<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1999
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________ to
_______________
COMMISSION FILE NUMBER 0-20871
SELFCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3164127
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 PROSPECT STREET
WALTHAM, MASSACHUSETTS 02453
(Address of principal executive offices)
(781) 647-3900
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the registrant's Common Stock as of
November 10, 1999 was 17,980,426.
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
<PAGE>
SELFCARE, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 1999
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Factors that might cause such
a difference are discussed in the section entitled "Certain Factors Affecting
Future Operating Results" beginning on page 15 of this Form 10-Q and in the
Company's Form 10-K/A as filed for the year ended December 31, 1998.
TABLE OF CONTENTS
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<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
a) Consolidated Statements of Operations for the three months ended September 30,
1999 and 1998 and the nine months ended September 30, 1999 and 1998. 3
b) Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998. 4
c) Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998. 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net product sales $33,047,073 $32,501,021 $89,004,945 $85,754,751
Grants and other revenue 99,159 1,138,657 641,750 3,204,288
------ --------- ------- ---------
Net revenues 33,146,232 33,639,678 89,646,695 88,959,039
Cost of sales 21,804,818 20,963,401 60,957,161 58,265,382
---------- ---------- ---------- ----------
Gross profit 11,341,414 12,676,277 28,689,534 30,693,657
---------- ---------- ---------- ----------
Operating Expenses:
Research and development 1,773,577 1,990,664 4,356,715 5,403,409
Selling, general and administrative 9,390,001 9,895,721 26,839,432 26,240,308
Gain on sale of assets -- (1,076,956) -- (1,076,956)
-- ----------- -- -----------
Total operating expenses 11,163,578 10,809,429 31,196,147 30,566,761
---------- ---------- ---------- ----------
Operating income (loss) 177,836 1,866,848 (2,506,613) 126,896
Interest expense, including non-cash interest
expense relating to issuance of warrants
and amortization of original issue discount (2,145,803) (1,907,404) (6,002,891) (7,520,277)
Interest income 148,345 128,395 305,139 456,849
Equity in net income (loss) of affiliate -- (467) -- 237,306
Other income (expense) 56,244 (24,564) (135,842) 1,699,716
------ -------- --------- ---------
Income (loss) before minority interest and dividends
and accretion on mandatorily redeemable preferred
stock of a subsidiary (1,763,378) 62,808 (8,340,207) (4,999,510)
Minority interest in subsidiary's loss 820 45,604 542 119,287
Dividends and accretion on mandatorily
redeemable preferred stock of a subsidiary (56,868) (29,446) (169,513) (87,425)
-------- -------- --------- --------
Income (loss) before extraordinary loss and income
taxes (1,819,426) 78,966 (8,509,178) (4,967,648)
Extraordinary loss on modification of
notes payable -- -- (306,092) --
-- -- --------- --
Income (loss) before income taxes (1,819,426) 78,966 (8,815,270) (4,967,648)
Provision for income taxes 14,895 160,886 348,516 297,198
------ ------- ------- -------
Net loss $(1,834,321) $ (81,920) $(9,163,786) $(5,264,846)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Basic and diluted net loss per common and potential
common share $(0.11) $(0.01) $(0.64) $(0.45)
------------ --------- ----------- -----------
------------ --------- ----------- -----------
Basic and diluted weighted average number of common
and potential common shares outstanding 17,282,270 12,740,077 16,503,290 11,673,422
------------ --------- ----------- -----------
------------ --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
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SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,311,481 $ 9,199,630
Accounts receivable, net of allowance for doubtful accounts of
$2,444,000 and $1,937,000 in 1999 and 1998, respectively 18,518,954 16,100,680
Inventories (Note 3) 12,767,436 9,949,347
Notes receivable from affiliated company 354,886 727,926
Prepaid expenses and other current assets 1,768,686 1,838,929
--------- ---------
Total current assets 40,721,443 37,816,512
PROPERTY, PLANT AND EQUIPMENT, NET 8,975,087 8,201,864
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE
ASSETS, NET 64,059,223 66,458,857
DEFERRED FINANCING COSTS AND OTHER ASSETS, NET 1,880,791 2,600,244
--------- ---------
$115,636,544 $115,077,477
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 20,614,971 $ 12,071,650
Accounts payable 16,734,891 11,960,808
Accrued expenses and other current liabilities 9,680,012 9,949,416
Current portion of deferred revenue 293,184 726,458
------- -------
Total current liabilities 47,323,058 34,708,332
---------- ----------
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion 284,542 517,190
Other long-term liabilities 160,000 173,000
Notes payable, net of current portion 41,585,474 50,409,484
---------- ----------
Total long-term liabilities 42,030,016 51,099,674
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY 3,524 4,122
----- -----
MANDATORILY REDEEMABLE PREFERRED STOCK OF A
SUBSIDIARY 3,887,764 3,718,251
--------- ---------
SERIES B CONVERTIBLE PREFERRED STOCK, $.001 par value -
Issued and outstanding - 4,720 and 4,880 in 1999 and 1998, respectively 6,259,798 5,651,235
--------- ---------
ADVANCE ON SERIES C AND E PREFERRED STOCK -- 4,887,000
-- ---------
STOCKHOLDERS' EQUITY:
Series C, D and E Preferred Stock, $.001 par value -
Issued and outstanding - 74,041 and 0 shares in 1999
and 1998, respectively 7,781,810 --
Common stock, $.001 par value -
Authorized - 40,000,000 shares
Issued - 18,058,834 and 15,852,319 shares in 1999 and 1998,
respectively 18,059 15,852
Additional paid-in capital 111,723,446 107,724,384
Less - Treasury stock, at cost, 743,678 shares (3,724,900) (3,724,900)
Accumulated deficit (99,649,733) (89,089,215)
Accumulated other comprehensive income (loss) (16,298) 82,742
-------- ------
Total stockholders' equity 16,132,384 15,008,863
---------- ----------
$115,636,544 $115,077,477
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
4
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SELFCARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,163,786) $ (5,264,846)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accretion on preferred stock of a subsidiary 169,513 87,425
Gain on sale of assets -- (1,076,956)
Noncash interest expense related to amortization of original issue discount
and issuance of warrants 250,990 1,679,268
Noncash portion of extraordinary loss on modification of notes payable 227,997 --
Noncash income related to legal settlement -- (1,498,844)
Amortization of deferred revenue (614,720) (3,204,288)
Depreciation and amortization 4,764,936 6,782,399
Equity in net income of affiliate -- (237,306)
Minority interest in subsidiary's loss (542) (119,287)
Changes in assets and liabilities:
Accounts receivable (2,560,373) (9,527,126)
Inventories (2,538,109) (2,320,020)
Prepaid expenses and other current assets 43,889 (3,272,827)
Accounts payable 4,914,531 6,108,493
Accrued expenses and other current liabilities (227,922) 183,365
--------- -------
Net cash used in operating activities (4,733,596) (11,680,550)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,646,753) (1,076,573)
Cash received from sale of assets -- 230,000
Cash received from affiliated company as repayment of loan 403,875 81,350
Cash paid for acquisition of Can-Am Care Corporation -- (15,044,640)
Cash paid for purchase of USB '93 Technology Associates Limited Partnership -- (515,604)
Cash paid for investment in Orgenics Ltd. -- (92,435)
Increase in other assets (5,012) (295,786)
------- --------
Net cash used in investing activities (2,247,890) (16,713,688)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for deferred financing costs (74,647) (1,927,886)
Net proceeds from issuance of common stock, preferred stock and warrants to
purchase common stock 2,908,528 1,326,725
Proceeds from borrowings under notes payable 10,901,810 52,339,187
Repayments of notes payable (8,315,058) (32,928,984)
----------- ------------
Net cash provided by financing activities 5,420,633 18,809,042
--------- ----------
FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS (327,296) 33,723
--------- ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,888,149) (9,551,473)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,199,630 15,669,898
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,311,481 $ 6,118,425
------------ -------------
------------ -------------
Supplemental Disclosures of Cash Flow Information:
Cash paid for -
Interest $ 4,044,578 $ 5,705,806
------------ -------------
------------ -------------
Income taxes $ 313,500 $ 450,592
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
5
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION OF FINANCIAL INFORMATION
The accompanying consolidated financial statements of Selfcare, Inc. and its
subsidiaries (the "Company" or "Selfcare") are condensed and unaudited. In the
opinion of management, the unaudited, condensed, consolidated financial
statements contain all adjustments considered normal and recurring necessary for
their fair presentation. Interim results are not necessarily indicative of
results to be expected for the year. These interim financial statements have
been prepared in accordance with the instructions for Form 10-Q and therefore do
not include all information and footnotes necessary for a complete presentation
of operations, financial position, and cash flows of the Company in conformity
with generally accepted accounting principles. The Company filed audited
consolidated financial statements which included information and footnotes
necessary for such presentation for the year ended December 31, 1998 on its Form
10-K/A filed with the Securities and Exchange Commission. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes for the period ended
December 31, 1998 included on the Company's Form 10-K/A.
2) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid cash investments with maturities of
three months or less at the date of acquisition to be cash equivalents. At
September 30, 1999, the Company's cash equivalents consisted of money market
funds. The Company follows the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". As of December 31, 1998 and September 30, 1999, all of the
Company's cash equivalents are classified as held to maturity and carried at
amortized cost.
3) INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
Raw materials $ 3,447,664 $2,879,965
Work in-process 2,757,842 890,483
Finished goods 6,561,930 6,178,899
------------- -----------
$12,767,436 $9,949,347
------------- -----------
------------- -----------
</TABLE>
4) NONRECURRING, NON-CASH INCOME AND EXPENSES
For the nine months ended September 30, 1999, the Company recognized a
$306,000 extraordinary loss, of which $228,000 was non-cash, related to the
modification of the Senior Subordinated Convertible Notes (see Note 7). Also,
for the nine months ended September 30, 1999, the Company recognized $251,000 of
non-cash interest expense related to the amortization of the original issue
discount with respect to Subordinated Promissory Notes and the issuance of
warrants.
For the nine months ended September 30, 1998, the Company recognized $1.5
million of non-cash income related to 155,724 shares of the Company's Common
Stock received into treasury in connection with the settlement agreement dated
March 6, 1998 by and between the Company, Trinity Biotech PLC, Flambelle Limited
and Eastcourt Limited. Also, for the nine months ended September 30, 1998, the
Company recognized $1.7 million of non-cash interest expense for the
amortization of the original issue discount on convertible notes and warrants.
Finally, on September 30, 1998, the Company and its wholly owned subsidiary,
Cambridge Diagnostics Ireland, Ltd. ("CDIL"), signed an agreement with Trinity
Biotech whereby CDIL agrees to sell certain assets of the infectious disease
diagnostics product lines. In return for the product lines the Company received
consideration of approximately $2.3 million consisting of 555,731 shares of
Selfcare stock, 300,000 shares of Enviromed stock and $230,000 in cash.
Enviromed was already 29% owned by the Company. The Company recorded a gain on
the sale of the business of approximately $1.1 million.
5) AMENDED AGREEMENTS WITH LIFESCAN, INC.
On June 7, 1999, the Company entered into amendments of its product
development and distribution agreements (the "Amended Agreements") with
LifeScan, Inc. ("LifeScan"), a subsidiary of Johnson & Johnson. Under the
Amended Agreements, the Company is to develop and supply to LifeScan additional
products for monitoring blood glucose in humans. Upon the execution of the
Amended Agreements, LifeScan provided the Company with an initial loan of
(pound)6,250,000 (approximately $9,900,000) to fund the anticipated
6
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5) AMENDED AGREEMENTS WITH LIFESCAN, INC. (CONTINUED)
production levels. LifeScan has also committed to make additional loans of up
to (pound)8,125,000 (approximately $13,000,000) to the Company upon the
accomplishment of certain milestones relating to the new products the Company
is to develop for LifeScan. Interest on the initial and additional loans
accrues at 11% and is payable quarterly. The aggregate principal amount of
the initial and additional loans will be repaid by deducting (pound)0.0125
(approximately $0.02) from the invoice price of each unit of product LifeScan
purchases from the Company commencing on the date of the initial loan.
Additionally, LifeScan has agreed to provide credit enhancements, related to
anticipated production levels, for further borrowings of up to $10,000,000 by
the Company from a commercial bank to fund additional manufacturing capacity
for the products covered by the Amended Agreements.
6) SERIES B PREFERRED STOCK
On August 26, 1997, the Company sold to investors in a private placement an
aggregate of 8,000 shares of Series B redeemable convertible preferred stock
(the "Series B Preferred Stock") and warrants (the "Warrants") to purchase an
aggregate of 114,628 shares of common stock for gross proceeds of $8,000,000.
The original terms of the Series B Preferred Stock provided for a
formula-based conversion price. During 1998, 3,120 shares of Series B Preferred
Stock were converted into 809,809 shares of common stock. On January 22, 1999
(the "Amendment Date"), the Company and the holders of Series B Preferred Stock
agreed to amend the terms of the Series B Preferred Stock, subject to
shareholder approval. Under the amended terms, the Company increased by a 15%
premium the face value of the Series B Preferred Stock on the Amendment Date,
subject to shareholder approval. The amended terms were approved at the
Company's annual meeting of Shareholders on May 20, 1999. The Company recorded
the value of this premium as a charge to retained earnings, approximately
$794,000, on the Amendment Date. The conversion ratio for the amended Series B
Preferred Stock to common stock was amended to be 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") for shares
converted prior to July 20, 1999 and (ii) in the case of conversions after July
20, 1999, a conversion price equal to the lower of $2.00 or the Variable
Conversion Price (defined as the average of the five lowest closing bid prices
of the common stock during the 30 trading days preceding such conversion) then
in effect. In the event the closing bid price per share is $3.25 or higher for
any ten consecutive trading days, the Company may fix the conversion price at
$2.00, by delivery of a written notice within five business days after the tenth
trading day, effective thirty days after the delivery of such notice. The
Company may require the conversion of all, but not less than all, of the shares
of Series B Preferred Stock, provided that the closing bid 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.
During the nine months ended September 30, 1999, 160 shares of Series B
Preferred Stock were converted into 80,090 shares of common stock. Any
unconverted Series B Preferred Stock will automatically convert into shares of
common stock on August 26, 2000.
