SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
___________ to _______________
COMMISSION FILE NUMBER 0-20871
SELFCARE, INC.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 04-3164127
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 PROSPECT STREET
WALTHAM, MASSACHUSETTS 02453
(Address of principal executive offices)
(781) 647-3900
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
The number of shares outstanding of the registrant's Common
Stock as of November 11, 1998 was 13,539,532.
Transitional Small Business Disclosure Format (check one):
Yes No X
SELFCARE, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 1998
This Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. The Company's actual
results could differ materially from those set forth in the
forward-looking statements. Some of the factors that might cause
such a difference are discussed in the section entitled "Certain
Factors Affecting Future Operating Results" on page 11 of this
Form 10-Q.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
a) Consolidated Statements of Operations for the
three months ended September 30, 1998 and 1997
and the nine months ended September 30, 1998 and
1997.
b) Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997.
c) Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997.
d) Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net product sales $32,501,021 $13,287,047 $85,754,751 $34,382,465
Grants and other revenue 1,138,657 336,366 3,204,288 1,011,939
------------ ----------- ----------- ------------
Net revenues 33,639,678 13,623,413 88,959,039 35,394,404
Cost of revenues 20,963,401 6,640,776 58,265,382 17,702,639
------------ ----------- ----------- ------------
Gross profit 12,676,277 6,982,637 30,693,657 17,691,765
Operating Expenses:
Research and development 1,990,664 4,566,665 5,403,409 11,945,504
Charge for in-process
research and
development (Note 5) -- 1,794,100 -- 3,072,300
Selling, general and
administrative 9,895,721 6,712,950 26,240,308 17,414,334
Gain on sale of assets (Note 10) (1,076,956) -- (1,076,956) --
Noncash compensation charge -- 37,629 -- 112,887
------------ ----------- ----------- ------------
Total operating expenses 10,809,429 13,111,344 30,566,761 32,545,025
------------ ----------- ----------- ------------
Operating income (loss) 1,866,848 (6,128,707) 126,896 (14,853,260)
Interest expense, including
noncash interest expense relating
to issuance of covertible notes (1,907,404) (1,544,001) (7,520,277) (3,273,642)
Interest income 128,395 203,447 456,849 608,461
Equity in net income (loss) of
affiliate (467) (430,000) 237,306 (430,000)
Other income (expense) (24,564) 23,148 1,699,716 (728,837)
------------ ------------ ------------ ------------
Income (loss) before minority
interest, dividends and
accretion on preferred stock
of a subsidiary 62,808 (7,876,113) (4,999,510) (18,677,278)
Minority interest in
subsidiaries' income 45,604 14,516 119,287 144,936
Dividends and accretion on
mandatorily Redeemable
preferred stock of
a subsidiary (29,446) (28,037) (87,425) (85,026)
------------ ----------- ----------- ------------
Income (loss) before
income taxes 78,966 (7,889,634) (4,967,648) (18,617,378)
Provision for income taxes 160,886 -- 297,198 --
------------ ----------- ----------- ------------
Net loss $(81,920) $(7,889,634) $(5,264,846) $(18,617,368)
============= ============ ============ =============
Basic and diluted net loss
per common and
potential common share $(0.01) $(1.08) $(0.45) $(2.57)
========== ========== ========== ==========
Basic and diluted weighted
average number of common
and potential common shares
outstanding 12,740,077 8,432,963 11,673,422 7,759,370
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $6,118,425 $15,669,898
Accounts receivable, net of allowance for
doubtful accounts of $1,640,000 in 1998 and
$1,158,000 in 1997 19,750,396 7,232,755
Inventories (Note 3) 11,722,460 5,344,531
Note receivable -- 4,979,232
Prepaid expenses and other current assets 2,487,216 1,452,855
----------- -----------
Total current assets 40,078,497 34,679,271
PROPERTY AND EQUIPMENT, NET 9,764,128 10,508,032
INVESTMENTS IN AFFILIATED COMPANIES 3,699,959 3,405,609
LOAN TO AFFILIATED COMPANY 800,854 742,105
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 71,204,029 43,393,263
OTHER ASSETS 7,628,883 3,035,414
---------- -----------
Total assets $133,176,350 $95,763,694
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $14,307,251 $20,426,511
Accounts payable 15,333,379 6,079,242
Accrued expenses and other current
liabilities 11,352,902 8,251,021
Current portion of deferred revenue 1,174,700 2,204,159
----------- -----------
Total current liabilities 42,168,232 36,960,933
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion 113,324 2,674,971
Notes payable, net of current portion 55,455,590 39,476,074
Other long-term liabilities 2,225,000 --
----------- -----------
Total long-term liabilities 57,793,914 42,151,045
COMMITMENTS AND CONTINGENCIES (Notes 5 through 7)
MINORITY INTEREST IN SUBSIDIARIES -- 70,496
------------ -----------
MANDATORILY REDEEMABLE PREFERRED STOCK OF
A SUBSIDIARY 1,955,452 1,868,027
----------- ----------
SERIES B CONVERTIBLE PREFERRED STOCK,
$.001 PAR VALUE Issued - 8,000 shares,
outstanding - 6,200 in 1998 and 8,000 in 1997 7,179,848 9,272,508
--------- ----------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $.001 par value -
Issued and outstanding - 0 and 400 shares in
1998 and 1997, respectively -- --
Common Stock, $.001 par value -
Authorized - 45,000,000 shares
Issued -13,696,307 and 9,681,389
shares in 1998 and 1997, respectively 13,696 9,681
Additional paid-in capital 102,907,702 75,753,699
Less-Treasury stock, at cost, 743,652
and 32,197 shares in 1998 and
1997, respectively (3,724,829) (211,460)
Accumulated deficit (75,480,161) (70,183,506)
Cumulative translation adjustment 362,496 72,271
-------------- ------------
Total stockholders' equity 24,078,904 5,440,685
-------------- ------------
Total liabilities and
stockholders' equity $133,176,350 $95,763,694
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
SELFCARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION> NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss $(5,264,846) $(18,617,368)
Adjustments to reconcile net loss to net
cash used in operating
Activities:
Dividends and accretion on preferred
stock of a subsidiary 87,425 85,026
Gain on sale of assets (1,076,956) --
Non-cash interest expense related to
amortization of original issue discount 1,679,268 --
Non-cash income related to treasury stock
received in settlement of lawsuit (1,498,844) --
Non-cash in-process research and
development expense -- 3,072,300
Compensation expense related to issuance
of common stock options -- 20,589
Amortization of deferred revenue (3,204,288) (1,046,907)
Depreciation and amortization 6,782,399 3,810,701
Equity in net (income) loss of affiliate (237,306) 430,000
Minority interest in subsidiaries' loss (119,287) (159,213)
Changes in assets and liabilities:
Accounts receivable (9,527,126) (2,291,203)
Inventories (2,320,020) (2,096,825)
Prepaid and other current assets (3,272,827) (554,351)
Accounts payable 6,108,493 1,336,572
Accrued expenses and other current
liabilities 183,365 1,303,371
----------- -----------
Net cash used in operating
activities (11,680,550) (14,707,308)
------------ ------------
Cash Flows From Investing Activities:
Purchases of property and equipment (1,076,573) (4,483,817)
Cash paid for acquisition of Can-Am Care
Corporation (15,044,640) --
Cash paid for purchase of USB '93
Technology Associates Limited Partnership (515,604) --
Cash paid for license from ChemTrak -- (333,000)
Cash paid for investment in Orgenics Ltd. (92,435) (9,134,252)
Cash paid for purchase of Nutritional
Supplement Lines -- (37,067,579)
Cash received from affiliated company as
repayment of loan 81,350 --
Cash loaned to affiliated company -- (572,105)
Cash received from sale of assets 230,000 --
Increase in other assets (295,786) (324,353)
----------- -----------
Net cash used in investing
activities (16,713,688) (51,915,106)
------------ -------------
Cash Flows From Financing Activities:
Cash paid for deferred financing costs (1,927,886) --
Net proceeds from issuance of common stock 1,326,725 17,380,032
Net proceeds from issuance of preferred stock -- 7,600,000
Purchase of treasury stock -- (196,260)
Proceeds from borrowings under notes
payable 52,339,187 46,606,876
Repayments of notes payable (32,928,984) (9,225,984)
------------- -------------
Net cash provided by
financing activities 18,809,042 62,164,664
-------------- --------------
Foreign Exchange Effect on Cash and Cash
Equivalents 33,723 559,632
-------------- -------------
Net Decrease in Cash and Cash
Equivalents (9,551,473) (3,898,118)
Cash and Cash Equivalents, beginning of year 15,669,898 16,458,654
------------- -------------
Cash and Cash Equivalents, end of period $6,118,425 $12,560,536
============ ===========
Supplemental Disclosures of Cash Flow
Information:
Cash paid for -
Interest $5,705,806 $2,042,396
Income taxes $450,592 $5,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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 necessary for
their fair presentation. Interim results are not necessarily
indicative of results to be expected for the year. These interim
financial statements have been prepared in accordance with the
instructions for Form 10-Q and therefore do not include all
information and footnotes necessary for a complete presentation
of operations, financial position, and cash flows of the Company
in conformity with generally accepted accounting principles. The
Company filed audited consolidated financial statements, which
included information and footnotes necessary for such
presentation, for the year ended December 31, 1997 on Form 10-
KSB. 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,
1997 included on Form 10-KSB filed with the Securities and
Exchange Commission.
2) Cash and Cash Equivalents
The Company considers all highly liquid cash investments with
maturities of three months or less at the date of acquisition to
be cash equivalents. At September 30, 1998, the Company's cash
equivalents consisted of 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". As of
December 31, 1997 and September 30, 1998, all of the Company's
cash equivalents are classified as held to maturity and carried
at amortized cost, which approximates market value.
3) Inventory
Inventory is comprised of the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $ 4,014,532 $ 3,006,076
Work in-process 715,584 405,404
Finished goods 6,992,344 1,933,051
-------------- ------------
$ 11,722,460 $ 5,344,531
============== ============
4) Reclassifications
Certain prior period amounts have been reclassified to conform
to the current period's presentation.
5) Non recurring, non-cash income and expenses
For the three and nine month periods ended September 30, 1998,
the Company recognized $60,000 and $1.7 million, respectively, of
non-cash interest expense for the amortization of the original
issue discount on convertible notes. Also, for the nine months
ended September 30, 1998, the Company recognized $1.5 million of
non-cash income related to 155,724 shares of the Company's Common
Stock received into treasury in connection with the Settlement
Agreement dated March 6, 1998 by and between the Company, Trinity
Biotech PLC, Flambelle Limited and Eastcourt Limited. Finally,
in the three and nine months ended September 30, 1998, the
Company received primarily non-cash consideration for the sale of
certain assets (see Note 10). The sale yielded a gain of
approximately $1.1 million.
For the three and nine months ended September 30, 1997, the
Company recognized expense of $1.8 million and $3.1 million,
respectively, for in-process research and development related to
the acquisition of Orgenics, Ltd. The allocation of a portion of
the purchase price to in-process research and development
represented the applicable pro-rata portion of its appraised
value of $7,700,000. For the nine months ended September 30,
1997, the Company recorded an unrealized loss of $717,000 related
to foreign currency translation of intercompany balances.
6) Subordinated Promissory Notes
On June 26, 1998, the Company entered into a Securities
Purchase Agreement to sell Units (the "Units") having an
aggregate purchase price of up to $11 million. Each Unit
consists of (i) $25,000 in principal amount of a Subordinated
Note (individually a "Note" and collectively the "Notes") and
(ii) a warrant (individually a "Warrant" and collectively the
"Warrants") to acquire such number of shares of the Company's
Common Stock, par value $.00l per share determined by dividing
$3,750 by the Exercise Price (as hereinafter defined) as of the
date of issuance of such Warrant. The "Exercise Price" as of a
particular date means the average of the closing prices for
shares of the Company's Common Stock on the American Stock
Exchange on the five trading days immediately preceding such
date. The Notes are due on the second anniversary of their date
of issuance and the Warrants may be exercised, in whole or in
part, at any time on or prior to the fifth anniversary of their
issuance.
The Notes bear interest at a rate equal to thirteen percent
(13%) per annum and are payable quarterly on the first day of
each quarter, beginning with October 1, 1998. Interest or
principal which is not paid when due shall bear interest,
compounded daily, at the rate of eighteen percent (18%).
Whenever the Company makes a payment of principal under the
Notes, it shall at the same time pay a premium (the "Premium")
equal to 5% of the principal amount then being paid. The Notes
may be prepaid by the Company in whole or in part at any time
after December 31, 1998 so long as the Company at the same time
pays the holder of the Notes the Premium with respect to the
principal amount then being prepaid.
On June 26, 1998, the Company sold Units consisting of an
aggregate of $4.9 million of Notes and Warrants exercisable for
72,588 shares at $10.125 per share. On July 17, 1998, the
Company sold Units consisting of an aggregate of $2.45 million of
Notes and Warrants exercisable for 40,330 shares at $9.1125 per
share. On August 28, 1998, the Company sold Units consisting of
an aggregate of $2.85 million of Notes and Warrants exercisable
for 68,813 shares at $6.2125 per share.
