<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-20871
SELFCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3161276
(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)
(617) 647-3900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the registrant's Common Stock as of
May 5, 1997 was 8,124,912.
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE> 2
SELFCARE, INC.
FORM 10-QSB
For the Quarterly Period Ended March 31, 1997
This Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Factors that might cause such
a difference are discussed in the section entitled "Certain Factors Affecting
Future Operating Results" on page 15 of this Form 10-QSB.
TABLE OF CONTENTS
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
a) Consolidated Statement of Operations for the three months ended
March 31, 1997 and 1996 1
b) Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 2
c) Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 3
d) Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL INFORMATION
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
Net product sales $8,757,181 $2,400,892
Grants and other revenue 337,426 68,509
------- ------
Net revenues 9,094,607 2,469,401
Cost of sales 5,036,978 1,835,497
--------- ---------
Gross profit 4,057,629 633,904
Operating Expenses:
Research and development 3,075,193 1,254,826
Selling, general and administrative 4,761,458 1,874,722
Noncash compensation charge (Note 4) 37,629 5,662,741
------ ---------
Total operating expenses 7,874,280 8,792,289
--------- -----------
Operating loss (3,816,651) (8,158,385)
----------- -----------
Interest expense, including noncash
interest expense relating to issuance
of warrants (Note 4) (605,432) (8,153,731)
Interest income 142,975 18,769
Unrealized loss on foreign currency translation (718,967) --
Other expense (27,401) --
-------- -----------
Loss before dividends and accretion on
preferred stock of a subsidiary (5,025,476) (16,293,347)
Minority interest in subsidiaries' income 159,540 --
Dividends and accretion on mandatorily
redeemable preferred stock of
a subsidiary (28,179) (22,977)
-------- --------
Net loss $(4,894,115) $(16,316,324)
------------ -------------
Net loss per common and
common equivalent share $(0.74) $(2.61)
------- -------
Weighted average number of common
and common equivalent shares
outstanding 6,591,261 6,247,515
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
1
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SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,484,148 $ 16,458,654
Accounts receivable, net of allowance for doubtful accounts
of $347,000 in 1997 and $316,000 in 1996 7,308,342 5,478,814
Inventories (Note 3) 2,624,327 2,266,234
Prepaid expenses and other current assets 1,676,153 1,034,260
------------ ------------
Total current assets 37,092,970 25,237,962
PROPERTY AND EQUIPMENT, NET 9,302,078 7,858,885
INVESTMENTS IN AFFILIATED COMPANIES 3,732,609 3,732,609
TRADEMARKS, NET 21,505,771 --
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 18,126,948 3,741,171
OTHER ASSETS 1,998,467 518,825
------------ ------------
Total assets $ 91,758,843 $ 41,089,452
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank debt $ 10,977,810 $ 1,337,000
Notes payable 8,975,000 --
Current portion of long-term debt 532,500 332,000
Current portion of promissory note payable to EN PLC 1,267,851 1,267,851
Accounts payable 5,949,959 4,991,543
Accrued expenses and other current liabilities 7,340,558 5,826,952
Current portion of deferred revenue 1,558,681 1,619,152
--------- ------------
Total current liabilities 36,602,359 15,374,498
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion 4,379,443 4,786,347
Notes payable, net of current portion -- 3,000,000
Promissory note payable to EN PLC, net of current portion 2,449,770 2,535,701
Long-term debt, net of current portion 21,710,391 360,000
---------- ------------
Total long-term liabilities 28,539,604 10,682,048
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7, 8, and 9)
MINORITY INTEREST IN SUBSIDIARIES 1,147,588 1,199,684
--------- ------------
MANDATORILY REDEEMABLE PREFERRED STOCK OF
SUBSIDIARY 1,782,107 1,753,928
--------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock
Authorized - 5,000,000 shares
Issued and outstanding - 3,000 in 1997 and 5,200 in 1996 3 5
Common stock, $.001 par value -
Authorized - 40,000,000 shares
Issued and outstanding - 8,094,951 and 5,975,263 shares in
1997 and 1996 respectively 8,095 5,975
Additional paid-in capital 71,560,534 55,233,847
Deferred compensation (20,590) --
Less-Treasury stock, at cost, 15,600 shares in 1997 and 1996 (15,200) (15,200)
Accumulated deficit (48,295,513) (43,318,898)
Cumulative translation adjustment 449,856 173,565
------------ ------------
Total stockholders' equity 23,687,185 12,079,294
------------ ------------
Total liabilities and stockholders' equity $ 91,758,843 $ 41,089,452
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
2
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SELFCARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (4,894,115) $(16,316,324)
Adjustments to reconcile net loss to net cash used in operating activities:
Dividends and accretion on preferred stock of a subsidiary 28,179 22,977
Dividends accrued on Series A preferred stock (23,865) --
Noncash interest expense related to issuance of warrants -- 8,118,724
Compensation expense related to issuance of common stock options 37,629 62,741
Compensation expense related to common stock options issued to the
Company's chief executive officer -- 5,600,000
Amortization of deferred revenue (348,801) (68,509)
