in compliance with testing protocols approved by an
institutional review board for the participating research institution. Second,
the Company must submit to the FDA a Premarket Approval ("PMA") application that
contains, among other things, the results of the clinical trials. The PMA
application also contains other information required under the FDC Act such as a
full description of the device and its components, a full description of the
methods, facilities and controls used for manufacturing and proposed labeling.
Finally, the manufacturing site for the product subject to the PMA must pass an
FDA premarketing approval inspection.
All of the Company's current home blood glucose monitoring products
have been deemed to meet the standards set forth under the 510(k) procedures,
and therefore MediSense has the necessary FDA clearance to market these
products in the United States. While the Company believes most of its future
products will also qualify for 510(k) clearance, no assurance can be given that
such future products may not instead require PMA clearance. There is no
guarantee that regulatory marketing clearances will be obtained in the future
on a timely basis, if at all. Delays in receiving such clearances could have a
significant adverse effect on the Company's business, financial condition and
results of operations.
Certain other countries require the Company to obtain clearances for
its products prior to marketing the products in those countries. In addition,
certain other countries impose product specifications that differ from those
mandated in the United States. These requirements may significantly affect the
efficiency and timeliness of international market introduction of the Company's
products.
The Company is inspected on a routine basis for compliance with the
FDC Act and applicable regulations, in particular the FDA's Good Manufacturing
Practices ("GMP") regulations. These regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner with
respect to manufacturing, testing and control activities. Further, the Company
is required to comply with various FDA requirements for labeling.
The Company's Precision G and SensorLink systems are subject to the
Clinical Laboratories Improvement Act of 1967, the Medicare program and the
Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). CLIA requires the
U.S. Department of Health and Human Services ("HHS") to establish certification
standards for any laboratory that performs tests on human specimens and issue
certificates to laboratories that meet the standards. The Precision G and
SensorLink systems are classified as moderately complex procedures and therefore
must contain certain features that allow the laboratories that use them to
comply with CLIA.
If the FDA believes that the Company is not in compliance with the FDC
Act, SMDA or their associated regulations, it can institute proceedings to
detain or seize the Company's products, require a recall, enjoin future
violations and assess civil and criminal penalties against the Company, its
directors, officers or employees. The FDA may also withdraw market approval for
the Company's products or require the Company to repair, replace or refund the
cost of any device manufactured or distributed by the Company. Although the
Company believes that it is in substantial compliance with all relevant
regulations, the commencement of any action described above against the Company
could have a significant impact on its business, financial condition and results
of operations.
THIRD-PARTY REIMBURSEMENT
Third-party payors such as private insurance companies, self-insured
employers, health maintenance organizations, national health services, and
governmental payors under Medicare and Medicaid programs are a source of
reimbursement to users of blood glucose monitoring systems and related products,
but there is no uniform policy on reimbursement among third-party payors. The
Medicare program reimburses people with diabetes for one meter and for one box
of 100 strips each month. In 1994, the Health Care Financing Administration
("HCFA"), which sets rates for the Medicare
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program, reduced the maximum reimbursement rates for a box of 50 test strips
from $63 to between $32 to $37, depending on the state in which the
reimbursement is sought. The Office of the Inspector General of the United
States Department of Health and Human Services (the "OIG") is conducting a
survey to determine more economical methods of providing blood glucose test
strips to Medicare beneficiaries. Also, in January, 1995 HCFA established a
special payment limit of $58.71 on personal blood glucose meters, down from a
maximum $179. Such proposals may lead to increased pricing pressures among
manufacturers of blood glucose meters and test strips. Frequent testers who
currently receive reimbursement may seek alternative, lower-priced off-brand
test strips that are currently available in the U.S. market for use in
photometric systems. Because the Company's systems operate only on its
proprietary test strips, users may seek alternative meters for which there are
lower cost alternatives. The Company's business, financial condition and results
of operations could be adversely affected by the continuing efforts of
governmental and private payors to reduce the costs of healthcare by lowering
reimbursement rates.
As a provider of products that are reimbursed by Medicare, Medicaid
and other third-party payors, the Company is subject to the anti-kickback
provisions of the Medicare and Medicaid fraud and abuse laws and similar state
laws. These laws prohibit the exchange of remuneration for referrals of services
or products reimbursed by Medicare, Medicaid or other third-party payors.
Violations of these prohibitions may result in civil and criminal penalties and
exclusion from the Medicare and Medicaid programs. In a December 1992 study of
discounts and rebates offered to consumers by the home blood glucose monitoring
industry, the OIG concluded that claims for reimbursement for these devices
submitted to the Medicare program often did not reflect manufacturers' rebates.
As a result, OIG recommended that HCFA take appropriate action, including
implementing fee schedules, identifying and addressing abusive practices as well
as recovering Medicare overpayments. The Company believes that it is in
substantial compliance with the federal anti-kickback statute and related safe
harbor regulations regarding the disclosure of discounts and rebates.
Recent healthcare cost containment initiatives in the United States
and in Europe that have focused on reduction in reimbursement levels may affect
the Company negatively. Emphasis on preventative measures to reduce the overall
costs to the healthcare system of complications from diabetes could, however,
lead to more frequent testing and use of the Company's test strips. The Company
is unable to predict the outcome or the effect on its business of the
healthcare reform initiatives.
PRODUCTS LIABILITY
The testing, marketing and selling of human healthcare products entail
an inherent risk of product liability claims and there can be no assurance that
product liability claims will not be asserted against the Company. Although the
Company maintains product liability insurance, there can be no assurance that
product liability claims will not exceed such insurance coverage limits or that
such insurance will be available in the future on commercially reasonable terms,
if at all. The Company is currently involved in two proceedings arising in the
normal course of business from product liability claims. The Company believes
the outcome of these suits will not have a material adverse effect on the
Company's financial position, cash flow, or results of operations.
EMPLOYEES
At March 31, 1996, the Company had 1,014 employees, including 408 in
operations, 108 in administration, 98 in research and development and 400 in
selling, marketing and related administrative support. Of the 1,014 employees,
641 were employed outside the United States. The Company believes that the
success of its business will depend, in part, on its ability to attract and
retain qualified personnel.
The Company's employees are not covered by collective bargaining
agreements. Management considers its relations with the Company's employees to
be good.
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PART I
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ITEM 2. PROPERTIES
The Company's principal executive office and central manufacturing
facility for meters is located in a 95,000 square foot building in Waltham,
Massachusetts. The Waltham facility is sub-leased. The sublease expires on
September 30, 1996. The Company intends to relocate its executive office and
meter manufacturing facility from Waltham to a 150,000 square foot facility in
Bedford, Massachusetts. The Bedford facility will be leased for a base term of
ten years commencing August, 1996. The Company also leases a total of 105,000
square feet in six buildings in the Abingdon Industrial Park in Abingdon,
England. These leases have expiration dates maturing between 2003 and 2011. The
Abingdon facilities are used for the development and the manufacture of the
Company's test strips.
The Company maintains 15 sales offices around the world, all of which
are leased. The Company believes that its facilities will provide sufficient
space suitable for all of the Company's present and planned activities, and that
sufficient additional space will be available on reasonable terms, if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business. The Company
believes that none of these proceedings, if adversely determined, would have a
material adverse effect on the Company's financial position, cash flow or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
During fiscal 1996 and 1995, the Company's Common Stock was traded on
the Nasdaq National Market under the symbol "MSNS." The price ranges presented
below represent the high and low sale prices for each quarter, as reported by
the consolidated reporting system. The Company's Common Stock ceased being
listed on the Nasdaq National Market on June 12, 1996.
FISCAL 1996 FISCAL 1995
--------------------------- --------------------------
HIGH LOW HIGH LOW
----------- ----------- ----------- -----------
First quarter * $ 20 $ 13-7/8 $ 12-1/4 $ 12
Second quarter 27-1/4 17 20-3/8 12
Third quarter 32 19-7/8 26 16-3/4
Fourth quarter 46-1/2 24 25-1/8 18-5/8
* First quarter of fiscal 1995 is from June 30, 1994.
At June 10, 1996, there were approximately 58 holders of record of the Company's
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended March 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Statements of Operations Data:
Revenue $ 173,756 $ 140,958 $ 110,384 $ 93,186 $ 89,782
Cost of revenue 57,146 47,221 38,651 37,661 37,470
Gross profit 116,610 93,737 71,733 55,525 52,312
Selling, general and administrative 71,112 60,002 51,154 46,445 52,586
Research and development 11,696 9,164 6,537 6,163 7,824
Restructuring charge -- -- -- 2,001 --
Total operating expenses 82,808 69,166 57,691 54,609 60,410
Income (loss) from operations 33,802 24,571 14,042 916 (8,098)
Interest income (expense), net 1,589 (965) (5,070) (6,364) (5,224)
Foreign currency exchange gain (loss) (20) 1,817 (979) 3,845 637
Net income (loss) 31,834 21,978 6,203 (2,515) (12,985)
Net income per share (1) $ 1.70 $ 1.34 $ 0.61 -- --
Weighted average shares outstanding 18,698 16,349 15,684 -- --
Balance Sheet Data:
Working capital (deficiency) $ 61,678 $ 37,024 $ 8,586 $ (1,706) $ (3,334)
Total assets 121,182 82,008 43,516 45,626 56,196
Revolving line of credit 2,207 -- 700 8,895 10,067
Other long-term debt, net of current portion 218 436 555 1,027 2,321
Notes payable to stockholders -- -- 48,330 49,108 45,213
Total stockholders' equity/(deficit) (2) 83,826 48,823 (31,324) (37,801) (30,687)
(1) Net income per share for the year ended March 31, 1994 is presented on a
supplemental basis. Pro forma net income per share for the year ended March
31, 1994 was $.51. Historical net income per share for the periods prior to
fiscal 1995 have not been presented as such information is not considered
meaningful.
See Notes 1 (n), (o) and (p) of the Notes to Consolidated Financial
Statements included in Item 8 herein.
(2) No cash dividends were declared or paid during the periods presented on the
Company's Common Stock.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MERGER AGREEMENT
The Company, Abbott Laboratories (Abbott), and AAC Acquisition
Corporation, Inc. (AAC), a wholly owned subsidiary of Abbott entered into a
merger agreement on March 29, 1996 that provided for the acquisition of
MediSense by Abbott for $45.00 per share in cash. Under the terms of the
agreement, AAC made a tender offer to acquire all of the outstanding shares of
MediSense common stock and Class B common stock. MediSense became a subsidiary
of Abbott on May 2, 1996 when AAC accepted for payment 19,861,081 shares of
common stock, including all shares of Class B common stock, that had been
tendered pursuant to the offer, which constituted approximately 98.4% of the
Company's common stock outstanding on a fully diluted basis. AAC paid
approximately $876 million, net of the exercise price of existing options for
the Company's shares, which it will obtain from Abbott.