U.S. Boston Capital Corporation ("U.S. Boston Capital") acted
as placement agent for the offering of the Notes. As compensation
for its services as placement agent, U.S. Boston Capital received
cash commissions totaling $612,000, which the Company recorded as
deferred financing costs and will amortize over the 2-year life
of the Notes. U.S. Boston Capital was also reimbursed for the
fees and disbursements of its counsel and received a non-
accountable expense allowance of $10,200. A Director of the
Company is the Chairman, President, Treasurer and a Director of
U.S. Boston Capital. In addition, three Directors of the Company
purchased Units with an aggregate issue price of $775,000 on June
26, 1998.
Pear Tree Royalty Company, Inc. ("Pear Tree Royalty Company"),
as the authorized representative of the Noteholders, received a
Warrant, at each closing at which Units were sold, for a number
of shares equal to one-third of the aggregate number of shares
issuable under the other Warrants issued at such closing. A
Company Director is also a Director and shareholder of Pear Tree
Royalty Company. On June 26, 1998, Pear Tree Royalty Company
received a Warrant for 24,196 shares, on July 17, 1998, Pear Tree
Royalty Company received a Warrant for 13,443 shares and on
August 28, 1998, Pear Tree Royalty Company received a Warrant for
22,938 shares.
Upon issuance of the Notes and Warrants the Company allocated a
total of $826,000 of the proceeds to the Warrants and is
amortizing the related original issuance discount and deferred
financing costs over the 2-year life of the Notes.
7) Legal proceedings
a) Abbott Laboratories v. Selfcare, Inc. and Princeton
BioMeditech Corporation
On April 22, 1998, Abbott Laboratories (Abbott) served process
on the Company and Princeton BioMeditech Corporation (PBM), which
manufactures certain products for the Company, asserting patent
infringement arising from the Company and PBM's manufacture, use
and sale of products that Abbott claims are covered by one or
more of the claims of patents to which Abbott asserts that it is
the exclusive licensee. Abbott claims that certain Selfcare
products relating to pregnancy detection and ovulation prediction
infringe the patents. Abbott is seeking an order preliminarily
and permanently enjoining the Company and PBM from infringing the
Patents, compensatory damages to be determined at trial, treble
damages, costs, prejudgment and postjudgment interest on Abbott's
compensatory damages, attorneys' fees, and a recall of all
existing Company or PBM products found to infringe the Patents.
On August 5, 1998, the court denied Abbott's motion for a
preliminary injunction. On October 23, 1998, the Company filed a
counterclaim against Abbott, asserting that Abbott is infringing
patents which are owned by a joint venture of the Company and
PBM, and seeking a declaration that Abbott infringes the patents,
permanent injunctive relief, money damages and attorneys' fees.
On November 5, 1998, Abbott filed a counterclaim against the
Company asserting the invalidity of the patents which are owned
by a joint venture of the Company and PBM and seeking a
declaration of invalidity, non-infringement and unenforceability.
The case is currently in the discovery stage. The Company
intends to defend this litigation vigorously. A final ruling
against the Company could have a material adverse impact on the
Company's business, financial condition and results of
operations.
b) Abbott Laboratories v. Lifescan, Inc. and Selfcare, Inc.
In late October 1998, Abbott commenced a lawsuit against the
Company and Lifescan, Inc., a subsidiary of Johnson & Johnson,
Inc. The complaint alleges that the disposable test strips used
in the FastTakeTM blood glucose monitoring system supplied by a
subsidiary of the Company to Lifescan infringe a patent owned by
Abbott. Abbott is seeking damages and an injunction against
sales in the United States. Abbott is also seeking to enjoin
Lifescan and Selfcare from the manufacture, use and sale of these
blood glucose test strips in the United States during the
pendency of the infringement litigation. Based on a review of
the Abbott claims by patent counsel, the Company believes that
the FastTake test strips do not infringe the Abbott patent.
Selfcare also believes that Abbott's claims will be proven to be
without merit, and intends to vigorously defend them. A final
ruling against the Company would have a material adverse impact
on the Company's business, financial condition and results of
operations.
8) Net Loss per Common Share.
In February 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, "Earnings per Share", which
established new standards for calculating and presenting earnings
per share. This standard is effective for periods ending after
December 15, 1997, with earlier application not permitted. These
condensed financial statements have been prepared and presented
based on the new standard. Basic net loss per share is
computed by dividing net loss by the weighted average number of
common shares outstanding during the period. Diluted net loss
per share for the periods presented is the same as basic net
loss per share since the inclusion of the potential common
stock equivalents would be antidilutive. Calculations of
basic and diluted net loss per share are as follows:
<TABLE>
<CAPTION> Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net loss $(81,920) $(7,889,634) $(5,264,846) $(18,617,368)
Dividends on Series A
Preferred Stock -- (6,049) -- (98,825)
Accretion on Series B
Preferred Stock -- (1,193,045) -- (1,193,045)
____________ ____________ ____________ _____________
Income (loss) available
to Common Shareholders $(81,920) $(9,088,728) $(5,264,846) $(19,909,238)
Basic and diluted weighted
average number of common
and potential common
shares outstanding 12,740,077 8,432,963 11,673,422 7,759,370
Basic and diluted net
loss per common and
potential common share $ (0.01) $(1.08) $(0.45) $(2.57)
</TABLE>
9) Comprehensive Income
The Company adopted SFAS 130, "Reporting Comprehensive Income",
effective January 1, 1998. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components
in financial statements. The Company's only item of other
comprehensive income relates to foreign currency translation
adjustments and is presented separately on the balance sheet as
required. If presented on the statement of operations,
comprehensive income would be approximately $378,000 more than
reported net income for the three months ended September 30, 1998
and $282,000 more than reported net income for the nine months
ended September 30, 1998, due to foreign currency translation
adjustments.
In July 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS No. 131
requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable
segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impractible,
companies would be required to disclose similar prior period
information upon adoption.
10) Sale of Certain Assets
On September 30, 1998, the Company and its wholly owned Irish
subsidiary, Cambridge Diagnostics Ireland, Ltd. (CDIL) signed an
agreement with Trinity Biotech whereby CDIL agrees to sell
certain assets of the infectious disease diagnostics product
lines, primarily inventories, equipment and its ongoing business.
In return for the product lines the Company received
consideration of approximately $2.3 million consisting of 555,731
shares of Selfcare stock, 300,000 shares of Enviromed stock and
$230,000 in cash. Enviromed is already 29% owned by the Company.
The Company recorded a gain on the sale of the business of
approximately $1.1 million.
11) License Agreements with Becton, Dickinson and Company
On September 1, 1998, the Company entered into two patent
license agreements with Becton, Dickinson and Company. The
agreements are effective April 1, 1998 and continue in effect
until the last to expire of the Licensed Patents, as defined in
the agreements, in each country or region. The Company has the
right to terminate its license by giving 30 days advance written
notice. The agreements grant the Company the rights to
manufacture and sell products incorporating certain patented
technology as defined by the agreement. The Company is obligated
to pay royalties on the net sales of products incorporating the
licensed technology at a rate of 6% until December 31, 1998, and
then a royalty of 6.25% beginning January 1, 1999, on the first
$108 million of net sales and 5.25%, thereafter, extending through
the expiration of the patents.
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, as well as the marketing of nutritional supplement
products, several of which are targeted primarily at the women's
health market. 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") and
nutritional supplements. 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 $20.0 million, or 147%, to
$33.6 million for the three months ended September 30, 1998 from
$13.6 million for the three months ended September 30, 1997. Net
revenues increased $53.6 million, or 151%, to $89.0 million for
the nine months ended September 30, 1998 from $35.4 million for
the nine months ended September 30, 1997. The most significant
portion of the increase in net revenues is attributed to the
Company's diabetes business, which had net revenues of $15.7
million and $42.6 million for the three and nine months ended
September 30, 1998, respectively. The Company's principal
product for the diabetes market is an electrochemical, biosensor-
based blood glucose monitoring system being distributed by
LifeScan, Inc., a subsidiary of Johnson & Johnson ("LifeScan"),
known as FastTakeTM. The FastTake system consists of an
instrument, referred to as a meter, and a disposable test strip.
The Company commenced shipments to LifeScan in December 1997.
Net revenues of the Company's diabetes business also increased as
a result of the Company's acquisition of Can-Am Care Corporation
("Can-Am"), a leading supplier of diabetes care products, on
February 18, 1998. Net revenues of women's health products
increased approximately $617,000 and $1.8 million for the three
and nine months ended September 30, 1998 as compared to the three
and nine months ended September 30, 1997, respectively.
Approximately $1.4 million of the increase in net revenues for
the three months ended September 30, 1998 as compared to the
three months ended September 30, 1997 is attributed to sales of
nutritional supplements. Net revenues of nutritional supplements
increased $5.7 million for the nine months ended September 30,
1998 as compared to the period of February 19 (the date of
acquisition) to September 30, 1997. Net revenues of diagnostic
products for infectious diseases increased by $1.5 million and
$1.3 million for the three and nine months ended September 30,
1998, respectively, as compared to the three and nine months
ended September 30, 1997, respectively. Grant and other revenue
was approximately $1.1 million and $3.2 million for the three and
nine months ended September 30, 1998 compared to $336,000 and
$1.0 million for the three and nine months ended September 30,
1997. The Company deferred $3.0 million of a $7.0 million success
fee received from LifeScan in October 1996. The Company
recognizes the revenue related to the success fee as FastTake
meters are shipped to LifeScan. The Company has accelerated the
recognition of this revenue based on the change in the estimated
life of the current meter because of the planned introduction of
an improved meter. The remainder of the deferred revenue relates
to certain development and capital grants for the Company's
facility in Inverness, Scotland.
Gross profit. Gross profit increased by $5.7 million or 82% to
$12.7 million for the quarter ended September 30, 1998 from $7.0
million for the quarter ended September 30, 1997. The increase in
the absolute amount of gross profit dollars was derived primarily
from net revenues of the diabetes products, which accounted for
$2.8 million of the increase. Due to higher sales levels, the
gross profits on the net revenues of nutritional supplements and
diagnostic products for infectious diseases increased by $1.0
million and $1.1 million, respectively, for the three months
ended September 30, 1998 as compared to the three months ended
September 30, 1997. Although net revenues of women's health
products increased approximately $617,000, the gross profits on
the net revenues of women's health products decreased by $141,000
for the three months ended September 30, 1998 as compared to the
three months ended September 30, 1997. This was due to royalty
obligations (see Note 11 of the "Notes to Consolidated Financial
Statements") and because there was a higher percentage of sales
of private labeled products versus branded products. These
factors were partially offset by reduced freight costs. In
addition, for the three months ended September 30, 1998, gross
profit was augmented by an $802,000 increase in grant and other
revenue compared to the three months ended September 30, 1997.
For the nine months ended September 30, 1998, gross profit
increased by $13.0 million or 73% to $30.7 million for the nine
months ended September 30, 1998 from $17.7 million for the nine
months ended September 30, 1997. Gross profits on the net
revenues of diabetes products accounted for $4.9 million of the
increase. The increased net revenues of the nutritional
supplements and diagnostic products for infectious diseases added
$4.1 million and $1.2 million of the increase in gross profits,
respectively, for the nine-month period. During the nine months
ended September 30, 1998, gross profits on the net revenues of
women's health products remained flat on higher sales volumes as
compared to the nine months ended September 30, 1997 due to the
product mix and royalties, as mentioned above. In addition,
gross profit was aided by a $2.2 million increase in grant and
other revenue for the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997. Gross
profit as a percentage of net revenues decreased to 38% and 35%
for the three and nine-month periods ended September 30, 1998,
respectively, from 51% and 50% of net revenues for the three and
nine months ended September 30, 1997, respectively. The decrease
in gross profit as a percentage of net revenues was due to
shipments of FastTake meters, which are sold at the Company's
cost per the agreement with LifeScan. This was partially offset
by the increase in the recognition of deferred revenue. The
Company expects that the blended gross profit, excluding the
effect of the recognition of deferred revenue, will improve as
volumes of test strips for the FastTake system increase. This
has already begun to occur as the gross profit as a percentage of
net revenues increased to 38% for the three months ended
September 30, 1998 from 33% for the three months ended June 30,
1998.
Research and Development. Research and development expenses
decreased by $2.6 million or 56% for the three months ended
September 30, 1998 to $2.0 million from $4.6 million for the
three months ended September 30, 1997. For the nine months ended
September 30, 1998, research and development expense decreased by
$6.5 million or 55% to $5.4 million from $11.9 million for the
nine months ended September 30, 1997. The decrease was primarily
due to the transition, in December 1997, of the FastTake system
from research and development into production. The Company
expects to continue to spend significant amounts on research and
development throughout 1998. However, the Company does not
expect 1998 research and development expenses to be as high as
research and development expenses in 1997.
Charge for In-Process Research and Development. For the three
and nine months ended September 30, 1997, the Company recognized
expense in the amount of $1.8 million and $3.1 million,
respectively, representing a pro rata portion of the purchase
price of the Company's interest in Orgenics, Ltd., which 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. Selling, general, and
administrative expense increased $3.2 million or 47% to $9.9
million for the three months ended September 30, 1998 from $6.7
million for the three months ended September 30, 1997. Selling,
general, and administrative expense increased $8.8 million or 51%
to $26.2 million for the nine months ended September 30, 1998
from $17.4 million for the nine months ended September 30, 1997.