The Series B Preferred Stock may also be redeemed by the Company for cash,
under certain circumstances as set forth below. In addition, a holder of Series
B Preferred Stock may require the Company to redeem any or all of such holder's
Series B Preferred Stock, under certain circumstances.
The Company may redeem not less than 50% of the outstanding shares of Series
B Preferred Stock at its option at the face amount, plus accrued premium and any
conversion default payments, in the event the price of the Company's common
stock is less than $2.00 for at least ten consecutive trading days prior to the
date of such redemption. As of September 30, 1999, all Warrants remain
outstanding and exercisable. Both the exercise price and the number of warrant
shares issuable under the Warrants are subject to antidilution provisions, as
defined.
Upon the original issuance of the Series B Preferred Stock and the Warrants,
the Company allocated $310,045 of the proceeds to the Warrants. Due to the
redemption provision described above, the Company classified the Series B
Preferred Stock outside of stockholders' equity in the accompanying consolidated
balance sheets.
7) SENIOR SUBORDINATED CONVERTIBLE NOTES
On October 27, 1997, the Company sold, in a private placement, senior
subordinated convertible notes (the "Convertible Notes") having an aggregate
face value of $10,000,000 and warrants (the "Convertible Note Warrants") to
purchase up to 106,700 shares of common stock to two institutional investors for
gross proceeds of $10,000,000.
7
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7) SENIOR SUBORDINATED CONVERTIBLE NOTES (CONTINUED)
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.
Shoreline Pacific Institutional Finance, the Institutional Division of
Financial West Group ("Shoreline"), acted as placement agent for the offering of
the Convertible Notes and the Convertible Note Warrants. As compensation for its
services as placement agent, Shoreline received a cash commission of $500,000,
representing 5% of the gross proceeds of the offering. In addition, the Company
issued four warrants to purchase up to an aggregate of 31,250 shares of common
stock with the same terms as the Convertible Note Warrants to certain designees
of Shoreline (the "Shoreline Warrants"). The Company recorded both the cash
commission paid to Shoreline and the value of the Shoreline Warrants, an
aggregate of $600,000 as deferred financing costs. Such costs were amortized
over the life of the Convertible Notes.
The original terms of the Convertible Notes provided for a formula-based
conversion price. During 1998, Convertible Noteholders converted Convertible
Notes representing an aggregate face value of $6,221,846 plus interest into
2,313,822 shares of common stock.
In January 1999, the Company and the Convertible Noteholders agreed to amend
the terms of the Convertible Notes by changing the maturity date and conversion
terms, as well as canceling the Convertible Note Warrants. The amended terms
were approved at the Company's annual meeting of shareholders on May 20, 1999.
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
was equal to the face value of the amended and replaced Convertible Notes plus a
15% premium. The New Convertible Notes matured on July 12, 1999, bore an
interest rate of 8% and provided for a fixed conversion price of $2.00. The
Company accounted for this transaction in January, 1999 in accordance to the
provisions of Emerging Issues Task Force ("EITF") Issue No. 96-19, "Debtor's
Accounting for a Modification or Exchange of Debt Instruments", and recorded an
extraordinary loss of approximately $306,000, net of the amount deemed to have
been paid to reacquire the Convertible Note Warrants. Since the new conversion
feature was less beneficial to the Convertible Noteholders than that to which
they were entitled on the date of the amendment, the Company did not perform any
further accounting for such conversion feature.
During the nine months ended September 30, 1999, Convertible Noteholders
converted Convertible Notes representing an aggregate face value of $3,319,130
plus interest into 1,715,328 shares of common stock. As of May 25, 1999, all of
the new Convertible Notes had been converted into Common Stock.
8) SERIES C, D AND E PREFERRED STOCK
On January 8, 1999, the Company sold in a private placement 57,842 shares of
Series C convertible preferred stock ("Series C Preferred Stock"), 3,030 shares
of Series D convertible preferred stock ("Series D Preferred Stock") and 13,169
shares of Series E convertible preferred stock ("Series E Preferred Stock")
(collectively, the "Preferred Shares") to investors (the "Preferred Investors")
at an aggregate purchase price of $7.4 million. The Preferred Investors include
certain officers and directors of the Company. Each Preferred Share accrues a
dividend of 7% per annum (the "Dividend"). The Preferred Shares are convertible
into shares of common stock. The actual number of shares of common stock
issuable upon conversion of a Preferred Share is equal to the aggregate stated
value per share (i.e., $100), plus any accrued and unpaid Dividend (unless the
Company elects to pay such dividend in cash) through the date of such
conversion, divided by a conversion price initially equal to $1.8125 per share
for the Series C Preferred Stock, $2.00 per share for the Series D Preferred
Stock, and $3.028 per share for the Series E Preferred Stock (in each case, the
"Conversion Price"). The Conversion Price is subject to adjustment for stock
splits, stock dividends, recapitalizations and similar transactions. All
Preferred Shares not previously converted will automatically convert into common
stock on January 8, 2002.
The issuance of the Preferred Shares was approved at the Company's annual
meeting of shareholders held on May 20, 1999. No holder of any Preferred Share
was entitled to convert such securities until the earlier of April 30, 1999 or
the date of shareholders' approval. Prior to shareholders' approval or if the
shareholders did not approve the issuance of the Preferred Shares, and any
holder of the Preferred Shares gave the Company a conversion notice on or after
April 30, 1999, then the Company would have given 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 were allowed to 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 was requested (the Requested Shares)
8
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8) SERIES C, D AND E PREFERRED STOCK (CONTINUED)
exceeded the number of such permitted shares, then the Company would have
converted, on a pro rata basis, only such portion of Preferred Shares as was
convertible into the number of such permitted shares, and would have redeemed
the remaining Preferred Shares for cash. If, however, the total number of shares
of common stock issuable upon conversion of the Requested Shares did not exceed
the number of such permitted shares, then the Company would have automatically
converted the Requested Shares and redeem all remaining outstanding Preferred
Shares. In such an event, the Company had 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 did 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 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 1999.
Because of the redemption possibility described above, the advance was
classified outside of stockholders' equity at December 31, 1998.
The Conversion Prices for the Series C and Series D Preferred Stock
represent the closing prices of the Company's common stock on the dates that the
parties agreed to the terms of the investment. The Conversion Price for the
Series E Preferred Stock represents a 15% discount to the fair value of the
common stock on the day prior to the applicable agreement. The Company accounted
for this guaranteed return of $212,550 in January 1999 and has amortized such
return through the earliest date on which the Preferred Shares were allowed to
be converted (April 30, 1999). The Company also recorded $377,710 representing
the 7% dividend accrued for the nine months ended September 30, 1999.
Certain of the Preferred Shares were issued to satisfy currently due debt
obligations plus accrued interest. The Company issued 9,662 shares of Series C
and E Preferred Stock as payment on such obligations. The terms and conditions
surrounding the issuance of these shares were the same as for the Preferred
Investors who paid cash.