PERCENTAGE
PERCENTAGE OF REVENUE INCREASE
FOR FISCAL YEAR FROM PRIOR
ENDED MARCH 31, FISCAL YEAR
------------------------------------- -----------------------
1996 1995 1994 1996 1995
--------- --------- ---------- --------- ----------
Revenue 100.0% 100.0% 100.0% 23.3% 27.7%
Gross Profit 67.1 66.5 65.0 24.4 30.7
Total Operating Expenses 47.6 49.1 52.3 19.7 19.9
Income From Operations 19.5 17.4 12.7 37.6 75.0
YEAR ENDED MARCH 31, 1996 VS. YEAR ENDED MARCH 31, 1995
Revenue increased $32.8 million, or 23.3%, to $173.8 million in the
fiscal year ended March 31, 1996 (fiscal 1996), from $141.0 million in the
fiscal year ended March 31, 1995 (fiscal 1995). Strip unit volume increased
22.2% with a corresponding 22.7% increase in strip revenue. The increase in
strip revenue was attributable to the demand created by increasing the number of
meters in use, growth in premium line strips and marketing programs focused on
increasing usage. Meter revenue increased 30.5% due to a 54.0% unit volume
increase, partially offset by a decline in meter average selling prices. The
decline in meter selling prices was caused by the introductory pricing offered
on the Precision Q-I-D(TM) meter and competitive pressures.
International revenue increased $28.7 million, or 31.4%, to $120.4
million in fiscal 1996, from $91.7 million in fiscal 1995. This increase was
primarily due to an increase in strip unit volume and a favorable foreign
exchange impact of $5.7 million. Domestic revenue increased $4.0 million or 8.2%
to $53.3 million in fiscal 1996, from $49.3 million in fiscal 1995. This
increase was attributable to increased meter sales from the Precision Q-I-D
introduced in June, 1995 and an increase in strip unit volume, partially offset
by a reduction in average strip selling prices. The decline in domestic average
strip selling prices was caused by special introductory pricing offered on
Precision Q-I-D strips, promotional pricing offered to chain stores and
wholesalers, and the establishment of a service allowance program for durable
medical equipment dealers.
Gross profit as a percent of revenue improved to 67.1% in fiscal 1996
from 66.5% in fiscal 1995. Gross profit was favorably impacted by foreign
exchange and product cost reductions, and unfavorably impacted by increased
meter sales and the previously mentioned reductions in average selling prices.
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Operating expenses increased $13.6 million, or 19.7%, to $82.8
million, but decreased as a percent of revenue to 47.6% from 49.1%, in fiscal
1996 as compared to fiscal 1995. The $11.1 million, or 18.5% increase in
selling, general and administrative expense was due to expenses associated with
the Precision Q-I-D(TM) product launch, increased staffing, higher legal
expenses and an unfavorable foreign exchange impact of $1.8 million. Research
and development expenses increased $2.5 million, or 27.6% to $11.7 million in
fiscal 1996, from $9.2 million in fiscal 1995. The increase was due to the
Company's continued expansion of the research and development organization and
increases in spending for the development of enhancements and extensions of the
current product line, and additional tests for monitoring diabetes. The Company
plans to increase research and development expenses in future periods.
The Company incurred a foreign currency exchange loss of $20,000 in
fiscal 1996. The loss was due primarily to the remeasurement of certain
intercompany accounts with its foreign subsidiaries. In fiscal 1995, the Company
recorded an exchange gain of $1.8 million due primarily to the remeasurement of
certain intercompany accounts as the U.S. Dollar weakened against the
Australian, Japanese, and European currencies and the British Pound weakened
against the Dutch Guilder.
Interest income increased substantially in fiscal 1996 to $1.7
million, from $0.4 million in fiscal 1995. The increase was attributable to the
growth in cash, cash equivalents and marketable securities to an average balance
of approximately $32.6 million in fiscal 1996, from an average balance of
approximately $11.5 million in fiscal 1995.
Interest expense decreased to $0.1 million in fiscal 1996, from $1.4
million in fiscal 1995, as a result of the repayment of all loans from
stockholders and bank debt during the second quarter of fiscal 1995. The Company
maintained this position until its subsidiary borrowed $2.2 million on its line
of credit in the fourth quarter of fiscal 1996.
For fiscal 1996, income taxes were provided at an effective worldwide
rate of 10.0%. For fiscal 1995, the effective worldwide rate was 13.6%. The
decrease in the rate from the prior period was primarily due to an increase in
earnings by certain of the Company's foreign subsidiaries that were able to
utilize their net operating loss carryforwards to reduce taxable income. See
Note 6 of Notes to the Consolidated Financial Statements, included herein, for a
reconciliation to the statutory rate and additional information concerning the
Company's tax situation.
YEAR ENDED MARCH 31, 1995 VS. YEAR ENDED MARCH 31, 1994
Revenue increased 27.7% in fiscal 1995 to $141.0 million from $110.4
million in fiscal 1994. The increase in revenue was primarily due to a 24.2%
increase in strip unit volume. Strip revenue increased 28.9% in fiscal 1995 over
the prior year, resulting primarily from the demand created by increasing the
number of meters in use, growth in premium line strips, and marketing programs
focused on increasing usage. International revenue increased 31.2% during fiscal
1995 to $91.7 million (65.0% of revenue) from $69.9 million (63.3% of revenue)
in fiscal 1994. This increase was primarily due to a 22.4% increase in strip
unit volume, a $5.2 million favorable foreign exchange impact, and the
commencement of sales activity by the Company's Australian subsidiary in January
1994, which increased revenue by $3.6 million. Domestic revenue increased 21.7%
in fiscal 1995 to $49.3 million from $40.5 million in fiscal 1994. This sales
growth was primarily attributable to increased strip volume resulting from the
restructuring and refocusing of the U.S. sales force and expansion of
distribution channels.
Gross profit as a percentage of revenue improved to 66.5% in fiscal
1995 from 65.0% in fiscal 1994. This increase was primarily due to a shift in
the revenue mix to strips which yield a higher gross margin than meters and, to
a lesser extent, a reduction in the unit cost to manufacture strips.
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Selling, general and administrative expenses increased 17.3% to $60.0
million in fiscal 1995 from $51.2 million in fiscal 1994, but decreased as a
percentage of revenues to 42.6% in fiscal 1995 from 46.3% in fiscal 1994. The
increase in dollars reflects the continued expansion of the Company's domestic
and international sales and marketing organizations and increases in the number
of promotional meter placements. The foreign exchange impact increased expenses
by $1.7 million in fiscal 1995, as compared to fiscal 1994. Fiscal 1994 included
$2.9 million of prepaid royalty amortization, which ended in December 1993.
The Company significantly increased its investment in research and
development by $2.6 million in fiscal 1995 as compared to fiscal 1994. The
increase reflects the expansion of the research and development organization and
an increase in spending for the development of noninvasive measurement
technology and additional tests for monitoring diabetes.
Interest expense decreased to $1.4 million in fiscal 1995 from $5.2
million in fiscal 1994. The decline was principally a result of the repayment of
long-term notes payable to stockholders and all bank debt during fiscal 1995.
The Company reported a foreign exchange gain of $1.8 million in fiscal
1995 versus a foreign exchange loss of $1.0 million in fiscal 1994. These
amounts result principally from the remeasurement of intercompany account
balances arising from inventory purchases. The Company manufactures strips in
England and intercompany sales of strips to the United States and Europe are
denominated in British Pounds. Gains over the prior year reflect a weakening in
the U.S. Dollar versus European, Japanese, and Australian currencies in which
the Company holds significant foreign currency denominated intercompany assets.
In addition, gains resulted from a stronger Dutch Guilder versus the British
Pound in which the Company, through its Dutch rebilling center, holds
significant intercompany liabilities denominated in British Pounds.
For fiscal 1995, income taxes were provided at an effective worldwide
rate of 13.6%. For fiscal 1994, the effective worldwide rate was 22.4%. The
decrease in the rate from the prior period was primarily due to an increase in
earnings by the Company's domestic operations and certain foreign subsidiaries
that are able to utilize their net operating loss carryforwards to reduce
taxable income, partially offset by an increase in the provision for income
taxes in states which disallow the benefit of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities increased significantly during the
year, increasing to $33.8 million in fiscal 1996, from $19.6 million in fiscal
1995. Cash, cash equivalents and short-term investments totaled $51.1 million at
March 31, 1996 compared to $26.0 million at March 31, 1995. Working capital
increased $24.7 million to $61.7 million at the end of fiscal 1996 from $37.0
million at the end of fiscal 1995.
Capital expenditures during fiscal 1996 were approximately $11.4
million and were funded by cash flow from operations. Management anticipates
that capital expenditures for the next 12 months will be approximately $16.0
million and will consist primarily of leasehold improvements and additions to
manufacturing equipment. The Company expects to fund fiscal 1997 capital
expenditures with cash on hand and cash flow from operations.
The increase in other assets was due to a $2.0 million minority
investment in a strategically related healthcare business made by the Company in
August, 1995.
During fiscal 1996, the Company received $5.5 million from the
issuance of approximately 552,000 shares of Common Stock under stock option and
stock purchase plans. In conjunction with the
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previously mentioned merger, 2.3 million of the options outstanding were
exercised in April, 1996 and the remainder are expected to be exercised in July,
1996, and the shares tendered as part of the merger.
The Company has a revolving line of credit agreement with a bank which
expires on January 9, 1997. On January 9, 1995, the bank line of credit was
increased from $8.5 million to $20 million, of which a maximum of $10 million
may be a foreign commitment. Under the amended line of credit, borrowings accrue
interest at the bank's base rate, LIBOR plus 1 1/2%, or the applicable foreign
branch cost of funds, plus 1 1/2%. Borrowings are secured by all assets in the
United States and inventory in the United Kingdom. As of March 31, 1996, no
amounts were outstanding under this revolving line of credit.
In addition, one of the Company's subsidiaries has a revolving
line-of-credit agreement with a bank in the amount of approximately $2.2
million. This line of credit expires on February 27, 1997, and borrowings accrue
interest at LIBOR plus 35 basis points. Borrowings are fully cash secured
(reported as "restricted cash" on the balance sheet) in an amount at least equal
to 115% of the outstanding principal. At March 31, 1996, the subsidiary had
fully utilized the line of credit and had an outstanding loan balance of
$2,207,000.
At March 31, 1996, the Company had net domestic operating loss
carryforwards for federal tax and financial reporting purposes of approximately
$37.1 million and $24.3 million, respectively. The Company's foreign
subsidiaries also had net operating loss carryforwards of approximately $15.7
million. In addition, the Company has available federal tax credit carryforwards
of approximately $1.3 million at March 31, 1996. These carryforwards may be used
to offset future taxable income and future tax liabilities, respectively, if
any, and are subject to review and possible adjustment. The Tax Reform Act of
1986 limits the amount of domestic net operating loss and credit carryforwards
that companies may utilize in any one year in the event of cumulative changes in
ownership over a three-year period in excess of 50%. As a result of a change of
ownership during fiscal 1995 and based on the valuation of the Company at that
time, the annual limitation imposed on utilization of the domestic net operating
loss carryforwards is approximately $23 million.
The previously mentioned exercise of options in April, 1996 generated
an additional net operating loss for tax purposes of $68.6 million. This loss,
combined with the Company's income for the period, resulted in a net operating
loss carryforward for federal tax purposes of $102.1 million as of May 4, 1996.
In addition, a second ownership change was triggered by the acquisition of the
Company by Abbott Laboratories. Therefore, based on the value of the Company on
that date, the annual limitation imposed on the utilization of the additional
net domestic operating loss carryforwards will be approximately $49.8 million.
During fiscal years 1996 and 1995, international revenue accounted
for approximately 69.3% and 65.0%, respectively, of total revenue. The
Company's international revenue is primarily denominated in foreign currencies.
In addition, the Company's strip manufacturing facility is in England and the
Company has 14 international sales subsidiaries. Accordingly, there are
significant intercompany transactions, and the resulting intercompany balances
are denominated in currencies other than the U.S. Dollar. The Company has
established two centralized billing centers that are intended to mitigate the
foreign currency transaction exposure of the international sales subsidiaries.
