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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(MARK ONE)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 00-20871
SELFCARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE (State or Other Jurisdiction of 04-3164127
Incorporation or Organization) (I.R.S. Employer Identification
No.)
200 PROSPECT STREET, WALTHAM, 02453
MASSACHUSETTS (Zip Code)
(Address of Principal Executive Offices)
(781) 647-3900
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.001 American Stock Exchange
per share par value
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Securities Registered under Section 12(g) of the Exchange Act:
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Title of Class
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 requirement for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. / /
Issuer's revenues for its most recent fiscal year ended December 31, 1998
were $117,983,618.
The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing price of the registrant's stock on the
American Stock Exchange on February 1, 1999 was $36,458,764.
As of February 9, 1999 the Registrant had 15,756,480 shares of common stock,
par value $0.001 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Items 10, 11, 12 and 13 of Part III of this
Annual Report on Form 10-K/A is hereby incorporated by reference from the
Company's definitive Proxy Statement with respect to its 1999 Annual
Stockholders' Meeting to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A.
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PART I
THIS REPORT ON FORM 10-K/A CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD MATERIALLY DIFFER
FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MAY
CAUSE SUCH A DIFFERENCE INCLUDE, WITHOUT LIMITATION, CHANGES IN PRODUCT DEMAND
AND MARKET ACCEPTANCE, CHANGING ECONOMIC CONDITIONS, RISKS IN PRODUCT AND
TECHNOLOGY DEVELOPMENT, REGULATORY APPROVALS, THE EFFECT OF THE COMPANY'S
ACCOUNTING POLICIES AND OTHER RISK FACTORS DISCUSSED IN SECTION ENTITLED
"CERTAIN FACTORS AFFECTING FUTURE RESULTS" HEREIN AND IN THE COMPANY'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ITEM 1. DESCRIPTION OF BUSINESS.
Selfcare, Inc. (the "Company" or "Selfcare"), was incorporated in Delaware
on August 25, 1992 and acquired its predecessor company, Superior Sensors, Inc.,
by merger on September 15, 1992. The Company's principal executive offices are
located at 200 Prospect Street, Waltham, Massachusetts 02453 and its telephone
number is (781) 647-3900.
Selfcare is engaged in the development, manufacture and sale of products for
diabetes management, women's health, and clinical diagnostics for infectious
diseases.
BUSINESS DEVELOPMENTS IN 1998
During 1998, the Company's subsidiary, Inverness Medical Ltd. ("Inverness
Medical"), through which the Company conducts all of its electrochemical blood
glucose monitoring business, started construction on a major expansion of its
manufacturing and R&D facilities which is expected to be completed in 1999.
These facilities are located in Inverness, Scotland and when completed will
double the plant's current size to 103,500 square feet and increase
manufacturing capacity for the production of electrochemical blood glucose meter
test strips which are used for diabetes management. The construction is financed
by Highlands and Islands Enterprise, a Scottish business development agency.
On February 18, 1998, the Company acquired Can-Am Care Corporation
("Can-Am"), a leading supplier of diabetes care products, for approximately
$27.9 million, consisting of $13.6 million in cash, notes in the aggregate
principal amount of $2.0 million (subject to potential premiums of up to an
additional $2.0 million in the aggregate based upon increases in the Company's
common stock, par value $.001 per share ("Common Stock") during the term of such
notes) and approximately 1.1 million shares of the Company's Common Stock.
Can-Am, a wholly-owned subsidiary of Selfcare, sells insulin syringes, blood
lancets, glucose tablets and specialty skin creams to retail outlets across the
United States. Upon the closing of the acquisition, Mr. Robert Oringer,
President of Can-Am, became a member of the Company's Board of Directors and
continued as President of Can-Am.
On March 31, 1998, the Company entered into an Agreement with USB '93
Technology Associates Limited Partnership under which it purchased immuno-assay
technology for an aggregate purchase price of $4.9 million payable in 487,017
shares of its Common Stock and $360,000 in cash. This transaction is described
in the Liquidity and Capital Resources section under the heading entitled "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in Note 16 to Notes to Consolidated Financial Statements.
On June 26, 1998, the Company entered into a Securities Purchase Agreement
to sell units, consisting of subordinated promissory notes and warrants, having
an aggregate purchase price of $10.2 million. This transaction is described in
the Liquidity and Capital Resources section under the heading entitled "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in Note 13 to Notes to Consolidated Financial Statements.
On September 1, 1998, the Company entered into two patent license agreements
with Becton, Dickinson and Company. The agreements are effective April 1, 1998
and continue in effect until the last to
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expire of the licensed patents, as described in the agreements, in each country
or region. The Company has the right to terminate its license by giving 30-days
advance written notice. The agreements grant the Company the rights to
manufacture and sell products incorporating certain patented technology as
defined in such agreements. The Company is obligated to pay royalties on the net
sales of products incorporating the licensed technology. See Note 15(g) to the
Consolidated Financial Statements.
On September 30, 1998, the Company and its wholly owned subsidiary,
Cambridge Diagnostics Ireland, Ltd. ("CDIL"), an Irish limited company, signed
an agreement with Trinity Biotech whereby CDIL agreed to sell certain assets of
the infectious disease diagnostics product lines, primarily inventories,
equipment and its ongoing business. In return for the product lines the Company
received consideration of approximately $2.3 million consisting of 555,731
shares of Selfcare Common Stock, 300,000 shares of Enviromed stock and $230,000
in cash. Following this transaction, the Company owns 33% of Enviromed's
ordinary shares (29.9% of Enviromed's voting shares). The Company recorded a
gain on the sale of the business of approximately $1.2 million.
As of December 29, 1998 and January 7, 1999, the Company entered into a
series of financings which are described in the Liquidity and Capital Resources
section under the heading entitled "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and in Note 17(g) to Notes to
Consolidated Financial Statements.
NARRATIVE DESCRIPTION OF BUSINESS
DIABETES MANAGEMENT
Diabetes management is the largest self-test market for medical diagnostic
products in the world. At the end of the nine months from the date of market
introduction in April through December 1998, the FastTAKE-REGISTERED TRADEMARK-
system, which the Company produces and LifeScan, a Johnson & Johnson Company
subsidiary ("LifeScan"), markets and distributes, managed to successfully
penetrate the blood glucose monitoring instrument market. By the end of 1998,
sales of the FastTAKE system represented nearly 10% of new-unit sales in the
U.S.
FastTAKE-REGISTERED TRADEMARK-. The Company's principal product in the
diabetes management self-test market is FastTAKE, an electrochemical,
biosensor-based blood glucose monitoring system. LifeScan is the exclusive
worldwide distributor of FastTAKE. FastTAKE consists of a meter and a disposable
test strip. The meter incorporates a large, easy-to-read display to assist
visually impaired users and has a simple user interface. To operate FastTAKE,
the strip is inserted into the meter, which automatically activates in a standby
mode. The user then places a small blood sample obtained by a finger prick on
the end of the test strip, which senses the size of the necessary sample and
automatically runs the test when the necessary amount of blood is available,
providing results in 15 seconds. Inverness Medical developed the electrochemical
technology for the FastTAKE test strips and manufactures the test strips at its
facilities in Scotland. A contract manufacturer produces the meters to the
Company's specifications in the United States.
ALTERNATIVE TEST STRIPS. The Company also produces and sells alternative
glucose test strips which are designed to be used in the meters of other leading
manufacturers. Currently the alternative strips are sold in Europe. The Company
is distributing these alternative strips in Europe through distribution channels
established by Selfcare International GmbH, a German subsidiary of Selfcare. The
Company intends to sell alternative test strips under its own label in the
United States, and is submitting a pre-market clearance notification to the U.S.
Food and Drug Administration (the "FDA") pursuant to Section 510(k) of the
Federal Food, Drug and Cosmetic Act seeking permission from the FDA to market
the product. There can be no assurance that FDA clearance will be granted. In
the U.S. the Company intends to distribute the alternative strips through
Can-Am's existing distribution channels.
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CAN-AM. Can-Am is the leading supplier of value-priced diabetes care
supplies sold under store brand labels. Can-Am distributes a comprehensive line
of diabetes care products, including lancets, glucose tablets, syringes and
specialty skin creams.
WOMEN'S HEALTH
Women's health is the second largest self-test market in the U.S for medical
diagnostic products. In the women's health market, the Company manufactures and
markets home pregnancy and ovulation prediction tests under its Inverness
Medical, Inc. ("IMI") label and under various private labels. As of the end of
1998, the Company had become the second largest supplier (measured in total
units sold) of both pregnancy and ovulation prediction self-test kits in the
United States.
PREGNANCY PREDICTION PRODUCTS. The Pregnancy self-test kits are marketed in
both stick and cassette versions. The stick version has an exposed wick which
absorbs urine when placed in the urine stream, while the cassette version
requires the user to first collect a urine sample in a cup and then utilize an
enclosed dropper to place the urine sample in the test well. Both versions
employ identical technology enabling the display of visual results in
approximately three minutes. The pregnancy test kits are manufactured by CDIL in
Galway, Ireland.
OVULATION PREDICTION PRODUCTS. The Company's ovulation prediction test-kit,
marketed as the Early Ovulation Predictor under the Selfcare brand name and
under private label by various drugstore chains and mass merchandisers, provides
24 to 48 hour notice of when ovulation is likely to occur. By identifying the
days when a woman is most fertile, these products assists couples in their
family planning. The early ovulation predictor has an easy-to-use and easily
read self-test cassette that is used by applying a urine sample to the sample
well with a supplied dropper. Clinically accurate results are available in
approximately three minutes. The ovulation prediction test kits are manufactured
by Princeton BioMeditech.
NUTRITIONAL SUPPLEMENTS. The Company acquired the U.S. rights to a line of
nutritional supplements it acquired from American Home Products Corporation in
1997 (the "Nutritional Supplements"). These products are marketed by the
Company's subsidiary, IMI. Included in this product line are
Stresstabs-Registered Trademark- (a B-complex vitamin with folic acid),
Stresstabs-Registered Trademark- plus iron, Ferro-Sequels-Registered Trademark-
(an iron supplement) and Posture-Registered Trademark- (a calcium supplement),
which are targeted primarily at the women's health market. Since the
acquisition, the Company has strengthened this line by adding SoyCare-TM- for
Menopause and SoyCare-TM- for Bone Health, and has announced the introduction of
Protegra-Registered Trademark- Cardio, which the Company started shipping in the
first quarter of 1999. IMI also has announced the introduction of a new line of
nutritional supplements blended with herbal ingredients. These products consist
of: Stresstabs-Registered Trademark- PMS, which includes chaste tree berry
extract; Stresstabs-Registered Trademark- Menopause, which is formulated with
black cohosh and St. John's Wort; and SoyCare-TM- Prostate, which is formulated
with soy isoflavones and saw palmetto. Many of the ingredients are formulated at
levels at or similar to those documented in scientific studies to optimize
health and nutritional benefits. Other nutritional supplement products marketed
by IMI consist of Stresstabs-Registered Trademark- with Zinc,
Protegra-Registered Trademark-, ALLBEE-Registered Trademark- and
Z-BEC-Registered Trademark-. There can be no assurance that the new nutritional
supplement products will gain adequate market acceptance for the products to
succeed in the market or that the existing products will be able to compete with
comparable products already on the market or yet to be introduced. Many
companies in this market are substantially larger than the Company and,
therefore, may possess greater resources for advertising and promotion.
Stresstabs, Ferro-Sequels, Posture, Protegra, ALLBEE and Z-BEC, are registered
trademarks of IMI.
CLINICAL DIAGNOSTICS FOR INFECTIOUS DISEASES
Orgenics, Ltd., a wholly owned subsidiary of the Company and an Israeli
limited company ("Orgenics"), develops, manufactures, and markets self-contained
test kits for the professional market which detect antibodies and infectious
agents, including those associated with AIDS and chlamydia. Orgenics
manufactures professional diagnostic test products based on several proprietary
technological systems including
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genetic assays, immunoassays, rapid tests and confirmatory tests using multiple
antigens. These tests, or adaptations of them, are applicable to detecting a
wide variety of infectious diseases and agents, including HIV-1 and HIV-2,
hepatitis, and chlamydia. Orgenics' products are designed to enable
small-to-medium-sized laboratories to analyze low volumes of tests economically.
Orgenics markets a product called DoubleCheck-TM-, a single sample, compact
diagnostic device which, in its first commercialized application, detects HIV in
saliva and blood serum samples in less than ten minutes, making it suitable for
use in physicians' offices and other patient point-of-care sites. Orgenics'
current products are sold in more than 20 countries, principally in Europe,
Latin America, Africa and Asia. Orgenics has obtained regulatory approval for
sale of its DoubleCheck HIV test in France and Latin America. DoubleCheck is a
trademark of Orgenics.
MARKETING AND SALES
UNITED STATES
In the United States, Selfcare has created an effective, low overhead sales
network. The Company's sales efforts are currently focused on large drug, food
and mass merchandising retail chains, as well as wholesalers who service smaller
accounts. The Company currently contracts with its broker agencies
geographically distributed across the United States.
DIABETES MANAGEMENT PRODUCTS. During 1998, FastTAKE was distributed in the
United States and Canada through the Company's exclusive distribution agreement
with LifeScan. Can-Am distributes its diabetes care supplies in the United
States under its own brand and to private label retailers such as Wal-Mart, Rite
Aid and Walgreens.
WOMEN'S HEALTH PRODUCTS. The Company markets and distributes its women's
health products primarily through independent retail brokers and distributors.
The Company markets its over-the-counter pregnancy self-test kits under the IMI
label and a variety of private labels through major drug, food store and mass
merchandising chains. The ovulation prediction self-test products were sold
under the Selfcare brand in 1998 and will be sold under the IMI label in 1999.
The ovulation prediction products were also sold under a variety of private
labels during 1998. The ovulation and pregnancy prediction products are sold
through major drug, food store and mass merchandising chains. The Company
markets nutritional supplements through its existing retail distribution
channels. In 1998, the Company completed the redesign of the packaging of its
nutritional supplements and increased emphasis on the products' benefits for
women.
INTERNATIONAL
The Company markets and sells its products in several international markets.
In 1998, approximately 9% of the Company's net sales were to customers in Europe
and 8% of the Company's net sales were to customers in regions other than North
America and Europe.
DIABETES MANAGEMENT PRODUCTS. LifeScan commenced distribution of the
FastTAKE system in Germany in the first quarter of 1999. Selfcare anticipates
that LifeScan will begin distribution of the FastTAKE system in other European
countries during 1999. The Company also sells in Europe alternative glucose test
strips which are designed to be used in the meters of other leading
manufacturers.
WOMEN'S HEALTH PRODUCTS. The Company has sales offices in Germany and
Belgium that market its over-the-counter women's health self-test kits in
Europe.
CLINICAL DIAGNOSTICS PRODUCTS. Orgenics markets self-contained test kits for
the professional market which detect antibodies and/or infectious agents,
including those associated with AIDS and chlamydia. Orgenics markets a product
called DoubleCheck-TM-, a single sample, compact diagnostic device which detects
HIV in saliva and blood serum samples in less than ten minutes, making it
suitable for use in
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physicians' offices and other patient point-of-care sites. Orgenics' current
products are sold in more than 20 countries, principally in Europe, Latin
America, Africa and Asia.
STRATEGIC TRANSACTIONS
An important part of Selfcare's business strategy is to enter into strategic
alliances and licensing arrangements with third parties, primarily medical
products companies, for the development and distribution of certain products.
The Company also pursues a strategy of selective acquisitions of companies,
assets and technologies, which it believes will enhance its ability to offer and
distribute products to the diabetes monitoring and women's health markets.
PRINCETON BIOMEDITECH CORPORATION AGREEMENTS
On August 6, 1997, the Company and Princeton BioMeditech, together with
wholly-owned subsidiaries of each of the Company (the "Selfcare Sub") and
Princeton (the "Princeton Sub"), and PBM-Selfcare LLC, a limited liability
company owned and managed by the Company and Princeton (the "LLC"), entered into
a joint venture agreement (the "Joint Venture Agreement"). The purpose of the
LLC is to own, develop and exploit certain intellectual property rights related
to rapid immunochemical diagnostic tests (the "Intellectual Property"). Under
the Joint Venture Agreement, Princeton contributed its rights in the
Intellectual Property to the LLC while Selfcare Sub agreed to contribute up to
$2,000,000, on an as needed basis, to cover expenses incurred by the LLC in
enforcing the rights of the LLC in the Intellectual Property. Selfcare Sub and
Princeton Sub are each obligated to cover 50% of any other operating expenses of
the LLC. The LLC entered into license agreements with both Selfcare and
Princeton granting each a non-exclusive, worldwide, royalty-free license to the
Intellectual Property. During 1998, the Company incurred significant legal
expenses in connection with the lawsuit by Abbott Laboratories ("Abbott")
against the Company and Princeton BioMeditech relating to the intellectual
property.
MANUFACTURING
The Company has manufacturing facilities in Galway, Ireland; Inverness,
Scotland; and Yavne, Israel.
The Company contracts with third-party manufacturers to produce the
Nutritional Supplements and has contracted with Exel Logistics to warehouse and
ship the Nutritional Supplements to the Company's customers. If the Company
should encounter delays or other difficulties in the supply of any of these
products from third parties, these interruptions could have a material adverse
effect on the Company's result of operations and result in significant
quarter-to-quarter fluctuations. In addition, contract manufacturers that the
Company uses or may use to supply products for the Nutritional Supplements must
adhere to the FDA's Good Manufacturing Practices ("GMPs") regulations which
regulate the manufacturing process. Failure to do so could result in the
withdrawal of FDA approval of such manufacturers and consequent interruptions in
the supply of products to the Company.
The Company has entered into a manufacturing agreement with Nova Biomedical
Corporation ("Nova") to supply Selfcare with electrochemical blood glucose
meters. The meters manufactured by Nova, together with the Company's test
strips, form FastTAKE. The Company's ability to ship FastTAKE on time and in
accordance with LifeScan's requirements is highly dependent upon receipt of an
adequate supply of electrochemical blood glucose meters. There can be no
assurance that the Company's supply of electrochemical blood glucose meters will
not be interrupted, or that if such supply were interrupted, that the Company
would be able to contract with another supplier on a timely or satisfactory
basis. If such supply were interrupted, the Company could incur set-up costs and
delays in manufacturing FastTAKE which could have a material adverse effect on
the Company's business, financial condition and results of operations. If any
such delay were to occur, and were to result in the Company being unable to
supply LifeScan with certain required amounts of meters for FastTAKE under the
distribution agreement with LifeScan, LifeScan would automatically receive a
license to manufacture, or to have manufactured on its
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behalf, FastTAKE, subject to payment of a royalty to the Company. In such event,
the Company could begin supplying FastTAKE to LifeScan again at any time, but
would be required to reimburse LifeScan for certain expenses incurred by
LifeScan to produce FastTAKE.
The Company currently manufactures pregnancy self-test products at its
facility in Galway, Ireland. It obtains ovulation self-test products from
contract manufacturers. The Company has entered into an agreement with CP&S
pursuant to which CP&S will perform the final packaging of early pregnancy and
ovulation test kits. The Company believes that there are multiple qualified
sources for its existing women's health products and for the materials and
components used in the manufacture of its existing products and, therefore, does
not consider it necessary to maintain protected supply arrangements with any
supplier.
The Company manufactures at the Inverness Medical facility in Scotland the
disposable test strips for use with the FastTAKE system and the alternative test
strips used by the electrochemical blood glucose monitoring systems sold by
Menarini and B. Braun in Europe. Inverness Medical has made improvements in test
strip manufacturing process control that has increased reliability and accuracy.
The Inverness Medical facility has been configured for automated, low cost
production of disposable test strips for use with electrochemical blood glucose
monitoring systems. Can-Am purchases its products from various manufacturers and
has a supply agreement with A.M.G. Medical, Inc. for monolet lancets.
The production facilities of Orgenics are located in Yavne, Israel. Orgenics
manufactures professional diagnostic test products based on several proprietary
technological systems including genetic assays, immunoassays, rapid tests and
confirmatory tests using multiple antigens. These tests, or adaptations of them,
are applicable to detecting a wide variety of infectious diseases and agents,
including HIV-1 and HIV-2, hepatitis, and chlamydia.
PATENTS AND PROPRIETARY TECHNOLOGY; TRADEMARKS
SELF-TEST PRODUCTS
The medical products industry, including the diagnostic testing industry,
places considerable importance on obtaining patent and trade secret protection
for new technologies, products and processes, and the Company's success will
depend, in part, on its ability to obtain patent protection for its products and
manufacturing processes, to preserve its trade secrets and to operate without
infringing the proprietary rights of third parties.
The Company holds certain patent rights, has certain patent applications
pending, and expects to seek additional patents in the future. However, there
can be no assurance as to its success or timeliness in obtaining any such
patents or as to the breadth or degree of protection that any such patents will
afford the Company. The patent position of medical products and diagnostic
testing firms is often highly uncertain and usually involves complex legal and
factual questions. There is a substantial backlog of patents at the U.S. Patent
and Trademark Office. No consistent policy has emerged regarding the breadth of
claims covered in medical products patents. Accordingly, there can be no
assurance that patent applications relating to the Company's products or
technology will result in patents being issued; that, if issued, such patents
will afford adequate protection to the Company's products; or, if patents are
issued to the Company, that its competitors will not be able to design around
such patents. In addition, the medical products industry, including the
diagnostic testing industry, has been characterized by extensive litigation
regarding patents, licenses and other intellectual property rights. The Company
could and has incurred substantial costs in defending itself against patent
infringement claims and in asserting such claims against others. Under the
distribution agreement entered into with LifeScan, Selfcare has agreed to
indemnify LifeScan for any claims that FastTAKE infringes any patents. If the
outcome of any such litigation is adverse to the Company, the Company's business
could be materially adversely affected.
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To determine the priority of inventions, the Company may also have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office, which could also result in substantial costs to the Company.
See "Item 3. Legal Proceedings."
In addition, the Company may be required to obtain licenses to patents or
other proprietary rights of third parties to market its products. No assurance
can be given that licenses required under any such patents or proprietary rights
would be made available on terms acceptable to the Company, if at all. If the
Company does not obtain such licenses, it could encounter delays in product
market introductions while it attempts to design around such patents or other
rights, or be unable to develop, manufacture or sell such products in certain
countries or at all.
The Company also seeks to protect its proprietary technology, including
technology that may not be patented or patentable, in part through
confidentiality agreements and, if applicable, inventors' rights agreements with
its collaborators, advisors, employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise be disclosed to, or discovered by, competitors. Moreover, the Company
may from time to time conduct research through academic advisors and
collaborators who are prohibited by their academic institutions from entering
into confidentiality or inventors' rights agreements.
NUTRITIONAL SUPPLEMENTS
In connection with the acquisition of the Nutritional Supplements, the
Company acquired certain trademarks which, the Company believes, are valuable
assets and are important to the marketing of the Nutritional Supplements.
Substantially all of these trademarks have been registered with the U.S. Patent
and Trademark Office. There can be no assurance, however, that such
registrations will afford adequate protection to the Company and not be
challenged as unenforceable or invalid, or not be infringed. In addition, the
Company could incur substantial costs in defending suits brought against it or
in prosecuting suits in which the Company asserted rights under such
registrations. If the outcome of such litigation were adverse to the Company,
the Company's business and results of operations could be materially adversely
affected.
GOVERNMENT REGULATION
SELF-TEST PRODUCTS
The Company's research, development and clinical programs, as well as its
manufacturing and marketing operations, are subject to extensive regulation by
numerous governmental authorities in the United States and other countries. Most
of the Company's self-test products, including those licensed by the Company
from third parties, require governmental approvals for commercialization. New
products may require pre-clinical and clinical trials. Manufacturing and
marketing of many of the Company's products are subject to the rigorous testing
and approval process of the FDA and corresponding foreign regulatory
authorities. The regulatory process, which includes pre-clinical and clinical
testing of many of the Company's products to establish their safety and
efficacy, can take many years and require the expenditure of substantial
financial and other resources. Data obtained from pre-clinical and clinical
activities are susceptible to varying interpretations that could delay, limit or
prevent regulatory approval. In addition, delays or rejection may be encountered
based upon changes in, or additions to, regulatory policies for device marketing
authorization during the period of product development and regulatory review.
Delays in obtaining such approvals could adversely affect the marketing of
products developed by the Company and the Company's ability to generate
commercial product revenues.
In addition, the Company is required to meet regulatory requirements in
countries outside the United States, which can change rapidly with relatively
short notice, resulting in the Company's products being banned in certain
countries with consequent loss of revenues and income. Foreign regulatory
agencies
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could also introduce test format changes which, if not quickly addressed by the
Company, could result in restrictions on sales of the Company's products. Such
changes are not uncommon due to advances in basic research and the nature of
certain infectious diseases and agents such as HIV, which is a mutating virus
capable of producing new strains and subtypes. In July 1993, the French Ministry
of Health prohibited the sale in France of certain diagnostic tests for HIV, due
to a concern that the tests did not meet required sensitivity levels. The
Ministry of Health has subsequently imposed a separate ban on a single HIV test
manufactured and sold due to the failure of such test to identify a newly
discovered HIV subtype. There can be no assurance that there will not be similar
actions in the future.
NUTRITIONAL SUPPLEMENTS
The manufacturing, processing, formulation, packaging, labeling and
advertising of nutritional supplements such as the Nutritional Supplements are
subject to regulation by one or more federal agencies, including the FDA, the
Federal Trade Commission ("FTC") and the Consumer Product Safety Commission.
These activities are also regulated by various agencies of the states,
localities and foreign countries in which Nutritional Supplements are now sold
or may be sold in the future. In particular, the FDA regulates the safety,
manufacturing, labeling and distribution of dietary supplements, including
vitamins, minerals and herbs, as well as food additives, over-the-counter
("OTC") and prescription drugs and cosmetics. The GMPs promulgated by the FDA
are different for food and drug products. In addition, the FTC has overlapping
jurisdiction with the FDA to regulate the promotion and advertising of dietary
supplements, OTC drugs, cosmetics and foods.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA"), which
amends the Food, Drug and Cosmetic Act by defining dietary supplements as a new
category of food separate from conventional food, was enacted on October 25,
1994. The FDA has finalized certain regulations to implement DSHEA, including
those relating to nutritional labeling requirements, but has not finalized other
regulations. The finalized regulations require different labeling for the
Nutritional Supplements and, with respect to nutritional supplement products
under development by the Company, impose new notification procedures and
scientific substantiation requirements regarding ingredients, product claims and
safety. The Company cannot determine what effect these regulations will have on
its business in the future. Failure to comply with applicable FDA requirements
could result in sanctions being imposed on the Company or the manufacturers of
its products, including warning letters, product recalls and seizures,
injunctions or criminal prosecution. With respect to regulations that have not
been finalized, the Company anticipates that the FDA will promulgate specific
GMPs to regulate dietary supplements which are modeled on the current GMPs for
food. The Company believes that the manufacture of the Nutritional Supplements
is currently in compliance with the proposed GMPs for dietary supplements. No
assurance can be given that the final GMPs for dietary supplements will not
change in ways that require changes in the manufacture of the Nutritional
Supplements.
