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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(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 or any
amendment to this Form 10-K. / /
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 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 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) 1998 1997 1996 1995 1994
- ---------------------------------------------------------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue............................................... $ 117,984 $ 52,250 $ 19,063 $ 7,239 $ 2,322
Operating loss............................................ (10,309) (18,768) (17,648) (5,560) (2,845)
Net loss.................................................. (18,778) (24,710) (28,578) (10,097) (2,785)
Net loss per common share................................. $ (1.55) $ (3.36) $ (6.00) $ (2.61) $ (0.52)
Cash dividends paid per common share...................... $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AS OF DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total assets.............................................. $ 115,077 $ 95,372 $ 41,089 $ 13,692 $ 5,331
Debt obligations.......................................... 62,481 59,903 8,833 10,500 2,168
Mandatorily redeemable preferred stock.................... 3,718 1,868 1,754 1,644 --
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:
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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:
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>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
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
<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
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
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-4
<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-5
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Preferred Stock Common Stock
Number of $.001 Number of $.001
Shares Par Value Shares Par Value
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 -- $ -- 4,057,924 $ 4,058
Issuance of common stock, net of issuance
costs of approximately $2,343,000 -- -- 1,505,508 1,505
Issuance of common stock related to
convertible advances -- -- 135,421 135
Issuance of Series A convertible preferred
stock, net of issuance costs of
approximately $338,000 5,500 5 -- --
Dividends accrued on Series A convertible
preferred stock -- -- -- --
Conversion of Series A convertible
preferred stock to common stock (300) -- 22,892 23
Conversion of note payable into common
stock -- -- 201,622 202
Exercise of stock options -- -- 51,896 52
Noncash interest expense related to common
stock warrants issued in connection with
promissory notes payable -- -- -- --
Noncash compensation expense related to
common stock options issued to Company's
president -- -- -- --
Noncash compensation expense related to
grants of common stock options -- -- -- --
Noncash interest expense related to common
stock warrants issued in connection with
promissory notes payable -- -- -- --
Options granted in connection with the
Orgenics Acquisition -- -- -- --
Amortization of deferred compensation
related to grant of common stock options -- -- -- --
Change in cumulative translation adjustment -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Total comprehensive loss
BALANCE, DECEMBER 31, 1996 5,200 $ 5 5,975,263 $ 5,975
<CAPTION>
Additional Treasury Stock
Paid-in Deferred Number of
Capital Compensation Shares Cost
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 9,553,220 $ (198,965) (15,600) $ (15,200)
Issuance of common stock, net of issuance
costs of approximately $2,343,000 10,439,344 -- -- --
Issuance of common stock related to
convertible advances 499,865 -- -- --
Issuance of Series A convertible preferred
stock, net of issuance costs of
approximately $338,000 5,161,850 -- -- --
Dividends accrued on Series A convertible
preferred stock -- -- -- --
Conversion of Series A convertible
preferred stock to common stock 14,162 -- -- --
Conversion of note payable into common
stock 13,693,346 -- -- --
Exercise of stock options 80,017 -- -- --
Noncash interest expense related to common
stock warrants issued in connection with
promissory notes payable 10,632,842 -- -- --
Noncash compensation expense related to
common stock options issued to Company's
president 3,240,000 -- -- --
Noncash compensation expense related to
grants of common stock options 756,472 -- -- --
Noncash interest expense related to common
stock warrants issued in connection with
promissory notes payable 106,729 -- -- --
Options granted in connection with the
Orgenics Acquisition 1,056,000 -- -- --
Amortization of deferred compensation
related to grant of common stock options -- 198,965 -- --
Change in cumulative translation adjustment -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Total comprehensive loss
BALANCE, DECEMBER 31, 1996 $ 55,233,847 $ -- (15,600) $ (15,200)
<CAPTION>
Accumulated Total
Other Stockholders'
Accumulated Comprehensive Equity Comprehensive
Deficit Income (Loss) (Deficit) Loss
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $(14,676,034) $ 102,524 $ (5,230,397) $ --
Issuance of common stock, net of issuance
costs of approximately $2,343,000 -- -- 10,440,849 --
Issuance of common stock related to
convertible advances -- -- 500,000 --
Issuance of Series A convertible preferred
stock, net of issuance costs of
approximately $338,000 -- -- 5,161,855 --
Dividends accrued on Series A convertible
preferred stock (51,037) -- (51,037) --
Conversion of Series A convertible
preferred stock to common stock (14,185) -- -- --
Conversion of note payable into common
stock -- -- 13,693,548 --
Exercise of stock options -- -- 80,069 --
Noncash interest expense related to common
stock warrants issued in connection with
promissory notes payable -- -- 10,632,842 --
Noncash compensation expense related to
common stock options issued to Company's
president -- -- 3,240,000 --
Noncash compensation expense related to