Depreciation and amortization 799,822 190,063
Minority interest in subsidiaries' income (159,539) --
Changes in assets and liabilities:
Accounts receivable (2,135,526) (33,444)
Inventory (265,219) (210,603)
Prepaid and other current assets (442,575) (282,732)
Accounts payable 1,531,288 722,715
Accrued expenses and other current liabilities 1,072,621 648,721
------------ ------------
Net cash used in operating activities (4,800,101) (1,545,671)
------------ ------------
Cash Flows From Investing Activities:
Purchases of property and equipment (2,121,026) (1,308,938)
Cash paid for purchase of nutritional supplement brands (30,983,869) --
Cash paid for license from ChemTrak (333,000) --
(Increase) decrease in other assets 93,036 (332,000)
------------ ------------
Net cash used in investing activities (33,344,859) (1,640,938)
------------ ------------
Cash Flows From Financing Activities:
Net proceeds from issuance of common stock 16,242,716 --
Net proceeds from issuance of notes payable 29,731,250 --
Repayments of notes payable (132,557) --
Net proceeds from borrowing under short-term bank debt 641,327 --
Net proceeds from borrowing under long-term bank debt 509,590 --
Repayments of long-term debt (103,150) --
Cash loaned to Enviromed plc (327,120) --
-------- ------------
Net cash provided by financing activities 46,562,056 --
------------ ------------
Foreign Exchange Effect on Cash and Cash Equivalents 608,398 (36,063)
Net Increase (Decrease) in Cash and Cash Equivalents 9,025,494 (3,222,672)
Cash and Cash Equivalents, beginning of year 16,458,654 7,394,750
------------ ------------
Cash and Cash Equivalents, end of period $ 25,484,148 $ 4,172,078
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for -
Interest $ 413,529 $ 76,631
Income taxes $ 1,000 $ 6,035
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE> 6
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Basis of Presentation of Financial Information
The accompanying consolidated financial statements of Selfcare, Inc. and its
subsidiaries (the "Company" or "Selfcare") are condensed and unaudited. In the
opinion of management, the unaudited, condensed, consolidated financial
statements contain all adjustments considered normal and recurring, with the
exception of the non-cash compensation and interest charges (see Note 4),
necessary for their fair presentation. These interim financial statements have
been prepared in accordance with the instructions for Form 10-QSB and therefore
do not include all information and footnotes necessary for a complete
presentation of operations, financial position, and cash flows of the Company,
in conformity with generally accepted accounting principles. The Company filed
audited consolidated financial statements which included information and
footnotes necessary for such presentation for the year ended December 31, 1996
on Form 10-KSB/A. These unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
related notes for the period ended December 31, 1996 included on Form 10-KSB/A
filed with the Securities and Exchange Commission.
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. Common Stock equivalents (certain stock options,
warrants and convertible preferred stock) for all periods have not been
included, as their inclusion would be antidilutive.
2) Cash and Cash Equivalents
The Company considers all highly liquid cash investments with maturities of
three months or less at the date of acquisition to be cash equivalents. At March
31, 1997, the Company's cash equivalents consisted of United States treasury
notes, repurchase agreements, and money market funds. The Company follows the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities; all of the
Company's cash equivalents are classified as held to maturity and carried at
amortized cost.
3) Inventory
Inventory is comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
Raw materials $1,922,452 $1,363,168
Work in-process 308,710 272,466
Finished goods 393,165 630,600
------- -------
$2,624,327 $2,266,234
========== ==========
</TABLE>
4) Non recurring, non-cash expenses
On August 15, 1995, the Company entered into a stock option agreement (the
"Agreement") with the Chief Executive Officer ("CEO") of the Company. Under the
Agreement, the CEO received an option to acquire 520,000 shares of the Company's
common stock, par value $.001 per share (the "Common Stock"). The stock option
vested and became exercisable upon the completion of the Company's initial
public offering on August 9, 1997. The exercise price of the option is $2.27 per
share of Common Stock. For the three months ended March 31, 1996, the non-cash
compensation expense related to this stock option was $5.6 million. There was no
charge related to the Agreement in the three months ended March 31, 1997.
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. 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.
4
<PAGE> 7
In December 1996, the Company entered into agreements with substantially all
the principal noteholders 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 and 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 occurs. 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. The Company has recorded noncash interest
charges of approximately $8.1 million for the three months ended March 31, 1996
which represented the difference between the fair market value of the underlying
Common Stock and the exercise price of the Cambridge Diagnostics Warrants. There
was no charge for the three months ended March 31, 1997 since the number of
shares to be issued was fixed.
