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 March
31, 1999
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 April 30, 1999 was 15,843,570.
Transitional Small Business Disclosure Format (check one):
Yes No X
SELFCARE, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 1999
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. Factors that might cause such a
difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 13 of this
Form 10-Q and in the Company's Form 10-K/A as filed for the year
ended December 31, 1998.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
a) Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998.
b) Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998.
c) Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998.
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 3. Quantitative and Qualitative Disclosures about Market Risk
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
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Net product sales $ 28,777,147 $ 23,984,871
Grants and other revenue 420,815 605,873
------------ ------------
Net revenues 29,197,962 24,590,744
Cost of sales 20,068,985 16,566,424
------------ ------------
Gross profit 9,128,977 8,024,320
Operating Expenses:
Research and development 1,224,709 1,563,179
Selling, general and administrative 9,286,689 7,725,248
Total operating expenses 10,511,398 9,288,427
------------ ------------
Operating loss (1,382,421) (1,264,107)
------------ ------------
Interest expense, including noncash interest
expense relating to issuance of warrants and
amortization of original issue discount (1,881,267) (3,409,872)
Interest income 81,434 181,533
Equity in net income of affiliate -- 108,000
Other income (expense) (133,999) 1,469,737
------------ ------------
Loss before minority interest and dividends and
accretion on mandatorily redeemable preferred
stock of a subsidiary (3,316,253) (2,914,709)
Minority interest in subsidiary's loss 1,092 36,789
Dividends and accretion on mandatorily
redeemable preferred stock of a subsidiary (56,767) (29,083)
------------- ------------
Loss before extraordinary loss and income taxes (3,371,928) (2,907,003)
Extraordinary loss on modification of
notes payable (306,092) --
------------ ------------
Loss before income taxes (3,678,020) (2,907,003)
Provision for income taxes 244,303 90,000
------------ ------------
Net loss $ (3,922,323) $ (2,997,003)
============= =============
Basic and diluted net loss per common and
potential common share $ (0.32) $ (0.29)
======== =======
Basic and diluted weighted average number of
common and potential common shares outstanding 15,651,965 10,297,174
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $6,415,992 $9,199,630
Accounts receivable, net of allowance for doubtful
accounts of $2,414,000 and $1,937,000 in 1999 and
1998, respectively 15,309,336 16,100,680
Inventories (Note 3) 11,423,304 9,949,347
Notes receivable from affiliated company 495,672 727,926
Prepaid expenses and other current assets 1,562,380 1,838,929
----------- -----------
Total current assets 35,206,684 37,816,512
PROPERTY, PLANT AND EQUIPMENT, NET 9,030,797 8,201,864
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE
ASSETS, NET 65,603,215 66,458,857
DEFERRED FINANCING COSTS AND OTHER ASSETS, NET 2,283,568 2,600,244
----------- -----------
$112,124,264 $115,077,477
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $10,313,011 $12,071,650
Accounts payable 15,095,765 11,960,808
Accrued expenses and other current liabilities 9,294,398 9,949,416
Current portion of deferred revenue 359,431 726,458
----------- -----------
Total current liabilities 35,062,605 34,708,332
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion 425,578 517,190
Other long-term liabilities 180,000 173,000
Notes payable, net of current portion 47,937,661 50,409,484
----------- -----------
Total long-term liabilities 48,543,239 51,099,674
COMMITMENTS AND CONTINGENCIES (Notes 5 through 7)
MINORITY INTEREST IN SUBSIDIARY 2,974 4,122
----------- -----------
MANDATORILY REDEEMABLE PREFERRED STOCK OF A
SUBSIDIARY 3,775,018 3,718,251
----------- -----------
SERIES B CONVERTIBLE PREFERRED STOCK, $.001 par value
Issued and outstanding - 4,720 and 4,880 in
1999 and 1998, respectively 6,259,798 5,651,235
----------- -----------
REDEEMABLE PORTION OF SERIES C, D AND E PREFERRED
STOCK, $001 par value
Issued and outstanding - 14,228 and 0 shares in 1999
and 1998, respectively 1,487,486 4,887,000
----------- -----------
STOCKHOLDERS' EQUITY:
Series C, D and E Convertible Preferred Stock, $.001
par value - Issued and outstanding - 59,813 and 0 shares
in 1999 and 1998, respectively 5,981,334 --
Common stock, $.001 par value -
Authorized - 40,000,000 shares
Issued -16,587,248 and 15,852,319 shares in 1999
and 1998, respectively 16,587 15,852
Additional paid-in capital 109,125,506 107,724,384
Less-Treasury stock, at cost, 743,678 shares in 1999
and 1998 (3,724,900) (3,724,900)
Accumulated deficit (94,095,279) (89,089,215)
Accumulated other comprehensive income (loss) (310,104) 82,742
----------- -----------
Total stockholders' equity 16,993,144 15,008,863
----------- -----------
$112,124,264 $115,077,477
============ ============
</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>
THREE MONTHS ENDED MARCH 31,
1999 1998
---- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (3,922,323) $ (2,997,003)
Adjustments to reconcile net loss to net cash used in
operating Activities:
Accretion on preferred stock of a subsidiary 56,767 29,083
Noncash interest expense related to amortization of
original issue discount and issuance of warrants 83,064 1,171,685
Noncash portion of extraordinary loss on
modification of notes payable 227,997 -
Noncash income related to legal settlement - (1,498,844)
Amortization of deferred revenue (417,644) (614,730)
Depreciation and amortization 1,685,245 2,053,688
Equity in net loss of affiliate - (108,000)
Minority interest in subsidiary's loss (1,092) (36,789)
Changes in assets and liabilities:
Accounts receivable 422,638 (5,554,016)
Inventories (1,667,009) (5,017,676)
Prepaid expenses and other current assets (2,693,880) (862,934)
Accounts payable 6,483,630 8,168,052
Accrued expenses and other current liabilities (577,187) 2,047,521
------------ ------------
Net cash used in operating activities (319,794) (3,219,963)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,761,508) (392,320)
Cash received from affiliated company as repayment of loan 244,875 -
Cash paid for acquisition of Can-Am Care Corporation - (13,600,000)
Cash paid for purchase of USB '93 Technology
Associates Limited Partnership - (360,000)
Cash paid for investment in Orgenics Ltd. - (60,328)
Increase in other assets - (212,196)
------------ ------------
Net cash used in investing activities (1,516,633) (14,624,844)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for deferred financing costs - (1,874,942)
Net proceeds from issuance of common stock, preferred
stock and warrants to purchase common stock 2,739,774 540,732
Proceeds from borrowings under notes payable 63,000 38,390,763
Repayments of notes payable (3,713,162) (24,617,688)
------------ ------------
Net cash provided by (used in)
financing activities (910,388) 12,438,865
------------ ------------
FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS (36,823) (141,774)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,783,638) (5,547,716)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,199,630 15,669,898
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,415,992 $ 10,122,182
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for -
Interest $ 1,438,943 $ 892,135
========== ==========
Income taxes $ 191,000 $ 258,814
========== ==========
</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, 1998 on Form 10-K/A.
These unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements
and related notes for the period ended December 31, 1998 included
on Form 10-K/A 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 March 31, 1999, the Company's cash
equivalents consisted of repurchase agreements and money market
funds. The Company follows the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities". As of December 31, 1998 and March 31, 1999, all of
the Company's cash equivalents are classified as held to maturity
and carried at amortized cost.
3) Inventories
Inventories are comprised of the following:
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
Raw materials $ 2,912,865 $ 2,879,965
Work in-process 1,794,008 890,483
Finished goods 6,716,431 6,178,899
------------ -----------
$ 11,423,304 $ 9,949,347
============= ===========
4) Nonrecurring, non-cash income and expenses
For the three months ended March 31, 1999, the Company
recognized a $306,000 extraordinary loss, of which $228,000 was
noncash, related to the modification of the Senior Subordinated
Convertible Notes (see Note 6). Also, for the three months ended
March 31, 1999, the Company recognized $83,000 of noncash
interest expense related to the amortization of the original
issue discount and the issuance of warrants.
For the three months ended March 31, 1998, the Company
recognized $1.5 million of noncash 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. Also, for the three months ended March
31, 1998, the Company recognized $1.2 million of noncash interest
expense for the amortization of the original issue discount on
convertible notes.
5) Series B Preferred Stock
On August 26, 1997, the Company sold to investors in a private
placement an aggregate of 8,000 shares of Series B redeemable
convertible preferred stock (the Series B Preferred Stock) and
warrants (the Warrants) to purchase an aggregate of 114,628
shares of common stock for gross proceeds of $8,000,000.