THIRD-PARTY REIMBURSEMENT
In both the United States and elsewhere, sales of some of the Company's
products may be dependent in part on the availability of reimbursement from
third-party payors, such as government and private insurance plans. Third-party
payors are increasingly challenging the prices charged for medical products and
services. If the Company succeeds in bringing one or more of such products to
market, there can be no assurance that these products will be considered
cost-effective, that reimbursement will be available or, if available, that the
level of reimbursement will be sufficient to allow the Company to sell its
products on a profitable basis.
PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE
The testing, manufacturing and marketing of medical diagnostic devices, such
as the Company's blood glucose monitoring systems, entail an inherent risk of
product liability claims. In addition, the marketing of
8
<PAGE>
the Nutritional Supplements may cause the Company to be subjected to various
product liability claims, including, among others, claims that the Nutritional
Supplements have inadequate warnings concerning side effects and interactions
with other substances. Potential product liability claims may exceed the amount
of the Company's insurance coverage or may be excluded from coverage under the
terms of the policy. There can be no assurance that the Company's existing
insurance can be renewed at a cost and level of coverage comparable to that
presently in effect, if at all. In the event that the Company is held liable for
a claim against which it is not indemnified or for damages exceeding the limits
of its insurance coverage, such claim could have a material adverse effect on
the Company's business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company is focusing its research and development efforts primarily on
the development of its diabetes products, including its electrochemical blood
glucose monitoring system, alternative test strips, and non-invasive blood
glucose technologies. In addition, the Company utilizes its in-house research
and development resources to adapt its existing technologies and technologies it
acquires from third parties into self-test formats, including formats addressing
HIV. The Company also seeks to develop new technologies which it is not able to
obtain from others. From time to time, the Company engages in co-development
projects with third parties with respect to new diagnostic products the Company
may want to market in the future. The Company may provide financial development
assistance to such parties and may also utilize its own research and development
resources to design certain portions of such products. The research and
development department of the Company, including Inverness Medical, CDIL and
Orgenics, employs 51 full-time researchers, including 26 Ph.D.'s. Total research
and development expenses for the years ended December 31, 1998, 1997 and 1996
were $7.4 million, $15.6 million and $6.6 million respectively. The Company
expects that it will spend a significant and increasing amount on research and
development efforts during the fiscal year ending December 31, 1999.
COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE
SELF-TEST PRODUCTS
The medical products industry, including the diagnostic testing industry, is
rapidly evolving and developments are expected to continue at a rapid pace.
Competition in this industry is intense and expected to increase as new products
and technologies become available and new competitors enter the market. The
Company's competitors in the United States and abroad are numerous and include,
among others, diagnostic testing and medical products companies, universities
and other research institutions. The Company's success depends, in part, upon
developing and maintaining a competitive position in the development of products
and technologies in its area of focus. The Company's competitors may succeed in
developing technologies and products that are more effective than those that
have been or are being developed by the Company or that render the Company's
technologies or products obsolete or noncompetitive. The Company's competitors
may also succeed in obtaining patent protection or other intellectual property
rights that would prevent the Company from developing its potential products, or
in obtaining regulatory approval for the commercialization of their products
more rapidly or effectively than the Company. Finally, many of the Company's
existing or potential competitors have or may have substantially greater
research and development capabilities, clinical, manufacturing, regulatory and
marketing experience and financial and managerial resources than the Company.
In the women's health market, the Company believes that it has already
developed a significant market penetration with its private label and branded
pregnancy and ovulation tests. The Company believes that it can continue to
compete effectively in the women's health market based on its planned product
line expansions, supported by its research and development capabilities, its
advanced manufacturing expertise, and its established distribution force.
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<PAGE>
The Company markets alternative test strips that are compatible with other
manufacturers' electrochemical blood glucose monitoring systems. If the Company
succeeds in the alternative strip market, others may attempt to enter this
market with similar products. In addition, the introduction of lower-priced
alternative test strips could lead the manufacturers of the systems with which
such test strips are compatible to lower their own test strip prices, thereby
reducing or eliminating the price advantage.
The Company is also aware of several of its competitors who are attempting
to develop a noninvasive blood glucose monitoring technology. Noninvasive blood
glucose monitoring involves methods for measuring blood glucose levels without
the need to draw blood and, in certain proposed configurations, without the need
to utilize disposable components, such as test strips. The Company believes that
manufacturers are pursuing a number of different technological approaches to
noninvasive blood glucose monitoring. These include near-infrared spectroscopy,
which involves shining a beam of near-infrared light to penetrate the skin and
determine the amount of glucose in the blood, and reverse iontophoresis, which
utilizes a "patch" system to extract glucose through the skin for measurement by
an external meter. In addition, several manufacturers are pursuing minimally
invasive approaches to blood glucose monitoring, such as using a fine needle to
withdraw a small sample of interstitial fluid which is analyzed by use of
mid-infrared spectroscopy. The development and successful introduction of any
such products by the Company's competitors could have a material adverse effect
on the Company's business, financial condition and results of operations.
NUTRITIONAL SUPPLEMENTS
The market for the sale of vitamins and nutritional supplements such as the
Nutritional Supplements is highly competitive. Competition is based principally
upon price, quality of products, customer service and marketing support. There
are numerous companies in the vitamin and nutritional supplement industry
selling products to retailers such as mass merchandisers, drug store chains,
independent drug stores, supermarkets and health food stores. A number of these
companies, particularly manufacturers of nationally advertised brand name
products, are substantially larger than the Company and have greater financial
resources. However, most of these companies are privately held and, therefore,
the Company is unable to assess precisely the size of such competitors.
ORGENICS INFECTIOUS DISEASE PRODUCTS
The primary competitors for Orgenics' ImmunoComb line of products are
standard, enzyme-linked immunoabsorbent assay ("ELISA") systems such as those
produced by Organon, Inc., Pasteur Sanofi Diagnostics, Abbott, Roche and other
diagnostic tests produced by Abbott and Ortho Diagnostic Systems, Inc. ELISA
tests are generally used by high-volume batch processors such as blood banks and
other centralized laboratories. In addition, there are other rapid testing
systems, generally for HIV, based upon immunoconcentration, which can provide
results in five to ten minutes. In contrast to ImmunoComb, an immunoassay-based
test which can be used to test simultaneously multiple samples for multiple
analytes, the immunoconcentration systems are single sample and mostly single
analyte systems. The Company believes that other characteristics of the
immunoconcentration systems are that: (i) the single sample presentation results
in production costs per test that are two to three times more expensive than
those of ImmunoComb, and (ii) the procedure for each immunoconcentration test
limits the number of tests that can be processed at one time resulting in less
flexibility in the number of samples that can be processed at one time. The
Company believes that Orgenics' DoubleCheck HIV test is competitive with
single-analyte immunoconcentration tests in speed, but will offer greater
sensitivity at a lower cost.
EMPLOYEES
As of December 31, 1998, the Company and its subsidiaries had a total of 524
full time employees, of which 40 employees are located in the United States. In
addition, the Company utilizes the services of a
10
<PAGE>
number of consultants specializing in research and development in the Company's
targeted markets, regulatory compliance, strategic planning, marketing and legal
matters.
SUBSEQUENT EVENTS
On January 8, 1999, the Company sold in a private placement 56,845 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 14,170
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 $7,404,500. 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 received payments totaling approximately $4.9 million for the Preferred
Shares prior to December 31, 1998. These cash receipts are recorded on the
Company's balance sheet at December 31, 1998.
U.S. Boston Capital Corporation ("U.S. Boston Capital") acted as placement
agent for a portion of the offering of the Preferred Shares for a cash
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 February 8, 1999, the Company reached a settlement of their dispute with
Enviromed, plc. See "Item 3. Legal Proceedings."
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal corporate administrative offices are housed in
10,000 square feet of leased space in Waltham, Massachusetts. The lease for this
facility is for a three-year term, expiring December 31, 1999 and provides for
monthly rent of $8,333. The Company also leases facilities in Brussels, Belgium
for a marketing and sales office and for warehousing, and in Munich, Germany for
offices and warehouse space. The lease for the Company's facility in Belgium
covers 262 square feet of space, provides for monthly rent of $700 and is
terminable on three months notice. The lease for the Company's facility in
Germany covers 1,247 square feet of space, provides for rent of $6,500 per month
and is for a term ending May 31, 2000. The Company believes that its current
facilities are adequate for its operations for the foreseeable future.
The Company's own manufacturing facilities are located in Ireland, Scotland
and Israel. The Inverness, Scotland facility consists of 50,500 square feet
(expanding to 103,500) and includes areas for manufacturing, warehousing,
research and development, and administrative offices. The Company currently
manufactures FastTAKE strips and alternative blood glucose strips at the
Inverness facility. The Inverness facility lease expires in 2016, with an option
to purchase at the open market value of the premises. CDIL is located in Galway,
Ireland in a 40,000 square foot facility, half of which is owned by the Company
and half of which is leased from a private developer under a lease that expires
in 2026. The Galway facility houses the central manufacturing, warehousing,
research and development, and administrative functions of CDIL, which was
responsible for the development, production and distribution of some of the
Company's infectious disease diagnostic products until the sale of that business
in September 1998. The Company currently manufactures its pregnancy products at
the Galway facility.
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<PAGE>
The FDA regulates companies that manufacture commercial medical devices and
requires that such companies manufacture such devices in a properly designed
environment. The Inverness facility was designed and constructed, and the Galway
facility has been upgraded, with the intention of complying with the FDA's GMPs
and requirements necessary for approvals and commercial sales within the United
States. The Company is required to register these facilities with the FDA and to
ensure that each meets the requirements of the GMPs prior to commercial sales in
the United States. Each registered facility is required to submit to an FDA
inspection no less frequently than every two years. The Company completed ISO
9002 regulation of the Galway facility in August 1996 and ISO 9001 regulation of
the Inverness facility in May 1998.
Orgenics houses its executive offices and development and manufacturing
operations in a leased facility of approximately 10,000 square feet in Yavne,
Israel. The lease for this facility expires in 2006 and carries rent of
approximately $21,000 per month. The facility includes a number of specialized
features and equipment, including environmentally controlled areas, customized
production equipment, and computerized systems for purchasing, inventory, and
materials tracking. Orgenics also maintains small sales offices in Paris,
France, Sao Paulo, Brazil, and Bogota, Columbia. The lease for the French office
runs through 2006 and carries monthly rent of approximately $6,000 which is
linked to the French building cost index. The lease for the Brazilian office is
for one year with monthly rent of approximately $2,000 and an option for another
year. The lease for the Columbian office is for one year with monthly rent of
approximately $1,300 with a non-limited option. The Company believes the
existing facilities are adequate for Orgenics' operations for the foreseeable
future.
The Company has insurance coverage for the properties and equipment that it
owns or houses.
ITEM 3. 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 Trademark- 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
12
<PAGE>
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
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<PAGE>
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 L437,000 in notes owed to Selfcare by Enviromed was rescheduled, and
(iii) Enviromed agreed to pay Selfcare an amount up to a maximum of L500,000,
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.
FLAMBELLE LIMITED AND EASTCOURT LIMITED V. SELFCARE, INC.
Trinity Biotech plc ("Trinity") and Eastcourt Limited ("Eastcourt") have
filed Schedule 13Ds with the Securities and Exchange Commission (the
"Commission") stating that Enviromed plc sold the Company's Common Stock held of
record by Enviromed to Flambelle Limited ("Flambelle"), a wholly-owned
subsidiary of Trinity, and Eastcourt, an entity owned 50% each by Enviromed and
Flambelle, on August 28, 1996. On November 1, 1996, Enviromed announced that it
had disposed of its holding of shares of Eastcourt to Flambelle for
consideration of $1.25 million. In December 1996, Eastcourt filed a Schedule
13D/A and Trinity and Flambelle filed a joint Schedule 13D with the Commission.
On February 12, 1997 Flambelle and Eastcourt commenced a lawsuit against the
Company in the United States District Court for the District of Massachusetts,
seeking a declaratory judgment that Flambelle and Eastcourt own the Common Stock
held of record by Enviromed and damages for alleged breach of a registration
rights agreement. As of March 6, 1998, the Company entered into a settlement
agreement with Trinity and Flambelle whereby the parties agreed that Flambelle
shall have title to 80% of the shares of Selfcare stock in dispute, amounting to
622,898 shares of the Company's Common Stock, and Selfcare shall have title to
20% of said shares, amounting to 155,724 shares of its Common Stock. Replacement
stock certificates have been issued and the lawsuit has been dismissed with
prejudice. Of the original 778,622 disputed shares, 185,094 shares were issued
in connection with the acquisition of certain manufacturing rights. The value of
such shares have been expensed in the Company's historical financial statements.
Accordingly, the Company has recorded the fair value of the shares recovered as
part of this settlement agreement, $1.5 million, as a component of other income
in the accompanying consolidated statements of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbol "SLF" The following table sets forth, for the periods
indicated, the high and low closing prices of the Common Stock on AMEX.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
1(st) Quarter............................................................................. $ 13.6250 $ 8.7500
2(nd) Quarter............................................................................. $ 13.6875 $ 8.6250
3(rd) Quarter............................................................................. $ 13.4375 $ 11.0000
4(th) Quarter............................................................................. $ 12.8750 $ 8.2500
Year ended December 31, 1998
1(st) Quarter............................................................................. $ 11.1250 $ 8.6250
2(nd) Quarter............................................................................. $ 11.6875 $ 9.2500
3(rd) Quarter............................................................................. $ 9.7500 $ 3.3750
4(th) Quarter............................................................................. $ 3.8125 $ 1.6250
</TABLE>
At March 22, 1999, there were 274 holders of record of the Company's Common
Stock.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, on the Common Stock will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion.
RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued unregistered securities to a limited number of
persons, as described below. No underwriters or underwriting discounts or
commissions were involved. There was no public offering in any such transaction,
and the Company believes that each transaction was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act").
On January 8, 1999, the Company sold in a private placement 56,845 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 14,170
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 $7,404,500. 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.
Although the sale of the Preferred Shares did not occur in the period covered by
this report, the Company received payments for the Preferred Shares prior to
December 31, 1998. The Company claimed 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
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<PAGE>
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.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 1995 1996 1997 1998
- --------------------------------------------------------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net revenue.............................................. $ 2,322 $ 7,239 $ 19,063 $ 52,250 $ 117,984
Operating loss........................................... (2,845) (5,560) (17,648) (18,768) (10,309)
Net loss................................................. (2,785) (10,097) (28,578) (24,710) (18,778)
Net loss per common share................................ $ (0.52) $ (2.61) $ (6.00) $ (3.36) $ (1.55)
Cash dividends paid per common share..................... $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AS OF DECEMBER 31,
(IN THOUSANDS) 1994 1995 1996 1997 1998
- ---------------------------------------------------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Total assets.............................................. $ 5,331 $ 13,692 $ 41,089 $ 95,372 $ 115,077
Debt obligations.......................................... 2,168 10,500 8,833 59,903 62,481
Mandatorily redeemable preferred stock.................... -- 1,644 1,754 1,868 3,718
Total stockholders' equity................................ $ 83 $ (5,230) $ 12,079 $ 5,441 $ 15,009
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues in 1998 increased $65.7 million or 126% to
$118.0 million from $52.3 million in 1997. The primary reason for the increase
in revenues was the addition of Can-Am acquired in February 1998 and the sales
of the FastTAKE system which the Company primarily started shipping in 1998. Net
sales from the Company's diabetes management segment were $57.2 million in 1998,
an increase of $56.8 million as compared to net sales of $434,000 in 1997. The
diabetes management net product sales accounted for 48.5% of the Company's net
revenues in 1998 compared to just 0.8% of the net revenues in 1997. Net sales
from the Company's women's health segment were $40.5 million in 1998, an
increase of $8.6 million or 27.1% as compared to $31.8 million in 1997. Although
the net sales of women's health products increased from 1997, they accounted for
a smaller percentage of the Company's net revenues due to the introduction of
the diabetes management products. The women's health product sales accounted for
34.3% of the Company's total net revenues in 1998 compared to 60.9% of the total
net revenues in 1997. The increase in the women's health segment is attributed
primarily to three factors. In 1998, the Company experienced the effect of a
full year's net sales of Nutritional Supplements compared with 10 1/2 months of
sales from the acquisition of these products in February, 1997. Secondly, the
Company introduced SoyCare-TM-, a new line of nutritional supplements for
menopause and bone health, in July 1998. The third factor in the increased net
sales of the women's health segment was an increase in sales of private label
pregnancy and ovulation tests. Other revenues were derived from the net sales of
clinical diagnostics products and the recognition of deferred revenue. Net sales
of the clinical diagnostic products for 1998 were $15.9 million, a decrease of
$2.2 million or 12.5% from net sales of $18.1 million in 1997. The decrease in
diagnostic product sales is partly due to the Company's sale of the diagnostics
business of CDIL in September 1998 in addition to a general decline in the sales
of the clinical diagnostics products. Grant and other revenue was $3.9 million
in 1998, an increase of $2.5 million or 187% from grant and other revenue of
$1.4 million in 1997. In 1998, the Company recognized $2.7 million of revenue
related to a $7.0 million success fee received from LifeScan in October 1996.
The Company recognized the revenue related to the success fee as FastTAKE meters
were shipped to LifeScan. The Company accelerated the recognition of this
revenue based on the change in estimated life of the current meter because of
the
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planned introduction of an improved meter. Approximately $1.2 million of the
revenues for 1998 was attributable to the amortization of deferred revenue
associated with certain development and capital grants relating to the Inverness
facility. In 1997, there was $1.1 million revenue recognized in connection with
the grants, most of which related to the Inverness facility.
GROSS PROFIT. Gross profit for 1998 increased $14.9 million or 57% to $40.9
million from $26.0 million in 1997. The increase in gross profit was primarily
attributable to the sale of FastTAKE and the inclusion of the products sold by
the newly acquired Can-Am. Gross profit as a percentage of net revenues
decreased to 35% in 1998 from 50% in 1997. The decrease in the gross profit as a
percentage of net revenues is attributed to the sale of meters for the FastTAKE
system, which are sold at cost. Gross profit on net sales of the diabetes
management segment was $7.8 million or 14% of the net sales of the diabetes
management segment for 1998. Gross profit on the women's health segment was
$20.2 million or 50% of the net sales of women's health products in 1998
compared to $15.9 million or 50% of the net sales of women's health products in
1997. The $4.3 million increase was primarily due to increases in the sales of
the nutritional supplements, including sales of SoyCare-TM-, a new product
introduced in 1998. Gross profit from net sales of clinical diagnostics and
other products, and the recognition of deferred revenue was $12.8 million in
1998 compared to $10.4 million in 1997. The increase was primarily attributable
to the revenue recognized on the aforementioned success fee.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1998
decreased $8.2 million or 53% to $7.4 million from $15.6 million in 1997. The
decrease was primarily due to the transition in December 1997 of the FastTAKE
system from research and development into production. The Company expects to
continue to spend significant and increasing amounts on research and development
throughout 1999.
CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT. There were no charges for
in-process research and development in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $10.7 million or 42% to $36.3 million from
$25.6 million in the 1997. The increase was primarily attributable to the
acquisition of Can-Am and marketing efforts and the hiring of additional staff
to support the sales of the women's health products, especially SoyCare-TM-.
Additionally, legal expenses were higher in 1998 due to litigation (See "Item 3.
Legal Proceedings"). Selling, general and administrative expense as a percentage
of net revenues decreased in 1998 from 1997. Selling, general and administrative
expense was 31% of net revenues for 1998 compared to 49% for 1997.
NET CHARGE ON BUSINESS DISPOSITION, ASSET IMPAIRMENT AND RESTRUCTURING
ACTIVITIES. On September 30, 1998, the Company sold the clinical diagnostics
business of its subsidiary, CDIL, to Trinity Biotech plc. ("Trinity") for
consideration of 555,731 shares of Selfcare. Common Stock, which was then owned
by Trinity, $230,000 in cash and other consideration valued at approximately
$43,000. The Company recorded a gain of approximately $1.2 million as a result
of the sale of the assets. In the fourth quarter of 1998, the Company recorded
charges totaling $7.8 million reflecting the change in the fair value of certain
assets that were no longer expected to contribute to the Company's
profitability. The Company also recorded a $810,000 restructuring charge related
to the discontinuance of development and manufacture of diabetes management
products at the Company's subsidiary, CDIL.
NON-CASH COMPENSATION EXPENSE. There were no non-cash compensation expenses
in 1998. The non-cash compensation expense of $168,000 for 1997 relates to the
compensation pertaining to the grant of certain stock options to employees.
INTEREST EXPENSE. Interest expense increased $4.1 million to $9.6 million
in 1998 from $5.5 million in 1997. In 1998, the Company recognized $1.8 million
of non-cash interest expense for the amortization of the original issue discount
on convertible notes and warrants. In 1997, the Company recognized $498,000 of
non-cash interest expense for the amortization of the original issue discount on
convertible notes and
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warrants. The increase in interest expense is due to new financing activities in
1998 that are described in this section under the caption of "Liquidity and
Capital Resources" and also due to a full year of interest expense on the
Subordinated Revenue Royalty Notes issued in mid-1997.
INTEREST AND OTHER INCOME, NET. Interest income decreased by $383,000 to
$585,000 in 1998 from $968,000 in 1997, primarily due to the decrease in cash
balances. The Company also recognized $1.5 million of non-cash income related to
155,724 shares of the Company's Common Stock received into treasury in
connection with the settlement agreement dated March 6, 1998 by and between the
Company, Trinity Biotech plc, Flambelle Limited and Eastcourt Limited. The
Company recognized a $251,000 gain in 1998 related to its 29.9% equity in the
net profit of Enviromed compared to a $327,000 loss recognized in 1997. The
Company incurred an unrealized loss of $717,000 in 1997 on the translation of
intercompany receivables. Fluctuations in foreign currency did not significantly
impact revenue performance measured in U.S. dollars for 1998. Substantially all
sales are paid in the functional currency of the selling entity.
DIVIDENDS AND MINORITY INTEREST. The Company's subsidiary in Inverness,
Scotland accrued $146,000 for 1998, representing a 6% dividend payable on its
outstanding cumulative redeemable preference shares, as compared to $114,000 for
1997. 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 was $100,000
in 1998 and $181,000 in 1997.
EXTRAORDINARY LOSS. In 1997, the Company incurred a non-cash charge of
$579,000 for the extinguishment of debt related to the Cambridge Diagnostics
Notes and EN PLC Notes which were exchanged for convertible notes.
INCOME TAXES. In 1998, the Company recorded provisions of $544,000 for
income taxes compared to $196,000 for 1997. The 1998 provision reflects certain
state income taxes relating to IMI and Can-Am, as well as capital gains taxes in
Ireland relating to the business disposition of CDIL. Substantially all of the
1997 provision relates to state income taxes.
NET LOSS. Net loss for 1998 was approximately $18.8 million or $1.55 per
common share as compared to $24.7 million or $3.36 per common share in 1997. The
net loss in 1998 and 1997 includes non-recurring, non-cash charges and income as
described above. Excluding the non-cash charges results in a net loss of $10.9
million or $0.91 per common share in 1998 as compared to $20.0 million or $2.50
per common share for 1997. These losses reflect continued spending on research
and development, expansion of the Company's sales and marketing efforts, the
hiring of additional staff to support the Company's operations and significant
interest expense on the Company's debts.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES. Net revenues in 1997 increased $33.2 million or 174% to $52.3
million from $19.1 million in 1996. Net product sales increased $36.8 million or
262% to $50.9 million from $14.1 million in 1996. The total net sales of the
Company's women's health products for 1997 were $31.8 million, an increase of
$24.5 million from net sales of $7.3 million in 1996. The primary reason for the
increase in revenues was the addition of the Nutritional Supplements acquired in
February 1997. Many of the Nutritional Supplements are marketed primarily for
women. Net sales of Nutritional Supplements were $18.1 million in 1997. The
remaining $6.4 million increase in the net sales of women's health products is
attributed to new private label accounts for the Company's pregnancy and
ovulation prediction self-tests. Net sales of clinical diagnostic products for
1997 were $18.1 million, an increase of $11.5 million or 175% from net sales of
$6.6 million in 1996. The increase in clinical diagnostic product sales is
primarily due to the Company's acquisition of Orgenics in October 1996. In
December 1997, the Company had its first sales of its electrochemical blood
glucose monitoring systems to LifeScan. The net sales to LifeScan was only
$144,000 and the total net sales of the diabetes management products was
$434,000 in 1997. Grant and other
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revenue was $1.4 million, in 1997, a decrease of $3.6 million or 73% from grant
and other revenue of $5.0 million in 1996. In 1996, the Company recognized $4.0
million of revenue related to a $7.0 million success fee received from LifeScan
in October 1996. The Company did not recognize revenue related to the success
fee in 1997. Approximately $1.1 million of the revenues for 1997 was
attributable to the amortization of deferred revenue associated with certain
development and capital grants relating to the Inverness facility. There was
approximately $722,000 of revenue recognized in connection with the grants
related to the Inverness facility for 1996.
GROSS PROFIT. Gross profit for 1997 increased $17.9 million or 220% to
$26.0 million from $8.1 million in 1996. Gross profit as a percentage of net
revenues increased to 50% for 1997 from 43% in 1996. Gross profit on the net
sales of women's health products was $15.9 million or 50% of the net sales of
women's health products in 1997 compared to $610,000 or 8% of the net sales of
women's health products in 1996. The increase in gross profit was primarily
attributable to the addition of revenue from the Nutritional Supplements. In
addition, the Company had recorded provisions for product returns in 1996 due to
consolidation in the industry and also realized cost reductions in 1997 from the
manufacture of pregnancy test sticks at the Company's facility in Galway,
Ireland. Gross profit on the net sales of clinical diagnostic products was $9.9
million or 54% of the net sales of clinical diagnostic products in 1997 compared
to $2.5 or 38% of the net sales of clinical diagnostic products in 1996. The
increase in gross profit on diagnostic product sales is primarily due to the
Company's acquisition of Orgenics in October 1996.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1997
increased $9.0 million or 135% to $15.6 million from $6.6 million in 1996. The
increase was primarily due to expenses incurred in connection with the
development of the Company's electrochemical blood glucose monitoring system and
increased spending on research related to non-invasive blood glucose
technologies. These development activities accounted for $11.5 million of the
1997 research and development expense.
CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT. A portion of the purchase
price of the Company's acquisition of Orgenics was allocated to in-process
research and development projects that did not achieve technological feasibility
and did not have future alternative uses. The total charge for in-process
research and development was $7.7 million of which $3.3 million was expensed in
1997 and $4.4 million was expensed in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $15.1 million or 144% to $25.6 million from
$10.5 million in the 1996. The increase was primarily attributable to the
acquisition of Orgenics and marketing efforts and the hiring of additional staff
to support the sales of the Nutritional Supplements. Selling, general and
administrative expense, as a percentage of net revenues, decreased during 1997
as compared to 1996. Selling, general and administrative expense was 49% of net
revenues for 1997 compared to 55% for 1996.
NON-CASH COMPENSATION EXPENSE. The non-cash compensation expense of
$168,000 for 1997 relates to the compensation pertaining to the grant of certain
stock options to employees. Substantially all of the non-cash compensation
expense for 1996 related to certain stock options granted to certain employees
of the Company. For 1996, the non-cash compensation expense related to stock
options granted to the Company's Chief Executive Officer in August 1995 was $3.2
million. Additional non-cash compensation expense of $680,000 for 1996 related
to stock options granted to certain other employees that were contingent on
certain goals that were met. In accordance with SFAS No. 123, Accounting for
Stock Based Compensation, the Company recorded non-cash compensation expense of
$76,000 for stock options granted to outside consultants. The remaining $199,000
of non-cash compensation expense for 1996 related to the amortization of
deferred compensation pertaining to the grant of certain stock options to
employees.