The increases were primarily attributable to increased spending
on marketing of the nutritional supplements and to the selling,
general and administrative expenses of Can-Am, which the Company
acquired on February 18, 1998. Amortization of goodwill and
intangible assets resulting from the acquisitions of the
nutritional supplement lines, Can-Am, and Orgenics, Ltd accounted
for $326,000 and $1.2 million of the increase for the three and
nine-month periods ended September 30, 1998. Selling, general
and administrative expense, as a percentage of net revenues,
decreased to 29% and 30% of net revenues during the three and
nine months ended September 30, 1998, respectively, as compared
to 49% of net revenues for the same periods in 1997.
Gain on Sale of Assets. On September 30, 1998, the Company sold
the infectious disease diagnostics business of its subsidiary,
Cambridge Diagnostics Ireland, Ltd., to Trinity Biotech plc, for
consideration of 555,731 shares of Selfcare Inc. common stock
owned by Trinity Biotech, $230,000 in cash and other
consideration valued at approximately $43,000. The Company
recorded a gain of approximately $1.1 million as a result of the
sale of the assets.
Interest and Other Income (Expense). For the three and nine
months ended September 30, 1998 the Company incurred interest
expense of $1.9 million and $7.5 million, respectively, compared
to $1.5 million and $3.3 million for the three and nine months
ended September 30, 1997, respectively. The Company recognized
$60,000 and $1.7 million of non-cash interest expense for the
amortization of the original issue discount on convertible notes
for the three and nine months ended September 30, 1998,
respectively. During the second and third quarters of 1998, the
Company issued $10.2 million in Subordinated Notes (See Note 6 of
the "Notes to Consolidated Financial Statements") and accrued
interest of $373,000 and $382,000 with respect thereto for the
three and nine months ended September 30, 1998. The Company
incurred interest expense on Subordinated Revenue Royalty
Notes of $425,000 and $1.4 million for the three and nine
months ended September 30, 1998, respectively, compared to
$387,000 and $459,000 for the three and nine months ended
September 30, 1997, respectively. The Company also
incurred interest expense of $177,000 and $882,000 for the
three and nine months ended September 30, 1998 on Senior
Subordinated Convertible Notes, which were issued October 28,
1997. In addition, the Company's subsidiary, Inverness Medical,
Inc. incurred interest expense increases of $315,000 and $879,000
for the three and nine months ended September 30, 1998 as
compared to the similar periods last year due to increased
borrowings used to acquire Can-Am. Also, for the nine months
ended September 30, 1998, the Company recognized $1.5 million of
non-cash income related to 155,724 shares of the Company's Common
Stock received into treasury in connection with the settlement
agreement dated March 6, 1998 by and between the Company, Trinity
Biotech PLC, Flambelle Limited and Eastcourt Limited.
Dividends and Accretion on Mandatorily Redeemable Preferred
Stock of a Subsidiary and Minority Interest. The Company's
subsidiary in Inverness, Scotland accrued $29,000 and $87,000 for
the three and nine months ended September 30, 1998, respectively,
representing a 6% dividend payable and accretion on the
outstanding cumulative redeemable preference shares. The accrued
dividends payable and accretion were $28,000 and $85,000 for the
similar periods last year. Minority interest in certain of the
Company's subsidiaries was income of $45,000 and $119,000 for the
three and nine months ended September 30, 1998, respectively, as
compared to income of $15,000 and $145,000 for the three and nine
months ended September 30, 1997, respectively.
Foreign Currency Translation. Fluctuations in foreign currency
did not significantly impact revenue performance measured in U.S.
dollars for the three or nine months ended September 30, 1998.
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 $717,000 for the nine months ended
September 30, 1997 related to foreign currency translation of
intercompany balances.
Net Loss. For the three months ended September 30, 1998, the
Company had a net loss of approximately $82,000 or ($0.01) per
common and potential common share compared to a net loss of $7.9
million or ($1.08) per common and potential common share for the
three months ended September 30, 1997. The results for the three-
month periods ending September 30, 1997 and September 30, 1998
included significant non-recurring, non-cash charges and income
as detailed above. Excluding these charges and income, the net
loss for the three months ended September 30, 1998 was $1.1
million or ($0.09) per common and potential common share compared
to a net loss of $6.1 million or ($0.87) per common and potential
common share for the three months ended September 30, 1997. For
the nine months ended September 30, 1998, the Company had a net
loss of $5.3 million or ($0.45) per common and potential common
share compared to a net loss of $18.6 million or ($2.57) per
common and potential common share for the nine months ended
September 30, 1997. The results for the nine-month periods
ending September 30, 1997 and September 30, 1998 included
significant non-recurring, non-cash charges and income as
detailed above. Excluding these charges and income, the net loss
for the nine months ended September 30, 1998 was $6.2 million or
($0.53) per common and potential common share compared to a net
loss of $15.4 million or ($2.16) per common and potential common
share for the nine months ended September 30, 1997.
For the three months ended September 30, 1998, earnings before
interest, taxes, depreciation and amortization ("EBITDA") before
non-recurring, non-cash charges was $2.4 million or $0.19 per
common and potential common share compared to a loss of $2.7
million or ($0.32) per common and potential common share for the
three months ended September 30, 1997. For the nine months ended
September 30, 1998, EBITDA before non-recurring, non-cash charges
was $3.5 million or $0.30 per common and potential common share
compared to a loss of $7.9 million or ($1.01) per common and
potential common share for the nine months ended September 30,
1997.
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 alliance with LifeScan, private placements of
debt and equity securities, bank loans and lines of credit,
capital lease obligations, cash from product sales and grants
from government development agencies.
At September 30, 1998, the Company had cash and cash
equivalents of $6.1 million, a $9.6 million decrease from
December 31, 1997. The net cash used in operating activities in
the nine months ended September 30, 1998 was $11.7 million due
partially to net losses of $5.3 million. However, the net loss
includes non-cash charges and income described above. Other uses
of cash in operating activities included increases in both
accounts receivable and inventory of $11.8 million. Prepaid and
other current assets increased $3.3 million. Cash was provided
for operations in part by an increase in accounts payable,
accrued expenses, and other current liabilities of $6.3 million.
During the nine months ended September 30, 1998, the Company
used $1.1 million to purchase property and equipment.
During the nine months ended September 30, 1998, the Company
borrowed $38.4 million from The Chase Manhattan Bank. The
Company used the majority of these funds to finance the $13.6
million cash portion of the Can-Am purchase price and to
refinance the existing bank debt, $22.0 million, with Fleet Bank.
The Company also paid $1.9 million in deferred financing costs,
primarily related to the purchase of Can-Am. Between June 26,
1998 and August 26, 1998, the Company raised $10.2 million before
expenses from the issuance of subordinated promissory notes and
warrants (See Note 5 of the "Notes to Consolidated Financial
Statements"). In addition, during the nine months ended September
30, 1998, the Company repaid $6.0 million of principal on a note
payable to American Home Products.
The Company currently anticipates that it will need to raise
additional capital, either through borrowings and/or issuance of
equity securities, during 1998 to help fund its operations and
scheduled debt payments. 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 may 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.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain matters discussed herein constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company intends such forward-
looking statements to be covered by the safe harbor provisions
for forward-looking statements, and is including this statement
for purposes of complying with these safe harbor provisions.
Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. Although the
Company believes the forward-looking statements are based on
reasonable assumptions, the Company can give no assurance that
its expectations will be attained. Actual results and timing of
certain events could differ materially from those projected in or
contemplated by the forward-looking statements due to a number of
factors, including, without limitation, general economic and real
estate conditions, the availability of equity and debt financing
for acquisitions, research and product development, interest
rates, competition for self-suppliers in achieving year 2000
compliance and other risks detailed from time to time in the
filings of the Company with the Securities and Exchange
Commission ("SEC") including, without limitation, quarterly
reports on Form 10-Q, current reports on Form 8-K, and annual
report on Form 10-KSB.
Risks Related to the LifeScan Alliance
The Company has entered into an exclusive worldwide alliance
and distribution agreement (the "LifeScan Alliance") with
LifeScan, Inc., a subsidiary of Johnson & Johnson ("LifeScan").
Under the terms of the LifeScan Alliance, Selfcare manufactures
and LifeScan distributes Selfcare's proprietary electrochemical
blood glucose monitoring system for the management of diabetes
known as FastTake. Selfcare commenced shipments of FastTake in
December 1997. The Company's future results of operations depend
to a substantial degree on LifeScan's ability to market and sell
FastTake. No assurance can be given as to the market acceptance
of FastTake. The failure to produce, market and distribute
successfully FastTake would have a material adverse effect on the
Company's business, financial condition and results of
operations. See Part II, Item 1 Legal Proceedings, below, for a
discussion of certain legal proceedings including recently filed
litigation against the Company and LifeScan.
Risk of Inadequate Funding; Future Capital Needs
The Company currently anticipates that it will need to raise
additional capital, either through borrowings and/or issuance of
equity securities, in early 1999, to help fund its operations and
scheduled debt payments. 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 curtail significantly
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.
Dependence on Patents and Proprietary Technology; Trademarks
Self-Test Products
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 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 patent position of medical products and diagnostic
testing firms is often highly uncertain and usually involves
complex legal and factual questions. There is a substantial
backlog of patents at the U.S. Patent and Trademark Office. No
consistent policy has emerged regarding the breadth of claims
covered in medical product patents. Accordingly, 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's products or, if patents are issued to the Company,
that its competitors will not be able to design around such
patents. In addition, the medical products industry, including
the diagnostic testing industry, has been characterized by
extensive litigation regarding patents, licenses and other
intellectual property rights. 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.
Under the distribution agreement entered into pursuant to the
LifeScan Alliance, Selfcare has agreed to indemnify LifeScan for
any claims that FastTake infringes any patents. See Part II, Item
1 Legal Proceedings, below, for a discussion of certain legal
proceedings including recently filed litigation against the
Company and LifeScan.
The Company also seeks to protect its proprietary technology,
including technology that may not be patented nor patentable, in
part through confidentiality agreements and, if applicable,
inventors' rights agreements with its collaborators, advisors,
employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade
secrets will not otherwise be disclosed to, or discovered by,
competitors. Moreover, the Company may from time to time conduct
research through academic advisors and collaborators who are
prohibited by their academic institutions from entering into
confidentiality or inventors' rights agreements.
Nutritional Supplements
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.
Risks Related to the Year 2000 Issue
The statements in the following section include "Year 2000
readiness disclosure" within the meaning of the Year 2000
Information and Readiness Disclosure Act of 1998.
Background. The term "Year 2000 issue" is a general term used
to describe various problems that may result from the improper
processing by computer systems of dates after 1999. These
problems arise from the inability of some hardware and software
to distinguish dates before the year 2000 from dates in and after
the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations. The Year 2000
issue affects virtually all companies and all organizations.
The Company's and its subsidiaries' (the "Companies") efforts
to address their Year 2000 issues are focused in the following
three areas: (i) reviewing and taking any necessary steps to
attempt to correct the Companies' computer information systems
(i.e., software applications and hardware platforms),
(ii) evaluating and making any necessary modifications to other
computer systems that do not relate to information technology but
include embedded technology, such as telecommunications,
security, fire and safety systems, and (iii) communicating with
certain significant customers, suppliers and service providers to
determine whether there will be any interruption in their systems
that could affect the Companies.
The Companies' State of Readiness. The Companies have
developed a four-phase plan to address their Year 2000 issues
(their "Year 2000 Plan"). The four phases are: (i) Awareness,
(ii) Assessment, (iii) Remediation, and (iv) Testing.
Awareness. The Companies have made the relevant employees
aware of the Year 2000 issue and collected information from such
employees regarding systems that might be affected. The Company
has established a project team to lead its efforts and management
will oversee the Companies' progress with respect to the
implementation of their Year 2000 Plan. In addition, the Year
2000 Plan will be subject to the review of the Board of
Directors.
Assessment. The Companies have substantially completed an
assessment of their standard computer information systems and are
now taking the further necessary steps to make their core
computer information systems, in those situations in which the
Companies are required to do so, Year 2000 compliant. See
"Remediation" below. The Companies are in the process of
obtaining written verification from vendors to the effect that
the Companies' other (i.e., non-core) standard computer
information systems acquired from such vendors correctly
distinguish dates before the year 2000 from dates in and after
the year 2000. The Companies expect that they will obtain such
verifications, or a commitment from the relevant vendor to
provide a solution, by no later than April 30, 1999.
In addition, the Companies are currently evaluating and
assessing their other computer systems that do not relate to
information technology but include embedded technology, such as
telecommunications, security, fire and safety systems, and
expects that their assessment will be completed by March 31,
1999. The Companies are aware that such systems contain embedded
chips that are difficult to identify and test and may require
complete replacement because they cannot be repaired. Failure of
the Companies to identify or remediate any embedded chips (either
on an individual or aggregate basis) on which significant
business operations depend, such as phone systems, could have a
material adverse impact on the Companies' business, financial
condition and results of operations.
The Companies are seeking written verification from its
significant customers, suppliers, and service providers that they
will be Year 2000 compliant by no later than April 30, 1999. For
the foregoing reasons, the Companies do not believe that there is
a significant risk related to the failure of vendors or third-
party service providers to prepare for the Year 2000; however,
the costs and timing of third-party Year 2000 compliance is not
within the Companies' control and no assurances can be given with
respect to the cost or timing of such efforts or the potential
effects of any failure to comply.