5) Public Offerings of Common Stock
In connection with the Company's Initial Public Offering, on August 6, 1996,
the Common Stock began trading on the AMEX. The Company sold 1,495,000 shares
and received net proceeds of approximately $10.4 million.
In March, 1997, the Company sold 1,800,000 shares of Common Stock in a public
stock offering ("the March 1997 Offering"). The total net proceeds from the
March 1997 Offering were approximately $16.2 million.
6) Nutritional Supplement Lines Acquisition
On February 19, 1997, a newly-formed subsidiary of the Company (the
"Acquisition Subsidiary"), acquired the U.S. rights to several nutritional
supplement product lines (the "Nutritional Supplement Lines" and the
"Nutritional Supplement Lines Acquisition") from American Home Products ("AHP").
As consideration for the Nutritional Supplement Lines, the Acquisition
Subsidiary paid to AHP $30.0 million in cash and issued to AHP a $6.0 million
promissory note ("the AHP Note"). The total purchase price of approximately
$37.0 million, including acquisition costs, was allocated to trademarks ($21.6
million) and goodwill ($15.4 million), each of which will be amortized over
their useful lives of 25 years. 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 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 would 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
bears interest at an annual floating rate equal to LIBOR plus 3.5 percent or
Fleet's Prime Rate plus 1.5 percent. The Company is required to maintain a
minimum of $5.0 million in cash or liquid investments as collateral for the AHP
Bridge Loan. If the AHP Bridge Loan is not repaid or refinanced at maturity, the
Company will have the option of extending the loan with cash pledged to
collateralize a like amount. The Company may prepay the AHP Note and AHP Bridge
Loan at any time.
5
<PAGE> 8
In connection with the Proposed Acquisition Facility, the Acquisition
Subsidiary has obtained from Fleet a $5.0 million revolving credit line for the
Acquisition Subsidiary (the "Credit Line"). The Credit Line, at the Company's
election, bears interest at an annual floating rate equal to 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 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
certain minimum EBITDA levels of $2.3 million per quarter beginning with the
quarter ending 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
Subsidiary's debt under the Acquisition Facility and the Credit Line, 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
the 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 fees and
expenses totaling approximately $1.3 million 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.
7) Acquisition of Orgenics
On December 23, 1995, the Company and Orgenics Ltd. ("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 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).
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 sheets prior to the Company's acquisition of Medica's
interest in the Debenture.
6
<PAGE> 9
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
"Optionees").
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 payment
of approximately $7.0 million in cash for the purchases of outstanding shares of
Orgenics and Orgenics International. In addition, the Company has granted
options to purchase 85,800 shares of its Common Stock having a fair market value
of $1,056,000 on the date of grant, and incurred direct acquisition costs of
approximately $100,000. On March 6, 1997, the Company exercised its call options
and as a result will acquire a 100% equity interest in Orgenics. The Company is
required to pay for each share of Orgenics acquired pursuant to the Option
Agreements 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. Accordingly, the Company will pay
additional consideration totaling approximately $8.2 million in cash and will
issue 87,169 shares of 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>
<CAPTION>
<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 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 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 Company has granted certain registration rights with respect to the shares
of Common Stock issued pursuant to the Option Agreements.
7
<PAGE> 10
8) Investment in Enviromed
In October, 1996, the Company purchased 200,000 common shares of Enviromed,
plc ("Enviromed") and agreed to purchase EN PLC Limited Partnership's ("EN PLC)
holding of 7,961,386 common shares of Enviromed for a promissory note with a
principal amount of approximately $3.8 million (the "EN PLC Note"). In November,
1996 the Company purchased an additional 100,000 common shares of Enviromed. On
January 1, 1997, the Company and EN PLC entered into an amendment to the
agreement ("EN PLC Agreement") with EN PLC 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 a fluctuating annual rate equal to
the Bank of Boston's prime rate plus 1.5 percent, payable quarterly over the
two-year term of the notes. 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. In accordance with SFAS No.
123, the Company recorded deferred financing costs of approximately $107,000 in
connection with the grant of this warrant. The EN PLC Note is secured only by
the Enviromed common shares purchased by the Company. In the event that the
Company decides to sell or transfer its Enviromed common shares, the Company
will have to pay off the balance of the EN PLC Note plus any interest due at
that time. The EN PLC Note is subordinated to any current or future indebtedness
of the Company. The Company's total equity interest in Enviromed is 28.9%.
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. The Company did not record its
immaterial portion of Enviromed's income for the three months ended March 31,
1997.
The Company loaned pound sterling 200,000 (approximately $327,000) to
Enviromed during the three months ended March 31, 1997.
9) Agreement with ChemTrak
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 the European Territories, in establishing
satisfactory testing facilities and counseling services or in successfully
commercializing the system in the European Territories. The Company paid
Chemtrak $333,000 as a license fee in January 1997. The Company is obligated to
pay quarterly royalty payments when sales commence and milestone payments of
$333,000 each upon (i) obtaining regulatory approval in the first of the U.K.,
Germany, or France and (ii) achieving the first $1.0 million in net sales of the
mail-in HIV testing system in the European Territory.