9) SETTLEMENT WITH ENVIROMED
In connection with the dispute with Enviromed plc ("Enviromed"), the
Company reached a settlement in February 1999 whereby (i) Enviromed's board
of directors was restructured and the Company's Chief Executive Officer was
replaced as a board member of Enviromed by another Company executive; (ii)
the repayment terms of the (pound)437,000 (approximately $728,000) note due
from Enviromed were amended to require repayment during 1999; and (iii)
Enviromed agreed to pay the Company an amount up to a maximum of
(pound)500,000 (approximately $810,000) based upon purchases made by the
Company from an Enviromed subsidiary in excess of certain minimums. The
Company received (pound)150,000 ($245,000) in February 1999 and
(pound)100,000 ($159,000) in August 1999 as the first and second
installments, respectively, pursuant to the note repayment terms under the
settlement agreement. The remaining payment of (pound)187,000 plus accrued
interest is due in November 1999.
10) NET LOSS PER COMMON SHARE
The Company follows the provisions of SFAS No. 128, "Earnings per Share",
which established standards for calculating and presenting earnings per share.
Basic net loss per share was computed by dividing reported net loss less
preferred stock dividends and premiums by the weighted average number of common
shares outstanding during the period. Diluted net loss per share for the periods
presented is the same as basic net loss per share since the inclusion of the
potential common stock equivalents would be antidilutive. Reconciliation of the
numerator in the EPS calculation is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- ------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net loss $(1,834,321) $(81,920) $ (9,163,786) $(5,264,846)
Premium on Series B Preferred Stock -- -- (808,453) --
Dividends on Series C, D and E Preferred Stock (130,636) -- (590,260) --
----------------- ----------------- ----------------- ----------------
Loss available to Common Shareholders $(1,964,957) $(81,920) $(10,562,499) $(5,264,846)
----------------- ----------------- ----------------- ----------------
----------------- ----------------- ----------------- ----------------
</TABLE>
9
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" requires disclosure of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The Company's only item
of other comprehensive income relates to foreign currency translation
adjustments. Comprehensive income for the nine months ended September 30, 1999
and 1998 was approximately $97,000 less and $282,000 more than reported net
income, respectively, and for the three months ended September 30, 1999 and 1998
was approximately $556,000 and $378,000 more than reported net income,
respectively, due to foreign currency translation adjustments.
12) FINANCIAL INFORMATION BY SEGMENT
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires reporting information about operating segments in annual
financial statements and requires selected information about operating segments
in interim financial reports issued to stockholders. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance. The Company's chief operating decision making
group is composed of the Chief Executive Officer, members of Senior Management
and the Board of Directors.
The Company's reportable operating segments are Diabetes, Women's Health,
Clinical Diagnostics and Other. The Company evaluates performance based on
earnings before interest, taxes, depreciation and amortization (EBITDA). Segment
information for the three and nine months ended September 30, 1999 and 1998,
respectively, is as follows:
<TABLE>
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net product sales from external customers $19,138,661 $11,424,412 $2,484,000 $ - $ 33,047,073
Intersegment net sales 1,495,765 1,908,243 - - 3,404,008
Grant and other revenue - - - 99,159 99,159
-------------------------------------------------------------------------------------
Total net revenue $20,634,426 $13,332,655 $2,484,000 $ 99,159 $ 36,550,240
EBITDA $ 893,928 $ 2,276,162 $ (286,576) $(1,210,839) $ 1,672,675
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net product sales from external customers $48,906,798 $31,757,445 $8,340,702 $ - $ 89,004,945
Intersegment net sales 2,050,881 4,378,281 - - 6,429,162
Grant and other revenue 316,441 - - 325,309 641,750
-------------------------------------------------------------------------------------
Total net revenue $51,274,120 $36,135,726 $8,340,702 $ 325,309 $ 96,075,857
EBITDA $ 44,086 $ 5,316,855 $ 165,838 $(3,846,337) $ 1,680,442
Assets $51,393,564 $45,847,188 $5,977,497 $12,418,295 $115,636,544
</TABLE>
<TABLE>
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
-------------------------------------------------------------------------------------
AT DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C>
Assets $47,483,580 $45,992,593 $6,301,200 $15,300,104 $115,077,477
</TABLE>
10
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12) FINANCIAL INFORMATION BY SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
-------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1998
<S> <C> <C> <C> <C> <C>
Net product sales from external customers $15,700,286 $11,547,776 $ 5,071,275 $ 181,684 $32,501,021
Intersegment net sales 126,424 793,079 12,285 - 931,788
Grant and other revenue 864,340 - - 274,317 1,138,657
-------------------------------------------------------------------------------------
Total net revenue $16,691,050 $12,340,855 $ 5,083,560 $ 456,001 $34,571,466
EBITDA $ 427,086 $ 2,440,528 $ 806,518 $(1,251,710) $ 2,422,422
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net product sales from external customers $42,566,230 $30,027,561 $12,673,527 $ 487,433 $85,754,751
Intersegment net sales 581,669 1,687,500 99,630 - 2,368,799
Grant and other revenue 2,326,437 - - 877,851 3,204,288
-------------------------------------------------------------------------------------
Total net revenue $45,474,336 $31,715,061 $12,773,157 $ 1,365,284 $91,327,838
EBITDA $(1,549,128) $ 6,445,856 $ 1,568,249 $(2,941,899) $ 3,523,078
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- ----------------------------------
Reconciliation of EBITDA to Net Loss 1999 1998 1999 1998
-------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
EBITDA $ 1,672,675 $ 2,422,422 $ 1,680,442 $ 3,523,078
Depreciation and amortization expense (1,521,090) (2,667,823) (4,764,936) (6,782,399)
Amortization of deferred revenue 98,384 1,138,657 614,720 3,204,288
Interest expense (2,145,803) (1,907,404) (6,002,891) (7,520,277)
Income taxes (14,895) (160,886) (348,516) (297,198)
Non-cash income related to legal settlement - - - 1,498,844
Other non-cash items 76,408 1,093,114 (342,605) 1,108,818
-------------------------------------- ----------------------------------
Net loss $(1,834,321) $ (81,920) $(9,163,786) $(5,264,846)
-------------------------------------- ----------------------------------
-------------------------------------- ----------------------------------
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Selfcare, Inc. (the "Company" or "Selfcare") is engaged in the development,
manufacture, and marketing of self-test diagnostic products for the diabetes and
women's health markets, as well as the marketing of nutritional supplement
products, several of which are targeted primarily at the women's health market.