Remediation. The Companies' primary use of software systems is
their accounting and Electronic Data Interface (EDI) software.
The Company also uses programmable logic controls ("PLC") in
manufacturing operations at its facility in Inverness, Scotland.
The Company has received written verification from its vendor of
the accounting software used in its corporate office that the
software is Year 2000 compliant. The Company expects an upgrade
for its EDI software that has been designed to be Year 2000
compliant by March 31, 1999. The PLCs are in process of being
tested.
Testing. To attempt to confirm that their computer systems are
Year 2000 compliant, the Companies expect to perform limited
testing of their computer information systems and their other
computer systems that do not relate to information technology but
include embedded technology. Unless Year 2000 issues arise in the
course of their limited testing, the Companies will rely on the
written verification received from each vendor of their computer
systems that the relevant system is Year 2000 compliant.
Nevertheless, there can be no assurance that the computer systems
on which the Companies' business relies will correctly
distinguish dates before the year 2000 from dates in and after
the year 2000. Any such failures could have a material adverse
effect on the Companies' business, financial condition and
results of operations. Testing of some systems is in process and
the Companies currently expect that their testing will be
complete by April 30, 1999. The Company has tested the software
in the FastTake blood glucose monitoring system and believes that
it is Year 2000 Compliant.
Costs to Address the Company's Year 2000 Issues. The Companies
anticipate that the primary cost of Year 2000 compliance will be
the cost of testing. Because the Companies' Year 2000 assessment
is ongoing and additional funds may be required as a result of
future findings, the Companies are not currently able to estimate
the final aggregate cost of addressing the Year 2000 issue.
While these efforts will involve additional costs, the Companies
believe, based on available information, that these costs will
not have a material adverse effect on their business, financial
condition or results of operations. The Companies expect to fund
the costs of addressing the Year 2000 issue from cash flows
resulting from operations and additional capital, either through
borrowings and/or issuance of equity securities. While the
Companies believe that they will be Year 2000 compliant by
December 31, 1999, if these efforts are not completed on time, or
if the costs associated with updating or replacing the Companies'
computer systems exceeds the Companies' estimates, the Year 2000
issue could have a material adverse effect on the Companies'
business, financial condition and results of operations.
Risks Presented by Year 2000 Issues. The Companies are still
in the process of evaluating potential disruptions or
complications that might result from Year 2000 related problems;
however, at this time the Companies have not identified any
specific business functions that will suffer material disruption
as a result of Year 2000 related events. It is possible,
however, that the Companies may identify business functions in
the future that are specifically at risk of Year 2000 disruption.
The absence of any such determination at this point represents
only the Companies' current status of evaluating potential Year
2000 related problems and facts presently known to the Companies,
and should not be construed to mean that there is no risk of Year
2000 related disruption. Moreover, due to the unique and
pervasive nature of the Year 2000 issue, it is impracticable to
anticipate each of the wide variety of Year 2000 events,
particularly outside of the Companies, that might arise in a
worst case scenario which might have a material adverse impact on
the Companies' business, financial condition and results of
operations.
The Company's Contingency Plans. The Companies intend to
develop contingency plans for significant business risks that
might result from Year 2000 related events, if necessary.
Because the Companies have not identified any specific business
function that will be materially at risk of significant Year 2000
related disruptions, and because a full assessment of the
Companies' risk from potential Year 2000 failures is still in
process, the Companies have not yet developed detailed
contingency plans specific to Year 2000 problems. Development of
these contingency plans is currently scheduled to occur before
May 31, 1999 and as otherwise appropriate.
The preceding "Year 2000 Readiness Disclosure" contains various
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements represent the Company's beliefs or expectations
regarding future events. All forward-looking statements involve
a number of risks and uncertainties that could cause the actual
results to differ materially from the projected results. Factors
that may cause these differences include, but are not limited to,
the availability of qualified personnel and other information
technology resources; the ability to identify and remediate all
date sensitive lines of computer code or to replace embedded
computer chips in affected systems or equipment; and the actions
of governmental agencies or other third parties with respect to
Year 2000 problems.
Managing and Maintaining Growth
The Company is currently experiencing a period of rapid growth
and expansion, including growth and expansion experienced since
the consummation of the Nutritional Supplement Lines Acquisition
and the Can-Am 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.
Risks Related to New Product Development
Certain 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.
Some of these 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.
Comprehensive Government Regulation
Self-Test Products
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
self-test products, including those licensed by the Company from
third parties, require governmental approvals for
commercialization that have not yet been obtained and are not
expected to be obtained for several 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 Food and Drug Administration (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 marketing authorization 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 Company is developing home self-tests for women, which
include tests for osteoporosis and follicle stimulating hormone,
and plans to develop self-tests for certain infectious disease in
the future. There can be no assurance that requisite regulatory
approvals for the Company's self-test products will be obtained
within a reasonable period of time, if at all. Moreover, if
regulatory approval of a product is granted, such approval may
impose limitations on the indicated uses, or methods of use, for
which such product may be marketed. Further, even if such
regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to
continual review and periodic inspections, and later discovery of
previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the
market. Failure to comply with the applicable regulatory
requirements can result in, among other things, fines,
suspensions of regulatory approvals, product recalls, operating
restrictions and criminal prosecution.
In addition, the Company is required to meet regulatory
requirements in countries outside the United States, which can
change rapidly with relatively short notice, resulting in the
Company's products being banned in certain countries with
consequent loss of revenues and income. Foreign regulatory
agencies could also introduce test format changes which, if not
quickly addressed by the Company, could result in restrictions on
sales of the Company's products. Such changes are not uncommon
due to advances in basic research and the nature of certain
infectious diseases and agents such as HIV, which is a mutating
virus capable of producing new strains and subtypes. 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 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.
Nutritional Supplements
The manufacturing, processing, formulation, 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 ("FTC") and the Consumer Product Safety Commission.
These activities are also regulated by various agencies of the
states, localities and foreign countries in which Nutritional
Supplement Lines are now sold or may be sold in the future. In
particular, the FDA regulates the safety, manufacturing, labeling
and distribution of dietary supplements, including vitamins,
minerals and herbs, as well as food additives, over-the-counter
("OTC") and prescription drugs and cosmetics. The regulations
that are promulgated by the FDA relating to the manufacturing
process are known as Good Manufacturing Practices ("GMPs"), and
are different for drug and food products. 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"), which amends the Food, Drug and Cosmetic Act by
defining dietary supplements as a new category of food separate
from conventional food, was enacted on October 25, 1994. The FDA
has finalized certain regulations to implement DSHEA, including
those relating to nutritional labeling requirements, but has not
finalized other regulations. The finalized regulations require
different labeling for the Nutritional Supplement Lines and, with
respect to nutritional supplement products under development by
Selfcare, impose new notification procedures and scientific
substantiation requirements regarding ingredients, product claims
and safety. The Company cannot determine what effect these
regulations will have on its business in the future. Failure to
comply with applicable FDA requirements could result in sanctions
being imposed on the Company or the manufacturers of its
products, including warning letters, product recalls and
seizures, injunctions or criminal prosecution. With respect to
regulations that have not been finalized, the Company anticipates
that the FDA will promulgate specific Good Manufacturing
Practices to regulate dietary supplements, which are modeled on
the current GMPs for food. The Company believes that the
manufacture of the Nutritional Supplement Lines is currently in
compliance with the proposed GMPs for dietary supplements. No
assurance can be given that the final GMPs for dietary
supplements will not change in ways that require changes in the
manufacture of the Nutritional Supplement Lines.
Competition; Risk of Technological Obsolescence
Self-Test Products
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
seeking to develop and market generic test strips which are
compatible with other manufacturers' electrochemical blood
glucose monitoring systems. If the Company succeeds in these
efforts, 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.
The Company is also aware of several of its competitors who are
attempting to develop a noninvasive blood glucose monitoring
technology. Noninvasive 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 noninvasive 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, 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. 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
such as the Nutritional Supplement Lines 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 of these companies are privately held and the
Company is unable to assess precisely 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.
Dependence upon Key Personnel
The Company is highly dependent on the services of Ron
Zwanziger, its Chairman, President and Chief Executive Officer,
and certain other members of its management and scientific staff,
and the loss of Mr. Zwanziger or one or more of such employees
could have a material adverse effect on the Company. In
addition, the Company believes that its future success will
depend in large part upon its ability to attract and retain
highly skilled scientific, managerial and marketing personnel,
particularly as the Company expands its activities, including
product development and regulatory affairs, research and
development and sales and manufacturing. The Company faces
significant competition for such personnel from other companies,
research and academic institutions, government entities, and
other organizations. There can be no assurance that the Company
will be successful in hiring or retaining the personnel it
requires for continued growth. The failure to hire and retain
such personnel could materially and adversely affect the
Company's prospects.
Risks Related to the Nutritional Supplement Lines Acquisition
On February 19, 1997, the Company acquired the U.S. rights to
several nutritional supplement product lines (the "Nutritional
Supplement Lines") from American Home Products Corporation
("AHP"). As part of its plans for maintaining and expanding
sales of these products, the Company expects to incur substantial
marketing and promotional expenses and allowances in 1998 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.
Selfcare is also developing additional nutritional supplement
products, but there can be no assurances that these can be
successfully introduced.
Risks Related to Can-Am Acquisition
On February 18, 1998, Selfcare's subsidiary Inverness Medical,
Inc., formerly known as Selfcare Consumer Products, Inc. (renamed
in the third quarter of 1998), acquired (the "Can-Am
Acquisition") Can-Am, a leading supplier of diabetes care
products, for approximately $27.9 million. Can-Am sells insulin
syringes, blood lancets, glucose tablets and specialty skin
creams to pharmacies across the United States. Can-Am's revenues
for the fiscal year ended May 31, 1997, were approximately $25.9
million. The Company expects to realize cost savings and
efficiencies by, among others, eliminating redundant management
functions and by coordinating the distribution channels of
Selfcare and Can-Am. No assurance can be given that such cost
savings and efficiencies can be realized or that the Company will
not incur significant costs in attempting to realize such cost
savings and efficiencies.
Risks Related to the Conversion to the Euro
On January 1, 1999, eleven of the fifteen member countries of
the European Union (the "Participating Countries") are scheduled
to establish fixed conversion rates between their sovereign
currencies and the Euro, and have agreed to adopt the Euro as
their common legal currency. The Euro will then trade on
currency exchanges and be available for non-cash transactions.
The Participating Countries will issue sovereign debt exclusively
in Euro, and will redenominate outstanding debt. Beginning
January 1, 2002, the Participating Countries will issue new Euro-
denominated bills and coins for use in cash transactions. No
later than July 1, 2002, the Participating Countries will
withdraw all bills and coins denominated in their sovereign
currencies, making the conversion to the Euro complete.
Certain of the Company's European Subsidiaries may need to
adapt their information technology systems to accommodate Euro-
denominated transactions. In addition, it is likely that there
will be a greater transparency of pricing in the Participating
Countries, making Europe a more competitive environment The
Company's European Subsidiaries may need to respond by adjusting
their business and financial strategies. The effect of any such
adaptations or adjustments has not been quantified at this time.
However, the Company does not believe that the consequences of
the Euro conversion will have a material effect on the Company,
although no assurances can be given that it will not.
Litigation
See Part II, Item 1 Legal Proceedings, below, for a discussion
of certain legal proceedings including recently filed litigation
against the Company and LifeScan.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Abbott Laboratories v. Selfcare, Inc. and Princeton BioMeditech
Corporation
On April 22, 1998, Abbott Laboratories ("Abbott") served
process on the Company and Princeton BioMeditech Corporation
("PBM"), which manufactures certain products for the Company, in
an action filed in the United States District Court for the
District of Massachusetts ("District Court"), asserting patent
infringement arising from the Company and PBM's manufacture, use
and sale of products that Abbott claims are covered by one or
more of the claims of U.S. Patent Nos. 5,073,484 and 5,654,162
(the "Patents") to which Abbott asserts that it is the exclusive
licensee. Abbott claims that certain Selfcare products relating
to pregnancy detection and ovulation prediction infringe the
Patents. Abbott is seeking an order finding that the Company and
PBM infringe the Patents, an order preliminarily and permanently
enjoining the Company and PBM from infringing the Patents,
compensatory damages to be determined at trial, treble damages,
costs, prejudgment and postjudgment interest on Abbott's
compensatory damages, attorneys' fees, and a recall of all
existing Company or PBM products found to infringe the Patents.
On August 5, 1998, the court denied Abbott's motion for a
preliminary injunction. On October 23, 1998, the Company filed a
counterclaim against Abbott, asserting that Abbott is infringing
U.S. Patent Nos. 5,559,041 (the "041 patent") and 5,728,587 (the
"587 patent") which are owned by a joint venture of the Company
and PBM, and seeking a declaration that Abbott infringes the
patents, permanent injunctive relief, money damages and
attorneys' fees. On November 5, 1998, Abbott filed a counterclaim
against the Company asserting the invalidity of the 041 and 587
patents and seeking a declaration of invalidity, non-infringement
and unenforceability. The case is currently in the discovery
stage. The Company intends to defend this litigation vigorously.
A final ruling against the Company could have a material adverse
impact on the Company's business, financial condition and results
of operations.