In addition, the Company attempts to minimize the net intercompany balances
denominated in currencies other than the U.S. Dollar by increasing the
capitalization of certain subsidiaries and managing the transfer of cash between
subsidiaries. To date, the Company has not entered into any financial
instruments to hedge either foreign currency denominated transactions or net
investments in foreign subsidiaries. While the Company continues to monitor
foreign currency markets and takes those actions it deems prudent and within its
control, the Company will continue to be subject to foreign currency
fluctuations.
The Company expects that with its cash flow from operations, and the
financial resources of Abbott Laboratories to have sufficient funds to meet its
cash needs for working capital, debt service and capital expenditures for at
least one year. The Company's working capital and capital requirements are
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subject to change and will depend upon numerous factors including the level of
capital expenditures, research and development activities, competitive and
technological developments and the availability for purchase or other
acquisition by the Company of complementary products and technologies.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121. Accounting for
the Impairment of Long-Lived Assets to be Disposed of (SFAS 121) was issued in
March, 1995 by the Financial Accounting Standards Board. It requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS 121
is required to be adopted for fiscal years beginning after December 15, 1995.
Adoption of SFAS 121 by the Company is not expected to have a significant effect
on the consolidated financial statements.
Statement of Financial Accounting Standards No. 123. Accounting for
Stock-Based Compensation (SFAS 123) was issued by the Financial Accounting
Standards Board in October, 1995. SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. This statement defines a fair value based method
of accounting for employee stock options or similar equity instruments, and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value-based
method of accounting prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees. Entities electing to remain with the accounting in Opinion
25 must make proforma disclosures of net income and, if presented, earnings per
share, as if the fair value based method of accounting defined by SFAS 123 had
been applied. SFAS 123 is applicable to fiscal years beginning after December
15, 1995. The Company currently accounts for its equity instruments using the
accounting prescribed by Opinion 25. The Company does not currently expect to
adopt the accounting prescribed by SFAS 123; however, the Company will include
the disclosures required by SFAS 123 as required in future consolidated
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and Index to Financial Statement
Schedule appearing on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the current directors and executive officers of the
Company, their ages as of May 2, 1996, and certain other information about them
are set forth below.
Name Age Position
------------------------ --- -----------------------------------------------------
Robert L. Coleman, Ph.D. 50 President, Chief Executive Officer and Director
John H. Chiricotti 48 Corporate Vice President and Chief Financial Officer
Peter C. Gonze 47 Corporate Vice President-- Sales and Marketing, North
America
Lawrence W. Huffman 51 Corporate Vice President-- International Sales and
Marketing
Geoffrey H. Jenkins 44 Corporate Vice President-- Operations
Donald L. Pieper, Ph.D. 55 Corporate Vice President-- Research and Development
Gerald J. Bojas 59 Corporate Controller and Treasurer
Gary P. Coughlan 52 Director
Jose M. de Lasa 54 Director
Miles D. White 41 Director
The executive officers of the Company are elected annually by the Board
of Directors following the annual meeting of stockholders and serve at the
discretion of the Board of Directors.
Dr. Coleman has served as President, Chief Executive Officer and a
Director of the Company since September 1991. From April 1976 to May 1991, Dr.
Coleman served as President and Chief Executive Officer and from May 1991 until
late 1991, Dr. Coleman was Chairman of the Board of NOVA Biomedical Corporation,
a manufacturer of clinical laboratory equipment. Dr. Coleman has a Ph.D. in
Analytical Chemistry from the University of Tennessee.
Mr. Chiricotti has served as Corporate Vice President and Chief
Financial Officer of the Company since February 1993. Beginning in 1984 and
until joining the Company, he was at Boston Scientific Corporation, a medical
device manufacturer, principally as Vice President -- Finance and Chief
Financial Officer. Mr. Chiricotti has an M.B.A. from DePaul University.
Mr. Gonze has served as Corporate Vice President -- Sales and
Marketing, North America for the Company since January 1996. Prior to that, he
was President of The Griffin Group, a business consulting firm. From 1990 to
1994, Mr. Gonze served as Vice President of Business Development, Vice President
of Product Management and as a member of the Management Board of Johnson &
Johnson, Advanced Care Products Division. Mr. Gonze has a degree in Strategic
Marketing Management from the Harvard Business School.
Mr. Huffman has served as Corporate Vice President -- International
Sales and Marketing for the Company since November 1995. Prior to that, he was
President of AmSou, Inc., a distributor of medical and consumer health products.
From 1993 to 1994, he served as President of Leocor, Inc., a manufacturer of
medical devices. From 1989 to 1992, he was General Manager of Robert et
Carriere-Lederle, a French pharmaceutical and medical device company. Mr.
Huffman has an M.B.A. from the Wharton Graduate School of Business.
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Mr. Jenkins has served as Corporate Vice President -- Operations in
charge of the Company's worldwide manufacturing activities since 1991. From 1987
to 1991, he was Vice President of U.S. Operations. From 1984 to 1987, he was
Manager of Electronic Development for the Company. From 1981 to 1984, he was
Project Director, Medical Products, at Sontek Industries, Inc., a manufacturer
of medical products. Mr. Jenkins has a B.S. in Engineering from Clarkson
University.
Dr. Pieper has served as Corporate Vice President -- Research and
Development of the Company since October 1993. He served as Vice President of
Product Development at NOVA Biomedical Corporation from 1990 to 1992. From 1989
to 1990, he served as President and General Manager of Automatic, Inc., a
manufacturer of machine vision systems, and from 1980 to 1989 as its Vice
President of Research and Development. He holds a Ph.D. in Mechanical
Engineering from Stanford University.
Mr. Bojas has served as Corporate Controller and Treasurer of the
Company since 1991. He served as Chief Financial Officer of the Company from
April 1990 to December 1991. From 1981 to April 1990, Mr. Bojas was Corporate
Controller at Compugraphic Corporation, a supplier of computerized
photocomposition systems. Mr. Bojas attended the M.B.A. program at the
University of Michigan.
Mr. Coughlan has served as Senior Vice President, Finance and Chief
Financial Officer of Abbott Laboratories for at least the past five years.
Mr. de Lasa has served as Senior Vice President, Secretary and General
Counsel of Abbott Laboratories since 1994. From 1991 to 1994, he served as Vice
President and Associate General Counsel of Bristol-Myers Squibb Company. In 1994
he also became Secretary of such company.
Mr. White has served as Senior Vice President, Diagnostic Operations of
Abbott Laboratories since 1994. From 1993 to 1994, he served as Vice President,
Diagnostic Systems and Operations, from 1992 to 1993, he served as Divisional
Vice President and General Manager, Diagnostic Systems and Operations. Prior to
1992, he served as Divisional Vice President and General Manager, Hospital
Laboratory Sector.
21
22
ITEM 11. EXECUTIVE COMPENSATION
The table below sets forth information with respect to the compensation
of each of the chief executive officer and the four other most highly paid
executive officers of the Company in fiscal 1996 (collectively, the "Named
Executive Officers"). No options were granted to the Named Executive Officers in
fiscal 1995.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------- ------------
SECURITIES ALL
OTHER ANNUAL UNDERLYING OTHER
NAME AND PRINCIPAL YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
POSITION
- --------------------------- ---- ------------ -------- ------------ ---------- ------------
Robert L. Coleman .... 1996 $350,000 $245,000 -- 200,000 $2,423 (2)
President and 1995 $300,194 $210,000 -- -- --
Chief Executive 1994 $251,603 $175,000 -- 725,000 --
Officer
John H. Chiricotti ..... 1996 $257,847 (1) $ 60,000 -- 80,000 $4,610 (2)
Corporate Vice 1995 $246,916 (1) $ 68,149 -- -- $4,601 (2)
President and 1994 $226,122 (1) $ 47,000 -- 37,500 $2,733 (2)
Chief Financial
Officer
Geoffrey H. Jenkins ... 1996 $201,537 $ 90,000 -- 80,000 $4,606 (2)
Corporate Vice 1995 $188,412 $113,047 -- -- $4,709 (2)
President 1994 $171,909 $ 78,000 -- 266,500 $6,478 (2)
-- Operations
Donald L. Pieper ....... 1996 $184,575 $100,000 -- 80,000 $4,862 (2)
Corporate Vice 1995 $172,587 $103,552 -- -- $4,106 (2)
President of Research 1994 (3) $ 72,692 $ 37,500 -- 180,000 --
and Development
Gerald J. Bojas .......... 1996 $125,000 $ 25,000 -- 9,000 $4,277 (2)
Corporate Controller 1995 $117,027 $ 37,554 -- -- $4,526 (2)
and Treasurer 1994 $110,705 $ 11,071 -- 15,000 $3,390 (2)
- ---------------------------
(1) Includes a guaranteed minimum annual bonus of $50,000.
(2) Represents Company matching contribution to the MediSense 401(k) Plan.
(3) Mr. Pieper joined the Company in October, 1993.
22
23
OPTIONS GRANTED IN FISCAL YEAR 1996
POTENTIAL REALIZABLE
% OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERMS (1)
OPTIONS EMPLOYEES PRICE PER EXPIRATION
NAME GRANTED (2) IN FY 1996 SHARE (3) DATE 5% 10%
- ------------- ---------- ---------- --------- ---------- ---------- ----------
Robert Coleman 200,000 17.3% $15.8125 14-May-05 $1,988,896 $5,040,076
John Chiricotti 80,000 6.9% $15.8125 14-May-05 $795,559 $2,016,031
Geoffrey Jenkins 80,000 6.9% $15.8125 14-May-05 $795,559 $2,016,031
Donald Pieper 80,000 6.9% $15.8125 14-May-05 $795,559 $2,016,031
Gerald Bojas 9,000 0.8% $15.8125 14-May-05 $89,500 $226,803
(1) Illustrates value that might be realized upon exercise of options
immediately prior to the expiration of their term, assuming specified
compounded rates of appreciation of MediSense Common Stock over the term of
the option. Assumed rates of appreciation are not necessarily indicative of
future stock performance
(2) Options were granted to the above individuals on May 15, 1995 with initial
vesting six months from date of grant and quarterly thereafter; and expire
ten years from date of grant.
(3) The exercise price per share is the fair market value of a share of
MediSense Common Stock on the date of grant.
(4) Employees were granted options to purchase 1,157,750 shares of Common Stock
in FY 1996.
The following table sets forth for the Named Executive Officers certain
information regarding stock options held at March 31, 1996 and stock option
exercises during fiscal 1996:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT IN-THE-MONEY OPTIONS
ON FISCAL YEAR-END (#) * AT FISCAL YEAR-END ($)
EXERCISE VALUE ------------------------- ------------------------
(#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-------- ------------ ------------------------- -------------------------
Robert L. Coleman -- $ -- 479,105 / 195,895 $16,958,680 / $5,778,507
John H. Chiricotti -- $ -- 127,500 / 70,000 $ 4,489,594 / $2,012,500
Geoffrey H. Jenkins 103,000 $809,595 82,900 / 78,100 $ 2,894,586 / $2,302,176
Donald L. Pieper 90,000 $717,751 70,000 / 100,000 $ 2,433,250 / $3,085,375
Gerald J. Bojas 5,000 $ 46,000 35,601 / 11,624 $ 1,265,285 / $ 360,487
* All of the above options were exercised in April, 1996 as part of the Merger
Agreement with Abbott Laboratories.