grants of common stock options -- -- 756,472 --
Noncash interest expense related to common
stock warrants issued in connection with
promissory notes payable -- -- 106,729 --
Options granted in connection with the
Orgenics Acquisition -- -- 1,056,000 --
Amortization of deferred compensation
related to grant of common stock options -- -- 198,965 --
Change in cumulative translation adjustment -- 71,041 71,041 71,041
Net loss (28,577,642) -- (28,577,642) (28,577,642)
------------ ------------ ------------ ------------
Total comprehensive loss $(28,506,601)
------------
BALANCE, DECEMBER 31, 1996 $(43,318,898) $ 173,565 $ 12,079,294
</TABLE>
F-6
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Number of $.001 Number of $.001
Shares Par Value Shares Par Value
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 5,200 $ 5 5,975,263 $ 5,975
Issuance of common stock, net of issuance
costs
of approximately $2,078,000 -- -- 1,813,201 1,813
Conversion of Series A convertible
preferred stock to common stock (4,800) (5) 508,019 508
Issuance of common stock in connection
with the purchase of Orgenics, Ltd. -- -- 90,344 90
Issuance of common stock related to
warrants issued in connection with
Cambridge Diagnostics Notes -- -- 1,142,635 1,143
Exercise of common stock options and
warrants -- -- 151,927 152
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 -- -- -- --
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 -- -- -- --
------------- ------------- ------------- -------------
Total comprehensive loss
BALANCE, DECEMBER 31, 1997 400 -- 9,681,389 9,681
Issuance of common stock -- -- 737,156 738
Conversion of preferred stock and notes to
common stock (400) -- 3,838,424 3,838
Issuance of common stock for the
acquisition of Can-Am Care Corporation -- -- 1,108,333 1,108
Issuance of common stock for Core
Immuno-Assay technology -- -- 487,017 487
Warrants issued with subordinated debt -- -- -- --
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
============= ============= ============= =============
<CAPTION>
Additional Treasury Stock
Paid-in Deferred Number of
Capital Compensation Shares Cost
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 55,233,847 $ -- (15,600) $ (15,200)
Issuance of common stock, net of issuance
costs
of approximately $2,078,000 16,051,352 -- -- --
Conversion of Series A convertible
preferred stock to common stock 126,039 -- -- --
Issuance of common stock in connection
with the purchase of Orgenics, Ltd. 1,068,230 -- -- --
Issuance of common stock related to
warrants issued in connection with
Cambridge Diagnostics Notes (1,143) -- -- --
Exercise of common stock options and
warrants 280,954 -- -- --
Purchase of treasury stock -- -- (16,597) (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 2,966,967 -- -- --
Deferred compensation related to grants of
common stock options 27,453 (27,453) -- --
Amortization of deferred compensation
related to grants of common stock options -- 27,453 -- --
Reversal of accrued dividends on Series A
convertible preferred stock -- -- -- --
Changes in cumulative translation
adjustment -- -- -- --
Net loss -- -- -- --
------------- ------------- ------------- -------------
Total comprehensive loss
BALANCE, DECEMBER 31, 1997 75,753,699 -- (32,197) (211,460)
Issuance of common stock 1,341,205 -- -- --
Conversion of preferred stock and notes to
common stock 14,641,043 -- -- --
Issuance of common stock for the
acquisition of Can-Am Care Corporation 10,597,326 -- -- --
Issuance of common stock for Core
Immuno-Assay technology 4,565,291 -- -- --
Warrants issued with subordinated debt 825,820 -- -- --
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)
Change in cumulative translation adjustment -- -- -- --
Net loss -- -- -- --
------------- ------------- ------------- -------------
Total comprehensive loss
BALANCE, DECEMBER 31, 1998 $ 107,724,384 $ -- (743,678) $ (3,724,900)
============= ============= ============= =============
<CAPTION>
Accumulated Total
Other Stockholders'
Accumulated Comprehensive Equity Comprehensive
Deficit Income (Loss) (Deficit) Loss
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (43,318,898) $ 173,565 $ 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 (126,542) -- -- --
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 (2,049,545) -- 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 -- 21,773 --
Changes in cumulative translation
adjustment -- (101,294) (101,294) (101,294)
Net loss (24,710,294) -- (24,710,294) (24,710,294)
------------- ------------- ------------- -------------
Total comprehensive loss $ (24,811,588)
-------------
BALANCE, DECEMBER 31, 1997 (70,183,506) 72,271 5,440,685
Issuance of common stock -- -- 1,341,943 --
Conversion of preferred stock and notes to
common stock (127,985) -- 14,516,896 --
Issuance of common stock for the
acquisition of Can-Am Care Corporation -- -- 10,598,434 --
Issuance of common stock for Core
Immuno-Assay technology -- -- 4,565,778 --
Warrants issued with subordinated debt -- -- 825,820 --
Common stock received in legal settlement
(Note 15(c)) -- -- (1,498,844) --
Common stock received in business
disposition
(Note 8(b)) -- -- (2,014,525) --
Common stock repurchased from related party -- -- (71) --
Change in cumulative translation adjustment -- 10,471 10,471 10,471
Net loss (18,777,724) -- (18,777,724) (18,777,724)
------------- ------------- ------------- -------------
Total comprehensive loss $ (18,767,253)
=============
BALANCE, DECEMBER 31, 1998 $ (89,089,215) $ 82,742 $ 15,008,863
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------Years Ended December 31,-----------
1996 1997 1998
<S> <C> <C> <C>
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-8
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
----------Years Ended December 31,-----------
1996 1997 1998
<S> <C> <C> <C>
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-9
<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
F-10
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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.
