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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 00-20871
SELFCARE, INC.
(Name of Small Business Issuer in Its Charter)
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DELAWARE 04-3164127
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 PROSPECT STREET, WALTHAM, MASSACHUSETTS 02154
(Address of Principal Executive Offices) (Zip Code)
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(617) 647-3900
(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Name of Each Exchange
Title of Each Class on which registered
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Common Stock, $0.001 American Stock Exchange
per share par value
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SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
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Title of Class
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirement for the past 90 days.
Yes X No .
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year ended December 31, 1996
were $19,062,788.
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the registrant's stock on the
American Stock Exchange on February 28, 1997 was $67,631,615.
As of March 12, 1997 the Registrant had 7,934,537 shares of common stock,
par value $0.001 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 9, 10, 11 and 12 of Part III of this
Annual Report on Form 10-KSB is hereby incorporated by reference from the
Company's definitive Proxy Statement with respect to its 1997 Annual
Stockholders' meeting to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT.
Selfcare, Inc. (the "Company" or "Selfcare"), was incorporated in Delaware
on August 25, 1992 and acquired its predecessor company, Superior Sensors, Inc.
by merger on September 15, 1992. The company's principal executive offices are
located at 200 Prospect Street, Waltham, Massachusetts 02154 and its telephone
number is (617) 647-3900.
BUSINESS OF REGISTRANT.
Principal Products, Markets and Strategy
Selfcare is engaged primarily in the development, manufacture and marketing
of self-test and self-care products for the diabetes, women's health and
infectious disease markets.
The Company's objective is to become a leading international provider of
self-test diagnostic products, while expanding into complementary self-care
product lines and extending its retail distribution capabilities through the
addition of other self-care products targeted primarily at the Company's
principal markets. The Company is pursuing a business strategy which
incorporates the following principal elements: (i) focus on diabetes, women's
health and infectious diseases to exploit growth opportunities in these markets
in both the United States and internationally; (ii) leverage the Company's
technology base to develop new self-test products and to lower production costs;
(iii) promote products used by physicians and laboratories to facilitate market
acceptance of new self-tests; (iv) utilize the Company's retail distribution
network and customer relationships to launch new products rapidly; (v) continue
to pursue private label arrangements with major retailers to increase market
penetration; (vi) target value-conscious consumers with low-cost, high-quality
products; (vii) seek and expand strategic alliances and other transactions to
develop or acquire technologies for new self-test diagnostic and other self-care
products.
Product Overview
The products currently marketed by the Company consist primarily of
pregnancy self tests and infectious disease diagnostic test kits for the
professional market. In addition, shortly after the end of the last fiscal year,
the Company agreed to acquire a line of nutritional supplements which are
expected to contribute significantly to the Company's revenues. The Company's
pregnancy self tests are supplied by third-party manufacturers, principally
Princeton BioMeditech Corporation ("Princeton"), and marketed by the Company in
the United States and Europe under the Selfcare brand name as well as private
labels. The Company's infectious disease diagnostic kits are manufactured and
marketed outside the United States, primarily to healthcare professionals.
Selfcare also has several products and technologies under development which
address each of the Company's target markets and are important to the Company's
growth prospects. The Company's current products as well as products under
development are described more fully below.
Diabetes Products under Development
The New System. The Company's principal product for the diabetes market is
an electrochemical, biosensor-based blood glucose monitoring system to be
distributed by LifeScan, Inc., a subsidiary of Johnson & Johnson ("Lifescan").
The system consists of an instrument, referred to as a meter, and a disposable
test strip. The meter component of the system incorporates all of the
significant features of the leading systems currently on the market, including
results displayed in less than 30 seconds, a large, easy-to-read display to
assist visually impaired users, and a simple user interface. The test strips to
be used with the system have been improved by the implementation of careful
process control in the manufacturing of such strips which the Company believes
will result in a more consistent product than the test strips currently on the
market. In September 1996, the Company received regulatory clearance from the
U.S. Food and Drug Administration (the "FDA") for the system. In conjunction
with LifeScan, the Company subsequently undertook certain enhancements to the
user interface features for the system. However, the underlying chemistry and
function of
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the disposable strips for the enhanced version of the system (hereinafter
referred to as the "New System") were not changed from those of the prior
version of the New System.
To operate the New System, a user first calibrates the meter for use with a
particular test strip by a simple push-button operation. The test strip is then
inserted into the meter, which automatically activates in a standby mode. The
user then places a small blood sample obtained by a finger prick on the end of
the test strip, which senses the size of the necessary sample and automatically
runs the test when the necessary amount of blood is available, providing results
in less than 30 seconds.
The Company and LifeScan expect the New System to become one of LifeScan's
principal blood glucose monitoring products, supplementing LifeScan's existing
photometric systems. Although LifeScan is currently the leader in the home blood
glucose monitoring market, with a U.S. market share of over 40% in 1995,
LifeScan does not currently market an electrochemical blood glucose monitoring
system. The Company believes that the addition of the New System to LifeScan's
current product line will allow LifeScan to continue to compete successfully in
the blood glucose monitoring market. According to a recent Frost & Sullivan
report, the U.S. blood glucose monitoring market (including both the home and
professional markets) was approximately $1.1 billion in 1995 and is expected to
grow at a compound annual rate of approximately 19% from 1994 to 2001.
On October 9, 1996, the Company and LifeScan entered into a distribution
agreement (the "Distribution Agreement") with respect to the New System,
pursuant to which Selfcare will supply the New System to LifeScan and LifeScan
will be the exclusive, worldwide distributor of the New System. In February
1997, the Company submited a pre-market clearance notification (a "Section
510(k) Notification") to the FDA pursuant to Section 510(k) of the Federal Food,
Drug and Cosmetics Act, as amended (the "FDC Act"), seeking permission from the
FDA ("FDA Clearance") to begin commercial distribution of the New System.
Selfcare currently believes that it can complete development, receive FDA
Clearance and commence shipments of the New System as early as the first half of
1997. However, no assurance can be given that these events will occur or will
not be delayed. The failure of any of these events to occur would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Generic Test Strips. Many companies in the blood glucose monitoring
industry market products based on an electrochemical, biosensor technology. A
complete system consists of a meter and a disposable test strip. Selfcare plans
to develop, manufacture, and market disposable, electrochemical, biosensor test
strips which can be used in electrochemical blood glucose monitoring meters
currently sold by the other leading manufacturers in the United States and
Europe. Under the terms of the LifeScan Alliance, the Company cannot develop a
generic test strip for the New System. However, the Company is developing
generic test strips for use with several other meters, including MediSense's
ExacTech(TM) and Companion 2(TM), Bayer's Glucometer Elite(TM) and Boehringer
Mannheim's Accu-Chek(R) Advantage(TM). On June 28, 1996, the Company obtained
FDA Clearance for its first generic test strip, which is compatible with the
ExacTech system sold by MediSense.
The functions of the principal components of all electrochemical blood
glucose meters are similar. The design of test strips, however, varies in both
dimensions and materials, because some features are unique to each meter. The
general strip design is a multi-layer sandwich of materials that receives a
collected blood sample and allows the sample to be analyzed in a meter which
then provides a reading which can be used by the patient to take actions to
regulate his or her blood glucose level through medication, exercise and diet.
Selfcare believes that it has developed manufacturing technology to enable
it to be the first company to produce high quality generic test strips at a cost
which is as low as, or lower than, those made by most manufacturers of branded
test strips. To achieve this goal, Selfcare has established multi-disciplinary
development teams which are able to work on several products in parallel. The
goal of each team is to design a new test strip configuration for each target
branded product which, while delivering equivalent or superior results, uses
less expensive materials and is simpler to construct. At the same time, the
teams hope to maintain the general similarities among the test strips which may
lead to efficiencies in manufacturing.
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The Company intends to sell the generic test strips under the Selfcare
brand name through the low cost distribution channels which Selfcare has already
established for its women's health self-test diagnostic products in the United
States and Europe. See "Marketing and Sales." In the future, the Company may
offer its generic strips to retailers as private label products. The Company
intends to commence marketing its generic test strip designed to be compatible
with MediSense's ExacTech system under the name "Excel(TM)," initially in the
United States in 1997.
The Company currently plans to manufacture future blood glucose-related
products at the Company's facility in Inverness, Scotland (the "Inverness
Facility"), with the exception of the generic strip for the MediSense ExacTech
system, which will be manufactured at the Company's facility in Galway, Ireland
(the "Galway Facility").
In August 1996, the Company, through a wholly-owned subsidiary, Selfcare
International GmbH, entered into a supply agreement with A. Menarini Industrie
Farmaceutical Riunite S.r.L. of Florence, Italy ("Menarini"). The agreement
provides that the Company will be a principal supplier to Menarini of blood
glucose strips distributed or to be distributed by Menarini in selected markets
in Europe and certain countries in other parts of the world. The blood glucose
test strips will be manufactured at the Inverness Facility. The Company expects
shipments under this agreement to commence in the second half of 1997. Under the
agreement, Menarini is subject to certain minimum purchases of products from the
Company, and the Company has agreed not to supply any third party with such
products in the selected markets for the term of the agreement.
Women's Health Products
Selfcare is currently marketing pregnancy and ovulation prediction self
tests which the Company purchases from third-party manufacturers, principally
Princeton BioMeditech Corporation ("Princeton"), and then repackages under
private labels, as well as under the Selfcare brand. In order to reduce product
costs and ensure quality, Selfcare is in the process of developing its own
manufacturing capabilities for these tests. The Company believes that pregnancy
and ovulation prediction tests to be manufactured by Selfcare will be of the
same quality as the tests that are now currently obtained from contract
suppliers. In September 1996, the Company entered into an agreement with Nova
Biomedical Corporation ("Nova") pursuant to which Nova agreed to repackage and
supply Selfcare with early pregnancy and ovulation test kits. Under such
agreement, the Company has agreed to purchase a minimum quantity of specified
products from Nova. The Company is also developing a birth control aid for
introduction in markets outside the United States.
Pregnancy Products. Selfcare markets a full line of pregnancy self-test
kits from various manufacturers in both stick and cassette versions. The stick
version has an exposed wick which absorbs urine when placed in the urine stream,
while the cassette version requires the user to first collect a urine sample in
a cup and then utilize an enclosed dropper to place the urine sample in the test
well. Both versions employ identical technology enabling the display of visual
results in approximately three minutes.
Ovulation Prediction Products. Selfcare's LH ovulation prediction tests,
marketed as the Early Ovulation Predictor under both the Selfcare brand name and
private labels, provide 24 to 48-hour notice of when ovulation is likely to
occur. By identifying the days when a woman is most fertile, these tests assist
couples in their family planning. The Early Ovulation Predictor has an
easy-to-use and easily read self-test cassette which is used by applying a urine
sample to the sample well with a supplied dropper. Clinically accurate results
are available in approximately three minutes.
Birth Control Aid. The Company is co-developing a birth control aid with
Princeton which will allow a woman to accurately identify the six-day period
when she is likely to be able to conceive. Selfcare's birth control aid is
designed to allow a woman to perform the test at any time during her monthly
cycle, and will yield the information on her fertility status almost immediately
utilizing an easy-to-use and read test device similar to the Company's pregnancy
tests and fertility monitors. The Company's birth control aid will be a
urinebased, estrogen and progesterone test which will give 72-hour notice of
ovulation and also indicate the end of a woman's fertile period. The system will
use a meter to read a test strip, and will have the capability to store previous
test results, as well as to prompt the user to commence testing. To date, the
FDA has not
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permitted such products to be marketed as a contraceptive aid in the United
States. Accordingly, this product will initially be introduced in European
countries where such claims are permitted. Unilever Corporation ("Unilever") has
recently introduced a birth control product in the United Kingdom which uses a
urine strip and an instrument and currently has a similar product in clinical
trials in the United States. Selfcare believes that it may benefit from
Unilever's effort to bring a birth control product to the U.S. market. However,
there can be no assurance that any such product will be approved for
commercialization in the United States.
CarePlus. Selfcare has recently commenced marketing in the United States a
contraceptive product called CarePlus(TM) under the Selfcare brand which
consists of condoms and spermicide inserts, in packaging designed to appeal to
women.
Nutritional Supplement Lines
On February 19, 1997, the Company acquired from American Home Products
("AHP") the U. S. rights to several nutritional supplement product lines (the
"Nutritional Supplement Lines"), which had domestic sales of approximately $24
million in 1996 ("the "Nutritional Supplement Lines Acquisition"). The
Stresstabs(R), Allbee(R) and Z-Bec(R) product lines included in the Nutritional
Supplement Lines Acquisition currently represent, according to industry sources,
approximately a 29% share of the B-complex vitamin category sold through U.S.
drug, food and mass merchandising retail chains. The following table summarizes
those Nutritional Supplement Lines which the Company believes will form an
important part of its retail marketing strategy:
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NUTRITIONAL SUPPLEMENT PRODUCT DESCRIPTION
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Stresstabs*............................. B-complex vitamin with folic acid (daily
supplements of folic acid have been shown to be
important in preventing various neural tube
defects (NTDs) such as spina bifida and
anencephaly)
Stresstabs with Iron*................... B-complex vitamin with folic acid and iron
Stresstabs with Zinc.................... B-complex vitamin with folic acid and zinc
Ferro-Sequels(R)*....................... Iron supplement (iron supplements help prevent
anemia associated with menstruation and other
women's health conditions)
Posture(R).............................. Calcium supplement (a calcium-rich diet is
believed to be the most effective way of
preventing osteoporosis)
Protegra(R)............................. Antioxidant multivitamin and mineral supplement
Allbee.................................. B-complex vitamin with Vitamin E and Vitamin C
Z-Bec................................... B-complex vitamin with Vitamin C, Vitamin E and
zinc
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* Products formulated to address certain women's health requirements.
In connection with the Nutritional Supplement Lines Acquisition, the
Company and AHP entered into supply agreements, pursuant to which AHP agreed to
supply the Company with the products for the Nutritional Supplement Lines for up
to one year after the closing of the acquisition. The Company will purchase such
products at agreed upon prices from AHP in quantities based on quarterly
forecasts provided by the Company. AHP will manufacture such products itself,
or, in the case of products it does not currently manufacture, obtain them from
third party suppliers. AHP has agreed that the Nutritional Supplement Lines
supplied pursuant to such agreements will conform to agreed upon specifications
and that they will be manufactured in compliance with applicable laws and
regulations, including the FDC Act and CGMPs. After the one-year period lapses,
the Company will be required to establish alternative supply arrangements for
the products.
In addition, the Company assumed responsibility for all marketing and sales
functions for the Nutritional Supplement Lines, as well as certain
administrative functions, including customer service. The Company also will
become responsible for other administrative functions, including order receipt,
billing and collection, and the distribution of all products on May 20, 1997.
The Company is marketing the Nutritional Supplement
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Lines through its existing retail distribution channels, and will seek to expand
sales through trade allowances, increased advertising and promotion, and
cross-merchandising with other Selfcare products. The Company will also
reposition the brands which address specific women's nutritional needs through
redesigned packaging and increased emphasis on the products' self-care benefits
for women. The Company expects to continue to expand its women's health product
line with products supplied by or co-developed with third party manufacturers,
as well as products developed by the Company.
Stresstabs, Ferro-Sequels, Posture, Protegra, Albee and Z-Bec, are
registered trademarks of American Home Products.
Infectious Disease Products
Selfcare is currently marketing a wide array of professional diagnostic
test kits for infectious disease agents, including human immunodeficiency
viruses ("HIV"), hepatitis and Lyme disease. In addition, the Company is
developing self-test products for HIV 1/2 and Strep-A. Orgenics, Ltd., an
Israeli company ("Orgenics") in which the Company owns an interest and is in the
process of completing the acquisition, (see "Strategic Transactions -- Orgenics
Acquisition") also markets professional diagnostic kits for HIV, hepatitis and
other infectious disease agents, including chlamydia, and is developing several
professional diagnostic products in various formats for a variety of other
infectious diseases.
HIV Tests. Selfcare produces two visually-read, rapid test HIV products
for the emergency blood screening and clinical diagnostic markets. The first of
these tests, the rapid test device ("RTD"), is a membrane-based, rapid enzyme
immunoassay ("EIA") test employing recombinant HIV-1 and HIV-2 coated latex
attached to a plastic membrane as an antibody capture mechanism. This product
has been on the market since June 1991 and is registered for sale in India, a
number of European countries, as well as many countries in Africa and the Middle
East. The second test is in a patented format licensed from Cambridge Biotech
Corporation ("Cambridge Biotech") under the trademarked name Capillus(TM).
Capillus is an instrument or visually-read latex agglutination assay employing
an acrylic capillary slide to achieve agglutination. The instrument is a simple,
low cost, battery-run photometer. The World Health Organization regularly
purchases HIV tests for shipment to developing countries, such as India, to be
used in major government AIDS control programs. Currently, approximately 33% of
the Indian government's requirements for HIV rapid tests are purchased from the
Company through the World Health Organization. Approximately the same percentage
of such requirements is purchased from Orgenics; accordingly, upon the
completion of the Orgenics Acquisition, the Company will be the supplier of
approximately two-thirds of these requirements. However, there can be no
assurance that the Company will be able to maintain this market share in the
future.
The Company also produces an HIV 1/2 microtiter plate screening assay that
is used mainly in blood collection and donation centers. Three individual EIA
products are also produced for hepatitis-D antigen, total antibody and IgM in
human blood serum. Sales are mainly under private label to Murex Ltd. and Sanofi
Pasteur.
In January 1997, Selfcare entered into an agreement with ChemTrak
Incorporated ("ChemTrak") pursuant to which ChemTrak appointed Selfcare as its
exclusive distributor in Europe, Scandinavia and certain other countries
formerly comprising the U.S.S.R., including Russia (the "European Territory") of
ChemTrak's home collection and mail-in HIV testing system for which FDA approval
is currently pending. As part of this agreement, Selfcare agreed to pursue
regulatory approval of the system in each country comprising the European
Territory. In addition, Selfcare agreed to establish and operate one or more
central testing facilities and offer counseling services to report results and
offer counseling to users of the system. ChemTrak retains the right to convert
the Company's exclusive distribution rights into non-exclusive rights upon the
occurrence of certain events, including the Company's failure to make certain
regulatory filings and the Company's failure to maintain market share goals.
There can be no assurance that Selfcare will be successful in obtaining the
necessary regulatory approvals in Europe, in establishing satisfactory testing
facilities and counseling services or in successfully commercializing the system
in Europe.
The Company believes that a home HIV test program using technology
currently available or under development by the Company may be marketable in
certain European countries in late 1997, although no
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assurance can be given that necessary regulatory approvals for such a test will
be obtained by such time, or at all. The Company anticipates that it will
develop or acquire HIV self tests in different formats as necessary for the
introduction of such tests in other countries, including the United States,
following the initial marketing of these tests in Europe. In each case, the
Company will be required to obtain certain regulatory approvals before marketing
such tests and no assurance can be given that such approvals will be obtained.
Selfcare is also developing an educational and testing program called
CarePlan to be used in conjunction with the Company's HIV self tests. The
educational material explains the spread of the virus, risk behavior, and how to
reduce risk and exposure. The Company believes that normal medical channels may
not meet the needs of the population at risk because many people suffer from
embarrassment, fear the loss of confidentiality, or do not have a regular
doctor. In contrast, a research program conducted by the Centers for Disease
Control and Prevention revealed that 29% of adults in the United States would
use a confidential HIV home test.
Accordingly, Selfcare believes that a significant potential market exists
for an easy and completely private HIV self-test method. Home Access and Direct
Access are currently selling home collection and mail-in HIV testing and
telephone counseling services in the United States. These services (and other
tests for which FDA authorization is currently being sought), provide a user
with instructions and material for taking a small home-drawn blood sample which
the user then mails to a designated laboratory where the actual test is
performed. A week after sending in the sample, the user telephones the
laboratory to obtain the results on an anonymous basis. If the result is
positive, the caller is offered immediate access to a counselor. By comparison,
under the protocol of the CarePlan educational and testing program being
developed by Selfcare, the test will be performed by the user entirely at home,
producing a randomized, coded result in less than 15 minutes. The user may then
immediately call a toll-free number, report the code anonymously, and be
informed whether the result is negative or inconclusive. If the result is
inconclusive, the caller is advised to consult their physician for a
confirmatory test and then, if necessary, to consult with a counselor. Although
the Company believes that the availability of immediate test results may give
CarePlan a significant advantage over the mail-in HIV testing services of the
type for which FDA Clearance has been obtained, there are substantive regulatory
and political obstacles, both in the United States and abroad, which must be
overcome before an HIV self test such as CarePlan can be commercialized. There
can be no assurance that these obstacles can be overcome in a manner which will
allow the Company to successfully market an HIV self test.
Selfcare recognizes that there are significant barriers to the introduction
of HIV self tests such as CarePlan. Despite the fact that many current
recipients of professional clinical laboratory test results do not receive
counseling even if they test positive for HIV, the FDA has expressed concern
about allowing individuals to receive test results without counseling. The
Company's HIV self test is being designed so that if a test result is not
negative, the person will be counseled to see their physician for a confirmatory
test which would lead to appropriate medical and professional treatment and/or
counseling. Such counseling is desirable to stop the possibility of inadvertent
spreading of the disease, to counsel and advise on safe sex practices to stop
the spread of the epidemic, as well as to promote the emotional well being of
the patient. The issue of "error proofing" the home self tests is also a
significant concern. The mail-in HIV testing services that are currently
available require the patient to collect a sample at home, which is then sent to
and analyzed in a laboratory. The FDA has expressed concern about ensuring the
integrity of the collection of the sample and interpretation of results. The
Company believes the FDA will have additional concerns with respect to HIV self
tests which are designed to be interpreted at home. Despite the political and
regulatory barriers in the industrialized world, Selfcare is positioning itself
to compete in the consumer market for HIV self tests, and is already marketing
clinical diagnostic products, including products for use in public health
programs in certain developing countries. Selfcare believes it has the ability
to market HIV self-testing and educational programs, and intends to be poised to
enter the market if regulatory barriers are overcome.
Other Infectious Disease Tests. In addition to its HIV tests, the Company
produces two separate Western Blot kits to distinguish between early and late
infections of Lyme disease which if left untreated can lead to severe arthritis
and brain damage. The Company expects to produce and sell an improved Lyme
disease test kit in 1997. Selfcare will seek to provide other companies with
private label products manufactured by Selfcare which utilize the Western Blot
test technology.
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Orgenics manufactures professional diagnostic test products based on
several proprietary technological systems including genetic assays,
immunoassays, rapid tests and confirmatory tests using multiple antigens. These
tests, or adaptations of them, are applicable to detecting a wide variety of
infectious diseases and agents, including HIV-1 and HIV-2, hepatitis, and
chlamydia. Orgenics' products are designed to enable small-to-medium-sized
laboratories to analyze low volumes of tests economically. In May 1995, Orgenics
introduced a new product, DoubleCheck(TM), a single sample, compact diagnostic
device which, in its first commercialized application, detects HIV in saliva and
blood serum samples in less than ten minutes, making it suitable for use in
physicians' offices and other patient point-of-care sites. Orgenics is also in
the advanced stages of development of a DoubleCheck test which will detect H.
pylori (a bacterium associated with stomach ulcers and stomach cancer), as well
as a new, easily performed DNA probe-based genetic assay test called
GeneComb(TM), which Orgenics believes will substantially reduce the time
required to perform testing for genetic material, including HIV. Orgenics'
current products are sold in more than 20 countries, principally in Europe,
Latin America, Africa and Asia. Orgenics has obtained regulatory approval for
sale of its DoubleCheck HIV test in France and Latin America, has FDA Clearance
for ImmunoComb(R) for chlamydia, cytomegalovirus and toxoplasmosis, and intends
to submit a Section 510(k) Notification for H. pylori. The DoubleCheck and
ImmunoComb test formats are immunoassay-based tests which detect the presence of
infectious disease agents.
MARKETING AND SALES
United States
In the United States, Selfcare has created an effective, low overhead sales
network. The Company's network utilizes independent, commissioned retail brokers
in conjunction with the Company's direct sales personnel. The Company's sales
efforts are currently focused on large drug, food and mass merchandising retail
chains, as well as wholesalers who service smaller accounts. The Company
currently contracts with its broker agencies geographically distributed across
the United States. The LifeScan Alliance contemplates that the New System will
be distributed worldwide exclusively by LifeScan, whose marketing resources can
more effectively leverage this technology.
Self-Test Products. Selfcare is taking steps to enter the generic
electrochemical blood glucose test strip market against established, branded
competition. The Company believes that it can produce test strips to be used
with the electrochemical blood glucose monitoring systems marketed by certain
major manufacturers at a lower cost to consumers than branded test strips. On
June 28, 1996, Selfcare obtained FDA Clearance for the first of its generic test
strip products. Selfcare intends to sell its generic blood glucose test strips
through its existing self test distribution network.
The Company currently markets several over-the-counter pregnancy and
ovulation prediction self tests. The Company purchases its pregnancy and
ovulation prediction self tests from third-party manufacturers and repackages
them for sale. These tests are marketed under both the Selfcare label and a
variety of private labels through major drug, food store and mass merchandising
chains. Selfcare pregnancy products are currently available in approximately 55%
of pharmacy chain outlets in the United States and are becoming available in new
outlets. Selfcare has recently commenced marketing CarePlus under the Selfcare
label through major drug, food store and mass merchandising chains in the United
States.
Nutritional Supplements. In connection with the Nutritional Supplement
Lines Acquisition, the Company assumed responsibility for all marketing and
sales functions for the Nutritional Supplement Lines, as well as certain
administrative functions, including customer service. The Company also will
become responsible for other administrative functions, including order receipt,
billing and collection, and the distribution of all products on May 20, 1997.
The Company is permitted to use packaging and labels bearing the names of AHP
and its affiliates for the Nutritional Supplement Lines until AHP's current
inventory of such packaging and labels is exhausted. After such time, the
Nutritional Supplement Lines will bear packaging and labels designed by the
Company and will not contain references to AHP or its affiliates. The Company is
marketing the Nutritional Supplement Lines through its existing retail
distribution channels, and will seek to expand sales through trade allowances,
increased advertising and promotion, and cross-merchandising with other Selfcare
products. The Company will also reposition the brands which address
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specific women's nutritional needs through redesigned packaging and increased
emphasis on the products' self-care benefits for women.
International
Initially, the Company's international marketing will focus on developing a
distribution network in Europe. The Company has assembled a ten-person sales and
marketing staff based in Brussels, Belgium and Munich, Germany. The Company
believes that the nature of the distribution of self-test products differs from
country to country. In particular, the distribution of medical products in
Europe is characterized by numerous, small pharmacies and drug store chains as
opposed to large, national retailers. The Company intends to focus its initial
efforts at marketing women's health products and generic blood glucose test
strips in Germany and the United Kingdom.
In August 1996, the Company entered into an agreement to become a principal
supplier of blood glucose test strips to Menarini which plans to distribute
these strips in selected markets in Europe and certain countries in other parts
of the world.
STRATEGIC TRANSACTIONS
An important part of Selfcare's business strategy is to enter into
strategic alliances and licensing arrangements with third parties, primarily
medical products companies, for the development and distribution of certain
products. The Company also pursues a strategy of selective acquisitions of
companies, assets and technologies which it believes will enhance its ability to
deliver innovative self-test diagnostic products to the marketplace at low cost.
Cambridge Diagnostics Acquisition
In November 1994, Selfcare acquired Cambridge Diagnostics from Cambridge
Biotech, which at that time was operating in Massachusetts under Chapter 11 of
the U.S. Bankruptcy Code. Cambridge Diagnostics, located in Galway, Ireland,
produces three categories of tests for infectious disease as well as packages
products for the Company's European customers, including pregnancy tests, birth
control and other women's health products. At the time of the acquisition,
Cambridge Diagnostics (then known as Cambridge Biotech Limited) was operating
under the protection of a court-appointed examiner in a procedure analogous to a
Chapter 11 reorganization under U.S. bankruptcy law. Pursuant to the acquisition
agreements, the terms of which were approved by the United States Bankruptcy
Court and the Irish High Court, Selfcare acquired all of Cambridge Diagnostics'
issued and outstanding capital stock and, pursuant to certain license
agreements, acquired certain technologies necessary for the production of
Cambridge Diagnostics' HIV 1/2 RTD, Capillus, Rapid Test and Lyme disease test
kits for an aggregate of $2.1 million and the assumption of certain liabilities.
In addition, the Company furnished Cambridge Diagnostics with a $900,000
unsecured working capital line of credit. Under the terms of Cambridge Biotech's
license agreements with Pasteur Sanofi Diagnostics, Cambridge Biotech could not
assign or sublicense its rights with respect to certain of these technologies
(the "Pasteur HIV Technologies") directly to the Company. In order to allow the
Company to have access to such technologies, Selfcare and Cambridge Biotech
formed an affiliate, Cambridge Affiliate Corporation ("Cambridge Affiliate"),
51% owned by Cambridge Biotech and 49% owned by Selfcare. A series of contracts
was entered into between Cambridge Affiliate and Cambridge Diagnostics, pursuant
to which Cambridge Diagnostics manages Cambridge Affiliate and manufactures and
sells products on behalf of Cambridge Affiliate. Cambridge Affiliate is managed
and funded separately from Selfcare and Cambridge Diagnostics. In return for
these goods and services, Cambridge Affiliate pays to Cambridge Diagnostics an
aggregate amount equal to its net revenues from sales of the products, less (i)
operating expenses attributable to such products (including the royalties which
Cambridge Affiliate pays to Cambridge Biotech), and (ii) an amount equal to 10%
of the royalty payments payable by Cambridge Affiliate. The additional 10% of
royalties deducted is designed to create a retention within Cambridge Affiliate
to cover its operating costs. The royalties paid by Cambridge Affiliate to
Cambridge Biotech are equal to the royalties owed by Cambridge Biotech to
Pasteur Sanofi Diagnostics. See Note 12(c) to the Consolidated Financial
Statements.
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Prior to the Cambridge Diagnostics Acquisition, Cambridge Diagnostics had
received certain capital expenditure and revenue grants from the Industrial
Development Authority of Ireland (the "IDA"). As a condition to retaining the
grants, the IDA requires Cambridge Diagnostics to maintain a certain number of
employees in Ireland. The IDA also prohibits the Company from disposing of
assets or terminating business activities that were funded by the grants within
10 years of such grants. As of December 31, 1996, Cambridge Diagnostics was not
in compliance with the employment provisions of the grants. As a result, the IDA
could require Cambridge Diagnostics to repay capital expenditure and revenue
grants totaling 774,000 Irish pounds (approximately $1.3 million in December
1996). The IDA has not historically pursued its right to recoup these grants
from Cambridge Diagnostics and, as of December 31, 1996, Cambridge Diagnostics
management believes that the IDA is unlikely to do so, provided that Cambridge
Diagnostics does not terminate its operations in Ireland. If the IDA did pursue
its rights to recoup these grants, it could have a material adverse effect on
the Company and Cambridge Diagnostics.
Selfcare financed the acquisition of Cambridge Diagnostics by utilizing a
bank line of credit and subsequently refinanced the amount borrowed through the
issuance of an aggregate of $3.0 million in original principal amount of 10%
promissory notes (the "Cambridge Diagnostics Notes"), together with attached
warrants having an aggregate purchase price of $30,000 (the "Cambridge
Diagnostics Warrants"), to certain individuals, including Ron Zwanziger, the
Company's Chairman and Chief Executive Officer, Dr. David Scott, Managing
Director of Inverness Medical Limited ("Inverness"), and Willard Lee Umphrey and
John F. Levy, each a director of the Company. The Cambridge Diagnostics Notes
are due March 31, 1998 and bear interest at the rate of 10% per annum. Upon
certain events of default by the Company, the noteholders may demand full or
partial payment of the notes and the accrued interest. As a fee for placement of
the Cambridge Diagnostics Notes, Selfcare issued an aggregate of 119,834 shares
of Common Stock to U.S. Boston Capital Corporation, an entity owned by Willard
Lee Umphrey, a director of the Company, and Mr. Leon Okurowski. Additionally,
the Company issued 92,950 shares of Common Stock to Mr. Zwanziger for his
personal guarantee of the Cambridge Diagnostics Notes.
In July 1996, the Company entered into agreements with holders of $2.75
million in principal amount of the Cambridge Diagnostics Notes in order for the
Company to obtain approval for listing of the Common Stock on the American Stock
Exchange (the "AMEX"). Pursuant to such agreements, the principal amount of the
notes were to be automatically converted into shares of Common Stock if the
Company's stockholders' equity as of November 30, 1996 were determined to be
less than $4.0 million. The Company stockholders' equity as of such date was
$14.9 million, as a result, the Company became obligated to repay such notes on
or about December 31, 1996. In December 1996, the Company entered into
agreements (the "First Extension Agreements") with holders of substantially all
of the Cambridge Diagnostics Notes pursuant to which such holders agreed to
defer repayment of the principal amount of their notes until January 15, 1998.
In consideration of such deferral, the Company agreed to issue warrants to
purchase an aggregate of 54,090 shares of Common Stock to such holders,
exercisable at any time within the next five years and at an exercise price of
$12.875 per share. The Company's reason for entering into the First Extension
Agreements was to extend the payment date of the Cambridge Diagnostic Notes from
December 31, 1996 to January 1998, in order to preserve liquidity.
The number of shares of Common Stock issuable pursuant to the Cambridge
Diagnostics Warrants is equal to 69% of the net sales of Cambridge Diagnostics
for the fiscal year preceding the repayment of the Cambridge Diagnostics Notes,
divided by $32.87. Based on this formula and Cambridge Diagnostics' net sales
for fiscal year 1995, had the Cambridge Diagnostics Notes been repaid on
December 31, 1996, all of the Cambridge Diagnostics Warrants would have become
exercisable for an aggregate of 1,142,635 shares of Common Stock. Pursuant to
the First Extension Agreements, such holders agreed that their Cambridge
Diagnostics Warrants would become exercisable as if the Cambridge Diagnostics
Notes had been repaid on December 31, 1996. As a result, the number of shares of
Common Stock issuable pursuant to such Cambridge Diagnostic Warrants will be
based on the net sales of Cambridge Diagnostics in 1995. On December 31, 1996,
the holders of $2.6 million in principal amount of the Cambridge Diagnostics
Notes, including substantially all of the holders who were subject to the First
Extension Agreements, entered into agreements (the "Second Extension
Agreements") to terminate and cancel their Cambridge Diagnostics Warrants, in
exchange for
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which the Company agreed to transfer to such holders, for no additional
consideration, an aggregate of 990,050 shares of Common Stock on the earlier of
January 15, 2000 or the occurrence of a change in control (as defined in the
Second Extension Agreements) of the Company. Of the holders of the remaining
$400,000 in principal amount of the Cambridge Diagnostics Notes, the holders of
$375,000 in principal amount of such notes remain parties to the First Extension
Agreements. The Company's reason for entering into the Second Extension
Agreements was to amend the terms of the Cambridge Diagnostic Warrants, in order
to fix the terms of the Cambridge Diagnostic Warrants and eliminate the
associated noncash interest charges.
The licenses of the Pasteur HIV Technologies to Cambridge Biotech are
non-exclusive and cover diagnostic test kits in finished form embodying the
Pasteur HIV Technologies. The territorial scope of the licenses is worldwide,
with the exception of exclusive rights which Pasteur Sanofi Diagnostics asserted
to have granted in the Pasteur HIV Technologies to Genetic Systems Corporation
("Genetic Systems") in the United States, Canada, Mexico, Australia, New Zealand
and India (the "Excluded Countries"). However, the licenses provide that, to the
extent that Pasteur Sanofi Diagnostics recovers the right to practice the
patents underlying the Pasteur HIV Technologies in the Excluded Countries,
Cambridge Biotech is entitled to non-exclusive rights in such technology in such
countries. In 1990, Pasteur Sanofi Diagnostics acquired ownership of Genetic
Systems, whereupon Cambridge Biotech commenced selling products incorporating
the Pasteur HIV Technologies in the United States. These activities were
challenged in a patent infringement lawsuit filed in bankruptcy court in March
1995 by Institut Pasteur, the minority stockholders of Pasteur Sanofi
Diagnostics and Genetic Systems. In September 1995, the bankruptcy court ruled
in favor of Cambridge Biotech on this issue, and Institut Pasteur and Genetic
Systems Corporation subsequently filed an appeal in district court. The date for
the appeal hearing is unknown. If the bankruptcy court decision were reversed on
appeal, the territories to which Cambridge Affiliate could sell HIV-related
products would be limited and this could have a material adverse effect on the
Company.
In May 1996, Cambridge Biotech proposed plans of reorganization under
Chapter 11 that contemplated the sale of its diagnostics business to bioMerieux
Vitek, Inc. ("bioMerieux"). Under the terms of the proposed sale, bioMerieux
would succeed to Cambridge Biotech's interest in Cambridge Affiliate, and
bioMerieux would acquire effective control of rights to practice the patents of
Syva Company ("Syva") and Pasteur Sanofi Diagnostics. Syva and Pasteur Sanofi
Diagnostics objected to confirmation of a plan that would permit Cambridge
Biotech to assume or transfer control of its rights as licensee with respect to
their patents. On July 18, 1996, the Bankruptcy Court confirmed Cambridge
Biotech's Chapter 11 plan over all objections, specifically upholding Cambridge
Biotech's right to assume the Syva and Pasteur Sanofi Diagnostics licenses. Syva
and Pasteur Sanofi Diagnostics immediately appealed the Bankruptcy Court's
order. The Syva appeal was subsequently settled. Pasteur Sanofi Diagnostics,
however, obtained orders staying the Bankruptcy Court's plan-confirmation order
and the proposed sale of stock to bioMerieux pending determination of its
appeal. On September 27, 1996, the United States District Court affirmed the
plan-confirmation order, including Cambridge Biotech's right to assume the
licenses extended to the Cambridge Affiliate. Pasteur Sanofi Diagnostics then
appealed to the Court of Appeals for the First Circuit. Cambridge Biotech and
bioMerieux consummated the sale in October 1996. On January 17, 1997, a
three-judge panel of the First Circuit Court of Appeals ruled that Cambridge
Biotech was entitled to assume its license agreements with Pasteur Sanofi
Diagnostics. Pasteur Sanofi Diagnostics has 90 days from the date of the First
Circuit's ruling in which to seek review by the United States Supreme Court. If
such review is granted and if the Court were to overturn the prior decisions in
the case, then it would be unclear whether Cambridge Biotech could continue to
extend the license to Cambridge Affiliate. The failure of the Company to retain
such license could have a material adverse effect on the Company.
Inverness Facility
In May 1995, the Company invested approximately $1.6 million for all of the
shares of voting capital stock in Inverness (formerly Hebocraft Limited), a
corporation organized under the laws of Scotland. A concurrent investment of
approximately $1.6 million, represented by shares of 6% cumulative redeemable
preferred stock of Inverness, was made by Inverness & Nairn Local Enterprise
Corporation ("INLEC"). Inverness has received funds in the amount of
approximately $3.6 million from the government of Scotland for
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equipment acquisitions, product development and employee training. The Company
has guaranteed the repayment of those obligations. In addition, in June 1995,
Inverness entered into a lease with Highlands and Islands Enterprises ("HIE"),
an affiliate of INLEC, to rent the Inverness Facility, a 50,000 square foot
production facility occupied by Inverness in December 1995 after having been
constructed by HIE. The annual rent under the Inverness Facility's twenty-year
lease is approximately $520,000 per year, subject to certain increases. The
Company has guaranteed all payments by Inverness under the terms of the lease,
although Inverness is not obligated to pay rent for the first two years of the
lease. The Company is currently configuring the Inverness Facility for
production of the test strips for use in the New System. The Company also plans
to manufacture certain generic blood glucose test strips at the Inverness
Facility including blood glucose test strips for distribution by Menarini.
LifeScan Alliance
In November 1995, the Company entered into an exclusive worldwide alliance
and distribution agreement (the "LifeScan Alliance") with LifeScan, a subsidiary
of Johnson & Johnson, which gives LifeScan certain rights to market the New
System. Under the terms of the LifeScan Alliance, Johnson & Johnson Development
Corporation ("JJDC"), an affiliate of LifeScan, advanced $7.0 million to the
Company at the time the Company entered into the LifeScan Alliance and $6.7
million in connection with the filing by the Company on May 20, 1996 of a
Section 510(k) Notification with respect to a prior version of the New System.
In September 1996, the Company received notification of FDA Clearance to begin
commercial distribution of the prior version of the New System. In conjunction
with LifeScan, the Company subsequently undertook certain enhancements to the
user interface features for the prior version of the New System. The underlying
chemistry and function of the disposable strips of the New System, however, were
not changed from those of the prior version of the New System. In October 1996,
the Company entered into the Distribution Agreement with LifeScan pursuant to
which LifeScan is to distribute the New System. The Company intends to file in
early 1997 a Section 510(k) Notification with the FDA with respect to the New
System. The New System must receive FDA Clearance before it may be sold in the
United States.