23
24
EMPLOYMENT AGREEMENTS
On September 24, 1991, Dr. Coleman entered into a one-year employment
agreement with the Company that automatically extends for successive one-year
terms on each anniversary date unless terminated by either party on ninety days'
notice. Under the agreement, the Company agrees to pay Dr. Coleman a base salary
of $225,000 subject to annual review by the Board of Directors, and a bonus
based on Company performance in the range of 35% to 70% of the base salary as
then in effect. The base salary for fiscal 1996 was $350,000. The agreement
granted Dr. Coleman an option to purchase 500,000 shares of Common Stock and
contains a clause prohibiting Dr. Coleman from competing for a period of two
years following termination of employment. In the event Dr. Coleman is
terminated without cause (as defined in the agreement), the Company is obligated
to pay his base salary for a period of twelve months from the date of
termination.
Mr. Jenkins has entered into an employment agreement with the Company
dated September 9, 1992. The agreement, which expired on March 31, 1993, is
automatically extended for one-year periods commencing on its expiration date
unless terminated by either party on ninety days' notice. Mr. Jenkins is
entitled to receive base salary at the rate of $145,000 per year, subject to
annual review by the Board, and a cash bonus of up to 40% of his base salary
based on the achievement of specific performance goals. Mr. Jenkins' base salary
for fiscal 1996 was $201,537. With respect to the options outstanding prior to
the date of the agreement, the agreement provides for automatic vesting with
respect to 75% of the shares covered thereby in the event of the termination by
the Company of Mr. Jenkins' employment without cause (as defined in the
agreement) or in the event of a change in control of the Company. The agreement
contains a clause prohibiting Mr. Jenkins from competing for a period of one
year following termination of employment. In the event Mr. Jenkins is terminated
without cause, the Company is obligated to pay his base salary for twelve months
following the date of termination.
Mr. Pieper entered into an employment agreement with the Company on
February 2, 1995 that governs his employment relationship from the commencement
of his employment (October 6, 1993). The agreement automatically extends for
successive one-year terms on October 6 of each year unless terminated by
either party on ninety days' notice. The agreement sets Mr. Pieper's base
compensation of $172,500 per year, subject to increase in the sole judgment of
the Board of Directors. Mr. Pieper's base salary for fiscal 1996 was $184,575.
In addition, each year Mr. Pieper will receive a bonus of between 30% and 60% of
his base compensation based upon the achievement of specific performance goals.
In the event of termination other than for cause, the Company will pay Mr.
Pieper base compensation for twelve months and a bonus prorated for the year in
which termination occurs. For options outstanding on February 2, 1995, the
agreement provides for automatic vesting of all shares covered thereby in the
event of a merger, consolidation, liquidation, dissolution or sale of all or
substantially all of the Company's assets. For options subsequently granted, the
agreements provide for automatic vesting as to 75% of the shares in such events.
Mr. Pieper's agreement prohibits him from competing with the Company for a
period of 24 months following termination.
Mr. Chiricotti's written offer of employment contained a provision
which provides that, if terminated, he will receive one year of severance pay.
In addition, the offer letter guarantees Mr. Chiricotti an annual bonus of at
least $50,000.
Gerald J. Bojas, Corporate Controller and Treasurer entered into an
agreement with the Company on November 15, 1990. Pursuant to this agreement, Mr.
Bojas will be entitled to receive a lump sum payment equal to two times his base
salary in the event that he is terminated after a Change in Control of the
Company or if he resigns for certain specified reasons after such a Change in
Control. A "Change in Control" is defined in the agreement as any of several
events, including the replacement of a majority of the directors of the Company
as a result of a tender offer, the acquisition by an entity (or a group of
entities acting together) of securities representing 30% of the voting power of
the Company and the execution of an agreement providing for any of the
transactions described in the definition of "Change in Control". To the extent
that any payments under the agreement are not deductible by the Company pursuant
to Section 280G of the Internal Revenue Code of 1986, as amended, such payments
will be reduced to the extent necessary to avoid the loss of the deduction.
24
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and notes thereto set forth certain information
with respect to the beneficial ownership of the Common Stock as of June 10, 1996
by (i) each person who is known to the Company to beneficially own more than 5%
of the outstanding shares of Common Stock, (ii) each of the chief executive
officers and the four other most highly paid executive officers of the Company
in fiscal 1996 (collectively, the "Named Executive Officers") and each director
of the Company, and (iii) all executive officers and directors of the Company as
a group. Except as otherwise indicated, each of the stockholders named below has
sole voting and investment power with respect to the shares of Common Stock
beneficially owned.
COMMON STOCK BENEFICIALLY OWNED
--------------------------------
PERCENT OF
NUMBER OF OUTSTANDING
5% STOCKHOLDERS SHARES SHARES (1)
--------------------------------------------- ---------- -----------
AAC Acquisition, Inc. 19,861,081 98.4
A wholly owned subsidiary of
Abbott Laboratories
100 Abbott Park Road
Abbott Park, Illinois 60064
NAMED EXECUTIVE OFFICERS
---------------------------------------------
Robert L. Coleman - 0 - - 0 -
John H. Chiricotti - 0 - - 0 -
Geoffrey H. Jenkins - 0 - - 0 -
Donald L. Pieper - 0 - - 0 -
Gerald J. Bojas - 0 - - 0 -
DIRECTORS
---------------------------------------------
Gary P. Coughlan - 0 - - 0 -
Jose M. de Lasa - 0 - - 0 -
Miles D. White - 0 - - 0 -
All directors and executive officers as a 160,000 0.8
group (10 persons) (1)
- --------------------
(1) Includes shares of Common Stock underlying options held by the executive
officers. All such options became exercisable upon consummation of the
merger.
25
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, Abbott Laboratories (Abbott), and AAC Acquisition
Corporation, Inc. (AAC), a wholly owned subsidiary of Abbott Laboratories,
entered into a merger agreement on March 29, 1996 that provided for the
acquisition of MediSense by Abbott for $45.00 per share in cash. Under the terms
of the agreement, AAC made a tender offer to acquire all of the outstanding
shares of MediSense Common Stock and Class B Common Stock. On May 2, 1996, AAC
accepted for payment 19,861,081 shares of Common Stock, including all shares of
Class B Common Stock, that had been tendered pursuant to the offer, which
constituted approximately 98.4% of the Company's Common Stock outstanding on a
fully diluted basis. AAC paid approximately $876 million, net of the exercise
price of existing options for the Company's shares, which it will obtain from
Abbott.
Pursuant to the merger agreement, a wholly-owned subsidiary of AAC
will be merged with and into the Company with the Company as the surviving
corporation in the merger. As a result of the merger, each outstanding share of
Common Stock will be converted into the right to receive $45.00 per share in
cash. An information statement relating to the merger will be mailed to
shareholders in advance of a special shareholders meeting that will be called
to approve the merger. As a result of Abbott's 98.4% ownership of the Common
Stock, approval of the merger at the special shareholders meeting is assured.
26
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
(1) The financial statements contained in the accompanying Index
to Consolidated Financial Statements covered by the
Independent Auditor's Report are filed as part of this Report
(see Page F-1).
(2) FINANCIAL STATEMENT SCHEDULE
The financial statement schedule contained in the accompanying
Index to Consolidated Financial Statements covered by the
Independent Auditor's Report are filed as part of this Report
(see Page F-1).
(3) EXHIBITS
The exhibits contained in the Index to Exhibits are filed as
part of this Report (see page 28).
(b) REPORTS ON FORM 8-K
During the last Quarter of Fiscal 1996, Form 8-K, dated March
29, 1996, reported the following:
Item 5. Other Events - Abbott Laboratories and MediSense,
Inc. announce definitive agreement through which
Abbott will acquire MediSense.
Item 7. Exhibits - Agreement and Plan of Merger dated as of
March 29, 1996 (the "Merger Agreement") among Abbott,
AAC Acquisition, Inc., and the Company.
27
28
EXHIBIT INDEX
Description
2.1 -- Agreement and Plan of Merger dated as of March 29, 1996 (the
"Merger Agreement") among Abbott Laboratories, AAC Acquisition,
Inc., and the Company (8)
2.2 -- Amendment to Agreement and Plan of Merger dated as of May
30,1996 (1)
3.1 -- Second Restated Articles of Organization (6)
3.2 -- By-Laws of the Company (6)
4.1 -- Specimen Common Stock Certificate (4)
10.1 -- Amended and Restated Revolving Credit Agreement dated as of
January 9, 1995 among MediSense, Inc., MediSense Import/Export,
Inc., MediSense International, Inc. and the First National Bank
of Boston (6)
10.2 -- 1983 Stock Option Plan (2)+
10.3 -- 1992 Directors' Stock Option Plan (2)+
10.4 -- 1993 Stock Option Plan (2)+
10.5 -- Employment Agreement between the Company and Robert L. Coleman
as amended (4)+
10.6 -- Employment Agreement between the Company and George O. Joseph
(2)+
10.7 -- Employment Agreement between the Company and Geoffrey H.
Jenkins (2)+
10.8 -- Employment Letter between the Company and John H. Chiricotti (2)+
10.10 -- Sublease of 266 Second Avenue, Waltham, MA from Helix
Technology Corporation to MediSense, Inc. (2)
10.11 -- Voting Agreement between Baxter and certain stockholders of
MediSense (2)
10.12 -- Voting Agreement between Morgan Capital Corporation and
MediSense (2)
10.13 -- Registration Rights Agreement (2)
10.15 -- 1995 Directors' Stock Option in Lieu of Retainer Plan (7)+
10.16 -- Lease of 2-14 Crosby Drive, Bedford, MA from Bedford Business
Park Limited Partnership to MediSense, Inc. (1)
10.17 -- Agreement between the Company and Gerald J. Bojas (1)+
10.18 -- Employment Agreement between the Company and Donald L. Pieper
(1)+
11. -- Statement of Computation of Net Income Per Share (1)
21. -- Subsidiaries of the Registrant (5)
27. -- Financial Data Schedule (1)
- ------------
(1) Filed herewith.
28
29
(2) Filed with the Registrant's Registration Statement on Form S-1 (No.
33-78686) filed with the Commission on May 6, 1994.
(3) Filed with the Registrant's Pre-Effective Amendment No. 1 to
Registration Statement on Form S-1 (No. 33-78686) filed with the
Commission on May 26, 1994.
(4) Filed with the Registrant's Pre-Effective Amendment No. 2 to
Registration Statement on Form S-1 (No. 33-78686) filed with the
Commission on June 10, 1994.
(5) Filed with the Registrant's Pre-Effective Amendment No. 3 to
Registration Statement on Form S-1 (No. 33-78686) filed with the
Commission on June 21, 1994.
(6) Filed with the Registrant's Registration Statement on Form S-1 (No.
33-88774) filed with the Commission on January 26, 1995.
(7) Filed with the Registrant's Form 10-Q for the quarterly period ended
December 30, 1995.
(8) Filed with the Registrant's Form 8-K dated March 29, 1996.
+ Indicates management or compensatory contract or arrangement.
29
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 20, 1996 MEDISENSE, INC.