The original terms of the Series B Preferred Stock provided for
a formula-based conversion price. During 1998, 3,120 shares of
Series B Preferred Stock were converted into 809,809 shares of
common stock. On January 22, 1999 (the Amendment Date), the
Company and the holders of Series B Preferred Stock agreed to
amend the terms of the Series B Preferred Stock, subject to
shareholder approval. Under the amended terms, the Company
provided a 15% premium on the face value of the Series B
Preferred Stock on the Amendment Date to the terms thereof,
subject to shareholder approval. The Company recorded the value
of this premium as a charge to retained earnings, approximately
$794,000, on the Amendment Date. The amended terms also affect
the conversion formula. The conversion price of the amended
Series B Preferred Stock to common stock will be equal to the
aggregate stated value ($1,000 per share), plus any accrued but
unpaid premium through the date of such conversion, divided by
(i) $2 (the amended Fixed Conversion Price) if the shares are
converted prior to July 20, 1999 and (ii) in the case of
conversions after July 20, 1999, a conversion price equal to the
lower of $2.00 or the Variable Conversion Price (defined as the
average of the five lowest closing bid prices of the common stock
during the 30 trading days preceding such conversion) then in
effect. In the event the price per share is $3.25 or higher for
any ten consecutive trading days after shareholder approval has
been obtained, the Company may fix the conversion price at $2.00,
by delivery of a written notice within five business days after
the tenth trading day, effective thirty days after the delivery
of such notice. The Company may require the conversion of all,
but not less than all, of the shares of Series B Preferred Stock,
provided that the closing bid price of the common stock is equal
to or greater than $13.9581 (subject to adjustment as defined in
the agreement) for 20 consecutive trading days preceding any such
conversion. During the three months ended March 31, 1999, 160
shares of Series B Preferred Stock were converted into 80,090
shares of common stock. Any unconverted Series B Preferred Stock
will automatically convert into shares of common stock on
August 26, 2000.
The Series B Preferred Stock may also be redeemed by the
Company for cash, under certain circumstances as set forth below.
In addition, a holder of Series B Preferred Stock may require the
Company to redeem any or all of such holder's Series B Preferred
Stock, under certain circumstances.
Upon shareholder approval, after July 20, 1999, the Company may
redeem not less than 50% of the outstanding shares of Series B
Preferred Stock at its option at the face amount, plus accrued
premium and any conversion default payments in the event the
price of the Company's common stock is less than $2.00 for at
least ten consecutive trading days prior to the date of such
redemption. As of March 31, 1999 all warrants remain outstanding
and exercisable. Both the exercise price and the number of
warrant shares issuable under the warrant are subject to
antidilution provisions, as defined.
Upon the original issuance of the Series B Preferred Stock and
the Warrants, the Company allocated $310,045 of the proceeds to
the Warrants. Due to the redemption provision described above,
the Company classified the Series B Preferred Stock outside of
stockholders' equity in the accompanying consolidated balance
sheets.
6) Senior Subordinated Convertible Notes
On October 28, 1997, the Company sold, in a private placement,
senior subordinated convertible notes (the Convertible Notes)
having an aggregate face value of $10,000,000 and warrants (the
Convertible Note Warrants) to purchase up to 106,700 shares of
common stock to two institutional investors for gross proceeds of
$10,000,000.
The principal of the Convertible Notes was originally payable
on October 28, 2002. Interest on the unpaid principal accrued at
the rate of 8% per year payable in cash or, at the Company's
option subject to certain conditions, shares of common stock
calculated at a price per share equal to the recent market price
(Recent Market Price). The Recent Market Price as of any date is
the lowest market price at which shares of Common Stock traded at
any time during the five trading days immediately preceding such
date. During an occurrence of an event of default (as defined),
the outstanding principal amount and accrued but unpaid interest
will accrue interest at a rate of the lower of Citibank's Prime
Rate (7.75% at December 31, 1998) per year plus 8% or the highest
rate permitted by law.
Shoreline Pacific Institutional Finance, the Institutional
Division of Financial West Group (Shoreline), acted as placement
agent for the offering of the Convertible Notes and the
Convertible Note Warrants. As compensation for its services as
placement agent, Shoreline received a cash commission of
$500,000, representing 5% of the gross proceeds of the offering.
In addition, the Company issued four warrants to purchase up to
an aggregate of 31,250 shares of Common stock with the same terms
as the Convertible Note Warrants to certain designees of
Shoreline (the Shoreline Warrants). The Company recorded both the
cash commission paid to Shoreline and the value of the Shoreline
Warrants, an aggregate of $600,000 as deferred financing costs.
Such costs are included as a component of other assets and are
being amortized over the life of the Convertible Notes.
Upon issuance of the Convertible Notes and Convertible Note
Warrants, the Company allocated $662,657 of the proceeds to the
Convertible Note Warrants and amortized the related original
issuance discount over 270 days, the period for which the
original terms of the conversion were most beneficial to the
Convertible Noteholders. Also, pursuant to the conversion terms
whereby the Convertible Noteholders were guaranteed a discount
after the 180th day, the Company recorded an additional original
discount of $1,185,864, which represents the maximum guaranteed return
available to the Convertible Noteholders on the issuance date.
This portion of the original issuance discount was also amortized
over 270 days in a manner consistent with the sliding scale
discount. The non-cash interest expense related to the amortization of the
aggregate original issuance discount was $1.1 million for the
three months ended March 31, 1998.
The original terms of the Convertible Notes provided for a
formula-based conversion price and allowed the Company to repay
the Convertible Notes prior to the due date for a 5% premium,
provided, however, that the Company's stock price had to meet
certain performance criteria for the Company to exercise this
right. During 1998, Convertible Noteholders converted Convertible
Notes representing an aggregate face value of $6,221,846 into
2,313,822 shares of common stock. In January 1999, Convertible
Noteholders converted Convertible Notes representing an aggregate
face value of $904,130 into 500,000 shares of common stock.
In January 1999, the Company and the Convertible Noteholders
agreed to amend the terms of the Convertible Notes by changing
the maturity date and conversion terms, as well as canceling the
Convertible Note Warrants. Pursuant to the amended terms, the
Company made an immediate payment of $859,049 representing
$780,954 of face value of the original Convertible Notes plus a
10% premium. The remaining Convertible Notes were amended and
replaced with amended notes (the New Convertible Notes). The face
value of the New Convertible Notes is equal to the face value of
the canceled Convertible Notes plus a 15% premium. The New
Convertible Notes mature on July 12, 1999, bear an interest rate
of 8% and provide for a fixed conversion price of $2.00. The
Company accounted for this transaction in January, 1999 following
the provisions of Emerging Issues Task Force (EITF) Issue No.
96-19, Debtor's Accounting for a Modification or Exchange of Debt
Instruments, and recorded an extraordinary loss of approximately
$306,000, net of the amount deemed to have been paid to reacquire
the Convertible Note Warrants. Since the new conversion feature
was less beneficial to the Convertible Noteholders than that to
which they were entitled on the date of the amendment, the
Company did not perform any further accounting for such
conversion feature.
7) Series C, D and E Preferred Stock
On January 8, 1999, the Company sold in a private placement
56,842 shares of Series C convertible preferred stock (Series C
Preferred Stock), 3,030 shares of Series D convertible preferred
stock (Series D Preferred Stock) and 14,169 shares of Series E
convertible preferred stock (Series E Preferred Stock)
(collectively, the Preferred Shares) to investors (the Preferred
Investors) at an aggregate purchase price of $7.4 million. The
Preferred Investors include certain officers and directors of the
Company. Each Preferred Share accrues a dividend of 7% per annum
(the Dividend). The Preferred Shares are convertible into shares
of common stock. The actual number of shares of common stock
issuable upon conversion of a Preferred Share is equal to the
aggregate stated value per share (i.e. $100), plus any accrued
and unpaid Dividend (unless the Company elects to pay such
dividend in cash) through the date of such conversion, divided by
a conversion price initially equal to $1.8125 per share for the
Series C Preferred Stock, $2.00 per share for the Series D
Preferred Stock and $3.028 per share for the Series E Preferred
Stock (in each case, the Conversion Price). The Conversion Price
is subject to adjustment for stock splits, stock dividends,
recapitalizations and similar transactions. All Preferred Shares
not previously converted will automatically convert into common
stock on January 8, 2002.
The Company's annual meeting of shareholders will be held on
May 20, 1999 to approve, among other proposals, the issuance of
the Preferred Shares. No holder of any Preferred Share is
entitled to convert such securities until the earlier of
April 30, 1999 or shareholder approval of the issuance of such
Preferred Shares. If the shareholders do not approve the issuance
of the Preferred Shares, and any holder of the Preferred Shares
gives the Company a conversion notice on or after April 30, 1999,
then the Company will give all holders of the Preferred Shares
notice of their right to convert up to a pro rata portion of the
aggregate number of shares which may be issued under the
applicable rules and regulations of the American Stock Exchange.
In such event, if the total number of shares of common stock
issuable upon conversion of the Preferred Shares for which
conversion is requested (the Requested Shares) exceeds the number
of such permitted shares, then the Company will convert, on a pro
rata basis, only such portion of Preferred Shares as is
convertible into the number of such permitted shares, and will
redeem the remaining Preferred Shares for cash. If, however, the
total number of shares of common stock issuable upon conversion
of the Requested Shares does not exceed the number of such
permitted shares, then the Company will automatically convert the
Requested Shares and redeem all remaining outstanding Preferred
Shares. In such an event, the Company has the option of redeeming
a percentage of such Preferred Shares in shares of common stock
so long as the aggregate number of shares of common stock
issuable upon conversion and redemption does not exceed the
number of permitted shares. Due to the redemption possibility
described above, certain shares have been reclassified to equity.
The Conversion Prices for the Series C and Series D Preferred
Stock represent the closing prices of the Company's common stock
on the dates that the parties agreed to the terms of the
investment. The Conversion Price for the Series E Preferred Stock
represents a 15% discount to the fair value of the common stock
on the day prior to the applicable agreement. The Company
accounted for this guaranteed return of $212,550 in January 1999
and is amortizing such return through the earliest date on which
the Preferred Shares may be converted (April 30, 1999). For the
three months ended March 31, 1999 the dividend related to the
guaranteed return was $159,413. The Company also recorded $117,857
representing the 7% dividend accrued for the three months ended
March 31, 1999.