As contemplated by the terms of the LifeScan Alliance, in connection with
entering into the Distribution Agreement, LifeScan paid the Company a success
fee of $7.0 million and JJDC converted its approximately $13.7 million in
previous advances to the Company into 201,622 shares of Common Stock which
represents 5% of (i) the Common Stock outstanding as of November 10, 1995, and
(ii) any shares of Common Stock issued prior to such conversion pursuant to the
exercise of rights to acquire Common Stock outstanding as of November 10, 1995.
In addition, under the terms of the LifeScan Alliance, the Company must issue to
JJDC, for no additional consideration, shares of Common Stock equal to 5% of any
additional Common Stock issued pursuant to the exercise of rights to acquire
Common Stock outstanding as of November 10, 1995 (the total of all shares so
issued, the "Conversion Shares"). The precise number of Conversion Shares
depends on the number of shares of Common Stock which the Company is required to
issue in connection with the financing of the Inverness Facility, as discussed
below, as well as the vesting and exercise of options and warrants. However, the
Company estimates that the number of additional Conversion Shares which JJDC
will acquire is approximately 278,572.
The Distribution Agreement provides that it will remain in effect through
December 31, 2010. It may be terminated earlier by either party upon the
happening of certain events, including a default on the part of the other party
not cured within applicable grace periods. The Distribution Agreement entitles
LifeScan to purchase from the Company the meters, test strips and related
components comprising the New System (collectively, "System Components") after
the Company has notified LifeScan that it is prepared to commence commercial
production of the New System. The Distribution Agreement provides that the
Company will be LifeScan's exclusive supplier of System Components, subject to
certain rights of LifeScan described below to make or obtain System Components
from others if the Company fails to meet its supply obligations. The
Distribution Agreement provides for periodic forecasts by LifeScan of its
planned purchases. If these forecasts exceed certain levels, the Company is
entitled to give notice to LifeScan if the Company anticipates that it will be
required to incur capital expenditures to meet LifeScan's anticipated
requirements of certain System Components. If the Company gives such a notice,
LifeScan must either agree to make certain
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payments to the Company if its actual purchases fall short of projections by a
specified margin, or the Company will not be required to supply LifeScan's full
forecast of such System Components.
Under the Distribution Agreement, the price per test strip varies depending
on the volumes purchased, while the price for System Components other than test
strips is the Company's cost, including appropriate allocations of overhead. If
the sale of test strips to LifeScan ceases to be profitable for the Company, the
price for test strips shall be such amount as gives the Company a commercially
reasonable profit. If the Company and LifeScan do not agree on this price, it is
subject to arbitration pursuant to a specified procedure. LifeScan is required
to purchase specified amounts of test strips beginning in 1998, subject to
adjustment if the Company has not obtained FDA Clearance by June 1, 1997. If
LifeScan's purchases of test strips fall below a certain level following
calendar year 2001, the Company may terminate the Distribution Agreement. The
Distribution Agreement does not otherwise require LifeScan to make any purchases
from the Company.
The Distribution Agreement prohibits the Company from selling instruments,
test strips or related components which are designed to be used with other
components of the New System to anyone other than LifeScan. This restriction
will cease to apply if LifeScan introduces a competing electrochemical system
for self testing of blood glucose not sourced from the Company prior to January
1, 2000. The Company is also prohibited from selling components of a complete
electrochemical system to measure blood glucose, consisting of test strips,
instruments and related components, unless LifeScan either (i) introduces an
electrochemical system for home use testing of blood glucose not sourced from
the Company, or (ii) fails to purchase specified minimum levels of test strips
over the life of the Distribution Agreement. If this restriction on the Company
terminates as a result of LifeScan's failure to purchase specified minimum
volumes of test strips, the Company will remain prohibited from supplying
products to any business in the home use testing market which has sales in
excess of a specified amount. Under certain circumstances, if the Company fails
to supply products in the volumes forecasted and ordered by LifeScan, LifeScan
would automatically become entitled to produce such products itself.
If the Company makes a Section 510(k) Notification on or before May 10,
1998 with respect to certain products relating to diabetes, LifeScan has the
right to require the Company to submit a proposed form of distribution agreement
for the applicable product reflecting certain agreed terms and to negotiate in
good faith with respect to the terms of a distribution agreement for such
product or products. If LifeScan elects to enter into a distribution agreement
for such product or products, LifeScan must pay the Company $3.0 million with
respect to each such product. In addition, if FDA Clearance is obtained for such
product, LifeScan must pay the Company an additional $2.0 million. If the
Company does not obtain written permission from the FDA to begin commercial
distribution of such product within one year after LifeScan has made the $3.0
million payment with respect to the product, LifeScan may require the Company to
repay that amount in eight equal quarterly installments, without interest
(provided payments are made in a timely manner).
If the Company makes a Section 510(k) Notification with respect to a novel
system for the measurement of human blood glucose which does not use test strips
in conjunction with an electronic meter or which does not measure an in vitro
fluid sample, the Company is required to provide LifeScan with the opportunity
to enter into a distribution agreement with respect to such system in accordance
with general terms previously agreed to in connection with the LifeScan
Alliance. There can be no assurance that the Company will enter into any
additional distribution agreements with LifeScan or that LifeScan will purchase
System Components under the Distribution Agreement.
Agreement with Princeton
On March 15, 1996, the Company entered into an agreement with Princeton
which provides for the development of certain specific infectious disease tests
by Princeton for marketing by Selfcare on a non-exclusive basis. The agreement
also grants Selfcare an option to market under its own brand name other
infectious disease tests, and certain other types of tests, developed by
Princeton, on terms to be agreed. Pursuant to the agreement, the Company is also
obligated to purchase specified minimum amounts of certain tests kits from
Princeton through 1998 and has provided certain financing for the purchase of
equipment (which will remain the property of the Company) to be used in
producing tests kits for the Company. The
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agreement also provides that Selfcare will provide funding for the development
by Princeton of a birth control aid, with respect to which the Company will have
exclusive worldwide marketing rights.
Agreement with Menarini
In August 1996 Selfcare entered into an agreement with Menarini pursuant to
which the Company became a principal supplier of blood glucose test strips for
blood glucose meters distributed or to be distributed by Menarini in selected
markets in Europe and certain countries in other parts of the world which
Menarini currently sources from another supplier. Under the agreement, Menarini
is subject to certain minimum purchases of products from Selfcare, and Selfcare
has agreed not to supply any third party with such products in the selected
markets for the term of the agreement. It is anticipated that distribution of
the blood glucose test strips will be undertaken by the diagnostics division of
Menarini, known as Menarini Diagnostics S.R.L. ("Menarini Diagnostics").
Menarini Diagnostics had 1995 revenues of $120 million, 430 employees, and nine
international subsidiaries. A significant part (approximately 40%) of the
existing business of Menarini Diagnostics is the supply of blood glucose test
strips and meters. Selfcare expects shipments under this agreement to commence
in the second half of 1997. The blood glucose test strips to be supplied to
Menarini pursuant to this agreement will be manufactured at the Company's
Inverness Facility.
Orgenics Acquisition
In December 1995, the Company entered into an Investment and Loan Agreement
(the "Orgenics Agreement") with Orgenics, pursuant to which the Company invested
$500,000, and two investment limited partnerships, Medica Investment (Israel)
L.P., ("Medica Israel") and Medica Investment (U.S.) L.P., (individually,
"Medica U.S." and, together with Medica Israel, "Medica") collectively invested
$500,000, in a $1.0 million debenture issued by Orgenics (the "Orgenics
Debenture"). On April 25, 1996, the Company exercised its right to acquire
Medica's interest in the Orgenics Debenture for 135,421 shares of Common Stock,
which were issued on May 7, 1996. Concurrently with the issuance of the Orgenics
Debenture, the Company provided guaranties (in the form of letters of credit) of
$200,000 of the debt of Orgenics' French subsidiary to two French banks.
In October 1996, the Company made a tender offer to all the holders of the
outstanding shares in Orgenics and Orgenics International Holding, B.V.
("Orgenics International"), a Dutch holding company whose only material asset is
its investment in Orgenics. In addition, on October 24, 1996, the Company
converted the Orgenics Debenture in accordance with its terms into redeemable
preferred shares of Orgenics representing 20% of Orgenics' outstanding share
capital on a fully diluted basis as of February 7, 1996, after giving effect to
the issuance of such preferred shares. The redeemable preferred shares have the
same voting rights as the ordinary shares of Orgenics, and are redeemable by
Orgenics in the event that the Company fails to perform its obligations under
the option agreements hereinafter described. As a result of purchases pursuant
to such tender offer and the conversion of the Orgenics Debenture, the Company
has acquired (on a fully-diluted basis) direct ownership of approximately 26.8%
of the shares of Orgenics, and approximately 59.7% of the shares of Orgenics
International. The purchase price for these interests was approximately $9.1
million (inclusive of the conversion of the Orgenics Debenture). Based on
Orgenics International's ownership of Orgenics shares, Selfcare, currently holds
a 57.1% direct and indirect equity interest in Orgenics, and under the terms of
the Orgenics Agreement, has the right to appoint two of the seven members of
Orgenics' board of directors.
The Company is a party to option agreements (the "Option Agreements") with
substantially all the holders of Orgenics and Orgenics International shares (the
"Optionees"). Pursuant to the exercise of the options under the Option Agreement
(as more fully described below) the Company expects to acquire direct or
indirect (through Orgenics International) ownership of approximately 100% of the
outstanding share capital of Orgenics. Under the terms of the Option Agreements,
the Optionees have put options which require the Company to purchase their
shares, and the Company has a call option to purchase such shares. The Company
exercised the call option under the Option Agreements on March 6, 1997. The
Company currently anticipates consummating its exercise of the call option in
April 1997.
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Selfcare is required to pay for each share of Orgenics which it acquires an
amount equal to 1.75 times Orgenics' gross revenues per share (on a fully
diluted basis as of the exercise date, and after giving effect to the conversion
of the Orgenics Debenture) during the four fiscal quarters ending December 31,
1996. Accordingly, the amount of the consideration payable by the Company for
the Orgenics and Orgenics International shares to be acquired will be
approximately $9.3 million. The consideration for the Orgenics shares purchased
pursuant to the Option Agreements is payable by Selfcare, at the election of
each Optionee, entirely in cash, entirely in Common Stock, or 50% in cash and
50% in Common Stock. As of the date of the filing of this report on Form 10-KSB
the final mix of cash to equity consideration for the Orgenics option call is
not known as not all of the Orgenics stockholders have responded to the
Company's exercise notice.
The Company has granted certain registration rights with respect to shares
of Common Stock which are issued pursuant to the Option Agreements.
The Company's short-term plans for the integration of Orgenics into
Selfcare include having Cambridge Diagnostics' and Orgenics' distribution
systems sell each other's products in selected territories; integrating sales
and marketing in Europe; improving the use of the combined manufacturing
facilities; and rationalizing research and development capabilities. In the
longer term, Selfcare plans to utilize Orgenics' relationships in the
professional market, particularly in professional HIV diagnostic tests, to help
gain acceptance for the Company's HIV self tests. Selfcare will also leverage
Orgenics' products and technology to develop a simple self-test format, in
particular for the chlamydia test, the first of several which will meet the
needs of consumers for quality, low-cost, confidential self tests.
Acquisition of Shares of Enviromed
In October 1996, the Company purchased 200,000 common shares of Enviromed,
plc ("Enviromed") an English company whose business activities include the
manufacture and sale of biological enzymes used in diagnostic tests. Enviromed
is a supplier of an enzyme used in blood glucose strips manufactured by
Selfcare. Later in the month, the Company entered into an agreement (the "EN PLC
Agreement") with EN PLC Limited Partnership ("EN PLC"), pursuant to which the
Company agreed to purchase 7,961,386 common shares of Enviromed held by EN PLC
for approximately $3.8 million. On January 1, 1997, the Company and EN PLC
entered into an amendment to the EN PLC Agreement pursuant to which the Company
agreed to issue two promissory notes, in principal amounts of approximately $2.8
million and $1.0 million respectively, evidencing the purchase price under the
EN PLC Agreement. Each note bears interest at the annual rate of the Bank of
Boston prime rate plus 1.5 percent, payable quarterly over the two-year term of
the note. The principal amount of the $1.0 million promissory note is payable in
eight quarterly installments, commencing in January 1997; the first four
installments are $85,897 each and the second four installments are $171,794
each. Approximately $1.4 million of the principal amount of the $2.8 million
promissory note is payable in January 1998, followed by three equal quarterly
installments of the remaining principal. In consideration of the amendment, the
Company agreed to issue to EN PLC a warrant to purchase 15,401 shares of Common
Stock at an exercise price of $12.875 per share. The warrant is exercisable at
any time prior to January 1, 2002. As a result of this purchase, the Company
acquired a 28.5% equity interest in Enviromed. The Company subsequently acquired
an additional 100,000 shares of Enviromed which increased the Company's equity
interest in Enviromed to 28.9%.
On January 17, 1997, at a meeting of the shareholders of Enviromed called
at the request of Selfcare, the shareholders of Enviromed voted to remove the
existing Board of Directors of Enviromed and to elect as directors four
individuals nominated by Selfcare: Mr. Zwanziger, Mr. Anthony H. Hall
(Selfcare's Chief Financial Officer), Dr. Paul Winson, and Mr. Clifford
Passmore. Dr. Winson is serving as the Managing Director of Enviromed; Messrs.
Zwanziger, Hall and Passmore are serving as non-executive directors. Neither Dr.
Winson nor Mr. Passmore is affiliated with Selfcare. Selfcare is currently
considering the possibility of providing a credit enhancement to enable
Enviromed to secure additional borrowing capacity and, to this end, may
determine to guaranty up to approximately $600,000 of Enviromed's bank debt.
Selfcare would be compensated for this guaranty, in an amount yet to be
determined. In lieu of this guaranty, Selfcare may elect to make an equity
investment of up to $600,000 in Enviromed.
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Agreement with ChemTrak
In January 1997, Selfcare entered into an agreement with ChemTrak pursuant
to which ChemTrak appointed Selfcare as its exclusive distributor in the
European Territory of ChemTrak's home collection and mail-in HIV testing system
for which FDA approval is currently pending. As part of this agreement, Selfcare
agreed to pursue regulatory approval of the system in each country comprising
the European Territory. In addition, Selfcare agreed to establish and operate
one or more central testing facilities and offer counseling services to report
results and offer counseling to users of the system. ChemTrak retains the right
to convert the Company's exclusive distribution rights into non-exclusive rights
upon the occurrence of certain events, including the Company's failure to make
certain regulatory filings and the Company's failure to maintain market share
goals. There can be no assurance that Selfcare will be successful in obtaining
the necessary regulatory approvals in Europe, in establishing satisfactory
testing facilities and counseling services or in successfully commercializing
the system in Europe.
Nutritional Supplement Lines Acquisition
On February 19, 1997, the Company completed the Nutritional Supplement
Lines Acquisition, pursuant to which a newly-formed subsidiary of the Company
(the "Acquisition Subsidiary") acquired the Nutritional Supplement Lines from
AHP. As consideration for the Nutritional Supplement Lines, the Acquisition
Subsidiary paid to AHP $30.0 million in cash and the Company issued to AHP a
$6.0 million promissory note (the "AHP Note"). The Company funded the cash
portion of the purchase price with a credit facility (the "Acquisition
Facility") consisting of a $25.0 million term loan (the "AHP Term Loan") and a
$5.0 million bridge loan (the "AHP Bridge Loan") made to the Acquisition
Subsidiary by Fleet National Bank ("Fleet"). The AHP Note is due on the first
anniversary of the closing of the Nutritional Supplement Lines Acquisition, and
bears interest payable quarterly at the rate of 7.0% per annum.
The AHP Term Loan has a five-year term, with quarterly amortization of
principal at annual rates ranging from $3.0 million to $5.0 million, and a $6.25
million balloon payment at maturity. In addition to this amortization schedule,
the Acquisition Subsidiary is required to make mandatory prepayments of the AHP
Term Loan at the end of each fiscal year, in an amount equal to 50% of the
excess of (i) its earnings before interest, taxes, depreciation and amortization
("EBITDA") for such fiscal year over (ii) principal payments on the AHP Term
Loan, cash interest and tax expense, capital expenditures and any change in
working capital. These prepayments will be applied in the inverse order of the
established amortization schedule. The AHP Term Loan, at the Company's election,
bears interest at an annual floating rate equal to either LIBOR plus two
percent, or Fleet's Prime Rate. The AHP Bridge Loan is due June 3, 1997, and at
the Company's election, bears interest at an annual floating rate equal to
either LIBOR plus 3.5 percent or Fleet's Prime Rate plus 1.5 percent. If the AHP
Bridge Loan has not been repaid or refinanced by May 3, 1997, Selfcare will be
required to maintain a minimum of $5.0 million in cash or liquid investments. As
of December 31, 1996, the Company had approximately $16.5 million in cash and
liquid investments. If the AHP Bridge Loan has not been repaid or refinanced at
maturity, Selfcare would have the option of extending the loan with cash pledged
to collateralize a like amount.
In connection with the Acquisition Facility, the Acquisition Subsidiary has
obtained from Fleet a $5.0 million revolving credit line (the "Credit Line").
The Credit Line, at the Company's election, bears interest at an annual floating
rate equal to either LIBOR plus 1.75 percent or Fleet's Prime Rate and matures
in three years. The Company has a limited number of LIBOR rate options for the
AHP Term Loan, the AHP Bridge Loan, and the Credit Line. Each LIBOR rate option
must be exercised for a period between one month and 12 months and must cover a
minimum of $1.0 million of the loan. The Acquisition Facility and the Credit
Line are secured by a first priority lien on all of the Acquisition Subsidiary's
assets and are guaranteed by the Company, which guaranty is secured by a first
priority lien on substantially all the Company's U.S. assets.
The Acquisition Facility and the Credit Line impose certain financial
covenants on the Acquisition Subsidiary, including (i) requirements to maintain
minimum EBITDA levels of $2.3 million per quarter beginning with the quarter
ended June 30, 1998 and $2.475 million per quarter beginning with the quarter
ended June 30, 1999 and not to exceed certain ratios of total indebtedness to
EBITDA, beginning with the quarter ended December 31, 1997, at which time the
ratio of total indebtedness to EBITDA cannot exceed
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3.75 to 1, (ii) limits on capital expenditures of $250,000 per year, (iii) a
requirement to maintain a ratio of EBITDA to fixed charges of not less than 1.25
for any quarter beginning with the quarter ending March 31, 1998, and (iv) a
requirement of a positive net income for any quarter. The Acquisition Subsidiary
has also agreed to restrictions on (x) acquisitions, mergers or joint ventures
without Fleet's consent, (y) material asset sales and other payments, and (z)
dividends and distributions. Further, the Company, as guarantor of the
Acquisition Subsidiary's debt under the Acquisition Facility and the Credit
Facility, is subject to a limited number of covenants, none of which are
financial maintenance covenants, including a requirement to provide Fleet with
periodic financial statements and other information and a prohibition on the
Company having other liens on its U.S. assets. The Company also will be limited
in its ability to receive dividends and distributions from the Acquisition
Subsidiary. In addition, an event of default shall be deemed to have occurred
under the Acquisition Facility and the Credit Line if any three of Ron
Zwanziger, Kenneth D. Legg, Richard A. Pinkowitz, Anthony H. Hall and Gary E.
Long cease to be employed by the Company or the Acquisition Subsidiary in
positions comparable to their current positions. Messrs. Zwanziger, Legg,
Pinkowitz and Hall are officers of the Company. See "Management." Mr. Long
joined the Company in February 1997 and has responsibility for the operation of
the Nutritional Supplement lines business. In addition, the Acquisition
Subsidiary was required, at the time of the closing of the Acquisition Facility,
to have a proforma capital base of at least $9.5 million. This requirement was
satisfied through a combination of (i) the Company's obligations under the AHP
Note, (ii) a $2.0 million subordinated loan by the Company to the Acquisition
Subsidiary and (iii) the Company's capital contribution of approximately $1.5
million to be used to pay expenses incurred in connection with the completion of
the Nutritional Supplement Lines Acquisition. The Company and the Acquisition
Subsidiary have paid Fleet fees and expenses totaling approximately $350,000 in
connection with the Acquisition Facility and the Credit Facility.
As of the date hereof, the Acquisition Subsidiary has not drawn down on the
Credit Line.
In connection with the Nutritional Supplement Lines Acquisition, the
Company entered into supply agreements with AHP to purchase products for the
Nutritional Supplement Lines from AHP. The Company's agreement with AHP provides
that AHP will supply the products for a period of up to one year after the
closing of the acquisition. In addition, the Company assumed responsibility for
all marketing and sales functions concerning the products as well as certain
administrative functions, including customer service. The Company also will
become responsible for other administrative functions, including order receipt,
billing and collection, and distribution of all the products on May 20, 1997.
Assumption of these activities could place a significant strain on the Company's
resources and personnel, and will require the Company to devote significant
additional resources and personnel to these areas. Failure by the Company to
successfully assume these services could have an adverse impact on the Company's
ability to support the Nutritional Supplement Lines and could have a material
adverse affect on the Company's result of operations.
MANUFACTURING
The Company currently manufactures its existing infectious disease
diagnostic products for the professional market at the Galway Facility and
sources its existing pregnancy and other women's health self-test products from
contract manufacturers. The Company believes that there are multiple qualified
sources for its existing women's health products and for the materials and
components used in the manufacture of its other existing products and therefore
does not consider it necessary to maintain protected supply arrangements with
any supplier. However, the Company has entered into a manufacturing arrangement
with Nova to supply Selfcare with electrochemical blood glucose meters for the
New System.
The Company has expended substantial efforts on the manufacturing scale-up
activities necessary to support the introduction of its planned new products.
Accordingly, in December 1995 the Company opened a new manufacturing facility in
Inverness, Scotland. The Inverness Facility has been configured for highly
automated, low cost production of disposable test strips for use with
electrochemical blood glucose monitoring systems. Sophisticated control
instrumentation systems will automatically print, cut and pack strips in vials.
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The Company is currently producing quantities sufficient to support clinical
trials, and has scheduled the ramp-up of its production capacity to support
commercial sales in the first half of 1997. The Company plans to commence
manufacturing blood glucose test strips for distribution by Menarini at the
Inverness Facility in the second half of 1997. The Company has implemented a
program to produce generic electrochemical glucose test strips for one or more
systems at the Galway Facility. There can be no assurance, however, that the
Company will be successful in achieving the production of new products at its
facilities at the volumes or cost levels required to support commercialization
in the United States or abroad. The Company anticipates that it will complete
the Orgenics Acquisition in April 1997. Orgenics manufactures infectious disease
diagnostic tests for the professional markets at a facility in Israel.
In connection with Nutritional Supplement Lines Acquisition, AHP has agreed
to supply the Company with the products for the Nutritional Supplement Lines for
a period of up to one year after the Acquisition Closing. Thereafter, the
Company will be required to establish alternative supply arrangements for the
products.
In September 1996, the Company entered into an agreement with Nova pursuant
to which Nova will perform the final packaging of early pregnancy and ovulation
test kits for Selfcare. Under such agreement, the Company has agreed to purchase
a minimum quantity of specified products from Nova.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are crucial to the Company's business
and its competitive position. The Company's strategy to develop and maintain its
competitive position is to file patent applications to protect technology,
inventions and improvements that it believes are important to its business, and
to protect know-how and continuing technological innovation as trade secrets.
The Company's success will depend in part on its ability to maintain patent
protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties.
The Company seeks to maintain the confidentiality of its proprietary
technology, including technology which may not be patented or patentable, by
requiring employees, collaborators, advisors and consultants to sign
confidentiality agreements. There can be no assurance that these agreements will
not be breached, or that the Company will have adequate remedies for breach. The
Company also seeks to preserve the confidentiality of its proprietary
information by limiting access by parties who work outside the Company to such
confidential information. There can be no assurance however, that these measures
will prevent the unauthorized disclosure or use of this information, or that
others will not be able to independently develop such information. Moreover, as
is the case with the Company's patent rights, the enforcement of its trade
secrets can be lengthy and costly, with no guarantee of success.
Selfcare, through its subsidiary, Cambridge Diagnostics, holds several
licenses: (i) the worldwide rights to a diagnostic test for hepatitis-D in
humans; (ii) a non-exclusive license for all markets except the U.S. and Canada
with respect to the Capillus rapid test technology, which is based on detecting
envelope proteins with applications to HIV-1 and HIV-2, and a non-exclusive
right to use recombinant technology to manufacture certain purified virus parts
which will react to antibodies of the target disease or condition; (iii) a non-
exclusive license with certain territorial limitations for an enzyme-linked
immunoabsorbent assay ("ELISA") test for HIV 1/2 under the Recombigen(TM)
tradename; (iv) an exclusive license for all markets except the United States
and Canada for a rapid test for HIV 1/2 under the Recombigen tradename; and (v)
a non-exclusive worldwide license for the Western Blot Lyme disease test kit.
Cambridge Affiliate holds licenses for HIV-2 proteins which are used in its
RTD, Capillus and EIA diagnostic tests for the detection of HIV-2 antibodies.
These tests are manufactured for Cambridge Affiliate at the Galway Facility and
are marketed by Cambridge Diagnostics on behalf of Cambridge Affiliate. The
licenses relating to the HIV-2 proteins extend to any future single-use,
disposable rapid test product for use at home or in a doctor's office, developed
by Cambridge Affiliate using such proteins.
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Selfcare has a number of U.S. patents pending covering systems and products
for blood glucose monitoring. Selfcare also holds two exclusive worldwide
licenses for techniques applicable to non-invasive blood glucose monitoring
systems utilizing non-linear, dialectric spectroscopy. In March 1996, the
Company obtained a license for a near infrared technique under a U.S. patent
held by the University of Iowa and Ohio University and for which an
international patent is pending.
The Company also licenses certain ovulation prediction technology from a
limited partnership, the general partner of which is controlled by Willard Lee
Umphrey, a Selfcare director.
In the future, the Company may be required to obtain licenses to patents or
proprietary rights of third parties. No assurance can be given that any licenses
required under such patents or proprietary rights will be made available on
terms acceptable to the Company, if at all. If the Company does not obtain such
licenses, it could encounter delays in product introductions while it attempts
to design around such patent or other rights, or be unable to develop,
manufacture or sell such products.
Orgenics holds several patents and licenses with respect to: (i) the use of
EIA methods to enable the diagnosis of special infectious diseases with
applications for ImmunoComb products in Germany, France, Israel, Japan, Spain
and the United States; (ii) the distribution of ImmunoComb products in the
Benelux countries, France, Japan, Spain, Switzerland and Germany; (iii) the use
and distribution of DNA probe products based on Chemi-Probe in the United
States, France, Germany and Japan; (iv) the use and distribution of DoubleCheck,
a device to detect antigens and antibodies to infectious diseases in saliva,
blood serum and other bodily fluids, in the United States and Israel; (v) the
use of GeneComb, a genetic assay system to detect target DNA, in the United
States, Israel and under the World Intellectual Property Organization's Patent
Cooperation Treaty (the "PCT"); and (vi) the use of applications on apparatus
for dry chemical analysis in the United States, Israel, Europe and Japan.
The Company is conducting research and expects to seek additional patents
in the future, but there can be no assurance as to its success, or the
timeliness in obtaining any such patents, or as to the breadth or degree of
protections which any patents will afford the Company. The patent position of
medical products companies is often highly uncertain and usually involves
complex legal and factual questions. There can be no assurance that patent
applications relating to the Company's products or technology will result in
patents being issued or that, if issued, such patents will afford adequate
protection to the Company and not be challenged as unenforceable or invalid, or
not be infringed. In addition, the Company could incur substantial costs in
defending suits brought against it or in prosecuting suits in which the Company
may assert its patents or other proprietary rights against others. If the
outcome of such litigation is adverse to the Company, the Company's business and
results of operations could be adversely affected.
In connection with the Nutritional Supplement Lines Acquisition, the
Company acquired certain trademarks which, the Company believes, are valuable
assets and are very important to the marketing of the Nutritional Supplement
Lines. Substantially all of these trademarks have been registered with the U.S.
Patent and Trademark Office. There can be no assurance, however, that such
registrations will afford adequate protection to the Company and not be
challenged as unenforceable or invalid, or not be infringed. In addition, the
Company could incur substantial costs in defending suits brought against it or
in prosecuting suits in which the Company asserted rights under such
registrations. If the outcome of such litigation were adverse to the Company,
the Company's business and results of operations could be materially adversely
affected. The Company did not purchase the trademark "Ferro-Sequels" from AHP,
but instead received an exclusive, perpetual, fully paid license from AHP to use
the mark in the United States.
Selfcare has filed applications for registration of several trademarks in
Europe and the United States. Applications for registration of the mark First
Signal for pregnancy products have been filed in Europe, and a registration has
issued in two countries. CarePlan is also the subject of applications for
registration in Europe for use on an HIV self test, and registrations have
issued in several countries. YourTime is the subject of trademark applications
in the United States and Europe for use on fertility-related products. The
YourTime mark has been registered in several European countries. Excel is also
the subject of trademark applications in the United States and Europe for use on
the Company's disposable test strips designed to be compatible with MediSense's
ExacTech System. CarePlus is also the subject of trademark applications in the
United States
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for use on contraceptive products. Selfcare has filed trademark applications in
the United States and Europe for the Company's "Little Man" logo and has filed
trademark applications in Europe for the name Selfcare.
GOVERNMENTAL REGULATION
Self-Test Products
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. In their evaluation process, these governmental authorities often
require lengthy and detailed laboratory and clinical testing procedures and
manufacturing data. In addition, the conduct of both animal and clinical testing
is presently covered in many countries by regulations designed to protect
research subjects and to ensure the validity of the test data. Government
regulation may impose costly procedures upon the Company and may delay or
prevent the marketing of certain of the Company's products. Failure to obtain,
or delays in obtaining, such approvals would prevent or delay the commercial
development of such products and could have a material adverse effect on the
business of the Company. If the government regulatory bodies approve the sale of
a product, their regulations generally will apply to manufacturing and marketing
of the product, including product labeling. Furthermore, approval of products by
governmental and other healthcare programs is important for sales in certain
countries. Many countries require that before users will be reimbursed for the
costs of diagnostic products in connection with applicable healthcare programs,
such products must be approved by a governmental agency. Failure to obtain, or
delays in obtaining, such approvals would limit the market for the products in
those countries and consequently reduce or delay revenues to the Company.
U.S. Government Regulation. The manufacture, distribution and sale of
diagnostic products, such as the Company's test kits, require compliance with
regulations which, though complex, are generally considered less difficult to
comply with than those covering therapeutic products. In the United States, test
kits and reagents which are intended for research purposes only, which are
labeled and sold as such and which are not used for the diagnosis of disease,
may be marketed without stringent regulation by the FDA. However, the FDA and
similar agencies in foreign countries have substantial regulations which apply
to the testing, marketing, export and manufacturing of products to be used for
the diagnosis of disease.
Under the FDC Act, as amended by the Safe Medical Devices Act of 1990,
manufacturers of medical devices must comply with applicable provisions thereof
and certain associated regulations governing the testing, manufacturing,
labeling, marketing and distribution of medical devices. The FDC Act requires
certain clearances from the FDA before medical devices, such as the Company's
blood glucose monitoring products, can be 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 Section 510(k) Notification to the FDA, and
after the subsequent issuance by the FDA of an order permitting commercial
distribution. Changes to existing devices that do not carry the potential to
affect safety or effectiveness can be made by the Company without a 510(k)
Notification.
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 pre-approval inspection. This procedure requires much more extensive
pre-filing testing than does the Section 510(k) Notification procedure, and
involves a significantly longer FDA review after the date of filing. In
addition, after product approvals are received, they may still be
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withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market.
While the Company believes most of its future products will qualify for FDA
Clearance pursuant to the Section 510(k) notification procedures, no assurance
can be given that such clearance will be given. Future products may 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.
Following submission of a Section 510(k) Notification, a manufacturer may
not place the device into commercial distribution until an order is issued by
the FDA. The FDA has no specific time limit within which it must respond to a
Section 510(k) Notification. After review of a Section 510(k) Notification, the
FDA will either agree with the manufacturer that the proposed device is
"substantially equivalent" to another legally marketed device and allow the
device to be marketed in the United States, or determine that the proposed
device is not substantially equivalent and not allow such marketing. The FDA may
also require that further information, such as additional clinical test data or
analysis or test results, be submitted before the FDA is able to make a
determination regarding substantial equivalence. There can be no assurance that
the Company will receive FDA Clearance for the New System. Failure to obtain FDA
Clearance for the New System on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's facilities are required to comply with the FDC Act and
applicable regulations, in particular, the FDA's Current Good Manufacturing
Practices ("CGMP") 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.
If the FDA believes that the Company is not in compliance with the FDC Act,
or its 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. Recently, the FDA has pursued a more
rigorous enforcement program to ensure that regulated firms such as the Company
comply with the provisions of the FDC Act. Although the Company believes that it
is in material 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.
The Company's products for the patient point-of-care market in the United
States may be adversely affected by the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"), which are intended to ensure the quality and
reliability of medical testing, and may have the effect of discouraging, or
increasing the cost of, testing in physicians' offices. CLIA requires the U.S.
Department of Health and Human Services to establish certification standards for
any laboratory that performs tests on human specimens and issue certificates to
laboratories that meet the standards.
Foreign Government Regulation. 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. Sales of the Company's products outside
the United States are also subject to extensive regulatory requirements, which
vary widely from country to country. The Company generally is unable to predict
the time required to obtain such government approvals.
Due to recent controversies concerning the blood supply in France, the
French Ministry of Health appears to be particularly concerned with blood
testing products and on several recent occasions has required recalls of
specific diagnostic tests upon short notice. In July 1993, the French Ministry
of Health prohibited the sale in France of certain diagnostic tests for HIV, due
to a concern that the tests did not meet required
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sensitivity levels. The Ministry of Health has subsequently imposed a separate
ban on a single HIV test manufactured and sold due to the failure of such test
to identify a newly discovered HIV subtype. There can be no assurance that there
will not be similar actions in the future.
In certain countries, an import license is required for marketing HIV or
hepatitis diagnostic products.
Nutritional Supplements
The manufacturing, processing, formulating, packaging, labeling and
advertising of nutritional supplements such as the Nutritional Supplement Lines,
are subject to regulation by one or more federal agencies, including the FDA,
the Federal Trade Commission (the "FTC"), the Consumer Products Safety
Commission, the United States Department of Agriculture, the United States
Postal Service, the United States Environmental Protection Agency and the
Occupational Safety and Health Administration. These activities are also
regulated by various agencies of the states, localities and foreign countries,
in which the Company's products are sold. In particular, the FDA regulates the
safety, manufacturing, labeling and distribution of dietary supplements,
including vitamins, minerals and herbs, food additives, OTC and prescription
drugs and cosmetics. In addition, the FTC has overlapping jurisdiction with the
FDA to regulate the promotion and advertising of dietary supplements, OTC drugs,
cosmetics and foods.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was
enacted on October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic
Act by defining dietary supplements, which include vitamins, minerals,
nutritional supplements, herbs and botanicals as a new category of food separate
from conventional food. DSHEA provides a regulatory framework to ensure safe,
quality dietary supplements and to foster the dissemination of accurate
information about such products. Under DSHEA, the FDA is generally prohibited
from regulating dietary supplements as food additives or as drugs unless product
claims, such as claims that a product may diagnose, mitigate, cure or prevent an
illness, disease or malady, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997, although final regulations have not been
published and the FDA has indicated that implementation will be delayed. DSHEA
permits substantiated, truthful and non-misleading statements of nutritional
support to be made in labeling, such as statements describing general well-being
resulting from consumption of a dietary ingredient or the role of a nutrient or
dietary ingredient in affecting or maintaining structure or function of the
body. Any statement of nutritional support beyond traditional claims must be
accompanied by disclosure that the FDA has not evaluated such statement and that
the product is not intended to cure or prevent any disease. The Company
anticipates that the FDA will promulgate CGMPs which are specific to dietary
supplements and require at least some of the quality control provisions
contained in the CGMPs for drugs, which are more rigorous than the CGMPs for
foods. The Company believes that the manufacture of the Nutritional Supplement
Lines is currently in compliance with the applicable food CGMPs.
The FDA has proposed but not finalized regulations to implement DSHEA. The
Company cannot determine what effect such regulations, when promulgated, will
have on its business in the future. Such regulations are likely to require
expanded or different labeling for the Company's vitamins and nutritional
supplement products and could, among other things, require the recall,
reformulation or discontinuance of certain products, additional record keeping,
warnings, notification procedures and expanded documentation of the properties
of certain products and scientific substantiation regarding ingredients, product
claims, safety or efficacy. The Company believes that it is in material
compliance with all applicable laws.
DSHEA created two new governmental bodies. The Commission on Dietary
Supplements was established for two years to provide recommendations to the
President and Congress for the regulation of supplement labeling, and health
claims, including procedures for making disease-related claims. Such
recommendations could lead to legislative or regulatory changes. The Office of
Dietary Supplements, established within the National Institutes of Health, is
charged with coordinating research on dietary supplements and disease
prevention, compiling research results, and advising the Secretary of Health and
Human Services on supplement regulation, safety and health claims.
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Although the vitamin and nutritional supplement industry is subject to
regulation by the FDA and local authorities, dietary supplements, including
vitamins, minerals, herbs and nutritional supplements, now have been statutorily
affirmed as foods and not as drugs or food additives. Therefore, the regulation
of dietary supplements is less restrictive than that imposed upon manufacturers
and distributors of drugs or food additives. Unlike food additives and new
drugs, which require regulatory approval of formulation safety and labeling and
for drugs, efficacy prior to marketing, dietary supplement companies are
authorized to make substantiated statements of nutritional support and to market
manufacturer-substantiated-as-safe dietary supplement products without such FDA
preclearances. Failure to comply with applicable FDA requirements can result in
sanctions being imposed on the Company or the manufacturers of its products,
including warning letters, product recalls and seizures, injunctions and
criminal prosecutions.
THIRD-PARTY REIMBURSEMENT
Third-party payors such as private insurance companies, self-insured
employers, health maintenance organizations 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 50 strips each month. In
1994, the Health Care Financing Administration (the "HCFA"), which sets rates
for the Medicare 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. Presently, the Office of the Inspector General of
the U.S. Department of Heath 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, the HCFA set a special
payment limit of $58.71 on personal blood glucose meters, down from a maximum
$179 (the special payment limit is $66.95 in Alaska, Hawaii, Puerto Rico and the
Virgin Islands). This payment limit 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-cost generic
test strips that are currently on the market for use in photometric systems. 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 for its
products, particularly test strips.
As a provider of products that are reimbursed by Medicare, Medicaid and
other third-party payors, the Company is subject to the antikickback 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 personal blood glucose monitoring industry,
the OIG concluded that claims for reimbursements 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 antikickback statute and related safe harbor regulations
regarding the disclosure of discounts.
Recent healthcare cost containment initiatives in the United States that
have focused on reduction in reimbursement levels may affect the Company
negatively. However, emphasis on preventive measures to reduce the overall costs
to the healthcare system of complications from diabetes could 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 current healthcare
reform debate.
The Company does not currently derive any revenue from reimbursements from
third-party payors. However, the Company may, in the future, derive revenue from
third-party payors in connection with certain of the Company's products such as
its generic test strips to be marketed in 1997. The Company is not able to
predict with any certainty future levels of revenues which may be derived from
such reimbursements.
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PRODUCT LIABILITY
The testing, marketing and sale of human healthcare products entails an
inherent risk of products liability claims and there can be no assurance that
products liability claims will not be asserted against the Company. In addition,
the marketing of the Nutritional Supplement Lines may cause the Company to be
subjected to various product liability claims, including, among others, that the
Nutritional Supplement Lines have inadequate warnings concerning side effects
and interactions with other substances. Although the Company maintains products
liability insurance, there can be no assurance that products 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.
RESEARCH AND DEVELOPMENT
The Company is focusing its research and development efforts primarily on
the development of its diabetes products, including its electrochemical blood
glucose monitoring system and generic test strips. In addition, the Company
utilizes its in-house research and development resources to adapt its existing
technologies and technologies it acquires from third parties into self-test
formats, including formats addressing HIV, chlamydia and Strep-A. The Company
also seeks to develop new technologies which it is not able to obtain from
others. From time to time, the Company engages in co-development projects with
third parties with respect to new diagnostic products the Company may want to
market in the future. The Company may provide financial development assistance
to such parties and may also utilize its own research and development resources
to design certain portions of such products. The research and development
department of the Company together with Orgenics employs 39 full-time
researchers, including 23 Ph.D.s. Total research and development expenses for
the years ended December 31, 1996, 1995 and 1994 were $6.6 million, $1.5 million
and $584,000, respectively.