By /S/ JOHN H. CHIRICOTTI
----------------------------
JOHN H. CHIRICOTTI
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exhange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ ROBERT L. COLEMAN Director, President and Chief June 20, 1996
- ------------------------------------ Executive Officer (Principal
ROBERT L. COLEMAN Executive Officer)
/s/ JOHN H. CHIRICOTTI Chief Financial Officer (Principal June 20, 1996
- ------------------------------------ Financial Officer)
JOHN H. CHIRICOTTI
/s/ GERALD J. BOJAS Treasurer (Principal Accounting June 20, 1996
- ------------------------------------ Officer)
GERALD J. BOJAS
/s/ GARY P. COUGHLAN Director June 20, 1996
- ------------------------------------
GARY P. COUGHLAN
/s/ JOSE M. de LASA Director June 20, 1996
- ------------------------------------
JOSE M. DE LASA
/s/ MILES D. WHITE Director June 20, 1996
- ------------------------------------
MILES D. WHITE
30
31
MEDISENSE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of March 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the Years Ended
March 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended March 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Schedule F-24
Schedule II--Valuation and Qualifying Accounts Years
Ended March 31, 1996, 1995 and 1994 F-25
Exhibit 11--Calculation of Shares Used in Determining
Net Income and Pro Forma Net Income per Share F-26
F-1
32
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MediSense, Inc.:
We have audited the accompanying consolidated balance sheets of MediSense, Inc.
(a Massachusetts corporation) and subsidiaries as of March 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended March
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MediSense, Inc. and
subsidiaries as of March 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 10, 1996
F-2
33
MEDISENSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31,
1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 24,114,000 $ 10,210,000
Marketable securities (Note 1(g)) 26,984,000 15,781,000
Accounts receivable, less reserves of approximately
$1,091,000 and $1,057,000 at March 31, 1996 and 1995,
respectively 27,130,000 24,572,000
Other receivables 1,980,000 1,413,000
Inventories (Note 1(h)) 14,634,000 14,758,000
Other current assets 2,372,000 1,816,000
------------ -----------
Total current assets 97,214,000 68,550,000
------------ -----------
38,901,000 29,592,000
PROPERTY AND EQUIPMENT, AT COST (Note 1(i))
Less--Accumulated depreciation and amortization 19,662,000 16,498,000
------------ -----------
19,239,000 13,094,000
------------ -----------
OTHER ASSETS:
Restricted cash 2,617,000 137,000
Other assets 2,112,000 227,000
------------ -----------
4,729,000 364,000
------------ -----------
$121,182,000 $82,008,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 2) $ 2,207,000 $ --
Current portion of long-term debt (Note 3) 203,000 540,000
Accounts payable 7,178,000 9,664,000
Accrued expenses (Note 9) 25,948,000 21,322,000
------------ -----------
Total current liabilities 35,536,000 31,526,000
------------ -----------
DEFERRED INCOME TAXES 1,602,000 1,223,000
------------ -----------
LONG-TERM DEBT, NET OF CURRENT PORTION (Note 3) 218,000 436,000
------------ -----------
COMMITMENTS (Notes 3 and 7)
STOCKHOLDERS' EQUITY (Note 4):
Convertible preferred stock, $.01 par value-
Authorized--1,000,000 shares
Issued--no shares at March 31, 1996 and 1995 -- --
Common stock, $.01 par value-
Authorized--30,000,000 shares
Issued and outstanding--16,792,849 and 16,240,633
shares at March 31, 1996 and 1995, respectively 168,000 162,000
Class A common stock, $.01 par value-
Authorized--3,000,000 shares
Issued and outstanding--no shares at March 31, 1996
and 1995 -- --
Class B nonvoting common stock, $.01 par value-
Authorized--1,500,000 shares
Issued and outstanding--897,340 shares at March 31,
1996 and 1995 9,000 9,000
Additional paid-in capital 158,262,000 152,769,000
Accumulated deficit (67,509,000) (99,343,000)
Unrealized loss on available-for-sale securities (41,000) --
Cumulative translation adjustment (7,063,000) (4,774,000)
------------ -----------
Total stockholders' equity 83,826,000 48,823,000
------------ -----------
$121,182,000 $82,008,000
============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
34
MEDISENSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
1996 1995 1994
REVENUE $173,756,000 $140,958,000 $110,384,000
COST OF REVENUE 57,146,000 47,221,000 38,651,000
----------- ----------- ----------
Gross profit 116,610,000 93,737,000 71,733,000
----------- ----------- ----------
OPERATING EXPENSES:
Selling, general and administrative 71,112,000 60,002,000 51,154,000
Research and development 11,696,000 9,164,000 6,537,000
----------- ----------- ----------
82,808,000 69,166,000 57,691,000
----------- ----------- ----------
Income from operations 33,802,000 24,571,000 14,042,000
INTEREST INCOME 1,716,000 406,000 108,000
INTEREST EXPENSE (127,000) (1,371,000) (5,178,000)
FOREIGN CURRENCY EXCHANGE GAIN (LOSS) (20,000) 1,817,000 (979,000)
----------- ----------- ----------
Income before provision for income 35,371,000 25,423,000 7,993,000
taxes
PROVISION FOR INCOME TAXES 3,537,000 3,445,000 1,790,000
----------- ----------- ----------
Net income $31,834,000 $21,978,000 $6,203,000
=========== =========== ==========
NET INCOME PER COMMON AND COMMON EQUIVALENT $ 1.70 $ 1.34
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 18,698,000 16,349,000
=========== ===========
PRO FORMA NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .51
==========
PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING 12,223,000
==========
SUPPLEMENTAL NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .61
==========
SUPPLEMENTAL WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 15,684,000
==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
35
MEDISENSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
NUMBER $.01 NUMBER $.01
OF SHARES PAR VALUE OF SHARES PAR VALUE
BALANCE, MARCH 31, 1993 572,686 $ 6,000 - $ -
Issuance of common stock
under stock option and
purchase plans - - - -
Compensation associated with
the grant of stock options - - - -
Amortization of deferred
compensation - - - -
Forfeiture of restricted stock - - - -
Translation adjustment - - - -
Repurchase of common stock - - - -
Common stock issued in
connection with warrant
exchange - - - -
Net income - - - -
-------- ------- ---------- --------
BALANCE, MARCH 31, 1994 572,686 6,000 - -
Issuance of common stock
under stock option and
purchase plans - - 1,205,218 12,000
Compensation associated with
the grant of stock options - - - -
Repurchase of stockholders'
rights - - - -
Exercise of Class A Common
Stock warrant through the
surrender of Series D
Preferred Stock (93,333) (1,000) - -
Issuance of common stock in
initial public offering,
net of expenses - - 4,575,000 46,000
Issuance of common stock in
secondary public offering,
net of expenses - - 50,000 -
Payment of preferred stock
dividends - - - -
Conversion of Class B common
stock into common stock - - 423,125 4,000
Conversion of preferred stock
into Class A and Class B
common stock (479,353) (5,000) - -
Conversion of Class A Common
Stock into common stock - - 9,987,290 100,000
Translation adjustment - - - -
Net income - - - -
-------- ------- ---------- --------
BALANCE, MARCH 31, 1995 - - 16,240,633 162,000
Sale of common stock under
stock option and purchase
plans - - 552,216 6,000
Unrealized loss on
available-for-sale
securities - - - -
Translation adjustment - - - -
Net income - - - -
-------- ------- ---------- --------
BALANCE, MARCH 31, 1996 - $ - 16,792,849 $168,000
======== ======= ========== ========
CLASS A COMMON STOCK CLASS B COMMON STOCK
NUMBER $.01 NUMBER $.01
OF SHARES PAR VALUE OF SHARES PAR VALUE
BALANCE, MARCH 31, 1993 869,229 $ 8,000 637,550 $ 6,000
Issuance of common stock
under stock option and
purchase plans 4,179 - - -
Compensation associated with
the grant of stock options - - - -
Amortization of deferred
compensation - - - -
Forfeiture of restricted stock (107) - - -
Translation adjustment - - - -
Repurchase of common stock (3,806) - - -
Common stock issued in
connection with warrant
exchange 86,911 1,000 147,785 2,000
Net income - - - -
---------- -------- -------- -------
BALANCE, MARCH 31, 1994 956,406 9,000 785,335 8,000
Issuance of common stock
under stock option and 2,300 - - -
purchase plans
Compensation associated with
the grant of stock options - - - -
Repurchase of stockholders'
rights - - - -
Exercise of Class A Common
Stock warrant through the
surrender of Series D
Preferred Stock 206,000 2,000 - -
Issuance of common stock in
initial public offering,
net of expenses - - - -
Issuance of common stock in
secondary public offering,
net of expenses - - - -
Payment of preferred stock
dividends - - - -
Conversion of Class B common
stock into common stock - - (423,125) (4,000)
Conversion of preferred stock
into Class A and Class B
common stock 832,750 9,000 535,130 5,000
Conversion of Class A Common
Stock into common stock (1,997,456) (20,000) - -
Translation adjustment - - - -
Net income - - - -
---------- -------- -------- -------
BALANCE, MARCH 31, 1995 - - 897,340 9,000
Sale of common stock under
stock option and purchase
plans - - - -
Unrealized loss on
available-for-sale
securities - - - -
Translation adjustment - - - -
Net income - - - -
---------- -------- -------- -------
BALANCE, MARCH 31, 1996 - $ - 897,340 $ 9,000
========== ======== ======== =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
36
MEDISENSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
LOSS ON TOTAL
ADDITIONAL AVAILABLE- CUMULATIVE STOCKHOLDERS'
PAID-IN ACCUMULATED FOR-SALE TRANSLATION DEFERRED EQUITY
CAPITAL DEFICIT SECURITIES ADJUSTMENT COMPENSATION (DEFICIT)
BALANCE, MARCH 31, 1993 $ 95,993,000 $(127,524,000) $ - $(6,272,000) $(18,000) $(37,801,000)
Issuance of common stock
under stock option and
purchase plans 122,000 - - - - 122,000
Compensation associated with
the grant of stock options 3,000 - - - - 3,000
Amortization of deferred
compensation - - - - 18,000 18,000
Forfeiture of restricted stock (6,000) - - - - (6,000)
Translation adjustment - - - 305,000 - 305,000
Repurchase of common stock (167,000) - - - - (167,000)
Common stock issued in
connection with warrant
exchange (4,000) - - - - (1,000)
Net income - 6,203,000 - - - 6,203,000
------------ ------------- -------- ----------- -------- ------------
BALANCE, MARCH 31, 1994 95,941,000 (121,321,000) - (5,967,000) - (31,324,000)
Issuance of common stock
under stock option and
purchase plans 11,299,000 - - - - 11,311,000
Compensation associated with
the grant of stock options 22,000 - - - - 22,000
Repurchase of stockholders'
rights (56,000) - - - - (56,000)
Exercise of Class A Common
Stock warrant through the
surrender of Series D
Preferred Stock (1,000) - - - - -
Issuance of common stock in
initial public offering,
net of expenses 50,011,000 - - - - 50,057,000
Issuance of common stock in
secondary public offering,
net of expenses 491,000 - - - - 491,000
Payment of preferred stock
dividends (4,849,000) - - - - (4,849,000)
Conversion of Class B common
stock into common stock - - - - - -
Conversion of preferred stock
into Class A and Class B
common stock (9,000) - - - - -
Conversion of Class A Common
Stock into common stock (80,000) - - - - -
Translation adjustment - - 1,193,000 - 1,193,000
Net income - 21,978,000 - - - 21,978,000
------------ ------------- -------- ----------- -------- ------------
BALANCE, MARCH 31, 1995 152,769,000 (99,343,000) - (4,774,000) - 48,823,000
Sale of common stock under
stock option and purchase
plans 5,493,000 - - - - 5,499,000
Unrealized loss on
available-for-sale
securities - - (41,000) - - (41,000)
Translation adjustment - - - (2,289,000) - (2,289,000)
Net income - 31,834,000 - - 31,834,000
------------ ------------- -------- ----------- -------- ------------
BALANCE, MARCH 31, 1996 $158,262,000 $ (67,509,000) $(41,000) $(7,063,000) $ - $ 83,826,000
============ ============= ========= =========== ======== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
37
MEDISENSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $31,834,000 $21,978,000 $6,203,000
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 4,325,000 3,670,000 3,348,000