Abbott Laboratories v. Lifescan, Inc. and Selfcare, Inc.
In late October 1998, Abbott Laboratories, Inc. ("Abbott")
commenced a lawsuit against the Company and Lifescan, Inc., a
subsidiary of Johnson & Johnson, in the United States District
Court for the District of Massachusetts. The complaint alleges
that the disposable test strips used in the FastTakeTM blood
glucose monitoring system supplied by a subsidiary of the Company
to Lifescan infringe U.S. Patent No. 5,820,551 (the "Patent")
issued to Abbott on October 13, 1998. Abbott is seeking damages
and an injunction against sales in the United States. Abbott is
also seeking to enjoin Lifescan and Selfcare from the
manufacture, use and sale of these blood glucose test strips in
the United States during the pendency of the infringement
litigation. Based on a review of the Abbott claims by patent
counsel, the Company believes that the FastTake test strips do
not infringe the Abbott patent. Selfcare also believes that
Abbott's claims will be proven to be without merit, and intends
to vigorously defend them. A final ruling against the Company
could have a material adverse impact on the Company's business,
financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES
On June 26, 1998, the Company entered into a Securities
Purchase Agreement to sell Units (the "Units") having an
aggregate purchase price of up to $10 million. Each Unit
consists of (i) $25,000 in principal amount of a Subordinated
Note (individually a "Note" and collectively the "Notes") and
(ii) a warrant (individually a "Warrant" and collectively the
"Warrants") to acquire such number of shares of the Company's
Common Stock, par value $.00l per share (the "Common Stock") as
is determined by dividing $3,750 by the Exercise Price (as
hereinafter defined) as of the date of issuance of such Warrant.
The "Exercise Price" as of a particular date means the average of
the closing prices for shares of the Company's Common Stock on
the American Stock Exchange on the five trading days immediately
preceding such date. The issue price for each Unit was $25,000.
The Warrants may be exercised, in whole or in part, at any time
on or prior to the fifth anniversary of their issuance.
On June 26, 1998, the Company sold Units consisting of an
aggregate of $4.9 million of Notes and Warrants exercisable for
72,588 shares at $10.125 per share. On July 17, 1998, the
Company sold Units consisting of an aggregate of $2.45 million of
Notes and Warrants exercisable for 40,330 shares at $9.1125 per
share. On August 28, 1998, the Company sold Units consisting of
an aggregate of $2.85 million of Notes and Warrants exercisable
for 68,813 shares at $6.2125 per share. The Company will use the
proceeds for working capital and to meet debt obligations.
U.S. Boston Capital Corporation ("U.S. Boston Capital") acted
as placement agent for the offering of the Notes. Willard L.
Umphrey, a Director of the Company, is the Chairman, President,
Treasurer and a Director of U.S. Boston Capital. In addition,
Jonathan J. Fleming, John F. Levy, and Willard L. Umphrey,
Directors of the Company, received Warrants for an aggregate of
11,483 shares of Common Stock.
Pear Tree Royalty Company, Inc. ("Pear Tree Royalty Company"),
as the authorized representative of the Noteholders, received a
Warrant, at each closing at which Units were sold, for a number
of shares equal to one-third of the aggregate number of shares
issuable under the other Warrants issued at such closing.
Mr. Umphrey is also a Director and shareholder of Pear Tree
Royalty Company. On June 26, 1998, Pear Tree Royalty Company
received a Warrant for 24,196 shares. On July 17, 1998, Pear Tree
Royalty Company received a Warrant for 13,443 shares. On August
28 1998, Pear Tree Royalty Company received a Warrant for 22,938
shares.
The foregoing placement of Units was made pursuant to an
exemption from registration under the Securities Act of 1933, as
amended, contained in Regulation D promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit Number Title
10.1 Form of Patent License Agreement dated
September 1, 1998 between the Company
and Becton, Dickinson and Company
10.2 Form of Patent License Agreement dated
September 1, 1998 between the Company
and Becton, Dickinson and Company
27 Financial Data Schedule
b. Reports on Form 8-K:
The Company filed no reports on Form 8-K during the three-
month period ended September 30, 1998.
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: November 16, 1998 /s/ Christopher L. Huntoon
--------------------------
Christopher L. Huntoon,
Chief Financial Officer
and an authorized officer
EXHIBIT 10.1
CAMPBELL LICENSE AGREEMENT
--------------------------
This License Agreement (the "Agreement") is entered into and
made effective this 1st day of April, 1998, (the "EFFECTIVE
DATE") between Becton, Dickinson and Company, a New Jersey
corporation, whose principal place of business is at 1 Becton
Drive, Franklin Lakes, New Jersey, 07417 (hereinafter referred to
as "BECTON") and Selfcare, Inc., having a principal place of
business at 200 Prospect Street, Waltham, Massachusetts, 02453
(hereinafter referred to as "SELFCARE").
For and in consideration of the mutual promises and
covenants set forth below, BECTON and SELFCARE agree as follows:
1.0 DEFINITIONS.
1.1 "AFFILIATE" shall mean any corporation or other
business entity controlled by, controlling or under common
control with the recited entity. For this purpose "control"
shall mean direct or indirect beneficial ownership of at least
fifty-one percent (51%) of the voting stock of, or at least a
fifty-one percent (51%) interest in the income of such
corporation or other business entity.
1.2 "LICENSED PATENT(S)" shall mean United States Letters
Patent No. 4,703,017 and any continuation, division, re-
examination, or reissue thereof.
1.3 "PRODUCT" shall mean immunodiagnostic assays made,
used, imported, offered for sale and/or sold by SELFCARE and
which are listed in Appendix A. As of the EFFECTIVE DATE of this
Agreement, Appendix A contains the complete list of
immunodiagnostic assays which are PRODUCTS hereunder. Subsequent
to the EFFECTIVE DATE, immunodiagnostic assays which differ from
those originally listed in Appendix A in format, structure,
function or use can be added to Appendix A as PRODUCTS by a
supplemental list on written notice by SELFCARE or BECTON, which
written notice shall specify details of the immunodiagnostic
assays and request the addition of this supplemental list to
Appendix A of this Agreement. Only those supplemental
immunodiagnostic assays which both BECTON and SELFCARE agree in
writing shall be PRODUCTS hereunder shall be accepted as part of
Appendix A, and the decisions of each party with respect to such
acceptance shall be entirely within the discretion of such party.
1.4 (a) "NET SALES" shall mean the sum of all amounts
invoiced on account of sale of PRODUCTS by SELFCARE or its
AFFILIATES to non-affiliated third party purchasers of PRODUCTS,
less (i) cash discounts to purchasers allowed and taken, (ii)
amounts for transportation or shipping charges to purchasers
shown on the invoice, (iii) taxes and duties levied on the sale
of PRODUCTS actually paid, and (iv) refunds, rebates, and
allowances for returned or rejected goods.
(b) In the instance where a PRODUCT is sold by
SELFCARE or its AFFILIATES to a purchaser with which the seller
does not deal at arms length, the NET SALES for the purposes of
determining the royalties shall be the average price for current
NET SALES for the same or similar items sold at arms length under
similar market conditions.
(c) In the instance where a PRODUCT is not sold, but
is OTHERWISE DISPOSED OF (as defined in Paragraph 1.5 below), the
NET SALES for the purposes of determining the royalties shall be
the average price for current NET SALES at which PRODUCTS of the
same or similar kind and quality, and in substantially similar
quantities, are sold or offered for sale.
1.5 "OTHERWISE DISPOSED OF" shall mean and include:
(i) the delivery of any amount of PRODUCT, other than
nominal quantities of free samples or free replacements, by
SELFCARE to others in any transaction other than a sale,
regardless of the basis of consideration, if any; or
(ii) the placing into use of any PRODUCT by SELFCARE
for any purpose, other than its internal routine testing,
provided that the scrapping or destruction (except if
consideration is received therefor) of any PRODUCT shall not fall
within the definition of "OTHERWISE DISPOSED OF" and no value in
respect thereof shall be included in calculating NET SALES. A
PRODUCT shall be considered OTHERWISE DISPOSED OF when used or
shipped by, or on behalf of, SELFCARE.
1.6 "QUARTER" shall mean any period of three consecutive
calendar months beginning January 1, April 1, July 1, and October
1, occurring during the term of this Agreement.
2.0 LICENSE GRANT.
2.1 Subject to the terms and conditions herein, BECTON
hereby grants to SELFCARE, who accepts the same, a non-exclusive,
non-transferable (except to its AFFILIATES) right and license
under the LICENSED PATENTS, without the right to sublicense, to
make, have made for its own use and sale, use, offer for sale,
sell, and import PRODUCT and to practice the methods claimed in
the LICENSED PATENTS in connection with such PRODUCT, and to
extend to its customers purchasing PRODUCT the right to use and
sell the PRODUCT purchased and to practice the methods claimed in
the LICENSED PATENTS in connection with such PRODUCT, all of the
foregoing limited expressly to the field of human IN VITRO
manually formatted immunodiagnostic assays.
In the event that SELFCARE sells PRODUCT(S) to a third party
that has a non-exclusive, non-transferable right and license
under the LICENSED PATENT(S), the royalty obligation of SELFCARE
under this license shall not extend to such sales, provided
however, SELFCARE shall be permitted to make PRODUCTS for any
third party licensee having the right and license under the
LICENSED PATENT(S) to have such PRODUCTS made for it, and to sell
those PRODUCTS to such licensee without any obligation to pay
royalties to BECTON thereon since the third party (without
waiving any right of BECTON to collect royalties from SELFCARE in
the event the third party licensee fails to account for and pay
royalties to BECTON on its sales of such PRODUCTS) licensee has
the obligation, under its license with BECTON, to pay royalties
on the sales of PRODUCTS made for it. BECTON agrees to provide
SELFCARE with the names of such third party licensees which have
the right and license to have PRODUCTS made for it.
2.2 BECTON further hereby releases SELFCARE from any
liability for infringement of the LICENSED PATENTS arising from
the manufacture, use, or sale of PRODUCTS by SELFCARE which
occurred prior to the EFFECTIVE DATE, provided that these events
are reported in accordance with Article 4.3 and royalties are
paid in accordance with Article 4.1(a) hereof. There is no
release for any infringement for which a report is not made under
Article 4.3 and/or royalties are not paid under Article 4.1(a).
3.0 TERM.
3.1 This Agreement shall become effective as of the
EFFECTIVE DATE hereof and shall continue in effect until the last
to expire of the LICENSED PATENTS in each country or region
(referred to collectively as "country") or until this Agreement
has been terminated under Paragraph 7.0.
4.0 PAYMENT.
4.1 In consideration for the license and release granted
hereunder, SELFCARE shall pay to BECTON the following:
(a) As of the EFFECTIVE DATE, a royalty of six percent
(6%) until December 31, 1998, and then a royalty of six and one-
quarter percent (6.25%) beginning January 1, 1999, on the first
$108,667,100.00 of NET SALES of all PRODUCTS sold or OTHERWISE
DISPOSED OF.
(b) Thereafter, a royalty of five and one-quarter
percent (5.25%) of the NET SALES of all PRODUCTS sold or OTHERWISE
DISPOSED OF.
4.2 SELFCARE's obligation to pay royalties under paragraph
4.1 on PRODUCT shall terminate, on a country by country basis,
upon expiration of the last of the LICENSED PATENTS in the
country of sale or manufacture, as applicable. Further, this
obligation shall cease in the event that a court of competent
jurisdiction in the country in question renders a final decision
from which no appeal is or can be taken, that the LICENSED
PATENTS are invalid and/or unenforceable. If in such decision
one or more claims of the LICENSED PATENTS are not declared
invalid or unenforceable, the obligation of SELFCARE to pay with
respect to PRODUCTS covered by the remaining claims shall not be
affected.
4.3 SELFCARE shall provide to BECTON a written report
stating the analyte name and NET SALES of all PRODUCTS sold or
OTHERWISE DISPOSED OF prior to the EFFECTIVE DATE, and this
report shall accompany the payment to BECTON of all royalties due
in connection herewith in accordance with Section 4.1(a) and, if
none, the report shall so state.
4.4 For all sales and royalty-bearing transfers and uses
occurring on or subsequent to the EFFECTIVE DATE, SELFCARE shall
provide written reports to BECTON within sixty (60) days after
the end of each QUARTER, stating in each report the analyte name
and the NET SALES of each PRODUCT sold or OTHERWISE DISPOSED OF
during such QUARTER and upon which royalties are payable as
provided in this Article.
4.5 For all sales and other dispositions of PRODUCTS
occurring on or subsequent to the EFFECTIVE DATE that SELFCARE
makes to a third party licensee of BECTON, SELFCARE shall provide
separate written reports to BECTON within sixty (60) days after
the end of each QUARTER, stating in each report the analyte name
and the NET SALES of each PRODUCT sold or OTHERWISE DISPOSED OF
during such QUARTER and upon which royalties are not payable as
provided in this Article, consistent with the provisions of
Paragraph 2.1, above.
4.6 (a) Concurrently with the making of each report
SELFCARE shall pay to BECTON all royalties due in the amount
specified in Section 4.1 on the NET SALES of all PRODUCTS
included in the report.
(b) Any late payment shall bear interest at the rate
of one percent (1%) per month.