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10) Series A Preferred Stock
In October 1996, the Company sold 5,500 shares of Series A Convertible
Preferred stock, $.001 par value per share (the "Series A Preferred Stock") at
$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 OIH shares. The holders of Series A Preferred Stock generally are entitled
to receive cumulative dividends at the rate of six percent per year and their
shares of Series A Preferred Stock are 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 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, except that the
maximum conversion price is $20 per share and the minimum is $8.75 per share,
and the discount is reduced or eliminated if and to the extent that the
conversion price would be less than $12.00. Any shares of Series A Preferred
Stock not previously converted will automatically convert into shares of the
Company's Common Stock in October 1998 at the closing bid price at the time. As
of March 31, 1997, 2,500 shares of Series A Preferred Stock had been converted
to 253,260 shares of Common Stock.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Selfcare, Inc. (the "Company" or "Selfcare") 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 viruses ("HIV"). An important part of the Company's business
strategy is to enter into strategic alliances, joint ventures and licensing
arrangements with third parties, primarily medical products companies, for the
development, manufacture, and distribution of certain products. The Company is
also pursuing a strategy of selective acquisitions of companies, assets and
technologies which it believes will enhance its ability to deliver innovative
diagnostic products to the marketplace at a low cost.
RESULTS OF OPERATIONS
Net Revenues. Net revenues increased $6.6 million, or 268%, to $9.1 million in
the quarter ended March 31, 1997 from $2.5 million for the three months ended
March 31, 1996. Net product sales increased $6.4 million, or 265% to $8.8
million in the quarter ended March 31, 1997 from $2.4 million in the same
quarter last year. The Company acquired a 57.1% interest in Orgenics Ltd.
("Orgenics") in October 1996 and purchased a line of nutritional supplements
("Nutritional Supplement Lines") from American Home Products ("AHP") in February
1997. The results for the three months ended March 31, 1997 included revenues of
$2.7 million and $1.9 million for these businesses, respectively. Increased
demand for the Company's pregnancy and ovulation prediction products accounted
for $1.4 million of the increased sales from $1.5 million for the three months
ended March 31, 1996 to $2.9 million for the three months ended March 31, 1997.
The remaining increase of $170,000 was derived from the introduction of CarePlus
(TM), a contraception product consisting of condoms and spermicide inserts, in
packaging designed to appeal to women. Approximately $280,000 of the revenues
for the three months ended March 31, 1997 was attributable to the amortization
of deferred revenue relating to certain development and capital grants relating
to the Company's facility in Inverness, Scotland (the "Inverness Facility"). The
Company did not have any revenue from grants for the three months ended March
31, 1996.
Gross profit. Gross profit increased $3.4 million or 540% in the quarter ended
March 31, 1997 to $4.0 million from $634,000 in the three months ended March 31,
1996. Gross profit as a percentage of net revenues increased to 45% of net
revenues in the three months ended March 31, 1997 from 26% of net revenues in
the same quarter last year. Gross profits from the recently acquired businesses
added $2.7 million of the overall increase in gross profit. As a percentage of
sales, the gross profits from sales of Orgenics and the Nutritional Supplement
Lines were 63% and 47% respectively. Gross profit on pregnancy and ovulation
prediction products was 35% for the three month periods ended March 31, 1996
and 1997. Gross profits for Cambridge Diagnostics Ltd. ("Cambridge Diagnostics")
increased from 11% of sales in the three months ended March 31, 1996 to 16% of
sales for the three months ended March 31, 1997. Cambridge Diagnostics primarily
manufactures and sells HIV tests.
Research and Development Expense. Research and development expense increased
by $1.8 million or 145% to $3.1 million for the three months ended March 31,
1997 from $1.3 million for the three months ended March 31, 1996. The increase
was primarily due to expenses incurred in connection with the development of the
Company's electrochemical blood glucose monitoring system, and accelerated
spending on research related to non-invasive blood glucose technologies. These
research and development activities accounted for $1.5 million of the increase.
In addition, the Company continues to allocate research and development
resources to the areas of women's health products and infectious diseases,
principally to those areas related to the detection of HIV. The Company expects
to continue to spend significant amounts on research and development throughout
1997 and 1998.
Selling, General, and Administrative Expense. Selling, general, and
administrative expense increased $2.9 million or 154% to $4.8 million for the
three months ended March 31, 1997 from $1.9 million for the three months ended
March 31, 1996. The increase was primarily attributable to the acquisition of
the above mentioned businesses. The selling, general and administrative costs of
these businesses were $2.1 million. Additionally, the Company expanded marketing
efforts of its pregnancy and ovulation prediction products in the United States
and Europe, and hired additional staff to support the Company's operations.