The Company's existing and planned products are targeted at the two largest
existing markets for self-care diagnostics, diabetes management and women's
health. An important part of the Company's business strategy is to enter into
strategic alliances, joint ventures and licensing arrangements with third
parties, primarily medical products companies, for the development, manufacture,
and distribution of certain products. The Company is also pursuing a strategy of
selective acquisitions of companies, assets and technologies, which it believes
will enhance its ability to deliver innovative diagnostic products to the
marketplace at a low cost.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues decreased $493,000, or 1%, to $33.1 million for
the three months ended September 30, 1999 from $33.6 million for the three
months ended September 30, 1998. However, net revenues increased $688,000, or
1%, to $89.6 million for the nine months ended September 30, 1999 from $89.0
million for the nine months ended September 30, 1998. The revenue decline for
the three months ended September 30, 1999 as compared to the three months ended
September 30, 1998 resulted from the net effect of the following: (1) increasing
diabetes product sales in 1999; (2) the revenue recognition of the
FastTAKE(Registered Trademark) success fee in 1998 (as discussed in detail
below); (3) approximately $263,000 of lost sales of DoubleCheck-TM- and Genie II
in France as a result of re-evaluation of these products by the French
regulators in June 1999 (as discussed in detail at COMPREHENSIVE GOVERNMENT
REGULATION on page 19); and (4) the disposition of the infectious disease
diagnostics product lines of the Company's wholly owned subsidiary in Ireland,
Cambridge Diagnostics Ireland, Ltd. ("CDIL"), at the end of September 1998. The
disposed of disease diagnostics product lines had generated net revenues of
$696,000 in the three months ended September 30, 1998. The increase in revenues
for the nine months ended September 30, 1999 as compared to the nine months
ended September 30, 1998 was derived primarily from a full nine months of sales
from Can-Am Care Corporation ("Can-Am") which the Company acquired in February
1998 and increased sales of diabetes and women's health products, offset by
decreased sales in clinical diagnostics products and the revenue recognition of
the FastTAKE(Registered Trademark)success fee in 1998 (as discussed in detail
below). Net product sales from the Company's diabetes management segment
increased by approximately $3.5 million for the three months ended September 30,
1999 as compared to the three months ended September 30, 1998, and approximately
$6.4 million for the nine months ended September 30, 1999 as compared to the
nine months ended September 30, 1998. The increased diabetes product sales
resulted from a new significant customer and increased sales to existing
customers. The diabetes management net product sales accounted for 58% and 55%
of the Company's net revenues for the three and nine months ended September 30,
1999, respectively, compared to 46% and 48% of the net revenues for the three
and nine months ended September 30, 1998, respectively. Net product sales from
the Company's women's health segment decreased $179,000 for the three months
ended September 30, 1999 as compared to the three months ended September 30,
1998, but increased $1.7 million for the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998. The women's health product
sales accounted for 34% and 35% of the Company's total net revenues for the
three and nine months ended September 30, 1999, respectively, compared to 34% of
total net revenues for both the three and nine months ended September 30, 1998.
The year-to-date increase in women's health product sales as compared to prior
year resulted from the continuous increase in sales of branded and private label
pregnancy and ovulation tests. Another factor of the increased year-to-date net
sales of the women's health segment was the introduction of SoyCare-TM- for
Menopause and SoyCare-TM- for Bone Health, new additions to the Company's line
of nutritional supplements, in July 1998 and the introduction of
Protegra(Registered Trademark) Cardio, SoyCare-TM- for Prostate,
Stresstabs(Registered Trademark) herbal PMS and Stresstabs(Registered Trademark)
herbal MENOPAUSE in 1999. Net sales of the clinical diagnostic products
decreased $2.6 million for the three months ended September 30, 1999 as compared
to the three months ended September 30, 1998 and $4.3 million for the nine
months ended September 30, 1999 as compared to the nine months ended September
30, 1998. The decrease in clinical diagnostic product sales over prior year was
primarily due to a one time sale to the government of Nigeria of $1.6 million in
the third quarter of 1998. Additionally, as mentioned above, the Company sold
the clinical diagnostics business of CDIL in September 1998. The clinical
diagnostic product sales accounted for 7% and 9% of the Company's total net
revenues for the three and nine months ended September 30, 1999, respectively,
compared to 15% and 14% of total net revenues for the three and nine months
ended September 30, 1998, respectively. Grant and other revenue was $99,000 for
the three months ended September 30, 1999 compared to $1.1 million for the three
months ended September 30, 1998 and $642,000 for the nine months ended September
30, 1999 compared to $3.2 million for the nine months ended September 30, 1998.
The Company deferred $3.0 million of a $7.0 million success fee received from
LifeScan in October 1996. The Company then recognized the revenue related to the
success fee as FastTAKE(Registered Trademark) blood glucose monitoring meters
were shipped to LifeScan. In 1998, the Company accelerated the recognition of
this revenue based on the change in the estimated life of the then current meter
in anticipation of the planned introduction of an improved meter. The success
fee was fully recognized by March 1999. The remainder of the deferred revenue
relates to certain development and capital grants for the Company's facility in
Inverness, Scotland.
12
<PAGE>
GROSS PROFIT. Gross profit decreased by $1.3 million or 11% to $11.3 million
for the three months ended September 30, 1999 from $12.7 million for the three
months ended September 30, 1998. For the nine months ended September 30, 1999,
gross profit decreased by $2.0 million or 7% to $28.7 million from $30.7 million
for the nine months ended September 30, 1998. Gross profit as a percentage of
net revenues decreased to 34% and 32% for the three and nine months ended
September 30, 1999, respectively, from 38% and 35% for the three and nine months
ended September 30, 1998, respectively. The decrease in gross profit as a
percentage of net revenues primarily resulted from a decrease in the revenue
recognized in relation to the success fee from LifeScan. Gross profit as a
percentage of net product sales decreased to 34% for the three months ended
September 30, 1999 from 35% for the three months ended September 30, 1998.
Similarly, gross profit, excluding grants and other revenue, as a percentage of
net product sales was 32% for both the nine-month periods ended September 30,
1999 and 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense decreased
by $217,000 or 11% for the three months ended September 30, 1999 to $1.8 million
from $2.0 million for the three months ended September 30, 1998. For the nine
months ended September 30, 1999, research and development expense decreased by
$1.0 million or 19% to $4.4 million from $5.4 million for the nine months ended
September 30, 1998. These declines in research and development expense resulted
primarily from significant reductions in expenditures in connection with
clinical diagnostics products due to a strategic de-emphasis of the Company's
clinical diagnostics segment in favor of its diabetes and women's health
segments. These reduced expenses in connection with clinical diagnostic products
were offset slightly by increased research and development expenses incurred on
programs with LifeScan. Although research and development expense has decreased
during the first nine months of 1999, the Company expects to spend significant
and increasing amounts on research and development throughout the remainder of
1999 and 2000, especially on several programs with LifeScan.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expense decreased by $506,000 or 5% to $9.4 million for the three
months ended September 30, 1999 from $9.9 million for the three months ended
September 30, 1998. The decrease in selling, general and administrative expense
for the quarter ending September 30, 1999 as compared to the same period in 1998
is primarily due to one time severance charges incurred for two executives of
the Company in 1998 and the successful reduction in selling expenses at Orgenics
Limited ("Orgenics"), the Company's subsidiary in Israel. However, for the nine
months ended September 30, 1999, selling, general and administrative expense
increased $599,000 or 2% to $26.8 million from $26.2 million for the nine months
ended September 30, 1998. The year-to-date increase was primarily attributable
to the effect of a full nine months of selling, general and administrative
expenses of Can-Am, which was acquired in February 1998, and increased legal
expenses related to the Company's defense of the Abbott lawsuits (see Part II,
Item 1. Legal Proceedings), net of the aforementioned decreases in the third
quarter of 1999. Selling, general and administrative expense as a percentage of
net revenues, was 28% and 30% for the three and nine months ended September 30,
1999, respectively, compared to 29% for the same periods in 1998.
GAIN ON SALE OF ASSETS. On September 30, 1998, the Company sold the
infectious disease diagnostics business of its subsidiary CDIL to Trinity
Biotech PLC, for consideration consisting of 555,731 shares of Selfcare's common
stock from Trinity Biotech PLC, cash in the amount of $230,000 and other
consideration valued at approximately $43,000. The Company recorded a gain of
approximately $1.1 million as a result of the sale of the assets.