4.7 All payments shall be made hereunder in United States
Dollars; provided, however, that if the proceeds of the sales
upon which such royalty payments are based are received by
SELFCARE in a foreign currency or other form that is not
convertible or exportable in Dollars, and SELFCARE does not have
ongoing business operations or bank accounts in the country in
which the currency is not convertible or exportable, SELFCARE
shall pay such royalties in the currency of the country in which
such sales were made by depositing such royalties in BECTON's
name in a bank designated by BECTON in such country. Royalties
in Dollars shall be computed by converting the royalty in the
currency of the country in which the sales were made at the
exchange rate for Dollars prevailing at the close of the last
business day of the QUARTER for which royalties are being
calculated as published the following day in the Wall Street
Journal (or a comparable publication agreed upon from time to
time by the parties), and with respect to those countries for
which rates are not published, the exchange rate fixed for such
date by the appropriate United States governmental agency.
4.8 In the event that any taxes, withholding or otherwise,
are levied by any taxing authority in connection with accrual or
payment of any royalties payable to BECTON under this Agreement,
SELFCARE shall have the right to pay such taxes to the local tax
authorities on behalf of BECTON and the payment to BECTON of the
net amount due, after reduction by the amount of such taxes,
shall fully satisfy SELFCARE's royalty obligations under this
Agreement, so long as appropriate documentation of such tax
payment is provided to BECTON.
4.9 All payments made hereunder shall be made to BECTON at
the address set forth in Article 6 of this Agreement or at such
changed address as BECTON shall specify by written notice.
4.10 SELFCARE shall keep detailed records of all PRODUCT
sold or OTHERWISE DISPOSED OF to permit verification of the
reports and payments made to BECTON. At BECTON's expense and
request and upon reasonable notice, SELFCARE shall permit such
records to be examined by independent public accountants
designated by BECTON and reasonably acceptable to SELFCARE. Such
examination shall take place not more than once each year.
4.11 In the event that an examination by BECTON of
SELFCARE's records and books of account reveals an underpayment
to BECTON, SELFCARE shall immediately pay BECTON the deficiency,
plus interest at a rate of one percent (1%) per month from the
date the underpayment occurred. In the event that such
underpayment amounts to ten percent (10%) or more of the total
amount payable for the period examined, SELFCARE shall also
reimburse BECTON for all out-of-pocket expense of the
examination.
5.0 TRANSFERABILITY OF RIGHTS AND OBLIGATIONS.
5.1 This Agreement and the license granted under it may not
be assigned or sold by SELFCARE without the express written
consent of BECTON, except to an entity acquiring substantially
all of SELFCARE's business relating to human IN VITRO
immunodiagnostic assay technology. If SELFCARE is permitted to
assign this Agreement, the assignee shall first agree, in
writing, to assume all obligations of SELFCARE created by this
Agreement.
5.2 BECTON may freely assign this Agreement in whole or in
part and any or all of the LICENSED PATENTS.
5.3 This Agreement, and each and every one of the terms and
conditions thereof, shall inure to the benefit of and be binding
upon the permitted successors and assignees of both parties.
6.0 NOTICE.
6.1 Any notice, payment, report, or other correspondence
(hereinafter collectively referred to as "correspondence")
required or permitted to be given hereunder shall be mailed by
certified mail or delivery by hand or overnight courier to the
party to whom such correspondence is required or permitted to be
given hereunder If mailed, any such notice shall be deemed to
have been given when received by the party to whom such
correspondence is given, as evidenced by written and dated
receipt of the receiving party.
6.2 Alternatively, correspondence provided for in this
Agreement shall be deemed sufficiently given by the party sending
the correspondence when sent by facsimile to the party to whom
the correspondence is addressed. A confirmation copy of the
correspondence will be sent by Certified or Registered Mail. The
date of the facsimile transmission will constitute the date of
receipt of the correspondence.
All correspondence to SELFCARE shall be addressed as
follows:
Selfcare, Inc.
200 Prospect Street
Waltham, Massachusetts 02453
Attention: Kenneth D. Legg, Ph.D.
Vice President
All correspondence to BECTON, except for royalty
payments, shall be addressed as follows:
Becton, Dickinson and Company
1 Becton Drive
Franklin Lakes, New Jersey 07417
Attention: Chief Patent and Licensing Counsel
All royalty payments to BECTON shall be addressed as
follows:
Becton Dickinson Microbiology Systems
7 Loveton Circle
Sparks, Maryland 21152-0999
Attention: Manager, Financial Reporting
Either party may change the address to which correspondence to it
is to be addressed by notification as provided for herein.
7.0 TERMINATION.
7.1 BECTON shall have the right to terminate this Agreement
if SELFCARE commits a material breach of an obligation under this
Agreement, including the failure to make timely royalty payments
hereunder, and continues in default for more than thirty (30)
days after receiving written notice from BECTON of such default,
such termination to be effective immediately upon further written
notice to SELFCARE after such thirty (30) day period.
7.2 In the event that SELFCARE shall be adjudicated
bankrupt, go into liquidation, receivership or trusteeship, make
a composition with its creditors or enter into any similar
proceeding of the same nature, then BECTON shall have the right
without liability therefor to terminate this Agreement forthwith
by notice in writing to SELFCARE.
7.3 SELFCARE shall have the right to terminate its license
by giving thirty (30) days advance written notice. SELFCARE
shall be obligated for royalty payments under Paragraph 4.1 for
NET SALES during such thirty (30) day notice period.
8.0 GOVERNING LAW.
8.1 This Agreement shall be governed by, interpreted in
accordance with and enforced under the laws of the State of North
Carolina, U.S.A. (regardless of its or any other jurisdiction's
choice of law principles), or, as necessary, the laws of the
United States of America. The Federal District Court of the
Eastern District of North Carolina shall have exclusive
jurisdiction in all matters arising under this Agreement, and the
parties hereto expressly consent and submit to such jurisdiction.
9.0 REPRESENTATIONS, WARRANTIES AND LIMITATIONS.
9.1 Nothing in this Agreement shall be construed as:
(a) An acknowledgment of any kind by SELFCARE as to
the infringement or non-infringement of the LICENSED PATENTS; or
(b) An acknowledgement of any kind by SELFCARE as to
the validity or invalidy of the LICENSED PATENTS; or
(c) An acknowledgement of any kind by SELFCARE as to
the enforceability or non-enforceability of the LICENSED PATENTS;
or
(d) A warranty or representation by BECTON as to the
validity or enforceability of any LICENSED PATENTS; or
(e) A warranty or representation by BECTON that
anything made, used, sold or OTHERWISE DISPOSED OF under the
license granted in this Agreement, is or will be free from
infringement of patents or other rights of third parties; or
(f) A requirement that BECTON shall file any patent
application or secure any patent; or
(g) An obligation of either party to bring or
prosecute actions or suits against third parties for infringement
of any patents; or
(h) Conferring a right to use in advertising,
publicity, or the like any name, tradename, or trademark of
SELFCARE or BECTON; or
(i) Granting by implication, estoppel or otherwise any
licenses or rights under any letters patents and applications for
letters patents other than under the LICENSED PATENTS; or
(j) An obligation by BECTON to furnish know-how or any
other technical information not disclosed in the LICENSED
PATENTS.
9.2 BECTON represents to SELFCARE that BECTON is the owner
of the LICENSED PATENTS and has the right to grant the license
hereunder.
9.3 Each party represents and warrants that it has full
authority to enter into and become bound by the terms and
conditions of this Agreement and that its execution of this
Agreement will not violate, contravene or be in conflict with any
law, rule, by-law, article of incorporation, order, regulation or
other agreement.
9.4 BECTON covenants not to sue SELFCARE for patent
infringement on any of the PRODUCTS during the term of this
Agreement, provided that SELFCARE is in compliance with all of
the provisions and obligations under this Agreement.
10.0 DISCLAIMER AND HOLD HARMLESS PROVISION.
10.1 It is understood and agreed by and between the parties
hereto that nothing contained in this Agreement shall constitute
or be construed to constitute any undertaking, representation,
suggestion, inducement, warranty, assurance or guarantee
whatsoever by either party in connection with PRODUCTS or any
component, product, material, service, process or apparatus with
respect to safety, quality, yield, production, cost, profit,
saleability, licensability, demand, utility, performance,
availability of raw materials, accident or injury to person or
property.
10.2 SELFCARE expressly indemnifies and holds BECTON, its
AFFILIATES, successors, and assigns and its officers, directors
and employees harmless from and against any and all claims,
liabilities, damages, costs, expenses, and/or actions
(collectively, the "Losses" and each individually a "Loss") of
any kind whatsoever which BECTON actually incurs arising from any
claims or allegations by a third party for personal injury or
damage resulting from the manufacturing, use, sale, lease or
distribution of the PRODUCTS by SELFCARE, provided, however, that
in no event shall this section be construed as an obligation of
SELFCARE to indemnify BECTON for any loss relating to or arising
from the invalidity or unenforceability of the LICENSED PATENTS
or BECTON's rights therein.
10.3 Neither of the parties hereto shall be liable in
damages or have the right to cancel for any delay or default in
performing hereunder (other than delay or default in the payment
of money) if such delay or default is caused by conditions beyond
its control, including but not limited to Acts of God,
governmental restrictions, continuing domestic or international
problems such as war or insurrections, strikes, fires, flood,
work stoppages, embargoes and/or other casualty or cause;
provided, however, that any party hereto shall have the right to
terminate this Agreement upon thirty (30) days prior written
notice if either party is unable to fulfill its obligations under
this Agreement due to any of the above-mentioned causes and such
inability continues for a period of six (6) months.
11.0 CAPTIONS.
11.1 The captions and paragraph headings of this Agreement
are solely for the convenience of reference and shall not affect
its interpretation.
12.0 SEVERABILITY.
12.1 Should any part or provision of this Agreement be held
unenforceable or in conflict with the applicable laws or
regulations of any jurisdiction, the invalid or unenforceable
part or provision shall be replaced with a provision which
accomplishes, to the extent possible, the original business
purpose of such part or provision in a valid and enforceable
manner, and the remainder of this Agreement shall remain binding
upon the parties hereto.
13.0 WAIVER.
13.1 No failure or delay on the part of a party in
exercising any right hereunder shall operate as a waiver of, or
impair, any such right. No single or partial exercise of any
such right shall preclude any other or further exercise thereof
or the exercise of any other right. No waiver of any such right
shall be deemed a waiver of any other right hereunder.
14.0 SURVIVAL.
14.1 The provisions of Section 8, 9 and 10 shall survive the
termination or expiration of this Agreement and shall remain in
full force and effect. Furthermore, termination or expiration
shall not affect, inter alia;
(a) SELFCARE's obligation to supply reports as
specified in Article 4 of this Agreement;
(b) BECTON's right to receive or recover and
SELFCARE's obligation to pay royalties accrued or accruable for
payment at the time of any termination;
(c) SELFCARE's obligation to maintain records and
BECTON's right to conduct one final examination of SELFCARE's
books and records relating to events prior to and right up to the
date of termination in accordance with Paragraph 4.9 of this
Agreement; and
(d) Licenses and releases running in favor of
customers or transferees of either party in respect to PRODUCT
sold or OTHERWISE DISPOSED OF prior to termination of this
Agreement.
14.2 The provisions of this Agreement which do not survive
termination or expiration hereof (as the case may be) shall,
nonetheless, be controlling on, and shall be used in construing
and interpreting, the rights and obligations of the parties
hereto with regard to any dispute, controversy or claim which may
arise under, out of, in connection with, or relating to this
Agreement.
15.0 MOST FAVORED LICENSEE.
15.1 In the event that after the EFFECTIVE DATE of this
Agreement BECTON enters into a license agreement with a third
party, in which such third party is licensed to make, use and
sell any PRODUCTS at a royalty rate which is different from the
royalty rate set forth in this Agreement, BECTON shall within
thirty (30) days after the signing of such license agreement,
disclose to SELFCARE the royalty rate in the third party
agreement. BECTON will provide such information to SELFCARE's
attorneys who will maintain the information in confidence and may
disclose it to others within SELFCARE only on a confidential,
need-to-know basis.
15.2 Concurrent with the above report, BECTON will extend to
SELFCARE the option of substituting the royalty rate in the third
party agreement for the royalty rate in this Agreement, subject
to the following provision:
(a) The different royalty rate shall become effective as of
the date of its written acceptance by SELFCARE and shall apply
only to sales occurring thereafter. In no event shall SELFCARE
be entitled to a refund or credit of any monies paid or payable
to BECTON prior to the acceptance of the different royalty rate.
15.3 In the event that SELFCARE does not accept the
different royalty rate relative to Paragraph 15.2 within thirty
(30) days after SELFCARE receives notice from BECTON, SELFCARE's
option to substitute the different royalty rate shall be deemed
forever waived.
16.0 ENTIRE AGREEMENT.
16.1 This Agreement constitutes the entire agreement between
the parties hereto respecting the subject matter hereof, and
supersedes and terminates all prior agreements respecting the
subject matter hereof, whether written or oral, and may be
amended only by an instrument in writing executed by both parties
hereto.