Amortization of prepaid royalties to a
stockholder -- -- 2,851,000
Compensation associated with stock issued
under deferred compensation plan -- -- 18,000
Compensation associated with the grant of
stock options -- 22,000 3,000
Deferred income taxes 473,000 (397,000) 665,000
Foreign currency exchange (gain) loss (152,000) (1,947,000) 932,000
Changes in current assets and liabilities-
Accounts receivable (3,494,000) (7,503,000) (1,518,000)
Accounts receivable from stockholder -- -- 1,781,000
Other receivables (598,000) 372,000 (657,000)
Inventories (667,000) (3,959,000) 1,291,000
Other current assets (690,000) (151,000) (719,000)
Accounts payable (2,246,000) 755,000 (1,219,000)
Accrued expenses 5,033,000 5,572,000 2,246,000
Accrued interest on notes payable to
stockholders -- 1,191,000 4,150,000
----------- ----------- ----------
Net cash provided by operating
activities 33,818,000 19,603,000 19,375,000
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (11,394,000) (5,930,000) (2,883,000)
Retirement of property and equipment 144,000 15,000 117,000
Purchase of marketable securities (48,313,000) (15,670,000) --
Sales and maturities of marketable
securities 37,155,000 -- --
(Increase) decrease in restricted cash (2,485,000) 12,000 453,000
(Increase) decrease in other assets (1,892,000) 28,000 465,000
Unrealized loss on available-for-sale
securities (41,000) -- --
----------- ----------- ----------
Net cash used in investing activities (26,826,000) (21,545,000) (1,848,000)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
lines of credit 2,207,000 (700,000) (8,195,000)
Net payments on notes payable and accrued
interest to stockholders -- (49,520,000) (5,000,000)
Payments on long-term debt (531,000) (327,000) (1,012,000)
Repurchase of stockholders' rights -- (56,000) --
Payment of dividend on preferred stock -- (4,849,000) --
Initial public offering of common stock -- 50,057,000 --
Secondary public offering of common stock -- 491,000 --
Issuance of common stock under stock
option and purchase plans 5,499,000 11,311,000 122,000
Repurchase of common stock -- -- (168,000)
----------- ----------- ----------
Net cash provided by (used in)
financing activities 7,175,000 6,407,000 (14,253,000)
----------- ----------- ----------
EXCHANGE RATE EFFECTS (263,000) 442,000 (277,000)
----------- ----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,904,000 4,907,000 2,997,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,210,000 5,303,000 2,306,000
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $24,114,000 $10,210,000 $5,303,000
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 158,000 $9,926,000 $6,031,000
========== ========== ==========
Income taxes $1,487,000 $2,093,000 $ 376,000
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Increase in capital lease obligations $ - $ 152,000 $ 55,000
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
38
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(1) OPERATIONS AND ACCOUNTING POLICIES
MediSense, Inc. (the Company or MediSense) and subsidiaries develop,
manufacture and market blood glucose monitoring systems that enable people
with diabetes to manage their disease more effectively.
The accompanying consolidated financial statements reflect the application
of certain accounting policies described below and elsewhere in these notes
to consolidated financial statements. The Company is subject to a number of
risks which are inherent in a company in this industry and in this stage of
its development, including protection of proprietary rights, government
regulation, reimbursement by third-party payors and product liability.
(a) Merger Agreement
The Company and AAC Acquisition Corporation, Inc. (AAC), a wholly owned
subsidiary of Abbott Laboratories (Abbott), entered into a merger
agreement on March 29, 1996 that provided for the acquisition of
MediSense by Abbott for $45.00 per share in cash. Under the terms of
the agreement, AAC made a tender offer to acquire all of the
outstanding shares of MediSense common stock and Class B common stock.
On May 2, 1996, AAC accepted for payment 19,861,081 shares of common
stock, including all shares of Class B common stock, that had been
tendered pursuant to the offer, which constituted approximately 98.37%
of the Company's common stock outstanding. AAC paid approximately $876
million, net of the exercise price of existing options for the
Company's shares, which it will obtain from Abbott. On May 2, 1996, the
Company became a subsidiary of Abbott.
(b) Initial Public Offering
The Company closed its initial public offering of 4,500,000 shares of
common stock on July 8, 1994. Certain selling stockholders sold 600,000
shares, and the Company sold 3,900,000 newly issued shares and received
net proceeds of $42.5 million. On August 5, 1994, the Company's
underwriters exercised their overallotment option to purchase an
additional 675,000 shares of common stock from which the Company
received net proceeds of $7.5 million. The net proceeds were used to
pay a $4.8 million cumulative preferred stock dividend and $45.2
million of long-term notes payable to stockholders.
F-7
39
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(1) OPERATIONS AND ACCOUNTING POLICIES (Continued)
(c) Secondary Public Offering
On February 24, 1995, the Company closed a secondary public offering of
5,320,000 shares, and on March 16, 1995, the underwriters exercised
their overallotment option to purchase an additional 349,900 shares. In
total, certain stockholders sold 5,619,900 shares, and the Company sold
50,000 newly issued shares. The Company received net proceeds of
approximately $3.5 million, including proceeds received from the
exercise of 321,219 stock options held by certain selling stockholders.
(d) Principles of Consolidation
The accompanying consolidated financial statements reflect the accounts
of the Company and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(f) Restatements
The consolidated balance sheet as of March 31, 1995 and the statements
of cash flows for the years ended March 31, 1995 and 1994 have been
restated to reflect the reclassification of certain items.
(g) Cash and Cash Equivalents and Marketable Securities
Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The adoption of this pronouncement did
not have a material impact on the Company's financial position or
results of operations. In accordance with this statement, the Company
has classified its marketable debt and equity securities into
held-to-maturity and available-for-sale categories. Held-to-maturity
securities represent those securities for which the Company has the
intent and
F-8
40
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(1) OPERATIONS AND ACCOUNTING POLICIES (Continued)
(g) Cash and Cash Equivalents and Marketable Securities (Continued)
ability to hold to maturity and are reported at amortized cost.
Available-for-sale securities represent those securities that do not
meet the classification of held-to-maturity, are not actively traded
and are reported at fair market value with unrealized gains and losses
included in stockholders' equity.
Cash and cash equivalents, which are carried at cost which approximates
market, consisted of the following at March 31, 1996 and 1995:
1996 1995
Cash $7,945,000 $6,142,000
Cash equivalents-
Money market 12,682,000 881,000
Commercial paper 3,487,000 3,187,000
----------- -----------
$24,114,000 $10,210,000
=========== ===========
Marketable securities consisted of the following at March 31, 1996 and
1995:
1996
--------------------------------
NET
AMORTIZED UNREALIZED FAIR
COST LOSS VALUE
Held-to-maturity-
Corporate debt
securities $12,616,000 $(31,000) $12,585,000
=========== ======== ===========
Available-for-sale-
Corporate debt
securities 10,150,000 (12,000) 10,138,000
Equity securities 1,024,000 (21,000) 1,003,000
U.S. Treasury note 2,735,000 (8,000) 2,727,000
Other 500,000 - 500,000
----------- --------- -----------
$14,409,000 $(41,000) $14,368,000
=========== ======== ===========
F-9
41
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(1) OPERATIONS AND ACCOUNTING POLICIES (Continued)
(g) Cash and Cash Equivalents and Marketable Securities (Continued)
1995
----------------------------------
NET
AMORTIZED UNREALIZED FAIR
COST GAIN VALUE
Held-to-maturity-
Corporate debt
securities $15,781,000 $5,000 $15,786,000
=========== ====== ===========
(h) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and include materials, labor and manufacturing overhead.
Inventories consist of the following at March 31, 1996 and 1995:
1996 1995
Raw materials $ 3,746,000 $ 4,962,000
Work-in-progress 2,516,000 3,395,000
Finished goods 8,372,000 6,401,000
----------- -----------
$14,634,000 $14,758,000
=========== ===========
The components of property and equipment at March 31, 1996 and 1995 are
as follows:
1996 1995
Production equipment $13,564,000 $11,622,000
Leasehold improvements 7,752,000 6,569,000
Equipment under capital leases 638,000 1,386,000
Furniture and fixtures 9,772,000 7,007,000
Laboratory equipment 1,967,000 1,289,000
Construction-in-progress 5,208,000 1,719,000
----------- -----------
$38,901,000 $29,592,000
=========== ===========
F-10
42
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(1) OPERATIONS AND ACCOUNTING POLICIES (Continued)
(i) Property and Equipment (Continued)
The Company provides for depreciation and amortization utilizing the
straight-line method in amounts estimated to allocate the cost of the
assets over their estimated useful lives, as follows:
ESTIMATED
CLASSIFICATION USEFUL LIFE
Production equipment 5 Years
Leasehold improvements Life of lease
Equipment under capital leases Life of lease
Furniture and fixtures 3-10 Years
Laboratory equipment 5 Years
(j) Foreign Currency Translation
The Company translates its foreign currency denominated assets and
liabilities and the financial statements of its foreign subsidiaries in
accordance with SFAS No. 52, Foreign Currency Translation. In
translating the accounts of the foreign subsidiaries into U.S. dollars,
certain intercompany accounts and stockholders' equity and deficits are
translated at historical rates, while all other assets and liabilities
are translated at the rate of exchange in effect at year-end. Revenue
and expense accounts are translated using the weighted average exchange
rate in effect during the year. Cumulative translation gains or losses
are reflected as a component of stockholders' equity. Foreign currency
exchange gains and losses, including the gains and losses resulting
from the remeasurement of certain assets and liabilities, are reflected
in the accompanying consolidated statements of operations.
(k) Revenue Recognition
Revenue from product sales is recognized upon shipment.
(l) Warranty
The Company provides a four-year warranty on certain of its products.
Estimated costs related to the warranty are accrued at the time of
product shipment.
(m) Research and Development Expenses
The Company charges research and development expenses to operations as
incurred.
F-11
43
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(1) OPERATIONS AND ACCOUNTING POLICIES (Continued)
(n) Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share for the years ended
March 31, 1996 and 1995 has been determined by dividing net income by
the weighted average common and common equivalent shares outstanding
during the period, computed in accordance with the treasury stock
method. In addition, the number of common and common share equivalents
for the fiscal 1995 period prior to the closing of the Company's
initial public offering includes the number of common shares issued to
generate sufficient proceeds for the payment of $4.8 million of
convertible preferred stock dividends paid upon the consummation of the
initial public offering (see Note 1(b)) and, as required by rules
promulgated by the Securities and Exchange Commission, the dilutive
effect of options issued at prices below the offering price in the year
before the Company's initial public offering using the treasury stock
method.
Historical net income (loss) per common and common equivalent share for
periods prior to fiscal 1995 has not been presented, as such
information is not considered meaningful.