(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:
1997 1998
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
========== ==========
F-11
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(e) Depreciation and Amortization
Depreciation and amortization are computed using the straight-line
method based on the estimated useful lives of the related assets
as follows:
Asset Classification Estimated Useful Life
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
(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
F-12
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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,----------------
1996 1997 1998
<S> <C> <C> <C>
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.
(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.
F-13
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(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
DECEMBER 31, 1998
(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:
1997 1998
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
=========== ===========
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
F-15
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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.
(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,----------
1996 1997 1998
<S> <C> <C> <C>
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>
F-16
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
<TABLE>
<CAPTION>
---------------December 31,--------------
1996 1997 1998
<S> <C> <C> <C>
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
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>
(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
F-17
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
$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:
Fair value of net assets $ 2,533,000
In-process research and development 7,700,000
Goodwill 8,134,000
-----------
$18,367,000
===========
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 trademarks and
$21,600,000 to goodwill. As discussed in Notes 2(n) and 8(e), the Company
F-18
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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:
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
===========
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,
F-19
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 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
F-20
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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.
(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,
1997 1998
(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
F-21
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 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.
F-22
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 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.
F-23
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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:
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
===========
(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.
F-24
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(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 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
F-25
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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.
F-26
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(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:
1997 1998
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
=========== ===========
F-27
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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.
(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:
Year Amount
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
===========
(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.
F-28
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 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
F-29
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 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
F-30
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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% 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
F-31
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 recorded as deferred financing costs and is amortizing over
the two-year life of the Subordinated Promissory Notes.
F-32
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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.
F-33
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 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:
Amount
December 31,
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
===========
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
F-34
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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.
(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 (pound)437,000 (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
F-35
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
maximum of (pound)500,000 (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
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
F-36
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 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.
F-37
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(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.
(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.
F-38
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(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.
(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
F-39
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
49%-owned by Cambridge Diagnostics 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.
F-40
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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.
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>
F-41
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
<TABLE>
<CAPTION>
-----------------Outstanding----------------- ----------Exercisable---------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Exercise Price Shares Contract Life Exercise Price Shares Exercise 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>
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:
Years Ended December 31,
1996 1997 1998
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%
F-42
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Years Ended December 31,
1996 1997 1998
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)
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.
(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.
F-43
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(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 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
F-44
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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.
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.
F-45
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(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 Company. Because the Company and these investors
effectively entered into an
F-46
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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-47
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(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:
1997 1998
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 $ -- $ --
============ ============
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
F-48
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how
to allocate resources and in assessing performance. The Company's chief
operating decision making group is composed of the Chief Executive
Officer, members of Senior Management and the Board of Directors.
The Company's reportable operating segments are Diabetes, Women's Health,
Clinical Diagnostics and Other.
The 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-49
<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>
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-50
<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-51
<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:
Revenue
Geographic Area 1996 1997 1998
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
=========== =========== ============
Long-lived tangible assets by geographic area were as follows:
Long-Lived Tangible Assets
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
=========== ===========
(20) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following
at December 31, 1997 and 1998:
1997 1998
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
========== ==========
F-52
<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 Other Uncollectible Balance at
Beginning of Provision 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-53
<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: March 31, 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 March 31, 1999
Ron Zwanziger Officer)
/s/ CHRISTOPHER L. HUNTOON Chief Financial Officer
- ------------------------------ (Principal Financial March 31, 1999
Christopher L. Huntoon Officer)
/s/ JONATHAN J. FLEMING
- ------------------------------ Director March 31, 1999
Jonathan J. Fleming
/s/ CAROL R. GOLDBERG
- ------------------------------ Director March 31, 1999
Carol R. Goldberg
/s/ JOHN F. LEVY
- ------------------------------ Director March 31, 1999
John F. Levy
/s/ ROBERT ORINGER
- ------------------------------ Director March 31, 1999
Robert Oringer
/s/ EDWARD B. ROBERTS
- ------------------------------ Director March 31, 1999
Edward B. Roberts
/s/ PETER TOWNSEND
- ------------------------------ Director March 31, 1999
Peter Townsend
/s/ WILLARD LEE UMPHREY
- ------------------------------ Director March 31, 1999
Willard Lee Umphrey
</TABLE>
45
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333-37961, 333-45535, 333-15583, 333-17855 and
333-45523.
ARTHUR ANDERSEN LLP
March 26, 1999
Boston, Massachusetts
<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, 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
March 28, 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>