17.0 DISPUTE RESOLUTION.
17.1 The parties shall attempt in good faith to resolve any
dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle such
dispute. Any party may give the other party(ies)written notice
of any dispute hereunder not resolved in the normal course of
business. Within twenty (20) days following delivery of such
notice, executives of both parties shall discuss by telephone or
meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary, to exchange relevant
information and to attempt to resolve such dispute. If the
matter has not been resolved within sixty (60) days following the
disputing party's notice, or if the parties fail to discuss or
meet within twenty (20) days, either party may initiate mediation
of the controversy or claim under the then-current Center for
Public Resources Procedure for Mediation of Business Disputes in
New York. No party shall institute any court proceedings until
the expiration of one hundred and twenty (120) days from the
initiation of negotiations. At the conclusion of this period,
absent any resolution of the dispute or further agreement between
the parties to extend this period, either party may file suit for
the subject matter of the dispute only.
17.2 If a negotiator intends to be accompanied at a
telephone conference or a meeting by an attorney, the other
negotiator shall be given at least three (3) business days'
notice of such intention and may also be accompanied by an
attorney. All negotiations pursuant to this clause are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and
any state rules of evidence.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto
duly authorized to be effective as of the EFFECTIVE DATE.
BECTON, DICKINSON AND COMPANY SELFCARE, INC.
By: By:
---------------------- ------------------------
Date: Date:
APPENDIX A
PRODUCTS
----------
Rapid Manual Tests for hCG and LH analytes
EXHIBIT 10.2
ROSENSTEIN LICENSE AGREEMENT
----------------------------
This License Agreement (the "Agreement") is entered into and
made effective this 1st day of April, 1998, (the "EFFECTIVE
DATE") between Becton, Dickinson and Company, a New Jersey
corporation, whose principal place of business is at 1 Becton
Drive, Franklin Lakes, New Jersey, 07417 (hereinafter referred to
as "BECTON") and Selfcare, Inc., having a principal place of
business at 200 Prospect Street, Waltham, Massachusetts 02453
(hereinafter referred to as "SELFCARE").
For and in consideration of the mutual promises and
covenants set forth below, BECTON and SELFCARE agree as follows:
1.0 DEFINITIONS.
1.1 "AFFILIATE" shall mean any corporation or other
business entity controlled by, controlling or under common
control with the recited entity. For this purpose "control"
shall mean direct or indirect beneficial ownership of at least
fifty-one percent (51%) of the voting stock of, or at least a
fifty-one percent (51%) interest in the income of such
corporation or other business entity.
1.2 "LICENSED PATENT(S)" shall mean United States Letters
Patent No. 5,591,645 and any continuation, division, re-
examination, or reissue thereof, and the foreign counterpart
patents granted on applications claiming priority thereto; a list
of such applications and patents as of the EFFECTIVE DATE is set
forth in Appendix A.
1.3 "PRODUCT" shall mean immunodiagnostic assays made,
used, imported, offered for sale and/or sold by SELFCARE and
which are listed in Appendix B. As of the EFFECTIVE DATE of this
Agreement, Appendix B contains the complete list of
immunodagnostic assays which are PRODUCTS hereunder. Subsequent
to the EFFECTIVE DATE, immunodiagnostic assays which differ from
those originally listed in Appendix B in format, structure,
fuction or use can be added to Appendix B as PRODUCTS by a
supplemental list on written notice by SELFCARE or BECTON, which
written notice shall specify details of the immunodiagnostic
assays and request the addition of this supplemental list to
Appendix B of this Agreement. Only those supplemental
immunodiagnostic assays which both BECTON and SELFCARE agree in
writing shall be PRODUCTS hereunder shall be accepted as part of
Appendix B, and the decisions of each party with respect to such
acceptance shall be entirely within the discretion of such party.
1.4 (a) "NET SALES" shall mean the sum of all amounts
invoiced on account of sale of PRODUCTS by SELFCARE or its
AFFILIATES to non-affiliated third party purchasers of PRODUCTS,
less (i) cash discounts to purchasers allowed and taken, (ii)
amounts for transportation or shipping charges to purchasers
shown on the invoice, (iii) taxes and duties levied on the sale
of PRODUCTS actually paid, and (iv) refunds, rebates, and
allowances for returned or rejected goods.
(b) In the instance where a PRODUCT is sold by
SELFCARE or its AFFILIATES to a purchaser with which the seller
does not deal at arms length, the NET SALES for the purposes of
determining the royalties shall be the average price for current
NET SALES for the same or similar items sold at arms length under
similar market conditions.
(c) In the instance where a PRODUCT is not sold, but
is OTHERWISE DISPOSED OF (as defined in Paragraph 1.5 below), the
NET SALES for the purposes of determining the royalties shall be
the average price for current NET SALES at which PRODUCTS of the
same or similar kind and quality, and in substantially similar
quantities, are sold or offered for sale.
1.5 "OTHERWISE DISPOSED OF" shall mean and include:
(i) the delivery of any amount of PRODUCT, other than
nominal quantities of free samples or free replacements, by
SELFCARE to others in any transaction other than a sale,
regardless of the basis of consideration, if any; or
(ii) the placing into use of any PRODUCT by SELFCARE
for any purpose, other than its internal routine testing,
provided that the scrapping or destruction (except if
consideration is received therefor) of any PRODUCT shall not fall
within the definition of "OTHERWISE DISPOSED OF" and no value in
respect thereof shall be included in calculating NET SALES. A
PRODUCT shall be considered OTHERWISE DISPOSED OF when used or
shipped by, or on behalf of, SELFCARE.
1.6 "QUARTER" shall mean any period of three consecutive
calendar months beginning January 1, April 1, July 1, and October
1, occurring during the term of this Agreement.
1.7 "CAMPBELL LICENSE AGREEMENT" shall mean the license
agreement entered into between BECTON and SELFCARE with respect
to United States Letters Patent No. 4,703,017 issued to Campbell
et al. and any re-examination or reissue thereof. There are no
foreign counterpart applications or patents of U.S. Patent No.
4,703,017 to Campbell et al.
2.0 LICENSE GRANT.
2.1 Subject to the terms and conditions herein, BECTON
hereby grants to SELFCARE, who accepts the same, a non-exclusive,
non-transferable (except to its AFFILIATES) right and license
under the LICENSED PATENTS, without the right to sublicense, to
make, have made for its own use and sale, use, offer for sale,
sell, and import PRODUCT and to practice the methods claimed in
the LICENSED PATENTS in connection with such PRODUCT, and to
extend to its customers purchasing PRODUCT the right to use and
sell the PRODUCT purchased and to practice the methods claimed in
the LICENSED PATENTS in connection with such PRODUCT, all of the
foregoing limited expressly to the field of human in vitro
manually formatted immunodiagnostic assays.
In the event that SELFCARE sells PRODUCT(S) to a third party
that has a non-exclusive, non-transferable right and license
under the LICENSED PATENT(S), the royalty obligation of SELFCARE
under this license shall not extend to such sales, provided
however, SELFCARE shall be permitted to make PRODUCTS for any
third party licensee having the right and license under the
LICENSED PATENT(S) to have such PRODUCTS made for it, and to sell
those PRODUCTS to such licensee without any obligation to pay
royalties to BECTON thereon since the third party (without
waiving any right of BECTON to collect royalties from SELFCARE in
the event the third party licensee fails to account for and pay
royalties to BECTON on its sales of such PRODUCTS) licensee has
the obligation, under its license with BECTON, to pay royalties
on the sales of PRODUCTS made for it. BECTON agrees to provide
SELFCARE with the names of such third party licensees which have
the right and license to have PRODUCTS made for it.
2.2 BECTON further hereby releases SELFCARE from any
liability for infringement of the LICENSED PATENTS arising from
the manufacture, use, or sale of PRODUCTS by SELFCARE which
occurred prior to the EFFECTIVE DATE, provided that these events
are reported in accordance with Article 4.3 and royalties are
paid in accordance with Article 4.1(a) hereof. There is no
release for any infringement for which a report is not made under
Article 4.3 and/or royalties are not paid under Article 4.3.
3.0 TERM.
3.1 This Agreement shall become effective as of the
EFFECTIVE DATE hereof and for each LICENSED PATENT shall continue
in effect until the last to expire of the LICENSED PATENTS in
each country or region (referred to collectively as "country") or
until this Agreement has been terminated under Paragraph 7.0.
4.0 PAYMENT.
4.1 In consideration for the license granted hereunder,
SELFCARE shall pay to BECTON, on or subsequent to the EFFECTIVE
DATE:
(a) As of the EFFECTIVE DATE, a royalty of six percent
(6%) until December 31, 1998, and then a royalty of six and one-
quarter percent (6.25%) beginning January 1, 1999, on the first
$108,667,100.00 of NET SALES of all PRODUCTS sold or OTHERWISE
DISPOSED OF.
(b) Thereafter, a royalty of five and one-quarter
percent (5.25%) of the NET SALES of all PRODUCTS sold or OTHERWISE
DISPOSED OF.
Royalties may be payable under both this Agreement and the
CAMPBELL LICENSE AGREEMENT for the same PRODUCT(S). In that
event, SELFCARE shall be entitled to a credit, on a country-by-
country basis, where sales of the same PRODUCTS occurred, for any
royalties payable and actually paid under the CAMPBELL LICENSE
AGREEMENT. The magnitude of this credit shall be on a dollar-
for-dollar basis up to, but not in excess of, the royalty payable
hereunder. SELFCARE shall note this credit in the reports filed
in accordance with Section 4.6.
4.2 SELFCARE's obligation to pay royalties under paragraph
4.1 on PRODUCT shall terminate, on a country by country basis,
upon expiration of the last of the LICENSED PATENTS in the
country of sale or manufacture, as applicable. Further, this
obligation shall cease in the event that a court of competent
jurisdiction in the country in question renders a final decision
from which no appeal is or can be taken, that all of the LICENSED
PATENTS in that country are invalid and/or unenforceable. If in
such decision one or more claims of the LICENSED PATENTS are not
declared invalid or unenforceable, the obligation of SELFCARE to
pay with respect to PRODUCTS covered by the remaining claims
shall not be affected.
4.3 SELFCARE shall provide to BECTON a written report
stating the analyte name and NET SALES of all PRODUCTS sold or
OTHERWISE DISPOSED OF prior to the EFFECTIVE DATE, and this
report shall accompany the payment to BECTON of all royalties due
in connection herewith in accordance with Section 4.1.
4.4 For all sales and royalty-bearing transfers and uses
occurring on or subsequent to the EFFECTIVE DATE, SELFCARE shall
provide written reports to BECTON within sixty (60) days after
the end of each QUARTER, stating in each report the analyte name
and the NET SALES of each PRODUCT sold or OTHERWISE DISPOSED OF
during such QUARTER and upon which royalties are payable as
provided in this Article.
4.5 For all sales and other dispositions of PRODUCTS
occurring on or subsequent to the EFFECTIVE DATE that SELFCARE
makes to a third party licensee of BECTON, SELFCARE shall provide
separate written reports to BECTON within sixty (60) days after
the end of each QUARTER, stating in each report the analyte name
and the NET SALES of each PRODUCT sold or OTHERWISE DISPOSED OF
during such QUARTER and upon which royalties are not payable as
provided in this Article, consistent with the provisions of
Paragraph 2.1, above.
4.6 (a) Concurrently with the making of each report
SELFCARE shall pay to BECTON all royalties due in the amount
specified in Section 4.1 on the NET SALES of all PRODUCTS
included in the report.
(b) Any late payment shall bear interest at the rate
of one percent (1%) per month.
4.7 All payments shall be made hereunder in United States
Dollars; provided, however, that if the proceeds of the sales
upon which such royalty payments are based are received by
SELFCARE in a foreign currency or other form that is not
convertible or exportable in Dollars, and SELFCARE does not have
ongoing business operations or bank accounts in the country in
which the currency is not convertible or exportable, SELFCARE
shall pay such royalties in the currency of the country in which
such sales were made by depositing such royalties in BECTON's
name in a bank designated by BECTON in such country. Royalties
in Dollars shall be computed by converting the royalty in the
currency of the country in which the sales were made at the
exchange rate for Dollars prevailing at the close of the last
business day of the QUARTER for which royalties are being
calculated as published the following day in the Wall Street
Journal (or a comparable publication agreed upon from time to
time by the parties), and with countries for which rates are not
published, the exchange rate fixed for such date by the
appropriate United States governmental agency.
4.8 In the event that any taxes, withholding or otherwise,
are levied by any taxing authority in connection with accrual or
payment of any royalties payable to BECTON under this agreement,
SELFCARE shall have the right to pay such taxes to the local tax
authorities on behalf of BECTON and the payment to BECTON of the
net amount due, after reduction by the amount of such taxes,
shall fully satisfy SELFCARE's royalty obligations under this
Agreement, so long as appropriate documentation of such tax
payment is provided to BECTON.
4.9 All payments made hereunder shall be made to BECTON at
the address set forth in Article 6 of this Agreement or at such
changed address as BECTON shall specify by written notice.
4.10 SELFCARE shall keep detailed records of all PRODUCT
sold or OTHERWISE DISPOSED OF to permit verification of the
reports and payments made to BECTON. At BECTON's expense and
request and upon reasonable notice, SELFCARE shall permit such
records to be examined by independent public accountants
designated by BECTON and reasonably acceptable to SELFCARE. Such
examination shall take place not more than once each year.