INTEREST EXPENSE. For the three and nine months ended September 30, 1999,
the Company incurred $2.1 million and $6.0 million, respectively, in interest
expense compared to $1.9 million and $7.5 million for the three and nine months
ended September 30, 1998. The interest expense increase in the third quarter of
1999 as compared to the same period in 1998 primarily resulted from interest
expense incurred on the LifeScan loan which the Company received in June 1999
(see Note 5 of the "Notes to Consolidated Financial Statements"). Interest
expense related to the LifeScan loan was $279,000 and $339,000 for the three and
nine months ended September 30, 1999. On the other hand, interest expense
related to the Senior Subordinated Convertible Notes decreased $177,000 and $2.2
million, respectively, for the three and nine months ended September 30, 1999 as
compared to the same periods in 1998. This decrease was due to a decline of the
principal balance of the Senior Subordinated Convertible Notes and because
during the three and nine months ended September 30, 1998, the Company
recognized $60,000 and $1.7 million, respectively, of non-cash interest expense
for the amortization of the original issue discount on convertible notes and
warrants. The decrease of year-to-date interest expense related to the Senior
Subordinated Convertible Notes was slightly offset by increased interest on the
Subordinated Revenue Royalty Notes and Subordinated Promissory Notes.
OTHER INCOME (EXPENSE). The Company incurred other income of $56,000 for the
three months ended September 30, 1999 and other expenses of $136,000 for the
nine months ended September 30, 1999. For the three and nine months ended
September 30, 1999, the Company incurred other expense of $25,000 and other
income of $1.7 million, respectively. Substantially all other income and expense
incurred in 1999 relates to foreign currency transaction expense. Substantially
all of the Company's foreign sales are paid in the functional currency of the
selling entity. For the nine months ended September 30, 1998, the Company
recognized $1.5 million of non-cash income related to 155,724 shares of the
Company's Common Stock received into treasury in connection with the settlement
agreement dated March 6, 1998 by and between the Company, Trinity Biotech PLC,
Flambelle Limited and Eastcourt Limited.
13
<PAGE>
DIVIDENDS AND ACCRETION ON MANDATORILY REDEEMABLE PREFERRED STOCK OF A
SUBSIDIARY AND MINORITY INTEREST. Inverness Medical Limited, the Company's
subsidiary in Inverness, Scotland, accrued $57,000 and $170,000 for the three
and nine months ended September 30, 1999, respectively, representing a 6%
dividend payable and accretion on the outstanding cumulative redeemable
preference shares, as compared to $29,000 and $87,000 for the three and nine
months ended September 30, 1998, respectively. In October 1998, an additional
1,000,000 shares of 6% cumulative redeemable preference stock of Inverness
Medical Ltd. were issued to Inverness & Nairn Local Enterprise Company, a U.K.
government agency, for approximately $1.7 million. Minority interest in the loss
of a subsidiary was $800 and $500 for the three and nine months ended September
30, 1999, respectively, as compared to $46,000 and $119,000 for the three and
nine months ended September 30, 1998, respectively.
EXTRAORDINARY LOSS. In the first quarter of 1999, the Company recorded an
extraordinary loss of approximately $306,000 ($228,000 of which is non-cash
expense) for the modification of the Senior Subordinated Convertible Notes (see
Note 7 of the "Notes to Consolidated Financial Statements").
INCOME TAXES. For the three and nine months ended September 30, 1999, the
Company recorded provisions of $15,000 and $349,000, respectively, for income
taxes compared to $161,000 and $297,000 for the three and nine months ended
September 30, 1998, respectively. Substantially all of the income tax provisions
reflect certain state income taxes relating to Inverness Medical Inc. ("IMI"),
the Company's subsidiary in the United States, and Can-Am.
NET LOSS. For the three months ended September 30, 1999, the Company had a
net loss of $1.8 million or $0.11 per common and potential common share compared
to a net loss of $82,000 or $0.01 per common and potential common share for the
three months ended September 30, 1998. For the nine months ended September 30,
1999, the Company had a net loss of $9.2 million or $0.64 per common and
potential common share compared to a net loss of $5.3 million or $0.45 per
common and potential common share for the nine months ended September 30, 1998.
The results for the nine-month periods ending September 30, 1999 and 1998
included significant non-recurring, non-cash charges and income as detailed
above. The loss per share for the three months ended September 30, 1999 includes
accrued dividends of approximately $131,000 on Series C, D and E Convertible
Preferred Stock and the loss per share for the nine months ended September 30,
1999 includes premiums of approximately $808,000 on Series B Convertible
Preferred Stock and accrued dividends of approximately $590,000 on Series C, D
and E Convertible Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, the Company received funds
through its alliance with LifeScan and private placements of convertible
preferred stock.
On June 7, 1999, the Company entered into amendments of its product
development and distribution agreements (the "Amended Agreements") with
LifeScan, Inc. ("LifeScan"), a subsidiary of Johnson & Johnson. Under the
Amended Agreements, the Company is to develop and supply to LifeScan
additional products for monitoring blood glucose in humans. Upon the
execution of the Amended Agreements, LifeScan provided the Company with an
initial loan of (pound)6,250,000 (approximately $9,900,000) to fund the
anticipated production levels. LifeScan has also committed to make additional
loans of up to (pound)8,125,000 (approximately $13,000,000) to the Company
upon the accomplishment of certain milestones relating to the new products
the Company is to develop for LifeScan. Interest on the initial and
additional loans accrues at 11% and is payable quarterly. The aggregate
principal amount of the initial and additional loans will be repaid by
deducting (pound)0.0125 (approximately $0.02) from the invoice price of each
unit of product LifeScan purchases from the Company commencing on the date of
the initial loan. Additionally, LifeScan has agreed to provide credit
enhancements, related to anticipated production levels, for further
borrowings of up to $10,000,000 by the Company from a commercial bank to fund
additional manufacturing capacity for the products covered by the Amended
Agreements.
On January 8, 1999, the Company sold in a private placement 57,842 shares of
Series C convertible preferred stock ("Series C Preferred Stock"), 3,030 shares
of Series D convertible preferred stock ("Series D Preferred Stock") and 13,169
shares of Series E convertible preferred stock ("Series E Preferred Stock")
(collectively, the "Preferred Shares") to investors (the "Preferred Investors")
at an aggregate purchases price of $7.4 million (see Note 8 of the "Notes to
Consolidated Financial Statements").
At September 30, 1999, the Company had cash and cash equivalents of $7.3
million, a $1.9 million decrease from December 31, 1998. The Company used cash
of $4.7 million in operating activities in the nine months ended September 30,
1999. The Company incurred a net loss of $9.2 million during the period, but the
net loss includes non-cash expenses of $4.8 million. Other uses of cash in
operating activities included increases in accounts receivable and inventories
and decreases in accrued expenses and other current liabilities totaling
approximately $5.3 million. Cash was provided for operations in part by an
increase in accounts payable of $4.9 million. The increase in inventories and
accounts receivable was significantly impacted by higher product sales in
September 1999 and the anticipated launch of Excel-TM- GE, the alternative
electrochemical blood glucose monitoring test strip for use with Glucometer
Elite(Registered Trademark) meters, in October 1999.