INTEREST AND OTHER INCOME (EXPENSE). In 1997, the Company recognized
$498,000 of non-cash interest expense for the amortization of the original issue
discount on convertible notes and warrants. In 1996, the
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Company recognized $10.6 million of non-cash interest expense relating to
certain warrants issued in connection with the acquisition of Cambridge
Diagnostics. The charge relates to the increase in the fair market value of the
underlying Common Stock at December 31, 1996 as compared to the estimated fair
market value at December 31, 1995. Excluding the aforementioned non-cash
charges, interest expense was $5.0 million for 1997 as compared to $662,000 for
1996. The increase in interest expense is due to new financing activities in
1997 that are described under the caption of "Liquidity and Capital Resources".
The interest expense on financing received in 1997 was $1.8 million on the loans
from Fleet National Bank, $400,000 on the AHP Note, $900,000 on the Subordinated
Revenue Royalty Notes, $800,000 on the Senior Subordinated Convertible Notes,
and $300,000 on a loan from LifeScan. Interest income increased by $425,000 to
$968,000 for 1997 from $543,000 in 1996, primarily due to larger cash balances.
The Company incurred an unrealized loss of $717,000 in 1997 on the
translation of intercompany receivables. Fluctuations in foreign currency did
not significantly impact revenue performance measured in U.S. dollars for 1997.
Substantially all sales are paid in the functional currency of the selling
entity. The Company recognized a $327,000 loss in 1997 related to its 28.9%
equity in the net loss of Enviromed compared to a $200,000 loss recognized in
1996.
DIVIDENDS AND MINORITY INTEREST. The Company's subsidiary in Inverness,
Scotland accrued $114,000 for 1997, representing a 6% dividend payable on its
outstanding cumulative redeemable preference shares, as compared to $110,000 for
1996. Minority interest in certain of the Company's subsidiaries was $181,000 in
1997 and $133,000 in 1996.
EXTRAORDINARY LOSS. In 1997, the Company incurred a non-cash charge of
$579,000 for the extinguishment of debt related to the Cambridge Diagnostics
Notes and EN PLC Notes which were exchanged for convertible notes.
INCOME TAXES. In 1997, the Company recorded provisions of $196,000 for
income taxes of which $175,000 is estimated Pennsylvania state income tax.
NET LOSS. Net loss for 1997 was approximately $24.7 million or $3.36 per
common share as compared to $28.6 million or $6.00 per common share in 1996. The
net loss in 1997 includes non-cash charges for (i) interest expense of $498,000,
(ii) an extraordinary loss on the extinguishment of debt of $579,000, and (iii)
in-process research and development of $3.3 million and (iv) equity in the net
loss of Enviromed of $327,000. The net loss in 1996 includes non-cash charges
for (i) interest expense of $10.6 million, (ii) compensation expense of $4.2
million, (iii) in-process research and development of $4.4 million and (iv)
equity in the net loss of Enviromed of $200,000. Excluding the non-cash charges
results in a net loss of $20.0 million or $2.50 per common share in 1997 as
compared to $9.2 million or $1.92 per common share for 1996. These losses
reflected increased spending on research and development as well as expansion of
the Company's sales and marketing efforts and the hiring of additional staff to
support the Company's operations.
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 secondary public
offering, funds received in connection with the LifeScan Alliance, private
placements of debt and equity securities, a bank line of credit and other
borrowings, cash from product sales and grants from government development
agencies.
In November 1994, Selfcare acquired CDIL from Cambridge Biotech Corporation
for an aggregate of $2.1 million and the assumption of certain liabilities. In
addition, the Company furnished Cambridge Diagnostics with a $900,000 working
capital line of credit. Selfcare financed the acquisition of Cambridge
Diagnostics by utilizing a bank line of credit and subsequently refinanced the
amount borrowed through the issuance of an aggregate of $3.0 million in original
principal amount of 10% promissory notes (the "CDIL Notes"), together with
attached warrants with an aggregate purchase price of $30,000 (the "CDIL
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Warrants"). The CDIL Notes were due March 31, 1998, and bore interest at the
rate of 10% per year. The number of shares of Common Stock issuable pursuant to
the CDIL Warrants is equal to 69% of the net sales of CDIL for the fiscal year
preceding the repayment of the CDIL Notes, divided by $32.87. Based on this
formula and CDIL's net sales for fiscal year 1995, had the CDIL Notes been
repaid on December 31, 1996, all of the CDIL Warrants would have become
exercisable for an aggregate of 1,142,635 shares of Common Stock. On December
31, 1996, the holders of $2.6 million in principal amount of the CDIL Notes
entered into agreements (the "Extension Agreements") to terminate and cancel
their CDIL Warrants, in exchange for which the Company agreed to transfer to
such holders, for no additional consideration, an aggregate of 990,050 shares of
Common Stock on the earlier of January 15, 2000, or the occurrence of a change
in control (as defined in the Extension Agreements) of the Company. In December
1997, the Company accelerated the issuance of the 1,142,635 shares to December
17, 1997. In December 1997, the Company entered into exchange agreements with
the holders of approximately $2.95 million of CDIL Notes pursuant to which the
Company exchanged notes convertible into shares of Common Stock (the
"Convertible CDIL Notes") for the CDIL Notes. The Convertible CDIL Notes were
issued in a principal amount equal to the principal amount of the CDIL Notes
exchanged by the holders thereof plus accrued interest at the rate of 10% per
annum, and were automatically converted at a price of $7.225 per share into
428,713 shares of Common Stock on June 12, 1998. The conversion price represents
a 15% discount from the closing price of the Company's Common Stock on the date
immediately preceding the effective date of the exchange of the CDIL Notes for
the Convertible CDIL Notes, reflecting, in part, the fact that shares are not
registered under the Securities Act. The direct and indirect holders of CDIL
Notes included the following directors and officers, which directors and
officers exchanged an aggregate principal amount of approximately $866,000 of
CDIL Notes on identical terms with all other holders of CDIL Notes: John F.
Levy, David Scott, Willard L. Umphrey and Ron Zwanziger. In addition, U.S.
Boston Capital, a broker-dealer, the President of which is Willard L. Umphrey, a
Director and principal stockholder of the Company, received a fee of three
percent (3%) of the principal amount of the CDIL Notes exchanged as compensation
for services rendered by U.S. Boston Capital in connection with the exchange.
The Company received $1.6 million in June, 1995 from an investment by
Inverness & Nairn Local Enterprise Corporation ("INLEC"), a development agency
funded by the government of the United Kingdom, in 1,000,000 shares of 6%
Cumulative Redeemable Preference Shares (the "Inverness Preference Shares") of
Inverness to finance a portion of the start-up costs relating to the facility in
Inverness, Scotland. The Inverness Preference Shares held by INLEC (including
cumulative dividends) are reflected in the accompanying consolidated balance
sheets as mandatorily redeemable preferred stock of a subsidiary. The Company
must redeem all 1,000,000 Inverness Preference Shares by May 31, 2000. If the
Company cannot legally redeem the Preference Shares on that date, it must redeem
the shares as soon as legally permissible at a price of approximately $1.91 per
share plus any accrued and unpaid dividends. Upon liquidation of Inverness, the
holders of Inverness Preference Shares are entitled to receive approximately
$1.59 per share, plus any accrued and unpaid dividends; thereafter, the ordinary
stockholders shall equally share with the holders of Inverness Preference Shares
in the remaining assets to be distributed. The holders of the Inverness
Preference Shares do not have any voting rights. In October, 1998, the Company
received $1.7 million in from INLEC, for 1,000,000 additional Preference Shares
of Inverness. The additional Inverness Preference Shares are due in October 2003
and contain the same terms as the Preference Shares that were issued in 1995.
On August 6, 1997, the Company and Princeton, together with the Selfcare
Sub, the Princeton Sub and the LLC entered into the Joint Venture Agreement. The
purpose of the LLC is to own, develop and exploit the intellectual property
related to rapid immunochemical diagnostic tests. Under the Joint Venture
Agreement, Princeton contributed its rights in the Intellectual Property to the
LLC while Selfcare Sub agreed to contribute up to $2,000,000, on an as needed
basis, to cover expenses incurred by the LLC in enforcing the rights of the LLC
in the Intellectual Property. Selfcare Sub and Princeton Sub are each obligated
to cover 50% of any other operating expenses of the LLC. The LLC entered into
license agreements with both Selfcare and Princeton granting each a
non-exclusive, worldwide, royalty-free license
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to the Intellectual Property. To date the Company has not incurred material
costs pursuant to the Joint Venture Agreement but the LLC filed a lawsuit
against Abbott Laboratories in October 1998 (See "Item 3. Legal Proceedings").
In October 1996, the Company purchased 200,000 common shares of Enviromed
plc ("Enviromed") and agreed to purchase EN PLC Limited Partnership's ("EN PLC")
holdings of 7,961,386 common shares of Enviromed for a promissory note with a
principal amount of approximately $3.8 million. In November 1996, the Company
purchased an additional 100,000 common shares of Enviromed. Effective as of
January 1, 1997, the Company and EN PLC entered into an amendment to the
agreement (the "EN PLC Agreement") with EN PLC pursuant to which the Company
agreed to issue two promissory notes, in principal amounts of approximately $2.8
million and $1.0 million, respectively, evidencing the purchase price under the
EN PLC Agreement (the "EN PLC Notes"). In December 1997, the Company exchanged
notes that are convertible into shares of Common Stock (the "Convertible EN PLC
Notes") in a principal amount equal to approximately $1.6 million for payments
due in January and April 1998 under the EN PLC Notes. The Convertible EN PLC
Notes accrued interest at the rate of 10% per annum, and were automatically
converted at a price of $7.225 per share into shares of Common Stock on June 12,
1998. The EN PLC Conversion Price represents a 15% discount from the closing
price of the Company's Common Stock on the date immediately preceding the
effective date of the exchange of the amounts due under the EN PLC Notes in
January and April 1998 for the Convertible EN PLC Notes, reflecting, in part,
the fact that shares are not registered under the Securities Act. The holders of
EN PLC Notes included the following directors and officers, which directors and
officers exchanged an aggregate amount of approximately $774,000 on identical
terms with all other holders of EN PLC Notes: Carol R. Goldberg, John F. Levy,
Willard L. Umphrey and Ron Zwanziger.
On February 19, 1997, the Company's subsidiary, IMI, acquired Nutritional
Supplements from AHP. As consideration for the Nutritional Supplements, IMI paid
to AHP $30.0 million in cash and the Company issued to AHP a $6.0 million
promissory note (the "AHP Note"). The Company funded the cash portion of the
purchase price with a credit facility consisting of a $25.0 million term loan
(the "AHP Term Loan") and a $5.0 million bridge loan (the "AHP Bridge Loan").
The AHP Bridge Loan was repaid June 4, 1997. The Company paid the AHP note in
three installments during 1998. The Company paid $3.0 million of principal on
the AHP Term Loan in 1997 and paid the remainder of the AHP Term Loan on
February 19, 1998 from funds received from The Chase Manhattan Bank ("Chase")
(described below).
On February 18, 1998, IMI acquired Can-Am, a leading supplier of diabetes
care products, for approximately $27.9 million, consisting of $13.6 million in
cash, notes in the aggregate principal amount of $2 million (subject to
potential premiums of up to an additional $2 million in the aggregate based upon
increases in the Company's common stock during the term of the Notes) and
approximately 1.1 million shares of the Company's Common Stock.
In consideration for the sale of his interest in Can-Am, Mr. Oringer, a
Director of the Company, received from the Company 277,083 shares of the
Company's Common Stock and a Non-Negotiable Note, maturing February 18, 2001, in
the principal amount of $500,000, bearing interest at an annual rate of 6%. In
connection with the acquisition, Can-Am entered into a supply agreement with
A.M.G. Medical, Inc. ("AMG") whereby Can-Am agreed, with certain exceptions, to
purchase 100% of its requirements for monolet-compatible lancets from AMG for so
long as Can-Am is in the business of selling monolet compatible lancets. In
addition, Can-Am entered into a management services agreement with AMG whereby
AMG will provide labor, office space, office related services and insurance to
Can-Am for a term of five years. Under the management services agreement, Can-Am
will pay AMG a fixed fee to cover the costs of office space, taxes, heating,
maintenance and insurance costs associated therewith, office expenses and
telephone and computer equipment and access expenses ("Fixed Fee"); a variable
fee to cover the costs of salaries, overtime pay, bonuses and related
compensation of employees providing services to Can-Am ("Variable Fee"); and the
costs of all direct expenses incurred by AMG, including supply expenses, postage
costs, printing costs, and other miscellaneous charges and expenses ("Direct
Expenses").
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During the first year of the term of the management services agreement, the
Fixed Fee was $112,800. This Fixed Fee will increase by 5% annually and is
subject to change after renegotiation based upon changes in the scope of
services required by Can-Am. The Variable Fee is based on the actual salaries
paid by AMG to the AMG employees providing services to Can-Am and the percentage
of their time such employees devote to providing services to Can-Am. The Direct
Expenses are based on the actual costs AMG incurs. Robert Oringer's wife owns
33% of AMG through a personal holding company.
To fund the cash portion of the purchase price for Can-Am, the Company and
IMI entered into a $42 million credit agreement with Chase. The new credit
agreement consists of a $37 million term loan and a $5 million revolving line of
credit. Of the proceeds from this term loan, IMI used $32 million to finance the
cash portion of the Can-Am purchase price and to refinance the then existing
bank debt with Fleet National Bank. The remaining $5 million was used to repay a
$5 million note payable by IMI to the Company. IMI uses the remaining
availability under the new credit facility to fund working capital.
The new credit agreement requires compliance with various financial and
non-financial covenants for both the Company and IMI. The primary financial
covenants pertain to, among other things, interest coverage, debt services
coverage, leverage, and earnings before interest, taxes, depreciation and
amortization (EBITDA).
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.
Borrowings are secured by IMI's stock, and the assets of IMI, Can-Am and the
Company and its subsidiaries. Borrowings under the revolving line of credit are
based on certain percentages of eligible assets, as defined in the credit
agreement. IMI is required to pay an annual fee of .375% for the unused portion
of the revolving line of credit. The revolving line of credit expires on
February 18, 2002.
IMI is required to make quarterly principal payments ranging from $1.3
million to $1.95 million through December 31, 2003. IMI and the Company must
also make mandatory prepayments on the term loan if they meet certain cash flow
thresholds, sell assets outside of the ordinary course of business, issue or
sell indebtedness or issue stock, as defined in the credit agreement. IMI made
three quarterly principal payments totaling $4.3 million in 1998.
On March 31, 1998, the Company finalized an agreement with USB '93, whereby
the Company agreed to purchase the interests of USB '93, effective February 25,
1998, for an aggregate purchase price of $4.9 million, payable in 487,017 shares
of the Company's common stock and $360,000 in cash. At the time of the purchase,
USB '93's assets consisted primarily of a core immuno-assay technology. The
Company reduced the value of the intangible asset by $397,000, representing the
amount of unrecognized deferred revenue related to the Company's sale of the
technology to USB '93 in December 1993. The remaining intangible asset will be
amortized over its estimated useful life of 15 years. As a result of this
transaction, the Company will no longer pay royalties to USB '93 of 1.5% of
product sales, which were due pursuant to the license and development agreement.
On June 26, 1998, the Company entered into a securities purchase agreement
to sell Units (the "Units") having an aggregate purchase price of $10.2 million.
Each Unit consists of (i) $25,000 in principal amount of a Subordinated Note
(individually a "Note" and collectively the "Notes") and (ii) a warrant
(individually a "Warrant" and collectively the "Warrants"), to acquire such
number of shares of the Company's Common Stock as is determined by dividing
$3,750 by the Exercise Price (as hereinafter defined) as of the date of issuance
of such Warrant. The "Exercise Price" as of a particular date means the average
of the closing prices for shares of the Company's Common Stock on the American
Stock Exchange for the five trading days immediately preceding such date. The
issue price for each Unit was $25,000. The Notes are due on the second
anniversary of their date of issuance and the Warrants may be exercised, in
whole or in part, at any time on or prior to the fifth anniversary of their
issuance.
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The Notes bear interest at a rate equal to thirteen percent (13%) per annum
and are payable quarterly on the first day of each quarter, beginning October 1,
1998. Interest or principal which is not paid when due shall bear interest,
compounded daily, at the rate of eighteen percent (18%). Whenever the Company
makes a payment of principal under the Notes, it shall at the same time pay a
premium (the "Premium") equal to 5% of the principal amount then being paid. The
Notes may be prepaid by the Company in whole or in part at any time after
December 31, 1998 so long as the Company at the same time pays the holder of the
Notes the Premium with respect to the principal amount then being prepaid.
On June 26, 1998, the Company sold Units consisting of an aggregate of $4.9
million of Notes and Warrants exercisable for 72,588 shares at $10.125 per
share. On July 17, 1998, the Company sold Units consisting of an aggregate of
$2.45 million of Notes and Warrants exercisable for 40,330 shares at $9.1125 per
share. On August 28, 1998, the Company sold Units consisting of an aggregate of
$2.85 million of Notes and Warrants exercisable for 68,813 shares at $6.2125 per
share.
U.S. Boston Capital acted as placement agent for the offering of the Notes.
As compensation for its services as placement agent, U.S. Boston Capital
received a cash commission of $612,000, which the Company recorded as deferred
financing costs and will amortize over the 2-year life of the Notes. U.S. Boston
Capital was also reimbursed for the fees and disbursements of its counsel and
received a non-accountable expense allowance of $10,200. Jonathan J. Fleming,
John F. Levy, and Willard L. Umphrey, Directors of the Company, purchased Units
with an aggregate issue price of $775,000 on June 26, 1998.
Pear Tree Royalty Company, Inc. ("Pear Tree Royalty Company"), as the
authorized representative of the Noteholders, received a Warrant, at each
closing at which Units were sold, for a number of shares equal to one-third of
the aggregate number of shares issuable under the other Warrants issued at such
closing. Mr. Umphrey, a Director of the Company, is also a Director and
shareholder of Pear Tree Royalty Company. Pear Tree Royalty Company received a
Warrant for 24,196 shares on June 26, 1998, a Warrant for 13,443 shares on July
17, 1998, and a Warrant for 22,938 shares on August 28, 1998.
Upon issuance of the Notes and Warrants on June 26, 1998, July 17, 1998, and
August 28, 1998, the Company allocated $826,000 of the proceeds to the Warrants
and is amortizing the related original issuance discount and deferred financing
costs over the two-year life of the Notes.
At December 31, 1998, the Company had cash and cash equivalents of $9.2
million, a $6.5 million decrease from December 31, 1997. Cash used for
operations in 1998 was $11.8 million due largely to net losses of $18.8 million
in 1998. However, the net loss for 1998 included $13.1 million of non-cash
items. Other uses of cash in operating activities included increases in both
accounts receivable and inventory totaling approximately $7.0 million reflecting
the Company's working capital needs related to its increase in sales. Cash was
provided for operations in part by an net increase in accounts payable, accrued
expenses, and other current liabilities of $664,000.
During 1998, the Company used $1.4 million to purchase property and
equipment. Approximately $758,000 of the purchased property and equipment was
for the Inverness facility.
As of December 31, 1998, the Company had approximately $13.0 million and
$34.5 million of domestic and foreign net operating loss carryforwards,
respectively, and approximately $65,000 of research and development tax credit
carryforwards, which expire at various dates through 2013. These losses and tax
credits are available to reduce federal taxable income and federal income taxes,
respectively, in future years, if any. These losses and tax credits are subject
to review and possible adjustment by the Internal Revenue Service and may be
limited in the event of certain cumulative changes in ownership interests of
significant shareholders over a three-year period in excess of 50%. The Company
has recorded a 100% valuation allowance against these deferred tax assets, as
the realization of such assets is uncertain.
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 at least the next 12 months. The
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Company currently plans to continue its research and development of new
technologies and pursue the acquisition of new products and technologies,
whether through licensing arrangements, business acquisitions, or otherwise. The
Company anticipates that it will be required to raise substantial additional
funds for such projects or strategies. 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 be required to significantly curtail one or
more of its research and development programs, or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies or products which the
Company would otherwise pursue on its own.
SUBSEQUENT EVENTS
On January 8, 1999, the Company sold in a private placement 56,845 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 14,170
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 $7,404,500. 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 received payments totaling approximately $4.9 million for the Preferred
Shares prior to December 31, 1998.
U.S. Boston Capital Corporation ("U.S. Boston Capital") acted as placement
agent for a portion of the offering of the Preferred Shares for a cash
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 February 8, 1999, the Company and Enviromed reached a settlement whereby
(i) the 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 Inverness Medical Limited subsidiary, (ii) the payment of
L437,000 in notes owed to Selfcare by Enviromed was rescheduled, and (iii)
Enviromed agreed to pay Selfcare an amount up to a maximum of L500,000, based
upon purchases by Selfcare from an Enviromed subsidiary in excess of certain
minimums.
CERTAIN FACTORS AFFECTING FUTURE 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 35.
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RISK OF INADEQUATE FUNDING; FUTURE CAPITAL NEEDS
Selfcare anticipates that during 1999, it will need to raise additional
capital to help fund our research and development, 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 7. 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-TM- 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;
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- 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-TM-, our proprietary electrochemical blood glucose monitoring system
for the management of diabetes. We commenced shipments of FastTake-TM-in
December 1997. FastTake-TM- 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-TM-.
Although the FastTake-TM- product appears to be gaining acceptance, we cannot
assure you that the market will fully accept FastTake-TM- or that any acceptance
will continue. Any failure by us to produce or failure of LifeScan to market and
distribute FastTake-TM- 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 testing 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.
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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-TM-, infringes upon a patent held by Abbott. Although we believe that
the pregnancy detection and ovulation prediction products and FastTake-TM- 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-TM-infringes any patents. For a more in-depth discussion of this
litigation, see the section entitled "Litigation".
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-TM-, which is compatible with the ExacTech-TM- 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.
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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 successful development and introduction of any
such products could reduce the demand for meters and test trips such as
FastTake-TM- and Excel-TM-.
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.
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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 "Item 3. 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
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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 are now taking the further necessary steps
to make our core computer information systems, in those situations in which we
are required to do so, Year 2000 compliant. We are in the process of obtaining
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. We expect that most
vendors will provide us with such verifications, or commitments to provide
solutions, by May 31, 1999.
In addition, we are currently evaluating and assessing our other computer
systems that do not relate to information technology but include embedded
technology, such as telecommunications, security, fire and safety systems, and
expect that our assessment will be completed by May 31, 1999. We are aware that
such systems contain embedded chips that are difficult to identify and test and
may require complete replacement because they cannot be repaired.
We are seeking written verification from our significant customers,
suppliers, and service providers that they will be Year 2000 compliant by no
later than May 31, 1999. 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 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 expect an
upgrade for our electronic data interface software that has been designed to be
Year 2000 compliant by May 31, 1999. The programmatic logic controls are in the
process of being tested for Year 2000 compliance.
TESTING. To attempt to confirm that our computer systems are Year 2000
compliant, we expect to perform limited testing of our computer information
systems and our other computer systems that do not relate to information
technology but include embedded technology. Unless Year 2000 issues arise in the
course of our limited testing, 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
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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. Testing of
some systems is in process and we currently expect that our testing will be
complete by May 31, 1999. We have tested the software in the FastTake-TM- blood
glucose monitoring system and believe that it is Year 2000 compliant.
COSTS TO ADDRESS OUR YEAR 2000 ISSUES. We anticipate that the primary cost
of Year 2000 compliance will be the cost of testing. 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 and additional capital, either through
borrowing and/or issuance of debt or equity securities. 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 are still in the process of
evaluating potential disruptions or complications that might result from Year
2000 related problems; however, at this time 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 facts
presently known to us, 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 intend to develop 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. Development of these contingency plans is currently
scheduled to occur before May 31, 1999, and as otherwise appropriate.
The preceding "Year 2000 Readiness Disclosure" contains various
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements represent 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
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legal currency. As a result, the Euro now trades on currency exchanges and is
available for non-cash 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
September 30, 1998, our accumulated deficit totaled approximately $75.5 million.
For the nine months ended September 30, 1998, we had revenues of approximately
$89.0 million and a net loss of approximately $5.3 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;
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- 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, 56,845 shares of Series C Convertible
Preferred Stock, 3,030 shares of Series D Convertible Preferred Stock and 14,170
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 stock holders.
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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.
ITEM 7A. 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 December 31, 1998, 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. 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.
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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 December
31, 1998, the assets related to non-dollar-denominated currencies was
approximately $22.0 million.
ITEM 8. FINANCIAL STATEMENTS
See Financial Statements and Schedules attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors, executive officers and significant
employees of the Company included in the Company's definitive Proxy Statement to
be filed pursuant to Regulation 14A in connection with its 1999 Annual Meeting
of Shareholders (the "Proxy Statement") is incorporated herein by reference in
response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information included in the Proxy Statement is incorporated herein by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included in the Proxy Statement is incorporated herein by
reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included in the Proxy Statement is incorporated herein by
reference in response to this Item 13.
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PART IV
ITEM 14. EXHIBITS LIST AND REPORTS ON FORM 8-K.
a) The following documents are filed as part of this Annual Report on Form
10-K/A:
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1. Financial Statements--See Index on page F-1.