Selling, general, and administrative expense, as a percentage of net revenues,
decreased during the three months ended March 31,1997 as compared to the same
period in 1996. Selling, general, and administrative expense were 52% of net
revenues for the three months ended March 31, 1997 compared to 76% for the three
months ended March 31, 1996.
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Noncash Compensation Expense. Substantially all of the non-cash compensation
expense for the three months ended March 31,1997 and 1996 related to certain
stock options granted to certain employees of the Company. For the three months
ended March 31, 1996 the non-cash compensation expense related to a stock option
granted to the Company's Chief Executive Officer in August 1995 was $5.6
million. See Note 4 of "Notes to Consolidated Financial Statements")
Interest and Other Income (Expense). For the three months ended March 31, 1997
the Company incurred $605,000 in interest expense. 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%. In October, 1996, the Company purchased
200,000 common shares of Enviromed, plc ("Enviromed") and agreed to purchase EN
PLC Limited Partnership's ("EN PLC) holding of 7,961,386 common shares of
Enviromed for a promissory note with a principal amount of approximately $3.8
million (the "EN PLC Note"). For the three months ended March 31, 1997, the
Company incurred $75,000 of interest expense on the Cambridge Diagnostics Notes
and $74,000 of interest expense on the note payable to EN PLC. In addition, the
Acquisition Subsidiary incurred $266,000 of interest expense related to loans
from Fleet National Bank ("Fleet"), and Orgenics incurred $168,000 of interest
expense related to short and long-term bank debts. In the three months ended
March 31, 1996, the Company recognized $8.1 million of non-cash interest expense
relating to the Cambridge Diagnostics Warrants. The charge relates to the
increase in the fair market value of the underlying common stock at March 31,
1996 as compared to the estimated fair market value at December 31, 1995.
Interest income increased by $124,000 for the three months ended March 31, 1997
as compared to the same period last year, primarily due to larger cash balances.
The Company's subsidiary in Inverness, Scotland accrued $28,000 for the three
months ended March 31, 1997, representing a 6% dividend payable on its
outstanding cumulative redeemable preference shares, as compared to $23,000 for
the three months ended March 31, 1996.
Minority Interest. The Company recorded $160,000, representing the minority
shareholders' portion of the loss at Orgenics for the three months ended March
31, 1997. In addition, Orgenics recorded a minority interest in the net income
of its Brazilian subsidiary in the amount of $46,000.
Foreign Currency Transaction. Fluctuations in foreign currency did not
significantly impact revenue performance measured in U.S. dollars for the three
months ended March 31, 1997. Substantially all of the Company's foreign sales
are paid in the functional currency of the selling entity. The Company recorded
an unrealized loss of $719,000 related to foreign currency translation of
intercompany balances.
Net Loss. The net loss for the three months ended March 31, 1997 was
approximately $4.9 million or ($0.74) per common and common equivalent share
compared to $16.3 million or ($2.61) for the three months ended March 31, 1996.
The three months ended March 31, 1997 included an unrealized loss on foreign
currency translation of $719,000 which, if excluded, would have resulted in a
net loss of approximately $4.2 million or ($0.63) per common and common
equivalent share. The three months ended March 31, 1996 included a non-cash
compensation charge of $5.6 million and a non-cash interest expense of $8.1
million which, if excluded, would have resulted in a net loss of approximately
$2.6 million or ($0.42) per common and common equivalent share. The first
quarter 1997 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the funds it has
received in connection with its initial public offering, a follow-on public
offering, funds received in connection with the LifeScan Alliance, private
placements of debt and equity securities, bank loans and line of credit, capital
lease obligations, cash from product sales and grants from government
development agencies.
In connection with the Company's initial public offering on August 6, 1996
(the "Initial Public Offering"), the Common Stock began trading on the American
Stock Exchange ("AMEX"). The Company sold 1,495,000 shares and received net
proceeds of approximately $10.4 million. In a subsequent public offering in
March 1997 ("the March 1997 Offering"), the Company sold 1,800,000 shares of
Common Stock and received net proceeds of approximately $16.2 million.
In November 1995, in connection with the closing of an investment agreement
between Johnson & Johnson Development Corporation ("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
Company's proprietary electrochemical blood glucose monitoring system (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, Inc., a
subsidiary of Johnson & Johnson ("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 a
distribution agreement with LifeScan, Inc. ("LifeScan") pursuant to which
LifeScan will distribute the New System. In February 1997, the Company filed a
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 States. 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 the Cambridge Diagnostics Notes and the
Cambridge Diagnostics 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.
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At March 31, 1997, the Company had cash and cash equivalents of $25.5 million,
a $9.0 million increase from December 31, 1996. This was primarily due to the
net proceeds of approximately $16.2 million from the March 1997 Offering. Cash
used for operations in the three months ended March 31, 1997 was $4.8 million
due largely to net losses of $4.9 million. Other uses of cash in operating
activities included an increased funding of accounts receivable and inventory of
$2.1 million and $265,000, respectively, reflecting the Company's increase in
sales. Cash was provided for operations in part by an increase in accounts
payable, accrued expenses, and other current liabilities of $2.6 million.