COMPETITION
Self-Test Products. Competition in the medical products industry in
general, and in the consumer self-diagnostics sector in particular, is based
primarily on product performance (including reliability and ease of use), price,
acceptance by health professionals, patients and other consumers, marketing
support, and distribution. The availability of patent protection and the ability
to obtain FDA Clearance for marketing are also important competitive factors. In
the women's health market, the Company believes that it has already developed a
significant market penetration with its private label and branded pregnancy and
LH tests. In the infectious diseases market, the Company believes that it has
achieved an important degree of acceptance among professional and public health
purchasers, and that the planned Orgenics Acquisition will enhance the Company's
ability to expand its product offerings and distribution for this market. The
Company believes that it can continue to compete effectively in these markets
based on its planned product line expansions, supported by its research and
development capabilities, its advanced manufacturing expertise, and its
established distribution force. The Company believes that these assets will also
enable it to compete effectively in the market for "generic" blood glucose test
strips which can be used with other manufacturers' meters. The Company also
believes that its exclusive distribution alliance with LifeScan and the
proprietary technology incorporated in the New System will prove advantageous to
the Company in competing in the market for self-test blood glucose monitoring
systems.
Notwithstanding these positive factors, however, the Company faces
competition in all of its targeted markets from a large number of competitors,
including major medical products companies such as Johnson & Johnson, Boehringer
Mannheim, Bayer and MediSense (in the market for blood glucose monitoring
systems), Johnson & Johnson, Carter-Wallace, Inc., Warner-Lambert Co., Unilever
and many others (in the women's health self-test market), the Diagnostic
Division of Abbott Laboratories ("Abbott Laboratories") and Johnson & Johnson
(in the markets for professional and consumer tests for infectious diseases). In
August, 1996, Abbott Laboratories acquired MediSense. Abbott Laboratories has
far greater resources than those of the Company and, consequently, the Company
believes that MediSense will be a substantially more significant competitor than
it is currently. The Company also competes with numerous other smaller companies
which compete directly with the Company's existing and planned products, such as
ChemTrak and
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<PAGE> 25
Quidel Corporation. Many of these competitors have substantially greater
financial, technical and human resources than the Company.
If the Company is successful in developing and marketing generic test
strips which are compatible with other manufacturers' electrochemical blood
glucose monitoring systems, others may attempt to enter this market with similar
products. In addition, the introduction of lower-priced generic test strips
could lead the manufacturers of the systems with which such test strips are
compatible to lower their own test strip prices, thereby reducing or eliminating
the price advantage enjoyed by the generic test strip producers. On June 28,
1996, the Company obtained FDA Clearance for its first generic test strip, to be
sold under the name "Excel" which is compatible with the ExacTech system sold by
MediSense. The Company intends to commence marketing this product in the United
States in the first half of 1997. Although the Company believes that its Excel
generic test strip will be priced lower than the strips produced by MediSense
for its ExacTech system and therefore will compete effectively with the
MediSense product, there can be no assurance that MediSense will not institute
price cuts and thereby reduce or eliminate any price advantage which the
Company's product may enjoy. In addition, there can be no assurance that the
Company will be able to maintain the quality of its products relative to those
of its competitors or continue to develop and market new products effectively.
The Company is also aware of several competitors, including Cygnus, Inc.,
Biocontrol Technology, Inc., Futrex Medical Instrumentation, Inc., Rio Grande
Medical Technologies, Inc. and Integ, Inc., which are attempting to develop a
non-invasive blood glucose monitoring technology. Non-invasive blood glucose
monitoring involves methods for measuring blood glucose levels without the need
to draw blood and, in certain proposed configurations, without the need to
utilize disposable components, such as test strips. The Company believes that
manufacturers are pursuing a number of different technological approaches to
non-invasive blood glucose monitoring. These include near-infrared spectroscopy,
which involves shining a beam of near-infrared light to penetrate the skin and
determine the amount of glucose in the blood, and reverse iontophoresis, which
utilizes a "patch" system to extract glucose through the skin for measurement by
an external meter. In addition, the Company believes that several manufacturers
are pursuing minimally invasive approaches to blood glucose monitoring, such as
using a fine needle to withdraw a small sample of interstitial fluid which is
analyzed by use of mid-infrared spectroscopy. Although the Company does not
believe that any products utilizing such technologies will be available for
several years, there can be no assurance that such products will not be
developed sooner, and the development and successful introduction of any such
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
Nutritional Supplements. The market for the sale of vitamins and
nutritional supplements is highly competitive. Competition is based principally
upon price, quality of products, customer service and marketing support. There
are numerous companies in the vitamin and nutritional supplement industry
selling products to retailers such as mass merchandisers, drug store chains,
independent drug stores, supermarkets and health food stores. Most companies are
privately held and the Company is unable to precisely assess the size of such
competitors. However, a number of the Company's competitors, particularly
manufacturers of nationally advertised brand name products, are substantially
larger than the Company and have greater financial resources. Notwithstanding
the foregoing, the Company believes that it will be able to compete favorably
with other vitamin and nutritional supplement companies because of the existing
brand recognition and market penetration enjoyed by the Nutritional Supplement
Lines and the Company's planned marketing strategy for these products. The
Nutritional Supplement Lines face competition from a number of major
multivitamin and mineral supplement manufacturers such as Lederle Consumer
Health Products, a division of AHP, Nature's Bounty, Bayer, and Twinlab
Corporation.
Orgenics
The primary competitors for the ImmunoComb line of products, recently
acquired through the Orgenics acquisition are standard, enzyme-linked
immunoabsorbent assay ("ELISA") systems such as those produced by Organon, Inc.,
Pasteur Sanofi Diagnostics, Abbott Laboratories, Boehringher Mannheim and other
diagnostic tests produced by Abbott Laboratories, Ortho Diagnostic Systems, Inc.
and Hybritech, Inc. ELISA tests are generally used by high-volume batch
processors such as blood banks and other centralized laboratories. In addition,
there are other rapid testing systems, generally for HIV, based upon
immunoconcen-
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<PAGE> 26
tration, which can provide results in five to ten minutes. In contrast to
ImmunoComb, an immunoassay-based test which can be used to simultaneously test
multiple samples for multiple analytes, the immunoconcentration systems are
single sample and mostly single analyte systems. Based on Orgenics' assertions,
the Company believes that other characteristics of the immunoconcentration
systems are that: (i) the single sample presentation results in production costs
per test that are two to three times more expensive than those of ImmunoComb;
and (ii) the procedure for each immunoconcentration test limits the number of
tests that can be processed at one time resulting in less flexibility in the
number of samples that can be processed at one time. The Company expects that
Orgenics' DoubleCheck HIV test will be competitive with single-analyte
immunoconcentration tests in speed, but will offer greater sensitivity at lower
cost.
In the field of DNA probe products, Orgenics competes with, among others,
Molecular Biosystems, Inc., Abbott Laboratories, Roche Molecular Systems, a
division of Hoffman La-Roche, Sanofi Diagnostics, Organon, Inc., Enzo Biochem,
Inc., Gene-Trak Systems, Inc. and Gen-Probe, Incorporated. Several of Orgenics'
competitors use a labeling technology in which precursors of DNA are labeled by
either Biotin or a radioactive marker and incorporated into the DNA probe by an
enzymatic reaction. The use of an enzymatic reaction requires highly-purified
DNA material. It is difficult for most clinical laboratories to achieve high
purification levels without highlytrained personnel. Orgenics' non-enzymatic
Chemi-Probe labeling technology, which does not require highly-purified DNA, is
not subject to these limitations. In addition, the Company believes that
Orgenics' non-enzymatic, genetic assay GeneComb technology provides a simpler,
more rapid assay than do competing detection systems which rely on enzyme
immunoassay methodology.
EMPLOYEES
As of December 31, 1996, the Company, not including Orgenics, had
approximately 201 employees. Of the Company's total work force at that date, 23
employees were engaged in research and development activities, 24 were engaged
in marketing and sales, 134 were devoted to production and distribution, and 20
were responsible for management and administration. Of the Company's 201
employees, 21 hold advanced science degrees. A significant number of the
Company's management and professional employees have prior experience with other
medical products or biotechnology companies. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its
relations with its employees to be good.
As of December 31, 1996, Orgenics had 82 employees in Israel, of whom
sixteen were employed in research and development, five in marketing and sales,
52 in production and nine in management and administration. Orgenics also
employs an additional 22 employees in France, 11 of whom are engaged primarily
in marketing and sales, three in production and eight in management and
administration. As of December 1, 1996, Orgenics' Brazilian operation (55%
majority owned) had 20 employees, eight of whom were in marketing and sales, and
12 in management and administration. Of Orgenics' 124 total employees, 18 held
advanced science degrees. Orgenics considers its relations with its employees to
be good.
Certain provisions of the collective bargaining agreements between the
Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations (including the Industrialists Association) are applicable
to Orgenics' Israeli employees by order of the Israeli Ministry of Labor. These
provisions concern mainly the length of the work day, minimum daily wages for
professional workers, contributions to a pension fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. Orgenics generally provides
its employees with benefits and working conditions which exceed the required
minimums. Furthermore, under the collective bargaining agreement, the wages of
most of Orgenics' employees are linked to the Israeli consumer price index,
although the extent of the linkage has been limited.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal corporate administrative offices are housed in
10,000 square feet of leased space in Waltham, Massachusetts. The lease for this
facility is for a three-year term with a Company option to extend for a two-year
period and provides for monthly rent of $8,333. The Company also leases
facilities in Brussels, Belgium for a marketing and sales office and for
warehousing, and in Munich, Germany for offices
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<PAGE> 27
and warehouse space. The lease for the Company's facility in Belgium covers 80
square meters of space, provides for monthly rent of $800 and is terminable on
three months notice. The lease for the Company's facility in Germany covers 380
square meters of space, provides for rent of $6,666 per month and is for a term
ending May 31, 2000. The Company believes that its current facilities are
adequate for its existing operations for the foreseeable future, although the
Company anticipates expanding its U.S. facilities to accommodate repackaging and
shipping new products.
The Company's manufacturing facilities are located in the United Kingdom
and Ireland. In December 1995, the Company began occupancy of a new 50,000
square foot manufacturing facility in Inverness, Scotland. The Inverness
Facility was designed and constructed to Selfcare's specifications and includes
areas for manufacture, warehousing, research and development, and administrative
offices. The Company plans to produce diabetes products (including generic test
strips and test strips for the New System and blood glucose test strips for
distribution by Menarini) at the Inverness Facility. The Inverness Facility
lease expires in 2015, with an option to purchase, and is rent-free through
1997. Cambridge Diagnostics is located in Galway, Ireland in a 40,000 square
foot facility leased from the Industrial Development Agency of Ireland and a
private developer under a lease which expires in 2022. The Galway Facility
houses the central manufacturing, warehousing, research and development, and
administrative functions of Cambridge Diagnostics, which is responsible for the
development, production and distribution of the Company's infectious disease
diagnostic products. In addition, pregnancy, ovulation prediction, birth control
and other women's health self-test products for the European market are packaged
at the Galway Facility. It is also a suitable location for the eventual
manufacture of products for the diabetes and women's health markets.
The FDA regulates companies that manufacture commercial medical devices and
requires that such companies manufacture such devices in a properly designed
environment. The Inverness Facility was designed and constructed, and the Galway
Facility has been upgraded, with the intention of complying with the FDA's GMP
regulations and requirements necessary for approvals and commercial sales within
the United States. The Company is required to register these facilities with the
FDA and to ensure that each meets GMP requirements prior to commercial sales in
the United States. Each registered facility is required to submit to an FDA
inspection no less frequently than every two years. The Company completed ISO
9002 regulation of the Galway Facility in August 1996 and intends to register
the Inverness Facility with the FDA during 1997.
Orgenics houses its executive offices, development and manufacturing in a
leased facility of approximately 21,000 square feet in Yavne, Israel. The lease
for this facility expires in 1999 and carries rent of approximately $17,000 per
month. The facility includes a number of specialized features and equipment,
including environmentally controlled areas, customized production equipment, and
computerized systems for purchasing, inventory, and materials tracking. Orgenics
also maintains small sales offices in Illkirch, France and Sao Paulo, Brazil.
The lease for the French facility runs through June 1997 and carries monthly
rent of approximately $5,955, which is linked to the French building cost index.
The lease for the Brazilian office is for an indefinite term with monthly rent
of approximately $856. Orgenics' management have informed the Company that they
believe the existing facilities are adequate for Orgenics' present level of
operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings which are expected
individually or in the aggregate to have a material adverse effect on the
Company's financial condition or results of operations.
Pasteur Sanofi Diagnostics licensed the Pasteur HIV Technologies to
Cambridge Biotech and its affiliates, including Cambridge Affiliate, relating to
patents and proprietary rights underlying the Company's HIV-related products.
The licenses of the Pasteur HIV Technologies to Cambridge Biotech are
non-exclusive and cover diagnostic test kits in finished form embodying the
Pasteur HIV Technologies. The territorial scope of the licenses is worldwide,
with the exception of exclusive rights which Pasteur Sanofi Diagnostics asserted
to have granted in the Pasteur HIV Technologies to Genetic Systems Corporation
("Genetic Systems") in the United States, Canada, Mexico, Australia, New Zealand
and India (the "Excluded Countries"). However, the licenses provide that, to the
extent that Pasteur Sanofi Diagnostics recovers the right to practice the
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<PAGE> 28
patents underlying the Pasteur HIV Technologies in the Excluded Countries,
Cambridge Biotech is entitled to non-exclusive rights in such technology in such
countries. In 1990, Pasteur Sanofi Diagnostics acquired ownership of Genetic
Systems, whereupon Cambridge Biotech commenced selling products incorporating
the Pasteur HIV Technologies in the United States. These activities were
challenged in a patent infringement lawsuit filed in bankruptcy court in March
1995 by Institut Pasteur, the minority stockholder of Pasteur Sanofi
Diagnostics, and Genetic Systems. In September 1995, the bankruptcy court ruled
in favor of Cambridge Biotech on this issue, and Institut Pasteur and Genetic
Systems subsequently filed an appeal in district court. The date for the appeal
hearing is unknown. If the bankruptcy court decision were reversed on appeal,
the territories to which Cambridge Affiliate could sell HIV-related products
would be limited and this could have a material adverse effect on the Company.
See "Business -- Patent and Patents and Proprietary Rights."
Pasteur Sanofi Diagnostics has notified Orgenics that as a result of
Orgenics' use of certain peptides, Orgenics may be liable for infringement of
certain patents held by Institut Pasteur, and under which Pasteur Sanofi
Diagnostics holds an exclusive license. Orgenics has informed the Company that
it is not aware of any other threatened litigation that would have a material
adverse effect on Orgenics or its business.
The Company has been involved in a dispute with Enviromed with respect to a
joint venture agreement entered into between the Company and Enviromed in March
1994 and other agreements (collectively, the "Disputed Enviromed Agreements")
entered into between the Company and Enviromed and its wholly-owned subsidiary
Cranfield Biotechnology Ltd. ("Cranfield") and the issuance of shares of Common
Stock to Enviromed in connection therewith. In connection with this dispute, the
Company has informed Enviromed that, due to the failure of Enviromed and
Cranfield to perform their obligations under the Disputed Enviromed Agreements,
it disputes Enviromed's ownership of the Common Stock held of record by
Enviromed. On July 5, 1996, Enviromed filed suit against the Company and the
representatives of the underwriters (the "IPO Representatives") of Selfcare's
initial public offering (the "Initial Public Offering") in United States
District Court for the Southern District of New York alleging breach of a
registration rights agreement relating to the Common Stock held of record by
Enviromed. Enviromed claimed that its rights under a registration rights
agreement were breached in connection with the Initial Public Offering and
requested damages, injunctive relief and a declaratory judgment that Enviromed
is the lawful owner of the shares. The Company has filed counterclaims against
Enviromed arising out of the failure of Enviromed and Cranfield to perform their
obligations under the Disputed Enviromed Agreements and is contesting
Enviromed's claims vigorously. On October 18, 1996, the case was ordered
transferred to the United States District Court for the District of
Massachusetts. The Company is not able to estimate the amount of damages, if
any, which might result from Enviromed's claims against the Company, but
believes that any such damages would not be in an amount which would have a
material adverse effect on the Company. The Company agreed to indemnify the IPO
Representatives for any losses they might incur, including reasonable attorney's
fees and expenses, as a result of the Enviromed lawsuit. On November 15, 1996,
Enviromed filed a dismissal without prejudice of its claims against the IPO
Representatives.
Trinity Biotech plc ("Trinity") and Eastcourt Limited ("Eastcourt") have
filed Schedule 13Ds with the Securities and Exchange Commission (the
"Commission") stating that Enviromed sold the Common Stock held by it of record
to Flambelle Limited ("Flambelle"), a wholly-owned subsidiary of Trinity, and
Eastcourt, an entity owned 50% each by Enviromed and Flambelle, on August 28,
1996. On November 1, 1996, Enviromed announced that it had disposed of its
holding of shares of Eastcourt to Flambelle for consideration of $1.25 million.
In December 1996, Eastcourt filed a Schedule 13D/A and Flambelle filed a
Schedule 13D with the Commission.
On February 12, 1997 Flambelle and Eastcourt commenced a lawsuit against
the Company in the United States District Court for the District of
Massachusetts, seeking a declaratory judgment that Flambelle and Eastcourt own
the Common Stock held of record by Enviromed and damages for alleged breach of a
registration rights agreement. The Company intends to contest Flambelle's and
Eastcourt's claims vigorously. The Company is not able to estimate the amount of
damages, if any, which might result from Flambelle's and Eastcourt's claims
against the Company, but believes that any such damages would not be in an
amount which would have a material adverse effect on the Company.
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<PAGE> 29
On January 17, 1997, at a meeting of the shareholders of Enviromed called
at the request of Selfcare, the shareholders of Enviromed voted to remove the
existing Board of Directors of Enviromed and to elect as directors four
individuals nominated by Selfcare: Mr. Zwanziger, Mr. Anthony H. Hall
(Selfcare's Chief Financial Officer), Dr. Paul Winson, and Mr. Clifford
Passmore. Dr. Winson is serving as the Managing Director of Enviromed; Messrs.
Zwanziger, Hall and Passmore are serving as non-executive directors. Neither Dr.
Winson nor Mr. Passmore is affiliated with Selfcare. Selfcare is currently
considering the possibility of providing a credit enhancement to enable
Enviromed to secure additional borrowing capacity and, to this end, may
determine to guaranty up to approximately $600,000 of Enviromed's bank debt. In
lieu of this guaranty, Selfcare may elect to make an equity investment of up to
$600,000 in Enviromed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange
("AMEX") under the symbol "SLF". The following table sets forth, for the periods
indicated, the high and low sale prices of the Common Stock on the AMEX. The
Initial Public Offering of the Common Stock at $8.50 per share was completed on
August 6, 1996.
<TABLE>
<CAPTION>
PRICE RANGE
-------------------
HIGH LOW
------- -------
<S> <C> <C>
Year ended December 31, 1996
3rd Quarter (commencing August 7, 1996)............................. $17.750 $ 8.500
4th Quarter......................................................... 18.000 11.500
Year ended December 31, 1997
1st Quarter (through March 5, 1997)................................. $13.625 $10.000
</TABLE>
On March 6, 1997, the last reported sale price per share of the Common
Stock on the AMEX was $11.50 per share. At March 6, 1997, there were
approximately 140 holders of record of Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, on the Common Stock will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion. Holders of Series A
Preferred Shares are generally entitled to receive cumulative quarterly
dividends payable in cash at the rate of 6% per annum.
RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued unregistered securities
to a limited number of persons, as described below. No underwriters or
underwriting discounts or commissions were involved. There was no public
offering in any such transaction, and the Company believes that each transaction
(with the exception of the transactions described in paragraphs 7, 10, 18 and 20
below) was exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), by reason of Section 4(2) thereof,
based on the private nature of the transactions and the financial sophistication
of the purchasers, all of whom had access to complete information concerning the
Company and acquired the securities for investment and not with a view to the
distribution thereof. The Company believes that the transactions described in
paragraphs 7, 10, 18 and 20 below were exempt from the registration requirements
of the Securities Act by reason of Rule 701 promulgated thereunder, because the
issuance of the options described was pursuant to a
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<PAGE> 30
written compensatory benefit plan of the Company, a copy of which was given to
each participant in the plan, and the aggregate offering price did not exceed
the limit prescribed by Rule 701.
1. On December 29, 1993, pursuant to a private placement and the
Technology Purchase Agreements, the Company issued warrants to purchase
438,750 shares of Common Stock to USB '93 Technology Associates Limited
Partnership ("USB '93") at an exercise price of $1.54 per share.
2. On February 18, 1994, the Company issued an aggregate of 169,650
shares of Common Stock for an aggregate purchase price of $261,000 to
certain existing stockholders, employees and other investors acquainted
with of the Board of Directors or management.
3. On March 22, 1994, the Company issued an aggregate of 26,000 shares
of Common Stock for an aggregate purchase price of $40,000 to David Scott.
4. On March 22, 1994, the Company issued an aggregate of 32,500 shares
of Common Stock for an aggregate purchase price of $50,000 to P & T
Consulting in consideration for consulting services performed.
5. On April 5, 1994, pursuant to a Stock Purchase Agreement and Joint
Venture Agreement by and among Selfcare, Inc., Enviromed plc and Ron
Zwanziger, the Company issued an aggregate of 593,528 shares of Common
Stock to Enviromed plc for an aggregate purchase price of $1,500,712.72 and
other consideration.
6. On June 10, 1994, the Company issued an aggregate of 26,000 shares
of Common Stock for an aggregate purchase price of $40,000 to David Scott.
7. On August 8, 1994, pursuant to Joanna Malenfant's exercise of a
partially vested option granted on December 12, 1992 under the Selfcare
1992 Stock Plan to purchase up to 2,600 shares of Common Stock, the Company
issued an aggregate of 650 shares of Common Stock for an aggregate purchase
price of $1,000 to Ms. Malenfant.
8. On September 15, 1994, the Company issued warrants to purchase
174,226 shares of Common Stock to certain existing stockholders at an
exercise price of $2.53 per share. On December 20, 1996, the Company issued
221 shares of Common Stock to one such holder upon the exercise of such
holder's warrants. On January 10, 1997, the Company issued 390 shares of
Common Stock to another such holder upon the exercise of such holder's
warrants.
9. On November 23, 1994, the Company issued an aggregate of 208,260
shares of Common Stock for an aggregate purchase price of $526,592 to
certain existing stockholders of the Company, who were offered the
opportunity to purchase additional shares of Common Stock in proportion to
their current ownership of Common Stock.
10. On November 23, 1994, pursuant to Piet Moerman's exercise of a
partially vested option granted on April 6, 1994 under the Selfcare 1994
Incentive and Non-Qualified Stock Plan to purchase up to 19,500 shares of
Common Stock, the Company issued an aggregate of 3,965 shares of Common
Stock for an aggregate purchase price of $10,025 to Mr. Moerman.
11. On December 22, 1994, pursuant to a Subscription Agreement between
Selfcare, Inc. and Enviromed, plc and a Manufacturing Agreement by and
between Cranfield Biotechnology Limited and Selfcare Israel Limited dated
September 30, 1994, the Company issued an aggregate of 185,094 shares of
Common Stock to Enviromed plc for an aggregate purchase price of $468,003
and other consideration.
12. On December 1, 1994, the Company issued an aggregate of 7,800
shares of Common Stock for an aggregate purchase price of $19,722 to David
Tavenner.
13. On January 1, 1995, the Company, in connection with the Company's
issuance of the Cambridge Diagnostics Notes to finance the Cambridge
Diagnostics Acquisition, issued an aggregate of 119,834 shares of Common
Stock to USB '93 as consideration for its services as placement agent for
the Cambridge Diagnostic Notes.
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<PAGE> 31
14. On January 31, 1995, the Company, in connection with the Cambridge
Diagnostics Acquisition, issued an aggregate of 92,950 shares of Common
Stock to Ron Zwanziger in consideration of Mr. Zwanziger's personal
guarantee of the Cambridge Diagnostic Notes.
15. On February 1, 1995, the Company issued an aggregate of 27,690
shares of Common Stock for an aggregate purchase price of $70,013 to
certain existing stockholders in connection with the Company's outstanding
November 23, 1994 offer to sell additional shares of Common Stock.
16. On March 1, 1995, the Company issued an aggregate of 13,000 shares
of Common Stock for an aggregate purchase price of $32,870 to James
Yafrate.
17. On March 30, 1995, the Company, in connection with the Company's
financing of the Cambridge Diagnostics Acquisition through the issuance of
the Cambridge Diagnostics Notes, issued the Cambridge Diagnostics Warrants
to the purchasers of the Cambridge Diagnostic's Notes, including Mr.
Zwanziger, Dr. Scott and Mr. Umphrey, for an aggregate purchase price of
$30,000. The number of shares of Common Stock issuable pursuant to the
Cambridge Diagnostics Warrants is calculated based on the net sales of
Cambridge Diagnostics for the fiscal year preceding the repayment of the
Cambridge Diagnostics Notes, divided by $32.87. On December 31, 1996, the
Company agreed to issue, for no additional consideration, 1,133,113 shares
of Common Stock upon the earlier to occur of January 15, 2000 or a change
in control of the Company, in exchange for the termination and cancellation
of the Cambridge Diagnostic Warrants which, if exercisable as of December
31, 1996, would have been exercisable for 1,133,113 shares of Common Stock.
18. On October 15, 1995, the Company granted options to purchase up to
118,508 shares of Common Stock to certain employees in lieu of salary at an
exercise price of $2.53 per share.
19. On December 1, 1995, the Company issued an aggregate of 14,365
shares of Common Stock for an aggregate purchase price of $36,315 to
certain employees of the Company.
20. On December 1, 1995, pursuant to Jim Walsh's exercise of a
partially vested option granted on November 11, 1994 under the 1994
Incentive and Non-Qualified Stock Option Plan to purchase up to 39,000
shares of Common Stock and a fully vested option granted on November 11,
1994 to purchase up to 19,500 shares of Common Stock, the Company issued an
aggregate of 27,300 shares of Common Stock for an aggregate purchase price
of $69,027 to Mr. Walsh.
21. On December 29, 1995, the Company issued an aggregate of 2,028
shares of Common Stock for an aggregate purchase price of $5,128 to Geoff
Hall.
22. On May 7, 1996, the Company issued an aggregate of 135,421 shares
of Common Stock to Medica Investments (Israel) L.P. and Medica Investments
(U.S.) L.P. in connection with the Company's exercise of its right to
acquire their interest in the $1.0 million debenture issued by Orgenics
Ltd.
23. On October 7, 1996, the Company issued 201,622 shares of Common
Stock to Johnson & Johnson Development Corporation in connection with the
LifeScan Alliance.
24. On October 10, 1996, the Company issued an aggregate of 3,000
shares of Series A Convertible Preferred Stock ("Series A Preferred
Shares") to certain non-U.S. investors for an aggregate of $3,000,000.
25. On October 14, 1996, the Company issued 1,000 Series A Preferred
Shares to Societe Generale for $1,000,000.
26. On October 17, 1996, the Company issued 500 Series A Preferred
Shares to Gifford Fund Ltd for $500,000.
27. On October 24, 1996, the Company issued 500 Series A Preferred
Shares to Privatinvest Bank AG for $500,000. On December 20, 1996 the
Company issued 22,892 shares of Common Stock to Privatinvest Bank AG
pursuant to the conversion of 300 Series A Preferred Shares.
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28. On October 28, 1996, the Company issued 500 Series A Preferred
Shares to Selfcare Holdings, Ltd. for $500,000.
29. On November 8, 1996, pursuant to Christopher Covington's exercise
of vested options granted on September 3, 1993 and April 30, 1993 under the
Selfcare 1992 Stock Plan, the Company issued an aggregate of 45,500 shares
of Common Stock for an aggregate purchase price of $70,000 to Mr.
Covington.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Revenues. Net revenues increased $11.8 million or 163% to $19.1
million from $7.2 million in 1995. Net product sales increased $7.3 million or
109% to $14.1 million from $6.7 million in 1995. Two significant factors
contributed to the increase. The first was the acquisition of 57.1% of Orgenics
on October 24, 1996, which accounted for $2.0 million of the sales in 1996. The
second was the increased demand in the United States for the Company's pregnancy
and ovulation prediction products. Net product sales for the Company's U.S.
operations for 1996 were $6.6 million, an increase of $4.5 million or 218% from
net product sales of $2.1 million in 1995. The Company also recognized $4.0
million of revenue related to a $7.0 million success fee received from LifeScan
in October 1996. Approximately $722,000 of the revenues for 1996 was
attributable to the amortization of deferred revenue associated with certain
development and capital grants relating to the Inverness Facility. There was
approximately $216,000 of revenue recognized in connection with these grants for
1995.
Gross Profit. Gross profit for 1996 increased $6.4 million or 384% to $8.1
million from $1.7 million in 1995. Gross profit as a percentage of net revenues
increased to 43% for 1996 from 23% in 1995. The increase in gross profit was
primarily attributable to the revenue related to the success fee from LifeScan
and the amortization of deferred revenue of certain development and capital
grants relating to the Inverness Facility. Gross profit on product sales was 16%
for both years.
Research and Development Expense. Research and development expense for
1996 increased $5.1 million or 333% to $6.6 million from $1.5 million in 1995.
The increase was primarily due to expenses incurred in connection with the
development of the Company' s New System and generic electrochemical blood
glucose test strips. These development activities accounted for $4.0 million of
the increase in 1996. In addition, the Company continues to allocate research
and development resources to the areas of women's health products and infectious
diseases, principally those related to the detection of HIV. The Company expects
to continue to spend significant amounts on research and development throughout
1997.
Charge for In Process Research and Development. A portion of the purchase
price of the Company's 57.1% interest in Orgenics was allocated to in process
research and development projects that did not achieve technological feasibility
and did not have future alternative uses.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $4.9 million or 86% to $10.5 million from $5.6
million in the 1995. The increase was primarily attributable to expansion of the
Company's marketing efforts in the United States and Europe and the hiring of
additional staff to support the Company's operations. Selling, general and
administrative expense, as a percentage of net revenues, decreased during 1996
as compared to 1995. Selling, general and administrative expense were 55% of net
revenues for 1996 compared to 78% for 1995.
Non-Cash Compensation Expense. Substantially all of the non-cash
compensation expense for 1996 related to certain stock options granted to
certain employees of the Company. For 1996 the non-cash compensation expense
related to a stock option granted to the Company's Chief Executive Officer in
August 1995 was $3.2 million. Non-cash compensation expense of $680,000 for 1996
related to stock options granted to certain employees that were contingent on
certain goals which have now been met. In accordance with SFAS No. 123,
Accounting for Stock Based Compensation, the Company recorded noncash
compensation expense of $76,000 for stock options granted to outside
consultants. The remaining $199,000 of non-cash
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compensation expense for 1996 relates to the amortization of deferred
compensation pertaining to the grant of certain stock options to employees.
Interest and Other Income (Expense). In 1996, the Company recognized $10.6
million of non-cash interest expense relating to certain warrants issued in
connection with the acquisition of Cambridge Diagnostics. The charge relates to
the increase in the fair market value of the underlying Common Stock at December
31, 1996 as compared to the estimated fair market value at December 31, 1995.
Excluding the non-cash interest expense relating to the warrants, interest
expense was $662,000 for 1996 as compared to $283,000 for 1995. Interest income
increased by $505,000 for 1996 as compared to last year, primarily due to larger
cash balances. The Company's subsidiary in Inverness, Scotland accrued $110,000
for 1996, representing a 6% dividend payable on its outstanding cumulative
redeemable preference shares, as compared to $56,000 for 1995. The Company also
recognized a $200,000 loss related to its 28.9% equity in the net loss of
Enviromed and an allocation of $133,000 minority interest in Orgenics.
Foreign Currency Transactions. Fluctuations in foreign currency did not
significantly impact revenue performance measured in U.S. dollars for 1996.
Substantially all sales are paid in the functional currency of the selling
entity.
Net Loss. Net loss for 1996 was approximately $28.6 million or ($4.70) per
common and common equivalent share as compared to $10.1 million or ($1.66) per
common and common equivalent share in 1995. Excluding the previously described
non-cash interest expense of $10.6 million, non-cash compensation expense of
$4.2 million, non-cash charge for in process research and development of $4.4
million and equity in the net loss of Enviromed of $200,000 in 1996 and non-cash
interest expense of $4.2 million in 1995 results in a net loss of $9.2 million
or ($1.51) per common and common equivalent share in 1996 as compared to $5.8
million or ($0.96) per common and common equivalent share for 1995. These losses
reflect increased spending on research and development as well as expansion of
the Company's sales and marketing efforts and the hiring of additional staff to
support the Company's operations.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Revenues. Net revenues increased $4.9 million, or 212%, to $7.2
million in 1995 from $2.3 million in 1994. Approximately $3.7 million of the
increase in net revenues was contributed by Cambridge Diagnostics which was
acquired by the Company in November 1994. Approximately $500,000 of the increase
in net revenues was due to net sales generated by Selfcare Europe Ltd. and
Selfcare International GmbH, neither of which had net sales in 1994. An
additional $216,000 of the income was attributable to the amortization of
deferred revenue relating to certain development grants relating to the
Inverness Facility. The remaining increase in net revenues in 1995 was
attributable to the introduction of new private label products and increased
sales of the Company's pregnancy and ovulation prediction products in the United
States.
Gross Profit. Gross profit increased $912,000, or 120%, to $1.67 million
in 1995 from $762,000 in 1994. Gross profit as a percentage of net sales
decreased from 33% in 1994 to 23% in 1995. The decrease in gross profit as a
percentage of net sales was primarily due to higher overhead costs associated
with the Company's acquisition of Cambridge Diagnostics. The Company
manufactures infectious disease tests at Cambridge Diagnositics which require
more extensive quality control than the Company's other products. In addition,
the Company's Galway Facility is not currently used at full capacity. This
excess capacity will allow production of an HIV self test if and when such a
test is approved by the FDA or foreign regulatory agencies, as well as the
manufacture of certain generic test strips at the Galway Facility. The excess
capacity at Cambridge Diagnositcs contributed to the increase in the Company's
overhead costs and consequent decrease in gross profit.
Research and Development Expense. Research and development expense
increased $948,000, or 162%, to $1.5 million in 1995 from $584,000 in 1994, but
decreased as a percentage of net sales to 21% in 1995 from 25% in 1994 as a
result of increased net sales. The Company's primary research and development
activities relate to the develoment of the New System and generic
electrochemical blood glucose test strips. In addition, the Company continues to
apply research and devleopment resources to the development of infectious
disease
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products, principally those relating to the detection of HIV, and to pregnancy
and ovulation predicition products.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $2.6 million, or 91%, to $5.6 million in 1995
from $3.0 million in 1994, but decreased as a percentage of net sales to 78% in
1995 from 128% in 1994 as a result of increased net sales. The increase in
selling, general and administrative expense was primarily attributable to
expansion of the Company's sales and marketing efforts in Europe and to the
Company's investment in administrative infrastructure to support operations at
the Galway Facility and the Inverness Facility.
Non-Cash Compensation Expense. Non-cash compensation expense in 1995 was
$52,000 and was related to the amortization of deferred compensation pertaining
to the grant of certain stock options to employees. Non-cash compensation
expense in 1994 was $60,000 and was related to the issuance of Common Stock in
connection with certain consulting agreements.
Interest Income (Expense). Interest income increased from zero in 1994 to
$38,000 in 1995, resulting from interest earned on higher cash balances.
Interest expense increased to $4.5 million in 1995 from $7,000 in 1994. This
increase was attributable to interest expense associated with bonds and warrants
issued by the Company to refinance a portion of the acquisition of Cambridge
Diagnostics. Approximately $4.2 million of the interest expense relates to a
non-cash charge relating to the grant of warrants and represents the difference
between the fair market value of the underlying Common Stock and the exercise
price of the warrants.
Foreign Currency Transactions. Fluctuations in foreign currency did not
significantly impact the Company's financial performance in 1995 because 1995
was the first year in which the Company generated significant net sales from its
foreign operations. Substantially all sales of the Company's products were
invoiced and paid in the functional currency of the selling entity.
Net Loss. The net 1oss for 1995 was approximately $10.1 million or ($1.66)
per common and common equivalent share. The loss increased by approximately $7.3
million or ($1.14) per share from the 1994 1oss of approximately $2.8 million or
($0.52) per common and common equivalent share. In addition to the previously
described non-cash interest expense of approximately $4.2 million, this loss
reflects increased spending on research and development as well as expansion of
the Company's sales and marketing efforts in Europe and the Company's investment
in administrative infrastructure to support operations at the Galway Facility
and the Inverness Facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the funds it has
received in connection with the Initial Public Offering, funds received in
connection with the LifeScan Alliance, private placements of debt and equity
securities, a bank line of credit and other borrowings, cash from product sales
and grants from government development agencies. With regard to the total
financing provided by these sources, the following table presents for the
periods indicated, the portion of funds derived from each source:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Initial Public Offering................................................. -- -- 23%
LifeScan Alliance....................................................... -- 34% 31%
Private placements of debt.............................................. -- 14% 8 %
Private placements of equity............................................ 47% 9 % 12%
Bank line of credit and other borrowings................................ 31% -- --
Product sales........................................................... 22% 32% 24%
Grants from government development agencies............................. -- 11% 2 %
--- --- ---
Total.............................................................. 100% 100% 100%
=== === ===
</TABLE>
In connection with the Initial Public Offering, on August 6, 1996, the
Common Stock began trading on the AMEX. The proceeds from the Initial Public
Offering were approximately $11.8 million after deducting the underwriters'
commission. The Company incurred approximately $1.4 million of expenses relating
to the
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Initial Public Offering. Therefore, the total net proceeds from the Initial
Public Offering were approximately $10.4 million.
In November 1995, in connection with the closing of an investment agreement
between JJDC and the Company, Selfcare received an advance of $7.0 million from
JJDC. The Company received an additional $6.7 million advance in May 1996 in
connection with the Company's filing of a Section 510(k) Notification with
respect to the prior version of the New System and the acceptance for the filing
by the FDA on May 21, 1996 of such notification. In September 1996, the Company
received FDA Clearance for the prior version of the New System. In conjunction
with LifeScan, the Company subsequently undertook certain enhancements to the
user interface features for the prior version of the New System. The underlying
chemistry and function of the disposable strips of the New System, however, were
not changed from those of the prior version of the New System. On October 22,
1996 the Company announced that it had entered into the Distribution Agreement
with LifeScan pursuant to which LifeScan will distribute the New System. The
Company intends to file in early 1997 Section 510(k) Notification with the FDA
with respect to the New System. The New System must receive FDA Clearance before
sales of the product can commence in the United Slates. As contemplated by
November 10, 1995 agreements between Selfcare and LifeScan, LifeScan paid
Selfcare in October 1996 a $7.0 million success fee and JJDC converted its
previous cash advances to Selfcare of approximately $13.7 million into 201,622
shares of Common Stock upon the consummation of the distribution agreement with
the Company. In addition, JJDC will also receive, for no additional
consideration, additional shares of Common Stock equal to 5% of all Common Stock
issued by the Company pursuant to options and warrants that were outstanding as
of November 10, 1995. The Company estimates that JJDC will ultimately receive
approximately an additional 278,572 shares of Common Stock.
The Company financed a portion of the acquisition of Cambridge Diagnostics
in 1994 by utilizing a bank line of credit. In 1995, the Company paid the
outstanding balance on the line of credit in full with a portion of the proceeds
of the issuance of $3.0 million of promissory notes (the "Cambridge Diagnostics
Notes") and warrants (the "Cambridge Diagnostic Warrants") to purchase Common
Stock. In order for the Company to obtain approval for listing of the Common
Stock on the AMEX in connection with the Initial Public Offering, the Company
entered into agreements with holders of $2.75 million in principal amount of the
Cambridge Diagnostics Notes. Pursuant to such agreements, the principal amount
of the notes were to be automatically converted into shares of Common Stock if
the Company's stockholders' equity as of November 30, 1996 were determined to be
less than 4.0 million. The Company Stockholders' equity as of such date was
$14.9 million; as a result, the Company became obligated to repay such notes on
or about December 31, 1996. On December 31, 1996, the Company entered into
agreements with holders of substantially all of the Cambridge Diagnostics Notes
pursuant to which such holders agreed to defer repayment of the principal amount
of their notes until January 15, 1998. In consideration of this postponement,
the Company agreed to issue warrants to purchase an aggregate of 54,090 shares
of Common Stock to such holders.
The Company received $1.6 million in June 1995 from an investment by
Inverness & Nairn Local Enterprise Corporation ("INLEC"), a development agency
funded by the government of the Unitcd Kingdom, in redeemable preferred stock of
Inverness to finance a portion of the start-up costs relating to the facility in
Inverness, Scotland. In addition, the Company has received $3.6 million in
deferred grants from Highlands and Islands Enterprise ("HIE"), an affiliate of
INLEC.