2. The following is a complete list of Exhibits filed as part of this Annual Report on
Form 10-K/A:
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
3.2 Certificate of Designation for the Selfcare, Inc. Series A Convertible Preferred
Stock (incorporated by reference to Exhibit 3.2 to the Company's Registration
statement on Form SB-2, No. 333-19911)
3.3 Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
4.1 Specimen certificate for shares of Common Stock, par value $.001 per share, of the
Company (incorporated by reference to Exhibit 4.1 to the Company's Registration
statement on Form SB-2, No. 333-4830-NY)
4.2 Specimen certificate for shares of Series A Convertible Preferred Stock, par value
$.001 par share, of the Company (incorporated by reference to Exhibit 4.2 to the
Company's registration statement on Form SB-2, No. 333-19911)
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 19, 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 19, 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 19, 1999)
9.1 Voting Agreement, dated May 13, 1996, by and among the stockholders of Selfcare,
Inc. who are signatories thereto. (incorporated by reference to Exhibit 9.1 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.1 Agreement, dated March 22, 1996, between Selfcare, Inc. and Princeton BioMeditech
Corporation (incorporated by reference to Exhibit 10.1 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.2 Master Agreement, dated as of November 10, 1995, by and among Johnson & Johnson
Development Corporation, LifeScan, Inc. and Selfcare, Inc. (incorporated by
reference to Exhibit 10.2 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.3 Form of Sales Distribution Agreement for Testing System for Blood Glucose between
LifeScan, Inc. and Selfcare, Inc. (incorporated by reference to Exhibit 10.3 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.4 Investment Agreement, dated as of November 10, 1995, by and between Johnson &
Johnson and Selfcare, Inc. (incorporated by reference to Exhibit 10.4 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.5 Master Agreement, dated as of November 30, 1994, among Selfcare, Inc., Cambridge
Biotech Limited (Cambridge Diagnostics Ireland Limited) and Cambridge Biotech
Corporation
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(incorporated by reference to Exhibit 10.5 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.6 Sale and Subscription Agreement, dated as of November 30, 1994, between Cambridge
Biotech Limited (Cambridge Diagnostics Ireland Limited), Cambridge Biotech
Corporation and Selfcare, Inc. (incorporated by reference to Exhibit 10.6 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.7 Indemnification Agreement dated as of November 30, 1994, by and between, Cambridge
Biotech Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland
Limited) (incorporated by reference to Exhibit 10.7 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.8 License Agreement [CAPILLUS], dated November 30, 1994, between Cambridge Biotech
Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.8 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.9 License Agreement [HIV 1/2 EIA], dated November 30, 1994, between Cambridge Biotech
Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.9 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.10 License Agreement [HIV 1/2 RTD], dated November 30, 1994, between Cambridge Biotech
Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.10 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.11 License Agreement [LYME], dated November 30, 1994, between Cambridge Biotech
Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.11 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.12 License Agreement [RAPID TEST], dated November 30, 1994, between Cambridge Biotech
Corporation and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.12 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.13 License Agreement [HEP D], dated November 30, 1994, between Cambridge Biotech
Limited (Cambridge Diagnostics Ireland Limited) and Cambridge Biotech Corporation
(incorporated by reference to Exhibit 10.13 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.14 Shareholders' Agreement, dated November 30, 1994, by and among Selfcare, Inc.,
Cambridge Biotech Corporation and Cambridge Biotech Affiliated Corporation)
(Cambridge Affiliate Corporation) (incorporated by reference to Exhibit 10.14 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.15 Management Agreement, dated November 30, 1994, between Cambridge Biotech Affiliated
Corporation (Cambridge Affiliate Corporation) and Cambridge Biotech Limited
(Cambridge Diagnostics Ireland Limited) (incorporated by reference to Exhibit 10.15
to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.16 Manufacturing Agreement, dated November 30, 1994, between Cambridge Biotech
Affiliated Corporation (Cambridge Affiliate Corporation) and Cambridge Biotech
Limited (Cambridge Diagnostics Ireland Limited) (incorporated by reference to
Exhibit 10.16 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
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10.17 Sales Agent Agreement, dated November 30, 1994, between Cambridge Biotech Affiliated
Corporation (Cambridge Affiliate Corporation) and Cambridge Biotech Limited
(Cambridge Diagnostics Ireland Limited) (incorporated by reference to Exhibit 10.17
to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.18 Stock Purchase Agreement, dated as of March 8, 1994, among Selfcare, Inc., Ron
Zwanziger and Enviromed plc (incorporated by reference to Exhibit 10.18 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.19 Registration Rights Agreement, dated April 5, 1994, between Selfcare, Inc., USB "93
Technology Associates Limited Partnership and Enviromed plc (incorporated by
reference to Exhibit 10.19 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.20 Shareholders' Agreement, dated as of March 15, 1994, among Selfcare, Inc., USB "93
Technology Associates Limited Partnership, Enviromed plc and the Ron Zwanziger
Family Trust (incorporated by reference to Exhibit 10.20 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.21 Technology Purchase and Sale Agreement, dated as of December 29, 1993, between
Selfcare, Inc. and USB "93 Technology Associates Limited Partnership (incorporated
by reference to Exhibit 10.21 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.22 Technology License and Development Agreement, dated as of December 29, 1993, between
Selfcare, Inc. and USB "93 Technology Associates Limited Partnership (incorporated
by reference to Exhibit 10.22 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.23 Guarantee and Debenture, dated August 30, 1995, between Cambridge Biotech Limited
(Cambridge Diagnostics Ireland Limited) and USB "93 Technology, Inc. (incorporated
by reference to Exhibit 10.23 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.24 Guarantee of Selfcare, Inc., dated June 11, 1995, in favor of Highlands and Islands
Enterprises (incorporated by reference to Exhibit 10.24 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.25 Guarantee of Selfcare, Inc., dated June 11, 1995, in favor of Inverness and Nairn
Enterprise Company (incorporated by reference to Exhibit 10.25 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.26 Investment and Loan Agreement, dated December 24, 1995, by and between Orgenics Ltd.
and Selfcare, Inc. (incorporated by reference to Exhibit 10.26 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.27 Form of Option Agreement by and between Selfcare, Inc. and stockholders of Orgenics,
Ltd. and Orgenics International Holdings, B.V., together with letter amendment
thereto dated July 11, 1996. (incorporated by reference to Exhibit 10.27 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.28 Grant Agreement, dated February 21, 1992, among The Industrial Development Authority
of Ireland, Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited) and
Cambridge Biotech Corporation (incorporated by reference to Exhibit 10.28 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.29 Grant Agreement, dated October 2, 1992, among The Industrial Development Authority
of Ireland, Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited) and
Cambridge Biotech Corporation (incorporated by reference to Exhibit 10.29 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
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10.30 Grant Agreement, dated December 5, 1995, among The Industrial Development Authority
of Ireland, Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited) and
Cambridge Biotech Corporation (incorporated by reference to Exhibit 10.30 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.31 Employment Agreement, dated October 15, 1991, between Superior Sensors, Inc.
(Selfcare, Inc.) and Kenneth D. Legg, Ph.D. (incorporated by reference to Exhibit
10.31 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.32 Employment Agreement, dated June 15, 1992, between Superior Sensors, Inc. (Selfcare,
Inc.) and Richard Pinkowitz, Ph.D. (incorporated by reference to Exhibit 10.32 to
the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.33 Employment Agreement, dated November 13, 1994, between Selfcare International GmbH
and Otto Wahl (incorporated by reference to Exhibit 10.33 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.34 Selfcare, Inc. 1992 Stock Plan (incorporated by reference to Exhibit 10.34 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.35 Selfcare, Inc. 1994 Incentive and Non-qualified Stock Option Plan (incorporated by
reference to Exhibit 10.35 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.36 Amended and Restated Selfcare, Inc. 1996 Stock Option and Grant Plan (incorporated
by reference to Exhibit 4.1 to the Company's registration statement on Form S-8, No.
333-15583)
10.37 Selfcare, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.37 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.38 Standard form Commercial Lease, dated July 15, 1992, between Superior Sensors, Inc.
(Selfcare, Inc.) and Nova Realty Associates (incorporated by reference to Exhibit
10.38 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.39 Lease, dated February 21, 1992, between The Industrial Development Authority of
Ireland and Cambridge Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.39 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.40 Form of lease between Highlands and Islands Enterprises and Hebocraft Limited
(Inverness Medical Limited) (incorporated by reference to Exhibit 10.40 to the
Company's registration statement on Form SB-2, No. 333-4830-NY)
10.41 Joint Venture Agreement, dated March 8, 1994, between Enviromed plc. and Selfcare,
Inc. (incorporated by reference to Exhibit 10.41 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.42 Lease for Selfcare, Inc.'s facility in Brussels, Belgium (incorporated by reference
to Exhibit 10.42 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.43 Lease for Selfcare International GmbH's facility in Munich, Germany (incorporated by
reference to Exhibit 10.43 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.44 Form of Cambridge Diagnostics Note, together with schedule of noteholders
(incorporated by reference to Exhibit 10.44 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.45 Manufacturing Agreement, dated June 3, 1996, between Nova Biomedical Corporation and
Selfcare, Inc. (incorporated by reference to Exhibit 10.45 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
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10.46 Form of Cambridge Diagnostics Warrants, together with schedule of warrantholders
(incorporated by reference to Exhibit 10.47 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
10.47 Agreement between Inverness Medical Limited (formerly, Hebocraft Limited) and
Highlands and Islands Enterprise, dated May 31, 1995 (incorporated by reference to
Exhibit 10.47 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.48 Agreement between Inverness Medical Limited (formerly, Hebocraft Limited) and
Inverness & Nairn Local Enterprise Company, dated May 31, 1995 (incorporated by
reference to Exhibit 10.48 to the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.49 Form of Letter Agreement by and between Selfcare, Inc. and certain holders of
Cambridge Diagnostics Notes dated July 19, 1996 (incorporated by reference to
Exhibit 10.49 to the Company's registration statement on Form SB-2, No. 333-4830-NY)
10.50 Supply Agreement dated August 27, 1996, by and between Selfcare, Inc., Selfcare
International GmbH and A. Menarini Industrie Parmaceutiche Riunite S.r.L.
(incorporated by reference to Exhibit 10.50 to the Company's quarterly report on
Form 10-QSB for the period ended September 30, 1996)
10.51 Manufacturing Agreement for Pregnancy and Ovulation Stick/Cassette Test Kits, dated
September 7, 1996, by and between Nova BioMedical Corp. and Selfcare, Inc.
(incorporated by reference to Exhibit 10.51 to the Company's quarterly report on
Form 10-QSB for the period ended September 30, 1996)
10.52 Development and Distribution Agreement dated as of December 31, 1996 between
ChemTrak Incorporated and Selfcare, Inc. (incorporated by reference to Exhibit 10.52
to the Company's registration statement on Form SB-2, No.333-19911)
10.53 Asset Purchase Agreement dated as of January 14, 1997 by and between American Home
Products Corporation, American Cyanamid Company, A.H. Robbins Company, Incorporated
and Selfcare, Inc. and Selfcare Acquisition Corp. with certain exhibits
(incorporated by reference to Exhibit 10.53 to the Company's registration statement
on Form SB-2, No. 333-19911)
10.54 Agreement between EN PLC Limited Partnership and Selfcare, Inc. dated October 17,
1996, together with an amendment thereto dated as of January 1, 1997 (incorporated
by reference to Exhibit 10.54 to the Company's registration statement on Form SB-2,
No. 333-19911)
10.55 Form of Letter Agreement by and between Selfcare, Inc. and certain holders of
Cambridge Diagnostics Notes dated November 23, 1996 (incorporated by reference to
Exhibit 10.55 to the Company's registration statement on Form SB-2, No. 333-19911)
10.56 Form of Letter Agreement by and between Selfcare, Inc. and certain holders of
Cambridge Diagnostics Notes dated December 31, 1996 (incorporated by reference to
Exhibit 10.56 to the Company's registration statement on Form SB-2, No. 333-19911)
10.57 Sales Distribution Agreement for Testing System for Blood Glucose between LifeScan,
Inc. and Selfcare, Inc. dated October 9, 1996 (incorporated by reference to Exhibit
10.57 to the Company's registration statement on Form SB-2, No333-19911)
10.58 Form of Offshore Convertible Securities Subscription Agreement by and between
Selfcare, Inc. and certain investors dated October, 1996, together with a form of
letter amendment thereto dated as of February 22, 1997 (incorporated by reference to
Exhibit 10.58 to the Company's registration statement on Form SB-2, No. 333-19911)
10.59 [Reserved]
</TABLE>
41
<PAGE>
<TABLE>
<C> <S>
10.60 Securities Purchase Agreement, dated as of October 27, 1997, by and between
Selfcare, Inc., Elliott Associates, L.P. and Westgate International, L.P.
(incorporated by reference to Exhibit 99.5 to Selfcare, Inc.'s 10-QSB for the
quarter ending September 30, 1997)
10.61 Registration Rights Agreement, dated as October 27, 1997, by and between Selfcare,
Inc., Elliott Associates, L.P. and Westgate International, L.P. (incorporated by
reference to Exhibit 99.5 to Selfcare, Inc.'s 10-QSB for the quarter ending
September 30, 1997)
10.62 Form of Senior Subordinated Convertible Note due October 28, 2002 (incorporated by
reference to Exhibit 99.7 to Selfcare, Inc.'s 10-QSB for the quarter ending
September 30, 1997)
10.63 Form of Common Stock Purchase Warrant Certificate, dated as of October 27, 1997
(incorporated by reference to Exhibit 99.8 to Selfcare, Inc.'s 10-QSB for the
quarter ended September 30, 1997)
10.64 Registration Rights Agreement, dated March 8, 1994, between Selfcare, Inc., USB "93
Technology Associates Limited Partnership and Enviromed plc (incorporated by
reference to Exhibit 10.19 to Selfcare Inc.'s registration statement on Form SB-2,
file no. 333-4830-NY)
10.65 Registration Rights Agreement dated August 26, 1997, by and among the Company and
Capital Ventures International, CC Investments LDC, and Proprietary Convertible
Investments Group, Inc. (incorporated by reference to Exhibit 99.1 to Selfcare
Inc.'s registration statement on Form S-3, file no. 333-37961)
10.66 Certificate of Designations, Preferences and Rights of Series B Convertible
Preferred Stock of Selfcare, Inc. (incorporated by reference to Exhibit 99.1 to
Selfcare Inc.'s registration statement on Form S-3, file no. 333-37961)
10.67 Securities Purchase Agreement, dated August 26, 1997 by and among the Company and
Capital Ventures International, CC Investments LDC, and Proprietary Convertible
Investments Group, Inc. (incorporated by reference to Exhibit 99.1 to Selfcare
Inc.'s registration statement on Form S-3, file no. 333-37961)
10.68 Form of Warrant to Purchase Shares of Common Stock of the Company issued to Capital
Ventures International, CC Investments LDC and Proprietary Convertible Investments
Group, Inc. (incorporated by reference to Exhibit 99.1 to Selfcare Inc.'s
registration statement on Form S-3, file no. 333-37961)
+10.69 Form of Amendment to Agreement between Selfcare, Inc. and Princeton BioMeditech
Corporation dated August 6, 1997 (incorporated by reference to the Company's report
on Form 10-QSB for the period ending September, 30, 1997)
10.70 Form of Stock Purchase Agreement dated February 18,1998 by and among Can-Am Care
Corporation, Selfcare, Inc., Selfcare Consumer Products, Inc. and the stockholders
of Can-Am Care Corporation (incorporated by reference to Exhibit 2.1 to the
Company's report on Form 8-K dated February 18, 1998)
10.71 Form of Exchange Agreement relating to the Conversion of Cambridge Diagnostics Note
to Convertible Promissory Note (incorporated by reference to Exhibit 10.71 to
Selfcare, Inc.'s Form 10-KSB for the year ended December 31, 1997)
10.72 Form of Exchange Agreement relating to the Conversion of EN PLC Note to Convertible
Promissory Note (incorporated by reference to Exhibit 10.72 to Selfcare, Inc.'s Form
10-KSB for the year ended December 31, 1997)
10.73 Form of Note issued by Company in connection with the conversion of Cambridge
Diagnostics and EN PLC Notes to Convertible Promissory Notes, dated December 12,
1997 (incorporated by reference to Exhibit 10.73 to Selfcare, Inc.'s Form 10-KSB for
the year ended December 31, 1997)
</TABLE>
42
<PAGE>
<TABLE>
<C> <S>
10.74 Form of Supply Agreement dated as of February 18, 1998 made by and between A.M.G.
Medical Inc., and Can-Am Care Corporation (incorporated by reference to Exhibit
10.74 to Selfcare, Inc.'s Form 10-KSB for the year ended December 31, 1997)
10.75 Form of Management Services Agreement dated February 18, 1998 made by and between
A.M.G. Medical Inc., and Can-Am Care Corporation (incorporated by reference to
Exhibit 10.75 to Selfcare, Inc.'s Form 10-KSB for the year ended December 31, 1997)
10.76 Form of Employment Agreement dated February 18, 1998 made by and between Selfcare
Consumer Products, Inc., Selfcare, Inc., and Herbert Cover Corporation (incorporated
by reference to Exhibit 10.76 to Selfcare, Inc.'s Form 10-KSB for the year ended
December 31, 1997)
10.77 From of Employment Agreement dated February 18, 1998 made by and between Selfcare
Consumer Products, Inc., Selfcare, Inc., and Robert Oringer (incorporated by
reference to Exhibit 10.77 to Selfcare, Inc.'s Form 10-KSB for the year ended
December 31, 1997)
10.78 Form of 6% Non-Negotiable Promissory Note, principal amount $500,000, dated February
18, 1998 between Selfcare, Inc. and Robert Oringer (incorporated by reference to
Exhibit 10.78 to Selfcare, Inc.'s Form 10-KSB for the year ended December 31, 1997)
10.79 Form of 6% Non-Negotiable Promissory Note, principal amount $500,000, dated February
18, 1998 between Selfcare, Inc. and Cover Family Trust (incorporated by reference to
Exhibit 10.79 to Selfcare, Inc.'s Form 10-KSB for the year ended December 31, 1997)
10.80 Form of Credit Agreement dated as of February 18, 1998, among Selfcare Consumer
Products, Inc., as the Borrower, Selfcare, Inc., as the Guarantor, Certain Financial
Institutions, as the Lenders, and The Chase Manhattan Bank, as the Agent for the
Lenders (incorporated by reference to Exhibit 10.80 to Selfcare, Inc.'s Form 10-KSB
for the year ended December 31, 1997)
10.81 Form of Settlement Agreement dated March 6, 1998 by and between Selfcare, Inc.,
Trinity Biotech Plc, Flambelle Limited and Eastcourt Limited (incorporated by
reference to Exhibit 10.1 to the Company's report on Form 10-Q for the period ending
March 31, 1998)..
10.82 Form of Agreement by and among USB '93 Technology Associates Limited Partnership,
USB '93 Technology, Inc. the Limited Partners, the General Partner, and Selfcare,
Inc. (incorporated by reference to Exhibit 10.2 to the Company's report on Form 10-Q
for the period ending March 31, 1998)
10.83 Form of Securities Purchase Agreement dated June 26, 1998 among Selfcare, Inc.,
certain named purchasers, and certain other parties (incorporated by reference to
Exhibit 10.1 to the Company's report on Form 10-Q for the period ending June 30,
1998)
10.84 Form of 13% Subordinated Note issued by the Company in connection with the
Securities Purchase Agreement dated June 26, 1998 (incorporated by reference to
Exhibit 10.2 to the Company's report on Form 10-Q for the period ending June 30,
1998)
10.85 Form of Warrant to Purchase Shares of Common Stock of the Company issued in
connection with the Securities Purchase Agreement dated June 26, 1998 (incorporated
by reference to Exhibit 10.2 to the Company's report on Form 10-Q for the period
ending June 30, 1998)
10.86 Stock Purchase Agreement, dated February 18, 1998, by and among Selfcare, Inc.,
Selfcare Consumer Products, Inc., Can-Am Care Corporation, and the Stockholders
party thereto (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K
dated February 18, 1998)
10.87 Form of Patent License Agreements dated September 1, 1998, between the Company and
Becton, Dickinson and Company dated September 1, 1998 (incorporated by reference to
</TABLE>
43
<PAGE>
<TABLE>
<C> <S>
Exhibits 10.1 and 10.2 to the Company's report on Form 10-Q for the period ending
September, 30, 1998)
11.1 Statement re: computation of per share earnings (incorporated by reference to
Exhibit 11.1 to the Company's registration statement on Form SB-2, No. 333-19911
21.1 Schedule of Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1 to
the Company's registration statement on Form SB-2, No. 333-19911)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Kost, Forer and Gabbay
27.1 Financial Data Schedule
99.1 [Reserved]
99.2 Judgment and Opinion of U.S. Bankruptcy Court (D. Mass. W. Division), In re:
Cambridge Biotech Corporation, Chapter 11 Case No. 94-43054-JFQ, entered September
1, 1995. (incorporated by reference to Exhibit 99.2 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
99.3 Order of Approval of Scheme of Arrangement by The High Court of Ireland
(incorporated by reference to Exhibit 99.3 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
99.4 Order of U.S. Bankruptcy Court (D. Mass. W. Division), In re: Cambridge Biotech
Corporation, Chapter 11 Case No. 94-43054-JFQ, entered November 18, 1994
(incorporated by reference to Exhibit 99.4 to the Company's registration statement
on Form SB-2, No. 333-4830-NY)
99.5 Note Amendment Agreement dated January 11, 1999, by and Among Company, Elliot
Associates, L.P. and Westgate International, L.P., amending certain Senior
Subordinated Convertible Notes (incorporated by reference to Exhibit 99.2 to Report
on Form 8-K dated January 19, 1999)
99.6 Amended and Restated Senior Subordinated Convertible Note dated January 11, 1999,
delivered by the Company to Elliot Associates, L.P. (incorporated by reference to
Exhibit 99.3 to Report on Form 8-K dated January 19, 1999)
99.7 Amended and Restated Senior Subordinated Convertible Note dated January 11, 1999,
delivered by the Company to Westgate International, L.P. (incorporated by reference
to Exhibit 99.3 to Report on Form 8-K dated January 19, 1999)
</TABLE>
+ Confidential treatment requested
b) During the last quarter of the period covered by this Annual Report on Form
10-K the Company filed a report on Form 8-K dated October 22, 1998 in
connection with the lawsuit by Abbott Laboratories against the Company and
LifeScan.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
SELFCARE, INC.
By: /s/ RON ZWANZIGER
-----------------------------------------
Ron Zwanziger
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
Date: April 16, 1999 OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ RON ZWANZIGER Officer and Director
- ------------------------------ (Principal Executive April 16, 1999
Ron Zwanziger Officer)
/s/ CHRISTOPHER L. HUNTOON Chief Financial Officer
- ------------------------------ (Principal Financial April 16, 1999
Christopher L. Huntoon Officer)
/s/ JONATHAN J. FLEMING
- ------------------------------ Director April 16, 1999
Jonathan J. Fleming
/s/ CAROL R. GOLDBERG
- ------------------------------ Director April 16, 1999
Carol R. Goldberg
/s/ JOHN F. LEVY
- ------------------------------ Director April 16, 1999
John F. Levy
/s/ ROBERT ORINGER
- ------------------------------ Director April 16, 1999
Robert Oringer
/s/ EDWARD B. ROBERTS
- ------------------------------ Director April 16, 1999
Edward B. Roberts
/s/ PETER TOWNSEND
- ------------------------------ Director April 16, 1999
Peter Townsend
/s/ WILLARD LEE UMPHREY
- ------------------------------ Director April 16, 1999
Willard Lee Umphrey
</TABLE>
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Selfcare, Inc. and subsidiaries:
Reports of Independent Public Accountants............................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................ F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998...................................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1996, 1997
and 1998.............................................................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998.............. F-8
Notes to Consolidated Financial Statements.............................................................. F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Selfcare, Inc.:
We have audited the accompanying consolidated balance sheets of Selfcare,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1996 financial
statements of Orgenics, Ltd., a majority-owned subsidiary of the Company, which
statements reflect 11% of total revenues in 1996, of the consolidated total.
Those statements were audited by other auditors whose report has been furnished
to us and our opinion, insofar as it relates to the amounts included for those
entities, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Selfcare, Inc. and subsidiaries as of December 31,
1997 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 4, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Orgenics Ltd.:
We have audited the consolidated balance sheet of Orgenics Ltd. (the
Company) as of December 31, 1996, and the related consolidated statement of
operations, changes in stockholders' equity and cash flows for the year ended
December 31, 1996 (not included herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of CPEI Orgenics LTDA (not included herein), a consolidated
subsidiary as of December 31, 1996 and for the year ended December 31, 1996,
which statements reflect total assets constituting 4% of total consolidated
assets and total revenues for the year ended December 31, 1996, constituting 20%
of total consolidated revenues. These statements were audited by other auditors
whose reports have been furnished to us, and our opinion, as it relates to the
amounts included for CPEI Orgenics LTDA, is based solely on the reports of the
other auditor.
We conducted our audit in accordance with generally accepted auditing
standards in Israel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973, which do not differ significantly from
generally accepted auditing standards in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, either
originating within the financial statements themselves, or due to any misleading
statements included herein. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1996 and the consolidated results of their operations and cash
flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles in Israel.
The Company did not account for stock options issued to employees according
to the requirement of generally accepted auditing standards in the United
States. For a description of the differences between generally accepted
accounting principles in Israel and United States generally accepted accounting
principles as applicable in these financial statements, see notes 2n, 2o, and 2p
(not included herein) (see Note 2 (a) included herein).