In February 1997, the Company acquired from AHP the U.S. rights to the
Nutritional Supplement Lines ("the Nutritional Supplement Lines Acquisition").
As consideration for the Nutritional Supplement Lines, a newly formed subsidiary
("the Acquisition Subsidiary") paid to AHP $30.0 million in cash and issued to
AHP a $6.0 million promissory note ("the AHP Note"). The Company also paid
approximately $1.0 million in costs associated with the Nutritional Supplement
Lines Acquisition. 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. In connection with the agreement, the Company purchased a
license from ChemTrak for $333,000 in cash. The Company is obligated to pay
quarterly royalty payments when sales commence and milestone payments of
$333,000 each upon (i) obtaining regulatory approval in the first of the U.K.,
Germany, or France and (ii) achieving the first $1.0 million in net sales of the
mail-in HIV testing system in the European Territory. During the three months
ended March 31, 1997, the Company used $2.1 million to purchase property and
equipment. Approximately $1.4 million of the purchased property and equipment
was for the Inverness Facility.
Financing activities provided approximately $46.6 million in the three months
ended March 31, 1997. The most significant financing activities were the March
1997 Offering of 1,800,000 shares at $10.00 per share, from which the net
proceeds after deducting offering costs were $16.2 million; the $25.0 million
AHP Term Loan; and the $5.0 million AHP Bridge Loan.
In October 1996, the Company acquired 57.1% direct and indirect equity
interest in Orgenics. On March 6, 1997, the Company exercised its call options
under certain option agreements with the stockholders of Orgenics and Orgenics
International, as a result of which the Company will acquire a 100% equity
interest in Orgenics. As consideration under the Option Agreements, the Company
will pay approximately $8.2 million in cash and will issue 87,169 shares of
Common Stock.
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 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. In addition, the Company loaned pound
sterling 200,000 (approximately $327,000) to Enviromed during the three months
ended March 31, 1997.
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 issued to AHP 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").
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The AHP Note is due on the first anniversary 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 would 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
bears interest at an annual floating rate equal to LIBOR plus 3.5 percent or
Fleet's Prime Rate plus 1.5 percent. Selfcare is required to maintain a minimum
of $5.0 million in cash or liquid investments as collateral for the AHP Bridge
Loan. 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. The Company may prepay the AHP Note and AHP Bridge
Loan at any time. In connection with the Acquisition Facility, the Acquisition
Subsidiary obtained a $5.0 million Credit Line from Fleet. The Credit Line bears
interest at the annual floating rate of LIBOR plus 1.75 percent or Fleet's Prime
Rate and matures in three years. 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 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
certain minimum EBITDA levels of $2.3 million per quarter beginning with the
quarter ending 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
Subsidiary's debt under the Acquisition Facility and the Credit Line, 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
the 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 fees and
expenses totaling approximately $1.3 million 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 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 A. Menarini Industrie Farmaceutical Riunite
S.r.L. The Company believes that funds received to date in connection with the
LifeScan Alliance, the net proceeds from the public offerings, and funds
available under the loans from Fleet will be sufficient to provide adequate
working capital and funds necessary for anticipated capital expenditures
through December 31, 1997. 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.
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CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Factors that might cause such
a difference include those discussed below, as well as those factors set forth
under "Risk Factors" beginning on page 8 of the Company's registration statement
on Form SB-2 filed with the Securities and Exchange Commission on January 16,
1997, as amended.
The Company's future results of operations depend to a substantial degree on
the LifeScan Alliance and on LifeScan's ability to market and sell the Company's
proprietary electrochemical blood glucose monitoring system. There can be no
assurance that the LifeScan Alliance will be profitable for the Company.
As part of the Company's plans for maintaining and expanding sales of the
Nutritional Supplement Lines, the Company expects to incur substantial marketing
and promotional expenses and allowances in 1997 and thereafter. There can be no
assurance that these expenditures and allowances will allow the Company to
increase or maintain the existing revenue levels from the Nutritional Supplement
Lines. The Company's product focus to date has been on diagnostic tests of
various kinds and the Company has not previously marketed nutritional
supplements, nor has the Company conducted a national advertising campaign of
the scope or magnitude of that which it plans for the Nutritional Supplement
Lines.
The Company is currently experiencing a period of rapid growth and expansion,
which is expected to accelerate further upon the consummation of the Nutrional
Supplement Lines Acquisition. This growth and expansion has placed, and could
continue to place, a significant strain on the Company's management, customer
service and support, operations, sales and administrative personnel and other
resources. In order to serve the needs of its existing and future customers, the
Company has increased and will continue to increase its workforce, which
requires the Company to attract, train, motivate and manage qualified employees.