(o) Pro Forma Net Income per Common and Common Equivalent Share
Pro forma net income per common and common equivalent share for the
year ended March 31, 1994 has been determined by dividing net income by
the weighted average common and common equivalent shares outstanding
during the period, computed in accordance with the treasury stock
method, plus the number of shares of common stock issued upon
conversion of preferred stock and the number of shares of common stock
issued pursuant to the initial public offering, sufficient to generate
proceeds for the payment of $4.8 million of convertible preferred stock
dividends paid upon consummation of the initial public offering. As
required by rules promulgated by the Securities and Exchange
Commission, shares or options issued at prices below the offering price
in the year before the Company's initial public offering have been
included in the calculation as if outstanding for all periods presented
using the treasury stock method.
(p) Supplemental Net Income per Common and Common Equivalent Share
Supplemental net income per common and common equivalent share for the
year ended March 31, 1994 has been determined by dividing net income,
increased by the effect of reduced interest expense associated with the
assumed repayment of indebtedness to stockholders, as of the beginning
of the period, from the net proceeds of the Company's initial public
offering, by the pro forma weighted average common and common
equivalent shares outstanding increased by the shares to be issued
pursuant to the initial public offering in excess of the number of
shares issued to fund the payment of $4.8 million of convertible
preferred stock dividends.
F-12
44
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(1) OPERATIONS AND ACCOUNTING POLICIES (Continued)
(q) Postretirement Benefits
The Company has no obligations under SFAS No. 106, Employers'
Accounting for Post-retirement Benefits Other Than Pensions, as it does
not currently offer such benefits.
(r) Concentration of Credit Risk
The Company has no significant off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts or
other foreign hedging arrangements. The Company's accounts receivable
credit risk is not concentrated within any geographical area, and no
single customer accounts for greater than 10% of revenues or represents
a significant credit risk to the Company.
(2) REVOLVING LINE OF CREDIT
The Company has a revolving line-of-credit agreement with a bank which
expires on January 9, 1997. On January 9, 1995, the line of credit was
amended to provide for borrowings not to exceed $20,000,000, of which a
maximum of $10,000,000 may be a foreign commitment. Borrowings accrue
interest at the bank's base rate, LIBOR plus 1-1/2%, or the applicable
foreign branch cost of funds plus 1-1/2%. Borrowings are secured by all
assets in the United States and inventory in the United Kingdom. The
Company is required to comply with certain financial covenants that require
minimum amounts of net worth, operating cash flow and net income. At March
31, 1996, no amounts were outstanding on this revolving line of credit.
In addition, one of the Company's subsidiaries has a revolving
line-of-credit agreement with a bank in the amount of $2,207,000. This line
of credit expires on February 27, 1997, and borrowings accrue interest at
LIBOR plus 35 basis points. Borrowings are fully cash secured in an amount
at least equal to 115% of the outstanding principal. At March 31, 1996, the
subsidiary had fully utilized the line of credit and had an outstanding
loan balance of $2,207,000.
F-13
45
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(3) LONG-TERM DEBT
Long-term debt consists of the following at March 31, 1996 and 1995:
1996 1995
Capital lease obligation $421,000 $865,000
Amount due to a university - 111,000
-------- --------
421,000 976,000
Less--Current portion 203,000 540,000
-------- --------
$218,000 $436,000
======== ========
The Company leases certain equipment under capital lease arrangements
expiring through December 1998. Future minimum lease commitments under
these capital leases are as follows:
Year Ending March 31,
1997 $240,000
1998 157,000
1999 81,000
--------
478,000
Less--Amount representing interest 57,000
--------
Present value of minimum lease payments $421,000
--------
(4) STOCKHOLDERS' EQUITY
(a) Capital Stock Amendment
On June 1, 1994, the Company's stockholders approved an amendment to
the Company's Articles of Organization to increase the authorized
shares of common stock to 34,500,000 shares of common stock, which are
divided into 30,000,000 shares of common stock, 3,000,000 shares of
Class A Common Stock and 1,500,000 shares of Class B Common Stock. The
Company's stockholders also approved an amendment to the rights and
preferences of the Class A Common Stock. As amended, each share of
Class A Common Stock may not be sold or transferred except for certain
limited, permitted transfers and will automatically convert into five
shares of
F-14
46
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(4) STOCKHOLDERS' EQUITY (Continued)
(a) Capital Stock Amendment (Continued)
Common Stock upon the earliest of (i) 90 days after the date on which
the Common Stock is registered as a class under the Securities Exchange
Act of 1934, (ii) the date on which a registration statement filed
under the Securities Act of 1933 covering such shares of Class A Common
Stock becomes effective under the Securities Act, and (iii) the date on
which the Board of Directors has voted to release the restrictions on
shares of Class A Common Stock pro rata among all holders of Class A
Common Stock. In addition, the Company's Board of Directors approved a
five-for-one Class B Common Stock split effected in the form of a
dividend. This amendment and the stock split became effective on June
29, 1994 upon the filing of the amendment. The accompanying
consolidated financial statements and notes have been retroactively
adjusted to reflect the stock split.
In connection with the Initial Public Offering, 120,000 shares of Class
A Common Stock were converted to 600,000 shares of common stock, and on
September 27, 1994, all remaining shares of Class A Common Stock were
automatically converted into 9,387,290 shares of common stock.
(b) Common Stock
The Class B Common Stock is entitled to all rights of the Common Stock
and Class A Common Stock, with the exception of voting rights. Holders
of Class A Common Stock are entitled to one vote for each share of
common stock into which Class A Common Stock would convert while
holders of common stock are entitled to one vote per share.
The Company has reserved shares of Common Stock for the conversion of
Class B Common Stock. During fiscal 1995, a total of 423,125 shares of
Class B Common Stock were converted into Common Stock.
(5) EMPLOYEE BENEFIT PLANS
(a) Pension and Profit Sharing Plans
The Company maintains a profit sharing retirement plan (the 401(k)
Plan) covering substantially all U.S. employees. Participants in the
401(k) Plan may contribute up to 15% of their compensation to the
401(k) Plan. The Company matches employee contributions up to 3% of
each employee's salary. The Company also maintains a UK defined
contribution pension plan
F-15
47
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(5) EMPLOYEE BENEFIT PLANS (Continued)
(a) Pension and Profit Sharing Plans (Continued)
covering qualified UK employees. Contributions under the pension plan
equal 3% of the eligible annual wages of qualified employees. In
addition, the Company maintains defined contribution plans in Canada
and certain European countries. During fiscal 1996, 1995 and 1994, the
Company contributed $714,000, $595,000 and $445,000, respectively, to
these plans. The Company may terminate the plans at any time.
(b) Stock Option Plans
In fiscal 1994, the stockholders approved the 1993 Stock Option Plan
under which the Board of Directors may grant options to purchase up to
2,000,000 shares of common stock to attract and retain employees,
consultants or advisers who are in a position to make significant
contributions to the success of the Company. In August 1995, at the
Annual Meeting of Stockholders, the stockholders approved an amendment
to the 1993 Stock Option Plan (the Option Plan) to add 1,000,000 shares
to the number of shares available under the Option Plan, setting the
total number of shares of common stock available for issuance under the
Option Plan at 3,000,000 shares. In addition, during fiscal 1996, the
Board of Directors approved the MediSense, Inc. Executive Share Option
Scheme (the UK Share Scheme) which allows the Board of Directors to
grant options to employees.
The number of shares and the terms under which shares granted under
these plans vest are determined by the Board of Directors at the time
of grant. As of March 31, 1996, options to purchase 1,351,080 shares of
common stock remain available for future grant under these two plans.
Substantially all options granted under these plans become exercisable
over a three- to six-year period from the date of grant.
In fiscal 1993, the Board of Directors approved the 1992 Directors'
Stock Option Plan under which the Company may grant options to purchase
shares of common stock to nonemployee directors and official observers.
In June 1994, the stockholders approved this plan, which allows for the
grant of options to purchase up to 600,000 shares of common stock. In
August 1995, the stockholders approved the 1995 Directors' Stock Option
In Lieu of Retainer Plan, which allows for the grant of options to
purchase up to 150,000 shares of common stock. Under the plan during
fiscal 1996, nonemployee directors of the Company received one-half of
their annual retainer in the form of an option to purchase shares of
common stock, which vests six months following the date of grant. As of
March 31, 1996, options to purchase 212,765 shares remain available for
future grants under these plans.
F-16
48
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(5) EMPLOYEE BENEFIT PLANS (Continued)
(b) Stock Option Plans (Continued)
The following table summarizes all stock option activity under existing
and terminated plans as well as specific grants by the Board of
Directors for the three years ended March 31, 1996:
NUMBER OPTION PRICE
OF SHARES PER SHARE
Balance outstanding, March 31, 1993 2,209,935 $ 2.00-$12.00
Granted 2,383,175 8.80- 12.00
Exercised (6,080) 2.00
Terminated (1,418,180) 2.00- 12.00
--------- -------------
Balance outstanding, March 31, 1994 3,168,850 2.00- 12.00
Granted 141,500 8.80- 23.12
Exercised (1,206,239) 2.00- 14.50
Terminated (73,535) 3.50- 14.50
--------- -------------
Balance outstanding, March 31, 1995 2,030,576 2.00- 23.12
Granted 1,169,985 15.81- 24.50
Exercised (532,431) 2.00- 18.88
Terminated (174,235) 8.80- 18.88
--------- -------------
Balance outstanding, March 31, 1996 2,493,895 $ 3.00-$24.50
========= =============
Exercisable, March 31, 1996 1,350,790 $ 3.00-$24.50
========= =============
Subsequent to year-end and in conjunction with the merger discuused in
Note 1(a), 2,333,395 options were exercised and the shares were
tendered as part of the merger.
(c) Employee Stock Purchase Plans
The Company has adopted an Employee Stock Purchase Plan (the Plan)
under which the Board of Directors may grant each eligible employee, on
the first day of each semiannual plan period, an option to purchase
shares of the Company's common stock on the last day of each semiannual
plan period. The option price per share is equal to 85% of the fair
value of the common stock on either the first or last day of each
semiannual plan period, whichever is lower. The maximum
F-17
49
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(5) EMPLOYEE BENEFIT PLANS (Continued)
(c) Employee Stock Purchase Plans (Continued)
number of shares purchased by each eligible employee is limited to the
number of shares that could be purchased with 10% of their respective
compensation, as defined, on the first day of each semiannual plan
period. The maximum fair value of options outstanding for each eligible
employee cannot exceed $25,000. During fiscal 1994, the Board of
Directors suspended stock purchases under the Plan as of April 1, 1994
and adopted the 1994 Employee Stock Purchase Plan (the 1994 Plan). A
total of 250,000 shares of common stock have been reserved for issuance
under the 1994 Plan. As of March 31, 1996, 212,541 shares of common
stock reserved for issuance remain available for future grants.
(6) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes.
The provision for income taxes shown in the accompanying consolidated
statements of operations consists of the following at March 31, 1996, 1995
and 1994:
1996 1995 1994
Current-
Federal $1,189,000 $ 530,000 $ 110,000
State 200,000 959,000 160,000
Foreign 1,675,000 2,353,000 855,000
---------- ---------- ----------
3,064,000 3,842,000 1,125,000
Deferred
(prepaid)-
Federal - - -
State - - -
Foreign 473,000 (397,000) 665,000
---------- ---------- ----------
$3,537,000 $3,445,000 $1,790,000
========== ========== ==========
The foreign tax provision represents the provision for income taxes in
countries where the Company does not have available net operating loss
carryforwards. Federal and state income taxes have been provided in fiscal
1996, 1995 and 1994, as the Company is subject to federal alternative
minimum tax and is subject to tax in certain states which do not allow the
carryforward of net operating losses.