In March 1996, the Company entered into an agreement with Princeton,
pursuant to which the Company provided $500,000 to finance the purchase of
equipment which will remain the property of the Company, to be used in
Princeton's production of certain products. The Company is obligated to purchase
certain minimum amounts of those products over the course of three years. The
Company has paid all of the aforementioned $500,000 financing as of December 31,
1996. The aggregate minimum amount of such purchases over the course of the
three-year period will be $6.9 million.
At December 31, 1996, the Company had cash and cash equivalents of $16.5
million, a $9.1 million increase from December 31, 1995. This was primarily due
to the net proceeds of approximately $10.4 million from the Initial Public
Offering, a $6.7 million investment by JJDC, and a $7.0 million success fee
payment from LifeScan. Cash used for operations in 1996 was $6.6 million due
largely to net losses of $28.6 million in
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<PAGE> 36
1996. However, the net loss for 1996 included $19.4 million of non-cash items.
The non-cash expenses included the interest charge of $10.6 million related to
the Cambridge Diagnostics Warrants, compensation expense of $4.2 million related
to certain stock options granted to the Company's Chief Executive Officer,
certain employees and outside consultants, a charge of $4.4 million for in
process research and development related to the acquisition of a 57.1% interest
in Orgenics and $200,000 related to the Company's 28.9% equity in the net loss
of Enviromed. Other uses of cash in operating activities included an increased
funding of accounts receivable of $1.9 million reflecting the Company's increase
in sales. Prepaid and other current assets increased $215,000 due primarily to
an increase in added taxes (VAT) receivable. Cash was provided for operations in
part by an increase in accounts payable, accrued expenses, and other current
liabilities of $4.6 million.
During 1996, the Company used $4.7 million to purchase property and
equipment. Approximately $3.3 million of the purchased property and equipment
was for the Inverness Facility.
Financing activities provided approximately $26.4 million in 1996. The most
significant financing activities were the Initial Public Offering of 1,495,000
shares at $8.50 per share, for which the net proceeds after deducting offering
costs were $10.4 million, and the $6.7 million investment by JJDC. In October
1996, the Company received net proceeds of approximately $5.2 million from the
private placement of 5,500 Series A Preferred Shares to certain non-U.S.
investors.
In March 1997, the Company sold 1.8 million shares of Common Stock in a
public offering (the "March 1997 Offering"). The total net proceeds from the
March 1997 Offering were approximately $16.3 million after deducting
underwriters' commission and approximately $600,000 of expenses.
The Company intends to invest substantially in development, property and
equipment at the Inverness Facility so that it can manufacture glucose strips
for the diabetes market in connection with the LifeScan Alliance and the
Company's supply agreement with Menarini. Although the Company does not have any
material contractual obligations for capital expenditures as of December 31,
1996, the Company plans to purchase $2.4 million of property and equipment for
this purpose. Based upon its current operating plan, the Company believes that
its existing capital resources, together with the proceeds of the March 1997
Offering and the interest earned thereon, will be adequate to satisfy its
capital requirements for at least the next 12 months. The Company currently
plans to continue its research and development of new technologies and pursue
the acquisition of new products and technologies, whether through licensing
arrangements, business acquisitions, or otherwise. The Company anticipates that
it will be required to raise substantial additional funds for such projects or
strategies. There can be no assurance that any such additional capital will be
available on terms acceptable to the Company, or at all.
As of December 31, 1996, the Company had approximately $4.4 million and
$30.9 million of domestic and foreign net operating loss carryforwards,
respectively, and approximately $61,000 of research and development tax credit
carryforwards, which expire at various dates through 2010. These losses and tax
credits are available to reduce federal taxable income and federal income taxes,
respectively, in future years, if any. These losses and tax credits are subject
to review and possible adjustment by the Internal Revenue Service and may be
limited in the event of certain cumulative changes in ownership interests of
significant shareholders over a three-year period in excess of 50%. The Company
believes that it may experience a change in ownership in excess of 50% upon
completion of this offering. However, the Company does not believe that these
changes in ownership will significantly impact the Company's ability to utilize
its net operating loss carryforwards. The Company has recorded a 100% valuation
allowance against these deferred tax assets, as the realization of such assets
is uncertain.
In October 1996, Selfcare acquired a 57.1% direct and indirect equity
interest in Orgenics, as a result of the conversion of the Orgenics Debenture
and purchase of outstanding shares of Orgenics and Orgenics International. The
Company paid approximately $7.0 million in cash. On March 6, 1997 the Company
exercised its call rights to purchase substantially all of the remaining shares
in Orgenics and Orgenics International pursuant to option agreements with
substantially all of the holders of Orgenics and Orgenics International shares.
The Company expects to pay $9.3 million in cash and Common Stock for
substantially all of the remaining Orgenics and Orgenics International shares.
Each of the Orgenics and Orgenics International
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<PAGE> 37
stockholders may elect to receive the purchase price entirely in cash, entirely
in Common Stock, or 50% in cash and 50% in Common Stock. Assuming that all
Orgenics and Orgenics International stockholders were to elect to receive the
consideration in the form of 50% cash and 50% Common Stock, the Company would
pay approximately $4.7 million in cash and issue approximately 393,537 shares of
Common Stock (based on an average market price of $11.825 per share of Common
Stock for the 10 days prior to the Company's notice and Orgenics' revenues for
the four fiscal quarters ended December 31, 1996.) In addition, the Company has
granted options to purchase up to 85,800 shares of Common Stock having a fair
market value of approximately $1.1 million and will incur direct acquisition
costs of approximately $100,000. The Company anticipates consummating its
exercise of the call options in April 1997.
In October 1996, the Company entered into the EN PLC Agreement pursuant to
which the Company purchased 7,961,386 shares of Enviromed held by EN PLC,
representing 28% of the outstanding shares of Enviromed, for approximately $3.8
million. On January 1, 1997, the Company and EN PLC entered into an amendment to
the EN PLC Agreement pursuant to which the Company agreed to issue two
promissory notes, in principal amounts of approximately $2.8 million and $1.0
million respetively, evidencing the purchase price under the EN PLC Agreement.
Each note bears interest at the annual rate of the Bank of Boston prime rate
plus 1.5 percent, payable quarterly over the two-year term of the note. The
principal amount of the $1.0 million promissory note is payable in eight
quarterly installments commencing in January 1997; the first four installments
are $85,897 each and the second four installments are $171.794 each.
Approximately $1.4 million of the principal amount of the $2.8 million
promissory note is payable in January 1998, followed by three equal quarterly
installments of the remaining principal. In consideration of the amendment, the
Company agreed to issue to EN PLC a warrant to purchase 15,401 shares of Common
Stock at an exercise price of $12.875 per share. The warrant is exercisable at
any time prior to January 1, 2002.
On January 17, 1997, at a meeting of the shareholders of Enviromed called
at the request of Selfcare, the shareholders of Enviromed voted to remove the
existing Board of Directors of Enviromed and to elect as directors four
individuals nominated by Selfcare: Mr. Zwanziger, Mr. Anthony H. Hall
(Selfcare's Chief Financial Officer), Dr. Paul Winson, and Mr. Clifford
Passmore. Dr. Winson is serving as the Managing Director of Enviromed; Messrs.
Zwanziger, Hall and Passmore are serving as non-executive directors. Neither Dr.
Winson nor Mr. Passmore is affiliated with Selfcare. Selfcare is currently
considering the possibility of providing a credit enhancement to enable
Enviromed to secure additional borrowing capacity and, to this end, may
determine to guaranty up to approximately $600,000 of Enviromed's bank debt.
Selfcare would be compensated for this guaranty in an amount yet to be
determined. In lieu of this guaranty, Selfcare may elect to make an equity
investment of up to $600,000 in Enviromed.
On February 19, 1997, the Company completed the Nutritional Supplement
Lines Acquisition, pursuant to which the Acquisition Subsidiary acquired the
Nutritional Supplement Lines from AHP. As consideration for the Nutritional
Supplement Lines, the Acquisition Subsidiary paid to AHP $30.0 million in cash
and the Company issued to AHP the AHP Note. The Company funded the cash portion
of the purchase price with the Acquisition Facility. The AHP Note will be due on
the first anniversary of the closing of the Nutritional Supplement Lines
Acquisition, and bears interest payable quarterly at the rate of 7.0% per annum.
The AHP Term Loan has a five-year term, with quarterly amortization of
principal at annual rates ranging from $3.0 million to $5.0 million, and a $6.25
million balloon payment at maturity. In addition to this amortization schedule,
the Acquisition Subsidiary is required to make mandatory prepayments of the AHP
Term Loan at the end of each fiscal year in an amount equal to 50% of the excess
of (i) its EBITDA for such fiscal year over (ii) principal payments on the AHP
Term Loan, cash interest and tax expense, capital expenditures and any change in
working capital. These prepayments will be applied in the inverse order of the
established amortization schedule. The AHP Term Loan, at the Company's election,
bears interest at an annual floating rate equal to either LIBOR plus two
percent, or Fleet's Prime Rate. The AHP Bridge Loan is due June 3, 1997, and at
the Company's election, bears interest at an annual floating rate equal to
either LIBOR plus 3.5 percent or Fleet's Prime Rate plus 1.5 percent. If the AHP
Bridge Loan has not been repaid or refinanced by May 3, 1997, Selfcare will be
required to maintain a minimum of $5.0 million in cash or liquid investments. As
of December 31, 1996, the Company had approximately $16.5 million in cash and
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liquid investments. If the AHP Bridge Loan has not been repaid or refinanced at
maturity, Selfcare would have the option of extending the loan with cash pledged
to colaterallize a like amount.
In connnection with the Acquisition Facility, the Acquisition Subsidiary
has obtained from Fleet a $5.0 million revolving credit line (the "Credit
Line"). The Credit Line, at the Company's election, bears interest at an annual
floating rate equal to either LIBOR plus 1.75 percent or Fleet's Prime Rate and
matures in three years. The Company has a limited number of LIBOR rate options
for the AHP Term Loan, the AHP Bridge Loan, and the Credit Line. Each LIBOR rate
option must be exercised for a period between one month and 12 months and must
cover a minimum of $1.0 million of the loan. The Acquisition Facility and the
Credit Line are secured by a first priority lien on all the Acquisition
Subsidiary's assets and are guaranteed by the Company, which guarranty is
secured by a first priority lien on substantially all the Company's U.S. assets.
The Acquisition Facility and the Credit Line impose certain financial
covenants on the Acquisition Subsidiary, including (i) requirements to maintain
minimum EBITDA levels of $2.3 million per quarter beginning with the quarter
ended June 30, 1998 and $2.475 million per quarter beginning with the quarter
ended June 30, 1999 and not to exceed certain ratios of total indebtedness to
EBITDA, beginning with the quarter ended December 31, 1997, at which time the
ratio of total indebtedness to EBITDA cannot exceed 3.75 to 1, (ii) limits on
capital expenditures of $250,000 per year, (iii) a requirement to maintain a
ratio of EBITDA to fixed charges of not less than 1.25 for any quarter beginning
with the quarter ending March 31, 1998, and (iv) a requirement of a positive net
income for any quarter. The Acquisition Subsidiary has also agreed to
restrictions on (x) acquisitions, mergers or joint ventures without Fleet's
consent (y) material asset sales and other payments, and (z) dividends and
distributions. Further, the Company, as guarantor of the Acquisition Subsidary's
debt under the Acquisition Facility and the Credit Facility, is subject to a
limited number of covenants, none of which are financial maintenance covenants,
including a requirement to provide Fleet with periodic financial statements and
other information and a prohibition on the Company having other liens on its
U.S. assets. The Company also will be limited in its ability to receive
dividends and distributions from the Acquisition Subsidiary. In addition, an
event of default shall be deemed to have occurred under the Acquisition Facility
and the Credit Line if any three of Ron Zwanziger, Kenneth D. Legg, Richard A.
Pinkowitz, Anthony H. Hall and Gary E. Long cease to be employed by the Company
or the Acquisition Subsidiary in positions comparable to their current
positions. Messrs. Zwanziger, Legg, Pinkowitz and Hall as officers of the
Company. Mr. Long joined the Company in February 1997 and has responsibility for
the operation of the Nutritional Supplement lines business. In addition, the
Acquisition Subsidiary was required, at the time of the closing of the
Acquisition Facility, to have a proforma capital base of at least $9.5 million.
This requirement was satisfied through a combination of (i) the Company's
obligations under the AHP Note. (ii) a $2.0 million subordinated loan by the
Company to the Acquisition Subsidiary and (iii) the Company's capital
contribution of approximately $1.5 million to be used to pay expenses incurred
in connection with the completion of the Nutritional Supplement Lines
Acquisition. The Company and the Acquisition Subsidiary have paid Fleet fees and
expenses totaling approximately $350.000 in connection with the Acquisition
Facility and the Credit Facility.
As of the date hereof, the Acquisition Subsidiary has not drawn down on the
Credit Line. The Company may prepay the AHP Note and the AHP Bridge Loan at any
time.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements and Schedules attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
<PAGE> 39
PART III
The information required by Items 9, 10, 11 and 12 of Part III of this
Report on Form 10-KSB is hereby incorporated by reference from the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
a) The following documents are filed as part of this Annual Report on Form
10-KSB:
1. Financial Statements - See Index on page F-1.
2. The following is a complete list of Exhibits filed as part of this
Annual Report on Form 10-KSB:
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
3.2 Certificate of Designation for the Selfcare, Inc. Series A Convertible Preferred
Stock (incorporated by reference to Exhibit 3.2 to the Company's registration
statement on Form SB-2, No. 333-19911)
3.3 Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
4.1 Specimen certificate for shares of Common Stock, par value $.001 per share, of the
Company (incorporated by reference to Exhibit 4.1 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
4.2 Specimen certificate for shares of Series A Convertible Preferred Stock, par value
$.001 per share, of the Company (incorporated by reference to Exhibit 4.2 to the
Company's registration statement on Form SB-2, No. 333-19911)
9.1 Voting Agreement, dated May 13, 1996, by and among the stockholders of Selfcare,
Inc. who are signatories thereto (incorporated by reference to Exhibit 9.1 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.1 Agreement, dated March 22, 1996, between Selfcare, Inc. and Princeton BioMeditech
Corporation (incorporated by reference to Exhibit 10.1 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.2 Master Agreement, dated as of November 10, 1995, by and among Johnson & Johnson
Development Corporation, LifeScan, Inc. and Selfcare, Inc. (incorporated by
reference to Exhibit 10.2 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.3 Form of Sales Distribution Agreement for Testing System for Blood Glucose between
LifeScan, Inc. find Selfcare, Inc. (incorporated by reference to Exhibit 10.3 to
the Company's registration statement on Form SB-2, No. 333-4830 NY)
10.4 Investment Agreement, dated as of November 10, 1995, by and between Johnson &
Johnson and Selfcare, Inc. (incorporated by reference to Exhibit 10.4 the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.5 Master Agreement, dated as of November 30, 1994, among Selfcare, Inc., Cambridge
Biotech Limited (Cambridge Diagnostics Ireland Limited) and Cambridge Biotech
Corporation (incorporated by reference to Exhibit 10.5 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.6 Sale and Subscription Agreement, dated as of November 30, 1994, between Cambridge
Biotech Limited (Cambridge Diagnostics Ireland Limited), Cambridge Biotech
Corporation and Selfcare, Inc. (incorporated by reference to Exhibit 10.6 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.7 Indemnification Agreement dated as of November 30, 1994, by and between, Cambridge
Biotech Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland
Limited) (incorporated by reference to Exhibit 10.7 the Company's registration
statement on Form SB-2, No. 333-4830-NY)
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.8 License Agreement [CAPILLUS], dated November 30, 1994, between Cambridge Biotech
Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.8 to the Company's registration statement
on Form SB- 2, No. 333-4830-NY)
10.9 License Agreement [HIV 1/2 EIA], dated November 30, 1994, between Cambridge
Biotoech Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland
Limited) (incorpoated by reference to Exhibit 10.9 the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.10 License Agreement HIV 1/2 RTD], dated November 30, 1994, between Cambridge Biotech
Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.10 the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.11 License Agreement [LYME], dated November 30, 1994, between Cambridge Biotech
Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.11 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.12 License Agreement [RAPID TEST], dated November 30, 1994, between Cambridge Biotech
Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(Incorporated by reference to Exhibit 10.12 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.13 License Agreement [HEP D], dated November 30, 1994, between Cambridge Biotech
Limited (Cambridge Diagnostics Ireland Limited) and Cambridge Biotech Corporation
(incorporated by reference to Exhibit 10.13 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.14 Shareholders' Agreement, dated November 30, 1994, by and among Selfcare, Inc.,
Cambridge Biotech Corporation and Cambridge Biotech Affiliated Corporation)
(Cambridge Affiiliate Corporation) (incorporated by reference to Exhibit 10.14 to
the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.15 Management Agreement, dated November 30, 1994, between Cambridge Biotech
Affiliated Corporation (Cambridge Affiliate Corporation) and Cambridge Biotech
Limited (Cambridge Diagnostics Ireland Limited) (incorporated by reference to
Exhibit 10.15 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.16 Manufacturing Agreement, dated November 30, 1994, between Cambridge Biotech
Affiliated Corporation (Cambridge Affiliate Corporation) and Cambridge Biotech
Limited (Cambridge Diagnostics Ireland Limited) (incorporated by reference to
Exhibit 10.16 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.17 Sales Agent Agreement, dated November 30, 1994, between Cambridge Biotech
Affiliated Corporation (Cambridge Affiliate Corporation) and Cambridge Biotech
Limited (Cambridge Diagnostics Ireland Limited) (incorporated by reference to
Exhibit 10.17 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.18 Stock Purchase Agreement, dated as of March 8, 1994, among Selfcare, Inc., Ron
Zwanziger and Enviromed plc (incorporated by reference to Exhibit 10.18 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.19 Registration Rights Agreement, dated April 5, 1994, between Selfcare, Inc, USB '93
Technology Associates Limited Partnership and Enviromed plc (incorporated by
reference to Exhibit 10.19 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.20 Shareholders' Agreement, dated as of March 15, 1994, among Selfcare, Inc., USB '93
Technology Associates Limited Partnership, Enviromed plc and the Ron Zwanziger
Family Trust (incorporated by reference to Exhibit 10.20 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.21 Technology Purchase and Sale Agreement, dated as of December 29, 1993, between
Selfcare, Inc. and USB '93 Technology Associates Limited Partnership (incorporated
by reference to Exhibit 10.21 to the Company's registration statement on Form
SB-2, No. 333-4830-NY)
10.22 Technology License and Development Agreement, dated as of December 29, 1993,
between Selfcare, Inc. and USB '93 Technology Associates Limited Partnership
(incorporated by reference to Exhibit 10.22 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.23 Guarantee and Debenture, dated August 30, 1995, between Cambridge Biotech Limited
(Cambridge Diagnostics Ireland Limited) and USB '93 Technology, Inc. (incorporated
by reference to Exhibit 10.23 to the Company's registration statement on Form
SB-2, No. 333-4830- NY)
10.24 Guarantee of Selfcare, Inc., dated June 11, 1995, in favor of Highlands and
Islands Enterprises (incorporated by reference to Exhibit 10.24 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.25 Guarantee of Selfcare, Inc., dated June 11, 1995, in favor of lnverness and Nairn
Enterprise Company (incorporated by reference to Exhibit 10.25 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.26 Investment and Loan Agreement, dated December 24, 1995, by and between Orgenics
Ltd. and Selfcare, Inc. (incorporated by reference to Exhibit 10.26 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.27 Form of Option Agreement by and between Selfcare, Inc. and stockholders of
Orgenics, Ltd. and Orgenics International Holdings, B.V., together with letter
amendment thereto dated July 11, 1996. (incorporated by reference to Exhibit 10.27
to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.28 Grant Agreement, dated February 21, 1992, among The Industrial Development
Authority of Ireland, Cambridge Biotech Limited (Cambridge Diagnostics Ireland
Limited) and Cambridge Biotech Corporation (incorporated by reference to Exhibit
10.28 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.29 Grant Agreement, dated October 2, 1992, among The Industrial Development Authority
of Ireland, Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited) and
Cambridge Biotech Corporation (incorporated by reference to Exhibit 10.29 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.30 Grant Agreement, dated December 5, 1995, among The Industrial Development
Authority of Ireland, Cambridge Biotech Limited (Cambridge Diagnostics Ireland
Limited) and Cambridge Biotech Corporation (incorporated by reference to Exhibit
10.30 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.31 Employment Agreement, dated October 15, 1991, between Superior Sensors, Inc.
(Selfcare, Inc.) and Kenneth D. Legg, Ph.D. (incorporated by reference to Exhibit
10.31 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.32 Employment Agreement, dated June 15, 1992, between Superior Sensors, Inc.
(Selfcare, Inc.) and Richard Pinkowitz, Ph.D. (incorporated by reference to
Exhibit 10.32 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.33 Employment Agreement, dated November 13, 1994, between Selfcare International Gmbh
and Otto Wahl (incorporated by reference to Exhibit 10.33 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.34 Selfcare, Inc. 1992 Stock Plan (incorporated by reference to Exhibit 10.34 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.35 Selfcare, Inc. 1994 Incentive and Non-qualified Stock Option Plan (incorporated by
reference to Exhibit 10.35 to the Company's registration statetment on Form SB-2,
No. 333-4830-NY)
10.36 Amended and Restated Selfcare, Inc. 1996 Stock Option and Grant Plan (incorporated
by reference to Exhibit 4.1 to the Company's registration statement on Form S-8,
No. 333-15583)
10.37 Selfcare, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.37 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.38 Standard form Commercial Lease, dated July 15, 1992, between Superior Sensors,
Inc. (Selfcare, Inc.) and Nova Realty Associates (incorporated by reference to
Exhibit 10.38 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.39 Lease, dated February 21 1992, between The Industrial Development Authority of
Ireland and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.39 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.40 Form of lease between Highlands and Islands Enterprises and Hebocraft Limited
(Inverness Medical Limited) (incorporated by reference to Exhibit 10.40 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.41 Joint Venture Agreement, dated March 8, 1994, between Enviromed Plc. and Selfcare,
Inc. (incorporated by reference to Exhibit 10.41 to the Company's registration
statement on Form SB- 2, No. 333-4830-NY)
10.42 Lease for Selfcare, Inc.'s facility in Brussels, Belgium (incorporated by
reference to Exhibit 10.42 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.43 Lease for Selfcare International GmbH's facility in Munich, Germany (incorporated
by reference to Exhibit 10.43 to the Company's registration statement on Form
SB-2, No. 333-4830-NY)
10.44 Form of Cambridge Diagnostics Note, together with schedule of noteholders
(incorporated by reference to Exhibit 10.44 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.45 Manufacturing Agreement, dated June 3, 1996, between Nova Biomedical Corporation
and Selfcare, Inc. (incorporated by reference to Exhibit 10.45 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.46 Form of Cambridge Diagnostics Warrants, together with schedule of warrantholders
(incorporated by reference to Exhibit 10.47 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.47 Agreement between Inverness Medical Limited (formerly, Hebocraft Limited) and
Highlands and Islands Enterprise, dated May 31, 1995 (incorporated by reference to
Exhibit 10.47 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.48 Agreement between Inverness Medical Limited (formerly, Hebocraft Limited) and
Inverness & Nairn Local Enterprise Company, dated May 31, 1995 (incorporated by
reference to Exhibit 10.48 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.49 Form of Letter Agreement by and between Selfcare, Inc. and certain holders of
Cambridge Diagnostics Notes dated July 19, 1996 (incorporated by reference to
Exhibit 10.49 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.50 Supply Agreement dated August 27, 1996, by and between Selfcare, Inc., Selfcare
International GmbH and A. Menarini Industrie Parmaceutiche Riunite S.r.L.
(incorporated by reference to Exhibit 10.50 to the Company's quarterly report on
Form 10-QSB for the period ended September 30, 1996)
10.51 Manufacturing Agreement for Pregnancy and Ovulation Stick/Cassette Test Kits,
dated September 7, 1996, by and between Nova BioMedical Corp. and Selfcare, Inc.
(incorporated by reference to Exhibit 10.51 to the Company's quarterly report on
Form 10-QSB for the period ended September 30, 1996)
10.52 Development and Distribution Agreement dated as of December 31, 1996 between
ChemTrak Incorporated and Selfcare, Inc. (incorporated by reference to Exhibit
10.52 to the Company's registration statement on Form SB-2, No.333-19911)
10.53 Asset Purchase Agreement dated as of January 14, 1997 by and between American Home
Products Corporation, American Cyanamid Company, A.H. Robbins Company,
Incorporated and Selfcare, Inc. and Selfcare Acquisition Corp. with certain
exhibits (incorporated by reference to Exhibit 10.53 to the Company's registration
statement on Form SB-2, No. 333-19911)
10.54 Agreement between EN PLC Limited Partnership and Selfcare, Inc. dated October 17,
1996, together with an amendment thereto dated as of January 1, 1997 (incorporated
by reference to Exhibit 10.54 to the Company's registration statement on Form
SB-2, No. 333-19911)
10.55 Form of Letter Agreement by and between Selfcare, Inc. and certain holders of
Cambridge Diagnostics Notes dated November 23, 1996 (incorporated by reference to
Exhibit 10.55 to the Company's registration statement on Form SB-2, No. 333-19911)
10.56 Form of Letter Agreement by and between Selfcare, Inc. and certain holders of
Cambridge Diagnostics Notes dated December 31, 1996 (incorporated by reference to
Exhibit 10.56 to the Company's registration statement on Form SB-2, No. 333-19911)
10.57 Sales Distribution Agreement for Testing System for Blood Glucose between
LifeScan, Inc. and Selfcare, Inc. dated October 9, 1996 (incorporated by reference
to Exhibit 10.57 to the Company's registration statement on Form SB-2, No.
333-19911)
10.58 Form of Offshore Convertible Securities Subscription Agreement by and between
Safecare, Inc. and certain investors dated October, 1996, together with a form of
letter amendment thereto dated as of February 22, 1997 (incorporated by reference
to Exhibit 10.58 to the Company's registration statement on Form SB-2, No.
333-1991
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.59 Commitment Letter dated February 3, 1997 from Fleet National Bank to Selfcare,
Inc. with a Summary of Proposed Terms and Conditions (incorporated by reference to
Exhibit 10.59 to the Company's registration statement on Form SB-2, No. 333-19911)
11.1 Statement re: computation of per share earnings (incorporated by reference to
Exhibit 11.1 to the Company's registration statement on Form SB-2, No. 333-19911
21.1 Schedule of Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1
to the Company's registration statement on Form SB-2, No. 333-19911)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Kost Levary and Forer
23.3 Consent of Galloro & Associados
27.1 Financial Data Schedule
99.1 Form of Lock-up Letter Agreement by and between the Underwriters and certain
stockholders of Selfcare, Inc. (incorporated by reference to Exhibit 99.1 to the
Company's registration statement on Form SB-2, No. 333-19911)
99.2 Judgment and Opinion of U.S. Bankruptcy Court (D. Mass. W. Division), In re:
Cambridge Biotech Corporation, Chapter 11 Case No. 94-43054-JFQ, entered September
1, 1995 (incorporated by reference to Exhibit 99.2 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
99.3 Order of Approval of Scheme of Arrangement by The High Court of Ireland
(incorporated by reference to Exhibit 99.3 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
99.4 Order of U.S. Bankruptcy Court (D. Mass. W. Division), In re: Cambridge Biotech
Corporation, Chapter 11 Case No. 94-43054-JFQ, entered November 18, 1994
(incorporated by reference to Exhibit 99.4 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
</TABLE>
(b) During the last quarter of the period covered by this Annual Report on
Form 10-KSB the Company filed no reports on Form 8-K.
43
<PAGE> 44
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.
SELFCARE, INC.
By: /s/ RON ZWANZIGER
----------------------------------
RON ZWANZIGER
Chairman, President and Chief
Executive Officer
March 28, 1997
Pursuant to the requirements of the Securities Exchange 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------- ---------------
<C> <S> <C>
/s/ RON ZWANZIGER President, Chief Executive March 28, 1997
- ------------------------------------------ Officer and Director (Principal
RON ZWANZIGER Executive Officer)
/s/ ANTHONY H. HALL Chief Financial Officer March 28, 1997
- ------------------------------------------ (Principal Financial Officer and
ANTHONY H. HALL Principal Accounting Officer)
/s/ JONATHAN J. FLEMING Director March 28, 1997
- ------------------------------------------
JONATHAN J. FLEMING
/s/ CAROL R. GOLDBERG Director March 28, 1997
- ------------------------------------------
CAROL R. GOLDBERG
/s/ EDWARD B. ROBERTS Director March 28, 1997
- ------------------------------------------
EDWARD B. ROBERTS
/s/ WILLARD LEE UMPHREY Director March 28, 1997
- ------------------------------------------
WILLARD LEE UMPHREY
/s/ PETER TOWNSEND Director March 28, 1997
- ------------------------------------------
PETER TOWNSEND
/s/ JOHN F. LEVY Director March 28, 1997
- ------------------------------------------
JOHN F. LEVY
</TABLE>
44
<PAGE> 45
SELFCARE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SELFCARE, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996..................... F-3
Consolidated Statements of Operations for the Years Ended 1994, 1995 and 1996.... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1994, 1995 and 1996................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996.................................................................. F-6
Notes to Consolidated Financial Statements....................................... F-7
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Financial Statements...................... F-33
Unaudited Pro Forma Combined Condensed Balance Sheet as of December 31, 1996..... F-35
Notes to Unaudited Pro Forma Combined Condensed Balance Sheet as of December 31,
1996............................................................................ F-36
Unaudited Pro Forma Combined Condensed Statement of Operations for the Year Ended
December 31, 1996............................................................... F-37
Notes to Unaudited Pro Forma Combined Condensed Statement of Operations for the
Year Ended December 31, 1996.................................................... F-38
ORGENICS LTD. AND ITS SUBSIDIARIES:
Reports of Independent Auditors.................................................. F-39
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30,
1996............................................................................ F-41
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995 and for the Nine Months Ended September 30, 1995 (Unaudited) and
1996............................................................................ F-42
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1993, 1994, and 1995 and for the Nine Months Ended September 30,
1996............................................................................ F-43
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994, and 1995 and for the Nine Months Ended September 30, 1995 (Unaudited) and
1996............................................................................ F-44
Notes to Consolidated Financial Statements....................................... F-46
AMERICAN HOME PRODUCTS CORPORATION WHITEHALL-ROBINS HEALTHCARE DIVISION -- CERTAIN
DOMESTIC VITAMIN AND NUTRITIONAL SUPPLEMENT CONSUMER HEALTHCARE BRANDS (NUTRITIONAL
SUPPLEMENT LINES)
Report of Independent Public Accountants......................................... F-65
Statement of Net Assets to be Sold as of November 30, 1996....................... F-66
Statements of Net Revenues in Excess of Direct Expenses for the Years Ended
November 30, 1995 and 1996...................................................... F-67
Notes to Statements.............................................................. F-68
</TABLE>
F-1
<PAGE> 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Selfcare, Inc.:
We have audited the accompanying consolidated balance sheets of Selfcare,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These consolidated 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 did not audit the
consolidated financial statements of Orgenics, Ltd., a majority-owned subsidiary
of the Company, which statements reflect total assets and total revenues of 20
percent and 11 percent in 1996, respectively, of the consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to the amounts included for those
entities, is based solely on the report of the other auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Selfcare, Inc. and subsidiaries as
of December 31, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1997 (except for the matters
discussed in Notes 2(n) and 5, as to which the date
is March 6, 1997)
F-2
<PAGE> 47
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 7,394,750 $ 16,458,654
Accounts receivable, net of allowance for doubtful accounts of approximately
$94,000 in 1995 and $316,000 in 1996.......................................... 1,414,232 5,478,814
Inventories..................................................................... 1,193,114 2,266,234
Prepaid and other current assets................................................ 305,043 1,034,260
------------ ------------
Total current assets...................................................... 10,307,139 25,237,962
------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and laboratory equipment.............................................. 1,705,802 7,275,161
Leasehold improvements.......................................................... 691,946 1,109,658
Furniture and fixtures.......................................................... 295,775 408,639
Computer equipment.............................................................. 151,092 657,780
------------ ------------
2,844,615 9,451,238
Less -- Accumulated depreciation and amortization............................... 625,008 1,592,353
------------ ------------
2,219,607 7,858,885
------------ ------------
INVESTMENTS IN AFFILIATED COMPANIES............................................... 1,000,000 3,732,609
------------ ------------
GOODWILL AND OTHER INTANGIBLE ASSETS, NET......................................... -- 3,741,171
OTHER ASSETS...................................................................... 165,602 518,825
------------ ------------
$ 13,692,348 $ 41,089,452
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term bank debt............................................................ $ -- $ 1,337,000
Current portion of long-term debt............................................... -- 332,000
Current portion of promissory note payable to EN PLC............................ -- 1,267,851
Accounts payable................................................................ 1,764,095 4,991,543
Accrued expenses and other current liabilities.................................. 1,665,368 5,826,952
Current portion of convertible advance.......................................... 2,333,333 --
Current portion of deferred revenue............................................. 226,667 1,619,152
------------ ------------
Total current liabilities................................................. 5,989,463 15,374,498
------------ ------------
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion........................................ 3,123,035 4,786,347
Notes payable, net of current portion........................................... 3,000,000 3,000,000
Promissory note payable to EN PLC, net of current portion....................... -- 2,535,701
Long-term debt, net of current portion.......................................... -- 360,000
Convertible advance, net of current portion..................................... 4,666,667 --
Convertible payable............................................................. 500,000 --
------------ ------------
Total long-term liabilities............................................... 11,289,702 10,682,048
COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 11)
MINORITY INTEREST IN SUBSIDIARY................................................... -- 1,199,684
------------ ------------
MANDATORILY REDEEMABLE PREFERRED STOCK OF A SUBSIDIARY............................ 1,643,580 1,753,928
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock
Authorized -- 5,000,000 shares
Issued and outstanding -- 5,200 shares in 1996................................ -- 5
Common stock, $.001 par value --
Authorized -- 40,000,000 shares
Issued -- 4,057,924 and 5,975,263 shares in 1995 and 1996, respectively....... 4,058 5,975
Additional paid-in capital...................................................... 9,553,220 55,233,847
Deferred compensation........................................................... (198,965) --
Less -- Treasury stock, at cost, 15,600 shares.................................. (15,200) (15,200)
Accumulated deficit............................................................. (14,676,034) (43,318,898)
Cumulative translation adjustment............................................... 102,524 173,565
------------ ------------
Total stockholders' equity (deficit)...................................... (5,230,397) 12,079,294
------------ ------------
$ 13,692,348 $ 41,089,452
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 48
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Net product sales.................................. $ 2,089,387 $ 6,722,625 $ 14,066,630
Grants and other revenue........................... 232,538 516,087 4,996,158
----------- ------------ ------------
Net revenue................................... 2,321,925 7,238,712 19,062,788
Cost of sales...................................... 1,559,854 5,564,438 10,958,024
----------- ------------ ------------
Gross profit.................................. 762,071 1,674,274 8,104,764
----------- ------------ ------------
Operating expenses:
Research and development......................... 584,217 1,532,496 6,643,186
Charge for in-process research and development... -- -- 4,396,700
Selling, general and administrative.............. 2,962,531 5,649,781 10,517,790
Noncash compensation charge...................... 60,025 52,000 4,195,437
----------- ------------ ------------
Total operating expenses...................... 3,606,773 7,234,277 25,753,113
----------- ------------ ------------
Operating loss................................ (2,844,702) (5,560,003) (17,648,349)
Interest expense, including noncash interest
relating to issuance of warrants (Note 8)........ (7,111) (4,519,375) (11,295,382)
Interest income.................................... -- 38,055 543,447
Equity in net loss of affiliate.................... -- -- (200,000)
----------- ------------ ------------
Loss before minority interest and dividends and
accretion on preferred stock of a subsidiary..... (2,851,813) (10,041,323) (28,600,284)
Minority interest in subsidiary's income........... 67,050 -- 132,990
Dividends and accretion on mandatorily redeemable
preferred stock of a subsidiary.................. -- (55,580) (110,348)
----------- ------------ ------------
Net loss...................................... $(2,784,763) $(10,096,903) $(28,577,642)
=========== ============ ============
Net loss per common and common equivalent share.... $ (.52) $ (1.66) $ (4.70)
=========== ============ ============
Weighted average number of common and common
equivalent shares outstanding.................... 5,378,736 6,071,799 6,082,928
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 49
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- -----------------------
NUMBER $.001 NUMBER
OF PAR OF $.001
SHARES VALUE SHARES PAR VALUE
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993................................... -- -- 2,507,310 $ 2,507
Issuance of common stock, net of issuance costs of
$92,133................................................... -- -- 1,216,332 1,216
Issuance of common stock in connection with consulting
agreements................................................ -- -- 36,465 36
Exercise of stock options................................... -- -- 650 1
Net loss.................................................... -- -- -- --
----- -------- --------- -------
Balance, December 31, 1994................................... -- -- 3,760,757 3,760
Subsidiary's issuance of preferred stock.................... -- -- -- --
Issuance of common stock.................................... -- -- 57,083 58
Issuance of common stock in connection with notes payable... -- -- 212,784 213
Issuance of common stock warrants in connection with notes
payable................................................... -- -- -- --
Noncash interest expense related to common stock warrants
issued in connection with notes payable................... -- -- -- --
Exercise of stock options................................... -- -- 27,300 27
Deferred compensation related to grants of common stock
options................................................... -- -- -- --
Amortization of deferred compensation related to grants of
common stock options...................................... -- -- -- --
Purchase of treasury stock.................................. -- -- -- --
Purchase of common stock options............................ -- -- -- --
Change in cumulative translation adjustment................. -- -- -- --
Net loss.................................................... -- -- -- --
----- -------- --------- -------
Balance, December 31, 1995................................... -- -- 4,057,924 4,058
Issuance of Common Stock, net of issuance costs of
approximately $2,343,000.................................. -- -- 1,505,508 1,505
Issuance of Common Stock related to Convertible advances.... -- -- 135,421 135
Issuance of Series A Convertible Preferred Stock, net of
issuance costs of approximately $338,000.................. 5,500 5 -- --
Dividends accrued on Series A Convertible Preferred Stock... -- -- -- --
Conversion of Series A Convertible Preferred Stock to Common
Stock..................................................... (300) -- 22,892 23
Conversion of Note Payable into Common Stock................ -- -- 201,622 202
Exercise of Stock Options................................... -- -- 51,896 52
Noncash interest expense related to Common Stock Warrants
issued in connection with promissory notes payable........ -- -- -- --
Noncash compensation expense related to Common Stock Options
issued to Company's President............................. -- -- -- --
Noncash compensation expense related to grants of Common
Stock Options............................................. -- -- -- --
Noncash interest expense related to Common Stock Warrants
issued in connection with promissory notes payable........ -- -- -- --
Options granted in connection with the Orgenics
acquisition............................................... -- -- -- --
Amortization of deferred compensation related to grant of
Common Stock options...................................... -- -- -- --
Change in cumulative translation adjustment................. -- -- -- --
Net loss.................................................... -- -- -- --
----- -------- --------- -------
Balance, December 31, 1996................................... 5,200 $ 5 5,975,263 $ 5,975
===== ======== ========= =======
<CAPTION>
TREASURY STOCK
----------------------
ADDITIONAL DEFERRED NUMBER OF
PAID-IN CAPITAL COMPENSATION SHARES COST
--------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1993................................... $ 1,834,477 $ -- -- $ --
Issuance of common stock, net of issuance costs of
$92,133................................................... 2,762,682 -- -- --
Issuance of common stock in connection with consulting
agreements................................................ 59,989 -- -- --
Exercise of stock options................................... 999 -- -- --
Net loss.................................................... -- -- -- --
----------- ---------- ------- --------
Balance, December 31, 1994................................... 4,658,147 -- -- --
Subsidiary's issuance of preferred stock.................... -- -- -- --
Issuance of common stock.................................... 144,260 -- -- --
Issuance of common stock in connection with notes payable... 179,835 -- -- --
Issuance of common stock warrants in connection with notes
payable................................................... 30,000 -- -- --
Noncash interest expense related to common stock warrants
issued in connection with notes payable................... 4,235,768 -- -- --
Exercise of stock options................................... 69,045 -- -- --
Deferred compensation related to grants of common stock
options................................................... 250,965 (250,965) -- --
Amortization of deferred compensation related to grants of
common stock options...................................... -- 52,000 -- --
Purchase of treasury stock.................................. -- -- (15,600) (15,200)
Purchase of common stock options............................ (14,800) -- -- --
Change in cumulative translation adjustment................. -- -- -- --
Net loss.................................................... -- -- -- --
----------- ---------- ------- --------
Balance, December 31, 1995................................... 9,553,220 (198,965) (15,600) (15,200)
Issuance of Common Stock, net of issuance costs of
approximately $2,343,000.................................. 10,439,344 -- -- --
Issuance of Common Stock related to Convertible advances.... 499,865 -- -- --
Issuance of Series A Convertible Preferred Stock, net of
issuance costs of approximately $338,000.................. 5,161,850 -- -- --
Dividends accrued on Series A Convertible Preferred Stock... -- -- -- --
Conversion of Series A Convertible Preferred Stock to Common
Stock..................................................... 14,162 -- -- --
Conversion of Note Payable into Common Stock................ 13,693,346 -- -- --
Exercise of Stock Options................................... 80,017 -- -- --
Noncash interest expense related to Common Stock Warrants
issued in connection with promissory notes payable........ 10,632,842 -- -- --
Noncash compensation expense related to Common Stock Options
issued to Company's President............................. 3,240,000 -- -- --
Noncash compensation expense related to grants of Common
Stock Options............................................. 756,472 -- -- --
Noncash interest expense related to Common Stock Warrants
issued in connection with promissory notes payable........ 106,729 -- -- --
Options granted in connection with the Orgenics
acquisition............................................... 1,056,000 -- -- --
Amortization of deferred compensation related to grant of
Common Stock options...................................... -- 198,965 -- --
Change in cumulative translation adjustment................. -- -- -- --
Net loss.................................................... -- -- -- --
----------- ---------- ------- --------
Balance, December 31, 1996................................... $55,233,847 $ -- (15,600) $(15,200)
=========== ========== ======= ========
<CAPTION>
TOTAL
CUMULATIVE STOCKHOLDERS'
ACCUMULATED TRANSLATION EQUITY
DEFICIT ADJUSTMENT (DEFICIT)
------------ ---------- -------------
<C> <C> <C>
Balance, December 31, 1993................................... $(1,794,368) $ -- $ 42,616
Issuance of common stock, net of issuance costs of
$92,133................................................... -- -- 2,763,898
Issuance of common stock in connection with consulting
agreements................................................ -- -- 60,025
Exercise of stock options................................... -- -- 1,000
Net loss.................................................... (2,784,763) -- (2,784,763)
------------ -------- ------------
Balance, December 31, 1994................................... (4,579,131) -- 82,776
Subsidiary's issuance of preferred stock.................... -- -- --
Issuance of common stock.................................... -- -- 144,318
Issuance of common stock in connection with notes payable... -- -- 180,048
Issuance of common stock warrants in connection with notes
payable................................................... -- -- 30,000
Noncash interest expense related to common stock warrants
issued in connection with notes payable................... -- -- 4,235,768
Exercise of stock options................................... -- -- 69,072
Deferred compensation related to grants of common stock
options................................................... -- -- --
Amortization of deferred compensation related to grants of
common stock options...................................... -- -- 52,000
Purchase of treasury stock.................................. -- -- (15,200)
Purchase of common stock options............................ -- -- (14,800)
Change in cumulative translation adjustment................. -- 102,524 102,524
Net loss.................................................... (10,096,903) -- (10,096,903)
------------ -------- ------------
Balance, December 31, 1995................................... (14,676,034) 102,524 (5,230,397)
Issuance of Common Stock, net of issuance costs of
approximately $2,343,000.................................. -- -- 10,440,849
Issuance of Common Stock related to Convertible advances.... -- -- 500,000
Issuance of Series A Convertible Preferred Stock, net of
issuance costs of approximately $338,000.................. -- -- 5,161,855
Dividends accrued on Series A Convertible Preferred Stock... (51,037) -- (51,037)
Conversion of Series A Convertible Preferred Stock to Common
Stock..................................................... (14,185) -- --
Conversion of Note Payable into Common Stock................ -- -- 13,693,548
Exercise of Stock Options................................... -- -- 80,069
Noncash interest expense related to Common Stock Warrants
issued in connection with promissory notes payable........ -- -- 10,632,842
Noncash compensation expense related to Common Stock Options
issued to Company's President............................. -- -- 3,240,000
Noncash compensation expense related to grants of Common
Stock Options............................................. -- -- 756,472
Noncash interest expense related to Common Stock Warrants
issued in connection with promissory notes payable........ -- -- 106,729
Options granted in connection with the Orgenics
acquisition............................................... -- -- 1,056,000
Amortization of deferred compensation related to grant of
Common Stock options...................................... -- -- 198,965
Change in cumulative translation adjustment................. -- 71,041 71,041
Net loss.................................................... (28,577,642) -- (28,577,642)
------------ -------- ------------
Balance, December 31, 1996................................... $(43,318,898) $173,565 $ 12,079,294
============ ======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 50
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.......................................................................... $(2,784,763) $(10,096,903) $(28,577,642)
Adjustments to reconcile net loss to net cash used in operating activities --
Accretion on preferred stock of a subsidiary.................................... -- 55,580 110,348
Dividends accrued on Series A preferred stock................................... -- -- (51,037)
Noncash interest expense related to issuance of warrants........................ -- 4,235,768 10,739,571
Noncash compensation expense related to issuance of Common Stock options........ -- 52,000 955,437
Noncash compensation expense related to Common Stock options issued to the
Company's Chief Executive Officer............................................. -- -- 3,240,000
Issuance of common stock for services rendered.................................. 60,025 -- --
Noncash in-process research and development expense............................. -- -- 4,396,700
Amortization of deferred revenue................................................ (226,667) (506,374) (1,034,974)
Depreciation and amortization................................................... 23,299 576,463 1,044,136
Equity in net loss of affiliate................................................. -- -- 200,000
Minority interest in subsidiary's income........................................ (67,050) -- (132,990)
Changes in assets and liabilities, net of assets and liabilities acquired in
connection with the acquisition of Cambridge Diagnostics in 1994 and Orgenics
in 1996 --
Accounts receivable........................................................... (49,634) (476,750) (1,937,323)
Inventory..................................................................... (32,505) (163,860) 80,341
Prepaid and other current assets.............................................. (10,148) (229,573) (215,400)
Accounts payable.............................................................. 190,156 801,224 2,194,066
Accrued expenses and other current liabilities................................ 130,497 948,364 2,433,403
----------- ------------ ------------
Net cash used in operating activities....................................... (2,766,790) (4,804,061) (6,555,364)
----------- ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment............................................... (36,826) (1,251,210) (4,749,476)
Proceeds from sale of property and equipment...................................... -- 61,386 --
(Increase) decrease in other assets............................................... 28,844 -- (448,050)
Cash paid for investment in affiliated companies.................................. -- -- (129,057)
Cash paid for investment in Orgenics, net of cash acquired........................ -- (500,000) (5,515,659)
Cash paid for acquisition of Cambridge Diagnostics, net of cash acquired.......... (1,333,869) -- --
----------- ------------ ------------
Net cash used in investing activities....................................... (1,341,851) (1,689,824) (10,842,242)
----------- ------------ ------------
Cash Flows from Financing Activities:
(Increase) decrease in restricted cash............................................ (69,346) 69,346 --
(Purchase of) proceeds from note receivable....................................... 950,000 -- --
Net proceeds from the issuance of Common Stock.................................... 2,764,898 213,390 10,520,918
Net proceeds from issuance of preferred stock..................................... -- -- 5,161,855
(Repayments on) proceeds from line of credit...................................... 1,872,685 (2,167,685) --
Repayments of long-term debt...................................................... -- -- (17,076)
Net proceeds from borrowing under short-term bank debt............................ -- -- 185,144
Increase in deferred revenue...................................................... -- 2,432,000 3,815,336
Proceeds from issuance of notes payable........................................... -- 3,000,000 --
Proceeds from issuance of Common Stock warrants in connection with notes
payable......................................................................... -- 30,000 --
Purchase of treasury stock........................................................ -- (15,200) --
Proceeds from convertible advance................................................. -- 7,000,000 6,693,548
Purchase of Common Stock options.................................................. -- (14,800) --
Proceeds from sale of preferred stock of a subsidiary............................. -- 1,588,000 --
----------- ------------ ------------
Net cash provided by financing activities................................... 5,518,237 12,135,051 26,359,725
----------- ------------ ------------
Foreign Exchange Effect on Cash and Cash Equivalents............................... -- (8,524) 101,785
----------- ------------ ------------
Net Increase in Cash and Cash Equivalents.......................................... 1,409,596 5,632,642 9,063,904
Cash and Cash Equivalents, beginning of period..................................... 352,512 1,762,108 7,394,750
----------- ------------ ------------
Cash and Cash Equivalents, end of period........................................... $ 1,762,108 $ 7,394,750 $ 16,458,654
=========== ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for --
Interest........................................................................ $ 12,168 $ 254,134 $ 396,118
=========== ============ ============
Income taxes.................................................................... $ 456 $ 6,162 $ 47,705
=========== ============ ============
Supplemental Disclosure of Noncash Investing and Financing Activities:
On November 23, 1994, the Company acquired all of the assets and assumed certain
liabilities of Cambridge Diagnostics --
Fair value of assets acquired................................................... $ 3,191,794 $ -- $ --
Liabilities assumed............................................................. 1,115,067 -- --
----------- ------------ ------------
Cash paid for acquisition, net of cash acquired............................. $ 2,076,727 $ -- $ --
=========== ============ ============
On October 24, 1996, the Company acquired 57.1% of the assets and liabilities of
Orgenics, Ltd.