Certain of the Preferred Shares were issued to satisfy
currently due debt obligations plus accrued interest. The Company
issued 9,662 shares of Series C and E Preferred Stock as payment,
on such obligations. The terms and conditions surrounding the
issuance of these shares was the same as for the Preferred
Investors that paid cash.
8) Settlement with Enviromed
In connection with the dispute with Enviromed plc
("Enviromed"), the Company reached a settlement in February 1999
whereby (i) Enviromed's board of directors was restructured and
the Company's Chief Executive Officer was replaced as a board
member of Enviromed by another Company executive; (ii) the
repayment terms of the 437,000 Pounds (approximately $728,000)
note due from Environmed were amended to require repayment during
1999; and (iii) Enviromed agreed to pay the Company an amount up
to a maximum of 500,000 Pounds (approximately $835,000) based
upon purchases made by the Company from an Enviromed subsidiary
in excess of certain minimums. The Company received 150,000
Pounds ($245,000) in February 1999 as the first installment
pursuant to the note repayment terms under the settlement.
Payments of 100,000 Pounds and 187,000 Pounds are due in August
1999 and November 1999, respectively.
9) Net Loss per Common Share
The Company follows the provisions of SFAS No. 128, "Earnings
per Share", which established new standards for calculating and
presenting earnings per share. Basic net loss per share was
computed by dividing reported net loss less Preferred Stock
dividends and premiums 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.
For the three months ended March 31, 1999, the Company recorded
premiums of approximately $808,000 on Series B Convertible
Preferred Stock and dividends of approximately $277,000 on Series
C, D and E Convertible Preferred Stock.
Reconciliation of numerator in EPS calculation
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Net loss $ (3,922,323) $ (2,997,003)
Premium on Series B Preferred
Stock (808,453) --
Dividends on Series C, D and E
Preferred Stock (277,270) --
------------- -------------
Loss available to Common
Shareholders $ (5,008,046) $ (2,997,003)
============= =============
</TABLE>
10) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" requires
disclosure of comprehensive income and its components.
Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other
events and circumstances from non-owner sources. The Company's
only item of other comprehensive income relates to foreign
currency translation adjustments. Comprehensive income for the
three months ended March 31, 1999 and 1998 was approximately
$391,000 and $241,000 less than reported net income,
respectively, due to foreign currency translation adjustments.
11) Financial Information by Segment
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" requires reporting information about
operating segments in annual financial statements and requires
selected information about operating segments in interim
financial reports issued to stockholders. Operating segments are
defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance.
The Company's chief operating decision making group is composed
of the Chief Executive Officer, members of Senior Management and
the Board of Directors.
The Company's reportable operating segments are Diabetes,
Women's Health, Clinical Diagnostics and Other. The Company
evaluates performance based on earnings before interest, taxes,
depreciation and amortization (EBITDA). Segment information for
the three months years ended March 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
-------- ------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Three Months Ended
March 31, 1999
- --------------
Net produt sales from
external customers $ 15,019,287 $ 10,771,874 $ 2,985,986 $ - $ 28,777,147
Intersegment net sales 127,929 1,171,677 - - 1,299,606
Grant and other revenue 316,441 - - 104,374 420,815
---------------------------------------------------------------------------
Total net revenue 15,463,657 11,943,551 2,985,986 104,374 30,497,568
EBITDA 90,119 1,743,706 (483,309) (1,517,901) (167,385)
Assets 48,450,532 45,451,287 6,493,688 11,728,757 112,124,264
</TABLE>
<TABLE>
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
-------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
At December 31, 1998
- --------------------
Assets 47,483,580 45,992,593 6,301,200 15,300,104 115,077,477
</TABLE>
<TABLE>
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
-------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Three Months Ended
March 31, 1998
- ---------------
Net product sales from
external customers $ 10,490,333 $ 9,435,193 $ 3,965,140 $ 94,205 $ 23,984,871
Intersegment net sales 458,384 362,859 62,389 - 883,632
Grant and other revenue 276,168 - - 329,705 605,873
---------------------------------------------------------------------------
Total net revenue 11,224,885 9,798,052 4,027,529 423,910 25,474,376
EBITDA (1,625,117) 2,107,864 845,500 (837,625) 490,622
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
----- ----
<S> <C> <C>
Reconcilation of EBITDA to Net Loss
EBITDA $ (167,385) $ 490,622
Depreciation and
amortization expense (1,685,245) (2,053,688)
Amortization of
deferred revenue 417,644 614,730
Interest expense (1,881,267) (3,409,872)
Income taxes (244,303) (90,000)
Noncash income related
to legal settlement - 1,498,844
Other noncash items (361,767) (47,639)
------------------------------
Net loss $ (3,922,323) $ (2,997,003)
===============================
</TABLE>
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"). 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 $4.6 million, or 19%, to
$29.2 million for the three months ended March 31, 1999 from
$24.6 million for the three months ended March 31, 1998. The
increase in revenues was derived primarily from (i) a full
quarter of sales from Can-Am Care Corporation ("Can-Am"), which
was acquired in February 1998 and (ii) increased sales of the
FastTake system. Net sales from the Company's diabetes management
segment were approximately $15.0 million for the three months
ended March 31, 1999, an increase of $4.5 million or 43% as
compared to net sales of $10.5 million for the three months ended
March 31, 1998. The diabetes management net product sales
accounted for 51% of the Company's net revenues for the three
months ended March 31, 1999 compared to 43% of the net revenues
for the three months ended March 31, 1998. Net sales from the
Company's women's health segment were $10.8 million for the three
months ended March 31, 1999, an increase of $1.4 million or 14%
as compared to $9.4 million for the three months ended March 31,
1998. Although the net sales of women's health products
increased, they accounted for a smaller percentage of the
Company's net revenues due to the increased sales of the diabetes
management products. The women's health product sales accounted
for 37% of the Company's total net revenues for the three months
ended March 31, 1999 compared to 38% of the total net revenues
for the three months ended March 31, 1998. The Company's
subsidiary, Inverness Medical, Inc. ("IMI"), introduced
SoyCare Trademark for Menopause and SoyCare Trademark for Bone
Health, new additions to the Company's line of nutritional
supplements, in July 1998 and introduced Protegra Registered
Cardio and SoyCare Trademark for Prostate in the first quarter of
1999. Another factor in the increased net sales of the women's
health segment was an increase in sales of branded and private
label pregnancy and ovulation tests. Net sales of the clinical
diagnostic products for the three months ended March 31, 1999
were $3.0 million, a decrease of $1.0 million or 25% from net
sales of $4.0 million for the three months ended March 31, 1998.
The decrease in clinical diagnostic product sales was due to the
Company's sale of the clinical diagnostics business of Cambridge
Diagnostics Ireland Limited, a wholly owned Irish subsidiary, in
September 1998. The clinical diagnostic product sales accounted
for 10% of the Company's total net revenues for the three months
ended March 31, 1999 compared to 16% of the total net revenues
for the three months ended March 31, 1998. Grant and other
revenue was $421,000 for the three months ended March 31, 1999
compared to $606,000 for the three months ended March 31, 1998.
Gross profit. Gross profit increased by $1.1 million or 14% to
$9.1 million for the three months ended March 31, 1999 from $8.0
million for the three months ended March 31, 1998. Gross profit
as a percentage of net revenues decreased to 31% for the three
months ended March 31, 1999 from 33% of net revenues for the
three months ended March 31, 1998. The increase in the absolute
amount of gross profit dollars was derived from increased net
sales of diabetes management products. The decrease in gross
profit as a percentage of net revenues was due to decreased sales
of clinical diagnostics products and because SoyCare, one of the
new products introduced in July 1998, has a higher product cost
than the Company's other nutritional supplements.
Research and Development Expense. Research and development
expense decreased by $338,000 or 22% for the three months ended
March 31, 1999 to $1.2 million from $1.6 million for the three
months ended March 31, 1998. The decrease in research and
development expense was primarily due to decreased expenses
related to the development of the FastTake system. Although the
research and development expense has decreased during the three
months ended March 31, 1999, the Company expects to spend
significant and increasing amounts on research and development
throughout 1999.
Selling, General and Administrative Expense. Selling, general,
and administrative expense increased $1.6 million or 20% to $9.3
million for the three months ended March 31, 1999 from $7.7
million for the three months ended March 31, 1998. The increase
was primarily attributable to the effect of a full quarter of
selling, general and administrative expenses of Can-Am, which was
acquired on February 18, 1998, and increased legal expenses
related to the Company's defense of the Abbott lawsuits.
Selling, general and administrative expense, as a percentage of
net revenues, was approximately the same for both periods.
Interest Expense. For the three months ended March 31, 1999 the
Company incurred $1.9 million in interest expense, a decrease of
$1.5 million compared to $3.4 million for the three months ended
March 31, 1998. Interest expense related to the Senior
Subordinated Convertible Notes decreased $1.6 million offset
slightly by increased interest on the Subordinated Revenue
Royalty Notes and Subordinated Promissory Notes. This decrease
was due to a decline of the principal balance of the Senior
Subordinated Convertible Notes and because in the three months
ended March 31, 1998, the Company recognized $1.2 million of
noncash interest expense for the amortization of the original
issue discount on Senior Subordinated Convertible Notes.