KOST LEVARY AND FORER
Certified Public Accountants (Israel)
A Member of Ernst & Young
International
Tel-Aviv, Israel
February 13, 1997
F-3
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 15,669,898 $ 9,199,630
Accounts receivable, net of reserves of approximately $1,550,000 and $1,937,000
in 1997 and 1998, respectively............................................... 6,840,744 16,100,680
Inventories.................................................................... 5,344,531 9,949,347
Notes receivable from affiliated company....................................... -- 727,926
Note receivable................................................................ 4,979,232 --
Prepaid expenses and other current assets...................................... 1,452,855 1,838,929
-------------- --------------
Total current assets....................................................... 34,287,260 37,816,512
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Machinery, laboratory equipment and tooling.................................... 11,908,740 11,018,090
Leasehold improvements......................................................... 1,337,809 731,882
Furniture and fixtures......................................................... 649,591 606,293
Computer equipment............................................................. 1,367,492 1,548,018
-------------- --------------
15,263,632 13,904,283
Less--Accumulated depreciation and amortization................................ 4,755,600 5,702,419
-------------- --------------
10,508,032 8,201,864
NOTE RECEIVABLE FROM AFFILIATED COMPANY.......................................... 742,105 --
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET............................ 46,798,872 66,458,857
DEFERRED FINANCING COSTS AND OTHER ASSETS, NET................................... 3,035,414 2,600,244
-------------- --------------
Total intangible and other assets.......................................... 50,576,391 69,059,101
-------------- --------------
$ 95,371,683 $ 115,077,477
-------------- --------------
-------------- --------------
</TABLE>
F-4
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable............................................... $ 20,426,511 $ 12,071,650
Accounts payable............................................................... 6,079,242 11,960,808
Accrued expenses and other current liabilities................................. 7,859,010 9,949,416
Current portion of deferred revenue............................................ 2,204,159 726,458
-------------- --------------
Total current liabilities.................................................. 36,568,922 34,708,332
-------------- --------------
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion....................................... 2,674,971 517,190
Other long-term liabilities.................................................... -- 173,000
Notes payable, net of current portion.......................................... 39,476,074 50,409,484
-------------- --------------
Total long-term liabilities................................................ 42,151,045 51,099,674
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
MINORITY INTEREST IN SUBSIDIARY.................................................. 70,496 4,122
-------------- --------------
MANDATORILY REDEEMABLE PREFERRED STOCK OF A SUBSIDIARY........................... 1,868,027 3,718,251
-------------- --------------
SERIES B CONVERTIBLE PREFERRED STOCK, $.001 PAR VALUE:
Issued and outstanding--8,000 and 4,880 shares in 1997 and 1998,
respectively................................................................. 9,272,508 5,651,235
-------------- --------------
ADVANCE ON SERIES C AND E PREFERRED STOCK........................................ -- 4,887,000
-------------- --------------
STOCKHOLDERS' EQUITY:
Series A Preferred stock, $.001 par value-
Issued and outstanding--400 and 0 shares in 1997 and 1998, respectively........ -- --
Common stock, $.001 par value-
Authorized--40,000,000 shares
Issued--9,681,389 and 15,852,319 shares in 1997 and 1998, respectively....... 9,681 15,852
Additional paid-in capital..................................................... 75,753,699 107,724,384
Less--Treasury Stock, at cost, 32,197 and 743,678 shares in 1997 and 1998,
respectively................................................................. (211,460) (3,724,900)
Accumulated deficit............................................................ (70,183,506) (89,089,215)
Accumulated other comprehensive income......................................... 72,271 82,742
-------------- --------------
Total stockholders' equity................................................. 5,440,685 15,008,863
-------------- --------------
$ 95,371,683 $ 115,077,477
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
NET PRODUCT SALES................................................ $ 14,066,630 $ 50,891,221 $ 114,081,599
GRANTS AND OTHER REVENUE......................................... 4,996,158 1,359,150 3,902,019
-------------- -------------- --------------
Net revenue................................................ 19,062,788 52,250,371 117,983,618
COST OF SALES.................................................... 10,958,024 26,277,645 77,080,920
-------------- -------------- --------------
Gross profit............................................... 8,104,764 25,972,726 40,902,698
-------------- -------------- --------------
OPERATING EXPENSES:
Research and development....................................... 6,643,186 15,632,789 7,379,796
Charge for in-process research and development................. 4,396,700 3,303,300 --
Selling, general and administrative............................ 10,517,790 25,636,823 36,289,959
Noncash compensation charge.................................... 4,195,437 167,938 --
Net charge on business dispositions, asset impairments and
restructuring activities (Note 8)............................ -- -- 7,542,083
-------------- -------------- --------------
Total operating expenses................................... 25,753,113 44,740,850 51,211,838
-------------- -------------- --------------
Operating loss............................................. (17,648,349) (18,768,124) (10,309,140)
INTEREST EXPENSE, INCLUDING NONCASH INTEREST RELATING TO ISSUANCE
OF WARRANTS (NOTE 10) AND AMORTIZATION OF ORIGINAL ISSUE
DISCOUNT (NOTE 12).............................................. (11,561,276) (5,486,835) (9,565,235)
INTEREST AND OTHER INCOME, NET................................... 809,341 579,973 1,449,334
EQUITY IN NET (LOSS) INCOME OF AFFILIATED COMPANY................ (200,000) (327,000) 237,366
-------------- -------------- --------------
Loss before minority interest and dividends and accretion
on Mandatorily Redeemable Preferred Stock of a
subsidiary............................................... (28,600,284) (24,001,986) (18,187,675)
MINORITY INTEREST IN SUBSIDIARY'S LOSS........................... 132,990 181,017 100,107
DIVIDENDS AND ACCRETION ON MANDATORILY REDEEMABLE PREFERRED STOCK
OF SUBSIDIARY................................................... (110,348) (114,099) (145,924)
-------------- -------------- --------------
Loss before extraordinary loss and income taxes............ (28,577,642) (23,935,068) (18,233,492)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF NOTES PAYABLE
(Note 2(m))..................................................... -- (579,354) --
-------------- -------------- --------------
Loss before income taxes................................... (28,577,642) (24,514,422) (18,233,492)
PROVISION FOR INCOME TAXES....................................... -- 195,872 544,232
-------------- -------------- --------------
Net loss................................................... $ (28,577,642) $ (24,710,294) $ (18,777,724)
-------------- -------------- --------------
-------------- -------------- --------------
BASIC AND DILUTED NET LOSS PER COMMON AND POTENTIAL COMMON
SHARE........................................................... $ (6.00) $ (3.36) $ (1.55)
-------------- -------------- --------------
-------------- -------------- --------------
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF COMMON AND POTENTIAL
COMMON SHARES OUTSTANDING....................................... 4,767,493 7,990,666 12,214,986
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A PREFERRED STOCK
COMMON STOCK
---------------------------- ------------------------ ADDITIONAL
NUMBER OF $.001 NUMBER OF $.001 PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995......................... -- $ -- 4,057,924 $ 4,058 $ 9,553,220
Issuance of common stock, net of issuance costs
of approximately $2,343,000.................... -- -- 1,505,508 1,505 10,439,344
Issuance of common stock related to convertible
advances....................................... -- -- 135,421 135 499,865
Issuance of Series A convertible preferred stock,
net of issuance costs of approximately
$338,000....................................... 5,500 5 -- -- 5,161,850
Dividends accrued on Series A convertible
preferred stock................................ -- -- -- -- --
Conversion of Series A convertible preferred
stock to common stock.......................... (300) -- 22,892 23 14,162
Conversion of note payable into common stock..... -- -- 201,622 202 13,693,346
Exercise of stock options........................ -- -- 51,896 52 80,017
Noncash interest expense related to common stock
warrants issued in connection with promissory
notes payable.................................. -- -- -- -- 10,632,842
Noncash compensation expense related to common
stock options issued to Company's president.... -- -- -- -- 3,240,000
Noncash compensation expense related to grants of
common stock options........................... -- -- -- -- 756,472
Noncash interest expense related to common stock
warrants issued in connection with promissory
notes payable.................................. -- -- -- -- 106,729
Options granted in connection with the Orgenics
Acquisition.................................... -- -- -- -- 1,056,000
Amortization of deferred compensation related to
grant of common stock options.................. -- -- -- -- --
Change in cumulative translation adjustment...... -- -- -- -- --
Net loss......................................... -- -- -- -- --
----- --- ----------- ----------- -------------
Total comprehensive loss.........................
BALANCE, DECEMBER 31, 1996......................... 5,200 $5 5,975,263 $ 5,975 $ 55,233,847
----- --- ----------- ----------- -------------
<CAPTION>
TREASURY STOCK ACCUMULATED
----------------------- OTHER
DEFERRED NUMBER OF ACCUMULATED COMPREHENSIVE
COMPENSATION SHARES COST DEFICIT INCOME (LOSS)
-------------- ----------- ---------- -------------- ---------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1995......................... $ (198,965) (15,600) $ (15,200) $ (14,676,034) $ 102,524
Issuance of common stock, net of issuance costs
of approximately $2,343,000.................... -- -- -- -- --
Issuance of common stock related to convertible
advances....................................... -- -- -- -- --
Issuance of Series A convertible preferred stock,
net of issuance costs of approximately
$338,000....................................... -- -- -- -- --
Dividends accrued on Series A convertible
preferred stock................................ -- -- -- (51,037) --
Conversion of Series A convertible preferred
stock to common stock.......................... -- -- -- (14,185) --
Conversion of note payable into common stock..... -- -- -- -- --
Exercise of stock options........................ -- -- -- -- --
Noncash interest expense related to common stock
warrants issued in connection with promissory
notes payable.................................. -- -- -- -- --
Noncash compensation expense related to common
stock options issued to Company's president.... -- -- -- -- --
Noncash compensation expense related to grants of
common stock options........................... -- -- -- -- --
Noncash interest expense related to common stock
warrants issued in connection with promissory
notes payable.................................. -- -- -- -- --
Options granted in connection with the Orgenics
Acquisition.................................... -- -- -- -- --
Amortization of deferred compensation related to
grant of common stock options.................. 198,965 -- -- -- --
Change in cumulative translation adjustment...... -- -- -- -- 71,041
Net loss......................................... -- -- -- (28,577,642) --
-------------- ----------- ---------- -------------- ---------------
Total comprehensive loss.........................
BALANCE, DECEMBER 31, 1996......................... $ -- (15,600) $ (15,200) $ (43,318,898) $ 173,565
-------------- ----------- ---------- -------------- ---------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY COMPREHENSIVE
(DEFICIT) LOSS
------------- ---------------
BALANCE, DECEMBER 31, 1995......................... $(5,230,397) $ --
Issuance of common stock, net of issuance costs
of approximately $2,343,000.................... 10,440,849 --
Issuance of common stock related to convertible
advances....................................... 500,000 --
Issuance of Series A convertible preferred stock,
net of issuance costs of approximately
$338,000....................................... 5,161,855 --
Dividends accrued on Series A convertible
preferred stock................................ (51,037) --
Conversion of Series A convertible preferred
stock to common stock.......................... -- --
Conversion of note payable into common stock..... 13,693,548 --
Exercise of stock options........................ 80,069 --
Noncash interest expense related to common stock
warrants issued in connection with promissory
notes payable.................................. 10,632,842 --
Noncash compensation expense related to common
stock options issued to Company's president.... 3,240,000 --
Noncash compensation expense related to grants of
common stock options........................... 756,472 --
Noncash interest expense related to common stock
warrants issued in connection with promissory
notes payable.................................. 106,729 --
Options granted in connection with the Orgenics
Acquisition.................................... 1,056,000 --
Amortization of deferred compensation related to
grant of common stock options.................. 198,965 --
Change in cumulative translation adjustment...... 71,041 71,041
Net loss......................................... (28,577,642) (28,577,642)
------------- ---------------
Total comprehensive loss......................... $ (28,506,601)
---------------
BALANCE, DECEMBER 31, 1996......................... $12,079,294
-------------
</TABLE>
F-7
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------------- ------------------------ ADDITIONAL
NUMBER OF $.001 NUMBER OF $.001 PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996............................. 5,200 $ 5 5,975,263 $ 5,975 $55,233,847
Issuance of common stock, net of issuance costs of
approximately $2,078,000........................... -- -- 1,813,201 1,813 16,051,352
Conversion of Series A convertible preferred stock to
common stock....................................... (4,800) (5) 508,019 508 126,039
Issuance of common stock in connection with the
purchase of Orgenics, Ltd.......................... -- -- 90,344 90 (1,143)
Issuance of common stock related to warrants issued
in connection with Cambridge Diagnostics Notes..... -- -- 1,142,635 1,143 280,954
Exercise of common stock options and warrants........ -- -- 151,927 152 --
Purchase of treasury stock........................... -- -- -- -- 2,966,967
Original issuance discount on convertible notes and
accretion on Series B preferred stock pertaining to
guaranteed discount upon conversion and valuation
of warrants........................................ -- -- -- -- 27,453
Deferred compensation related to grants of common
stock options...................................... -- -- -- -- --
Amortization of deferred compensation related to
grants of common stock options..................... -- -- -- -- --
Reversal of accrued dividends on Series A convertible
preferred stock.................................... -- -- -- -- --
Changes in cumulative translation adjustment......... -- -- -- -- --
Net loss............................................. -- -- -- -- 75,753,699
------ --- ----------- ----------- -----------
Total comprehensive loss
BALANCE, DECEMBER 31, 1997............................. 400 -- 9,681,389 9,681 75,753,699
Issuance of common stock............................. -- -- 737,156 738 1,341,205
Conversion of preferred stock and notes to common
stock.............................................. (400) -- 3,838,424 3,838 14,641,043
Issuance of common stock for the acquisition of
Can-Am Care Corporation............................ -- -- 1,108,333 1,108 10,597,326
Issuance of common stock for the acquisition of
Can-Am Care Corporation............................ -- -- 10,598,434 -- --
Issuance of common stock for Core Immuno-Assay
technology......................................... -- -- 487,017 487 4,565,291
Warrants issued with subordinated debt............... -- -- 825,820 --
Warrants issued with subordinated debt............... -- -- -- -- 825,820
Common stock received in legal settlement (Note
15(c))............................................. -- -- -- -- --
Common stock received in business disposition (Note
8(b)).............................................. -- -- -- -- --
Common stock repurchased from related party.......... -- -- -- -- --
Change in cumulative translation adjustment.......... -- -- -- -- --
Net loss............................................. -- -- -- -- --
------ --- ----------- ----------- -----------
Total comprehensive loss
BALANCE, DECEMBER 31, 1998............................. -- $ -- 15,852,319 $ 15,852 $107,724,384
------ --- ----------- ----------- -----------
------ --- ----------- ----------- -----------
<CAPTION>
TREASURY STOCK ACCUMULATED
---------------------------- OTHER
DEFERRED NUMBER OF ACCUMULATED COMPREHENSIVE
COMPENSATION SHARES COST DEFICIT INCOME (LOSS)
--------------- ----------- ---------- ------------ --------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996............................. $ -- (15,600) $ (15,200) ($43,318,898) $ 173,565
Issuance of common stock, net of issuance costs of
approximately $2,078,000........................... -- -- -- -- --
Conversion of Series A convertible preferred stock to
common stock....................................... -- -- -- (126,542) --
Issuance of common stock in connection with the
purchase of Orgenics, Ltd.......................... -- -- -- -- --
Issuance of common stock related to warrants issued
in connection with Cambridge Diagnostics Notes..... -- -- -- -- --
Exercise of common stock options and warrants........ -- (16,597) (196,260) -- --
Purchase of treasury stock........................... -- -- -- -- --
Original issuance discount on convertible notes and
accretion on Series B preferred stock pertaining to
guaranteed discount upon conversion and valuation
of warrants........................................ (27,453) -- -- (2,049,545) --
Deferred compensation related to grants of common
stock options...................................... 27,453 -- -- -- --
Amortization of deferred compensation related to
grants of common stock options..................... -- -- -- -- --
Reversal of accrued dividends on Series A convertible
preferred stock.................................... -- -- -- 21,773 --
Changes in cumulative translation adjustment......... -- -- -- -- (101,294)
Net loss............................................. -- (32,197) (211,460) (24,710,294) --
------- ----------- ---------- ------------ --------------
Total comprehensive loss
BALANCE, DECEMBER 31, 1997............................. -- (32,197) (211,460) (70,183,506) 72,271
Issuance of common stock............................. -- -- -- -- --
Conversion of preferred stock and notes to common
stock.............................................. -- -- -- (127,985) --
Issuance of common stock for the acquisition of
Can-Am Care Corporation............................ -- -- --
Issuance of common stock for the acquisition of
Can-Am Care Corporation............................ -- 4,565,778 --
Issuance of common stock for Core Immuno-Assay
technology......................................... -- -- --
Warrants issued with subordinated debt...............
Warrants issued with subordinated debt............... -- -- -- -- --
Common stock received in legal settlement (Note
15(c))............................................. -- (155,724) (1,498,844) -- --
Common stock received in business disposition (Note
8(b)).............................................. -- (555,731) (2,014,525) -- --
Common stock repurchased from related party.......... -- (26) (71) -- 10,471
Change in cumulative translation adjustment.......... -- -- -- -- 10,471
Net loss............................................. -- -- -- (18,777,724) --
------- ----------- ---------- ------------ --------------
Total comprehensive loss
BALANCE, DECEMBER 31, 1998............................. $ -- (743,678) $(3,724,900) ($89,089,215) $ 82,742
------- ----------- ---------- ------------ --------------
------- ----------- ---------- ------------ --------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY COMPREHENSIVE
(DEFICIT) LOSS
------------ --------------
BALANCE, DECEMBER 31, 1996............................. $12,079,294 $ --
Issuance of common stock, net of issuance costs of
approximately $2,078,000........................... 16,053,165 --
Conversion of Series A convertible preferred stock to
common stock....................................... -- --
Issuance of common stock in connection with the
purchase of Orgenics, Ltd.......................... 1,068,320 --
Issuance of common stock related to warrants issued
in connection with Cambridge Diagnostics Notes..... -- --
Exercise of common stock options and warrants........ 281,106 --
Purchase of treasury stock........................... (196,260) --
Original issuance discount on convertible notes and
accretion on Series B preferred stock pertaining to
guaranteed discount upon conversion and valuation
of warrants........................................ 917,422 --
Deferred compensation related to grants of common
stock options...................................... -- --
Amortization of deferred compensation related to
grants of common stock options..................... 27,453 --
Reversal of accrued dividends on Series A convertible
preferred stock.................................... 21,773 --
Changes in cumulative translation adjustment......... (101,294) (101,294)
Net loss............................................. (24,710,294) (24,710,294)
------------ --------------
Total comprehensive loss $(24,811,588)
--------------
BALANCE, DECEMBER 31, 1997............................. 5,440,685
Issuance of common stock............................. 1,341,943 --
Conversion of preferred stock and notes to common
stock.............................................. 14,516,896 --
Issuance of common stock for the acquisition of
Can-Am Care Corporation............................
Issuance of common stock for the acquisition of
Can-Am Care Corporation............................
Issuance of common stock for Core Immuno-Assay
technology.........................................
Warrants issued with subordinated debt...............
Warrants issued with subordinated debt............... (1,498,844) --
Common stock received in legal settlement (Note
15(c))............................................. (2,014,525) --
Common stock received in business disposition (Note
8(b)).............................................. (71) --
Common stock repurchased from related party.......... 10,471 10,471
Change in cumulative translation adjustment.......... 10,471 10,471
Net loss............................................. (18,777,724) (18,777,724)
------------ --------------
Total comprehensive loss $(18,767,253)
--------------
--------------
BALANCE, DECEMBER 31, 1998............................. $15,008,863
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (28,577,642) $ (24,710,294) $ (18,777,724)
Adjustments to reconcile net loss to net cash used in operating
activities--
Accretion on preferred stock of a subsidiary................. 110,348 114,099 145,924
Noncash portion of net charge on business dispositions, asset
impairments and restructuring activities................... -- -- 7,289,459
Loss on disposal of fixed assets............................. -- -- 838,000
Noncash interest expense related to amortization of original
issue discount and issuance of warrants.................... 10,739,571 497,702 1,788,116
Noncash income related to legal settlement................... -- -- (1,498,844)
Noncash compensation expense related to issuance of common
stock options.............................................. 4,195,437 27,453 --
Extraordinary loss on extinguishment of debt................. -- 579,354 --
Write-off of in-process research and development expense..... 4,396,700 3,303,300 --
Amortization of deferred revenue............................. (1,034,974) (1,406,078) (3,902,019)
Depreciation and amortization................................ 1,044,136 6,597,051 8,779,108
Equity in net (income) loss of affiliate..................... 200,000 327,000 (237,366)
Minority interest in subsidiary's loss....................... (132,990) (181,017) (100,107)
Changes in assets and liabilities, net of acquisitions--
Accounts receivable........................................ (1,937,323) (2,402,314) (6,344,661)
Inventories................................................ 80,341 (3,129,256) (665,745)
Prepaid expenses and other current assets.................. (215,400) (228,394) 168,622
Accounts payable........................................... 2,194,066 1,347,664 817,370
Accrued expenses and other current liabilities............. 2,382,366 3,406,759 (166,788)
-------------- -------------- --------------
Net cash used in operating activities.................... (6,555,364) (15,856,971) (11,866,655)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (4,749,476) (5,400,952) (1,442,480)
Increase in other assets....................................... (448,050) (2,622,715) (332,723)
Cash loaned to affiliated company.............................. -- (742,105) --
Cash received from affiliate as repayment of loan.............. -- -- 163,625
Cash paid for purchase of Nutritional Supplement Lines......... -- (31,067,580) --
Cash paid for investment in affiliated companies............... (129,057) -- --
Cash paid for purchase of Orgenics, Ltd. net of cash
acquired..................................................... (5,515,659) (8,417,325) --
Cash received from business disposition........................ -- -- 230,000
Cash paid for Core Immuno Assay technology..................... -- -- (471,354)
Cash paid for purchase of Can-Am Care Corporation.............. -- -- (15,317,628)
-------------- -------------- --------------
Net cash used in investing activities.................... $ (10,842,242) $ (48,250,677) $ (17,170,560)
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for deferred financing cost............................. $ -- $ (1,677,749) $ (1,934,835)
Net proceeds from sale of common stock, preferred stock and
warrants to purchase common stock............................... 15,682,773 24,084,022 7,073,474
Proceeds from borrowings under notes payable...................... 6,878,692 51,406,273 50,598,402
Increase in deferred revenue...................................... 3,815,336 -- 703,876
Repayments of notes payable....................................... (17,076) (10,556,994) (35,489,810)
Purchase of treasury stock........................................ -- (196,260) (71)
Proceeds from sale of preferred stock of a subsidiary............. -- -- 1,680,400
------------- ------------- -------------
Net cash provided by financing activities....................... 26,359,725 63,059,292 22,631,436
------------- ------------- -------------
FOREIGN EXCHANGE EFFECT ON CASH AND
CASH EQUIVALENTS.................................................. 101,785 259,600 (64,489)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................................................. 9,063,904 (788,756) (6,470,268)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR........................................................... 7,394,750 16,458,654 15,669,898
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR.............................. $ 16,458,654 $ 15,669,898 $ 9,199,630
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) ORGANIZATION
Selfcare, Inc. and its subsidiaries (the Company) are engaged in the
development, manufacturing and marketing of self-test diagnostic products for
the diabetes, women's health and, to a lesser extent, infectious disease
markets. The Company's existing and planned products are targeted at the two
largest existing markets for self-care diagnostics, diabetes management and
women's health.
During 1996 and 1997, the Company acquired a 99.8% direct and indirect
equity interest in Orgenics Ltd. and subsidiaries (Orgenics) for total
consideration of approximately $18,368,000, which consisted of $16,417,000 in
cash and approximately 74,000 shares of the Company's common stock (see Note 3).
On February 19, 1997, the Company acquired the U.S. rights to several
nutritional supplement product lines (the Nutritional Supplement Lines) from
American Home Products Corporation (AHP) for $30,000,000 in cash and the
issuance of a $6,000,000, 7% promissory note (see Note 4).
On February 18, 1998, the Company acquired all of the outstanding stock of
Can-Am Care Corporation (Can-Am), a distributor of certain diabetes-related home
health care products. The total cost of this acquisition was approximately
$27,900,000, which consisted of $13,600,000 in cash, a $2,000,000 note payable
(see Note 5) and approximately 1,100,000 shares of the Company's common stock.
Since inception, the Company has devoted substantial effort toward research
and development of products, the establishment of distribution networks in the
United States and Europe, raising capital, and identifying strategic
acquisitions and partnerships. The acquisitions noted above have significantly
increased the Company's operations. Principal risks to the Company include the
ability of the Company to obtain adequate financing to fund future operations
management and integration of acquired companies, dependence on key individuals,
competition from substitute products and larger companies, obtaining regulatory
approval, and the need for successful development and marketing of commercial
products.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
the Company and its wholly owned (unless otherwise noted) subsidiaries, the most
significant of which include Cambridge Diagnostics Ireland, Ltd. (Cambridge
Diagnostics) (an Irish corporation), Inverness Medical Limited (Inverness) (a
Scottish corporation), Inverness Medical, Inc. (IMI, formerly Selfcare Consumer
Products, Inc.) (a Delaware corporation), and Orgenics, Ltd. (Orgenics) (a 99.8%
Company-owned Israeli corporation) and its subsidiaries. Also included in the
accompanying consolidated financial statements is the Company's 49% minority
interest in Cambridge Affiliate Corporation (Cambridge Affiliate) (see Note
16(b)) and its 33% interest in Enviromed, plc (Enviromed) (see Note 7), both of
which are accounted for under the equity method. All material intercompany
balances and transactions have been eliminated in consolidation.
The accounts of Orgenics also includes its wholly owned subsidiaries. The
Orgenics financial statements were prepared in accordance with Israeli generally
accepted accounting principles which, for the purposes of the Company's
consolidated financial statements, do not materially differ from U.S. generally
accepted accounting principles.
F-11
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) REVENUE RECOGNITION
The majority of the Company's revenues are derived from product sales.
Product revenue is recognized when products are shipped to customers, at which
time title is transferred. The Company is recognizing deferred revenue relating
to the LifeScan alliance as unfulfilled obligations are met (see Note 14). The
Company has also recorded deferred revenue in the accompanying consolidated
balance sheets relating to amounts received in advance on certain contracts and
grants (see Notes 15 (b) and 6). The Company records the related revenue on
funded grants relating to facilities and equipment over their estimated useful
lives and related costs based on when such costs are incurred.
(C) CASH AND CASH EQUIVALENTS
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its cash equivalents as available for
sale and recorded them at fair market value. The Company considers all highly
liquid cash investments with original maturities of three months or less at the
date of acquisition to be cash equivalents. Cash equivalents consisted of money
market funds as of December 31, 1997 and 1998.
(D) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 3,006,076 $ 2,879,965
Work-in-process................................................... 405,404 890,483
Finished goods.................................................... 1,933,051 6,178,899
------------ ------------
$ 5,344,531 $ 9,949,347
------------ ------------
------------ ------------
</TABLE>
(E) DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed using the straight-line method
based on the estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- ---------------------------------------------- ----------------------------------------------
<S> <C>
Machinery, laboratory equipment and tooling... 1-16 years
Leasehold improvements........................ Lesser of life of lease or life of asset
Furniture and fixtures........................ 7-10 years
Computer equipment............................ 3-6 years
</TABLE>
F-12
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) POSTRETIREMENT BENEFITS
The Company does not have any obligations for postretirement or
postemployment benefits, as defined by SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, as it does not currently offer such
benefits. Orgenics does provide certain severance benefits (see Note 15(f)).
(G) NET LOSS PER COMMON SHARE
The Company follows the provisions of SFAS, No. 128, Earnings Per Share.
Basic net loss per common share was computed by dividing net loss less Preferred
Stock dividends by the weighted average number of common shares outstanding
during the year. Diluted net loss per share is the same as basic net loss per
share, as the effects of the Company's potential common stock (6,701,441,
5,335,267 and 7,283,387 shares in 1996, 1997 and 1998, respectively) are
antidilutive.
In the year ended December 31, 1997, the Company recorded accretion of
approximately $2,050,000 representing the 6% premium and 5% conversion discount
on the Series B Preferred Stock. The Company has also recorded approximately
$105,000 of dividends on the Series A Preferred Stock. In the year ended
December 31, 1998 the Company recorded accretion of approximately $128,000
representing the 6% premium on the Series B Preferred Stock. The following table
reconciles the net loss per common and common equivalent shares.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
-------------- -------------- --------------
Net loss......................................................... $ (28,577,642) $ (24,710,294) $ (18,777,724)
Dividends on Series A Preferred Stock............................ (51,037) (104,769) --
Accretion on Series B Preferred Stock............................ -- (2,049,545) (127,985)
-------------- -------------- --------------
Loss attributable to common shareholders..................... $ (28,628,679) $ (26,864,608) $ (18,905,710)
-------------- -------------- --------------
-------------- -------------- --------------
Basic and diluted net loss per common and potential common
share.......................................................... $ (6.00) $ (3.36) $ (1.55)
-------------- -------------- --------------
-------------- -------------- --------------
Basic and diluted weighted average number of common shares
outstanding.................................................... 4,767,493 7,990,666 12,214,986
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
(H) FOREIGN CURRENCY TRANSLATION
The accounts of the Company's subsidiaries are translated in accordance with
SFAS No. 52, Foreign Currency Translation. Accordingly, assets and liabilities
of the Company's foreign subsidiaries are translated into U.S. dollars using the
exchange rate at each balance sheet date. Income and expense accounts are
translated using an average rate of exchange during the period. Cumulative
translation gains or losses are reflected as a separate component of
consolidated stockholders' equity (deficit). Foreign currency exchange
transaction gains and losses of $324,000, ($717,000) and $(33,291) for the years
ended December 31, 1996, 1997 and 1998, respectively, are reflected as a
component of interest and other income, net, in the accompanying consolidated
statements of operations.
F-13
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(J) CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet or
concentration of credit risks such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. The Company maintains the
majority of its cash balances with financial institutions. The Company had one
significant customer during 1998 representing 28.3% of the revenue and 25.8% of
the total accounts receivable. The Company had no significant customers during
1997 and 1996. See Note 19 for financial information by geographic area and
segment information.
(K) DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company does not have any material derivative or other financial
instruments as defined by SFAS No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
accounts receivable and debt. The estimated fair value of these financial
instruments approximates their carrying value at December 31, 1997 and 1998. The
estimated fair values have been determined through information obtained from
market sources and management estimates.
(L) RECLASSIFICATIONS
Certain prior year account balances have been reclassified to be consistent
with the current year's presentation.
(M) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
On December 12, 1997, the Company effectively extinguished two series of
notes, whereby the Company recorded extraordinary losses. The Company
extinguished certain notes pertaining to its investment in Enviromed (see Note
7) and substantially all of the notes issued in connection with its acquisition
of Cambridge Diagnostics (see Note 10) and recorded extraordinary losses of
approximately $206,000 and $373,000, respectively.