Fair value of net assets acquired, net of minority interest..................... $ -- $ -- $ 1,659,326
In-process research and development............................................. -- -- 4,397,700
Goodwill........................................................................ -- -- 3,020,176
Conversion of debenture into shares of Orgenics................................. -- -- (1,000,000)
Options granted in connection with the acquisition.............................. -- -- (1,056,000)
Less cash acquired.............................................................. -- -- (1,505,543)
----------- ------------ ------------
Cash paid for acquisition, net of cash acquired............................. $ -- $ -- $ 5,515,659
=========== ============ ============
Cash paid for Investment in Affiliated Companies
Cost of investment.............................................................. $ -- $ -- $ 3,932,609
Stock acquired through issuance of promissory notes payable..................... -- -- 3,803,552
----------- ------------ ------------
Cash paid for investment in affiliated companies............................ $ -- $ -- $ 129,057
=========== ============ ============
Conversion of convertible advance into Common Stock................................ $ -- $ -- $ 13,693,548
=========== ============ ============
Conversion of convertible payable into Common Stock................................ $ -- $ -- $ 500,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 51
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Selfcare, Inc. ("Selfcare" or the "Company") is engaged in the development,
manufacture and marketing of self-test diagnostic products for the diabetes,
women's health and infectious disease markets. The Company's existing and
planned products are targeted at the two largest existing markets for self-care
diagnostics, diabetes management and women's health, as well as the emerging
market for self tests for infectious diseases and agents, including human
immunodeficiency virus ("HIV").
On November 30, 1994, the Company acquired substantially all of the assets
and the exclusive rights to certain licenses (see Note 12(c)) of Cambridge
Biotech Limited from Cambridge Biotech Corporation ("Cambridge Biotech").
Thereafter, the Company changed this subsidiary's name from Cambridge Biotech
Limited to Cambridge Diagnostic Ireland Limited ("Cambridge Diagnostics"). The
total cost of the acquisition was $3,191,794, which consisted of $2,076,727 in
cash (including acquisition costs) and $1,115,067 of assumed liabilities. This
transaction was accounted for as a purchase (see Note 3).
In October 1996 the Company acquired a 57.1% direct and indirect equity
interest in Orgenics Ltd. ("Orgenics") for total consideration of $9,077,000.
The Company estimates that it will pay additional consideration totaling
approximately $9,307,000 in cash and Common Stock for the remaining 42.9% direct
and indirect equity interest in March 1997 (see Note 5).
On January 14, 1997, the Company entered into an agreement to acquire the
U.S. rights to several nutritional supplement product lines (the "Nutritional
Supplement Lines Acquisition") from American Home Products Corporation ("AHP")
for $30 million in cash and the issuance of a $6 million 7% promissory note (see
Note 19).
Since inception, the Company has devoted substantially all of its efforts
toward the research and development of products, the establishment of
distribution networks in the United States and Europe, and raising capital.
Management anticipates that substantially all future revenues will be derived
from products under development or those developed or acquired in the future.
Principal risks to the Company include the ability of the Company to obtain
adequate financing to fund future operations, dependence on key individuals,
competition from substitute products and larger companies, obtaining regulatory
approval, and the successful development and marketing of commercial products.
Based on the Company's current operating plan, including alternate financing
sources, such as from the Master Agreement with Johnson and Johnson Development
Corporation ("JJDC") and Lifescan, Inc. ("LifeScan") (see Note 10), management
believes that the Company has adequate financial resources to continue
operations through at least January 1998. See "Risk Factors" beginning on page 8
of this Prospectus.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the results of
the Company and its wholly owned subsidiaries: Cambridge Diagnostics (an Irish
corporation), Selfhelp Israel, Ltd. (an Israeli corporation), Selfcare
International GmbH (a German corporation), Selfcare Europe Ltd. ("SCE") and
subsidiaries (a UK corporation), and Inverness Medical Limited (a Scottish
corporation) ("Inverness"). Also included in the accompanying consolidated
financial statements is the Company's 49% minority interest in Cambridge
Affiliate Corporation ("Cambridge Affiliate"), as discussed in Note 12(c) and
its 57.1% direct and indirect equity interest in Orgenics (see Note 5). The
results of operations of Orgenics from the date of acquisition (October 24,
1996) through December 31, 1996 have been consolidated by the Company, adjusted
to give effect to the minority interest of 42.9%. All material intercompany
balances and transactions have been eliminated in consolidation.
F-7
<PAGE> 52
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accounts of SCE include its wholly owned subsidiaries, Selfcare Europe,
GmbH (a German company) and Selfcare Benelux (a Belgian company). SCE was a
joint venture between the Company and Enviromed plc ("Enviromed") in which the
Company originally held a 50% interest. Due to default by Enviromed on certain
covenants of the joint venture agreement during 1995, the Company has assumed
100% ownership and effective operating control of SCE (see Note 11(c)).
Accordingly, the Company considers this entity to be a wholly owned subsidiary
and has included its results of operations in the accompanying consolidated
financial statements for the year ended December 31, 1995 and 1996.
The accounts of Orgenics also includes its wholly-owned subsidiary PBS S.A.
("PBS"), a French corporation and its 55% owned subsidiary CPEI Orgenics LTDA, a
Brazilian corporation.
(b) Revenue Recognition
Product revenue is recognized when products are shipped to customers, at
which time title is transferred. The Company is recognizing deferred revenue
relating to the 1993 sale of technology over a defined life (see Note 12(a)).
The Company is recognizing deferred revenue relating to the Lifescan alliance as
unfulfilled obligations are met (see Note 10). The Company has also recorded
deferred revenue in the accompanying consolidated balance sheets relating to
amounts received in advance on certain contracts and grants (see Notes 4 and
11(b)). The Company records the related revenue on funded amounts relating to
facilities and equipment over their estimated useful lives and related costs
based on when such costs are incurred.
(c) Cash and Cash Equivalents
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its cash equivalents as held-to-maturity
and recorded them at amortized cost, which approximates market value. The
Company considers all highly liquid cash investments with maturities of three
months or less at the date of acquisition to be cash equivalents. Cash and cash
equivalents consisted of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996
---------- -------------
<S> <C> <C>
Cash and money market funds.............................. $7,394,750 $ 2,622,824
Overnight time deposits.................................. -- 13,835,830
---------- ------------
$7,394,750 $ 16,458,654
========== ============
</TABLE>
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996
---------- -------------
<S> <C> <C>
Raw materials............................................ $ 776,770 $ 1,363,168
Work in-process.......................................... 237,954 272,466
Finished goods........................................... 178,390 630,600
---------- -----------
$1,193,114 $ 2,266,234
========== ===========
</TABLE>
F-8
<PAGE> 53
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method
based on the estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
------------------------------------------------------ ------------------------
<S> <C>
Machinery and laboratory equipment.................... 3 - 5 Years
Leasehold improvements................................ Lesser of Life of Lease
or Life of Asset
Furniture and fixtures................................ 3 - 7 Years
Computer equipment.................................... 3 - 5 Years
</TABLE>
(f) Postretirement Benefits
The Company does not have any obligations for postretirement or
postemployment benefits, as defined by SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, as it does not currently offer such
benefits. Orgenics provides certain severance benefits as discussed in Note
11(h).
(g) Net Loss per Common and Common Equivalent Share
Net loss per common and common equivalent share is based on the weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding during the period. All shares, options and warrants issued during
the 12 months immediately preceding the initial public offering were treated as
if they had been outstanding for the years ended December 31, 1994 and 1995 and
from January 1, 1996 through August 6, 1996 in accordance with the
treasury-stock method. Common Stock equivalents (certain stock options, warrants
and convertible preferred stock) for all periods have not been included, as
their inclusion would be antidilutive.
(h) Foreign Currency Translation
The accounts of the Company's subsidiaries are translated in accordance
with SFAS No. 52, Foreign Currency Translation. Accordingly, assets and
liabilities of the Company's foreign subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date. Income and expense
accounts are translated using an average rate of exchange during the period.
Foreign currency translation adjustments are accumulated as a separate component
of consolidated stockholders' equity. The aggregate transaction gains and losses
were immaterial for all periods presented.
(i) 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.
(j) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. 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
F-9
<PAGE> 54
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company maintains the majority of its cash balances and its overnight time
deposits with financial institutions. See Note 16 for financial information by
geographic area.
(k) Derivative Financial Instruments and Fair Value of Financial Instruments
The Company does not have any derivative or other financial instruments as
defined by SFAS No. 119, Disclosure About Derivative Financial Instruments and
Fair Value of Financial Instruments.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
accounts receivable and debt. The estimated fair value of these financial
instruments approximates their carrying value at December 31, 1995 and 1996. The
estimated fair values have been determined through information obtained from
market sources and management estimates.
(l) Recapitalization
On June 13, 1996, the Company's Board of Directors authorized 5,000,000
shares of preferred stock and declared a 13-for-1 stock split of the Company's
Common Stock, effected as a dividend for all common stockholders of record as of
June 20, 1996. All share and per share amounts of Common Stock for all periods
presented have been retroactively adjusted to reflect the stock split.
(m) Investment in Affiliated Company
The Company accounts for its investment in an affiliated company under the
equity method (see Note 15).
(n) Public Offerings
Effective August 6, 1996, the Company completed its initial public offering
(the "IPO") of 1,495,000 shares of Common Stock for $8.50 per share. The sale of
Common Stock resulted in net proceeds to the Company of approximately
$10,365,000 after deducting all expenses related to the IPO. On March 6, 1997,
the Company sold 1,800,000 shares of Common Stock resulting in net proceeds of
$16,300,000.
(3) ACQUISITION OF CAMBRIDGE DIAGNOSTICS
On November 30, 1994, the Company acquired all outstanding stock of
Cambridge Diagnostics for a nominal value and concurrently acquired
substantially all of the assets and assumed certain liabilities of Cambridge
Diagnostics. As consideration, the Company paid $2,076,727 in cash (including
acquisition costs) and assumed $1,115,067 of liabilities. In connection with
this acquisition, the Company also acquired 49% of Cambridge Affiliate and
entered into various contractual agreements (see Note 12(c)). This transaction
was accounted for as a purchase, and accordingly, the results of Cambridge
Diagnostics since November 30, 1994 are included in the accompanying
consolidated financial statements. The aggregate purchase price of $3,191,794
was allocated based on the fair value of tangible assets acquired as follows:
<TABLE>
<S> <C>
Current assets........................................... $1,766,960
Property and equipment................................... 1,424,834
----------
$3,191,794
==========
</TABLE>
(4) INVESTMENT IN INVERNESS MEDICAL LIMITED
On May 31, 1995, the Company invested approximately $1,588,000 to fund
initial operations and to acquire a 50% interest in Inverness. Inverness
(formerly named Hebocraft Limited) was founded on November 1, 1994 and had no
significant activities, assets or liabilities at the time of the Company's
F-10
<PAGE> 55
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment. Inverness & Nairn Local Enterprise Company ("INLEC") holds the
remaining 50% interest in Inverness and also paid in $1,588,000 for its
interest. The Company holds 1,000,000 ordinary shares of stock, while INLEC
holds 1,000,000 shares of 6% Cumulative Redeemable Preference Shares (the
"Preference Shares"). This investment is consolidated by the Company due to its
ownership of 100% of Inverness' ordinary shares. The Preference Shares held by
INLEC (including cumulative dividend) are reflected in the accompanying
consolidated balance sheets as mandatorily redeemable preferred stock of a
subsidiary.
The Preference Shareholders are entitled to receive, out of funds legally
available, a cumulative annual dividend of approximately $0.095 per share,
payable annually on April 30, beginning in 1996. At the option of the Company
and subject to certain limitations on each redemption, the Preference Shares may
be redeemed for approximately $1.67 per share, plus any accrued and unpaid
dividends. The Company must redeem all 1,000,000 Preference Shares by May 31,
2000. If the Company cannot legally redeem the Preference Shares on that date,
it must redeem the shares as soon as legally permissible at a price of
approximately $1.91 per share plus any accrued and unpaid dividends. Upon
liquidation of Inverness, the Preference Shareholders are entitled to receive
approximately $1.59 per share, plus any accrued and unpaid dividends;
thereafter, the ordinary stockholders shall equally share with the Preference
Shareholders in the remaining assets to be distributed. The Preference
Shareholders do not hold any voting rights.
Under a related agreement, Highlands and Islands Enterprise ("HIE"), a
party related to INLEC, constructed a 50,000-square-foot production facility for
Inverness to use for manufacturing its products. Inverness has entered into a
20-year facility lease, with an option to purchase the facility for fair market
value. The rent due under this lease will be approximately $520,000 per year,
subject to increases each five years, dependent upon then-current market rates,
as defined. Inverness is not obligated to pay rent for the first two years of
the lease. The Company is guarantor to HIE for these payments if Inverness
defaults on its payments.
INLEC has provided Inverness with L2,100,00 British Pounds Sterling
(approximately $3,596,000 at December 31, 1996) for the purpose of outfitting
the facility with required equipment, providing training for the Inverness work
force and certain other defined costs. These funds shall be permanently invested
in Inverness, so long as no events of default by Inverness occur within five
years of the funding. Events of default are defined as the insolvency of
Inverness, defined changes in ownership of Inverness and certain other similar
related criteria. Should a default occur within five years of the funding by
INLEC to Inverness, the Company will be liable to INLEC for a declining portion,
as defined, of the amounts paid by INLEC.
Inverness recognizes as revenue the funded amounts relating to the facility
and equipment over the estimated useful life of the facility and equipment and
amounts related to training and other costs based on when such costs are
incurred. Inverness recognized grant revenue of approximately $216,000 and
$722,000 during the years ended December 31, 1995 and 1996, respectively, which
are included in grants and other revenues in the accompanying consolidated
statements of operations. Unearned amounts of approximately $2,539,000 at
December 31, 1996 are included in deferred revenue in the accompanying
consolidated balance sheets
(5) INVESTMENT IN ORGENICS
On December 23, 1995, the Company and Orgenics entered into an Investment
and Loan Agreement whereby the Company purchased a $1,000,000, 18-month,
unsecured, interest-bearing debenture that is convertible into redeemable
preferred shares of Orgenics (the "Debenture"). Concurrent with the issuance of
the Debenture, the Company provided guaranties (in the form of letters of
credit) of $200,000 on the debt of Orgenics' French subsidiary to two French
banks, which is included in other assets in the accompanying consolidated
balance sheet. The Debenture accrues interest at the LIBOR rate (5 17/32% at
December 31, 1996) plus 2%. Upon a conversion event, as defined, the principal
amount together with accrued interest will convert into 20% of the then issued
and outstanding share capital of Orgenics. In October 1996, the Company
exercised its right to convert the Debenture (see below).
F-11
<PAGE> 56
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Two investment limited partnerships, Medica Investment (Israel) L.P. and
Medica Investment (U.S.) L.P. (collectively "Medica"), contributed a total of
$500,000 in cash toward the purchase of the Debenture. A director of the Company
is a partner of MVP Ventures, which serves as the general partner of both Medica
Investment (Israel) L.P. and Medica Investment (U.S.) L.P. On April 25, 1996,
the Company exercised its right to acquire Medica's interest in the Debenture
for 135,421 shares of Common Stock; the Company issued such shares on May 7,
1996. Accordingly, the Company will receive all of the Orgenics shares upon
conversion of the Debenture. The Company recorded the Orgenics Debenture as an
asset and also recorded a convertible payable for $500,000 related to the
investment made by Medica as a long-term liability in the accompanying
consolidated balance sheet prior to the Company's acquisition of Medica's
interest in the Debenture.
The Company also entered into option purchase agreements (the "Option
Agreements") with all of the individual stockholders of Orgenics and Orgenics
International Holdings B.V. ("Orgenics International"), a Dutch holding company
whose only material asset is its investment in Orgenics. Each Option Agreement
provides a put option on the part of the stockholders to sell to the Company and
a call option on the part of the Company to purchase from the stockholders (the
"Optionee"). On March 6, 1997, the Company exercised its call option and
effectively gained control of 100% of Orgenics'. The Company will be required to
pay for each share of Orgenics that it acquires consideration equal to 1.75
times Orgenics' gross revenues per share (on a fully diluted basis as of the
exercise date, giving effect to the conversion of the Debenture) during the most
recent four fiscal quarters immediately preceding the date of exercise.
In October 1996, the Company acquired a 57.1% direct and indirect equity
interest in Orgenics as a result of the conversion of the Debenture and cash
payment of approximately $7,000,000 for the purchases of outstanding shares of
Orgenics and Orgenics International. In addition, the Company has granted
options to purchase 85,800 shares of Common Stock having a fair market value of
$1,056,000 (Note 13(b)) and incurred direct acquisition costs of $100,000. The
Company estimates that it will pay additional consideration totaling
approximately $9,307,000 in cash and common stock for substantially all the
remaining shares in Orgenics and Orgenics International pursuant to the exercise
of the Option Agreements.
The aggregate purchase price of the Company's 57.1% direct and indirect
interest in Orgenics of approximately $9,077,000 was allocated based on the
relative fair values of the assets acquired as follows:
<TABLE>
<S> <C>
Current assets......................................................... $2,981,000
Property, equipment and other assets................................... 1,245,000
Liabilities assumed.................................................... (2,567,000)
In-process research and development.................................... 4,397,000
Goodwill............................................................... 3,021,000
----------
$9,077,000
==========
</TABLE>
The allocation of a portion of the purchase price to in-process research
and development represents the applicable pro-rata portion of its appraised
value of $7,700,000. Upon completion of the Orgenics acquisition, the Company
anticipates that of the remaining estimated purchase price of $9,307,000, it
will allocate an additional $3,303,000 to in-process research and development
and $4,890,000 to goodwill.
The portion of the purchase price allocated to goodwill and other
intangible assets relates primarily to acquired technology, trade names and
goodwill and will be amortized on a straight-line basis over their estimated
useful lives of five years. The portion of the purchase price allocated to
in-process research and development projects that had not reached technological
feasibility and did not have a future alternative use was charged to expense as
of the acquisition date on a pro rata basis. The remaining portion of the
in-process
F-12
<PAGE> 57
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
research and development will be charged to expense upon completion of the
Orgenics Acquisition. The amount allocated to in-process research and
development projects represents the estimated fair value related to these
projects determined by an independent appraisal. Proven valuation procedures and
techniques were used in determining the fair market value of each intangible
asset. To bring these projects to technological feasibility, high-risk
development and testing issues will need to be resolved which will require
substantial additional effort and testing.
The remaining consideration of approximately $9,307,000 for the Orgenics
shares to be purchased pursuant to the Option Agreements is payable by the
Company, at the election of each Optionee, entirely in cash, entirely in Common
Stock or 50% in cash and 50% in Common Stock. Assuming the Orgenics and Orgenics
International Stockholders elect to receive the consideration in the form of 50%
cash and 50% Common Stock, the Company would pay approximately $4,654,000 in
cash and issue approximately 393,537 shares of Common Stock (based on an average
market price of $11.825 per share of Common Stock and Orgenics' revenues for the
four fiscal quarters ended December 31, 1996).
The Company has granted certain registration rights with respect to the
shares of Common Stock issued pursuant to the Option Agreements.
For financial information reflecting the Orgenics Acquisition on a pro
forma basis, along with the Nutritional Supplement Lines Acquisition (see Note
19) and certain other events, see the Company's Unaudited Pro Forma Combined
Condensed Financial Statements beginning on page F-33.
(6) LINE OF CREDIT
During 1994, the Company entered into an agreement for a demand line of
credit with a bank. This line of credit was established to finance the
acquisition of Cambridge Diagnostics, as discussed in Notes 1 and 3. The Company
included a certificate of deposit as a component of its assets collateralizing
this line of credit. During November 1995, the Company paid off this line of
credit with a portion of the proceeds from the issuance of notes payable (see
Note 8), and the line subsequently expired. The President of the Company had
personally guaranteed the line of credit.
(7) SHORT-TERM BANK DEBT
Orgenics has the following short-term debt instruments outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Israeli NIS bank overdraft................................... $ 717,000
Short-term loans (linked to the U.S. dollar)................. 620,000
----------
$1,337,000
==========
</TABLE>
The State of Israel has guaranteed approximately $500,000 of the
outstanding borrowings; the balance is collateralized by certain Orgenics
assets. Orgenics is required to make monthly interest payments on borrowings at
interest rates ranging form 7% to 21%.
(8) NOTES PAYABLE
In 1995, the Company issued notes payable (the "Cambridge Diagnostics
Notes") and common stock warrants (the "Cambridge Diagnostics Warrants") to
individual investors for gross proceeds of $3,030,000. Of this amount,
$3,000,000 relates to the Cambridge Diagnostics Notes, which bear interest at
10% and are due on March 31, 1998. As of December 31, 1995 and 1996, $675,000
and $825,000, respectively, of such notes were due to certain directors and
officers of the Company. Upon default by the Company, as defined, and the vote
of at least 51% (based on the total principal value of the Cambridge Diagnostics
Notes) of the
F-13
<PAGE> 58
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
noteholders, the noteholders may demand full or partial payment of the notes
plus accrued interest. The Company closed on this financing in several
installments from March 1995 through August 1995.
The remaining $30,000 represents amounts paid to the Company in exchange
for warrants to purchase shares of Common Stock. The number of Cambridge
Diagnostics Warrants is calculated as 69% of the net sales of Cambridge
Diagnostics for the fiscal year preceding the repayment of the Cambridge
Diagnostics Notes divided by $32.87. The Company would have issued 1,142,635
shares of the Company's Common Stock based on net sales of Cambridge Diagnostics
for 1995, if the notes were repaid prior to December 31, 1996. In December 1996,
the Company entered into agreements with substantially all the principal
noteholders of the Cambridge Diagnostics Notes, whereby the Company canceled the
Cambridge Diagnostics Warrants and effectively fixed the ultimate number of
shares of the Company's Common Stock to be issued at 1,142,635, of which 314,222
will be exercisable by certain directors and officers of the Company; 990,050 of
the shares of Common Stock will be issued for no additional consideration upon
the earlier of January 15, 2000 or the date on which a change in control of the
Company (as defined) occurs, pursuant to one of the December agreements.
Accordingly, the Company has recorded noncash interest charges of approximately
$4,236,000 and $10,633,000 for the year ended December 31, 1995 and 1996,
respectively, which represents the difference between the fair market value of
the underlying Common Stock and the exercise price of the Cambridge Diagnostics
Warrants.
In order for the Company to obtain approval for listing of its common stock
on the American Stock Exchange, the Company entered into agreements with certain
holders of $2,750,000 in principal amounts of the Cambridge Diagnostic Notes,
pursuant to which such holders agreed that such aggregate principal amount,
together with any accrued but unpaid interest thereon, would automatically
convert into shares of Common Stock if the Company's stockholders' equity as of
November 30, 1996 is less than $4.0 million. If the Company met the
stockholders' equity threshold, the Cambridge Diagnostics Notes would be due and
payable on December 31, 1996. As consideration for the foregoing, each holder
who agreed to these terms will receive additional consideration in an amount
equal to 5.0% of the principal amount of the Cambridge Diagnostics Notes held by
such holder. The Company's stockholders' equity was greater than $4.0 million as
of November 30, 1996; accordingly, the $2,750,000 principal amount and $137,500
of additional consideration became due. On December 31, 1996, the Company
entered into an agreement with substantially all the principal holders of the
Cambridge Diagnostic Notes, pursuant to which such holders agreed to defer
repayment of the principal amount of their notes until January 15, 1998 and
effectively fix the ultimate number of shares of Common Stock to be issued. As
consideration for the foregoing, the Company agreed to issue five-year warrants
to purchase an aggregate of 54,090 shares of Common Stock that are fully
exercisable at an exercise price of $12.875 (fair market value as of grant
dated) to such holders, of which 14,999 will be exercisable by certain directors
and officers of the Company. If the notes are not paid by June 30, 1997 and the
Company has not sold shares of Common Stock on or before June 30, 1997 pursuant
to a registration statement on form SB-2 (or a similar form), then the Company
will issue additional five-year warrants to purchase an aggregate of 27,046
shares of Common Stock that would be fully exercisable at an exercise price of
$12.875 to such holders, of which 7,500 would be exercisable by certain
directors and officers of the Company.
In connection with Selfcare's financing of the acquisition of Cambridge
Diagnostics, Cambridge Diagnostics entered into a Guarantee and Debenture, dated
August 30, 1995, with USB '93 Technology, Inc. ("USB '93, Inc."), a corporation
whose president and chief executive officer is a director of the Company.
Pursuant to the Guarantee and Debenture, USB '93, Inc. became the guarantor of
an aggregate of $3.0 million in notes issued by SelfCare to certain investors.
In return for this guarantee, Cambridge Diagnostics granted USB '93, Inc. a
security interest in its machinery, equipment, securities, goodwill and uncalled
capital, patents, trademarks, patent applications, brand names, copyrights, any
and all rights acquired by Cambridge Diagnostics as a licensee or sub-licensee,
and all present and future benefit, right, title and interest in any and all
moneys, payments and proceeds of insurance presently maintained or obtained in
the future.
F-14
<PAGE> 59
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company issued 119,834 shares of Common Stock to U.S. Boston Capital
Corporation, the president of which is a director of the Company, for its
services as placement agent on the Cambridge Diagnostics Notes. Additionally,
the Company issued 92,950 shares of Common Stock to the Company's President for
his personal guarantee of these notes. The total fair value of the shares issued
to both the President and USB '93 ($101,000 and $79,000, respectively) have been
recorded as deferred financing costs, which are included in other assets in the
accompanying consolidated financial statements, and are being amortized over the
original life of the Cambridge Diagnostics Notes.
(9) LONG-TERM DEBT
Orgenics has the following long-term debt outstanding as of December 31,
1996.
<TABLE>
<CAPTION>
INTEREST DECEMBER 31,
RATE 1996
-------- ------------
%
--------
<S> <C> <C>
Bank debt.................................................... 18-20 $ 66,000
7- 9 626,000
--------
692,000
Less current maturities.................................................... 332,000
--------
$360,000
========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997....................................................................... $332,000
1998....................................................................... 326,000
1999....................................................................... 34,000
--------
$692,000
========
</TABLE>
Orgenics is required to make monthly and quarterly payments of principle
and interest ranging from $1,035 to $62,133 on the various Notes through April
1999.
As collateral for Orgenics' liabilities to banks and others in Israel,
Orgenics has granted liens on certain assets, including fixed assets, insurance
rights, share capital and goodwill.
(10) LIFESCAN ALLIANCE
On November 10, 1995, the Company entered into a master agreement with JJDC
and LifeScan, an affiliate of JJDC (the "Master Agreement"). The Master
Agreement includes an equity investment agreement, a glucose distribution
agreement and a summary of terms to be included in other distribution
agreements.
The equity investment agreement calls for up to a total of $14,000,000 of
advances from JJDC. The advances convert into a maximum of 480,194 shares of the
Company's Common Stock, representing 5% of the Company's Common Stock on a fully
diluted basis, upon the occurrence of certain events. JJDC made the initial
advance of $7,000,000 upon closing, which the Company recorded as a convertible
advance in the accompanying consolidated balance sheets. On May 21, 1996, the
Company met certain Food and Drug Administration (the "FDA") filing criteria, as
set forth in the Master Agreement, and accordingly, the Company received
approximately $6,700,000 from the second advance. As of December 31, 1995 the
Company had not met either of the two conversion events nor had JJDC issued an
acceleration notice; accordingly, the advances have been recorded as a
convertible advances in the accompanying consolidated balance sheet in
accordance with the repayment terms set forth in the agreement (quarterly
installments over a three-year period). In October 1996 the Company met one of
the conversion event criteria (see below).
F-15
<PAGE> 60
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Master Agreement requires LifeScan to pay the Company an additional
$7,000,000 as a success fee when the Company receives clearance from the FDA
regarding the glucose system. LifeScan, as a condition of payment, may, at its
option, require the Company to enter into a glucose distribution agreement (the
"Distribution Agreement"). The glucose Distribution Agreement, which will run
through December 31, 2010, sets certain minimum purchase requirements which, if
not met by LifeScan, render the exclusivity provisions null and void.
In October 1996, the Company met one of the conversion event criteria by
entering into a Distribution Agreement with LifeScan pursuant to which LifeScan
will distribute an advanced version of the Company's proprietary electrochemical
blood glucose monitoring system (the "New System"). As contemplated by the terms
of the LifeScan Alliance, in connection with entering into the Distribution
Agreement, LifeScan paid the Company a success fee of $7,000,000 million and
JJDC converted all of its approximately $13,700,000 million in convertible
advances to the Company into 201,622 shares of Common Stock which represents 5%
of (i) the Common Stock outstanding as of November 10, 1995, and (ii) any shares
of Common Stock issued prior to such conversion pursuant to the exercise of
rights to acquire Common Stock outstanding as of November 10, 1995. In addition,
under the terms of the LifeScan Alliance, the Company must issue to JJDC, for no
additional consideration, shares of Common Stock equal to 5% of any additional
Common Stock issued pursuant to the exercise of rights to acquire Common Stock
outstanding as of November 10, 1995 (the total of all shares so issued, the
"Conversion Shares"). The precise number of Conversion Shares depends on the
number of shares of Common Stock which the Company is required to issue in
connection with the financing of the Inverness Facility as well as the vesting
and exercise of options and warrants that were outstanding on November 10, 1995.
However, the Company estimates that the number of additional Conversion Shares
which JJDC will acquire is approximately 278,572. The New System must receive
FDA clearance before sales of the product can commence in the United States. The
Company has deferred revenue recognition on $3,000,000 of the success fee based
on management's estimate of its future commitments under the Distribution
Agreement. The Company will recognize this amount as revenue as such obligations
are met, which management estimates will be over four years.
The Master Agreement also covers two other Company products. Upon FDA
acceptance of the Company's filing for each of these products, LifeScan may, at
its sole discretion, pay the Company $3,000,000 and require the Company to enter
into a distribution agreement for each product, under the terms set forth below.
If LifeScan elects to make the $3,000,000 payment and the product receives FDA
clearance, then LifeScan shall make an additional payment of $2,000,000. If
LifeScan makes the $3,000,000 payment and the Company does not receive FDA
clearance within one year of the payment, the $3,000,000 must be repaid in eight
quarterly installments without interest (provided payments are made in a timely
manner), and the related distribution agreement will terminate.
Under the Distribution Agreement, SelfCare has agreed to indemnify LifeScan
for any claims that the New System infringes on any patents. As a condition for
entering into the Distribution Agreement, LifeScan was entitled to receive and
received opinions of patent counsel to the effect that the New System does not
infringe patents held by others.
F-16
<PAGE> 61
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company has operating lease commitments for certain of its facilities
and equipment that expire through 2026. The following schedule outlines future
minimum annual rental payments under these leases at December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
-------------------------------------------------------- -----------
<S> <C>
1997.................................................... $ 767,000
1998.................................................... 1,154,000
1999.................................................... 1,119,000
2000.................................................... 928,000
2001.................................................... 928,000
Thereafter.............................................. 12,917,000
-----------
$17,813,000
===========
</TABLE>
Rent expense relating to these operating leases was approximately $51,000,
$315,000 and $401,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
(b) Industrial Development Authority of Ireland Grants
Prior to the Company's acquisition of Cambridge Diagnostics (Note 3),
Cambridge Diagnostics received certain capital expenditure and revenue grants
from the Industrial Development Authority of Ireland (the "IDA"). Cambridge
Diagnostics recognizes revenue on the capital expenditure grants over the
estimated useful lives of the related assets and on revenue grants as the
related costs are incurred.
As a condition to retaining the grants, the IDA requires Cambridge
Diagnostics to maintain a certain number of employees in Ireland. The IDA also
prohibits the Company from disposing of assets or terminating business
activities that were funded by the grants within 10 years of such grants. As of
December 31, 1996, Cambridge Diagnostics was not in compliance with the
employment provisions of the grants. As a result, the IDA could require
Cambridge Diagnostics to repay capital expenditure and revenue grants totaling
774,000 Irish pounds (approximately $1,282,000 at December, 1996). The IDA has
not historically pursued its right to recoup these grants from Cambridge
Diagnostics and, as of December 31, 1996, Cambridge Diagnostics management
believes that the IDA is unlikely to do so, provided that Cambridge Diagnostics
does not terminate its operations in Ireland. Accordingly, as management
believes that repayment is not probable, Cambridge Diagnostics has not provided
for a potential liability for the repayment of these grants.