Other income (expense). The Company incurred other expense of
$134,000 for the three months ended March 31, 1999 compared to
other income of $1.5 million for the three months ended March 31,
1998. The other expense for the three months ended March 31,
1999 includes foreign currency transaction expense. For the
three months ended March 31, 1998, the Company recognized $1.5
million of noncash 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. Fluctuations in foreign currency did not significantly
impact revenue performance measured in U.S. dollars for the three
months ended March 31, 1999. Substantially all of the Company's
foreign sales are paid in the functional currency of the selling
entity.
Dividends and accretion on mandatorily redeemable preferred
stock of a subsidiary and Minority Interest. The Company's
subsidiary in Inverness, Scotland accrued $57,000 for the three
months ended March 31, 1999, representing a 6% dividend payable
and accretion on the outstanding cumulative redeemable preference
shares, as compared to $29,000 for the three months ended March
31, 1998. In October 1998, an additional 1,000,000 shares of 6%
cumulative redeemable preference stock of Inverness Medical were
issued to Inverness & Nairn Local Enterprise Company, a U.K.
government agency, for approximately $1.7 million. Minority
interest in certain of the Company's subsidiaries' losses was
$1,000 for the three months ended March 31, 1999 as compared to
$37,000 for the three months ended March 31, 1998.
Extraordinary Loss. For the three months ended March 31, 1999,
the Company recorded an extraordinary loss of approximately
$306,000 ($228,000 of which is noncash expense) for the
modification of the Senior Subordinated Convertible Notes.
Income Taxes. For the three months ended March 31, 1999, the
Company recorded provisions of $244,000 for income taxes compared
to $90,000 for the three-month period ending March 31, 1998.
Substantially all of the income tax provisions reflect certain
state income taxes relating to IMI and Can-Am.
Net Loss. For the three months ended March 31, 1999, the
Company had a net loss of $3.9 million or $0.32 per common and
potential common share compared to a net loss of $3.0 million or
$0.29 per common and potential common share for the three months
ended March 31, 1998. The results for the three-month periods
ending March 31, 1998 and March 31, 1999 included significant non-
recurring, noncash charges and income as detailed above. The
loss per share for the three months ending March 31, 1999 also
includes premiums of approximately $808,000 on Series B
Convertible Preferred Stock and dividends of approximately
$277,000 on Series C, D and E Convertible Preferred Stock.
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.
On January 8, 1999, the Company sold in a private placement
56,842 shares of Series C convertible preferred stock (Series C
Preferred Stock), 3,030 shares of Series D convertible preferred
stock (Series D Preferred Stock) and 14,169 shares of Series E
convertible preferred stock (Series E Preferred Stock)
(collectively, the Preferred Shares) to investors (the Preferred
Investors) at an aggregate purchases price of $7.4 million (see
Note 7 of the "Notes to Consolidated Financial Statements").
At March 31, 1999, the Company had cash and cash equivalents of
$6.4 million, a $2.8 million decrease from December 31, 1998.
The Company used cash of $320,000 in operating activities in the
three months ended March 31, 1999. The Company incurred a net
loss of $3.9 million. However, the net loss includes noncash
expenses of $1.6 million. Other uses of cash in operating
activities included increases in inventories, prepaid expenses
and other current assets totaling approximately $4.4 million
reflecting the Company's working capital needs related to its
increase in sales. Cash was provided for operations in part by a
net increase in accounts payable, accrued expenses, and other
current liabilities of $5.9 million and by a decrease in accounts
receivable of $423,000.
During the three months ended March 31, 1999, the Company used
$1.8 million to purchase property, plant and equipment. The
Company received approximately $245,000 (150,000 Pounds) from
Enviromed, an affiliated company, in February 1999 as the first
installment pursuant to the note repayment terms under the
settlement. Payments of 100,000 Pounds and 187,000 Pounds are due
in August 1999 and November 1999, respectively.
During the three months ended March 31, 1999, the Company
received proceeds of $3.3 million from the issuance of common
stock and preferred stock. In addition, the Company also repaid
approximately $3.7 million, in aggregate, of principal related to
loans by Chase Manhattan Bank and the Senior Subordinated
Convertible Notes (see Note 6 of the "Notes to Consolidated
Financial Statements").
Based upon its current operating plans, the Company believes
that its existing capital resources will be adequate to fund its
operations and scheduled debt payments for the remainder of the
year. The Company may expand its research and development of new
technologies and pursue the acquisition of new products and
technologies, whether through licensing arrangements, business
acquisitions, or otherwise. The Company anticipates that it will
be required to raise substantial additional funds for such
projects or strategies. No assurance can be given that additional
capital will be available, or, if available, that it will be
available on acceptable terms. If additional funds are raised by
issuing equity securities, further dilution to then existing
stockholders will result. If adequate funds are not available,
the Company may not be able to pursue desirable research and
development programs unless it obtains 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
There are various risks, including those described below, which
may materially impact your investment in Selfcare or may in the
future, and, in some cases, already do, materially affect us and
our business, financial condition and results of operations. You
should consider carefully these factors with respect to your
investment in the Company's securities. This section includes or
refers to certain forward-looking statements; you should read the
explanation of the qualifications and limitations on such
forward-looking statements discussed on page 20.
Risk of Inadequate Funding; Future Capital Needs
Selfcare anticipates that during 1999, it may need to raise
additional capital to help fund our aforementioned research and
development of new products and technology, through borrowing, or
the issuance of debt or equity securities, or in connection with
agreements which might be made with one or more collaborative
partners. We are not certain that such additional financing will
be available, or, if available, that it will be available on
acceptable terms. For additional information on the Company's
liquidity and capital needs, please see the section entitled
Liquidity and Capital Resources in this "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Managing and Maintaining Growth
Selfcare is currently experiencing a period of rapid growth and
expansion, due, in part, to recent acquisitions and increased
sales. This growth has placed and may continue to place strains
on our management, customer service and support, operations,
sales and administrative personnel as well as our financial and
other resources. In order to meet the needs of existing and
future customers, Selfcare has increased and will continue to
increase its workforce. To do this, we need to attract, train,
motivate and manage qualified employees and need to expand our
operating, management, information and financial systems. This
may result in a significant increase in operating expenses.
Additionally, through such acquisitions, Selfcare is expanding
into new lines of business which impose additional demands. The
risks involved with such acquisitions and expansion are discussed
in further detail below.
Nutritional Supplement Lines Acquisition. On February 19,
1997, we purchased from American Home Products Corporation the
U.S. rights to several nutritional supplement product lines. We
are also developing additional nutritional supplement products
and plan to expand sales of these nutritional supplements. In
order to do this, we paid and expect to continue to pay
substantial marketing and promotional expenses and allowances in
1999 and in future years. We cannot guarantee that these
expenditures and allowances will result in an increase or
maintenance of the existing revenue levels from the nutritional
supplement lines or new product lines. Furthermore, except for
our existing promotional efforts with respect to the nutritional
supplement lines, we have not conducted a national advertising
campaign of the scope or magnitude equal to the ongoing and
planned promotional efforts for the nutritional supplement lines.
There is a risk that our efforts may not be successful or
cost-efficient.
The Can-Am Acquisition. On February 18, 1998, Inverness
Medical, Inc., a subsidiary of Selfcare, purchased Can-Am Care
Corporation, a leading supplier of diabetes care products. We
have decreased, and expect to continue to decrease, certain
expenses by, among other things, eliminating duplicative
management functions and combining our distribution channels with
those of Can-Am. Although we believe that synergies are present
between our existing distribution channels and those of Can-Am,
we can not be certain that the integration of the Can-Am product
line with our product lines will lead to increased overall
revenue or decreased spending as a percentage of revenue, or that
the integration will result in other benefits customarily pursued
in a strategic acquisition. Accordingly, we may not save any
money and may, in fact, incur additional costs in attempting to
make these changes or in attempting to mitigate any adverse
consequences of the integration.
Risks Related to New Product Development
Some of our products are available for commercial sale,
including certain professional diagnostic products for infectious
diseases, women's health products produced by third-party
manufacturers, FastTake Registered diabetes care products, blood
glucose strips and nutritional supplements. All of our other
products are in various stages of research and development and
are not generating revenue. We must develop these products and
perform pre-clinical and clinical testing before we can sell
these products to the public. At this stage, we cannot be certain
that:
* any of the products under development will prove to be
safe or effective in clinical trials;
* we will be able to obtain regulatory approval to market
any of our products that are in development or contemplated;
* any of such products can be manufactured at acceptable
cost and with appropriate quality; or
* any of such products, if and when approved, can be
successfully marketed.
Risks Related to the LifeScan Alliance
In 1995, we entered into an exclusive worldwide alliance and
distribution agreement with LifeScan, Inc., a subsidiary of
Johnson & Johnson. Under the terms of the alliance with LifeScan,
we manufacture and LifeScan distributes FastTake Registered, our
proprietary electrochemical blood glucose monitoring system for
the management of diabetes. We commenced shipments of FastTake in
December 1997. FastTake is currently the most successful product
in our diabetes line of business. Our future results of
operations depend to a substantial degree on LifeScan's ability
to market and sell FastTake. Although the FastTake product
appears to be gaining acceptance, we cannot assure you that the
market will fully accept FastTake or that any acceptance will
continue. Any failure by us to produce or failure of LifeScan to
market and distribute FastTake successfully could have a material
adverse effect on our business, financial condition and results
of operations.