The Company's ability to manage its planned growth depends upon the Company's
success in continuing to expand its operating, management, information and
financial systems, which may significantly increase its operating expenses. If
the Company fails to achieve its growth as planned or is unsuccessful in
managing its anticipated growth, there could be a material adverse effect on the
Company.
The Company is at an early stage in its development. With the exception of
certain professional diagnostic products for infectious diseases and its women's
health products produced by third-party manufacturers, all of the Company's
products are in various stages of research and development, and the Company has
generated no revenue from the commercialization of these products under
development. Many of the Company's products will require substantial additional
development, pre-clinical and clinical testing and investment prior to their
commercialization. There can be no assurance that the Company's research and
development efforts will be successful, that any of the Company's products under
development will prove to be safe or effective in clinical trials, that the
Company will be able to obtain regulatory approval to market any of its
products, that any of its products can be manufactured at acceptable cost and
with appropriate quality, or that any of its products, if and when approved, can
be successfully marketed.
The Company's research, development and clinical programs, as well as its
manufacturing and marketing operations, are subject to extensive regulation by
numerous governmental authorities in the United States and other countries. Most
of the Company's products require governmental approvals for commercialization
that have not yet been obtained and are not expected to be obtained for several
months or years. Pre-clinical and clinical trials and manufacturing and
marketing of many of the Company's products will be subject to the rigorous
testing and approval process of the FDA and corresponding foreign regulatory
authorities. The regulatory process, which includes pre-clinical and clinical
testing of many of the Company's products to establish their safety and
efficacy, can take many years and require the expenditure of substantial
financial and other resources. Data obtained from pre-clinical and clinical
activities are susceptible to varying interpretations that could delay, limit or
prevent regulatory approval. In addition, delays or rejection may be encountered
based upon changes in, or additions to, regulatory policies for device and test
approval during the period of product development and regulatory review. Delays
in obtaining such approvals could adversely affect the marketing of products
developed by the Company and the Company's ability to generate commercial
product revenues.
The medical products industry, including the diagnostic testing industry,
places considerable importance on obtaining patent and trade secret protection
for new technologies, products and processes, and the Company's.
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success will depend, in part, on its ability to obtain patent protection for its
products and manufacturing processes, to preserve its trade secrets and to
operate without infringing the proprietary rights of third parties.
The Company holds certain patent rights, has certain patent applications
pending, and expects to seek additional patents in the future, but there can be
no assurance as to its success or timeliness in obtaining any such patents or as
to the breadth or degree of protection that any such patents will afford the
Company. The Company could incur substantial costs in defending itself against
patent infringement claims or in asserting such claims against others. If the
outcome of any such litigation is adverse to the Company, the Company's business
could be materially adversely affected. To determine the priority of inventions,
the Company may also have to participate in interference proceedings declared by
the U.S. Patent and Trademark Office, which could also result in substantial
costs to the Company.
In addition, the Company may be required to obtain licenses to patents or
other proprietary rights of third parties to market its products. No assurance
can be given that licenses required under any such patents or proprietary rights
would 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
market introductions while it attempts to design around such patents or other
rights, or be unable to develop, manufacture or sell such products in certain
countries or at all.
The medical products industry, including the diagnostic testing
industry, is rapidly evolving and developments are expected to continue at a
rapid pace. Competition in this industry is intense and expected to increase as
new products and technologies become available and new competitors enter the
market. The Company's competitors in the United States and abroad are numerous
and include, among others, diagnostic testing and medical products companies,
universities and other research institutions. The Company's success depends upon
developing and maintaining a competitive position in the development of products
and technologies in its area of focus. The Company's competitors may also
succeed in developing technologies and products that are more effective than any
that have been or are being developed by the Company or that render the
Company's technologies or products obsolete or noncompetitive. The Company's
competitors may also succeed in obtaining patent protection or other
intellectual property rights that would prevent the Company from developing its
potential products, or in obtaining regulatory approval for the
commercialization of their products more rapidly or effectively than the
Company. Finally, many of the Company's existing or potential competitors have
or may have substantially greater research and development capabilities,
clinical, manufacturing, regulatory and marketing experience and financial and
managerial resources than the Company.
The Company is also aware of several of its competitors who are attempting to
develop a non-invasive blood glucose monitoring technology. 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.
The Company will be subject to risks normally associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest. As of March 31, 1997, the Company
had $45.9 million of outstanding debt, including the AHP Term Loan which was
used to pay part of the cash portion of the consideration payable to AHP under
the terms of the Nutritional Supplement Lines Acquisition. This outstanding
indebtedness, together with restrictions in the Company's financing instruments,
may limit the Company's ability to obtain additional debt financing in the
future and to respond to changing business and economic conditions and could
adversely affect its ability to effect its business strategies. In addition,
because certain of the Company's debt, including the AHP Term Loan, bears
interest at floating rates, an increase in interest rates could adversely affect
the Company's ability to meet its debt service obligations.