F-14
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(N) GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
Goodwill, trademarks and other intangible assets consist of the following as
of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Goodwill....................................................... $ 27,219,377 $ 47,047,002
Trademarks..................................................... 21,600,000 21,059,405
Other intangible assets........................................ 1,117,000 5,757,465
------------- -------------
Less--Accumulated amortization................................. 3,137,505 7,405,015
------------- -------------
$ 46,798,872 $ 66,458,857
------------- -------------
------------- -------------
</TABLE>
The Company is amortizing goodwill and trademarks related to the acquisition
of the Nutritional Supplement Lines and Can-Am using the straight-line method
over 25 years, their estimated useful lives (see Notes 4 and 5). The Company is
amortizing goodwill pertaining to Orgenics over 5 years (see Note 3), its
estimated useful life. Goodwill relating to the Company's investment in
Enviromed (see Note 7) is being amortized over 15 years. The Company recorded
amortization expense of approximately $105,000, $2,643,000 and $4,415,000 in
1996, 1997 and 1998, respectively, related to goodwill, trademarks and other
intangible assets.
The Company follows the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, and
Accounting Principles Board (APB) Opinion No. 17, Intangible Assets. SFAS No.
121 and APB No. 17 require that long-lived and intangible assets be reviewed for
impairment. Any write-downs are to be treated as permanent reductions in the
carrying amount of the assets and are determined based on the fair value of the
assets. During 1998, the Company recorded an impairment charge associated with
certain goodwill and trademarks pertaining to a specific Nutritional Supplement,
the goodwill associated with Orgenics and certain other long-lived assets held
by Cambridge Diagnostics (see Note 8). The Company believes that the remaining
carrying value of these assets are realizable as of December 31, 1998.
(O) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The statement is
effective for the year ending December 31, 2000. SFAS 133 establishes accounting
and reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company does not expect adoption of
this statement to have a material impact on its consolidated financial position
or results of operations.
(P) 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 nonowner sources. Comprehensive income
consists entirely of the net loss plus the Company's translation adjustment
accounts (see Note 2(h)) and is disclosed in the accompanying statements of
stockholders' equity.
F-15
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(Q) NONCASH INVESTING AND FINANCING ACTIVITIES
The following table summarizes the supplemental disclosures of the Company's
noncash financing and investing transactions for the periods indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
Cash paid for--
Interest.......................................................... $ 396,118 $ 3,590,446 $ 7,591,165
------------- ------------- ------------
------------- ------------- ------------
Income taxes...................................................... $ 47,705 $ 21,600 $ 506,134
------------- ------------- ------------
------------- ------------- ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES-- On October 24, 1996, the Company acquired 57.1% of the
assets and liabilities of Orgenics, Ltd.; in 1997, the Company
acquired substantially all of the remaining shares--
Fair value of net assets.......................................... $ 1,660,326 $ 1,113,201 $ --
In-process research and development............................... 4,396,700 3,303,300 --
Goodwill.......................................................... 3,020,176 4,873,824 --
Conversion of debenture into shares of Orgenics................... (1,000,000) -- --
Options granted in connection with the acquisition................ (1,056,000) -- --
Issuance of Common stock.......................................... -- (873,000) --
Less cash acquired................................................ (1,505,543) -- --
------------- ------------- ------------
CASH PAID FOR ACQUISITION, NET OF CASH ACQUIRED....................... $ 5,515,659 $ 8,417,325 $ --
------------- ------------- ------------
------------- ------------- ------------
On February 19, 1997, the Company acquired the Nutritional Supplement
Lines from AHP--
Goodwill.......................................................... $ -- $ 15,467,580 $ --
Trademarks........................................................ -- 21,600,000 --
Note payable to AHP............................................... -- (6,000,000) --
------------- ------------- ------------
CASH PAID FOR PURCHASE OF NUTRITIONAL SUPPLEMENT LINES................ $ -- $ 31,067,580 $ --
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------ --------------
On February 18, 1998, the Company acquired Can-Am Care Corporation--
Accounts receivable............................................... -- -- 2,812,000
Inventories....................................................... -- -- 3,766,000
Other current assets.............................................. -- -- 313,000
</TABLE>
F-16
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------- ------------ --------------
<S> <C> <C> <C>
Fixed assets...................................................... -- -- 32,000
Goodwill.......................................................... -- -- 26,916,062
Accounts payable.................................................. -- -- (5,923,000)
Note Payable to Can-Am shareholders............................... -- -- (2,000,000)
Issuance of common stock.......................................... -- -- (10,598,434)
------------- ------------ --------------
Cash paid for acquisition..................................... $ -- $ -- $ 15,317,628
------------- ------------ --------------
------------- ------------ --------------
CASH PAID FOR INVESTMENT IN AFFILIATED COMPANIES--
Cost of investment................................................ $ 3,932,609 $ $
Stock acquired through issuance of promissory notes payable....... (3,803,552) -- --
------------- ------------ --------------
$ 129,057 $ -- $ --
------------- ------------ --------------
------------- ------------ --------------
CONVERSION OF CONVERTIBLE ADVANCE INTO COMMON STOCK................. $ 13,693,548 $ -- $ --
------------- ------------ --------------
------------- ------------ --------------
CONVERSION OF CONVERTIBLE PAYABLE INTO COMMON STOCK................. $ 500,000 $ -- $ --
------------- ------------ --------------
------------- ------------ --------------
FORGIVENESS OF ACCOUNTS RECEIVABLE AS CONSIDERATION FOR A NONCOMPETE
AGREEMENT IN CONNECTION WITH ORGENICS PURCHASE OF THE MINORITY
INTEREST IN ITS BRAZILIAN SUBSIDIARY.............................. $ -- $ 1,375,000 $ --
------------- ------------ --------------
------------- ------------ --------------
EARLY EXTINGUISHMENT OF CERTAIN NOTES PAYABLE....................... $ -- $ 4,580,940 $ --
------------- ------------ --------------
------------- ------------ --------------
ORIGINAL ISSUE DISCOUNT ON NOTES PAYABLE PERTAINING TO GUARANTEED
DISCOUNT UPON CONVERSION.......................................... $ -- $ 1,994,265 $ --
------------- ------------ --------------
------------- ------------ --------------
ACCRETION AND DIVIDENDS ON PREFERRED STOCK.......................... $ 51,037 $ 2,154,314 $ --
------------- ------------ --------------
------------- ------------ --------------
SHARES ISSUED IN CONNECTION WITH PURCHASE OF CORE IMMUNO ASSAY
TECHNOLOGY........................................................ $ -- $ -- $ 4,565,778
------------- ------------ --------------
------------- ------------ --------------
CONVERSION OF PREFERRED STOCK AND NOTES TO COMMON STOCK............. $ -- $ -- $ 14,516,896
------------- ------------ --------------
------------- ------------ --------------
</TABLE>
F-17
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(3) ACQUISITION OF ORGENICS
On December 23, 1995, the Company and Orgenics entered into the Investment
and Loan Agreement whereby the Company purchased a $1,000,000, 18-month,
unsecured, interest-bearing debenture that was convertible into redeemable
preferred shares of Orgenics (the Debenture). In October 1996, the Company
exercised its right to convert the Debenture, at which time the principal
amount, together with accrued interest, converted into 20% of the then issued
and outstanding share capital of Orgenics.
In October 1996, the Company acquired a 57.1% direct and indirect equity
interest in Orgenics as a result of the conversion of the Debenture and cash
payments of approximately $7,000,000. In addition, the Company granted options
to purchase 85,800 shares of Common Stock having a fair value of $1,056,000 and
incurred direct acquisition costs of $100,000. Throughout 1997, the Company
acquired additional shares of Orgenics for approximately $8,417,000 in cash and
73,747 shares of common stock (with a fair value of $872,000, net of treasury
stock repurchases), resulting in a 99.8% ownership interest in Orgenics.
The aggregate purchase price of the Company's 99.8% direct and indirect
interest in Orgenics of approximately $18,367,000 was allocated based on the
relative fair values of the assets acquired as follows:
<TABLE>
<S> <C>
Fair value of net assets....................................... $2,533,000
In-process research and development............................ 7,700,000
Goodwill....................................................... 8,134,000
----------
$18,367,000
----------
----------
</TABLE>
As discussed in Notes 2(n) and 8(c), the Company recorded an impairment
charge in 1998 pertaining to Orgenics' goodwill.
As part of the original acquisition, the portion of the purchase price
allocated to in-process research and development projects that had not reached
technological feasibility and did not have a future alternative use was charged
to expense. The amount allocated to in-process research and development projects
represents the estimated fair value related to these projects determined by an
independent appraisal. Proven valuation procedures and techniques were used in
determining the fair market value of each intangible asset. To bring these
projects to technological feasibility, high-risk development and testing issues
will need to be resolved that will require substantial additional effort and
testing.
In December 1997, Orgenics purchased the 45% minority interest of its
Brazilian subsidiary. As consideration, Orgenics forgave certain amounts due
from the minority shareholders. The parties also entered into a one-year
noncompete agreement, valued at $1,375,000. The assets and results of operations
of the Brazilian subsidiary are not material to the Company's operations.
For unaudited pro forma financial information reflecting the acquisitions of
Orgenics, the Nutritional Supplement Lines and Can-Am, see Note 5(c).
(4) ACQUISITION AND FINANCING OF NUTRITIONAL SUPPLEMENT LINES
On February 19, 1997, the Company acquired the Nutritional Supplement Lines
from AHP. As consideration for the Nutritional Supplement Lines, the Company
paid to AHP a total of $36,000,000 in cash. Including direct costs related to
the acquisition, the total purchase price was approximately $37,100,000. The
entire purchase price was allocated to intangible assets: approximately
$15,500,000 to
F-18
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(4) ACQUISITION AND FINANCING OF NUTRITIONAL SUPPLEMENT LINES (CONTINUED)
trademarks and $21,600,000 to goodwill. As discussed in Notes 2(n) and 8(e), the
Company recorded an impairment charge in 1998 relating to a specific nutritional
supplement. The Company funded the $30,000,000 cash portion of the purchase
price with bank debt, the AHP Term Loan and the AHP Bridge Loan (collectively,
the Acquisition Facility) with original principal amounts of $25,000,000 and
$5,000,000, respectively. The remaining $6,000,000 is in the form of a note
payable from the Company to AHP. The Company paid this amount during 1998.
For unaudited pro forma financial information reflecting the acquisitions of
Orgenics, the Nutritional Supplement Lines and Can-Am, see Note 5(c).
In connection with the Acquisition Facility, the Company obtained from the
bank a $5,000,000 revolving credit line (the Credit Line). As a part of the
Can-Am acquisition described in Note 5(a), the Company refinanced its
obligations under these agreements with another bank in February 1998 (see Note
5(b)).
(5) ACQUISITION AND FINANCING OF CAN-AM
(A) CAN-AM ACQUISITION
On February 18, 1998, IMI purchased all of the outstanding stock of Can-Am,
a distributor of certain diabetes-related home health care products and entered
into a new bank lending agreement (Note 5(b)). The aggregate purchase price of
approximately $27,900,000 consisted of the following: $13,600,000 in cash,
1,108,333 shares of the Company's stock with a fair value of $10,600,000, a
$2,000,000 subordinated note payable to former Can-Am shareholders and closing
costs of approximately $1,700,000. IMI allocated the aggregate purchase price to
the acquired assets and assumed liabilities approximately as follows:
<TABLE>
<S> <C>
Accounts receivable............................................ $2,812,000
Inventory...................................................... 3,766,000
Other current assets........................................... 313,000
Fixed assets................................................... 32,000
Goodwill....................................................... 26,916,062
Liabilities assumed............................................ (5,923,000)
----------
$27,916,062
----------
----------
</TABLE>
Of the Company's shares delivered at closing, 284,168 are being held in
escrow until no later than 30 days following the delivery of Can-Am audited
financial statements for the year ending December 31, 1998. Pursuant to the
terms of the escrow agreement, the Company may file a claim with the escrow
agent until this time. At this time, the Company does not expect to file such a
claim.
In connection with the purchase of Can-Am, Can-Am's shareholders granted a
right of first refusal to the Company to purchase the assets or stock of an
entity under common control, A.M.G. Medical, Inc. (AMG). AMG historically
performed certain administrative, management and manufacturing functions for
Can-Am and, concurrent with the purchase of Can-Am, Can-Am and AMG entered into
formal management services and supply agreements. Under the terms of the
management services agreement, AMG will continue to provide such administrative
and management services to Can-Am on an arm's-length basis. The management
services agreement provides a mechanism to adjust charges for services
F-19
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(5) ACQUISITION AND FINANCING OF CAN-AM (CONTINUED)
based on the needs of Can-Am and an arbitration provision in the event the
parties can not agree on such charges. Under the terms of the supply agreement,
Can-Am must purchase 100% of its lancet product requirements from AMG, unless
AMG is unable to meet Can-Am's requirements. Further, Can-Am's President entered
into an employment agreement with the Company to continue managing Can-Am for
three years at an annual salary of $150,000.
Both the stock and promissory note issued by the Company are subject to
adjustment in certain circumstances. The number of shares issued may be reduced
based on the occurrence of certain events, as defined. The principal amount of
the promissory note is subject to adjustment based on the performance of the
Company's Common stock. The computation of the ultimate principal due on the
maturity date, February 19, 2001, will yield an amount not less than $2,000,000
nor greater than $4,000,000.
For unaudited pro forma financial information reflecting the Orgenics
Acquisition, the Nutritional Supplement Lines Acquisition and the Can-Am
Acquisition, see Note 5(c).
(B) REFINANCING
To fund the cash portion of the purchase price and refinance existing bank
debt (see Note 4), IMI entered into a $42,000,000 credit agreement with a new
bank; the Company is the guarantor of all obligations due under this credit
agreement. The new credit agreement consists of a $37,000,000 term loan and a
$5,000,000 revolving line of credit. Of the proceeds from this term loan, IMI
used $32,000,000 to finance the cash portion of the Can-Am purchase price (Note
5(a)) and refinance the existing bank debt (see Note 4). The remaining
$5,000,000 was used for working capital purposes.
The new credit agreement requires compliance with various financial and
nonfinancial covenants for both IMI and the Company. The primary financial
covenants pertain to, among other things, interest coverage, debt services
coverage, leverage and earnings before interest, taxes, depreciation and
amortization (EBITDA). Both IMI and the Company were in compliance with such
covenants at December 31, 1998.
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, as
defined, plus a spread from 0.25% to 1.75%, or the LIBOR (5.10% at December 31,
1998) plus a spread from 1.75% to 3.00%. The spreads discussed above depend on
IMI's ratio of senior funded debt to EBITDA.
Borrowings are secured by IMI's stock and the assets of IMI and Can-Am. The
Company's guarantee is secured by certain of the Company's assets. Borrowings
under the revolving line of credit are based on certain percentages of eligible
assets, as defined. IMI is required to pay an annual fee of 0.375% for the
unused portion of the revolving line of credit. The revolving line of credit
expires on February 18, 2002.
IMI is required to make quarterly principal payments ranging from $1,300,000
to $1,950,000 through December 31, 2003, with payments of $1,433,333 beginning
on June 30, 1998. IMI must also make mandatory prepayments on the term loan if
they meet certain cash flow thresholds, sell assets not in the ordinary course
of business, issue or sell indebtedness or issue stock, as defined.
F-20
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(5) ACQUISITION AND FINANCING OF CAN-AM (CONTINUED)
(C) UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents selected unaudited financial information of the
Company, Can-Am (see Note 5(a)), the Nutritional Supplement Lines (see Note 4)
and Orgenics (see Note 3), assuming the companies were acquired on January 1,
1997. The unaudited pro forma results are not necessarily indicative of either
actual results that would have occurred had the acquisition been consummated on
January 1, 1997 or of future results.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
<S> <C> <C>
1997 1998
-------------- --------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Pro forma net revenue............................................................ $ 74,569,752 $ 120,450,663
-------------- --------------
-------------- --------------
Pro forma loss before extraordinary loss and taxes............................... $ (21,363,643) $ (18,026,066)
-------------- --------------
-------------- --------------
Pro forma net loss(1)............................................................ $ (22,415,437) $ (18,604,869)
-------------- --------------
-------------- --------------
Pro forma basic and diluted net loss per common and potentially common share..... $ (2.37) $ (1.52)
-------------- --------------
-------------- --------------
Pro forma basic and diluted weighted average number of common and potentially
common shares outstanding(2)................................................... 9,456,672 12,214,986
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) Excludes non-recurring charges for in-process research and development of
$3,300,300 in 1997 (see Note 3)
(2) Assumes completion of initial and secondary public offerings and the use of
proceeds to consummate the Orgenics and Nutritional Supplement Lines
acquisitions.
(6) INVESTMENT IN INVERNESS MEDICAL LIMITED
On May 31, 1995, the Company invested approximately $1,588,000 to fund
initial operations and to acquire a 50% interest in Inverness. Inverness was
founded on November 1, 1994 and had no significant activities, assets or
liabilities at the time of the Company's investment. Inverness & Nairn Local
Enterprise Company (INLEC) holds the remaining 50% interest in Inverness and
also paid in $1,588,000 for 1,000,000 shares of 6% cumulative redeemable
preference shares (the Original Preference Shares). During 1998, the Company
invested an additional $1,680,000 for an additional 1,000,000 shares of common
stock. INLEC invested approximately $1,680,000 for an additional 1,000,000
shares of 5% cumulative redeemable preference shares (the 1998 Preference
Shares). This investment is consolidated by the Company since it owns 100% of
Inverness' ordinary shares. The preference shares held by INLEC (including
cumulative dividend) are reflected in the accompanying consolidated balance
sheets as mandatorily redeemable Preferred Stock of a subsidiary.
Upon liquidation of Inverness, the Preference Shareholders (Original and
1998 Preference Shareholders) are entitled to receive, out of funds legally
available, cumulative annual dividends of approximately $0.084 and $0.095 per
share, respectively. At the option of the Company and subject to certain
limitations on each redemption, the preference shares may be redeemed for
approximately $1.67 per share, plus any accrued and unpaid dividends. The
Company must redeem all 1,000,000 Original Preference Shares by
F-21
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(6) INVESTMENT IN INVERNESS MEDICAL LIMITED (CONTINUED)
May 31, 2000, and all 1,000,000, 1998 preference shares by October 2003. If the
Company cannot legally redeem the Preference Shares (Original and 1998
Preference Shareholders) on those dates, as defined, it must redeem the shares
as soon as legally permissible at a price of approximately $1.91 per share plus
any accrued and unpaid dividends. Upon liquidation of Inverness, the Preference
Shareholders (Original and 1998 Preference Shareholders) are entitled to receive
approximately $1.59 per share, plus any accrued and unpaid dividends;
thereafter, the ordinary stockholders shall equally share with the preference
shareholders in the remaining assets to be distributed. The preference
shareholders do not hold any voting rights.
Under a related agreement, Highlands and Islands Enterprise (HIE), a party
related to INLEC, constructed a 50,000 square foot production facility for
Inverness to use for manufacturing its products. Inverness has entered into a
20-year facility lease, with an option to purchase the facility for fair market
value. The rent due under this lease will be approximately $550,000 per year,
subject to increases every five years, dependent upon then current market rates,
as defined. The Company is guarantor to HIE for these payments if Inverness
defaults on its payments.
Through December 31, 1998, INLEC provided Inverness with (pound)3,100,000
British pounds sterling (approximately $5,255,500 at December 31, 1998) for the
purpose of outfitting the facility with required equipment, providing training
for the Inverness work force and certain other defined costs. These funds shall
be permanently invested in Inverness, so long as no events of default by
Inverness occur within five years of the funding. Events of default are defined
as the insolvency of Inverness, defined changes in ownership of Inverness and
certain other similar related criteria. Should a default occur within five years
of the funding by INLEC to Inverness, the Company will be liable to INLEC for a
declining portion, as defined, of the amounts paid by INLEC.
Inverness recognizes as revenue the funded amounts relating to the facility
and equipment over the estimated useful life of the facility and equipment and
amounts related to training and other costs, based on when such costs are
incurred. Inverness recognized grant revenue of approximately $722,000,
$1,128,000 and $1,555,000 during the years ended December 31, 1996, 1997 and
1998, respectively, which are included in grants and other revenue in the
accompanying consolidated statements of operations. Unearned amounts of
approximately $1,312,000 and $847,000 at December 31, 1997 and 1998,
respectively, are included in deferred revenue in the accompanying consolidated
balance sheets.
(7) TRANSACTIONS WITH ENVIROMED AND EN PLC LIMITED PARTNERSHIP
In October 1995, EN PLC Limited Partnership (EN PLC) was formed by the
Company's President and a group of investors for the purpose of purchasing
ordinary shares of Enviromed. As of May 1, 1996, EN PLC had acquired 27.0% of
Enviromed's outstanding voting stock. In October 1996, the Company purchased
200,000 common shares of Enviromed and entered into an agreement with EN PLC
(the EN PLC Agreement), pursuant to which the Company purchased 7,961,386 shares
of Enviromed held by EN PLC for approximately $3,800,000. As a result of the
purchase, along with a subsequent purchase of an additional 100,000 shares of
Enviromed, the Company's ownership interest in Enviromed increased to 28.9%. The
Company's purchase price for these shares was based on their quoted market price
at the date of the Company's acquisition of such shares from EN PLC. On January
1, 1997, the Company and EN PLC entered into an amendment to the EN PLC
Agreement pursuant to which the Company agreed to issue two promissory notes, in
principal amounts of approximately $2,800,000 and $1,000,000, respectively. In
consideration of the amendment, the Company agreed to issue to EN PLC a warrant
to purchase 15,401
F-22
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(7) TRANSACTIONS WITH ENVIROMED AND EN PLC LIMITED PARTNERSHIP (CONTINUED)
shares of common stock at an exercise price of $12.875 per share. The warrant is
exercisable at any time prior to January 1, 2002. In accordance with SFAS No.
123, the Company recorded deferred financing costs of approximately $107,000 in
connection with the grant of these warrants.
On December 12, 1997, certain EN PLC shareholders agreed to exchange their
existing promissory notes for new promissory notes, whereby certain January and
April 1998 principal payments of approximately $1,600,000 converted into common
stock upon the earlier of the election of the noteholder or June 10, 1998; the
terms of the subsequent principal payments remained unchanged. The conversion
price represented a 15% discount to the market price on the date the new
promissory notes were issued. The holders of the new promissory notes could not
have received cash payments in lieu of conversion. The Company accounted for
this transaction as an early extinguishment of debt and the issuance of two new
instruments, the new promissory notes and a forward contract to purchase Common
stock. Accordingly, the Company recorded the value of the forward contract as a
component of stockholder's equity, the new promissory notes at their fair value
and an extraordinary loss of $206,000 on the retirement of the original
promissory notes.
During 1998 the Company acquired an additional 300,000 shares of Enviromed
(see Note 8(b)), increasing the Company's ownership to 33% (and its voting
interest to 29.9%).
Following the Company's acquisition of its ownership interest in Enviromed,
the Company has accounted for its investment under the equity method. In the
years ended December 31, 1996, 1997 and 1998, the Company has recorded income
(loss) of $(200,000), $(327,000) and $237,000, respectively, representing the
Company's pro rata share of Enviromed's results of operations during the
Company's period of ownership. Pursuant to APB Opinion No. 18, The Equity Method
of Accounting for Investments in Common Stock, the Company accounts for the
excess of the Company's investment over its pro rata share of Enviromed's net
assets as goodwill; the Company is amortizing such goodwill over 15 years, its
estimated useful life.
During 1998, the Company determined that its investment in Enviromed
suffered a permanent impairment and wrote down its investment by approximately
$1,958,000 (see Note 8(d)).
(8) NET CHARGE ON BUSINESS DISPOSITIONS, ASSET IMPAIRMENTS AND RESTRUCTURING
ACTIVITIES
The components of the net charge on business dispositions, asset
impairments and restructuring activities are as follows:
<TABLE>
<S> <C>
Bankruptcy of majority-owned subsidiary......................................... $ 147,614
Gain on sale of Cambridge Diagnostics product line.............................. (1,232,492)
Asset impairments and restructuring activities at Cambridge Diagnostics......... 810,486
Impairment of Orgenics' goodwill................................................ 5,000,000
Impairment of investment in Enviromed........................................... 1,957,724
Impairment of intangible assets relating to the Nutritional Supplement Lines.... 858,751
----------
$7,542,083
----------
----------
</TABLE>
F-23
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(8) NET CHARGE ON BUSINESS DISPOSITIONS, ASSET IMPAIRMENTS AND
RESTRUCTURING ACTIVITIES (CONTINUED)
(A) BANKRUPTCY OF MAJORITY-OWNED SUBSIDIARY
As of December 31, 1998 the Company owned a 61.7% interest in Jmar Ames,
Inc. (Jmar), a distributor of certain consumer products. In December 1998, the
Jmar Board of Directors (with the Company's approval) voted to file for Chapter
11 bankruptcy. In February 1999 the bankruptcy petition was filed. The Company
recorded as an expense its share of the write-down of the Jmar assets and
expenses relating to the assumption of certain Jmar liabilities that the Company
had guaranteed.
(B) SALE OF CAMBRIDGE DIAGNOSTIC PRODUCT LINE
On September 30, 1998, the Company's wholly owned Irish subsidiary,
Cambridge Diagnostics, signed an agreement with Trinity Biotech, Ltd. whereby
Cambridge Diagnostic agreed to sell certain assets pertaining to Cambridge
Diagnostics' infectious disease diagnostic business, primarily inventories,
equipment and its ongoing business. In return for these assets Cambridge
Diagnostics received consideration of approximately $2,300,000 consisting of
555,731 shares of the Company's stock, 300,000 shares of Enviromed stock (a 33%
owned investee of the Company (see Note 7)) and $230,000 in cash. The Company
recorded a gain on the sale of the business of approximately $1,232,000.
After the sale of these assets the Company reorganized the remaining
business conducted by Cambridge Diagnostics during the fourth quarter. As a
result of this reorganization, Cambridge Diagnostics' future activities will
consist of manufacturing certain consumer products for other Company
subsidiaries, primarily IMI. Its activities will no longer include any
substantial intercompany work with Inverness or the manufacture of disease
diagnostic products for unrelated customers. In connection with this strategic
reorganization, Cambridge Diagnostics accrued expenses of approximately $190,000
pertaining to severance, outplacement and related obligations. Of this amount,
$69,000 was paid before year-end; Cambridge Diagnostics expects to pay the
balance of this amount, approximately $121,000, in the first quarter of 1999.
Cambridge Diagnostics also wrote off the net book value of certain fixed assets
and leasehold improvements relating to the discontinued activities for which it
has no alternative future use. The total asset impairment charge was
approximately $437,000. The balance of this charge relates to legal and advisory
fees related to the reorganization.
(C) IMPAIRMENT OF ORGENICS' GOODWILL
In accordance with the provisions of SFAS No. 121 and APB Opinion No. 17
(see Note 2(n)), the Company determined that Orgenics' goodwill had suffered an
impairment of value during the fourth quarter of 1998. Orgenics' declining
financial performance and short-term outlook (both earnings and gross cash
flows) suggested that an impairment had occurred. The Company performed an
impairment test using a discounted future cash flow model and recorded an
impairment charge of $5,000,000 relating to this asset. The remaining carrying
value of Orgenics' goodwill is not material to the Company's financial position.