If the IDA did pursue its rights to recoup these grants, it could have a
material adverse effect on the Company and Cambridge Diagnostics.
(c) Legal Proceedings
From time to time, the Company may be exposed to litigation arising out of
its products and operations. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's financial condition or results of operations.
Pasteur Sanofi Diagnostics licensed the Pasteur HIV Technology to Cambridge
Biotech and its affiliates, including Cambridge Affiliate, relating to patents
and proprietary rights underlying the Company's HIV-related products. The
licenses of the Pasteur HIV Technologies to Cambridge Biotech are nonexclusive
and cover diagnostic test kits in finished form embodying the Pasteur HIV
Technologies. The territorial scope of the licenses is worldwide, with the
exception of exclusive rights which Pasteur Sanofi Diagnostics asserted to have
granted in the Pasteur HIV Technologies to Genetic Systems Corporation ("Genetic
Systems") in the
F-17
<PAGE> 62
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
United States, Canada, Mexico, Australia, New Zealand and India (the "Excluded
Countries"). However, the licenses provided that, to the extent that Pasteur
Sanofi Diagnostics recovers the right to practice the patents underlying the
Pasteur HIV Technologies in the Excluded Countries, Cambridge Biotech is
entitled to nonexclusive rights in such technology in such countries. In 1990,
Pasteur Sanofi Diagnostics acquired ownership of Genetic Systems, whereupon
Cambridge Biotech commenced selling products incorporating the Pasteur HIV
Technologies in the United States. These activities were challenged in a patent
infringement lawsuit filed in bankruptcy court in March 1995 by Institut
Pasteur, the minority stockholder of Pasteur Sanofi Diagnostics, and Genetic
Systems. In September 1995, the bankruptcy court ruled in favor of Cambridge
Biotech on this issue, and Institut Pasteur and Genetic Systems subsequently
filed an appeal in district court. The date for the appeal hearing is unknown.
If the bankruptcy court decision were reversed on appeal, the territories to
which Cambridge Affiliate could sell HIV-related products would be limited and
this could have a material adverse effect on the Company. See
"Business -- Patent and Patents and Proprietary Rights."
Pasteur Sanofi Diagnostics has notified Orgenics that as a result of
Orgenics' use of certain peptides, Orgenics may be liable for infringement of
certain patents held by Institut Pasteur and under which Pasteur Sanofi
Diagnostics holds an exclusive license. Orgenics has informed the Company that
it is not aware of any other threatened litigation that would have a material
adverse effect on Orgenics or its business.
The Company has been involved in a dispute with Enviromed with respect to a
joint venture agreement entered into between the Company and Enviromed in March
1994 and other agreements (collectively, the "Disputed Enviromed Agreements")
entered into between the Company and Enviromed and its wholly owned subsidiary,
Cranfield Biotechnology Ltd., and the issuance of shares of Common Stock to
Enviromed in connection therewith. See "Certain Transactions." In connection
with this dispute, the Company has informed Enviromed that, due to the failure
of Enviromed and Cranfield to perform their obligations under the Disputed
Enviromed Agreements, it disputes Enviromed's ownership of the Common Stock held
of record by Enviromed. On July 5, 1996, Enviromed filed suit against the
Company and the representatives of the underwriters of the Company's IPO (the
"IPO Representatives") in United States District Court for the Southern District
of New York alleging breach of a registration rights agreement relating to the
Common Stock held of record by Enviromed. Enviromed claimed that its rights
under a registration rights agreement were breached in connection with the IPO
and requested damages, injunctive relief and a declaratory judgment that
Enviromed is the lawful owner of the shares. The Company has filed counterclaims
against Enviromed arising out of the failure of Enviromed and Cranfield to
perform their obligations under the Disputed Enviromed Agreement and is
contesting Enviromed's claims vigorously. On October 18, 1996, the case was
ordered transferred to the United States District Court for the District of
Massachusetts. The Company is not able to estimate the amount of damages, if
any, which might result from Enviromed's claims against the Company, but
believes that any such damages would not be in an amount that would have a
material adverse effect on the Company. The Company agreed to indemnify the IPO
Representatives for any losses they might incur, including reasonable attorney's
fees and expenses, as a result of the Enviromed lawsuit. On November 15, 1996,
Enviromed filed a dismissal without prejudice of its claims against the IPO
Representatives.
Trinity Biotech plc ("Trinity") and Eastcourt Limited ("Eastcourt") have
filed Schedule 13Ds with the Securities and Exchange Commission (the
"Commission") stating that Enviromed sold the Common Stock held by it of record
to Flambelle Limited ("Flambelle"), a wholly-owned subsidiary of Trinity, and
Eastcourt, an entity owned 50% each by Enviromed and Flambelle, on August 28,
1996. On November 1, 1996, Enviromed announced that it had disposed of its
holding of shares of Eastcourt to Flambelle for consideration of $1.25 million.
In December 1996, Eastcourt filed a Schedule 13D/A and Flambelle filed a
Schedule 13D with the Commission.
On February 12, 1997 Flambelle and Eastcourt commenced a lawsuit against
the Company in the United States District Court for the District of
Massachusetts, seeking a declaratory judgment that Flambelle and
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SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Eastcourt own the Common Stock held of record by Enviromed and damages for
alleged breach of a registration rights agreement. The Company intends to
contest Flambelle's and Eastcourt's claims vigorously. The Company is not able
to estimate the amount of damages, if any, which might result from Flambelle's
and Eastcourt's claims against the Company, but believes that any such damages
would not be in an amount which would have a material adverse effect on the
Company.
(d) Agreement with Princeton BioMeditech Corporation
On March 15, 1996, the Company entered into an agreement with Princeton
BioMeditech Corporation ("Princeton") that provides for the development of
certain specific infectious disease tests by Princeton for marketing by Selfcare
on a nonexclusive basis. The agreement also grants the Company an option to
market under its own brand name other infectious disease tests and certain other
types of tests developed by Princeton on terms to be agreed. Pursuant to the
agreement, the Company is also obligated to purchase $6,900,000 of certain test
kits from Princeton through 1998 and will provide $500,000 to finance the
purchase of equipment, which will remain the property of the Company, to be used
in producing test kits for the Company. As of December 31, 1996, the Company is
obligated to purchase up to $2,177,000 and $3,030,000 of certain test kits from
Princeton in 1997 and 1998, respectively. The Company has paid $500,000 of the
above-mentioned financing as of December 31, 1996. The agreement also provides
that the Company will provide funding for the development by Princeton of a
birth control aid, with respect to which the Company will have exclusive
worldwide marketing rights.
(e) Agreement with Nova Biomedical
In September 1996, the Company entered into an agreement with Nova
Biomedical Corp., a Massachusetts corporation ("Nova"), pursuant to which Nova
will perform the final packaging of early pregnancy and ovulation test kits for
the Company. The initial term of the agreement expires on December 31, 1998 and
may be automatically renewed for additional and successive terms of one year
thereafter unless either party gives written notice of its intention not to
renew the agreement. Under the manufacturing agreement, the Company has agreed
to purchase a minimum quantity of $1,620,000 of specified products from Nova
during the term of the agreement.
(f) Employment Agreements
The Company has employment agreements with several of its executive
officers. The terms of the agreements cover option grants, noncompete
provisions, and severance arrangements.
In September 1993, Orgenics entered into an employment agreement with its
Chairman of the Board and Chief Executive Officer ("the Employee"). Under the
terms of the agreement, the Employee became entitled annually to participate in
the profit of Orgenics at a rate of 2% of the next income of Orgenics, subject
to the condition that the net income of Orgenics be at least 10% of total sales
of Orgenics in the same year. The agreement will expire in August 1997 unless
one of the two parties gives expiration notice earlier. Orgenics did not incur
any liability in 1996 in connection with this employment agreement.
(g) Orgenics Royalty Commitment
Orgenics finances its research and development expenditures in Israel under
programs sponsored by the Chief Scientist of the Ministry of Trade of Israel,
for the support of research and development projects. In the event that
development of the products in which the Chief Scientist participates is
successful, Orgenics will be obligated to pay royalties at the rate of 2%-5% of
the sales of products developed with funds provided by the Chief Scientist, up
to an amount equal to 100% of the Chief Scientist's research and development
grants to such projects. Orgenics incurred royalty expense of $209,000 in 1996
under these programs. The maximum
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SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contingent royalty as of December 31, 1996 was approximately $1,500,000.
Orgenics does not have any liability to the State of Israel for amounts received
in support of unsuccessful programs or unsaleable products.
(h) Orgenics Severance Obligations
Orgenics' liability for severance pay, pursuant to Israeli law, is provided
by managers insurance policies and by severance pay funds. The Company has
accrued a liability of $173,000, net of contributions, as of December 31, 1996,
included as a component of accrued expenses in the accompanying consolidated
balance sheet.
France has a State-run mandatory pension plan to which contributions are
made monthly by both the employee and employer based on the gross monthly
salary. Orgenics' liability is fully covered by these contributions.
In addition, pursuant to industry employment agreements, a lump sum
severance is payable upon retirement to employees still in the service of PBS at
the date of retirement. Orgenics has fully provided for the $221,000 obligation
as of December 31, 1996.
(12) RESEARCH, MANAGEMENT AND MANUFACTURING AGREEMENTS
(a) U.S. Boston Technology Associates Limited Partnership
On December 30, 1993, the Company entered into a purchase and sale
agreement with USB '93 for the sale of the Company's core immuno-assay
technology (the "Technology") for $1,360,000. USB '93 is a limited partnership,
the general partner of which is USB '93 Inc., a corporation whose president and
chief executive officer is a director of the Company. This director beneficially
owns approximately 20% of the Company on a fully diluted basis. The Company may
repurchase the Technology for $6,000,000.
The Company and the USB '93 also entered into a license and development
agreement on December 30, 1993 whereby the Company leased back the rights to the
Technology from the USB '93 in consideration for three warrants to purchase up
to an aggregate of 438,750 shares of the Company's Common Stock at an exercise
price of $1.54 per share (see Note 13(c)) and the payment of 1.5% of gross sales
and 22.5% of royalty income, up to an aggregate total payment of $6,000,000. The
license agreement remains in effect until such time that the Company reacquires
the Technology or pays $6,000,000 in royalties. This agreement is immediately
void if the Company decides to repurchase the rights to the Technology according
to terms of the Technology purchase and sale agreement noted above. Pursuant to
this agreement, the Company has charged approximately $35,000, $104,000 and
$235,000 to cost of sales in the accompanying consolidated statements of
operations for the years ended December 31, 1994 1995 and 1996, respectively.
The income from the sale of technology has been included in deferred
revenue in the accompanying consolidated balance sheets and will be recognized
on the earlier of (1) a straight-line basis over a period of six years, the
Technology's estimated useful life, or (2) will be eliminated upon the
repurchase of the Technology, if the Company opts to repurchase the Technology,
as discussed above. The Company has recognized approximately $227,000, as grants
and other revenue in the accompanying consolidated statement of operations for
each of the years ended December 31, 1996. Accordingly, $680,000 is included in
deferred revenue in the accompanying consolidated balance sheet as of December
31, 1996.
(b) University College of Wales/Aberystwyth
On February 10, 1992, the Company entered into a research and development
contract with University College of Wales/Aberystwyth, a corporation organized
and existing under the laws of England and Wales, whereby the Company obtained
the right to develop and market certain technology in consideration for a
royalty stream of 1.5% of gross revenues generated from the technology. The
agreement will remain in effect
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SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the duration of the life of any patent issued with respect to the
technology, or any improvements thereof, unless terminated pursuant to
provisions of the agreement. As of December 31, 1996, the Company had not
generated any revenues related to this technology and, therefore, did not incur
any royalty expense for the year then ended.
(c) Cambridge Biotech Corporation
On November 30, 1994, Selfcare acquired Cambridge Diagnostics from
Cambridge Biotech, which at that time was operating in Massachusetts under
Chapter 11 of the U.S. Bankruptcy Code. Cambridge Diagnostics, located in
Galway, Ireland, produces three categories of tests for infectious diseases as
well as packages products for the Company's European customers, including
pregnancy tests, birth control and other women's health products. At the time of
the acquisition, Cambridge Diagnostics (then known as Cambridge Biotech Limited)
was operating under the protection of a court-appointed examiner in a procedure
analogous to a Chapter 11 reorganization under U.S. bankruptcy law. Pursuant to
the acquisition agreements, the terms of which were approved by the United
States Bankruptcy Court and the Irish High Court, Selfcare acquired all of
Cambridge Diagnostics' issued and outstanding capital stock and, pursuant to
certain license agreements, acquired certain technologies necessary for the
production of Cambridge Diagnostics' HIV 1/2 RDT, Capillus, Rapid Test and Lyme
disease test kits for an aggregate of $2.1 million and the assumption of certain
liabilities. In addition, the Company furnished Cambridge Diagnostics with a
$900,000 unsecured working capital line of credit. Under the terms of Cambridge
Biotech's license agreements with Pasteur Sanofi Diagnostics, Cambridge Biotech
could not assign or sublicense its rights with respect to certain of these
technologies directly to the Company. In order to allow the Company to have
access to such technologies, Selfcare and Cambridge Biotech formed an affiliate,
Cambridge Affiliate, 51% owned by Cambridge Biotech and 49% owned by Selfcare. A
series of contracts was entered into between Cambridge Affiliate and Cambridge
Diagnostics, pursuant to which Cambridge Diagnostics manages Cambridge Affiliate
and manufactures and sells products on behalf of Cambridge Affiliate. Cambridge
Affiliate is managed and funded separately from Selfcare and Cambridge
Diagnostics.
The Company acquired the 49% interest in Cambridge Affiliate for $1.00. The
Company is accounting for this investment under the equity method. During the
period from November 30, 1994 to December 31, 1994, Cambridge Affiliate had no
significant activity. Pursuant to the series of contracts between Cambridge
Affiliate and Cambridge Diagnostics described above and in Note 3, Cambridge
Diagnostics and Cambridge Affiliate owe Cambridge Biotech royalties ranging from
4% to 6% of certain net sales, as defined. In return for the goods and services
provided by Cambridge Diagnostics pursuant to the series of contracts between
Cambridge Affiliate and Cambridge Diagnostics described above, Cambridge
Affiliate has agreed to pay to Cambridge Diagnostics an aggregate amount equal
to its net revenues from sales of the products, less (i) operation expenses
attributable to such products (including the royalties which Cambridge Affiliate
pays to Cambridge Biotech), and (ii) an amount equal to 10% of such royalty
payments payable by Cambridge Affiliate. The additional 10% of royalties
deducted is designed to create a retention within Cambridge Affiliate to cover
its operating costs. The royalties paid by Cambridge Affiliate to Cambridge
Biotech are equal to the royalties owed by Cambridge Biotech to Pasteur Sanofi
Diagnostics. Portions of the aggregate amounts payable by Cambridge Affiliate to
Cambridge Diagnostics are allocated 75%, 5% and 20% to the manufacturing
agreement, the management agreement and the sales agreement, respectively.
Royalty payments made by Cambridge Diagnostics to Cambridge Biotech during the
years ended December 31, 1995 and 1996 were approximately $45,000 to $56,000,
respectively, and Cambridge Diagnostics received approximately $1,914,000 and
$1,942,000 during the years ended December 31, 1995 and 1996, respectively, from
Cambridge Affiliate under the manufacturing agreement. In addition, Cambridge
Diagnostics received approximately $128,000 and $129,000 from Cambridge
Affiliate during the years ended December 31, 1995 and 1996, respectively, under
the management agreement and approximately $510,000 and $518,000 from
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SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cambridge Affiliate during the years ended December 31, 1995 and 1996,
respectively, under the sales agreement.
In May 1996, Cambridge Biotech proposed plans of reorganization under
Chapter 11 that contemplated the sale of its diagnostics business to bioMerieux
Vitek, Inc. ("bioMerieux"). Under the terms of the proposed sale, bioMerieux
would succeed to Cambridge Biotech's interest in Cambridge Affiliate, and
bioMerieux would acquire effective control of rights to practice the patents of
Syva Company ("Syva") and Pasteur Sanofi Diagnostics. Syva and Pasteur Sanofi
Diagnostics objected to confirmation of a plan that would permit Cambridge
Biotech to assume or transfer control of its rights as licensee with respect to
their patents. On July 18, 1996, the Bankruptcy Court confirmed Cambridge
Biotech's Chapter 11 plan over all objections, specifically upholding Cambridge
Biotech's right to assume the Syva and Pasteur Sanofi Diagnostics licenses. Syva
and Pasteur Sanofi Diagnostics immediately appealed the Bankruptcy Court's
order. The Syva appeal was subsequently settled. Pasteur Sanofi Diagnostics,
however, obtained orders staying the Bankruptcy Court's plan-confirmation order
and the proposed sale of stock to bioMerieux pending determination of its
appeal. On September 27, 1996, the United States District Court affirmed the
plan-confirmation order, including Cambridge Biotech's right to assume the
licenses extended to the Cambridge Affiliate. Pasteur Sanofi Diagnostics then
appealed to the Court of Appeals for the First Circuit. Cambridge Biotech and
bioMerieux consummated the sale in October 1996. On January 17, 1997, a
three-judge panel of the First Circuit Court of Appeals ruled that Cambridge
Biotech was entitled to assume its license agreements with Pasteur Sanofi
Diagnostics. Pasteur Sanofi Diagnostics has 90 days from the date of the First
Circuit's ruling in which to seek review by the United States Supreme Court. If
such review is granted and if the Court were to overturn the prior decisions in
the case, then it would be unclear whether Cambridge Biotech could continue to
extend the license to Cambridge Affiliate. The failure of the Company to retain
such license could have a material adverse effect on the Company.
(13) STOCKHOLDERS' EQUITY
(a) Stock Option Plans
In 1992, the Company adopted the 1992 Stock Plan (the "1992 Plan"), which
provides for granting to directors, officers, employees and consultants of the
Company, at the discretion of the Board of Directors, incentive stock options,
nonqualified stock options and stock awards for the purchase of up to 10,725,000
shares of Common Stock under terms similar to those in the 1996 Plan, as
described below. In June 1996, the Company amended the 1992 Plan to provide that
no additional stock options would be granted under the 1992 Plan. As of December
31, 1996, options to purchase up to 336,739 shares of Common Stock remain
outstanding.
In 1994, the Company adopted the 1994 Incentive and Nonqualified Stock
Option Plan (the "1994 Plan"), which provides for the granting of up to
3,380,000 shares of Common Stock under terms similar to those in the 1996 Plan,
as described below. In June 1996, the Company amended the 1994 Plan to provide
that no additional stock options would be granted under the 1994 Plan. As of
December 31, 1996, options to purchase up to 2,997,930 shares of Common Stock
remain outstanding.
In 1996, the Company adopted the 1996 Stock Option and Grant Plan (the
"1996 Plan"). The 1996 Plan may be administered by the Board of Directors or by
an Option Committee, as defined (in either case, the "Administrator"), to grant
incentive stock options, nonqualified stock options, restricted stock,
unrestricted stock, stock appreciation rights ("SAR"), performance share awards
and dividend equivalent rights. The Company has reserved a total of 1,000,000
shares of Common Stock for future grant under the 1996 Plan. As
F-22
<PAGE> 67
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of December 31, 1996, options to purchase up to 838,392 shares of Common Stock
remain outstanding. The key terms of the amended 1996 Plan are as follows:
Incentive and Nonqualified Stock Options
The Administrator, at its discretion, may determine the number, term and
exercise price of each option to be granted, except that no option shall have a
term of greater than ten years. Also, incentive stock options may not be granted
at less than fair market value.
Stock Appreciation Right
The Administrator may award a freestanding award or in tandem with a stock
option. Upon exercise of the SAR, the holder will be entitled to receive an
amount equal to the excess of the fair market value on the date of exercise of
one share of Common Stock over the exercise price per share specified in the
related stock option (or, in the case of a freestanding SAR, the price per share
specified in such right, which price may not be less than 85% of the fair market
value of the Common Stock on the date of grant) times the number of shares of
Common Stock with respect to which the SAR is exercised. This amount may be paid
in cash, Common Stock, or a combination thereof, as determined by the
Administrator. If the SAR is granted in tandem with a stock option, exercise of
the SAR cancels the related option to the extent of such exercise.
Restricted Stock
The Administrator may award shares of Common Stock to officers, other
employees and key persons subject to such conditions and restrictions as the
Committee may determine. These conditions and restrictions may include the
achievement of certain performance goals and/or continued employment with the
Company through a specified restricted period. The purchase price of shares of
restricted stock will be determined by the Administrator. If the performance
goals and other restrictions are not attained, the employees will forfeit their
awards of restricted stock.
Unrestricted Stock
The Administrator may grant shares that are free from any restrictions
under the 1996 Plan. Unrestricted stock may be issued to employees and key
persons in recognition of past services or other valid consideration.
Performance Share Awards
The Administrator may grant performance share awards to employees or other
key persons entitling the recipient to receive shares of Common Stock upon the
achievement of individual or Company performance goals and such other conditions
as the Administrator shall determine.
Dividend Equivalent Rights
The Administrator may grant dividend equivalent rights, which entitle the
recipient to receive credits for dividends that would be paid if the grantee had
held specified shares of Common Stock. Dividend equivalent rights may be granted
as a component of another award or as a freestanding award. Dividend equivalents
credited under the 1996 Plan may be paid currently or be deemed to be reinvested
in additional shares of Common Stock, which may thereafter accrue additional
dividend equivalents at fair market value at the time of deemed reinvestment or
on the terms then governing the reinvestment of dividends under the Company's
dividend reinvestment plan, if any. Dividend equivalent rights may be settled in
cash, shares, or a combination thereof, in a single installment or installments,
as specified in the award. Awards payable in cash on a deferred basis may
provide for crediting and payment of interest equivalents.
F-23
<PAGE> 68
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Grants to Nonemployee Directors
Each nonemployee director of the Company as of the date of the IPO was
granted an option to purchase up to 12,000 shares of Common Stock at an exercise
price equal to the IPO price. In addition, each new nonemployee director elected
after the date of the IPO and before November 4, 1996 received an option to
purchase up to 12,000 shares of Common Stock upon such director's election to
the Board of Directors, at an exercise price equal to the fair market value of
the Common Stock on the date of grant. After November 4, 1996, options to
nonemployee directors may be granted at the sole discretion of the Board of
Directors. The exercise price of each such Nonqualified Option will be the fair
market value of the Common Stock on the date of grant. Each Nonqualified Option
granted to Independent Directors shall vest ratably over four years from the
date of grant.
Change of Control Provisions
The 1996 Plan provides that in the event of a "Change of Control" (as
defined in the 1996 Plan) of the Company, all stock options and stock
appreciation rights shall automatically become fully exercisable. In addition,
at any time prior to or after a Change of Control, the Administrator may
accelerate awards and waive conditions and restrictions on any awards to the
extent it may determine appropriate.
(b) Other Stock Options
On August 15, 1995, the Company entered into a stock option agreement (the
"Agreement") with the President of the Company. Under the Agreement, the
President received an option to acquire 520,000 shares of the Company's Common
Stock. The option vests and becomes exercisable, within a two-year period, if a
liquidity event, such as an initial public offering or the sale of the Company,
occurs; otherwise, the option expires. The exercise price per share is
determined by the liquidity price per share. The exercise price per share will
decrease $1 for every $1 that the liquidity price per share exceeds $5.38 per
share. Accordingly, upon completion of the IPO, the Company recorded a
compensation charge of approximately $3,240,000 representing the difference
between the exercise price per share and the fair market value per share at the
date of vesting.
On October 17, 1995, the Company entered into stock option agreements with
certain officers and key employees granting them options to acquire up to
253,500 shares of Common Stock at an exercise price of $1.54 per share. These
shares are exercisable after ten years of continuous employment or earlier if
certain milestones, such as meeting certain financial targets and the
effectiveness of an IPO, are achieved. At the date of grant, the fair market
value per share of the Company's Common Stock exceeded the exercise price of the
options; therefore, the Company recorded deferred compensation of $250,965
related to this difference at the date of grant. Such goals were met in 1996
and, accordingly, the Company fully amortized the deferred compensation in 1996.
During the years ended December 31, 1995 and 1996, the Company recorded
compensation expense of approximately $52,000 and $199,000, respectively,
related to these option grants in the accompanying consolidated statement of
operations.
During the year ended December 31, 1996, the Company recorded compensation
expense of approximately $680,000 related to stock options granted to employees
that were contingent on certain goals that have now been met. In accordance with
SFAS No. 123 Accounting for Stock-Based Compensation (SFAS No. 123), the Company
also recorded compensation expense of $76,000 for options granted to
nonemployees.
On December 29, 1995, the Company entered into stock option agreements with
certain shareholders and officers of Orgenics granting them options to acquire
up to 85,800 shares of Common Stock at an exercise price of $3.69 per share.
These options vest over a four-year period but were not be considered granted
until the Company's ownership of Orgenics exceeded 51%, which occurred during
October 1996. The difference between the exercise price and the fair market
value price per share of $1,056,000 is included as a component of the purchase
price.
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<PAGE> 69
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of all stock option activity during the three
years ended December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF WTD AVG
SHARES OPTION PRICE OPTION PRICE
---------- -------------- ------------
<S> <C> <C> <C>
Options outstanding, December 31, 1993..... 668,473 $ .001- 1.538 $ 1.134
Granted.................................. 649,649 1.538- 2.528 2.214
Exercised................................ (650) 1.538 1.538
Terminated............................... (189,865) 1.538- 2.528 1.559
---------- -------------- --------
Options outstanding, December 31, 1994..... 1,127,607 .001- 2.528 1.685
Granted.................................. 2,591,056 .001- 3.692 2.609
Exercised................................ (27,300) 2.528 2.528
Terminated............................... (308,919) .001- 2.528 1.257
---------- -------------- --------
Options outstanding, December 31, 1995..... 3,382,444 1.15- 3.692 2.407
Granted.................................. 842,292 3.69-15.375 12.576
Exercised................................ (51,675) 1.540 1.540
---------- -------------- --------
Options outstanding, December 31, 1996..... 4,173,061 $ 1.15- 15.375 $ 4.47
---------- -------------- --------
Options exercisable, December 31, 1996..... 2,598,680 $ 1.15- 3.692 $ 2.23
========== ============== ========
</TABLE>
On December 10, 1996 the Company granted 600,000 options at an exercise
price of $13.875 to the President and certain officers and key employees of the
Company. The options vest in seven years unless certain performance goals, as
defined, are met. In the event that such performance goals are met, the vesting
of these options will accelerate.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, which requires the measurement of the fair value of stock options or
warrants to be included in the statement of income or disclosed in the notes to
the financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No.
123 for options granted in 1996 using the Black-Scholes option pricing model
prescribed by SFAS No. 123. The weighted average assumptions are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
------------ ----
<S> <C> <C>
Risk-free interest rate...................................... 6.3% 6.2%
Expected dividend yield...................................... -- --
Expected lives............................................... 5 5
Expected volatility.......................................... 60% 74%
</TABLE>
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net loss and loss per share would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996
------------ ------------
<S> <C> <C> <C>
Net Loss:............................ As Reported $(10,096,903) $(28,577,642)
Pro Forma (11,517,942) (31,307,295)
Net Loss Per Share:.................. As Reported $ (1.66) $ (4.70)
Pro Forma (1.90) (5.15)
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-25
<PAGE> 70
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Warrants
On November 16, 1993, the Company issued a warrant to purchase 279,500
shares of Common Stock, at an exercise price of $1.54 per share, to the
President of the Company. This price was determined by the Company's Board of
Directors to be fair market value at the date of grant. This warrant was issued
in consideration of the President's guarantee of certain Company loans and is
fully exercisable through November 16, 2013.
As discussed in Note 12(a), on December 30, 1993, the Company issued to the
USB '93 warrants to purchase 438,750 shares of Common Stock at an exercise price
of $1.54 per share. This price was determined by the Company's Board of
Directors to be fair market value at the date of grant. The warrants are fully
exercisable up to 30 days after the time when the Company fulfills all of its
obligations under its agreements with the USB '93.
In connection with certain sales of Common Stock in 1994, the Company
issued five-year warrants to purchase up to 174,226 shares of Common Stock to
those individuals purchasing the Common Stock. These warrants are fully
exercisable at $2.53 per share; 174,005 of such warrants remain outstanding at
December 31, 1996.
As discussed in Note 8, on December 31, 1996, the Company entered into
agreement with substantially all of the principal noteholders of the Cambridge
Diagnostics Notes and fixed the number of shares of Common Stock to be issued at
1,142,635, of which 314,222 will be issued to certain directors and officers of
the Company. All such shares of Common Stock will be issued for no additional
consideration on the earlier of January 15, 2000 or the date on which a change
in control of the Company (as defined) occurs. In addition, the Company agreed
to issue five-year warrants to purchase an aggregate of 54,090 shares of Common
Stock, which are fully exercisable at an exercise price of $12.875 to such
holders, of which 14,999 will be exercisable by certain directors and officers
of the Company. In accordance with SFAS No. 123, the Company has recorded
interest expense of approximately $394,000 related to the grant of these
warrants. If the notes are not paid by June 30, 1997 and the Company has not
sold shares of Common Stock on or before June 30, 1997 pursuant to a
registration statement on form SB-2 (or a similar form), then the Company will
issue additional five-year warrants to purchase an aggregate of 27,046 shares of
Common Stock, which would be fully exercisable at an exercise price of $12.875
to such holders, of which 7,500 would be exercisable by certain directors and
officers of the Company.
(d) Employee Stock Purchase Plan
Upon the consummation of the IPO, the Company adopted the Selfcare, Inc.
Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Company has
reserved 250,000 shares of Common Stock for issuance under the Stock Purchase
Plan. Under the Stock Purchase Plan, eligible employees will be able to purchase
shares of the Company's Common Stock at 85% of fair market value, as defined,
subject to certain limitations. 10,508 shares have been issued under the Stock
Purchase Plan as of December 31, 1996.
(e) Preferred Stock
The Board of Directors of the Company is authorized, without further action
of the stockholders of the Company, to issue up to 5,000,000 shares of preferred
stock in classes or series and to fix the designations, powers, preferences and
the relative, participating, optional or other special rights of the shares of
each series and any qualifications, limitations and restrictions thereon as set
forth in the Certificate of Incorporation. Any such preferred stock issued by
the Company may rank prior to the Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of Common Stock.
F-26
<PAGE> 71
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1996, the Board of Directors adopted a resolution authorizing
10,000 shares of Series A Convertible Preferred Stock, $.001 par value (the
"Series A Preferred Stock"). In October 1996, the Company sold 5,500 shares of
Series A Preferred Stock at a price of $1,000 per share to various non-U.S.
investors. The net proceeds of such sales of approximately $5.2 million were
used to purchase a portion of the Orgenics and Orgenics International shares.
The holders of Series A Preferred Stock generally are entitled to receive
cumulative quarterly dividends at the rate of six percent per year and their
shares of Series A Preferred Stock will become convertible into shares of the
Company's Common Stock in five equal installments over a 120-day period
beginning in December 1996. Shares of Series A Preferred Stock are generally
convertible at a discount of 14.5% from the average closing bid price per share
of the Company's Common Stock for the five trading days prior to their
conversion, subject to the following: (i) the maximum conversion price is $20
per share and (ii) if the conversion price would otherwise be $12.00 or less, it
shall instead be $12.00; provided, however, if the average closing bid price is
less than $12.00, then the conversion price shall be equal to such price but in
no event less than $8.75 per share. Any shares of Series A Preferred Stock not
previously converted will automatically convert into shares of the Company's
Common Stock on October 15, 1998 at the closing bid price at the time. During
December 1996 and February 1997, 700 shares of Series A Preferred Stock together
with cumulative dividends were converted into 63,951 shares of Common Stock. The
4,800 remaining shares of Series A Preferred Stock will convert into 421,684
shares of Common Stock assuming an average closing market price of $11.60 per
share at the time of conversion resulting in a conversion price of $11.60 per
share. The Company has accreted dividends of $51,037 as of December 31, 1996
relating to the outstanding shares of Series A Preferred Stock.
(14) INCOME TAXES
The Company provides for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes. Accordingly, a deferred tax asset or
liability is determined based on the difference between the financial statement
and tax basis of assets and liabilities, as measured by the enacted tax rates
expected to be in effect when these differences reverse.
The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting and income tax
purposes. The income tax effects of these temporary differences at December 31,
1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets --
Nondeductible reserves................... $ 116,000 $ 70,000 $ 522,000
Deferred revenue......................... 422,000 338,000 1,288,000
Net domestic and foreign operating loss
and tax credit carryforwards.......... 1,370,000 7,800,000 12,382,000
----------- ----------- ------------
1,908,000 8,208,000 14,192,000
----------- ----------- ------------
Deferred tax liabilities --
Depreciation............................. $ (1,300) $ (2,000) (19,000)
Other temporary differences.............. (5,000) (3,000) (2,000)
----------- ----------- ------------
(6,300) (5,000) (21,000)
----------- ----------- ------------
Valuation allowance...................... (1,901,700) (8,203,000) (14,171,000)
----------- ----------- ------------
Net deferred tax asset................... $ -- $ -- $ --
=========== =========== ============
</TABLE>
The Company has available domestic and foreign net operating loss
carryforwards of approximately $4,441,000 and $30,933,000, respectively, as of
December 31, 1996 and federal research and development
F-27
<PAGE> 72
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit carryforwards of approximately $61,000 as of December 31, 1996 to reduce
future income taxes, if any. These carryforwards expire through 2010 and are
subject to review and possible adjustment by the appropriate taxing authorities.
The Internal Revenue Code contains provisions that limit the amount of
federal net operating loss and credit carryforwards that the Company may utilize
in any one year in the event of certain cumulative changes in ownership over a
three-year period in excess of 50%, as defined. The Company has recorded a 100%
valuation allowance against the deferred tax asset, as the realization of the
asset is uncertain at this time.
Orgenics and its subsidiaries have approximately $11,000,000 in net
operating loss carryforwards, substantially all of which do not expire. These
net operating loss carryforwards may only be used to offset taxable income of
the entities in which the losses were generated and may be otherwise limited or
adjusted by the appropriate taxing authorities.
(15) TRANSACTIONS WITH ENVIROMED AND EN PLC LIMITED PARTNERSHIP
In March 1994, the Company entered into a joint venture agreement with
Enviromed for the purpose of distributing diabetes and women's health products
in European Union countries. The joint venture activities were to be conducted
through a newly formed entity, Selfcare Europe Ltd. ("SCE"), in which the
Company and Enviromed each held 50% equity interests, but for which the Company
had sole management responsibility. The capital requirements of SCE were to be
funded 75% by Enviromed and 25% by Selfcare, in accordance with the agreed SCE
budgets. In connection with the formation of SCE, SCE entered into certain
distributorship agreements with Selfcare and affiliates of Enviromed, and
Enviromed purchased 593,528 shares of Common Stock in consideration for certain
manufacturing rights granted by an affiliate of Enviromed. In June 1995,
Selfcare notified Enviromed that Enviromed was in breach of its obligation to
make agreed payments to fund SCE's capital needs. In July 1995, Selfcare
notified Enviromed that, as a result of Enviromed's failure to cure this breach,
Enviromed's shares in SCE were deemed to be transferred to Selfcare pursuant to
the terms of SCE's charter and the joint venture agreement. For its part,
Enviromed informed Selfcare that it denied Selfcare's claims of breach and
claimed that Selfcare was in breach of the joint venture agreement in several
respects. SCE is currently classified as a wholly owned subsidiary in the
Company's financial statements (see Note 2). In April 1995, the Company's
President resigned as a director of Enviromed and his counterpart at Enviromed
resigned as a director of the Company. The Company does not consider SCE to be
material to its business or operations.
In October 1995, EN PLC Limited Partnership ("EN PLC") was formed by the
Company's President and a group of investors for the purpose of purchasing
ordinary shares of Enviromed. As of May 1, 1996, EN PLC had acquired 27.0% of
Enviromed's outstanding voting stock. The Company's President shares control of
EN PLC's general partner with another individual who is not affiliated with the
Company. The Company's President and two Company directors are among EN PLC's
limited partners. In October 1996, the Company purchased 200,000 common shares
of Enviromed and entered into an agreement with EN PLC (the "EN PLC Agreement")
pursuant to which the Company purchased 7,961,386 shares of Enviromed held by EN
PLC for approximately $3.8 million. The Company's purchase price for these
shares was based on their quoted market price at the date of the Company's
acquisition of such shares from EN PLC. On January 1, 1997, the Company and EN
PLC entered into an amendment to the EN PLC Agreement pursuant to which the
Company agreed to issue two promissory notes, in principal amounts of
approximately $2.8 million and $1.0 million respectively, evidencing the
purchase price under the EN PLC Agreement. Each note bears interest at the
annual rate of the Bank of Boston prime rate plus 1.5 percent, payable quarterly
over the two-year term of the note. The principal amount of the $1.0 million
promissory note is payable in eight quarterly installments, commencing in
January 1997; the first four installments are $85,897 each and the second four
installments are $171,794 each. Approximately $1.4 million of the principal
amount of the $2.8 million promissory note is payable in January 1998, followed
by three equal quarterly installments of the
F-28
<PAGE> 73
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remaining principal. In consideration of the amendment, the Company agreed to
issue to EN PLC a warrant to purchase 15,401 shares of Common Stock at an
exercise price of $12.875 per share. The warrant is exercisable at any time
prior to January 1, 2002. In accordance with SFAS No. 123, the Company recorded
deferred financing costs of approximately $107,000 in connection with the grant
of these warrants. As a result of this purchase, the Company acquired a 28.5%
equity interest in Enviromed. The Company subsequently acquired an additional
100,000 shares of Enviromed which increased the Company's equity interest in
Enviromed to 28.9%.
On January 17, 1997, at a meeting of the shareholders of Enviromed called
at the request of Selfcare, the shareholders of Enviromed voted to remove the
existing Board of Directors of Enviromed and to elect as directors four
individuals nominated by Selfcare: Mr. Zwanziger, Mr. Anthony H. Hall
(Selfcare's Chief Financial Officer), Dr. Paul Winson, and Mr. Clifford
Passmore. Dr. Winson is serving as the Managing Director of Enviromed; Messrs.
Zwanziger, Hall and Passmore are serving as non-executive directors. See
"Business -- Strategic Acquisitions -- Acquisition of Shares of Enviromed."
Neither Dr. Winson nor Mr. Passmore is affiliated with Selfcare. Selfcare is
currently considering the possibility of providing a credit enhancement to
enable Enviromed to secure additional borrowing capacity and, to this end, may
determine to guaranty up to approximately $600,000 of Enviromed's bank debt.
Selfcare would be compensated for this guaranty, in an amount yet to be
determined. In lieu of this guaranty, Selfcare may elect to make an equity
investment of up to $600,000 in Enviromed.
Following the Company's acquisition of its ownership interest in Enviromed,
the Company has accounted for its investment under the equity method. In the
year ended December 31, 1996, the Company has recorded a loss of $200,000,
representing the Company's pro rata share of Enviromed's estimated net loss
during the Company's period of ownership.
(16) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Prior to the Company's acquisition of Cambridge Diagnostics in 1994,
substantially all of the revenues, net income, and identifiable assets of the
Company related to operations in the United States.