The Company currently anticipates that its existing capital resources together
with funds expected to be generated from operations, will be adequate to satisfy
its capital requirements through December 31, 1997. No assurance can be
given that additional financing will be available, or, if available, that it
will be available on acceptable terms. If additional funds are raised by issuing
equity securities, further dilution to then existing stockholders will result.
If adequate funds are not available, the Company may be required to
significantly curtail one or more of its research and development programs, or
obtain funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies or
products which the Company would otherwise pursue on its own.
16
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently a party to or affected by litigation in
several matters which are described in the Company's 1996 Report on Form
10-KSB/A (see Item 3, "Legal Proceedings"), and in a Registration Statement
dated March 7, 1997, filed by the Company with the Securities and Exchange
Commission on Form SB-2 (see "Risks related to certain Licensing Arrangements"
and "Legal Proceedings").
There is ongoing litigation in connection with certain patent and
proprietary rights related to HIV Technology owned by Institut Pasteur (the
"Pasteur HIV Technologies"), which has been licensed by Pasteur Sanofi
Diagnostics to Cambridge Biotech Corporation ("Cambridge Biotech") and in which
the Company derives an economic interest through the sale of products
incorporating the Pasteur HIV Technologies by a company known as Cambridge
Affiliate, which is 51% owned by bioMerieux Vitek, Inc. (which has purchased the
interest of Cambridge Biotech) and 49% owned by the Company. In April 1997,
Pasteur Sanofi Diagnostics filed a petition for certiorari, asking the United
States Supreme Court to review the decision of a three judge panel of the
Circuit Court of Appeals for the First Circuit, that Cambridge Biotech was
entitled to assume its license agreements with Pasteur Sanofi Diagnostics. If
the Supreme Court grants certiorari and decides in favor of Pasteur Sanofi
Diagnostics, there is a risk that Cambridge Affiliate would no longer be able to
sell products incorporating the HIV Technologies.
In a separate matter, there are no new developments in the appeal to
the United States District Court for the District of Massachusetts by Institut
Pasteur and Genetic Systems Corporation, of the ruling by the United States
Bankruptcy Court for the District of Massachusetts (Western District) that
Cambridge Biotech may sell products incorporating the Pasteur HIV Technologies
in the United States.
In connection with the dispute between the Company and Enviromed, plc
("Enviromed"), on March 11, 1997, Enviromed and the Company filed a stipulation
of dismissal without prejudice of all the claims and counterclaims in the case,
and the case has been dismissed without prejudice.
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 Company's Common Stock held of record by
Enviromed 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 Trinity and
Flambelle filed a joint 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.
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 has provided pound
sterling200,000 (approximately $327,000) in secured loans and pound
sterling100,000 (approximately $160,000) in unsecured loans to Enviromed and has
indicated that it will provide Enviromed with an additional loan of pound
sterling50,000 (approximately $80,000) if needed.
17
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Title
<S> <C> <C>
10.1 Asset Purchase Agreement dated as of January
14, 1997, by and between American Home
Products Corporation, American Cyanamid
Company, A.H. Robins 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).
10.2 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).
10.3 Credit Agreement dated as of February 19,
1997, by and among Selfcare, Inc., Selfcare
Acquisition Corp., the lenders from time to
time parties thereto and Fleet National
Bank, as agent (incorporated by reference to
Exhibit 10.1 to the Company's current report
on Form 8-K filed with the Commission on
March 5, 1997).
27 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K:
A current report on Form 8-K was filed by the Company on March 5, 1997,
in connection with the acquisition by the Company of the Nutritional Supplement
Lines from American Home Products Corporation and was subsequently amended by a
Form 8-K/A filed on May 5, 1997.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SELFCARE, INC.
Date: May 14, 1997 /s/ Anthony H. Hall
-------------------
Anthony H. Hall,
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 25,484,148
<SECURITIES> 0
<RECEIVABLES> 7,655,342
<ALLOWANCES> 347,000
<INVENTORY> 2,624,327
<CURRENT-ASSETS> 37,092,970
<PP&E> 13,133,375
<DEPRECIATION> 3,831,297
<TOTAL-ASSETS> 91,758,843
<CURRENT-LIABILITIES> 36,602,359
<BONDS> 24,160,161
1,782,107
3
<COMMON> 8,095
<OTHER-SE> 23,679,087
<TOTAL-LIABILITY-AND-EQUITY> 23,687,185
<SALES> 8,757,181
<TOTAL-REVENUES> 9,094,607
<CGS> 5,306,978
<TOTAL-COSTS> 7,836,651
<OTHER-EXPENSES> 37,629
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 605,432
<INCOME-PRETAX> (4,894,115)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,894,115)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,894,115)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