(D) IMPAIRMENT OF INVESTMENT IN ENVIROMED
During the fourth quarter of 1998, the Company determined that under the
provisions of APB Opinion No. 18, the Company's investment in Enviromed (see
Note 7) had suffered an impairment. The
F-24
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(8) NET CHARGE ON BUSINESS DISPOSITIONS, ASSET IMPAIRMENTS AND
RESTRUCTURING ACTIVITIES (CONTINUED)
protracted decline in Enviromed's market price, and the absence of qualitative
factors that would indicate a recovery, suggested that such an impairment had
occurred. The Company recorded a loss of approximately $1,958,000 to write down
the Company's investment to its estimated fair value. The Company's estimate of
fair value was determined by reviewing the market value of Enviromed's stock.
(E) IMPAIRMENT OF INTANGIBLE ASSETS RELATING TO THE NUTRITIONAL SUPPLEMENT
LINES
Goodwill and trademarks relating to the purchase of the Nutritional
Supplement Lines are being amortized over 25 years. During 1998 the Company
recorded an impairment charge of approximately $859,000 relating to one
discontinued Nutritional Supplement Line. The impairment charge represents the
remaining net book value of the goodwill and trademark values assigned to this
product line.
(9) NOTES PAYABLE
The Company has the following debt outstanding as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Bank debt--Orgenics................................................................ $ 4,510,000 $ 2,318,000
Note payable to AHP (Note 4)....................................................... 6,000,000 --
Promissory note payable to EN PLC (Note 7)......................................... 3,378,278 405,643
Cambridge Diagnostic notes (Note 10)............................................... 2,827,500 --
Term loan--IMI (Note 5(b))......................................................... 22,000,000 32,700,000
Note payable to customer (Note 14)................................................. 4,951,079 --
Subordinated revenue royalty notes (Note 11)....................................... 7,500,000 7,500,000
Senior subordinated convertible notes (Note 12).................................... 8,649,181 3,778,154
Note payable to former Can-Am shareholders (Note 5)................................ -- 2,000,000
Subordinated promissory notes payable (Note 13).................................... -- 9,728,555
Revolving line of credit--IMI (Note 4)............................................. -- 3,905,565
Other miscellaneous notes payable.................................................. 86,547 145,217
------------- -------------
59,902,585 62,481,134
Less--Current portion.............................................................. 20,426,511 12,071,650
------------- -------------
$ 39,476,074 $ 50,409,484
------------- -------------
------------- -------------
</TABLE>
Each of the debt instruments listed above is discussed in the notes to the
consolidated financial statements as referenced, except as follows:
(A) BANK DEBT--ORGENICS
Orgenics has approximately $2,318,000 of notes payable to a bank outstanding
at December 31, 1998. The outstanding balance is collateralized by certain
Orgenics assets. The notes bear interest at rates ranging from 5% to 7.5% and
are payable monthly through 2002. Orgenics has granted liens on all of its
assets, insurance rights, share capital, goodwill and shares of a subsidiary as
collateral for certain debt.
F-25
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(9) NOTES PAYABLE (CONTINUED)
(B) MATURITIES OF LONG-TERM DEBT
Certain of the Company's debt instruments provide for either a mandatory or
optional conversion to common stock. Future cash maturities of the Company's
debt instruments, including convertible debt, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
1999............................................................................................... $ 8,293,496
2000............................................................................................... 19,505,576
2001............................................................................................... 8,653,000
2002............................................................................................... 7,017,000
2003............................................................................................... 7,800,000
Thereafter......................................................................................... 7,500,000
-------------
58,769,072
Less--Unamortized original issue discount.......................................................... 471,735
Plus--Notes payable convertible into common stock (see Notes 12 and 13)............................ 4,183,797
-------------
$ 62,481,134
-------------
-------------
</TABLE>
(10) CAMBRIDGE DIAGNOSTIC NOTES AND WARRANTS
In connection with the 1994 acquisition of Cambridge Diagnostics, the
Company issued notes payable (the Cambridge Diagnostics Notes) and common stock
warrants (the Cambridge Diagnostics Warrants) to individual investors for gross
proceeds of $3,030,000. Of this amount, $3,000,000 related to the Cambridge
Diagnostics Notes, which bore interest at 10% and were due on March 31, 1998.
Pursuant to the variable terms of the Cambridge Diagnostic Warrants, the Company
recorded noncash interest charges of approximately $10,633,000 for the year
ended December 31, 1996, which represents the difference between the fair market
value of the underlying common stock and the exercise price of the Cambridge
Diagnostics Warrants. All of the shares of common stock underlying the Cambridge
Diagnostics Warrants (1,142,635) were issued in 1997.
On December 12, 1997, substantially all of the Cambridge Diagnostic
Noteholders agreed to exchange their existing Cambridge Diagnostic Notes for new
promissory notes (the New Cambridge Diagnostic Notes). Under the terms of the
New Cambridge Diagnostic Notes, the noteholders received the right to convert
the New Cambridge Diagnostic Notes, plus accrued interest at an annual rate of
10%, into common stock at a conversion price of $7.23. The conversion price
represented a 15% discount to the market price on the date the New Cambridge
Diagnostic Notes were issued.
The New Cambridge Diagnostic Noteholders could have exercised their
conversion right at any time through the maturity date (June 12, 1998), at which
time the New Cambridge Diagnostic Notes automatically converted into common
stock; holders of the New Cambridge Diagnostic Notes could not have received
cash payments in lieu of conversion. The Company accounted for this transaction
as an early extinguishment of debt and the issuance of two new instruments: the
New Cambridge Diagnostic Notes and a forward contract to purchase common stock.
Accordingly, in 1997, the Company recorded the value of the forward contract as
a component of stockholder's equity, the New Cambridge Diagnostic Notes at
F-26
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(10) CAMBRIDGE DIAGNOSTIC NOTES AND WARRANTS (CONTINUED)
their fair value and an extraordinary loss of $373,000 on the retirement of the
original Cambridge Diagnostic Notes.
On June 12, 1998, all of the existing New Cambridge Diagnostic Notes and
accrued interest were converted into 428,713 shares of common stock.
(11) SUBORDINATED REVENUE ROYALTY NOTES
In June 1997, the Company sold subordinated revenue royalty notes (the
Royalty Notes) having an aggregate issue price of $7,500,000. Each Royalty Note
entitles the holder thereof (each, a Royalty Noteholder) to payments relating to
net revenue of the Company during each fiscal quarter the Royalty Note is
outstanding, which payments are pro rated with respect to the number of days the
Royalty Note is outstanding during such fiscal quarter (each, a Royalty
Payment). The Company is obligated to make Royalty Payments until the total
amount of Royalty Payments equals four times the total issue price of the
Royalty Note (the Total Repayment Amount). In addition, the Company may elect to
prepay the Royalty Notes, as described below.
The quarterly Royalty Payment for each $25,000 of issue price will equal the
greater of (i) 0.005% of net revenues of the Company during such fiscal quarter
or (ii) $1,300. Until the Total Repayment Amount has been paid, the Company will
pay Royalty Payments as to each Royalty Note as follows: (i) the first payment
will be made on or before the forty-fifth day after the closing of the fourth
full fiscal quarter during which such Royalty Note is outstanding and will cover
Royalty Payments for such fiscal quarter and the prior fiscal quarters during
which such Royalty Note was outstanding, provided, however, that the aggregate
Royalty Payments made at such time shall not be less than $6,000; and (ii) the
Royalty Payment for each subsequent fiscal quarter will be made on or before the
forty-fifth day after the closing of such fiscal quarter. Based on the estimated
repayment schedules, the Company imputed interest rates ranging from 31.4% to
32.9% and recorded interest expense of approximately $904,000 and $2,210,000 in
1997 and 1998, respectively. The Company made royalty payments of approximately
$2,287,500 during 1998, with an additional payment of $423,300 due on February
15, 1999.
If the Company elects to prepay the amount due under the Royalty Notes or if
an event of default (as defined) is not cured with 30 days after notice to the
Company, the Company will pay an amount equal to the greater of (i) 1.5 times
the issue price of Royalty Notes minus all Royalty Payments made by the Company
prior to the date of payment (but excluding any amount paid as Late Payment
Interest, as defined below) or (ii) an amount equal to the issue price of the
Royalty Notes plus an annualized internal rate of return on the issue price
equal to 30% calculated from the issue date of the Royalty Notes to the date of
payment, minus all Royalty Payments made by the Company prior to the date of
payment (but excluding any amount paid as Late Payment Interest, as defined
below).
The Royalty Notes will bear interest only in the event of a late Royalty
Payment, an event of default or a prepayment. If a Royal Payment is not made
within 45 days of the end of the relevant fiscal quarter, the overdue amount
will accrue interest (Late Payment Interest) at the rate of 18% per annum,
compounded daily, accruing from the date such Royalty Payment is due to the date
the Royalty Payment, including late payment interest thereon, is made. Any such
late payment interest will be payable on demand.
U.S. Boston Capital Corporation (U.S. Boston Capital), the president of
which is a director of the Company, acted as a placement agent for the offering
of Royalty Notes. As compensation for its services as
F-27
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(11) SUBORDINATED REVENUE ROYALTY NOTES (CONTINUED)
placement agent, U.S. Boston Capital received a cash commission of $600,000,
which the Company has recorded as deferred financing costs and will amortize
over the estimated 14-year life of the Royalty Notes. In addition, an affiliate
of U.S. Boston Capital receives 1% of payments as additional compensation for
its services.
Subsequent to year-end, a majority of the noteholders elected to convert the
minimum cash royalty payments due to them on February 15, 1999 and May 15, 1999
to 5,980 shares of Series C or E Preferred Stock (see Note 17(g)).
(12) 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 the
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 commission
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.
Amortization of the aggregate original issuance discount was $497,703 and
$1,350,819 in 1997 and 1998, respectively.
The original terms of the Convertible Notes provided for a formula-based
conversion price, as defined, and allowed the Company to repay the Convertible
Notes prior to the due date for a 5%
F-28
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(12) SENIOR SUBORDINATED CONVERTIBLE NOTES (CONTINUED)
premium, provided however that the Company's stock price had to meet certain
performance criteria, as defined, for the Company to exercise this right. During
1998, Convertible Noteholders converted their Convertible Notes representing an
aggregate face value of $6,221,846 into 2,313,822 shares of common stock.
In January 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. The Company will account for this
transaction in January of 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 anticipates that it will record an extraordinary loss
of approximately $306,000, net of the amount deemed to have been paid to
reacquire the warrants. Since the new conversion feature is less beneficial to
the convertible noteholders than that to which they were entitled on the date of
the amendment, the Company will not perform any further accounting for such
conversion feature.
(13) SUBORDINATED PROMISSORY NOTES
During June 1998, the Company entered into a securities purchase agreement
pursuant to which it sold units (the Units) having an aggregate purchase price
of $10.2 million. Each Unit consists of (i) $25,000 in principal amount of a
subordinated promissory note (the Subordinated Promissory Notes) and (ii) a
warrant to acquire such number of shares of the Company's common stock. In the
aggregate, the Company issued warrants to purchase 181,731 shares of common
stock with exercise prices ranging from $6.21 to $10.13 per share. The
Subordinated Promissory Notes are due on the second anniversary of their date of
issuance and the warrants may be exercised at any time on or prior to the fifth
anniversary of their issuance.
The Subordinated Promissory Notes bear interest at a rate equal to 13% per
year which is payable quarterly on the first day of each quarter, beginning
October 1, 1998. Whenever the Company makes a payment of principal under the
Subordinated Promissory Notes, it shall at the same time pay a premium equal to
5% of the principal amount then being paid. The Subordinated Promissory Notes
may be prepaid by the Company in whole or in part at any time after December 31,
1998.
U.S. Boston Capital (a related party) acted as placement agent for the
offering of the Subordinated Promissory Notes. As compensation for its services
as placement agent, U.S. Boston Capital received cash commissions totaling
$612,000, which the Company recorded as deferred financing costs and is
amortizing over the two-year life of the Subordinated Promissory Notes. In
addition, three Directors of the Company purchased Units with an aggregate issue
price of $775,000 during 1998.
Pear Tree Royalty Company, Inc., as the authorized representative of the
Subordinated Promissory Noteholders, received warrants to purchase 60,577
shares. A director of the Company is also a director and shareholder of Pear
Tree Royalty Company. The value of these warrants is $217,820 which the Company
F-29
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(13) SUBORDINATED PROMISSORY NOTES (CONTINUED)
recorded as deferred financing costs and is amortizing over the two-year life of
the Subordinated Promissory Notes. Upon issuance of the Subordinated Promissory
Notes and warrants the Company allocated a total of $826,000 of the proceeds to
the Warrants and is amortizing the related original issuance discount and
deferred financing costs over the two-year life of the Notes.
(14) LIFESCAN ALLIANCE
On November 10, 1995, the Company entered into an agreement with Johnson and
Johnson Development Corporation (JJDC) and LifeScan, Inc. (LifeScan), an
affiliate of JJDC (the Master Agreement) that included an equity investment
agreement, a glucose distribution agreement and a summary of terms to be
included in other distribution agreements.
The equity investment provided for $13,700,000 of advances from JJDC, which
converted into 201,622 shares of Company common stock in 1996. Upon conversion
of the advances, LifeScan also paid the Company a success fee of $7,000,000. The
number of shares issued represents 5% of (i) the common stock outstanding as of
November 10, 1995, and (ii) any shares of common stock issued prior to such
conversion pursuant to the exercise of rights to acquire common stock
outstanding as of November 10, 1995. In addition, under the terms of the
LifeScan Alliance, the Company must issue to JJDC, for no additional
consideration, shares of common stock equal to 5% of any additional common stock
issued pursuant to the exercise of rights to acquire common stock outstanding as
of November 10, 1995 (the total of all shares so issued, the Conversion Shares).
The precise number of Conversion Shares depends on the number of shares of
common stock that the Company is required to issue in connection with the
financing of the Inverness Facility as well as the vesting and exercise of
options and warrants that were outstanding on November 10, 1995. To date, JJDC
has received an additional 76,128 shares of common stock. The Company estimates
that JJDC will ultimately receive an additional 179,151 shares of common stock.
Upon the receipt of the $7,000,000 success fee, the Company deferred $3,000,000
based on management's estimate of its future commitments under the distribution
agreement. During 1998, the Company's product development plans led it to change
the original estimate, as the product to which the deferred revenue pertains
will be replaced by the first quarter of 1999. Accordingly, the Company
accelerated the amortization of this amount to reflect the new estimate.
The Master Agreement also covers two other Company products. Upon the Food
and Drug Administration (FDA)'s acceptance of the Company's filing for each of
these products, LifeScan may, at its sole discretion, pay the Company $3,000,000
and require the Company to enter into a distribution agreement for each product,
under the terms set forth below. If LifeScan elects to make the $3,000,000
payment and the product receives FDA clearance, then LifeScan shall make an
additional payment of $2,000,000. If LifeScan makes the $3,000,000 payment and
the Company does not receive FDA clearance within one year of the payment, the
$3,000,000 must be repaid in eight quarterly installments without interest
(provided payments are made in a timely manner), and the related distribution
agreement will terminate.
In order to fund start-up manufacturing and operating costs, LifeScan loaned
the Company $5,000,000 in August 1997. The Company then loaned the $5,000,000 to
its primary supplier. Both the loans payable and receivable accrued interest at
12% and were repaid through product credits for the first 130,000 meters shipped
during 1997 and 1998. The Company has also agreed to share with LifeScan certain
start-up costs associated with the new product launch. The Company will fund its
share of such costs ($3,750,000) via product discounts/rebates granted on future
product sales. Based on current forecasts, the
F-30
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(14) LIFESCAN ALLIANCE (CONTINUED)
Company expects these discounts/rebates to run through 2000. The Company records
such amounts as a reduction of sales in the period incurred, as the Company does
not have an obligation to pay the balance of its share of the costs if its
relationship with LifeScan were to cease.
(15) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
The Company has operating lease commitments for certain of its facilities
and equipment that expire through 2026. The following schedule outlines future
minimum annual rental payments under these leases at December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1999........................................................................... $ 1,275,318
2000........................................................................... 1,139,439
2001........................................................................... 1,122,021
2002........................................................................... 1,048,128
2003........................................................................... 927,134
Thereafter..................................................................... 10,304,180
-------------
$ 15,816,220
-------------
-------------
</TABLE>
Rent expense relating to these operating leases was approximately $401,000,
$778,000 and $1,406,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
(B) INDUSTRIAL DEVELOPMENT AUTHORITY OF IRELAND GRANTS
Prior to the Company's acquisition of Cambridge Diagnostics, Cambridge
Diagnostics received certain capital expenditure and revenue grants from the
Industrial Development Authority of Ireland (the IDA). Cambridge Diagnostics
recognizes revenue on the capital expenditure grants over the estimated useful
lives of the related assets and on revenue grants as the related costs are
incurred.
As a condition to retaining the grants, the IDA requires Cambridge
Diagnostics to maintain a certain number of employees in Ireland. The IDA also
prohibits the Company from disposing of assets or terminating business
activities that were funded by the grants within 10 years of such grants. As of
December 1998, Cambridge Diagnostics was not in compliance with the employment
provisions of the grants. As a result, the IDA could require Cambridge
Diagnostics to repay capital expenditure and revenue grants totaling 876,990
Irish pounds (approximately $1,304,000 at December 31, 1998). The IDA
historically has not pursued its right to recoup these grants from Cambridge
Diagnostics and, as of December 31, 1998, Cambridge Diagnostics management
believes that the IDA is unlikely to do so, provided that Cambridge Diagnostics
does not terminate its operations in Ireland. Accordingly, as management
believes that repayment is not probable, Cambridge Diagnostics has not provided
for a potential liability for the repayment of these grants.
If the IDA did pursue its rights to recoup these grants, it could have a
material adverse effect on the Company and Cambridge Diagnostics.
F-31
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(15) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(C) LEGAL PROCEEDINGS
From time to time, the Company may be exposed to litigation arising out of
its products and operations. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's financial condition or results of operations, except as
discussed below.
The Company has been involved in a dispute with Enviromed (see Note 7) 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 the
issuance of shares of common stock to Enviromed in connection therewith. On
March 23, 1998, the Company entered into a settlement agreement with certain
parties to whom Enviromed sold the Company's common stock whereby the parties
agreed that such parties shall have title to 80% of common stock in dispute, or
622,898 shares, and the Company shall have title to the remaining 20% of said
shares, or 155,724 shares. The parties agreed to dismiss the lawsuit with
prejudice and the parties agreed to release each other from any liability
arising out of the lawsuit. When originally issued to Enviromed, 185,094 of the
total 778,622 shares of common stock related to the acquisition of certain
manufacturing rights; the fair value of such shares was previously recorded as
an expense by the Company. Accordingly, the Company recorded the fair value of
the shares recovered as a part of this settlement agreement as a component of
other income in the accompanying consolidated statement of operations.
In connection with the original dispute with 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 by another
Company executive; (ii) the repayment terms of the L437,000 (approximately
$730,000) note due from Environmed were amended to allow for repayment during
1999; and (iii) Enviromed agreed to pay the Company an amount up to a maximum of
L500,000 (approximately $835,000) based upon purchases made by the Company from
an Enviromed subsidiary in excess of certain minimums as defined by the
agreement.
On November 15, 1997, Medical Selfcare, Inc. (Medical) served process on the
Company asserting service mark and trade name infringement, unfair competition,
dilution and related claims arising from the Company's use of the mark
"Selfcare" for medical devices, pharmaceutical products and nutritional
supplements. On June 30, 1998, the Company entered into a settlement agreement
resolving Medical's claims and the Company's counterclaims. Pursuant to the
settlement agreement, the Company received a payment of $275,000, which was
recognized as other income during 1998. In return for the settlement, the
Company is obligated to phase out its use of the name Selfcare.
On April 22, 1998, Abbott Laboratories (Abbott) served process on the
Company and Princeton BioMeditech Corporation (PBM), which manufacturers certain
products for the Company, asserting patent infringement arising from the Company
and PBM's manufacture, use and sale of products that Abbott claims are covered
by one or more of the claims of patents to which Abbott asserts that it is the
exclusive licensee. Abbott claims that certain of the Company's products
relating to pregnancy detection and ovulation prediction infringe the patents.
Abbott is seeking an order preliminary and permanently enjoining the Company and
PBM from infringing the patents, compensatory damages to be determined at trial,
treble damages, costs, prejudgment and postjudgment interest on Abbott's
compensatory damages, attorneys' fees, and a recall of all the Company's and
PBM's existing products found to infringe the
F-32
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(15) COMMITMENTS AND CONTINGENCIES (CONTINUED)
patents. On August 5, 1998, the court denied Abbott's motion for a preliminary
injunction. On October 23, 1998, the Company filed a counterclaim against
Abbott, asserting that Abbott is infringing patents that are owned by the joint
venture, and seeking a declaration that Abbott infringes the patents, permanent
injunctive relief, money damages and attorneys' fees. On November 5, 1998,
Abbott filed a counterclaim against the Company asserting the invalidity of the
patents that are owned by a joint venture of the Company and PBM and seeking a
declaration of invalidity, non-infringement and unenforceability. The case is
currently in the discovery stage. The Company intends to defend this litigation
vigorously. A final ruling against the Company could have a material adverse
impact on the Company's business, financial condition and results of operations.
In late October 1998, Abbott commenced a lawsuit against the Company and
Lifescan. The complaint alleges that the disposable test strips used in the
Company's blood glucose monitoring system supplied by Inverness to LifeScan
infringe a patent owned by Abbott. Abbott is seeking damages and an injunction
against sales in the United States. Abbott is also seeking to enjoin Lifescan
and the Company from the manufacture, use and sale of these blood glucose test
strips in the United States during the pendency of the infringement litigation.
In February 1999, the court denied Abbott's motion for a preliminary injunction.
Based on a review of the Abbott claims by patent counsel, the Company believes
that the test strips do not infringe the Abbott patent. The Company also
believes that Abbott's claims will be proven to be without merit and intends to
vigorously defend them. A final ruling against the Company would have a material
adverse impact on the Company's business, financial condition and results of
operations.
On January 22, 1999, in connection with Cambridge Diagnostic's sale of its
infectious disease business to Trinity (see Note 8(b)) Cambridge Biotech
Corporation (CBC) and Cambridge Affiliate Corporation (CAC) (see Note 16(b)) for
discussion of relationship to the Company) commenced a lawsuit against the
Company, the Company's Chief Executive Officer, CDIL, Trinity Biotech plc
(Trinity) and Pasteur Sanofi Diagnostic (Pasteur) alleging that the sale of the
business was not properly authorized and as a result CBC would loose the benefit
of certain patented licenses from Pasteur. CBC is requesting the sale agreement
to be null and void, to have the license between Pasteur and CBC declared to be
in full force, to recover any damages caused by the Company and its Chief
Executive Officer. On January 25, 1999, the Court denied CBC's motion and all
parties have agreed to mediation. The Company does not believe that an adverse
ruling against the Company would have a material adverse impact on sales,
operations or financial performance.
(D) AGREEMENT WITH PRINCETON BIOMEDITECH CORPORATION
On March 15, 1996, the Company entered into an agreement with PBM that
provides for the development of certain specific infectious disease tests by PBM
for marketing by Selfcare on a nonexclusive basis. The agreement also grants the
Company an option to market under its own brand name other infectious disease
tests and certain other types of tests developed by PBM on terms to be agreed.
Pursuant to the agreement, the Company is also obligated to purchase $6,900,000
of certain test kits from PBM through 1998 and will provide $500,000 to finance
the purchase of equipment, which will remain the property of the Company, to be
used in producing test kits for the Company.
On August 6, 1997, the Company and PBM amended their manufacturing agreement
by extending the term of the original agreement to July 1, 2001, adjusting the
pricing and establishing new minimum purchase quantities in the aggregate amount
of $2,656,000 over the course of the first year. The Company
F-33
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1998
(15) COMMITMENTS AND CONTINGENCIES (CONTINUED)
is obligated over the remaining three years to purchase minimum amounts of
products to be mutually agreed upon by the parties. Also on August 6, 1997, the
Company and PBM, along with wholly owned subsidiaries of each, formed a limited
liability company, PBM-Selfcare LLC (the LLC), in which each party owns a 50%
interest, entered into a joint venture and a series of related technology
transfer and licensing agreements to develop a comprehensive strategy to
commercially exploit products, and related intellectual property, in the area of
pregnancy detection and ovulation prediction (collectively the Joint Venture
Agreement). Under the Joint Venture Agreement, the parties each contributed
intellectual property and, in addition, the Company agreed to spend up to
$2,000,000 on an as-needed basis to cover expenses incurred by the LLC in
enforcing the rights of the LLC in the intellectual property. To date, the
Company has not incurred material costs pursuant to the Joint Venture Agreement
and does not anticipate expending material resources in connection with this
activity during 1999.
(E) ORGENICS ROYALTY COMMITMENT
Orgenics finances its research and development expenditures in Israel under
programs sponsored by the Chief Scientist of the Ministry of Trade of Israel for
the support of research and development projects. In the event that development
of the products in which the Chief Scientist participates is successful,
Orgenics will be obligated to pay royalties at the rate of 2% to 3% of the sales
of products developed with funds provided by the Chief Scientist, up to an
amount equal to 100% of the Chief Scientist's research and development grants to
such projects. The maximum contingent royalty as of December 31, 1998 was
approximately $2,100,000. Orgenics does not have any liability to the State of
Israel for amounts received in support of unsuccessful programs or unsaleable
products.
(F) ORGENICS SEVERANCE OBLIGATIONS
Orgenics' liability for severance pay, pursuant to Israeli law is provided
by managers' insurance policies and by severance pay funds. Severance expenses
were $139,000, $248,000 and $166,000 for the years ended December 31, 1996, 1997
and 1998, respectively. The related liability is not material at either December
31, 1997 or 1998.
France has a government-run mandatory pension plan to which contributions
are made monthly by both the employee and employer based on the gross monthly
salary. Orgenics' liability is fully covered by these contributions.
In addition, pursuant to industry employment agreements, a lump-sum
severance is payable upon retirement to employees still in the service of
Orgenics' French subsidiary at the date of retirement. Orgenics has fully
provided for the obligations as of December 31, 1997 and 1998.
F-34
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(15) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(G) LICENSE AGREEMENTS WITH BECTON, DICKINSON AND COMPANY
On September 1, 1998, the Company entered into two patent license agreements
with Becton, Dickinson and Company. The agreements are effective April 1, 1998
and continue in effect until the last of the patents expire. The agreements
grant the Company the rights to manufacture and sell products incorporating
certain patented technology, as defined by the agreement. The Company is
obligated to pay royalties on the net sales of products incorporating the
licensed technology at a rate of 6% until December 31, 1998, 6.25% on the first
$108 million of net sales beginning January 1, 1999 and 5.25% thereafter,
extending through the expiration of the patents. During 1998, the Company paid
Royalties of approximately $212,000 under this agreement and had approximately
$482,000 accrued at December 31, 1998.
(16) RESEARCH, MANAGEMENT AND MANUFACTURING AGREEMENTS
(A) U.S. BOSTON TECHNOLOGY ASSOCIATES LIMITED PARTNERSHIP
On December 30, 1993, the Company entered into a purchase and sale agreement
with USB '93 Technology Associates Limited Partnership (USB '93) for the sale of
the Company's core immuno-assay technology (the Technology) for $1,360,000. USB
`93 is a limited partnership, the general partner of which is USB '93 Inc., a
corporation whose president and chief executive officer is a director of the
Company.