Dependence Upon Key Personnel
Our future success is highly dependent on the services of Ron
Zwanziger, the Chairman, President and Chief Executive Officer,
and certain other members of management. Due to the specialized
scientific nature of our business, our future success depends in
large part upon our ability to attract and retain highly skilled
scientific, managerial and marketing personnel, particularly as
we continue to develop and expand our activities. We face
significant competition for such personnel from other companies,
research and academic institutions, government entities and other
organizations. We cannot be certain that we will be able to hire
or retain the personnel we require for continued growth. The loss
of Mr. Zwanziger or one or more of the management or scientific
employees could have a negative impact upon our ability to manage
and operate effectively.
Dependence on Patents and Proprietary Technology; Trademarks
Obtaining patent and trade secret protection for new
technologies, products and processes is important in the medical
products and diagnostic testing industries. Our success depends,
in part, on our ability to obtain patent protection for our
products and manufacturing processes, to preserve our trade
secrets and to operate without infringing the proprietary rights
of others.
Patents and Trademarks. We hold certain patent rights, have
certain patent applications pending, and expect to seek
additional patents in the future. However, we cannot be certain
that we will be successful or timely in obtaining any such
patents. The patent position of medical products and diagnostic
testing companies is often highly uncertain and usually involves
complex legal and factual questions. Furthermore, the U.S. Patent
and Trademark Office has not set forth a consistent policy
regarding the breadth of claims covered in medical products
patents. Therefore, we cannot be certain that any issued patents
will provide adequate protection for our products. If such
patents are limited in scope, our competitors may be able to
design around such patents.
In the medical products industry, including the diagnostic
product industry, there is extensive litigation regarding
patents, licenses and other intellectual property rights. We
periodically incur, and will likely continue to incur, costs
related to defending potential infringement claims or asserting
such claims against others. To determine the priority of
inventions, we may also have to participate in interference
proceedings to determine the scope of patents issued by the
Patent and Trademark Office which could also result in
substantial costs.
In April of 1998, Abbott Laboratories, Inc. filed a lawsuit
against us and Princeton BioMeditech Corporation which
manufactures our pregnancy detection and ovulation prediction
products. Abbott alleges that these products infringe a patent
under which Abbott claims to have exclusive rights. In October,
1998, Abbott filed a lawsuit against us alleging that our glucose
monitoring system, FastTake, infringes upon a patent held by
Abbott. Although we believe that the pregnancy detection and
ovulation prediction products and FastTake do not infringe upon
these patents, we have already incurred and may continue to incur
substantial costs in defending against Abbott's claims.
Furthermore, under the distribution agreement with LifeScan, we
agreed to indemnify LifeScan for any damage, including expenses
incurred by it, resulting from any claims that FastTake infringes
any patents. For a more in-depth discussion of this litigation,
see the section entitled "Part II, Item 1. Legal Proceedings".
Licensing of Technology. We may be required to obtain licenses
to patents or other proprietary rights of third parties to market
their products. We do not know if we will be able to obtain
licenses under any such patents or proprietary rights on
acceptable terms, if at all. If we do not obtain necessary
licenses, we could encounter delays in product introductions
while attempting to design products that do not infringe on the
patents or other rights which we are unable to license, or we may
be unable to develop, manufacture or sell such products in
certain countries or at all.
Other Proprietary Technology. We seek to protect proprietary
technology, including technology that may not be patented, or
patentable, in part through confidentiality agreements and, if
applicable, inventors' rights agreements with collaborators,
advisors, employees and consultants. If the parties breach these
agreements, we may not have adequate remedies for any such
breach. Although we take actions to prevent the disclosure of
confidential information, we cannot be certain that our trade
secrets will not otherwise be revealed to, or discovered by,
competitors. Moreover, we may from time to time conduct research
through academic advisors and collaborators who may be prohibited
by their academic institutions from entering into confidentiality
or inventor's rights agreements.
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. Our competitors in the United States and abroad are
numerous and include, among others, diagnostic testing and
medical products companies, universities and other research
institutions. Our future success depends upon our maintaining a
competitive position in the development of products and
technologies in our areas of focus. Competitors may be more
successful in:
* developing technologies and products that are more
effective than our products or that render our
technologies or products obsolete or noncompetitive;
* obtaining patent protection or other intellectual
property rights that would prevent us from developing
our potential products; or
* obtaining regulatory approval for the commercialization
of their products more rapidly or effectively than we
are able to do so.
Many of our existing or potential competitors have or may have
substantially greater research and development capabilities,
clinical, manufacturing, regulatory and marketing experience and
financial and managerial resources.
We are seeking to develop and market generic test strips which
are compatible with other manufacturers' electrochemical blood
glucose monitoring systems including Excel Trademark, which is
compatible with the ExacTech Trademark system sold by
MediSense, Inc. Others may attempt to enter this market with
similar products or the manufacturers of the systems with which
such test strips are compatible may lower their own test strip
prices. This would reduce or eliminate our competitive price
advantage.
Additionally, several of our competitors are attempting to
develop 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. We believe
that manufacturers are pursuing a number of different
technological approaches to noninvasive blood glucose monitoring,
including 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 Company is also pursuing the
development noninvasive blood glucose monitoring technologies.
The successful development and introduction of any such products
could reduce the demand for meters and test trips such as
FastTake and Excel.
Nutritional Supplements. The market for the sale of vitamins
and nutritional supplements is highly competitive. This
competition is based principally upon price, quality of products,
customer service and marketing support. There are numerous
companies in the vitamin and nutritional supplement industry
selling products to retailers such as mass merchandisers, drug
store chains, independent drug stores, supermarkets and health
food stores. As most of these companies are privately held, we
are unable to obtain the information necessary to assess
precisely the size and success of these competitors. However, we
believe that a number of our competitors, particularly
manufacturers of nationally advertised brand name products, are
substantially larger than we are and have greater financial
resources.
Effect of Adverse Publicity; Scientific Research
Our nutritional supplement lines contain vitamins, minerals,
herbs and other ingredients that we generally regard as safe when
taken as directed. Various scientific studies have suggested such
vitamins, minerals and herbs may offer certain health benefits.
However, the success of such products is highly dependent upon
consumers' perception of safety and quality of the nutritional
supplement lines as well as similar products distributed by
competitors.
We believe that the recent growth of the nutritional
supplements market is based, in part, on recent scientific
research suggesting potential health benefits from regular
consumption of certain vitamins and other nutritional products
and the attention focused on such benefits by the media. The
scientific research to date is preliminary and therefore it is
possible that future scientific results could be unfavorable or
inconsistent and media attention could be unfavorable. This could
result in a significant decline in sales of the nutritional
supplement products.
Comprehensive Government Regulation
Self-Test Products. Our research, development and clinical
programs, and manufacturing and marketing operations, are subject
to extensive regulation by numerous governmental authorities in
the United States and in other countries. At this time we do not
have the required governmental approvals for commercial sale of
most of our self-test products, including those licensed from
third parties. We expect that some approvals will not be obtained
for several years. The Food and Drug Administration and
corresponding foreign regulatory authorities will review our
pre-clinical and clinical trials to test the safety and efficacy
of many of our products. This regulatory process can take many
years and may require us to spend substantial amounts of money
and other resources.
The FDA and corresponding foreign regulatory authorities may
interpret data obtained from pre-clinical and clinical activities
in ways that could delay, limit or prevent regulatory approval or
may reject approval based upon future, unknown changes to
regulatory policies. Such delays may prevent us from marketing
and selling these products.
Moreover, even if regulatory approval of a product is granted,
the FDA and foreign authorities may impose limitations on the
indicated uses or methods of use for a product. This could limit
the way in which we market such product. Furthermore, even after
granting approval, the FDA or other regulatory agencies may
continue to review and inspect a marketed product, the
manufacturer and its manufacturing facilities. If the FDA or the
foreign authorities discover previously unknown problems with a
product, manufacturer or facility, they may restrict or prohibit
the sale of the product. If we fail to comply with the applicable
regulatory requirements, the FDA or foreign authorities may
impose fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution.
Regulatory requirements in countries outside the United States
can change rapidly with relatively short notice. It is possible
that changes in such regulations may result in products being
banned in certain countries, causing us to lose revenues and
income. Foreign regulatory agencies could also introduce testing
changes which, if not quickly addressed, could result in
restrictions on sales of our products. Such changes are not
uncommon as such regulatory authorities may react and respond to
advances in basic research and the nature of certain infectious
diseases and agents such as HIV, as some of these diseases are
mutating viruses capable of producing new strains and subtypes.
Nutritional Supplements. Federal agencies, including the FDA, the
Federal Trade Commission and the Consumer Product Safety
Commission, regulate the manufacturing, processing, formulation,
packaging, labeling and advertising of nutritional supplements.
Various agencies of the states, localities and foreign countries
where we sell or may sell the nutritional supplement lines may
also regulate our activities.