14
<PAGE>
During the nine months ended September 30, 1999, the Company received
proceeds of $465,000 from the issuance of common stock and $2.5 million from the
issuance of preferred stock ($4.9 million was received during 1998 for Preferred
Shares which were not issued until January, 1999). Certain of the Preferred
Shares were issued to satisfy $598,000 of accrued interest on debt obligations
(see Note 8 of the "Notes to Consolidated Financial Statements"). Proceeds of
$10.9 million were received from borrowings under notes payable, of which $9.9
million was received from LifeScan to fund the anticipated production levels in
connection with the Amended Agreements with LifeScan (see Note 5 of the "Notes
to Consolidated Financial Statements"). Approximately $793,000 of proceeds
received from borrowings under notes payable were obtained for the purchase of
facilities by CDIL in Ireland. The Company also repaid approximately $8.3
million, in aggregate, of principal primarily related to loans from Chase
Manhattan Bank and the Senior Subordinated Convertible Notes (see Note 7 of the
"Notes to Consolidated Financial Statements").
During the nine months ended September 30, 1999, the Company used $2.6
million to purchase property, plant and equipment. The Company received
$245,000 ((pound)150,000) and $159,000 ((pound)100,000) from Enviromed, an
affiliated company, in February and August 1999, respectively, as the first
and second installments pursuant to the note repayment terms under the
settlement agreement (see Note 9 of the "Notes to Consolidated Financial
Statements"). The remaining payment of (pound)187,000 plus accrued interest
is due in November 1999.
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 through the first quarter of next year. The Company believes that
it will be able to fund its research and development activities related to
products being designed and developed for LifeScan out of existing funds and
anticipated funding pursuant to the Amended Agreements with LifeScan. If the
Company were to encounter delays in achieving the milestones necessary for
receiving the funding from LifeScan, it would need to seek alternative financing
arrangements. The Company is currently seeking financing from a commercial bank
to fund additional manufacturing capacity at its facility in Inverness,
Scotland. In addition, the Company may expand its research and development of
new technologies (beyond the aforementioned activities related to LifeScan) and
may 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 next
year. No assurance can be given that additional capital will be available, or,
if available, that it will be available on acceptable terms. If additional funds
are raised by issuing equity securities, further dilution to then existing
stockholders will result. If adequate funds are not available, the Company may
not be able to pursue desirable research and development programs unless it
obtains funds through arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of its technologies or
products which the Company would otherwise pursue on its own.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
There are various risks, including those described below, which may
materially impact your investment in Selfcare or may in the future, and, in some
cases, already do, materially affect us and our business, financial condition
and results of operations. You should consider carefully these factors with
respect to your investment in the Company's securities. This section includes or
refers to certain forward-looking statements; you should read the explanation of
the qualifications and limitations on such forward-looking statements discussed
on page 23.
RISK OF INADEQUATE FUNDING; FUTURE CAPITAL NEEDS
Selfcare anticipates that during 1999, it may need to raise additional
capital to help fund our aforementioned research and development of new products
and technology, the purchase of additional equipment at our plant in Inverness,
Scotland, and any possible acquisitions, through borrowings, the issuance of
debt or equity securities, or in connection with agreements which might be made
with one or more collaborative partners. We are not certain that such additional
financing will be available, or, if available, that it will be available on
acceptable terms. For additional information on the Company's liquidity and
capital needs, please see the section entitled Liquidity and Capital Resources
in this "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations".
MANAGING AND MAINTAINING GROWTH
Selfcare is currently experiencing a period of rapid growth and expansion,
due, in part, to recent acquisitions and increased sales. This growth has placed
and may continue to place strains on our management, customer service and
support, operations, sales and administrative personnel as well as our financial
and other resources. In order to meet the needs of existing and future
customers, Selfcare has increased and will continue to increase its workforce.
To do this, we need to attract, train, motivate and manage qualified employees
and need to expand our operating, management, information and financial systems.
This may result in a significant increase in operating expenses. Additionally,
through such acquisitions, Selfcare is expanding into new lines of business,
which imposes additional demands. The risks involved with such acquisitions and
expansion are discussed in further detail below.
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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.
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 administrative
functions with those of Can-Am. We believe that cost reductions due to
efficiencies may be possible, however, we may not be able to reduce any costs
and may, in fact, incur additional costs in the attempt to make these changes or
mitigate any adverse consequences of the integration.
RISKS RELATED TO NEW PRODUCT DEVELOPMENT
Some of our products are available for commercial sale, including certain
professional diagnostic products for infectious diseases, women's health
products produced by third-party manufacturers, FastTAKE(Registered Trademark)
diabetes care products, blood glucose strips and nutritional supplements. All of
our other products are in various stages of research and development and are not
generating revenue. We must develop these products and perform pre-clinical and
clinical testing before we can sell these products to the public. At this stage,
we cannot be certain that:
- any of the products under development will prove to be safe or
effective in clinical trials;
- we will be able to obtain regulatory approval to market any of
our products that are in development or contemplated;
- any of such products can be manufactured at acceptable cost and
with appropriate quality; or
- any of such products, if and when approved, can be successfully
marketed.
RISKS RELATED TO NEW PRODUCT
On September 17, 1999, the Company received notification of Federal and Drug
Administration ("FDA") clearance for its low cost alternative electrochemical
blood glucose monitoring test strip, Excel-TM- GE, for use with Glucometer
Elite(Registered Trademark) meters sold by Bayer. We commenced shipments of
Excel GE in October 1999. Our future results of operations depend to some extent
on our ability to market and sell Excel GE. Additionally, we cannot assure you
that the market will fully accept Excel GE.
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, which was
amended in June 1999 (see Note 5 of the "Notes to Consolidated Financial
Statements"). Under the terms of the alliance with LifeScan, we develop and
manufacture and LifeScan distributes FastTAKE(Registered Trademark), our
proprietary electrochemical blood glucose monitoring system for the management
of diabetes, and any new systems consisting of new meters and disposable strips.
We commenced shipments of FastTAKE in December 1997 and the first upgrade of
FastTAKE in July 1999. FastTAKE is currently the most successful product in our
diabetes line of business. Our future results of operations depend to a
substantial degree on LifeScan's ability to market and sell FastTAKE as well as
any other new systems. Although the FastTAKE product appears to be gaining
acceptance, we cannot assure you that the market will fully accept FastTAKE or
that any acceptance will continue. Any failure by us to produce or failure of
LifeScan to market and distribute FastTAKE as well as several additional new
systems successfully could have a material adverse effect on our business,
financial condition and results of operations. Further, we cannot assure the
success of future development of products.
DEPENDENCE UPON KEY PERSONNEL
Our future success is highly dependent on the services of certain key
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 certain management or scientific employees could have a
negative impact on our ability to manage and operate effectively.
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DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY; TRADEMARKS
Obtaining patent and trade secret protection for new technologies, products
and processes is important in the medical products and diagnostic testing
industries. Our success depends, in part, on our ability to obtain patent
protection for our products and manufacturing processes, to preserve our trade
secrets and to operate without infringing the proprietary rights of others.
PATENTS AND TRADEMARKS. We hold certain patent rights, have certain patent
applications pending, and expect to seek additional patents in the future.