4.11 In the event that an examination by BECTON of
SELFCARE's records and books of account reveals an underpayment
to BECTON, SELFCARE shall immediately pay BECTON the deficiency,
plus interest at a rate of one percent (1%) per month from the
date the underpayment occurred. In the event that such
underpayment amounts to ten percent (10%) or more of the total
amount payable for the period examined, SELFCARE shall also
reimburse BECTON for all out-of-pocket expense of the
examination.
5.0 TRANSFERABILITY OF RIGHTS AND OBLIGATIONS.
5.1 This Agreement and the license granted under it may not
be assigned or sold by SELFCARE without the express written
consent of BECTON, except to an entity acquiring
substantially all of SELFCARE's business relating to human in
vitro immunodiagnostic assay technology. If SELFCARE is
permitted to assign this Agreement, the assignee shall first
agree, in writing, to assume all obligations of SELFCARE created
by this Agreement.
5.2 BECTON may freely assign this Agreement in whole or in
part and any or all of the LICENSED PATENTS.
5.3 This Agreement, and each and every one of the terms and
conditions thereof, shall inure to the benefit of and be binding
upon the permitted successors and assignees of both parties.
6.0 NOTICE.
6.1 Any notice, payment, report, or other correspondence
(hereinafter collectively referred to as "correspondence")
required or permitted to be given hereunder shall be mailed by
certified mail or delivery by hand or overnight courier to the
party to whom such correspondence is required or permitted to be
given hereunder If mailed, any such notice shall be deemed to
have been given when received by the party to whom such
correspondence is given, as evidenced by written and dated
receipt of the receiving party.
6.2 Alternatively, correspondence provided for in this
Agreement shall be deemed sufficiently given by the party sending
the correspondence when sent by facsimile to the party to whom
the correspondence is addressed. A confirmation copy of the
correspondence will be sent by Certified or Registered Mail. The
date of the facsimile transmission will constitute the date of
receipt of the correspondence.
All correspondence to SELFCARE shall be addressed as
follows:
Selfcare, Inc.
200 Prospect Street
Waltham, Massachusetts 02453
Attention: Kenneth D. Legg, Ph.D.
Vice President
All correspondence to BECTON, except for royalty
payments, shall be addressed as follows:
Becton, Dickinson and Company
1 Becton Drive
Franklin Lakes, New Jersey 07417
Attention: Chief Patent and Licensing Counsel
All royalty payments to BECTON shall be addressed as
follows:
Becton Dickinson Microbiology Systems
7 Loveton Circle
Sparks, Maryland 21152-0999
Attention: Manager, Financial Reporting
Either party may change the address to which correspondence to it
is to be addressed by notification as provided for herein.
7.0 TERMINATION.
7.1 BECTON shall have the right to terminate this Agreement
if SELFCARE commits a material breach of an obligation under this
Agreement, including the failure to make timely royalty payments
hereunder, and continues in default for more than thirty (30)
days after receiving written notice from BECTON of such default,
such termination to be effective immediately upon further written
notice to SELFCARE after such thirty (30) day period.
7.2 In the event that SELFCARE shall be adjudicated
bankrupt, go into liquidation, receivership or trusteeship, make
a composition with its creditors or enter into any similar
proceeding of the same nature, then BECTON shall have the right
without liability therefor to terminate this Agreement forthwith
by notice in writing to SELFCARE.
7.3 SELFCARE shall have the right to terminate its license
by giving thirty (30) days advance written notice. SELFCARE
shall be obligated for royalty payments under Paragraph 4.1 for
NET SALES during such thirty (30) day notice period.
8.0 GOVERNING LAW.
8.1 This Agreement shall be governed by, interpreted in
accordance with and enforced under the laws of the State of North
Carolina, U.S.A. (regardless of its or any other jurisdiction's
choice of law principles), or, as necessary, the laws of the
United States of America. The Federal District Court of the
Eastern District of North Carolina shall have exclusive
jurisdiction in all matters arising under this Agreement, and the
parties hereto expressly consent and submit to such jurisdiction.
9.0 REPRESENTATIONS, WARRANTIES AND LIMITATIONS.
9.1 Nothing in this Agreement shall be construed as:
(a) An acknowledgment of any kind by SELFCARE as to
the infringement or non-infringement of the LICENSED PATENTS; or
(b) An acknowledgement of any kind by SELFCARE as to
the validity or invalidy of the LICENSED PATENTS; or
(c) An acknowledgement of any kind by SELFCARE as to
the enforceability or non-enforceability of the LICENSED PATENTS;
or
(d) A warranty or representation by BECTON as to the
validity or enforceability of any LICENSED PATENTS; or
(e) A warranty or representation by BECTON that
anything made, used, sold or OTHERWISE DISPOSED OF under the
license granted in this Agreement, is or will be free from
infringement of patents or other rights of third parties; or
(f) A requirement that BECTON shall file any patent
application or secure any patent; or
(g) An obligation of either party to bring or
prosecute actions or suits against third parties for infringement
of any patents; or
(h) Conferring a right to use in advertising,
publicity, or the like any name, tradename, or trademark of
SELFCARE or BECTON; or
(i) Granting by implication, estoppel or otherwise any
licenses or rights under any letters patents and applications for
letters patents other than under the LICENSED PATENTS; or
(j) An obligation by BECTON to furnish know-how or any
other technical information not disclosed in the LICENSED
PATENTS.
9.2 BECTON represents to SELFCARE that BECTON is the owner
of the LICENSED PATENTS and has the right to grant the license
hereunder.
9.3 Each party represents and warrants that it has full
authority to enter into and become bound by the terms and
conditions of this Agreement and that its execution of this
Agreement will not violate, contravene or be in conflict with any
law, rule, by-law, article of incorporation, order, regulation or
other agreement.
9.4 BECTON covenants not to sue SELFCARE for patent
infringement on any of the PRODUCTS during the term of this
Agreement, provided that SELFCARE is in compliance with all of
the provisions and obligations under this Agreement.
10.0 DISCLAIMER AND HOLD HARMLESS PROVISION.
10.1 It is understood and agreed by and between the parties
hereto that nothing contained in this Agreement shall constitute
or be construed to constitute any undertaking, representation,
suggestion, inducement, warranty, assurance or guarantee
whatsoever by either party in connection with PRODUCTS or any
component, product, material, service, process or apparatus with
respect to safety, quality, yield, production, cost, profit,
saleability, licensability, demand, utility, performance,
availability of raw materials, accident or injury to person or
property.
10.2 SELFCARE expressly indemnifies and holds BECTON, its
AFFILIATES, successors, and assigns and its officers, directors
and employees harmless from and against any and all claims,
liabilities, damages, costs, expenses, and/or actions
(collectively, the "Losses" and each individually a "Loss") of
any kind whatsoever which BECTON actually incurs arising from any
claims or allegations by a third party for personal injury or
damage resulting from the manufacturing, use, sale, lease or
distribution of the PRODUCTS by SELFCARE, provided, however, that
in no event shall this section be construed as an obligation of
SELFCARE to indemnify BECTON for any loss relating to or arising
from the invalidity or unenforceability of the LICENSED PATENTS
or BECTON's rights therein.
10.3 Neither of the parties hereto shall be liable in
damages or have the right to cancel for any delay or default in
performing hereunder (other than delay or default in the payment
of money) if such delay or default is caused by conditions beyond
its control, including but not limited to Acts of God,
governmental restrictions, continuing domestic or international
problems such as war or insurrections, strikes, fires, flood,
work stoppages, embargoes and/or other casualty or cause;
provided, however, that any party hereto shall have the right to
terminate this Agreement upon thirty (30) days prior written
notice if either party is unable to fulfill its obligations under
this Agreement due to any of the above-mentioned causes and such
inability continues for a period of six (6) months.
11.0 CAPTIONS.
11.1 The captions and paragraph headings of this Agreement
are solely for the convenience of reference and shall not affect
its interpretation.
12.0 SEVERABILITY.
12.1 Should any part or provision of this Agreement be held
unenforceable or in conflict with the applicable laws or
regulations of any jurisdiction, the invalid or unenforceable
part or provision shall be replaced with a provision which
accomplishes, to the extent possible, the original business
purpose of such part or provision in a valid and enforceable
manner, and the remainder of this Agreement shall remain binding
upon the parties hereto.
13.0 WAIVER.
13.1 No failure or delay on the part of a party in
exercising any right hereunder shall operate as a waiver of, or
impair, any such right. No single or partial exercise of any
such right shall preclude any other or further exercise thereof
or the exercise of any other right. No waiver of any such right
shall be deemed a waiver of any other right hereunder.
14.0 SURVIVAL.
14.1 The provisions of Section 8, 9 and 10 shall survive the
termination or expiration of this Agreement and shall remain in
full force and effect. Furthermore, termination or expiration
shall not affect, inter alia;
(a) SELFCARE's obligation to supply reports as
specified in Article 4 of this Agreement;
(b) BECTON's right to receive or recover and
SELFCARE's obligation to pay royalties accrued or accruable for
payment at the time of any termination;
(c) SELFCARE's obligation to maintain records and
BECTON's right to conduct one final examination of SELFCARE's
books and records relating to events prior to and right up to the
date of termination in accordance with Paragraph 4.9 of this
Agreement; and
(d) Licenses and releases running in favor of
customers or transferees of either party in respect to PRODUCT
sold or OTHERWISE DISPOSED OF prior to termination of this
Agreement.
14.2 The provisions of this Agreement which do not survive
termination or expiration hereof (as the case may be) shall,
nonetheless, be controlling on, and shall be used in construing
and interpreting, the rights and obligations of the parties
hereto with regard to any dispute, controversy or claim which may
arise under, out of, in connection with, or relating to this
Agreement.
15.0 MOST FAVORED LICENSEE.
15.1 In the event that after the EFFECTIVE DATE of this
Agreement BECTON enters into a license agreement with a third
party, in which such third party is licensed to make, use and
sell any PRODUCTS at a royalty rate which is different from the
royalty rate set forth in this Agreement, BECTON shall within
thirty (30) days after the signing of such license agreement,
disclose to SELFCARE the royalty rate in the third party
agreement. BECTON will provide such information to SELFCARE's
attorneys who will maintain the information in confidence and may
disclose it to others within SELFCARE only on a confidential,
need-to-know basis.
15.2 Concurrent with the above report, BECTON will extend to
SELFCARE the option of substituting the royalty rate in the third
party agreement for the royalty rate in this Agreement, subject
to the following provision:
(a) The different royalty rate shall become effective as of
the date of its written acceptance by SELFCARE and shall apply
only to sales occurring thereafter. In no event shall SELFCARE
be entitled to a refund or credit of any monies paid or payable
to BECTON prior to the acceptance of the different royalty rate.
15.3 In the event that SELFCARE does not accept the
different royalty rate relative to Paragraph 15.2 within thirty
(30) days after SELFCARE receives notice from BECTON, SELFCARE's
option to substitute the different royalty rate shall be deemed
forever waived.
16.0 ENTIRE AGREEMENT.
16.1 This Agreement constitutes the entire agreement between
the parties hereto respecting the subject matter hereof, and
supersedes and terminates all prior agreements respecting the
subject matter hereof, whether written or oral, and may be
amended only by an instrument in writing executed by both parties
hereto.
17.0 DISPUTE RELATIONS.
17.1 The parties shall attempt in good faith to resolve any
dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle such
dispute. Any party may give the other party(ies) written notice
of any dispute hereunder not resolved in the normal course of
business. Within twenty (20) days following delivery of such
notice, executives of both parties shall discuss by telephone or
meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary, to exchange relevant
information and to attempt to resolve such dispute. If the
matter has not been resolved within sixty (60) days following the
disputing party's notice, or if the parties fail to discuss or
meet within twenty (20) days, either party may initiate mediation
of the controversy or claim under the then-current Center for
Public Resource Procedure for Mediation of Business Disputes in
New York. No party shall institute any court proceedings until
the expiration of one hundred and twenty (120) days from the
initiation of negotiations. At the conclusion of this period,
absent any resolution of the dispute or further agreement between
the parties to extend this period, either party may file suit for
the subject matter of the dispute only.
17.2 If a negotiator intends to be accompanied at a
telephone conference or a meeting by an attorney, the other
negotiator shall be given at least three (3) business days'
notice of such intention and may also be accompanied by an
attorney. All negotiations pursuant to this clause are
confidential and shall be treated as comprise and settlement
negotiations for purposes of the Federal Rules of Evidence any
state rules of evidence.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto
duly authorized to be effective as of the EFFECTIVE DATE.
BECTON, DICKINSON AND COMPANY SELFCARE, INC.
By: By
Date: Date:
APPENDIX A
----------
U.S. Patent No. 5,591,645 - issued January 7, 1997
Foreign counterparts:
Country Patent No. Appln. No. Issue/Filing Date
- ------- --------- ---------- -----------------
EPO 0284232 0284232A1 June 7, 1995
Canada 1,303,983 557,276 June 23, 1992
Japan 68000/88 68000/88 March 22,1988
Australia 605565 13595/88 May 9, 1991
Denmark 1681/88 1681/88 March 25, 1988
Finland 880764 880764 February 18, 1988
Taiwan NI55849 77101765 August 1, 1992
Malaysia MY-103176 PI 8800068 April 30, 1993
Korea 42295 3311/88 June 10, 1991
APPENDIX B
PRODUCTS
Rapid Manual Tests for hCG and LH Analytes
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1,955,452
7,179,848
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