The Dietary Supplement Health and Education Act of 1994 enacted
on October 25, 1994, defines dietary supplements as a new
category of food separate from conventional food. The FDA has
finalized certain regulations to implement the Dietary Supplement
Health and Education Act of 1994, including those relating to
nutritional labeling requirements, but it has not finalized other
regulations. Under the Dietary Supplement Health and Education
Act of 1994, we are required to have different labeling for the
nutritional supplement lines and, with respect to nutritional
supplement products under development, we are subject to new
notification procedures and scientific proof requirements
regarding ingredients, product claims and safety. We cannot
determine how, or if, these regulations will affect business in
the future. If we do not comply with applicable FDA requirements,
the FDA could impose sanctions and penalties, including warning
letters, product recalls and seizures, injunctions or criminal
prosecution. Although not yet final, we anticipate that the FDA
will enact specific standards under the law to regulate the
manufacturing of dietary supplements. The current proposal
standards are similar to the current standards for food and we
believe that the current manufacturing process of our nutritional
supplement lines will be in compliance with the proposed
standards for dietary supplements. However, we cannot be certain
that the final standards for dietary supplements will not change
in ways that require changes in the manufacture of the
nutritional supplement lines.
Litigation
The Company encounters many risks associated with litigation
concerning, among other things, the enforcement of patents and
other intellectual property rights. For information on the risks
involved, please see "Part II, Item 1. Legal Proceedings."
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.
Our efforts to address the Year 2000 issue are focused in
the following areas:
(1) reviewing and taking any necessary steps to
attempt to correct our computer information systems,
including software applications and hardware platforms;
(2) 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
(3) communicating with certain significant customers, suppliers
and service providers to determine whether there will be any
interruption in their systems that could affect us.
Our State of Readiness. We have developed a four-phase plan to
address the Year 2000 issues. The four phases are: (1) awareness,
(2) assessment, (3) remediation, and (4) testing.
Awareness. We have made the relevant employees aware of the
Year 2000 issue and collected information from such employees
regarding systems that might be affected. We have established a
project team to lead our efforts, and management will oversee the
progress with respect to the implementation of the Year 2000
Plan. In addition, the Year 2000 Plan will be subject to the
review of the Board of Directors.
Assessment. We have substantially completed an assessment of
our standard computer information systems and we have taken the
necessary steps to make our core computer information systems, in
those situations in which we are required to do so, Year 2000
compliant. We have tested or obtained written verification from
vendors to the effect that our other standard computer
information systems acquired from such vendors correctly
distinguish dates before the year 2000 from dates in and after
the year 2000.
In addition, we have completed our evaluation and assessment
our other computer systems that do not relate to information
technology but include embedded technology, such as
telecommunications, security, fire and safety systems. We have
obtained written confirmation from our vendors and landlord that
these systems are, to the best of their knowledge, Year 2000
Compliant.
We have sent letters to our significant customers, suppliers,
and service providers regarding their Year 2000 readiness and
have requested a response by no later than July 31, 1999. We
will develop contingency plans for those suppliers and service
providers that do not provide satisfactory assurance regarding
their Year 2000 readiness. We 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 our control and we cannot be certain of the cost or timing
of such efforts or the potential effects of any failure of our
customers, suppliers or service providers to comply.
Remediation. Our primary use of software systems is in our
accounting and electronic data interface ("EDI") software. We
also use programmable logic controls in manufacturing operations
at our facility in Inverness, Scotland. We have received written
verification from our vendor of the accounting software used in
our corporate office that the software is Year 2000 compliant. We
have upgraded our EDI software to a version that has been
designed to be Year 2000 Compliant. The programmatic logic
controls are Year 2000 compliant, although we are awaiting
confirmation regarding printers.
Testing. To attempt to confirm that our computer systems are
Year 2000 compliant, we have performed limited testing of our
computer information systems and our other computer systems that
do not relate to information technology but include embedded
technology. We will rely on the written verification, when and if
received, from each vendor of our computer systems that the
relevant system is Year 2000 compliant. Nevertheless, we cannot
be certain that the computer systems on which we rely will
correctly distinguish dates before the year 2000 from dates in
and after the year 2000. Any failure to distinguish the dates
could have an adverse effect on our operations. We have tested
the software in the FastTake blood glucose monitoring system and
believe that it is Year 2000 compliant. We have also
successfully tested our ability to communicate with customers
that are not using EDI software that is Year 2000 Compliant.
Costs to Address Our Year 2000 Issues. The primary cost of our
Year 2000 compliance to date, which has been associated with
assessment and testing, has not been significant. Because our
Year 2000 assessment is ongoing and additional funds may be
required as a result of future findings, we are not currently
able to estimate the final aggregate cost of addressing the Year
2000 issue. While these efforts will involve additional costs, we
believe, based on available information, that these costs will
not have a material adverse effect on our business, financial
condition or results of operations. We expect to fund the costs
of addressing the Year 2000 issue from cash flows resulting from
operations. While we believe that we 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 our
computer systems exceed our estimates, the Year 2000 issue could
have a material adverse effect on our business, financial
condition and results of operations.
Risks Presented by Year 2000 Issues. We have evaluated our
business critical systems and we have not identified any specific
business functions that we know will suffer material disruption
as a result of Year 2000 related events. It is possible, however,
that we 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 our current
status of evaluating potential Year 2000 related problems. This
should not be construed to mean that there is no risk of Year
2000 related problems 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 Selfcare, that might arise in a
worst case scenario and which might have a material adverse
effect on our business, financial condition and results of
operations.
Our Contingency Plans. We have developed general contingency
plans for significant business risks that might result from Year
2000 related events, if necessary. Because we 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 risk from potential Year 2000 failures is still
in process, we have not yet developed detailed contingency plans
specific to Year 2000 problems. We will develop specific
contingency plans for those suppliers and service providers that
do not provide satisfactory assurance regarding their Year 2000
readiness by July 31, 1999.
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 our 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.
Risks Related to the Conversion to the Euro
On January 1, 1999, eleven of the fifteen member countries of
the European Union established fixed conversion rates between
their sovereign currencies and the Euro and adopted the Euro as
their common legal currency. As a result, the Euro now trades on
currency exchanges and is available for noncash transactions. The
participating countries have issued sovereign debt exclusively in
Euro, and redenominated outstanding debt. Beginning January 1,
2002, the participating countries will issue new Euro-denominated
bills and coins for use in cash transactions and will withdraw
all bills and coins denominated in their sovereign currencies by
July 1, 2002, making the conversion to the Euro complete.
Certain of our European subsidiaries may need to adapt their
information technology systems to accommodate Euro-denominated
transactions, even if they are not located in countries which are
members of the European Union. In addition, it is likely that
there will be a greater transparency of pricing in the
participating countries, making Europe a more competitive
environment. Our 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, we do not believe that the consequences of
the Euro conversion will have a material effect on us, although
no assurances can be given that it will not.
We have manufacturing facilities in Galway, Ireland; Yavne,
Israel; and Inverness, Scotland, and sales and marketing offices
in Germany and Belgium, and we market our products in several
international markets.
Limited Operating History; History of Operating Losses and
Accumulated Deficit; Uncertain Profitability
We have not had significant profits since we began operations.
As of March 31, 1999, our accumulated deficit totaled
approximately $90.2 million. In order to continue developing
products, we must expend substantial resources to conduct
research and pre-clinical and clinical development programs, to
establish manufacturing facilities, sales and marketing
capabilities, and to establish additional quality control and
regulatory and administrative capabilities. We may lose
substantial and, perhaps, increasing amounts of money, over the
next several years as our product programs expand and various
clinical trials commence. We do not know when, or if, we will
make money because our profitability depends on a number of
uncertainties.
Fluctuations in Results of Operations; Volatility of Share Price
Our annual and quarterly operating results may fluctuate due
to factors such as:
* the timing of new product announcements and
introductions by us and our competitors,
* market acceptance of new or enhanced versions of our
products,
* changes in manufacturing costs or other expenses,
* competitive pricing pressures,
* the gain or loss of significant distribution outlets or
customers,
* increased research and development expenses, or
* general economic conditions.
In addition, it is possible that in some future periods the
results of our operations will be below the expectations of the
public market. In any such event, the market price of the common
stock could be materially and adversely affected. Furthermore,
the stock market may experience significant price and volume
fluctuations which may affect the market price of the common
stock for reasons unrelated to our operating performance. The
market price of the common stock may be highly volatile and may
be affected by such factors as:
* our quarterly operating results;
* changes in general conditions in the economy, the
financial markets, or the health care industry;
* government regulation in the health care industry;
* changes in other areas such as tax laws;
* sales of substantial amounts of common stock or the
perception that such sales could occur, including as a
result of the conversion or potential conversion
of convertible securities issued by us; or
* other developments affecting us or our competitors.
Control by Certain Stockholders
Our executive officers and directors owned as of February 1,
1999, approximately 17.7% of the outstanding shares of common
stock. Accordingly, these persons may have the ability to control
Selfcare's Board of Directors, and, therefore, our business,
policies and affairs.
Anti-Takeover Effect of Certificate of Incorporation and By-law
Provisions and Delaware Law
Our Amended and Restated Certificate of Incorporation and
Amended and Restated By-laws contain certain provisions relating
to corporate governance and the rights of stockholders. These
provisions may be deemed to have a potential "anti-takeover"
effect since such provisions may delay, defer or prevent a change
in control of Selfcare. These provisions make more difficult, and
may in fact discourage, a proxy contest to change control of
Selfcare and therefore may in turn have an adverse affect on our
stock price.