F-18
50
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(6) INCOME TAXES (Continued)
A reconciliation of the federal statutory rate to the Company's effective
rate at March 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
Income tax provision at federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) in tax resulting from-
Utilization of net operating loss (22.5) (33.4) (22.7)
carryforward
Utilization of foreign subsidiaries' net (10.1) - -
operating loss
Taxes provided for foreign subsidiaries in
excess - 2.7 4.5
of federal rate
State tax provision, net of federal benefit .6 3.4 2.0
Other 7.0 5.9 3.6
---- ---- ----
Effective tax rate 10.0% 13.6% 22.4%
==== ==== ====
At March 31, 1996, the Company had a net domestic operating loss
carryforward for federal tax purposes and financial reporting purposes of
approximately $37,089,000 and $24,280,000, respectively. The primary
difference represents a deduction of approximately $12,809,000 in fiscal
1995 and 1996 from the exercise of certain stock options. The tax benefit
of approximately $4,500,000 will be reflected as a component of additional
paid-in capital upon the utilization of the tax operating loss
carryforward. In addition, the Company has available federal tax credit
carryforwards of approximately $1,276,000 at March 31, 1996. These
carryforwards may be used to offset future taxable income and future tax
liabilities, respectively, if any, and are subject to review and possible
adjustment by the Internal Revenue Service. The Tax Reform Act of 1986 (the
Reform Act) limits the amount of domestic net operating loss and credit
carryforwards that companies may utilize in any one year in the event of
cumulative changes in ownership over a three-year period in excess of 50%.
As a result of the public offering, the Company had a cumulative change in
ownership over a three-year period. Based on the valuation of the Company
at the time of this ownership change, the annual limitation imposed on
utilization of the net domestic operating loss carryforwards is
approximately $23 million. The Company anticipates that this limitation
will not impair its ability to fully utilize its existing net domestic
operating loss and tax credit carryforwards.
F-19
51
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(6) INCOME TAXES (Continued)
The Company's wholly owned foreign subsidiaries have net operating loss
carryforwards of approximately $15,700,000, of which $5,409,000 is not
subject to expiration. The expiration dates of the Company's net operating
loss carryforwards are as follows:
NET OPERATING
LOSS CARRYFORWARDS
EXPIRES FEDERAL FOREIGN
March 31,
1997 $ - $ 1,440,000
1998 - 4,282,000
1999 - 1,506,000
2000 - 1,916,000
2001 - 261,000
2002 - 669,000
2003 - 143,000
2004 - 2,000
2005 16,828,000 72,000
2006 13,764,000 -
2007 4,056,000 -
2008 2,441,000 -
----------- -----------
Total $37,089,000 $10,291,000
=========== ===========
The components of deferred income tax assets and liabilities and the
valuation allowance at March 31, 1996 and 1995 are as follows:
1996 1995
Domestic-
Assets-
Operating loss carryforwards $ 12,981,000 $ 19,482,000
Tax credit carryforwards 1,276,000 898,000
Temporary differences-
Warranty reserve 1,615,000 1,209,000
Allowance for doubtful 137,000 107,000
accounts
Inventory valuation allowance 1,050,000 1,201,000
Other 2,251,000 2,449,000
------------ ------------
19,310,000 25,346,000
Valuation allowance (18,636,000) (24,720,000)
------------ ------------
674,000 626,000
Liabilities-
Capital lease expense (674,000) (626,000)
------------ ------------
$ - $ -
============ ============
F-20
52
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(6) INCOME TAXES (Continued)
1996 1995
Foreign-
Assets-
Operating loss carryforwards $ 5,495,000 $ 9,345,000
Valuation allowance (5,495,000) (9,345,000)
----------- ----------
- -
Liabilities-
Depreciation 372,000 116,000
Foreign exchange 635,000 703,000
Other 595,000 404,000
----------- ----------
$ 1,602,000 $1,223,000
=========== ==========
The Reform Act also expanded the corporate alternative minimum tax (AMT).
Under the Reform Act, the Company's federal tax liability is the greater of
its regular tax or AMT liability. The Company's foreign deferred tax
liability represents the tax effect of accelerating foreign tax deductions
relating to property and equipment and deferring taxable income relating to
foreign exchange gains. Because the level and the jurisdiction of future
taxable income is uncertain, the Company has recorded a valuation allowance
equal to the net deferred tax asset. The decrease in the valuation
allowance for fiscal 1995 is due primarily to the utilization of the
domestic net operating loss carryforward and the effect of certain items
being deductible for tax purposes and financial reporting purposes in
different periods.
(7) COMMITMENTS
The Company conducts its operations in leased facilities and leases office
equipment and vehicles under various operating lease agreements that expire
through 2011. Rental expense charged to operations was approximately
$3,533,000, $3,417,000 and $2,580,000 in fiscal 1996, 1995 and 1994,
respectively. Future minimum lease commitments under these operating leases
are as follows:
EQUIPMENT
FACILITIES AND TOTAL
VEHICLES
Year Ending March 31,
1997 $ 2,379,000 $1,362,000 $ 3,741,000
1998 2,506,000 891,000 3,397,000
1999 2,388,000 491,000 2,879,000
2000 2,342,000 159,000 2,501,000
2001 1,934,000 4,000 1,938,000
Thereafter 14,020,000 23,000 14,043,000
----------- ---------- -----------
$25,569,000 $2,930,000 $28,499,000
=========== ========== ===========
F-21
53
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(7) COMMITMENTS (Continued)
Restricted cash of $2,617,000 and $137,000 in the accompanying consolidated
balance sheets at March 31, 1996 and 1995, respectively, represents funds
restricted for use under the subsidiary line of credit and certain facility
leases.
(8) GEOGRAPHIC SEGMENT INFORMATION
The Company conducts its operations in two significant geographic segments,
the United States and Europe. During the years ended March 31, 1996, 1995
and 1994, international revenues, including export sales, represented
69.3%, 65.0% and 63.3% of revenues, respectively.
1996 UNITED EUROPE OTHER ELIMINATIONS TOTAL
STATES
Sales to unaffiliated
customers-
Domestic $53,312,000 $ 90,979,000 $27,328,000 $ -- $171,619,000
Export 2,137,000 -- -- -- 2,137,000
Intercompany sales 21,245,000 177,798,000 47,000 (199,090,000) --
----------- ----------- ----------- ------------- ------------
Total $76,694,000 $268,777,00 $27,375,000 $(199,090,000) $173,756,000
=========== ============ =========== ============= ============
Income (loss) from
operations $16,288,000 $ 13,802,000 $ 6,498,000 $ (2,786,000) $ 33,802,000
=========== ============ =========== ============= ============
Identifiable assets $67,845,000 $ 50,734,000 $10,822,000 $ (8,219,000) $121,182,000
=========== ============ =========== ============= ============
1995 UNITED EUROPE OTHER ELIMINATIONS TOTAL
STATES
Sales to unaffiliated
customers-
Domestic $49,291,000 $ 68,824,000 $ 21,094,000 $ -- $139,209,000
Export 1,749,000 -- -- -- 1,749,000
Intercompany sales 22,353,000 137,183,000 -- (159,536,000) --
----------- ------------ ------------ ------------- ------------
Total $73,393,000 $206,007,000 $ 21,094,000 $(159,536,000) $140,958,000
=========== ============ ============ ============= ============
Income (loss) from
operations $18,241,000 $ 9,595,000 $ (1,027,000) $ (2,238,000) $ 24,571,000
=========== ============ ============ ============= ============
Identifiable assets $36,604,000 $ 40,896,000 $ 9,931,000 $ (5,423,000) $ 82,008,000
=========== ============ ============ ============= ============
1994 UNITED EUROPE OTHER ELIMINATIONSTOTAL TOTAL
STATES
Sales to unaffiliated
customers-
Domestic $40,498,000 $ 52,888,000 $12,476,000 $ -- $105,862,000
Export 4,522,000 -- -- -- 4,522,000
Intercompany sales 14,282,000 101,049,000 -- (115,331,000) --
----------- ------------ ------------ ----------- ------------
Total $59,302,000 $153,937,000 $12,476,000 $(115,331,000) $110,384,000
=========== ============ ============ ============= ============
Income (loss) from
operations $ 7,956,000 $ 7,472,000 $ (92,000) $ (1,294,000) $ 14,042,000
=========== ============ ============ ============= ============
Identifiable assets $10,419,000 $ 28,999,000 $ 7,355,000 $ (3,257,000) $ 43,516,000
=========== ============ ============ ============= ============
F-22
54
MEDISENSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Continued)
(9) ACCRUED EXPENSES
Accrued expenses consist of the following at March 31, 1996 and 1995:
1996 1995
Payroll and $ 8,683,000 $ 7,413,000
payroll-related costs
Accrued income taxes 5,142,000 3,638,000
Warranty reserve 4,613,000 3,454,000
Accrued marketing program 2,507,000 2,044,000
Other accrued expenses 5,003,000 4,773,000
----------- -----------
$25,948,000 $21,322,000
=========== ===========
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly financial results for the years ended March 31, 1996 and 1995
are as follows (in thousands, except per share data):
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31, DECEMBER 31, OCTOBER 1, JULY 2,
1996 1995 1995 1995
REVENUE $44,072 $44,811 $44,184 $40,689
GROSS PROFIT 30,081 29,836 29,411 27,282
INCOME FROM OPERATIONS 9,611 8,736 7,748 7,707
NET INCOME 9,358 8,107 6,925 7,444
======= ======= ======= =======
NET INCOME PER SHARE $.49 $.43 $.37 $.41
==== ==== ==== ====
THREE MONTHS ENDED
------------------------------------------------
MARCH 31, DECEMBER 25, SEPTEMBER 25, JUNE 26,
1995 1994 1994 1994
REVENUE $38,081 $37,100 $34,626 $31,151
GROSS PROFIT 25,279 24,923 22,506 21,029
INCOME FROM OPERATIONS 7,334 6,440 5,708 5,089
NET INCOME 7,343 5,549 5,088 3,998
======= ======= ======= =======
NET INCOME PER SHARE $.41 $.31 $.30 $.32
==== ==== ==== ====
F-23
55
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To MediSense, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of MediSense, Inc. included in MediSense,
Inc.'s annual report to stockholders incorporated by reference in this Form 10-K
and have issued our report thereon dated May 10, 1996. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 14(a) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and in our opinion, fairly states in
all material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 10, 1996
F-24
56
SCHEDULE II
MEDISENSE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE, CHARGED TO BALANCE,
ALLOWANCE FOR BEGINNING COST OR CHARGED TO DEDUCTIONS END OF
DOUBTFUL ACCOUNTS OF PERIOD EXPENSE OTHER (1) (WRITE-OFFS) PERIOD
FISCAL 1996 $1,057,000 $557,000 $(41,000) $(482,000) $1,091,000
FISCAL 1995 669,000 497,000 65,000 (174,000) 1,057,000
FISCAL 1994 420,000 327,000 (7,000) (71,000) 669,000
<FN>
(1) Represents the effect of the fluctuation in foreign currency exchange rates
on translation of amounts denominated in foreign currencies into U.S.
dollars.
F-25