Revenues by geographic destination and as a percentage of total revenues
for the years ended December 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------------
DESTINATION 1994 1995 1996
---------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
North America................................. $1,650,621 $2,993,249 $11,484,380
Europe........................................ 609,725 1,875,855 4,761,713
Africa........................................ -- 86,400 947,390
Asia.......................................... -- 800,000 585,055
Middle East................................... -- 1,075,200 356,435
Other......................................... 61,579 408,008 927,815
---------- ---------- -----------
$2,321,925 $7,238,712 $19,062,788
========== ========== ===========
</TABLE>
F-29
<PAGE> 74
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
GEOGRAPHIC AREA BY ----------------------------------------
DESTINATION 1994 1995 1996
----------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
North America.................................. 71% 41% 60%
Europe......................................... 26 26 25
Africa......................................... -- 1 5
Asia........................................... -- 11 3
Middle East.................................... -- 15 2
Other.......................................... 3 6 5
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Revenues, net income, and identifiable assets for the Company's United
States, Irish, Scottish, Israeli and other European operations are as follows:
<TABLE>
<CAPTION>
UNITED OTHER INTERCOMPANY
YEAR ENDED DECEMBER 31, STATES IRELAND SCOTLAND ISRAEL EUROPEAN ELIMINATIONS CONSOLIDATED
- ----------------------------- ------------ ---------- ----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 --
Revenues................... $ 1,806,533 $ 515,392 $ -- $ -- $ -- $ -- $ 2,321,925
============ ========== =========== ========== =========== =========== ===========
Net income (loss).......... (2,906,193) 154,956 -- -- (134,101) 100,575 (2,784,763)
============ ========== =========== ========== =========== =========== ===========
Identifiable assets........ 3,734,362 3,784,775 -- -- -- (2,188,235) 5,330,902
============ ========== =========== ========== =========== =========== ===========
1995 --
Revenues................... $ 2,302,154 $4,187,104 $ -- -- $ 749,454 $ -- $ 7,238,712
============ ========== =========== ========== =========== =========== ===========
Net loss................... (7,339,808) (710,400) (519,661) -- (1,527,034) -- (10,096,903)
============ ========== =========== ========== =========== =========== ===========
Identifiable assets........ 11,421,961 2,946,355 5,316,234 -- 1,941,297 (7,933,499) 13,692,348
============ ========== =========== ========== =========== =========== ===========
1996 --
Revenues................... $ 10,834,816 $4,601,838 $ 722,163 $2,036,000 $ 867,971 $ -- $19,062,788
============ ========== =========== ========== =========== =========== ===========
Net loss................... (16,471,342) (747,888) (4,745,715) (310,000) (2,249,659) (4,053,038) (28,577,642)
============ ========== =========== ========== =========== =========== ===========
Identifiable assets........ 41,578,973 3,570,683 9,335,606 8,129,000 2,929,440 (24,454,250) 41,089,452
============ ========== =========== ========== =========== =========== ===========
</TABLE>
(17) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following
at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Compensation and compensation-related..................... $ 326,271 $1,181,337
Professional fees......................................... 94,967 499,174
Product return reserve.................................... 480,000 1,183,630
Other..................................................... 764,130 2,962,811
---------- ----------
$1,665,368 $5,826,952
========== ==========
</TABLE>
F-30
<PAGE> 75
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts
receivable reserve account:
<TABLE>
<CAPTION>
BALANCE AT OTHER UNCOLLECTIBLE BALANCE AT
BEGINNING PROVISION FOR ADDITIONS TO ACCOUNTS END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF PERIOD BAD DEBT ALLOWANCES(1) WRITTEN OFF PERIOD
- ----------------------------------- ---------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994....... -- -- 94,190 -- 94,190
Year Ended December 31, 1995....... 94,190 37,372 -- (38,184) 93,378
Year Ended December 31, 1996....... 93,378 191,662 51,000 (19,821) 316,219
</TABLE>
- ---------------
(1) Additions arising through the acquisition of Cambridge Diagnostics in 1994
and Orgenics in 1996.
(19) NUTRITIONAL SUPPLEMENT LINES ACQUISITION
On February 19, 1997, the Company completed the Nutritional Supplement
Lines Acquisition, pursuant to which a newly-formed subsidiary of the Company
(the "Acquisition Subsidiary") acquired the Nutritional Supplement Lines from
AHP. As consideration for the Nutritional Supplement Lines, the Acquisition
Subsidiary paid to AHP $30,000,000 in cash and the Company issued to AHP the
AHP Note for total consideration of $36,000,000. The Company funded the cash
portion of the purchase price with the AHP Term Loan and the AHP Bridge Loan
(collectively, the "Acquisition Facility"). The AHP Note will be due on the
first anniversary of the closing of the Nutritional Supplement Lines
Acquisition, and will bear interest payable quarterly at the rate of 7.0% per
annum.
The AHP Term Loan has a five-year term, with quarterly amortization of
principal at annual rates ranging from $3,000,000 to $5,000,000, and a
$6,250,000 balloon payment at maturity. In addition to this amortization
schedule, the Acquisition Subsidiary is required to make mandatory prepayments
of the AHP Term Loan at the end of each fiscal year, in an amount equal to 50%
of the excess of (i) its earnings before interest, taxes, depreciation and
amortization ("EBITDA") for such fiscal year over (ii) principal payments on the
AHP Term Loan, cash interest and tax expense, capital expenditures and any
change in working capital. These prepayments will be applied in the inverse
order of the established amortization schedule. The AHP Term Loan, at the
Company's election, bears interest at an annual floating rate equal to either
LIBOR plus two percent, or Fleet's Prime Rate. The AHP Bridge Loan is due June
3, 1997, and at the Company's election, bears interest at an annual floating
rate equal to either LIBOR plus 3.5 percent or Fleet's Prime Rate plus 1.5
percent. If the AHP Bridge Loan has not been repaid or refinanced by May 3,
1997, Selfcare will be required to maintain a minimum of $5,000,000 in cash or
liquid investments. As of December 31, 1996, the Company had approximately
$16,500,000 in cash and liquid investments. If the AHP Bridge Loan has not been
repaid or refinanced at maturity, Selfcare would have the option of extending
the loan with cash pledged to collateralize a like amount.
In connection with the Acquisition Facility, the Acquisition Subsidiary has
obtained from Fleet a $5,000,000 revolving credit line (the "Credit Line"). The
Credit Line, at the Company's election, bears interest at an annual floating
rate equal to either LIBOR plus 1.75 percent or Fleet's Prime Rate and matures
in three years. The Company has a limited number of LIBOR rate options for the
AHP Term Loan, the AHP Bridge Loan, and the Credit Line. Each LIBOR rate option
must be exercised for a period between one month and 12 months and must cover a
minimum of $1,000,000 of the loan. The Acquisition Facility and the Credit Line
are secured by a first priority lien on all of the Acquisition Subsidiary's
assets and are guaranteed by the Company, which guaranty is secured by a first
priority lien on substantially all the Company's U.S. assets.
The Acquisition Facility and the Credit Line impose certain financial
covenants on the Acquisition Subsidiary, including (i) requirements to maintain
minimum EBITDA levels of $2,300,000 per quarter beginning with the quarter ended
June 30, 1998 and $2,475,000 per quarter beginning with the quarter ended
F-31
<PAGE> 76
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1999 and not to exceed certain ratios of total indebtedness to EBITDA,
beginning with the quarter ended December 31, 1997, at which time the ratio of
total indebtedness to EBITDA cannot exceed 3.75 to 1, (ii) limits on capital
expenditures of $250,000 per year, (iii) a requirement to maintain a ratio of
EBITDA to fixed charges of not less than 1.25 for any quarter beginning with the
quarter ending March 31, 1998, and (iv) a requirement of a positive net income
for any quarter. The Acquisition Subsidiary has also agreed to restrictions on
(x) acquisitions, mergers or joint ventures without Fleet's consent, (y)
material asset sales and other payments, and (z) dividends and distributions.
Further, the Company, as guarantor of the Acquisition Subsidiary's debt under
the Acquisition Facility and the Credit Facility, is subject to a limited number
of covenants, none of which are financial maintenance covenants, including a
requirement to provide Fleet with periodic financial statements and other
information and a prohibition on the Company having other liens on its U.S.
assets. The Company also will be limited in its ability to receive dividends and
distributions from the Acquisition Subsidiary. In addition, an event of default
shall be deemed to have occurred under the Acquisition Facility and the Credit
Line if any three of Ron Zwanziger, Kenneth D. Legg, Richard A. Pinkowitz,
Anthony H. Hall and Gary E. Long cease to be employed by the Company or the
Acquisition Subsidiary in positions comparable to their current positions.
Messrs. Zwanziger, Legg, Pinkowitz and Hall are officers of the Company. Mr.
Long joined the Company in February 1997 and has responsibility for the
operation of the Nutritional Supplement lines business. In addition, the
Acquisition Subsidiary was required, at the time of the closing of the
Acquisition Facility, to have a proforma capital base of at least $9,500,000.
This requirement was satisfied through a combination of (i) the Company's
obligations under the AHP Note, (ii) a $2,000,000 subordinated loan by the
Company to the Acquisition Subsidiary and (iii) the Company's capital
contribution of approximately $1,500,000 to be used to pay expenses incurred in
connection with the completion of the Nutritional Supplement Lines Acquisition.
The Company and the Acquisition Subsidiary have paid Fleet fees and expenses
totaling approximately $350,000 in connection with the Acquisition Facility and
the Credit Facility.
The Company may prepay the AHP Note and the AHP Bridge Loan at any time.
For financial information reflecting the Nutritional Supplement Lines
Acquisition on a Pro Forma basis, along with the Orgenics Acquisition (see Note
5) and certain other events, see the Company's Unaudited Pro Forma Combined
Condensed Financial Statements beginning on page F-33.
F-32
<PAGE> 77
SELFCARE, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
OVERVIEW:
On December 23, 1995, the Company and Orgenics entered into an Investment
and Loan Agreement whereby the Company purchased a $1,000,000, 18-month,
unsecured interest-bearing Debenture that is convertible into redeemable
preferred shares of Orgenics. Medica contributed $500,000 in cash toward the
purchase of the Debenture. On April 25, 1996, the Company exercised its right to
acquire Medica's interest in the Debenture for 135,421 shares of Common Stock.
The Company has also entered into Option Agreements with a majority of the
individual stockholders of Orgenics and Orgenics International. Each Option
Agreement provides a put option on the part of the stockholders to sell to the
Company and a call option on the part of the Company to purchase from the
stockholder such shares of Orgenics and Orgenics International (the "Optionee").
On March 6, 1997, the Company exercised its call option and effectively gained
control of 100% of Orgenics. The Company will be required to pay for each share
of Orgenics which it acquires, consideration equal to 1.75 times Orgenics' gross
revenues per share (on a fully diluted basis as of the exercise date, giving
effect to the conversion of the Debenture) during the most recent four fiscal
quarters immediately preceding the date of exercise.
In October 1996, the Company acquired a 57.1% direct and indirect equity
interest in Orgenics, as a result of the conversion of the Debenture and cash
payment of approximately $7,000,000 for the purchases of outstanding shares of
Orgenics and Orgenics International. In addition, the Company has granted
options to purchase up to 85,800 shares of Common Stock having a fair market
value of $1,056,000 and will incur direct acquisition costs of approximately
$100,000. The Company estimates that it will pay additional consideration
totaling approximately $9,307,000 in cash and Common Stock for all the remaining
shares in Orgenics and Orgenics International pursuant to the exercise of the
Option Agreements.
The remaining consideration of approximately $9,307,000 for the Orgenics
shares to be purchased pursuant to the Option Agreements is payable by the
Company, at the election of each Optionee entirely in cash, entirely in Common
Stock or 50% in cash and 50% in Common Stock. Assuming the Orgenics and Orgenics
International Stockholders elect to receive the consideration in the form of 50%
cash and 50% Common Stock, the Company would pay approximately $4,654,000 in
cash and issue approximately 393,537 shares of Common Stock, based on an average
market price of $11.825 per share of Common Stock and Orgenics' revenues for the
four fiscal quarters ended December 31, 1996.
The portion of the purchase price allocated to goodwill and other
intangible assets relates primarily to acquired technology, trade names and
goodwill and will be amortized on a straight-line basis over their estimated
useful lives of five years. The portion of the purchase price allocated to
in-process research and development projects that had not reached technological
feasibility and did not have a future alternative use was charged to expense as
of the acquisition date on a pro rata basis. The remaining portion of the
in-process research and development will be charged to expense upon completion
of the Orgenics Acquisition. The amount allocated to in-process research and
development projects represents the estimated fair value related to these
projects determined by an independent appraisal. Proven valuation procedures and
techniques were used in determining the fair market value of each intangible
asset. To bring these projects to technological feasibility, high-risk
development and testing issues will need to be resolved which will require
substantial additional effort and testing.
On February 19, 1997, the Company paid $36 million to acquire the
Nutritional Supplement Lines from American Home Products Corporation ("AHP"),
through $31 million of debt and $5 million of proceeds
F-33
<PAGE> 78
SELFCARE, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
from the March 1997 Offering. See "Strategic Transactions -- Nutritional
Supplement Lines Acquisition." The Company anticipates that the entire purchase
price will be allocated to trade names, goodwill and other intangible assets,
and plans to amortize such assets over their estimated useful lives of 20 years.
In March 1997, the Company sold 1.8 million shares of Common Stock in a
public offering (the "March 1997 Offering"). The total net proceeds from the
March 1997 Offering were approximately $16.3 million after deducting
underwriters' commission and approximately $600,000 of expenses.
The following unaudited pro forma combined condensed financial statements
are presented in U.S. dollars, are in accordance with generally accepted
accounting principles ("GAAP") and give effect to the proposed offering of the
Company's Common Stock and the transactions described above. The financial
statement of Orgenics have been prepared in accordance with Israeli GAAP; there
are no material differences between U.S. GAAP and Israeli GAAP, insofar as they
pertains to Orgenics financial statements. The unaudited pro forma combined
condensed statements combine the historical consolidated balance sheets of the
Company and Orgenics as of December 31, 1996 and the statement of assets to be
sold of the Nutritional Supplement Lines as of November 30, 1995 and combine the
historical consolidated statements of operations of the Company and Orgenics for
the year ended December 31, 1996 and the statements of revenues and expenses of
the Nutritional Supplement Lines for the year ended November 30, 1996 assuming
that Orgenics and the Nutritional Supplement Lines acquisitions were consummated
on January 1, 1996 using proceeds from the Company's initial public offering and
the March 1997 Offering and after giving effect to certain adjustments. The
unaudited pro forma combined condensed financial statements were prepared based
on the purchase price that has been calculated using 1.75 times Orgenics gross
revenues per share (on a fully-diluted basis as of the exercise date, and after
giving effect to the conversion of the Debentures) based upon the revenues for
the four fiscal quarters ended December 31, 1996. The unaudited pro forma
combined condensed financial statements do not reflect additional consideration
that will be paid if the Company does not complete the Orgenics Acquisition on
or prior to March 31, 1997 insofar as it relates to determining the most recent
four fiscal quarters immediately preceding the date of exercise, or prior to
March 10, 1997 insofar as it relates to the gross revenues multiple to be used
in the calculation of the purchase price. The unaudited pro forma combined
condensed financial statements do not purport to be indicative of the results
which would actually have been reported if the acquisitions of Orgenics and the
Nutritional Supplement Lines had been effected at those dates or which may be
reported in the future. These unaudited pro forma combined condensed financial
statements should be read in conjunction with the accompanying notes and the
respective historical financial statements and related notes of the Company,
Orgenics and the Nutritional Supplement Lines.
F-34
<PAGE> 79
SELFCARE, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL
-------------------------- PRO FORMA
NUTRITIONAL -------------------------------
SUPPLEMENT COMBINED
THE COMPANY LINES ADJUSTMENTS COMPANY
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 16,458,654 $ -- $ 16,320,000(1) $ 21,625,084
(4,653,570)(2)
(6,500,000)(4)
Accounts receivable.................................. 5,478,814 -- -- 5,478,814
Inventory............................................ 2,266,234 -- -- 2,266,234
Prepaid and other current assets..................... 1,034,260 -- -- 1,034,260
----------- ----------- ------------ ------------
Total current assets........................... 25,237,962 -- 5,166,430 30,404,392
----------- ----------- ------------ ------------
PROPERTY AND EQUIPMENT, NET............................ 7,858,885 -- -- 7,858,885
IN PROCESS RESEARCH AND DEVELOPMENT.................... -- -- 7,700,000(3)
(7,700,000)(3)
GOODWILL AND OTHER INTANGIBLE ASSETS................... 3,741,171 13,822,000 4,890,156(3) 46,131,327
23,678,000(5)
INVESTMENT IN AFFILIATED COMPANIES..................... 3,732,609 -- 3,732,609
OTHER ASSETS........................................... 518,825 -- -- 518,825
----------- ----------- ------------ ------------
$ 41,089,452 $13,822,000 $ 33,734,586 $ 88,646,038
=========== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term bank debt................................. $ 1,337,000 $ -- $ -- $ 1,337,000
Current portion of long-term debt.................... 332,000 -- 10,000,000(4) 10,332,000
Current portion of promissory notes payable.......... 1,267,851 -- -- 1,267,851
Accounts payable..................................... 4,991,543 -- -- 4,991,543
Accrued expenses and other current liabilities....... 5,826,952 1,443,000 (1,443,000)(5) 5,826,952
Current portion of deferred revenue.................. 1,619,152 -- -- 1,619,152
----------- ----------- ------------ ------------
Total current liabilities.......................... 15,374,498 1,443,000 8,557,000 25,374,498
----------- ----------- ------------ ------------
LONG-TERM LIABILITIES
Deferred revenue, net of current portion............. 4,786,347 -- -- 4,786,347
Notes Payable........................................ 3,000,000 -- -- 3,000,000
Promissory notes payable, net of current portion..... 2,535,701 -- -- 2,535,701
Long-term debt, net of current portion............... 360,000 -- 21,000,000(4) 21,360,000
----------- ----------- ------------ ------------
Total long-term liabilities........................ 10,682,048 -- 21,000,000 31,682,048
----------- ----------- ------------ ------------
MINORITY INTEREST...................................... 1,199,684 -- (1,113,684)(2) 86,000
----------- ----------- ------------ ------------
MANDATORILY REDEEMABLE PREFERRED STOCK OF A
SUBSIDIARY........................................... 1,753,928 -- -- 1,753,928
----------- ----------- ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock............................. 5 -- -- 5
Common stock......................................... 5,975 -- 1,800(1) 8,169
394(2)
Additional paid-in capital........................... 55,233,847 12,379,000 16,318,200(1) 76,205,223
4,653,176(2)
(12,379,000)(5)
Treasury stock, at cost.............................. (15,200) -- -- (15,200)
Accumulated deficit.................................. (43,318,898) -- (3,303,300) (46,622,198)
Cumulative translation adjustment.................... 173,565 -- -- 173,565
----------- ----------- ------------ ------------
Total stockholders' equity (deficit)............... 12,079,294 12,379,000 5,291,270 29,749,564
----------- ----------- ------------ ------------
$ 41,089,452 $13,822,000 $ 33,734,586 $ 88,646,038
=========== =========== ============ ============
</TABLE>
F-35
<PAGE> 80
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1996
The accompanying unaudited pro forma combined condensed balance sheet has
been prepared by combining the historical results of the Company as of December
31, 1996 and the Nutritional Supplement Lines as of November 30, 1996 and
reflects the following pro forma adjustments:
<TABLE>
<C> <S> <C>
(1) Represents the receipt of the net proceeds from the Company's secondary
public offering of 1,800,000 shares of Common Stock at the public
offering price of 10.00 per share....................................... $16,320,000
(2) Represents the payment of additional consideration in connection with
the completion of the Orgenics Acquisition in the form of cash
consideration of $4,653,570 and the issuance of 393,537 shares of Common
Stock having a fair market value of $4,653,570.......................... 9,307,140
(3) Represents the Orgenics Acquisition purchase price allocation to
in-process research and development and goodwill and other intangible
assets and charge to operations the estimated fair values of the
in-process research and development..................................... 4,890,156
(4) Represents the payment of consideration in connection with the
Nutritional Supplement Lines Acquisition in the form of cash
consideration of $6,500,000 (including acquisition costs of $1,500,000),
bank debt of $25,000,000 and the AHP Note of $6,000,000................. 37,500,000
(5) Represents the Nutritional Supplement Lines Acquisition purchase price
allocation to goodwill and other intangible assets and the elimination
of the Nutritional Supplement Lines equity account...................... 22,528,000
</TABLE>
F-36
<PAGE> 81
SELFCARE, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL
-------------------------------------------- PRO FORMA
NUTRITIONAL ------------------------------
SUPPLEMENT COMBINED
THE COMPANY ORGENICS(1) LINES(2) ADJUSTMENTS COMPANY
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net product sales............................... $ 14,066,630 $10,273,000 $24,449,000 $ -- $ 48,788,630
Grants and other revenue........................ 4,996,158 -- -- -- 4,996,158
------------ ---------- ----------- ----------- -----------
Net revenue................................... 19,062,788 10,273,000 24,449,000 -- 53,784,788
Cost of sales................................... 10,958,024 3,084,000 7,246,000 724,600(3) 22,012,624
------------ ---------- ----------- ----------- -----------
Gross profit.................................. 8,104,764 7,189,000 17,203,000 (724,600) 31,772,164
Operating Expenses:
Research and development...................... 6,643,186 1,159,000 210,000 -- 8,012,186
Charge for in process research and
development................................. 4,396,700 -- -- 3,303,300(5) --
(7,700,000)(8)
Selling, general and administrative........... 10,517,790 4,983,000 4,798,000 1,468,972(4) 26,640,762
2,863,000(3)
2,010,000(6)
Noncash compensation charge................... 4,195,437 -- -- -- 4,195,437
------------ ---------- ----------- ----------- -----------
Total operating expenses.................... 25,753,113 6,142,000 5,008,000 1,945,272 38,848,385
------------ ---------- ----------- ----------- -----------
Operating income (loss)..................... (17,648,349) 1,047,000 12,195,000 (2,669,872) (7,076,221)
Interest expense, including noncash interest.... (11,295,382) -- -- (2,295,000)(7) (13,590,382)
----------- -----------
Interest income................................. 543,447 9,000 -- 552,447
Equity in loss of Enviromed..................... (200,000) -- -- -- (200,000)
------------ ---------- ----------- ----------- -----------
Income (loss) before minority interest and
dividends and accretion on preferred stock of
subsidiary and provision for income taxes..... (28,600,284) 1,056,000 12,195,000 (4,964,872) (20,314,156)
Minority interest in subsidiary's income........ 132,990 -- -- (132,990)(9) --
Dividends and accretion on mandatorily
redeemable preferred stock of a subsidiary.... (110,348) -- -- -- (110,348)
------------ ---------- ----------- ----------- -----------
Net income (loss)........................... $(28,577,642) $ 1,056,000 $12,195,000 $(5,097,862) $(20,424,504)
============ ========== =========== =========== ===========
Pro forma net loss per share:
Net loss per common share..................... $ (4.70) $ (2.47)
============ ===========
Weighted average common shares outstanding.... 6,082,928 2,193,537(10) 8,276,465
============ =========== ===========
</TABLE>
F-37
<PAGE> 82
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
The accompanying unaudited pro forma combined condensed statement of
operations has been prepared by combining the historical results of the Company
and Orgenics for the year ended December 31, 1996 and the Nutritional Supplement
Lines for the year ended November 30, 1996 and reflects the following pro forma
adjustments:
<TABLE>
<C> <S> <C>
(1) The Orgenics historical statement of operations for the period from January
1, 1996 to October 24, 1996 has been translated into U.S. dollars for this
unaudited pro forma combined condensed statement of operations. The
Orgenics statement of operations is translated at the average exchange rate
in effect for the period from January 1, 1996 to October 24, 1996, which
was 3.170 U.S. dollars per New Israeli Shekel. The operations of Orgenics
from the acquisition date (October 24, 1996) through December 31, 1996 are
included in the Company's consolidated statement of operations.
(2) The Nutritional Supplement Lines data presented herein reflect only the
revenues and direct expenses; it does not reflect actual AHP Corporate
overhead allocations of $3,433,000
(3) Represents incremental costs of goods sold and selling, general and
administrative expenses that the Company estimates it will incur following
the Nutritional Supplement Lines Acquisition. Does not reflect additional
revenues, if any, which may result from increased promotional spending. $3,587,660
(4) Reflects amortization expense on goodwill and other intangible assets
acquired as a part of the Orgenics Acquisition based on their estimated
useful life of five years. $1,468,973
(5) Represents charge to operations for the estimated fair values of certain
in-process research and development projects. 3,303,300
(6) Represents amortization expense on goodwill and other intangible assets
acquired as a part of the Nutritional Supplement Lines Acquisition based on
their estimated useful lives of 5 to 20 years. 2,010,000
(7) Represents interest in connection with the bank debt and the AHP Note
associated with the Nutritional Supplement Lines acquisition, assuming an
annual interest rate of 7.5% and 7.0%, respectively. 2,295,000
(8) Represents reversal of nonrecurring charges, in accordance with Securities
and Exchange Commission regulations; the Company has recorded charges
pertaining to the expensing of certain in-process research and development
acquired in connection with the Orgenics Acquisition. Such charges were
recorded as a part of the purchase price allocation. 7,700,000
(9) Represents reversal of minority interest in subsidiary's income. 132,990
(10) Pro forma net loss per share is computed assuming the 1,800,000 and 393,537
shares issued in connection with the proposed public offering and Orgenics
Acquisition, respectively, were outstanding for the entire period. 2,193,537
</TABLE>
F-38
<PAGE> 83
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of ORGENICS LTD.
We have audited the consolidated balance sheets of Orgenics Ltd. ("the
Company") as of September 30, 1996 and December 31, 1995 and 1994, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the nine month period ended September 30, 1996 and for each
of the three years in the period ended December 31, 1995. 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 did not audit the financial statements of CPEI Orgenics LTDA, a
consolidated subsidiary as of September 30, 1996 and December 31, 1995 and for
the nine month period ended September 30, 1996 and for the year ended December
31, 1995 which statements reflect total assets constituting 7% and 8%
respectively of total consolidated assets and total revenues for the nine month
period ended September 30, 1996 and the year ended December 31, 1995,
constituting 23% and 21% respectively of total consolidated revenues. These
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, as it relates to the amounts included for CPEI Orgenics
LTDA, is based solely on the reports of the other auditor.
We conducted our audits in accordance with generally accepted auditing
standards in Israel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973 which do not differ significantly from
generally accepted auditing standards in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, either
originating within the financial statements themselves, or due to any misleading
statement included therein. 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 and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly in all
material respects the consolidated financial position of the Company as of
September 30, 1996 and December 31, 1995 and 1994 and the consolidated results
of their operations and cash flows for the nine month period ended September 30,
1996 and for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles in Israel. For a
description of the differences between generally accepted accounting principles
in Israel and United States generally accepted accounting principles as
applicable in these financial statements see Notes 2n and 2c.
KOST LEVARY AND FORER
Certified Public Accountants (Israel)
a Member of Ernst & Young
International
Tel-Aviv, Israel
November 14, 1996
F-39
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
CPEI ORGENICS LTDA
We have examined the accompanying balance sheet of CPEI ORGENICS LTDA, at
September 30, 1996 and the related statements of income, changes in
stockholders' equity and cash flow for the nine months period then ended. These
financial statements are the responsibility of the entity management. Our
responsibility is to express an opinion on these financial statements.
We conduct our auditing in accordance with the generally accepted auditing
standard in Brazil and in the United States of America. These standards require:
(a) assignment planning, considering the balance materiality, the volume of the
transactions, and the accounting system and internal controls of the entity, (b)
verifying on test basis evidence supporting the amounts and accounting
information, and (c) the evaluation of the practices and significant accounting
estimate made by the management of the entity, as well the presentation of the
financial statements.
In our opinion, the financial statements referred to above represent
fairly, in all material respects, the financial position of CPEI ORGENICS LTDA
at September 30, 1996 and the results of their operation and their cash flow for
the nine months period then ended, in conformity with accounting principles
accepted in Brazil and in the United States of America.
Our examination also comprehended the translation of Brazilian real amounts
into US dollar amounts and in our opinion, such translation has been made in
conformity with the basis stated in note 1. Such US dollar amounts are presented
solely for the convenience of readers outside Brazil.
SAO PAULO, DECEMBER 10TH, 1996
GALLORO & ASSOCIADOS
AUDITORES INDEPENDENTES S/C
CRC-SP N degrees 05.851
VICTOR DOMINGOS GALLORO
SOCIO-DIRETOR
CT-CRC-SP N degrees 44.278
F-40
<PAGE> 85
ORGENICS LTD.
CONSOLIDATED BALANCE SHEETS
U.S. DOLLARS (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2c).................... $ 752 $ 886 $ 1,373
Marketable securities (Note 2d)........................ 78 81 60
Accounts receivable -- trade (Notes 2e and 3).......... 2,131 2,052 2,085
Other accounts receivable and prepaid expenses (Note
4).................................................. 475 451 1,081
Inventories (Notes 2f and 5)........................... 1,167 1,238 1,022
-------- -------- ---------
Total current assets........................... 4,603 4,708 5,621
-------- -------- ---------
INVESTMENTS (Notes 2g and 6)............................. 175 206 200
-------- -------- ---------
FIXED ASSETS (Notes 2h and 7):
Cost................................................... 3,163 3,289 3,484
Less -- accumulated depreciation....................... 1,396 1,772 2,015
-------- -------- ---------
1,767 1,517 1,469
-------- -------- ---------
OTHER ASSETS (Notes 2i and 8)............................ 535 525 520
-------- -------- ---------
$ 7,080 $ 6,956 $ 7,810
======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank debt (Note 9).......................... $ 1,936 $ 1,702 $ 1,240
Current maturities of long-term debt (Note 11)......... 973 639 370
Trade payables......................................... 773 1,208 861
Accrued expenses and other payables (Note 10).......... 1,197 1,348 1,300
-------- -------- ---------
Total current liabilities...................... 4,879 4,897 3,771
-------- -------- ---------
LONG-TERM DEBT, net of current maturities (Note 11)...... 1,117 683 542
-------- -------- ---------
ACCRUED SEVERANCE PAY, NET (Note 12)..................... 108 129 181
-------- -------- ---------
MINORITY INTEREST........................................ -- 71 152
-------- -------- ---------
CONVERTIBLE DEBENTURE (Note 15c)......................... -- -- 1,045
-------- -------- ---------
SHAREHOLDERS' EQUITY (Note 15b):
Share capital.......................................... 66 66 66
Additional paid-in capital............................. 13,114 13,114 13,141
Cumulative translation adjustment...................... 27 99 70
Accumulated deficit.................................... (12,231) (12,103) (11,158)
-------- -------- ---------
Total stockholders' equity..................... 976 1,176 2,119
-------- -------- ---------
$ 7,080 $ 6,956 $ 7,810
======== ======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE> 86
ORGENICS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. DOLLARS (IN THOUSANDS)
(EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ---------------------
1993 1994 1995 1995(*) 1996
------ ------- ------- --------- -------
AUDITED UNAUDITED AUDITED
<S> <C> <C> <C> <C> <C>
Revenues (Notes 2j and 18a)................ $6,307 $ 7,562 $10,173 $ 7,078 $ 9,431
Cost of revenues (Note 18c)................ 2,105 2,192 3,074 2,243(*) 2,878
------ ------- ------- ------- -------
Gross profit............................... 4,202 5,370 7,099 4,835 6,553
------ ------- ------- ------- -------
Research and development expenses (Notes 2k
and 18d)................................. 829 1,563 1,409 909 1,499
Less royalty bearing grants (Notes 21 and
14a)..................................... 273 780 418 228 664
------ ------- ------- ------- -------
Research and development expenses, net..... 556 783 991 681 835
Selling expenses (Note 18e)................ 1,335 1,583 2,377 1,878(*) 2,387
General and administrative expenses (Note
18f)..................................... 1,773 1,946 2,696 1,842 2,225
------ ------- ------- ------- -------
Operating income........................... 538 1,058 1,035 434 1,106
Financial expenses, net (Note 18g)......... (367) (319) (600) (440) (38)
Other income (expenses), net (Note 18h).... (6) 45 15 (6) --
Aborted initial public offering expenses... -- (1,125) (200) (200) --
------ ------- ------- ------- -------
Income (loss) before taxes on income....... 165 (341) 250 (212) 1,068
Taxes on income (Note 16).................. 6 15 62 38 42
------ ------- ------- ------- -------
159 (356) 188 (250) 1,026
Minority share in income of subsidiary..... -- -- (60) (45) (81)
------ ------- ------- ------- -------
Net income (loss).......................... $ 159 $ (356) $ 128 $ (295) $ 945
====== ======= ======= ======= =======
Earning (loss) per share (Note 2o)......... $ 0.25 $ (0.44) $ 0.16 $ (0.37) $ 1.04
====== ======= ======= ======= =======
Weighted average number of shares
outstanding during the year (in
thousands)............................... 635 801 801 801 1,000
====== ======= ======= ======= =======
</TABLE>
- ---------------
(*) Reclassified -- see Note 2t.
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE> 87
ORGENICS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. DOLLARS (IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL CUMULATIVE TOTAL
SHARES SHARE PAID-IN TRANSLATION ACCUMULATED SHAREHOLDERS'
OUTSTANDING CAPITAL CAPITAL ADJUSTMENT DEFICIT * EQUITY
----------- ------- ---------- ---------- ----------- --- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1993.......... 518,997 $46 $ 9,166 $ 60 $ (12,034) $ $ (2,762)
Issuance of shares................... 221,714 20 3,528 -- -- 3,548
Foreign currency translation
adjustments........................ -- -- -- 80 -- 80
Amortization of compensation in stock
options issued to employees........ -- -- 93 -- -- 93
Waiver of interest by related
party.............................. -- -- 268 -- -- 268
Net income........................... -- -- -- -- 159 159
------- --- -------- ---- --------- --- --------
Balance as of December 31, 1993........ 740,711 66 13,055 140 (11,875) 1,386
Foreign currency translation
adjustment......................... -- -- -- (113) -- (113)
Amortization of compensation in stock
options issued to employees........ -- -- 59 -- -- 59
Net loss............................. -- -- -- -- (356) (356)
------- --- -------- ---- --------- --- --------
Balance as of December 31, 1994........ 740,711 66 13,114 27 (12,231) 976
Foreign currency translation
adjustment......................... -- -- -- 72 -- 72
Net income........................... -- -- -- -- 128 128
------- --- -------- ---- --------- --- --------
Balance as of December 31, 1995........ 740,711 66 13,114 99 (12,103) 1,176
Issuance of shares................... 70,923 -- -- -- -- --
Deferred compensation (Note
15b(3))............................ -- -- 62 -- -- 62
Payments to optionees for waiving
stock options (Note 15a(2))........ -- -- (35) -- -- (35)
Foreign currency translation
adjustment......................... -- -- -- (29) -- (29)
Net income........................... -- -- -- -- 945 945
------- --- -------- ---- --------- --- --------
Balance as of September 30, 1996....... 811,634 $66 $ 13,141 $ 70 $ (11,158) $ $ 2,119
======= === ======== ==== ========= === ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE> 88
ORGENICS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. DOLLARS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
---------------------- -------------------
1993 1994 1995 1995 1996
----- ----- ------ --------- -------
AUDITED UNAUDITED AUDITED
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 159 $(356) $ 128 $(295) $ 945
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Minority share in income of subsidiary......... -- -- 60 45 81
Loss (gain) on sale of fixed assets and other
investments.................................. 4 (30) 8 8 --
Depreciation and amortization.................. 225 260 595 469 331
Increase in accrued severance pay, net......... 44 21 21 14 52
Amortization of unearned compensation in stock
options issued to employees.................. 93 59 -- -- 31
Decrease (increase) in accounts
receivable -- trade.......................... (218) (620) 140 341 (79)
Decrease (increase) in other accounts
receivable................................... (160) (103) 13 21 (682)
Decrease (increase) in inventories............. (339) (462) (54) 46 203
(Decrease) increase in trade payables.......... 79 185 419 (174) (323)
(Decrease) increase in accrued expenses and
other payables............................... 391 30 205 146 (1)
Decrease (increase) in marketable securities,
net.......................................... (645) 567 (3) (5) 21
Accrued interest on convertible debenture...... -- -- -- -- 45
----- ----- ------ ----- -----
Net cash provided by (used in) operating
activities..................................... (367) (449) 1,532 616 624
----- ----- ------ ----- -----
Cash flows from investing activities:
Purchase of fixed assets....................... (271) (525) (118) (118) (242)
Purchase of other assets....................... -- (200) (341) (9) (30)
Proceeds from sale of fixed assets............. 58 86 20 13 11
Proceeds from sale of other investments........ 34 -- -- -- --
Purchase of other investments.................. (81) (36) -- -- --
----- ----- ------ ----- -----
Net cash used in investing activities............. (260) (675) (439) (114) (261)
----- ----- ------ ----- -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE> 89
ORGENICS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. DOLLARS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------
1993 1994 1995 1995 1996
------ ------- ----- --------- -------
AUDITED UNAUDITED AUDITED
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Payment to optionees for waiving stock options.... -- -- -- -- (35)
Repayment of short-term debt to a related party... (957) -- -- -- --
Long-term debt -- undertaken...................... 461 509 65 -- 65
Issuance of shares in a private placement......... 3,548 -- -- -- --
Issuance of shares by a subsidiary................ -- -- 11 11 --
Repayment of long-term debt....................... (415) (1,008) (777) (662) (472)
Increase (decrease) in short-term bank debt....... (807) 959 (266) 140 (429)
Issuance of convertible debenture................. -- -- -- -- 1,000
------ ------- ----- ----- -------
Net cash provided by (used in) financing
activities........................................ 1,830 460 (967) (511) 129
------ ------- ----- ----- -------
Net increase (decrease) in cash and cash
equivalents....................................... 1,203 (664) 126 (9) 492
Effect of exchange rate changes on cash............. (3) 13 8 7 (5)
Cash and cash equivalents at the beginning of the
year.............................................. 203 1,403 752 752 886
------ ------- ----- ----- -------
Cash and cash equivalents at the end of the year.... $1,403 $ 752 $ 886 $ 750 $ 1,373
====== ======= ===== ===== =======
Cash paid during the year for:
Interest.......................................... $ 300 $ 338 $ 159 $ 335 $ 213
====== ======= ===== ===== =======
Taxes on income................................... $ 5 $ 15 $ 62 $ 41 $ 46
====== ======= ===== ===== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE> 90
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
a. Organization:
Orgenics Ltd. (hereinafter "Orgenics") is an Israeli corporation which is
engaged in the development, manufacturing and marketing of diagnostic test kits
for infectious diseases and genetic markers.
As of September 30, 1996, approximately 63.9% of the ordinary shares of
Orgenics Ltd. were owned by Orgenics International Holdings B.V. ("OIH"), a
holding company with no business activity.
During November 1996, Selfcare Inc. of Boston USA purchased from the
stockholders of Orgenics approximately 6.5% of Orgenics shares and acquired
direct ownership of 26.8% (after converting the debenture -- see Note 15c).
Following these transactions, 50.7% of Orgenics shares are directly held by
OIH.
PBS S.A. ("PBS"), a French corporation engaged in the marketing of
diagnostic devices in France was, through December 1993, also a wholly-owned
subsidiary of OIH. In December 1993, OIH transferred all of its holdings in PBS
to Orgenics. The acquisition of PBS by Orgenics represents a reorganization of
entities under common control and has been accounted for in a manner similar to
a pooling of interests. Accordingly, the financial statements for prior years
have been restated to give effect to this transaction.
CPEI ORGENICS LTDA ("CPEI"), a Brazilian corporation engaged in the
marketing of diagnostic devices in Brazil, is 55% owned by Orgenics. Beginning
April 1, 1995 CPEI has been accounted for as a consolidated subsidiary of
Orgenics (on April 1, 1995 CPEI started its activity).
The Company and its subsidiaries sell their products throughout the world,
mainly in France and South America. For the nine months ended September 30, 1996
98.5% and for the three years ended December 31, 1995, approximately 95.9%,
96.8% and 98.1%, respectively, of the Group's total revenues were derived from
sales to customers outside of Israel.
b. Principles of consolidation:
The consolidated financial statements include the financial statements of
Orgenics and its subsidiaries, PBS and CPEI.
Significant intercompany balances and transactions have been eliminated in
the consolidation.
Hereinafter, Orgenics and its consolidated subsidiaries are collectively
referred to as the "Company".
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
a. Financial statements in U.S. dollars:
The accompanying financial statements have been prepared in U.S. dollars.
Approximately 98% of the sales of the Company are made outside Israel. In
1996, 34.6% of the Company's consolidated revenues were in U.S. dollars, 1.4%
were in NIS and 64% were in other currencies, primarily the French Franc.
The U.S. dollar has been determined to be the functional currency for the
Company and its subsidiaries except for the French subsidiary.
The functional currency for PBS is the French Franc. Accordingly, the
financial statements of PBS have been translated into dollars in accordance with
the principles set forth in Statement No. 52 of the Financial Accounting
Standards Board of the United States (FASB). Gains and losses resulting from
translation are reflected in stockholders' equity under the caption "cumulative
translation adjustments".
F-46
<PAGE> 91
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company was to declare a dividend, it would be paid in NIS to
Israeli and foreign stockholders.
b. Rates of Exchange:
The amounts stated for assets and liabilities in currencies other than the
functional currency of the Company and its subsidiaries, or linked to foreign
currencies are remeasured into the appropriate functional currency using the
representative exchange rates prevailing at the balance sheet dates.
The exchange rates of the dollar in relation to the New Israeli Shekel and
to the French Franc were as follows:
<TABLE>
<S> <C>
September 30, 1996...................... U.S.$1 = NIS 3.220 = F.FR. 5.17
September 30, 1995...................... U.S.$1 = NIS 2.995 = F.FR. 4.90
December 31, 1995....................... U.S.$1 = NIS 3.135 = F.FR. 4.89
December 31, 1994....................... U.S.$1 = NIS 3.018 = F.FR. 5.35
December 31, 1993....................... U.S.$1 = NIS 2.986 = F.FR. 5.90
December 31, 1992....................... U.S.$1 = NIS 2.764 = F.FR. 5.51
</TABLE>
c. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are readily
convertible to cash and with maturities when purchased of three months or less,
such as short-term deposits.
d. Marketable securities:
Marketable securities are accounted for in accordance with FASB Statement
No. 115. The Company designated its marketable securities as trading and
therefore are presented at their market value at the balance sheet date and
resulting realized and unrealized gains and losses are included in financial
income and expenses.
e. Allowance for doubtful accounts:
The allowance for doubtful accounts is determined with respect to specific
debts which are of doubtful collection.
f. Inventories:
Inventories are stated at the lower of cost or market value.