Effect of Issuance of Preferred Stock
Our Board of Directors is currently authorized to issue up to
4,893,500 shares of preferred stock in the future without further
stockholder approval and upon such terms and conditions, and
having such rights, privileges and preferences, as they may
determine. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future.
In addition, if Selfcare were to sell additional shares of
preferred stock, it could become more difficult for a third party
to acquire control of, or make acquisition bids for, Selfcare.
This, in turn, could affect the price of the shares of our common
stock.
Effect of Conversions of Convertible Preferred Stock and Senior
Subordinated Convertible Notes
We have authorized shares of Series A Convertible Preferred
Stock, par value $.001 per share, Series B Convertible Preferred
Stock, par value $.001 per share, Series C Convertible Preferred
Stock, par value $.001 per share, Series D Convertible Preferred
Stock, par value $.001 per share, and Series E Convertible
Preferred Stock, par value $.001 per share. We have outstanding
4,720 shares of Series B Convertible Preferred Stock, 56,842
shares of Series C Convertible Preferred Stock, 3,030 shares of
Series D Convertible Preferred Stock and 14,169 shares of Series
E Convertible Preferred Stock.
Our Series B Convertible Preferred Stock and our Senior
Subordinated Convertible Notes issued October 27, 1997, as
amended January 11, 1999, contain variable conversion ratio
provisions. The terms of the Series B Convertible Preferred Stock
and, in the event of certain defaults thereunder, the Senior
Subordinated Convertible Notes provide that, subject to certain
limitations, as the price of our common stock declines the number
of shares of common stock into which the holders may convert such
securities increases. Accordingly, if our stock price falls the
result may be that the holders of the convertible securities with
variable conversion ratios can convert such securities for a
greater number of shares of our common stock than previously
obtainable by such holder, thereby resulting in an increase in
the potential dilution to all existing common stockholders.
Cautionary Statements Concerning Forward-Looking Statements
Statements made in this document include 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. Also, documents we subsequently file with the Commission
and incorporate by reference will contain forward-looking
statements. These statements include, among other things,
statements regarding our intent, belief or expectations and those
of our directors and officers with respect to:
* our ability to develop new products and integrate new
product lines;
* our ability to manage growth;
* our ability to successfully market new products in
general;
* our ability to obtain debt and equity financing;
* our ability to successfully prosecute and defend
litigation;
* general economic conditions; and
* trends affecting our business, financial condition or
results of operations.
We caution you that, while forward-looking statements reflect
our good faith beliefs, they are not guarantees of future
performance and involve known and unknown risks and
uncertainties, and that actual results may differ materially from
those in the forward-looking statements as a result of factors
outside of our control. In addition, we disclaim any obligation
to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or
otherwise.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Abbott Laboratories v. LifeScan, Inc. and Selfcare, Inc.
In late October 1998, Abbott commenced a lawsuit against the
Company and LifeScan in the United States District Court for the
District of Massachusetts. The complaint alleges that the
disposable test strips used in the FastTake Registered blood
glucose monitoring system supplied by the Company to LifeScan
infringe U.S. Patent No. 5,820,551 (the "Test Strip Patent")
issued to Abbott on October 13, 1998. Abbott is seeking damages
and an injunction against sales in the United States. Abbott also
sought to enjoin LifeScan and Selfcare from the manufacture, use
and sale of these blood glucose test strips in the United States
during the pendency of the infringement litigation. On
February 22, 1999, the court denied Abbott's motion for a
preliminary injunction and stated "...that Abbott is unlikely to
succeed on the merits of its claim of patent infringement..."
Although a final ruling against the Company could have a material
adverse impact on sales, operations or financial performance,
based on a review of the Abbott claims by patent counsel and the
aforementioned court ruling, the Company believes that the
FastTake test strips do not infringe the Test Strip Patent and
that Abbott's claims will be proven to be without merit.
Abbott Laboratories v. Selfcare, Inc. and Princeton BioMeditech
Corporation
In April 1998, Abbott commenced a lawsuit against 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 "Pregnancy Test
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
Pregnancy Test Patents. Abbott is seeking an order finding that
the Company and PBM infringe the Pregnancy Test Patents, an order
permanently enjoining the Company and PBM from infringing the
Pregnancy Test Patents, compensatory damages to be determined at
trial, treble damages, costs, prejudgment and post-judgment
interest on Abbott's compensatory damages, attorneys' fees, and a
recall of all existing Company or PBM products found to infringe
the Pregnancy Test Patents. On August 5, 1998, the court denied
Abbott's motion for a preliminary injunction. On October 23,
1998, the Company, PBM, and the LLC, the joint venture between
the two companies, filed a motion to amend their counterclaim
against Abbott, asserting that Abbott is infringing U.S. Patent
Nos. 5,559,041 (the "041 patent") and 5,728,587 (the "587
patent") which are owned by the LLC and seeking a declaration
that Abbott infringes the patents, permanent injunctive relief,
money damages and attorneys' fees. On November 5, 1998, Abbott
filed suit in the United States District Court for the Northern
District of Illinois seeking a declaratory judgment of non-
infringement, unenforceability and invalidity of the 041 patent
and 587 patent. The Illinois court granted the Company's motion
to transfer the aforementioned Illinois action to Massachusetts.
The Company and its co-defendant have moved for summary judgment
on their defense that the Abbott patents are invalid, and Abbott
has cross-moved for summary judgment on the issue of
infringement. The case is currently in the discovery stage. The
Company intends to defend this litigation vigorously; however, a
final ruling against the Company could have a material adverse
impact on the Company's sales, operations or financial
performance.
Cambridge Biotech Corporation and Cambridge Affiliate Corporation
v. Ronald Zwanziger, Selfcare, Inc., Cambridge Diagnostics
Ireland, Ltd., Trinity Biotech, plc and Pasteur Sanofi
Diagnostics
On January 22, 1999, Cambridge Biotech Corporation ("CBC")
and Cambridge Affiliate Corporation ("CAC") filed suit (Civil
Action No. 99-378) in the Middlesex County Massachusetts Superior
Court against the Company, its President, Ron Zwanziger, CDIL,
Trinity Biotech plc ("Trinity") and Pasteur Sanofi Diagnostics
("Pasteur"). The complaint alleges, among other things, that
actions taken by Mr. Zwanziger as President of CAC in connection
with the sale by CDIL of its diagnostics business to Trinity (See
Notes 8(b) and 16(c) of Notes to Consolidated Financial
Statements) were not properly authorized and that, as a result of
the actions, CBC may lose the benefit of valuable patent licenses
from Pasteur. CBC's requested relief is to have the CAC/Trinity
manufacturing and sales agreements declared null and void, the
license between Pasteur and CBC declared to be in full force, to
recover damages allegedly caused by the Company and
Mr. Zwanziger, and to recover damages due to Pasteur's actions.
CBC moved for a preliminary injunction, seeking to enjoin the
Company, CDIL, Mr. Zwanziger, and Trinity from acting pursuant to
the CAC/Trinity agreements and to enjoin Pasteur from terminating
its license agreements with CBC. Following a hearing on
January 25, 1999, the Court denied CBC's motion. Subsequently,
all of the parties (including Pasteur, which continues to
maintain that the issues between it and CBC should be litigated
in France) have agreed to voluntary, non-binding mediation of the
dispute. The Company believes that CBC's complaint against the
Company, Mr. Zwanziger, and CDIL is without merit and intends to
defend the action vigorously if the mediation does not lead to a
settlement. The Company does not believe that an adverse ruling
against the Company would have a material adverse impact on
sales, operations or financial performance.
Enviromed plc v. Selfcare, Inc.
The Company had been involved in a dispute with Enviromed
plc ("Enviromed") with respect to a joint venture agreement
entered into between the Company and Enviromed in March 1994 and
other agreements (collectively, the "Disputed Enviromed
Agreements") entered into between the Company and Enviromed and
its wholly-owned subsidiary Cranfield Biotechnology Ltd.
("Cranfield") and the issuance of shares of Common Stock to
Enviromed in connection therewith. In connection with this
dispute, the Company informed Enviromed that, due to the failure
of Enviromed and Cranfield to perform their obligations under the
Disputed Enviromed Agreements, the Company disputed Enviromed's
ownership of the Common Stock held of record by Enviromed. On
July 5, 1996, Enviromed filed suit against the Company and the
representatives of the underwriters (the "IPO Representatives")
of Selfcare's initial public offering in United States District
Court for the Southern District of New York alleging breach of a
registration rights agreement relating to the Common Stock held
of record by Enviromed. Enviromed claimed that its rights under a
registration rights agreement were breached in connection with
the Company's initial public offering and requested damages,
injunctive relief and a declaratory judgment that Enviromed is
the lawful owner of the shares. The Company filed counterclaims
against Enviromed arising out of the failure of Enviromed and
Cranfield to perform their obligations under the Disputed
Enviromed Agreements. On October 18, 1996, the case was ordered
transferred to the United States District Court for the District
of Massachusetts. On November 15, 1996, Enviromed filed a
dismissal without prejudice of its claims against the IPO
Representatives. On March 11, 1997, Enviromed and the Company
filed a stipulation of dismissal without prejudice of all the
claims and counterclaims in the case, and the case was dismissed
without prejudice. On February 8, 1999, the Company and Enviromed
reached a settlement whereby (i) Enviromed's board of directors
was restructured and Mr. Zwanziger, the Company's Chairman, was
replaced as a board member by David Scott, the Managing Director
of the Company's subsidiary, Inverness Medical, (ii) the payment
of 437,000 Pounds in notes owed to Selfcare by Enviromed was
rescheduled, and (iii) Enviromed agreed to pay Selfcare an amount
up to a maximum of 500,000 Pounds, based upon purchases by
Selfcare from an Enviromed subsidiary in excess of certain
minimums. The settlement was subject only to approval of the
Enviromed's shareholders, which was received in March 1999.