The Company and USB `93 also entered into a license and development
agreement on December 30, 1993 whereby the Company leased back the rights to the
Technology from USB '93 in consideration for three warrants to purchase up to an
aggregate of 438,750 shares of the Company's common stock at an exercise price
of $1.54 per share and the payment of 1.5% of gross sales and 22.5% of royalty
income, up to an aggregate total payment of $6,000,000. Pursuant to this
agreement, the Company has charged approximately $235,000 and $702,000 to cost
of sales in the accompanying consolidated statements of operations for the years
ended December 31, 1996 and 1997, respectively.
The income from the sale of technology was recorded as deferred revenue at
the time of the sale and was being recognized using the straight-line method
over a period of six years. The Company has recognized approximately $227,000 as
grants and other revenue in the accompanying consolidated statements of
operations for each of the two years ended December 31, 1997.
On March 31, 1998, the Company finalized an agreement with USB '93 whereby
the Company agreed to purchase the interests of USB '93, effective February 25,
1998, for an aggregate purchase price of $4.9 million, paid in (i) 487,017
shares of the Company's common stock and (ii) $360,000 in cash. At the time of
the purchase, USB '93's assets consisted primarily of a core immuno-assay
technology.
The Company reduced the value of the intangible asset by $397,000,
representing the amount of unrecognized deferred revenue related to the
Company's sale of the technology to USB `93 in December 1993. The remaining
intangible asset will be amortized over its estimated useful life of 15 years.
As a result of this transaction, the Company will no longer pay royalties to USB
'93 of 1.5% of product sales, which were due pursuant to the license and
development agreement.
F-35
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(16) RESEARCH, MANAGEMENT AND MANUFACTURING AGREEMENTS (CONTINUED)
(B) CAMBRIDGE DIAGNOSTICS AND CAMBRIDGE AFFILIATE
Concurrent with the Company's 1994 acquisition of Cambridge Diagnostics,
Cambridge Diagnostics entered into a series of agreements with Cambridge
Affiliate. Cambridge Affiliate is 49%-owned by Selfcare and 51%-owned by the
successor corporation of the company that sold Cambridge Diagnostics to the
Company in 1994. Cambridge Affiliate was formed to allow Cambridge Diagnostics
access to certain non-assignable technologies, pursuant to the terms of the 1994
acquisition. Cambridge Diagnostics accounts for its investment in Cambridge
Affiliate under the equity method. Under the terms of the agreements mentioned
above, Cambridge Diagnostics manufactures and sells products on behalf of and
manages the affairs of Cambridge Affiliate. During 1996, 1997 and 1998,
Cambridge Diagnostics paid royalties of $56,000, $86,000 and $62,000,
respectively, and earned total sales, manufacturing and management fees of
$2,589,000, $3,351,000 and $2,211,000, respectively, under the terms of these
agreements.
Following the disposition of certain assets from its disease diagnostic
business and subsequent reorganizations (see Note 8(b)), Cambridge Diagnostics
will not conduct any significant future business with Cambridge Affiliate.
(17) STOCKHOLDERS' EQUITY
(A) STOCK OPTION PLAN
In 1996, the Company adopted the 1996 Stock Option and Grant Plan (the 1996
Plan); the 1996 Plan replaced both the 1992 and 1994 Plans. The 1996 Plan may be
administered by the Board of Directors or by an Option Committee, as defined, to
grant incentive stock options, nonqualified stock options, restricted stock,
unrestricted stock, stock appreciation rights (SAR), performance share awards
and dividend equivalent rights. The Company has reserved a total of 1,500,000
shares of common stock for future grant under the 1996 Plan. As of December 31,
1998, the Company has authority to isuue options to purchase up to 33,834 shares
of common stock under the 1996 Plan. The key terms of the 1996 Plan include the
granting of incentive stock options or nonqualified stock options with a term of
up to 10 years and the granting of stock appreciation rights, restricted stock,
unrestricted stock, performance share awards and dividend equivalent rights. The
1996 Plan also provides for option grants to nonemployee directors and automatic
acceleration of all options and stock appreciation rights upon a change in
control.
(B) OTHER STOCK OPTIONS
On August 15, 1995, the Company entered into a stock option agreement (the
Agreement) with the President of the Company. Under the Agreement, the President
received a variable-term option to acquire 520,000 shares of the Company's
common stock. Upon completion of the Company's initial public offering (IPO) in
1996, the Company recorded a compensation charge of approximately $3,240,000
representing the difference between the exercise price per share and the fair
market value per share at the date the terms became fixed.
On October 17, 1995, the Company entered into variable-term stock option
agreements with certain officers and key employees that granted them options to
acquire up to 253,500 shares of common stock at an exercise price of $1.54 per
share. The option terms became fixed upon completion of the Company's 1996 IPO.
During the year ended December 31, 1996, the Company recorded compensation
expense of approximately $199,000 related to these option grants.
F-36
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(17) STOCKHOLDERS' EQUITY (CONTINUED)
During the year ended December 31, 1996, the Company recorded compensation
expense of approximately $680,000 related to stock options granted to employees
that were contingent on certain goals that were met in 1996.
On December 29, 1995, the Company entered into stock option agreements with
certain shareholders and officers of Orgenics that granted them options to
acquire up to 85,800 shares of common stock at an exercise price of $3.69 per
share. These options vest over a four-year period but were not to be considered
granted until the Company's ownership of Orgenics exceeded 51%, which occurred
during October 1996. The difference between the exercise price and the fair
market value price per share of $1,056,000 is included as a component of the
Orgenics purchase price.
The following is a summary of all stock option activity during the three
years ended December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE OPTION
SHARES OPTION PRICE PRICE
---------- ------------- ---------------
<S> <C> <C> <C>
Options outstanding, December 31, 1995................................ 3,382,444 $ 1.15- 3.69 $ 2.41
Granted............................................................. 842,292 3.69-15.38 12.58
Exercised........................................................... (51,675) 1.54 1.54
----------
Options outstanding, December 31, 1996................................ 4,173,061 1.15-15.38 4.47
Granted............................................................. 130,200 9.25-12.38 10.33
Exercised........................................................... (148,898) 1.15- 2.53 1.84
Terminated.......................................................... (9,425) 1.54- 2.53 2.41
----------
Options outstanding, December 31, 1997................................ 4,144,938 1.15-15.38 4.75
Granted............................................................. 664,691 2.94-13.60 6.64
Exercised........................................................... (192,406) 1.15- 2.53 2.22
Terminated.......................................................... (68,392) 1.54-13.88 7.30
----------
Options outstanding, December 31, 1998................................ 4,548,831 $ 1.15-15.38 $ 5.10
---------- ------------- -----
Options exercisable, December 31, 1998................................ 3,066,748 $ 1.15-15.38 $ 3.13
---------- ------------- -----
---------- ------------- -----
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE SHARES CONTRACT LIFE PRICE SHARES PRICE
- ------------------------------------------- ---------- --------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
$1.15-1.54................................. 606,927 4.56 $ 1.40 606,927 $ 1.40
2.27-2.94.................................. 1,848,991 6.23 2.44 1,679,679 2.45
3.46-4.62.................................. 854,400 8.55 3.77 509,300 3.91
7.33-10.13................................. 581,688 9.07 9.24 248,167 9.39
10.88-15.38................................ 656,825 8.16 13.71 22,675 13.67
---------- ----------
4,548,831 7.08 $ 5.10 3,066,748 $ 3.13
---------- --- ------ ---------- ------
---------- --- ------ ---------- ------
</TABLE>
F-37
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(17) STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average fair value under the Black-Scholes option pricing model
of options granted during the years ended December 31, 1996, 1997 and 1998 under
the Company's stock options is $8.76, $5.33 and $3.67, respectively.
On December 10, 1996, the Company granted 600,000 options at an exercise
price of $13.875 to the President and certain officers and key employees of the
Company. The options vest in seven years unless certain performance goals, as
defined, are met. In the event that such performance goals are met, the vesting
of these options will accelerate.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which requires the measurement of the fair value of stock options
or warrants to be included in the statement of income or disclosed in the notes
to the financial statements. The Company has continued to account for
stock-based compensation for employees under APB Opinion No. 25, Accounting for
Stock Issued to Employees, and has elected the disclosure-only alternative under
SFAS No. 123. The Company has computed the pro forma disclosures required under
SFAS No. 123 for stock options and warrants granted after January 1, 1995 using
the Black-Scholes option pricing model prescribed by SFAS No. 123. The
assumptions used were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................................................ 6.2% 6.0% 5.0%
Expected dividend yield............................................................ -- -- --
Expected lives..................................................................... 5 years 5 years 5 years
Expected volatility................................................................ 74% 51% 64%
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss--
As reported.................................................... $ (28,577,642) $ (24,710,294) $ (18,777,724)
Pro forma...................................................... (29,878,119) (26,269,519) (21,380,111)
Net loss per share--
As reported.................................................... $ (6.00) $ (3.36) $ (1.55)
Pro forma...................................................... (6.27) (3.56) (1.76)
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-38
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(17) STOCKHOLDERS' EQUITY (CONTINUED)
(C) WARRANTS
The following is a summary of all warrant activity during the three years
ended December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE EXERCISE PRICE
----------------- -------------- -----------------
<S> <C> <C> <C>
Warrants outstanding, December 31, 1995...................... 2,034,890 $ 1.54- 2.53 $ 1.97
Granted.................................................... 54,090 12.88 12.88
----------------- -------------- ------
Warrants outstanding, December 31, 1996...................... 2,088,980 1.54-12.88 2.21
Granted.................................................... 267,979 11.94-13.96 11.93
Exercised.................................................. 1,145,664 2.93 2.93
----------------- -------------- ------
Warrants outstanding, December 31, 1997...................... 1,211,295 1.54-13.96 2.26
Granted.................................................... 242,308 6.21-10.13 8.42
Exercised.................................................. 438,841 1.54- 2.53 1.54
----------------- -------------- ------
Warrants outstanding, December 31, 1998...................... 1,014,762 $ 1.54-13.96 $ 4.03
----------------- -------------- ------
----------------- -------------- ------
</TABLE>
The substantial majority of the warrants included in the table above were
issued in connection with debt and equity financings, or amendments thereto, of
which 70,045 were issued to officers or directors of the Company. The value of
warrants issued in connection with debt financings and amendments have yielded
original issue discounts and additional interest expense of approximately
$10,632,842, $497,702 and $1,788,116 in 1996, 1997 and 1998, respectively.
(D) EMPLOYEE STOCK PURCHASE PLAN
Upon the consummation of the IPO, the Company adopted the Selfcare, Inc.
Employee Stock Purchase Plan (the Stock Purchase Plan). The Company has reserved
250,000 shares of common stock for issuance under the Stock Purchase Plan. Under
the Stock Purchase Plan, eligible employees will be able to purchase shares of
the Company's common stock at 85% of fair market value, as defined, subject to
certain limitations. The Company had issued 53,154 shares under the Stock
Purchase Plan as of December 31, 1998.
(E) SERIES A PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
of the stockholders of the Company, to issue up to 5,000,000 shares of Preferred
Stock in classes or series and to fix the designations, powers, preferences and
the relative, participating, optional or other special rights of the shares of
each series and any qualifications, limitations and restrictions thereon, as set
forth in the Certificate of Incorporation. Any such Preferred Stock issued by
the Company may rank senior to the common stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of common stock.
In October 1996, the Board of Directors adopted a resolution authorizing
10,000 shares of Series A convertible preferred stock, $.001 par value (the
Series A Preferred Stock). In October 1996, the Company sold 5,500 shares of
Series A Preferred Stock at a price of $1,000 per share to various foreign
investors. The net proceeds of such sales of approximately $5,200,000 were used
to fund a portion of the Orgenics
F-39
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(17) STOCKHOLDERS' EQUITY (CONTINUED)
purchase price. In 1996, 1997 and 1998, the Series A Preferred Stock converted
into 22,892, 508,019 and 49,058 shares of common stock, respectively. As of
December 31, 1998, all shares of the Series A Preferred Stock, plus total
dividends of 155,806, have been converted into common stock.
(F) 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 (the Warrant Shares) for gross
proceeds of $8,000,000.
The original terms of the Series B Preferred Stock provided for a
formula-based conversion price, as defined. During 1998, 3,120 shares of Series
B Preferred Stock were converted into 809,809 shares of common stock. 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 will provide 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 Company will record the value of this premium,
approximately $794,000, on the amendment date. The amended terms also affect the
conversion formula. 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 the Fixed Conversion Price 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 and after July 20, 1999, the Company may redeem
outstanding Series B Preferred Stock at its option (consisting of at least 50%
of the then-outstanding Series B Shares) 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 December 31, 1998 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.
F-40
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(17) STOCKHOLDERS' EQUITY (CONTINUED)
Upon the original issuance of the Series B Preferred Stock and the Warrants,
the Company allocated $310,045 of the proceeds to the Warrants. Also, pursuant
to the original conversion terms whereby the Series B Preferred Stockholders
were guaranteed a discount after May 24, 1998, the Company has recorded
aggregate accretion of $2,049,545, which represents the maximum guaranteed
return available to Series B Preferred Stockholders. This accretion was charged
directly to accumulated deficit during 1997. 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.
(G) SERIES C, D AND E PREFERRED STOCK
On January 8, 1999, the Company sold in a private placement 56,845 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 14,170
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 $7,404,500. 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 intends to call a special meeting of the shareholders as soon as
practicable to approve 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.
Of the gross proceeds, the Company received Series C and E Preferred Stock
proceeds of approximately $4,887,000 during December 1998 from certain officers,
directors and previous investors of the
F-41
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(17) STOCKHOLDERS' EQUITY (CONTINUED)
Company. Because the Company and these investors effectively entered into an
oral agreement regarding the terms of the investment prior to December 31, 1998,
the Company recorded this amount as an advance on Series C and E Preferred Stock
in 1998 and reclassified this amount to the respective series of Preferred Stock
when the shares were issued in January 1999. The advance has been classified
outside of stockholders' equity because of the redemption provisions described
above.
The Conversion Prices for the Series C and Series D Preferred Stock
represents the closing price 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 will
account for this guaranteed return in January 1999.
Certain of the Preferred Shares issued served to extinguish currently due
debt obligations. The Company issued 9,665 shares of Series C and E Preferred
Stock as payment, in lieu of interest due. The terms and conditions surrounding
the issuance of these shares was the same as for the Preferred Investors that
paid cash.
(18) INCOME TAXES
The Company provides for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes. Accordingly, a deferred tax asset or
liability is determined based on the difference between the financial statement
and tax bases of assets and liabilities, as measured by the enacted tax rates
expected to be in effect when these differences reverse.
The tax provision of $195,872 in the accompanying consolidated statement of
operations for 1997 relates entirely to current state taxes payable. The 1998
tax provision of approximately $544,000 relates to both current state taxes
($283,000) and capital gains taxes $(214,000) due in Ireland upon the business
disposition described in Note 8(b).
F-42
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(18) INCOME TAXES (CONTINUED)
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. The income tax effects of these temporary differences at December 31,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Deferred tax assets--
Nondeductible reserves.......................................................... $ 140,000 $ 218,000
Deferred revenue................................................................ 1,209,000 (152,000)
Net domestic and foreign operating loss and tax credit carryforwards............ 20,089,000 17,416,000
-------------- --------------
21,438,000 17,482,000
-------------- --------------
Deferred tax liabilities--
Depreciation.................................................................... (23,000) (66,000)
Other temporary differences..................................................... (2,000) --
-------------- --------------
(25,000) (66,000)
-------------- --------------
Valuation allowance............................................................... (21,413,000) (17,416,000)
-------------- --------------
Net deferred tax asset............................................................ $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The Company has available domestic and foreign net operating loss
carryforwards of approximately $13,016,000 and $34,491,000, respectively, as of
December 31, 1998 and federal research and development credit carryforwards of
approximately $65,000 as of December 31, 1998 to reduce future income taxes, if
any. These carryforwards expire on various dates through 2013 and are subject to
review and possible adjustment by the appropriate taxing authorities.
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss carryforwards for tax purposes may be subject to an annual limitation if a
cumulative change of ownership of more than 50% occurs over a three-year period.
As a result of the Company's recent preferred stock financings, such a change in
ownership has occurred. As a result of this ownership change, the utilization of
substantally all of the Company's domestic net operating loss carryforwards will
be limited to approximately $4,500,000 per year. The Company has recorded a 100%
valuation allowance against the deferred tax asset, as the realization of the
asset is uncertain at this time.
(19) FINANCIAL INFORMATION BY SEGMENT
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, during the fourth quarter of 1998. SFAS No.
131 established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. 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.
F-43
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(19) FINANCIAL INFORMATION BY SEGMENT (CONTINUED)
The Company's reportable operating segments are Diabetes, Women's Health,
Clinical Diagnostics and Other.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on earnings before interest and taxes (EBITA). Revenues are
attributed to geographic areas based on where the customer is located. Segment
information for the years ended December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
CLINICAL CORPORATE AND
DIABETES WOMEN'S HEALTH DIAGNOSTICS OTHER TOTAL
------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1998
Net product sales from external
customers....................... $ 57,215,716 $ 40,451,437 $ 15,852,391 $ 562,055 $ 114,081,599
Intersegment net sales............ 1,115,379 2,386,889 -- 2,104 3,504,372
Grant and other revenue........... 2,689,609 -- -- 1,212,410 3,902,019
------------- --------------- ------------- ------------- --------------
Total net revenue........... 61,020,704 42,838,326 15,852,391 1,776,569 121,487,990
EBITDA............................ (3,949,964) 8,373,838 934,913 (3,047,265) 2,311,522
Depreciation and amortization..... 2,426,135 2,058,805 3,498,170 795,998 8,779,108
Interest income--
External........................ 89,165 43,025 103,238 349,351 584,779
Intersegment.................... -- 80,453 -- 1,607,514 1,687,967
------------- --------------- ------------- ------------- --------------
Total interest income....... 89,165 123,478 103,238 1,956,865 2,272,746
Interest expense--
External........................ 6,667 2,975,774 241,000 6,341,794 9,565,235
Intersegment.................... 1,370,828 90,154 826,985 -- 1,687,967
------------- --------------- ------------- ------------- --------------
Total interest expense...... 1,377,495 3,065,928 467,985 6,341,794 11,253,202
Other items--
Net charge on business
dispositions, asset
impairments and restructuring
activities.................... -- 858,751 4,577,994 2,105,338 7,542,083
Equity in net income of
affiliated company............ -- -- -- 237,366 237,366
Income taxes...................... 37,841 156,000 260,841 89,550 544,232
Assets............................ 47,483,580 45,992,593 6,301,200 15,300,104 115,077,477
Expenditures for property, plant
and equipment................... 814,061 136,718 256,931 234,780 1,442,480
</TABLE>
F-44
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
CLINICAL CORPORATE AND
DIABETES WOMEN'S HEALTH DIAGNOSTICS OTHER TOTAL
-------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1997
Net product sales from external
customers....................... $ 434,476 $ 31,817,105 $ 18,122,176 $ 517,464 $ 50,891,221
Intersegment net sales............ 42,820 1,479,288 -- -- 1,522,108
Grant and other revenue........... -- -- -- 1,359,150 1,359,150
-------------- --------------- ------------- ------------- -------------
Total net revenue............. 477,296 33,296,393 18,122,176 1,876,614 53,772,479
EBITDA............................ (14,263,131) 5,300,334 2,863,947 (3,208,548) (9,307,398)
Depreciation and amortization..... 953,342 2,023,830 3,011,310 608,569 6,597,051
Interest income--
External........................ 97,420 186,867 148,531 535,522 968,340
Intersegment.................... 5,948 58,219 -- 1,049,472 1,113,639
-------------- --------------- ------------- ------------- -------------
Total interest income......... 103,368 245,086 148,531 1,584,994 2,081,979
Interest expense--
External........................ 322,245 1,831,841 696,906 2,635,843 5,486,835
Intersegment.................... 463,460 650,179 -- -- 1,113,639
-------------- --------------- ------------- ------------- -------------
Total interest expense........ 785,705 2,482,020 696,906 2,635,843 6,600,474
Other items--
Charge for in process research
and development............... -- -- 3,303,300 -- 3,303,300
Noncash compensation charge..... -- -- -- 167,938 167,938
Equity in net loss of affiliated
company....................... -- -- -- (327,000) (327,000)
Income taxes...................... (13,938) 175,000 34,373 437 195,872
Assets............................ 14,505,278 46,142,091 18,820,221 15,904,093 95,371,683
Expenditures for property, plant
and equipment................... 3,773,561 414,967 976,409 236,015 5,400,952
</TABLE>
F-45
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
CLINICAL CORPORATE AND
DIABETES WOMEN'S HEALTH DIAGNOSTICS OTHER TOTAL
-------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1996
Net product sales from external
customers....................... $ 223,438 $ -- $ 6,590,510 $ -- $ 14,066,630
Intersegment net sales............ 71,398 465,823 -- -- 537,221
Grant and other revenue........... 4,000,000 -- -- 996,158 4,996,158
-------------- --------------- ------------- ------------- -------------
Total net revenue............. 4,294,836 465,823 6,590,510 996,158 19,600,009
EBITDA............................ (5,637,123) (2,969,260) (55,501) (60,975) (8,722,859)
Depreciation and amortization..... 307,288 51,768 569,446 115,634 1,044,136
Interest income--
External........................ 90,066 41,730 -- 411,651 543,447
Intersegment.................... -- -- -- -- --
-------------- --------------- ------------- ------------- -------------
Total interest income......... 90,066 41,730 -- 411,651 543,447
Interest expense--
External.......................... 28,348 81,774 502,882 10,948,272 11,561,276
Intersegment.................... -- -- -- -- --
-------------- --------------- ------------- ------------- -------------
Total interest expense........ 28,348 81,774 502,882 10,948,272 11,561,276
Other items--
Charge for in process research
and development............... -- -- 4,396,700 -- 4,396,700
Noncash compensation charge..... -- -- -- 4,195,437 4,195,437
Equity in net loss of affiliated
company....................... -- -- -- (200,000) (200,000)
Income taxes...................... -- -- -- -- --
Assets............................ 9,854,689 3,042,938 14,045,449 14,146,376 41,089,452
Expenditures for property, plant
and equipment................... 3,867,187 600,338 189,534 92,417 4,749,476
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF EBITDA TO NET LOSS 1996 1997 1998
- ----------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
EBITDA........................................................... $ (8,722,859) $ (9,307,398) $ 2,311,522
Depreciation and amortization expense............................ (1,044,136) (6,597,051) (8,779,108)
Amortization of deferred revenue................................. 996,158 1,359,150 3,902,019
Interest expense................................................. (11,561,276) (5,486,835) (9,565,235)
Income taxes..................................................... -- (195,872) (544,232)
Other noncash items.............................................. (8,245,529) (4,482,288) (6,102,690)
-------------- -------------- --------------
Net loss..................................................... $ (28,577,642) $ (24,710,294) $ (18,777,724)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-46
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
Revenues by geographic area for the years ended December 31, 1996, 1997 and
1998 were as follows:
<TABLE>
<CAPTION>
REVENUE
--------------------------------------------
1996 1997 1998
------------- ------------- --------------
<S> <C> <C> <C>
Geographic Area
United States.................................................... $ 11,534,753 $ 31,721,014 $ 95,649,297
France........................................................... 1,514,632 4,733,787 4,362,890
Germany.......................................................... 373,294 1,002,511 2,302,177
Other............................................................ 5,640,109 14,793,059 15,669,254
------------- ------------- --------------
$ 19,062,788 $ 52,250,371 $ 117,983,618
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
Long-lived tangible assets by geographic area were as follows:
<TABLE>
<CAPTION>
LONG-LIVED TANGIBLE ASSETS
---------------------------
<S> <C> <C>
GEOGRAPHIC AREA 1997 1998
- ------------------------------------------------------------------------------------- ------------- ------------
United Kingdom..................................................................... $ 5,960,317 $ 5,678,913
United States...................................................................... 1,341,602 745,565
Israel............................................................................. 2,039,000 1,297,000
Other.............................................................................. 1,167,113 480,386
------------- ------------
$ 10,508,032 $ 8,201,864
------------- ------------
------------- ------------
</TABLE>
(20) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Compensation and compensation-related............................................... $ 1,471,289 $ 2,345,034
Professional fees................................................................... 615,112 860,008
Product return reserve.............................................................. 257,042 106,048
Advertising and marketing........................................................... 769,133 893,448
Interest payable.................................................................... 1,448,481 528,646
Other............................................................................... 3,297,953 5,216,232
------------ ------------
$ 7,859,010 $ 9,949,416
------------ ------------
------------ ------------
</TABLE>
F-47
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
(21) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts receivable
reserve account:
<TABLE>
<CAPTION>
BALANCE AT PROVISION OTHER UNCOLLECTIBLE BALANCE AT
BEGINNING OF FOR ADDITIONS TO ACCOUNTS END OF
PERIOD BAD DEBT ALLOWANCES(1) WRITTEN OFF PERIOD
------------ ------------ ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1996........................................... 93,378 191,662 51,000 (19,821) 316,219
1997........................................... 316,219 1,281,054 -- (46,804) 1,550,469
1998........................................... 1,550,469 392,355 25,700 (31,666) 1,936,858
</TABLE>
- ------------------------
(1) Additions arising through the acquisition of Orgenics in 1996 and Can-Am in
1998
F-48
<PAGE>
SLFCR-10K-99
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 4, 1999 on the financial statements of the Company,
included in this Form 10-K/A, and to the incorporation of our report into the
Company's previously filed Registration Statement File Nos. 333-37961,
333-45535, 333-15583, 333-17855 and 333-45523, as amended.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 14, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the use of our report, dated
February 13 1997, on the financial statements of Orgenics Ltd. included in this
Form 10-K/A, and to the incorporation of our report into Selfcare, Inc.'s
previously filed Registration Statement File Nos. 333-37961, 333-45535,
333-15583, 333-17855 and 333-45523, as amended.
KOST,FORER AND GABBAY
CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
A MEMBER OF ERNST & YOUNG INTERNATIONAL
April 12, 1999
Tel-Aviv, Israel
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000915901
<NAME> SELFCARE, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,199,630
<SECURITIES> 0
<RECEIVABLES> 18,037,680
<ALLOWANCES> 1,937,000
<INVENTORY> 9,949,347
<CURRENT-ASSETS> 37,816,512
<PP&E> 13,904,283
<DEPRECIATION> 5,702,419
<TOTAL-ASSETS> 115,077,477
<CURRENT-LIABILITIES> 34,708,332
<BONDS> 50,409,484
3,718,251
10,538,235
<COMMON> 15,852
<OTHER-SE> 14,993,011
<TOTAL-LIABILITY-AND-EQUITY> 115,077,477
<SALES> 114,081,599
<TOTAL-REVENUES> 117,983,618
<CGS> 77,080,920
<TOTAL-COSTS> 43,669,755
<OTHER-EXPENSES> 7,542,083
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,565,235
<INCOME-PRETAX> (18,233,492)
<INCOME-TAX> 544,232
<INCOME-CONTINUING> (18,777,724)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,777,724)
<EPS-PRIMARY> (1.55)
<EPS-DILUTED> (1.55)
</TABLE>