Cost is determined as follows:
Raw materials -- on the basis of weighted average.
Work in process and finished products of Orgenics -- on the basis of
computed manufacturing costs.
Finished products purchased by PBS and CPEI from third parties -- on the
"first-in, first-out" method.
g. Investments:
The investment in affiliate is accounted for using the equity method of
accounting. Other investments are stated at cost.
h. Fixed assets:
Fixed assets are stated at cost, net of related investment grants received
(see Note 14b).
F-47
<PAGE> 92
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets.
The annual depreciation rates are as follows:
<TABLE>
<CAPTION>
%
------------------
<S> <C>
Laboratories and equipment............................... 7-20 (mainly 7)
Motor vehicles........................................... 15-25 (mainly 15)
Computers and peripheral equipment....................... 20-25 (mainly 20)
Leasehold improvements................................... 10
</TABLE>
i. Other assets:
Purchased know-how and patent registration costs are stated at cost.
Amortization is computed on the straight-line method over the estimated useful
lives of the assets 5-8 years.
j. Revenue recognition:
Sales are recognized upon shipment.
k. Research and development expenses:
Research and development expenses, net of related research grants, are
charged to income as incurred.
l. Royalty-bearing grants:
Royalty-bearing grants from the Government of Israel for funding approved
research projects, are recognized of the time the Company is entitled to such
grants, on the basis of the related costs incurred, and are netted from such
costs in the statement of operations.
m. Advertising expenses:
Advertising costs are expensed as incurred.
n. Taxes on income:
The Company follows the asset and liability method of accounting for income
taxes in accordance with Israeli accounting principles. Under Israeli accounting
principles, deferred income taxes are provided for differences resulting from
changes in the Israeli Consumer Price Index (CPI) (the basis for the Company's
tax reporting) and changes in the exchange rate of the NIS to the U.S. dollar.
FAS No. 109, "Accounting for Income Taxes", does not allow deferred income taxes
to be recognized for these differences which with respect to the Company's
financial statements, are immaterial.
o. Earnings per share:
Earnings per share are computed based on the weighted average number of
shares outstanding during the year, in accordance with Opinion No. 55 of the
Institute of Certified Public Accountants in Israel. The effect of applying APB
15 (U.S. GAAP) on earnings per share is immaterial.
p. Accounting for stock issued to employees:
The Company accounts for stock-based compensation in accordance with the
requirements of APB 25 and intends to continue to do so.
F-48
<PAGE> 93
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
q. Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
r. Concentrations of credit risks:
The Company performs ongoing credit valuations of its debtors. In
management's opinion, the allowance for doubtful accounts adequately covers all
anticipated losses with respect to concentration of credit risks of trade
receivables.
s. Unaudited information:
The financial statements include the unaudited results of operations and
cash flows for the nine months ended September 30, 1995. This unaudited
information has been prepared by the Company on the same basis as the audited
consolidated financial statements and, in management's opinion, reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial information in accordance with generally
accepted accounting principles for the period presented when read in conjunction
with the Company's audited consolidated financial statements and notes thereto.
t. Reclassification:
Prior years amounts have been reclassified to conform to the September 30,
1996 presentation.
NOTE 3: ACCOUNTS RECEIVABLE -- TRADE
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C>
Accounts receivable.................................. $2,169 $2,103 $ 2,155
Less allowance for doubtful accounts................. 38 51 70
------ ------ -------
$2,131 $2,052 $ 2,085
====== ====== =======
</TABLE>
NOTE 4: OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
---- ---- -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C>
Prepaid expenses........................................ $236 $267 $ 427
V.A.T. receivable....................................... 47 52 183
Accrued income receivable............................... 192 104 416
Other receivables....................................... -- 28 55
---- ---- -------
$475 $451 $ 1,081
==== ==== =======
</TABLE>
F-49
<PAGE> 94
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C>
Raw materials and work in process.................... $ 820 $ 692 $ 700
Finished products manufactured by Orgenics........... 332 503 270
Finished products purchased by subsidiaries.......... 15 43 52
------ ------ -------
$1,167 $1,238 $ 1,022
====== ====== =======
</TABLE>
NOTE 6: INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
---- ---- -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C>
Cost of investment in 50%-owned Japanese joint
venture -- Orgenics Takra Co. Ltd..................... $ 25 $ 25 $ 25
Equity in post-acquisition earnings..................... 7 7 7
Cumulative translation adjustments...................... 27 27 27
---- ---- -----
59 59 59
Orgenics International Holding shares(1)................ 84 101 95
Other investments at cost............................... 32 46 46
---- ---- -----
$175 $206 $ 200
==== ==== =====
</TABLE>
- ------------------
(1) In December 1993, PBS bought 24,474 Orgenics International Holding ("OIH")
shares from the former general manager of PBS, as part of a transaction
following his resignation.
In January 1994, PBS bought 1,000 OIH shares from its former marketing
manager, as part of a transaction following his resignation.
F-50
<PAGE> 95
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C>
a. Cost:
Laboratories and equipment......................... $2,094 $2,116 $ 2,153
Motor vehicles..................................... 186 164 209
Computers and peripheral equipment................. 364 417 527
Leasehold improvements............................. 519 592 595
------ ------ -------
$3,163 $3,289 $ 3,484
====== ====== =======
b. Accumulated depreciation:
Laboratories and equipment......................... $ 876 $1,074 $ 1,171
Motor vehicles..................................... 46 63 77
Computers and peripheral equipment................. 245 294 363
Leasehold improvements............................. 229 341 404
------ ------ -------
$1,396 $1,772 $ 2,015
====== ====== =======
c. For assets pledged -- see Note 13.
</TABLE>
NOTE 8: OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C>
Deferred expenses.................................... $ 200 $ -- $ --
Purchased know-how and patent registration costs..... 391 642 672
------ ------ -------
591 642 672
Less accumulated amortization........................ 56 117 152
------ ------ -------
$ 535 $ 525 $ 520
====== ====== =======
</TABLE>
NOTE 9: SHORT-TERM BANK DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C>
French Franc bank overdraft.......................... $ 365 $ 614 $ 5
Israeli NIS bank overdraft........................... 475 500 529
Short-term loans (linked to the U.S. dollar)......... 1,096 588 706
------ ------ -------
$1,936 $1,702 $ 1,240
====== ====== =======
</TABLE>
F-51
<PAGE> 96
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: ACCRUED EXPENSES AND OTHER PAYABLES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C>
Employee payroll and accrued vacation pay............ $ 446 $ 554 $ 616
Government institutions.............................. 35 89 287
Royalties payable to the Chief Scientist of the
Ministry of Trade of Israel........................ 39 65 60
Royalties in respect of production and know-how
licenses........................................... 28 73 16
Royalties payable to the Fund for Encouragement of
Marketing Activity................................. 49 -- --
Other accrued expenses............................... 600 567 321
------ ------ -------
$1,197 $1,348 $ 1,300
====== ====== =======
</TABLE>
NOTE 11: LONG-TERM DEBT
a. Linkage terms and rates of interest:
<TABLE>
<CAPTION>
INTEREST
RATE DECEMBER 31,
TERMS OF -------- ----------------- SEPTEMBER 30,
LINKAGE % 1994 1995 1996
------------- -------- ------ ------ ------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Bank debt(1)................ NIS 20 $ 136 $ 28 $ 75
U.S. Dollar 5- 9 1,495 1,131 682
French Franc 7-12 280 -- --
------ ------ ----
1,911 1,159 757
Government loans(2)......... French Franc 0 179 163 155
------ ------ ----
2,090 1,322 912
Less current maturities................................ 973 639 370
------ ------ ----
$1,117 $ 683 $542
====== ====== ====
</TABLE>
b. Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
First year -- (current maturities)..................... $ 973 $ 639 $370
------ ------ ----
Second Year............................................ 374 375 403
Third Year............................................. 367 308 139
Fourth Year............................................ 376 -- --
------ ------ ----
Long-term debt, net of current maturities.............. 1,117 683 542
------ ------ ----
$2,090 $1,322 $912
====== ====== ====
</TABLE>
c. For assets pledged -- see Note 13.
- ---------------
(1) Including state-guaranteed loans in the amount of $101 thousand.
(2) An interest free loan of $155 thousand (F.FR.800,000) received by PBS from
the Government of France Agency for the Encouragement of Innovation
("ANVAR"). Under the provisions of the loan, and provided the Company
complies with the conditions, if the innovation project is not considered a
technical success, the Company will only be required to refund F.FR.490,000.
The Company is presently
F-52
<PAGE> 97
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
negotiating with this Agency to obtain total waiver of this debt following
the technical failure of the project.
During 1994, ANVAR agreed to convert an interest-free loan of $138 thousand
(F.FR.740,000) to a research grant.
NOTE 12: ACCRUED SEVERANCE PAY
a. Orgenics' liability for severance pay, pursuant to Israeli law, is provided
by managers' insurance policies and by severance pay funds.
Since the insurance policies are owned by the Company, the cash value of
these policies at each period end is recorded as an asset of the Company and
included in Severance Pay Funds in the Company's balance sheet.
According to U.S. GAAP the amounts deposited should have been presented
under Investments.
Following are the amounts of accrued severance pay, and amounts deposited
as presented in the balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1994 1995 1996
----- ----- -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C>
Accrued severance pay................................... $441 $421 $ 529
Less amounts deposited.................................. 333 292 348
---- ---- -----
$108 $129 $ 181
==== ==== =====
</TABLE>
Severance pay expenses for the nine months ended September 30, 1996 and for
the three years ended December 31, 1995 were $109, $248, $156 and $210,
respectively.
b. France has a State-run mandatory pension plan to which contributions are made
monthly by both the employee and employer based on the gross monthly salary.
The liability is fully covered by these contributions.
In addition, pursuant to industry employment agreements, a lump sum
indemnity is payable upon retirement to employees still in the service of PBS at
the date of retirement. Full accrual has been made for this obligation.
NOTE 13: CHARGES (ASSETS PLEDGED)
As collateral for Orgenics' liabilities to banks and to others in Israel,
Orgenics has granted liens on certain assets, including fixed assets, insurance
rights, share capital and goodwill.
NOTE 14: CONTINGENT LIABILITIES AND COMMITMENTS
a. Royalty Commitments:
1. Royalty commitments to the Chief Scientist:
Orgenics finances its research and development expenditures in Israel under
programs sponsored by the Chief Scientist of the Ministry of Trade of Israel,
for the support of research and development projects. In the event that
development of the products in which the Chief Scientist participation is
successful, Orgenics will be obligated to pay royalties at the rate of 2%-5% of
the sales of products developed with funds provided by the Chief Scientist, up
to an amount equal to 100% of the Chief Scientist's research and development
grants to such projects.
F-53
<PAGE> 98
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The maximum contingent royalty as at September 30, 1996 was approximately
$1.6 million.
2. Royalties in respect of production and know-how licenses:
Orgenics entered into several agreements for the license of know-how. Under
these agreements, Orgenics is committed to make royalty payments at rates
varying between 3.5%-8% of sales of the products which were manufactured using
such know-how. The minimum annual royalties payable is $10,500.
b. Commitments in respect of government loans:
See Note 11(2)
c. Lease commitments:
Orgenics and its subsidiaries have leased offices and other facilities
under operating leases for periods through 2006.
Minimum annual rentals payables under non-cancellable operating leases at
rates in effect as of September 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, U.S. DOLLARS
-------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1996................................................................ $ 114
1997................................................................ 266
1998 until 2006 ($235 each year).................................... 1,880
------
Total..................................................... $2,260
======
</TABLE>
d. Patent dispute:
Pasteur Sanofi Diagnostics S.A. ("Sanofi Diagnostics") has asserted that it
holds patents to certain peptides purchased by the Company from Biochem
ImmunoSystems Inc. for use in diagnostic products for HIV, but has not brought a
claim against the Company with respect to the Company's use of such peptides.
However, if the Company were found to be infringing upon patents of Sanofi
Diagnostics, it might be required to pay damages, develop alternate sources of
supply or identify alternate peptides, any of which could have a material
adverse effect upon the Company. At this time, the Company is unable to estimate
the probability of Sanofi Diagnostics making a claim against the Company or the
possible liability of the Company, if any, to Sanofi Diagnostics for the use of
such peptides. In June 1996, the Company signed a toll manufacturing contract
with Sanofi Diagnostic, whereby Orgenics is becoming a toll manufacturer for
rapid HIV kits for Sanofi Diagnostics.
e. Subsidy granted by ANVAR
In 1988, PBS obtained a subsidy from "ANVAR" amounting to $33,900 to share
the costs of a new scientist. "ANVAR" might request a refund on dismissal of
this employee, which occurred when the Company ceased its research and
development activity during 1992. Management considers that it is unlikely that
such a request will be made.
F-54
<PAGE> 99
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: SHAREHOLDERS' EQUITY
a. Share Capital:
1. In February 1994, all classes of shares were converted into one class of
ordinary shares, NIS 0.1 par value each, and the authorized share capital of
Orgenics was increased to 20,000,000 Ordinary Shares of NIS 0.1 par value each.
<TABLE>
<CAPTION>
ORDINARY SHARES OF NIS 0.1
PAR VALUE EACH
--------------------------
NUMBER OF SHARES
--------------------------
ISSUED AND
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
September 30, 1996........................................... 20,000,000 811,634
========== =======
December 31, 1995 and 1994................................... 20,000,000 740,711
========== =======
</TABLE>
2. In September 1993, Orgenics issued 110,855 shares by a private
placement. Within the private placement agreement, the investors were guaranteed
a minimal rate of return in the event the Company effected a public offering.
For this purpose, the Company has allocated 110,859 additional shares to a
trustee, at the date of the private placement.
During the reported period and following an agreement signed between the
Company and Selfcare Inc. (see c. below), the Company transferred the 110,859
shares from the trustee to the private investors, and allocated to those
investors 59,681 additional shares, all in return for the private investors
waiving future rights to a minimal rate of return.
Within the framework of the private placement and as part of the consulting
agreement, the private placement consultants were granted an option to purchase
3.45% of the Company's share capital in an amount equivalent to 10% of the
proceeds raised in the private placement.
During August 1996, the private placement consultants waived their option
against a one-time payment of $35 thousand.
This amount was charged in the financial statements to share premium.
3. The number of shares used in the computation of earnings per share in
prior years was restated in order to reflect the issue of additional shares to
the private investors.
b. Employee Stock Option Plans:
1. During 1992 and 1993, certain employees of Orgenics and PBS were granted
options for the purchase of shares of OIH. As of December 31, 1994 and 1995, all
such options have been exercised or cancelled.
2. In January 1995, the Company granted to Max Herzberg, under the 1994
option plan, options to purchase 11,242 of the Company's ordinary shares, at an
exercise price equal to the par value of the shares. During the reported period,
these stock options were exercised. The exercise increment amounted to $300.
3. 1995 Stock Option Plan:
The Company's stock option plan (the "1995 plan") provides that stock
options of the Company may be granted to employees, officers, directors and
consultants of the Company or any subsidiary. An aggregate of 200,000 ordinary
shares of the Company are reserved for issuance under the 1995 plan. Any options
which are canceled or not exercised within the option period will become
available for future grants. The 1995 plan will terminate in 2004, unless
previously terminated by the Board of Directors.
F-55
<PAGE> 100
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1995 plan will be administered by the Board of Directors or an option
committee which may be appointed by the Board, which has the authority to
determine the persons to whom options will be granted, the number of ordinary
shares to be covered by each option, the time or times at which options will be
granted or exercised, and the terms and provisions of the options.
Options granted under the 1995 plan will generally be exercisable in
installments during the option term. These options will not be transferable by
an optionee other than by will or by laws of descent and distribution and,
during an option holder's lifetime, will be exercisable only by such option
holder or by his or her legal representative. Options granted under the 1995
plan will terminate at such time and under such circumstances as the Board or
option committee determines.
During January 1996, the Company granted to certain employees options,
under the 1995 plan, to purchase 6,392 ordinary shares. These options were
granted on the condition that the employee still be an employee of the company
in January 1998 and at exercises prices representing a discount of 40% on the
share value attributed at the time of the exchange with Selfcare Inc. or 40% of
a company valuation basis of $15 million on a fully diluted basis whatever the
lowest for the employee.
According with U.S. GAAP, the Company accrued deferred compensation in the
amount of $62,000. This amount reflects the excess of the market price over the
exercise price at the date of the grant.
This amount is amortized over the period from January 1996 through January
1998.
c. Convertible debenture
On February 7, 1996, the Company signed an agreement with Selfcare Inc. of
Boston USA by which Selfcare invested $1 million in the Company. The investment
was made in the form of a convertible debenture.
During November 1996, the debenture was converted into 20% of the shares of
Orgenics.
d. In November 1993, a related party agreed to waive $268,356 in interest
payable and the Company repaid the remaining balance of the loan. This waiver of
this debt has been accounted for in "stockholders' equity" as a contribution to
additional paid-in capital.
NOTE 16: TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital Investments,
1959, as amended (hereafter -- "the Law"):
1. The production facilities of the Company have been granted an
"Approved Enterprise" status under the Law.
Income derived from an "Approved Enterprise" is subject, in the case
of Orgenics qualifying as a "foreign investment company," to corporate tax
at the rate of 20% (rather than the regular corporate tax), during a period
of ten years from the year in which such enterprise first earns taxable
income (limited to twelve years from commencement of production or to
fourteen years from the year in which the approval was granted, whichever
is earlier).
The period of benefits in respect of this approval will expire in
1997.
2. Further, an expansion program of Orgenics' enterprise engaged in
the production of diagnostic kits, has been granted an "Approved
Enterprise" status under the Law.
Investments under this program were made in 1991-1994. The Company has
not yet received a final operating approval for this program.
F-56
<PAGE> 101
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
According to the provisions of the Law, Orgenics has chosen, in
respect of this program, to enjoy "alternative benefits" -- waiver of
grants in return for tax exemption.
Accordingly, income derived from such program will be tax exempt for a
period of two years and will be subject to corporate tax at a rate of 20%
for the following eight years (limited to twelve or fourteen years, as
mentioned in 1. above).
The benefit period for this expansion program has not yet commenced.
Since Orgenics is operating under more than one approved program and
since part of its taxable income is not entitled to tax benefits under the
above-mentioned law and is taxed at regular rates (1993 -- 39%,
1994 -- 38%, 1995 -- 37% and 1996 -- 36%), its effective tax rate is the
result of a weighted combination of the various applicable rates or tax
exemptions. The computation is made for income derived from each project on
the basis of formulas specified in the Law and in the approvals.
3. The Law also grants the right to claim accelerated depreciation on
equipment used by the "Approved Enterprise".
b. Tax benefits under the Law for the Encouragement of Industry (Taxation),
1969:
Orgenics is an "Industrial Company" under the above law, and, as such, is
entitled to certain tax benefits, including accelerated depreciation at
increased rates and the deduction of the purchase price of know-how, over a
period of eight years.
c. Measurement of results of Orgenics for tax purposes:
Results of Orgenics for tax purposes are measured in terms of earnings in
NIS after certain adjustments for increases in the Israeli Consumer Price Index
("CPI"). As explained in Note 2a, the financial statements are presented in
United States dollars. The difference between the annual change in the Israeli
CPI and in the NIS/Dollar exchange rate causes a difference between taxable
income and the income before taxes in the financial statements.
d. Taxes on income in France:
Income taxes in France are computed, for fiscal years beginning on January
1, 1996, at a standard rate of 36.66% of taxable income (for the previous fiscal
years the standard rate was 33.33%). Ordinary tax losses can be carried forward
to offset taxable income for five years. Tax losses resulting from depreciation
can be carried forward with no time limit.
e. Taxes on income in Brazil:
Taxes on income in Brazil are computed for fiscal years beginning on
January 1. Commencing in 1996, the standard rate for taxable income will be 15%
(for the previous fiscal year the standard rate was 25%).
f. Carryforward tax losses:
Orgenics has a carryforward tax loss with no time limit amounting to
approximately $8.1 million (NIS 26 million) as of December 31, 1995. Losses in
NIS are linked to the Israeli CPI.
F-57
<PAGE> 102
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PBS has a carryforward tax loss amounting to approximately $4.4 million
as of September 30, 1996.
Tax losses expire as follows:
<TABLE>
<CAPTION>
U.S. DOLLARS
----------------
(IN THOUSANDS)
<S> <C>
1996................................................... $ 531
1997................................................... --
1998................................................... 476
With no time limit..................................... 3,436
------
$4,443
======
</TABLE>
g. Tax assessments:
1. Orgenics has received final tax assessments up to and including the year
1990.
2. PBS has received final tax assessments up to and including the year
1991. Fiscal years remaining open for a tax audit are the years ended December
31, 1995, 1994 and 1993. However, in the event of utilization of carryforward
losses from previous years, the tax authorities are entitled to reassess the
years in which the tax loss originated.
h. A reconciliation of the theoretical tax expense assuming all income is taxed
at the statutory rate and the actual tax expense is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ SEPTEMBER 30,
1993 1994 1995 1996
----- ----- ---- -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Theoretical tax expense (income tax benefit) computed
at the statutory rate applicable to corporations in
Israel(1)........................................... $ 64 $(130) $ 93 $ 384
Increase (decrease) in income taxes resulting from:
Tax adjustments in respect of inflation in Israel... 63 (110) (18) (171)
Non-deductible expenses............................. 52 470 94 17
Different tax rate resulting from lower tax rate in
France and Brazil................................ (53) (5) (25) (44)
Tax benefits realized from use of loss carryforwards
not previously recorded as deferred tax
benefit.......................................... (120) (210) (82) (144)
----- ----- ---- -----
Taxes on income in the statements of operations(2).... $ 6 $ 15 $ 62 $ 42
===== ===== ==== =====
</TABLE>
(1) Computed at the rate of 39% for the year 1993, 38% for the year 1994, 37%
for the year 1995, and 36% for the year 1996.
(2) Represents the minimum taxes paid by PBS and CPEI pursuant to the French and
the Brazilian law.
F-58
<PAGE> 103
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
i. Income before income taxes consisted
of the following:
Domestic (Israel)....................... $ 423 $ (420) $ 16 $ 525
Foreign................................. (258) 79 234 543
------- ------- ------- -------
$ 165 $ (341) $ 250 $ 1,068
======= ======= ======= =======
</TABLE>
j. Deferred income taxes:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
The Company's deferred income taxes
consist of the following:
Various accrued liabilities........... $ 32 $ 39 $ 105 $ 120
Carryforward losses................... 3,226 3,449 4,464 3,927
Intercompany unrealized income
currently taxable.................. 14 18 15 17
------- ------- ------- -------
3,272 3,506 4,584 4,064
Less valuation allowance(1)........... (3,272) (3,506) (4,584) (4,064)
------- ------- ------- -------
$ -- -- -- --
======= ======= ======= =======
</TABLE>
(1) In 1993, 1994 and 1995, the Company has provided a 100% valuation allowance
against the deferred tax assets, in respect of those tax loss carryforwards
and other temporary differences, due to uncertainty of future results and
its ability to realize these deferred tax assets.
F-59
<PAGE> 104
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17: TRANSACTIONS WITH RELATED PARTIES
a. In September 1993, an employment agreement was signed between Orgenics and
its Chairman of the Board and Chief Executive Officer ("the Employee"). It was
agreed that from January 1, 1993, the Employee will be entitled annually to
participate in the profit of the Company at a rate of 2% of the net income of
the Company, subject to the condition that the net income of the Company be at
least 10% of total sales of the Company in the same year. The agreement will
expire after four years beginning from September 1993 unless one of the two
parties gives expiration notice earlier.
In January 1995, the Company, under the 1994 option plan, granted to the
Employee options to purchase 11,242 of the Company's ordinary shares (see Note
15b).
b. Transactions with related parties are included in the following items in the
statement of operations:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1993 1994 1995 1996
--- --- --- -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Legal fees and other expenses to OIH....................... $30 $16 $50 $ 165
Revenues from a Company owned by the minority stockholder
of CPEI.................................................. -- -- -- $ 305
</TABLE>
c. CPEI-ORGENICS LTDA -- local management neglected to apply for a permit to
conduct business in the State of Sao Paulo and this company received a warning
from the Health Authorities of that State that it is precluded from selling
products until full documentation is obtained.
Management believes that such a permit will be obtained soon, provided
CPEI-ORGENICS LTDA's local management makes efforts to receive it. In the
meantime, Orgenics Ltd. gave authorization to a related company to sell its
products for a period of three months in the Brazilian market through
CPEI-ORGENICS LTDA.
Management believes that CPEI-ORGENICS LTDA's local management is acting in
conflict of interest and have been notified by the Company to that effect.
Management believes that sales in Brazil could be temporarily affected by 10-20%
in 1997 if a dispute with a local partner would force the Company to establish
alternative distribution channels.
NOTE 18: SELECTED STATEMENT OF OPERATIONS DATA
a. Sales classified by geographical destination:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------- -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
France............................................ $3,139 $3,054 $ 4,182 $ 6,401
South America..................................... 1,117 1,675 3,310 2,153
United States..................................... 448 199 132 287
Europe (excluding France)......................... 522 1,027 701 36
Israel............................................ 258 245 192 137
Other countries................................... 823 1,362 1,656 417
------ ------ ------- -------
Total revenues.......................... $6,307 $7,562 $10,173 $ 9,431
====== ====== ======= =======
Including exchange rate insurance revenues (net of
premium)........................................ $ 42 $ -- $ -- $ --
====== ====== ======= =======
</TABLE>
F-60
<PAGE> 105
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
b. Information about the Company's operations in different geographical areas:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------
ADJUSTMENTS
AND
ISRAEL FRANCE BRAZIL ELIMINATIONS CONSOLIDATED
------ ------ ------ ------------ ------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers......... $3,264 $4,014 $2,153 $ -- $ 9,431
Transfers between geographic areas...... 1,814 -- -- (1,814) --
------ ------ ------ -------- --------
Total sales................... $5,078 $4,014 $2,153 $ (1,814) $ 9,431
====== ====== ====== ======== ========
Operating income........................ $ 532 $ 486 $ 132 $ (44) $ 1,106
====== ====== ====== ========
Financial expenses, net................. (38)
Other expenses, net..................... --
--------
Income before taxes on income........... $ 1,068
========
Identifiable and total assets at
September 30, 1996.................... $6,444 $1,756 $ 597 $ (987) $ 7,810
====== ====== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------
ADJUSTMENTS
AND
ISRAEL FRANCE BRAZIL ELIMINATIONS CONSOLIDATED
------ ------ ------ ------------ ------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers......... $3,838 $4,182 $2,153 $ -- $ 10,173
Transfers between geographic areas...... 1,857 -- -- (1,857) --
------ ------ ------ -------- --------
Total sales................... $5,695 $4,182 $2,153 $ (1,857) $ 10,173
====== ====== ====== ======== ========
Operating income........................ $ 583 $ 321 $ 221 $ (90) $ 1,035
====== ====== ====== ======== ========
Financial expenses, net................. (600)
Other expenses, net..................... (185)
--------
Income before taxes on income........... $ 250
========
Identifiable and total assets at
December 31, 1995..................... $5,274 $1,976 $ 562 $ (856) $ 6,956
====== ====== ====== ======== ========
</TABLE>
F-61
<PAGE> 106
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------
ADJUSTMENTS
AND
ISRAEL FRANCE ELIMINATIONS CONSOLIDATED
------ ------ ------------ ------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers.................. $4,463 $3,099 $ -- $ 7,562
Transfers between geographic areas............... 1,079 -- (1,079) --
------ ------ -------- --------
Total sales............................ $5,542 $3,099 $ (1,079) $ 7,562
====== ====== ======== ========
Operating income................................. $1,026 $ 13 $ 19 $ 1,058
====== ====== ========
Financial expenses, net.......................... (319)
Other expenses, net.............................. (1,080)
--------
Loss before taxes on income...................... $ (341)
========
Identifiable and total assets at December 31,
1994........................................... $6,972 $1,749 $ (1,641) $ 7,080
====== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------
ADJUSTMENTS
AND
ISRAEL FRANCE ELIMINATIONS CONSOLIDATED
------ ------ ------------ ------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers.................. $3,079 $3,228 $ -- $ 6,307
Transfers between geographic areas............... 1,080 150 (1,230) --
------ ------ -------- --------
Total sales............................ $4,159 $3,378 $ (1,230) $ 6,307
====== ====== ======== ========
Operating income (loss).......................... $ 558 $ (62) $ 42 $ 538
====== ====== ========
Financial expenses, net.......................... (367)
Other expenses, net.............................. (6)
--------
Income before taxes on income.................... $ 165
========
Identifiable and total assets at December 31,
1993........................................... $7,291 $2,746 $ (3,848) $ 6,189
====== ====== ======== ========
</TABLE>
c. Cost of revenues:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Materials consumed................................. $812 $1,149 $1,231 $ 1,009
Salaries and related employee benefits............. 350 456 535 460
Royalties.......................................... 246 129 111 195
Other manufacturing costs.......................... 231 190 114 194
Depreciation and amortization...................... 112 91 185 106
------ ------ ------ -------
1,751 2,015 2,176 1,964
Decrease (increase) in finished products and work
in process manufactured by Orgenics.............. (87) (188) (111) 179
------ ------ ------ -------
1,664 1,827 2,065 2,143
Commercial activities -- cost of purchased products
sold............................................. 441 365 1,009 735
------ ------ ------ -------
$2,105 $2,192 $3,074 $ 2,878
====== ====== ====== =======
</TABLE>
F-62
<PAGE> 107
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
d. Research and development expenses:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and related employee benefits............. $ 475 $ 765 $ 961 $ 889
Materials consumed................................. 111 528 314 280
Subcontractors and others.......................... 197 215 74 172
Depreciation and amortization...................... 46 55 60 158
------ ------ ------ -------
$ 829 $1,563 $1,409 $ 1,499
====== ====== ====== =======
</TABLE>
e. Selling expenses:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and related employee benefits............. $ 591 $ 787 $1,179 $ 1,098
Transportation and deliveries...................... 281 313 409 556
Advertising........................................ 138 138 418 166
Depreciation....................................... 6 30 32 10
Other selling expenses............................. 319 315 339 557
------ ------ ------ -------
$1,335 $1,583 $2,377 $ 2,387
====== ====== ====== =======
</TABLE>
f. General and administrative expenses:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and related employee benefits............. $ 881 $ 931 $1,221 $ 999
Rental expense and municipal taxes................. 219 380 230 227
Other general and administrative expenses.......... 613 550 1,156 942
Depreciation....................................... 60 85 89 57
------ ------ ------ -------
$1,773 $1,946 $2,696 $ 2,225
====== ====== ====== =======
</TABLE>
F-63
<PAGE> 108
ORGENICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
g. Financial expenses, net
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------- SEPTEMBER 30,
1993 1994 1995 1996
---- ---- ---- -------------
U.S. DOLLARS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest on short-term debt............................. $208 $204 $377 $ 168
Interest on long-term debt.............................. 135 162 203 45
Foreign translation differences......................... 105 (39) 88 (196)
Interest on short-term investments and others........... (32) (70) (62) --
Loss (gain) from marketable securities.................. (49) 62 (6) 21
---- ---- ---- -----
Financial expenses, net................................. $367 $319 $600 $ 38
==== ==== ==== =====
</TABLE>
h. Other income (expenses) net
<TABLE>
<S> <C> <C> <C> <C>
Gain (loss) on sale of fixed assets and other
investments........................................... $ (4) $ 30 $ (8) $ --
Other income (expenses)................................. (2) 15 23 --
---- ---- ---- -----
$ (6) $ 45 $ 15 $ --
==== ==== ==== =====
</TABLE>
NOTE 19: SUBSIDIARIES INCLUDED IN THE CONSOLIDATION
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME OF THE COMPANY OWNERSHIP
----------------------------------------------------------------- -----------------------
<S> <C>
PBS S.A.......................................................... 99.98%
Orgenics International Corporation
(wholly-owned by PBS S.A.)..................................... 99.98%
CPEI ORGENICS LTDA (CPEI)........................................ 55.00%
</TABLE>
F-64
<PAGE> 109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Home Products Corporation:
We have audited the accompanying statement of net assets to be sold of
American Home Products Corporation's Whitehall-Robins Healthcare
Division-Certain Domestic Vitamin and Nutritional Supplement Consumer Healthcare
Brands (Nutritional Supplement Lines) as of November 30, 1996, and the related
statements of net revenues in excess of direct expenses for the years ended
November 30, 1995 and 1996. These 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.
These statements have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Form SB-2 of Selfcare, Inc., as described in Note 1 and are not intended to
be a complete presentation of the Nutritional Supplement Line's assets and
liabilities and revenues and expenses.
In our opinion, the statements referred to above present fairly, in all
material respects, the net assets to be sold as of November 30, 1996, and net
revenues in excess of direct expenses of the Nutritional Supplement Lines for
the years ended November 30, 1995 and 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 30, 1996
F-65
<PAGE> 110
AMERICAN HOME PRODUCTS CORPORATION
WHITEHALL-ROBINS HEALTHCARE DIVISION -- CERTAIN DOMESTIC VITAMIN
AND NUTRITIONAL SUPPLEMENT CONSUMER HEALTHCARE BRANDS
(NUTRITIONAL SUPPLEMENT LINES)
STATEMENT OF NET ASSETS TO BE SOLD
AS OF NOVEMBER 30, 1996
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<S> <C>
INTANGIBLES, net................................................................... $13,822
ACCRUED EXPENSES................................................................... (1,443)
-------
Net assets to be sold.................................................... $12,379
=======
</TABLE>
The accompanying notes are an integral part of this statement.
F-66
<PAGE> 111
AMERICAN HOME PRODUCTS CORPORATION
WHITEHALL-ROBINS HEALTHCARE DIVISION -- CERTAIN DOMESTIC VITAMIN
AND NUTRITIONAL SUPPLEMENT CONSUMER HEALTHCARE BRANDS
(NUTRITIONAL SUPPLEMENT LINES)
STATEMENTS OF NET REVENUES IN EXCESS OF DIRECT EXPENSES
FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1996
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
NET REVENUES........................................................... $25,986 $24,449
------- -------
DIRECT COSTS AND EXPENSES:
Cost of sales........................................................ 7,809 7,246
Direct marketing expenses............................................ 6,543 3,847
Direct selling, general and administrative expenses.................. 1,045 951
Research and development expenses.................................... 210 210
------- -------
Net revenues in excess of direct expenses.................... $10,379 $12,195
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE> 112
AMERICAN HOME PRODUCTS CORPORATION
WHITEHALL-ROBINS HEALTHCARE DIVISION -- CERTAIN DOMESTIC VITAMIN
AND NUTRITIONAL SUPPLEMENT CONSUMER HEALTHCARE BRANDS
(NUTRITIONAL SUPPLEMENT LINES)
NOTES TO STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission for
inclusion in the Form SB-2 of Selfcare, Inc., and are not intended to be a
complete presentation of the American Home Products Corporation's
Whitehall-Robins Healthcare Division -- Certain Domestic Vitamin and Nutritional
Supplement Consumer Healthcare Brands (the Nutritional Supplement Lines) assets
and liabilities and revenues and expenses. Pursuant to a draft Purchase
Agreement between American Home Products Corporation (the Parent), American
Cyanamid Company, A.H. Robins Company, Inc. and Selfcare, Inc., certain
intangible assets and certain liabilities (see accrued expenses) will be
acquired by Selfcare, Inc. for $30,000,000 cash and $6,000,000 in the form of a
note payable with an annual interest rate of 7%, due one year after closing. All
other assets and liabilities of the Nutritional Supplement Lines have been
excluded in accordance with the draft Purchase Agreement.
The statement of net assets to be sold has been derived from the financial
statements of Domestic Whitehall-Robins Healthcare, a division of American Home
Products Corporation (the Division). The products (the Brands) subject to the
draft Purchase Agreement are --
-- Allbee(R)
-- Beminal(R)
-- Gevral(R)-T
-- Gevrabon(R)
-- Posture(R)
-- Protegra(R)
-- Stresstabs(R)
-- Z-Bec(R)
The Company will not purchase the trademark "Ferro-Sequels" from the
Parent, but instead will receive an exclusive, fully paid license from the
Parent to use the mark in the United States.
The statements of net revenues in excess of direct expenses excludes
charges which are allocated to the Nutritional Supplement Lines by the Division
or the Parent. These allocations include, among other things, support services
such as research and development, legal, finance, treasury, tax, pension and
group insurance, insurance, environmental, safety, public relations, audit and
executive management advisory functions, as well as quality control, warehousing
and administrative costs. Interest income or expense attributable to borrowings
required to finance the Nutritional Supplement Lines' operations have also been
excluded.
Intangibles, Net
No specific historical costs had been recorded relative to the intangible
assets subject to the draft Purchase Agreement. Certain of the Brands were
acquired as part of American Home Products Corporation's acquisition of American
Cyanamid Company, which occurred effective December 1, 1994. The intangible
assets to be sold pursuant to the draft Purchase Agreement represent these
brands' proportionate share of the excess of the cost over the fair value of the
net assets acquired in that acquisition of American Cyanamid and are being
amortized on the straight-line method over 40 years. The allocation has been
made based upon the relative brand profit of the products to the total brand
profit of the Consumer Health division of American Cyanamid Company. At November
30, 1996, the accumulated amortization was $728,000.
F-68
<PAGE> 113
AMERICAN HOME PRODUCTS CORPORATION
WHITEHALL-ROBINS HEALTHCARE DIVISION -- CERTAIN DOMESTIC VITAMIN
AND NUTRITIONAL SUPPLEMENT CONSUMER HEALTHCARE BRANDS
(NUTRITIONAL SUPPLEMENT LINES)
NOTES TO STATEMENTS -- (CONTINUED)
Accrued Expenses
Accrued expenses represents the liabilities for returns and other price
adjustments and promotional accruals on sales occurring on or before November
30, 1996. The Company provides for these accruals at the time of sale based on
historical percentages.
Net Revenues and Direct Expenses
Net revenues, cost of sales, marketing and selling, general and
administrative direct expenses are based on the actual amounts recorded by the
Division associated with the Nutritional Supplement Lines. Amortization of
intangibles was $364,000 for each of the years ended November 30, 1995 and 1996
and is included in selling, general and administrative expenses.
(2) COMMITMENTS AND CONTINGENCIES:
In accordance with the draft Purchase Agreement, American Home Products
Corporation and its subsidiaries and divisions will be required to provide
certain transition supplies of the Brands and manufacturing capacity for the
Brands to the buyer.
F-69
<PAGE> 1
EXHIBIT 23.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-KSB, into the Company's previously filed
Registration Statement File Nos. 33-15583 and 33-17855.
ARTHUR ANDERSON LLP
March 24, 1997
Boston, Massachusetts
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Public Auditors
As independent public accountants of Orgenics Ltd., we hereby consent to the
incorporation of our report, dated January 6, 1997 included in this Form
10-KSB, into the Company's previously filed Registration Statement File No.
33-15583 and No. 33-17855.
/s/ KOST, LEVARY and FORER
Certified Public Accountants (Israel)
a Member of Ernst & Young International
March 26, 1997
Tel-Aviv, Israel
<PAGE> 1
-------------------------
[GALLORO LOGO]
-------------------------
Sao Paulo, March 25, 1997
SELFCARE, INC.
Re: CPEI ORGENICS LTDA.
"CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS"
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made apart of this Form
10-KSB, into the Company's previously filed Registration Statement Nos.
33-15583 and 33-17855.
GALLORO & ASSOCIADOS
Auditores Independentes S/C
CRC - SP n 05.851
/s/ VICTOR DOMINGOS GALLORO
Socio-Director
CT-CRC-SP n 44.278
Certified Public Accountant in Brazil
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,458,654
<SECURITIES> 0
<RECEIVABLES> 5,794,814
<ALLOWANCES> 316,000
<INVENTORY> 2,266,234
<CURRENT-ASSETS> 25,237,962
<PP&E> 9,451,238
<DEPRECIATION> 1,592,353
<TOTAL-ASSETS> 41,089,452
<CURRENT-LIABILITIES> 15,374,498
<BONDS> 5,895,701
1,753,928
5
<COMMON> 5,975
<OTHER-SE> 12,073,314
<TOTAL-LIABILITY-AND-EQUITY> 41,089,452
<SALES> 14,066,630
<TOTAL-REVENUES> 19,062,788
<CGS> 10,958,024
<TOTAL-COSTS> 17,160,976
<OTHER-EXPENSES> 8,592,137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,295,382
<INCOME-PRETAX> (28,577,642)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,577,642)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,577,642)
<EPS-PRIMARY> (4.70)
<EPS-DILUTED> (4.70)
</TABLE>