Item 2. Changes in Securities
On January 8, 1999, the Company sold in a private placement
56,842 shares of Series C Convertible Preferred Stock, par value
$.001 per share, 3,030 shares of Series D Convertible Preferred
Stock, par value $.001 per share, and 14,169 shares of Series E
Convertible Preferred Stock, par value $.001 per share, of the
Company (collectively, the "Preferred Shares") to private
investors (the "Preferred Investors") at an aggregate purchase
price of $7,404,100. The Preferred Investors include certain
officers and directors of the Company. Each Preferred Share
accrues a dividend of 7% per annum (the "Dividend"). The
Preferred Shares are convertible into shares of Common Stock. The
actual number of shares of Common Stock issuable upon conversion
of a Preferred Share is equal to the aggregate stated value per
share (i.e., $100), plus any accrued but unpaid Dividend (unless
the Company elects to pay such Dividend in cash) through the date
of such conversion, divided by a conversion price initially equal
to $1.8125 per share of Series C Convertible Preferred Stock,
$2.00 per share of Series D Convertible Preferred Stock, and
$3.028 per share of Series E Convertible Preferred Stock (in each
case, the "Conversion Price"). The Conversion Price is subject to
adjustment for stock splits, stock dividends, recapitalization
and similar transactions. Any Preferred Share not previously
converted will automatically convert into Common Stock on
January 8, 2002. The Company claimed an exemption from the
registration requirements of the Securities Act by reason of
Regulation D promulgated thereunder, based on the private nature
of the transaction and the financial sophistication of the
purchasers, all of whom had access to complete information
concerning the Company and acquired the securities for investment
and not with a view to the distribution thereof. U.S. Boston
Capital acted as placement agent for a portion of the offering of
the Preferred Shares for a commission of $47,000. Willard L.
Umphrey, a Director of the Company, is the Chairman, President,
Treasurer and a Director of U.S. Boston Capital.
On January 11, 1999, the Company and Convertible Noteholders
agreed to amend the terms of the Convertible Notes by changing
the maturity date and conversion terms, as well as canceling the
related warrants. Pursuant to the amended terms, the Company made
an immediate payment of $859,049 representing $780,954 of face
value of the original Convertible Notes plus a 10% premium. The
remaining Convertible Notes were amended and replaced with
amended notes (the "New Convertible Notes"). The face value of
the New Convertible Notes is equal to the face value of the
canceled Convertible Notes plus a 15% premium. The New
Convertible Notes mature on July 12, 1999, bear an interest rate
of 8% and provide for a fixed conversion price of $2.00.
On January 22, 1999, the Company and the Series B preferred
stockholders agreed to amend the terms of the Series B Preferred
Stock, subject to shareholder approval. Under the amended terms,
the Company provided the Series B preferred stockholders a 15%
premium on the face value of the preferred stock on the date of
the amendment to the terms of the Series B Preferred Stock,
subject to shareholder approval. The conversion price of the
amended Conversion Shares of common stock will be equal to the
aggregate stated value ($1,000 per share), plus any accrued but
unpaid premium through the date of such conversion, divided by
(i) $2 (the amended Fixed Conversion Price) if the shares are
converted prior to July 20, 1999 and (ii) in the case of
conversions after July 20, 1999, a conversion price equal to the
lower of $2.00 or the Variable Conversion Price (defined as the
average of the five lowest closing bid prices of the common stock
during the 30 trading days preceding such conversion) then in
effect. In the event the price per share rises to $3.25 or higher
for any ten consecutive trading days after shareholder approval
has been obtained, the Company may fix the conversion price at
$2.00, by delivery of a written notice within five business days
after the tenth trading day, effective thirty days after the
delivery of such notice. The Company may require the conversion
of all, but not less than all, of the Series B Preferred Shares,
provided that the closing bid prices of the common stock are
equal to or greater than $13.9581 (subject to adjustment as
defined in the agreement) for 20 consecutive trading days
preceding any such conversion. Any unconverted Series B Preferred
Stock will automatically convert into shares of common stock on
August 26, 2000. The Series B Preferred Stock may also be
redeemed under certain circumstances for cash. A holder of
Series B Preferred Stock may require the Company to redeem any or
all of such holder's Series B Preferred Stock, under certain
circumstances. Upon shareholder approval after July 20, 1999,
the Company may redeem at least a majority of the outstanding
Series B Preferred Stock at its option at the face amount, plus
accrued premium and any conversion default payments, in the event
the price of the Company's common stock is less than $2.00 for at
least ten consecutive trading days prior to the date of such
redemption.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
The following discussion about the Company's market risk
disclosures involves forward-looking statements. Actual results
could differ materially from those discussed in the
forward-looking statements. The Company is exposed to market risk
related to changes in interest rates and foreign currency
exchange rates. The Company does not use derivative financial
instruments for speculative or trading purposes.
Interest Rate Risk
The Company is exposed to market risk from changes in interest
rates primarily through its investing and borrowing activities.
In addition, the Company's ability to finance future acquisition
transactions may be impacted if the Company is unable to obtain
appropriate financing at acceptable rates.
The Company's investing strategy, to manage interest rate
exposure, is to invest in short-term, highly liquid investments.
Currently, the Company's short-term investments are in money
market funds with original maturities of 90 days or less. At
March 31, 1999, the fair value of the Company's short-term
investments approximated market value.
In February, 1998, the Company's subsidiary, IMI, entered into
a $42 million credit agreement with Chase Manhattan Bank. The
credit agreement consists of a $37 million term loan and a
$5 million revolving line of credit. The term loan and revolving
line of credit allow IMI to borrow funds at varying rates,
including options to borrow at an alternate base rate plus a
spread from .25% to 1.75%, or the LIBOR rate plus a spread from
1.75% to 3.00%. The spreads depend on IMI's ratio of senior
funded debt to EBITDA. IMI entered into an interest rate swap
agreement with an effective date of March 31, 1998. This
agreement protects approximately 50% of IMI's term loan against
LIBOR interest rates rising over 7.5%. This agreement is
effective through March 30, 2001.
Foreign Currency Risk
The Company faces exposure to movements in foreign currency
exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse effect on the
Company's business, financial condition and results of operation.
The Company does not use derivative financial instruments or
other financial instruments to hedge economic exposures or for
trading. Historically, the Company's primary exposures have been
related to the operations of its European subsidiaries. However,
the sales of FastTake, the Company's lead diabetes management
product, are denominated in the currency in which the
manufacturing costs are incurred. In 1998, the net impact of
foreign currency changes was not material. The introduction of
the Euro as a common currency for members of the European
Monetary Union has taken place in the Company's fiscal year 1999.
The Company has not determined the impact, if any, that the Euro
will have on foreign exposure. The Company intends to hedge
against fluctuations in the Euro if this exposure becomes
material. At March 31, 1999, the assets related to non-
dollar-denominated currencies were approximately $23.0 million.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit Title
Number
4.3 Certificate of Designations, Preferences and
Rights of Series C Convertible Preferred Stock as
filed with the Secretary of State of the State of
Delaware January 8, 1999 (incorporated by
reference to Exhibit 4.1 to Report on Form 8-K
dated January 20, 1999)
4.4 Certificate of Designations, Preferences and
Rights of Series D Convertible Preferred Stock as
filed with the Secretary of State of the State of
Delaware January 8, 1999 (incorporated by
reference to Exhibit 4.1 to Report on Form 8-K
dated January 20, 1999)
4.5 Certificate of Designations, Preferences and
Rights of Series E Convertible Preferred Stock as
filed with the Secretary of State of the State of
Delaware January 8, 1999 (incorporated by
reference to Exhibit 4.1 to Report on Form 8-K
dated January 20, 1999)
4.6 Agreement to Amend Terms of Series B Convertible
Preferred Stock (incorporated by reference to
Exhibit 4.1 to Report on Form 8-K dated March 19,
1999)
4.7 Note Amendment Agreement / amended & restated
Notes (incorporated by reference to Exhibit 4.1 to
Report on Form 8-K dated January 20, 1999)
27.1 Financial Data Schedule
b. Reports on Form 8-K:
The Company filed a report on Form 8-K dated January 20,
1999, in connection with the Company entering into a Note
Amendment Agreement and the issuance of Amended and Restated
Senior Subordinated Convertible Notes, a letter of intent to
amend the terms of the Series B Convertible Stock and a new
issuance of Series C, D and E Convertible Preferred Stock. The
Company filed a report on Form 8-K dated March 19, 1999, in
connection the Agreement to Amend Terms of the Series B
Convertible Preferred Stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SELFCARE, INC.
Date: May 17, 1999
/s/ Christopher L. Huntoon
--------------------------
Christopher L. Huntoon
Chief Financial Officer
and an authorized officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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AND IS QUALIFIED IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
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