However, we cannot be certain that we will be successful or timely in obtaining
any such patents. The patent position of medical products and diagnostic testing
companies is often highly uncertain and usually involves complex legal and
factual questions. Furthermore, the U.S. Patent and Trademark Office has not set
forth a consistent policy regarding the breadth of claims covered in medical
products patents. Therefore, we cannot be certain that any issued patents will
provide adequate protection for our products. If such patents are limited in
scope, our competitors may be able to design around such patents.
In the medical products industry, including the diagnostic product industry,
there is extensive litigation regarding patents, licenses and other intellectual
property rights. We periodically incur, and will likely continue to incur, costs
related to defending potential infringement claims or asserting such claims
against others. To determine the priority of inventions, we may also have to
participate in interference proceedings to determine the scope of patents issued
by the Patent and Trademark Office which could also result in substantial costs.
In April of 1998, Abbott Laboratories, Inc. filed a lawsuit against us and
Princeton BioMeditech Corporation, which manufactures our pregnancy detection
and ovulation prediction products. Abbott alleges that these products infringe a
patent under which Abbott claims to have exclusive rights. In October 1998,
Abbott filed a lawsuit against us alleging that our glucose monitoring system,
FastTAKE, infringes upon a patent held by Abbott. Although we believe that the
pregnancy detection and ovulation prediction products and FastTAKE do not
infringe upon these patents, we have already incurred and may continue to incur
substantial costs in defending against Abbott's claims. Furthermore, under the
distribution agreement with LifeScan, we agreed to indemnify LifeScan for any
damage, including expenses incurred by it, resulting from any claims that
FastTAKE infringes any patents. For a more detail discussion of this litigation,
see the section entitled "Part II, Item 1. Legal Proceedings".
LICENSING OF TECHNOLOGY. We may be required to obtain licenses to patents or
other proprietary rights of third parties to market their products. We do not
know if we will be able to obtain licenses under any such patents or proprietary
rights on acceptable terms, if at all. If we do not obtain necessary licenses,
we could encounter delays in product introductions while attempting to design
products that do not infringe on the patents or other rights which we are unable
to license, or we may be unable to develop, manufacture or sell such products in
certain countries or at all.
OTHER PROPRIETARY TECHNOLOGY. We seek to protect proprietary technology,
including technology that may not be patented, or patentable, in part through
confidentiality agreements and, if applicable, inventor's 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.
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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., and Excel GE, which is compatible with the Glucometer
Elite(Registered Trademark) system sold by Bayer. Others may attempt to enter
this market with similar products or the manufacturers of the systems with which
such test strips are compatible may lower their own test strip prices. This
would reduce or eliminate our competitive price advantage.
Additionally, several of our competitors are attempting to develop
noninvasive blood glucose monitoring technology. Noninvasive blood glucose
monitoring involves methods for measuring blood glucose levels without the need
to draw blood and, in certain proposed configurations, without the need to
utilize disposable components, such as test strips. We believe that
manufacturers are pursuing a number of different technological approaches to
noninvasive blood glucose monitoring, including near-infrared spectroscopy,
which involves shining a beam of near-infrared light to penetrate the skin and
determine the amount of glucose in the blood, and reverse iontophoresis, which
utilizes a "patch" system to extract glucose through the skin for measurement by
an external meter. In addition, several manufacturers are pursuing minimally
invasive approaches to blood glucose monitoring, such as using a fine needle to
withdraw a small sample of interstitial fluid which is analyzed by use of
mid-infrared spectroscopy. The Company is also pursuing the development of
noninvasive blood glucose monitoring technologies. The successful development
and introduction of any such products could reduce the demand for meters and
test strips such as FastTAKE and Excel.
NUTRITIONAL SUPPLEMENTS. The market for the sale of vitamins and nutritional
supplements is highly competitive. This competition is based principally upon
price, quality of products, customer service and marketing support. There are
numerous companies in the vitamin and nutritional supplement industry selling
products to retailers such as mass merchandisers, drug store chains, independent
drug stores, supermarkets and health food stores. As most of these companies are
privately held, we are unable to obtain the information necessary to assess
precisely the size and success of these competitors. However, we believe that a
number of our competitors, particularly manufacturers of nationally advertised
brand name products, are substantially larger than we are and have greater
financial resources.
EFFECT OF ADVERSE PUBLICITY; SCIENTIFIC RESEARCH
Our nutritional supplement lines contain vitamins, minerals, herbs and other
ingredients that we generally regard as safe when taken as directed. Various
scientific studies have suggested such vitamins, minerals and herbs may offer
certain health benefits. However, the success of such products is highly
dependent upon consumers' perception of safety and quality of our nutritional
supplements 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.
One example of the volatility of the foreign regulatory environment occurred
on June 15, 1999, when the Company's majority owned subsidiary in Israel,
Orgenics Limited ("Orgenics"), received a notice from the regulatory agency in
France that one of its HIV products, DoubleCheck-TM-, and a product that it
produces for Pasteur Sanofi Diagnostics ("Pasteur"), Genie II, failed the
regulatory agency's reevaluation process of all HIV products sold in France. As
such, the products were removed from the market in France. Orgenics has improved
the DoubleCheck test and obtained regulatory approval for re-release to the
market in France starting October 7, 1999. Genie II is a product sold to Pasteur
and Pasteur decided not to market the product in France. The Company does not
believe that the temporary removal of DoubleCheck and the complete removal of
Genie II from the market in France will have a material adverse impact on the
sales. The Company's management stands behind the quality of its products.
However, it is conceivable that the actions of the French authorities, or their
perceived concerns regarding DoubleCheck and Genie II, could cause regulators in
other jurisdictions to reevaluate or take other actions involving Genie II or
the Company's other products. The Company's management is unaware of any such
action or planned actions at this time that would have a material adverse impact
on sales, operation or financial performance.
NUTRITIONAL SUPPLEMENTS. Federal agencies, including the FDA, the Federal
Trade Commission and the Consumer Product Safety Commission, regulate the
manufacturing, processing, formulation, packaging, labeling and advertising of
nutritional supplements. Various agencies of the states, localities and foreign
countries where we sell or may sell the nutritional supplement lines may also
regulate our activities.
The Dietary Supplement Health and Education Act of 1994 enacted on October
25, 1994, defines dietary supplements as a new category of food separate from
conventional food. The FDA has finalized certain regulations to implement the
Dietary Supplement Health and Education Act of 1994, including those relating to
nutritional labeling requirements, but it has not finalized other regulations.
Under the Dietary Supplement Health and Education Act of 1994, we are required
to have different labeling for the nutritional supplement lines and, with
respect to nutritional supplement products under development, we are subject to
new notification procedures and scientific proof requirements regarding
ingredients, product claims and safety. We cannot determine how, or if, these
regulations will affect business in the future. If we do not comply with
applicable FDA requirements, the FDA could impose sanctions and penalties,
including warning letters, product recalls and seizures, injunctions or criminal
prosecution. Although not yet final, we anticipate that the FDA will enact
specific standards under the law to regulate the manufacturing of dietary
supplements. The current proposal standards are similar to the current standards
for food and we believe that the current manufacturing process of our
nutritional supplement lines will be in compliance with the proposed standards
for dietary supplements. However, we cannot be certain that the final standards
for dietary supplements will not change in ways that require changes in the
manufacture of the nutritional supplement lines.
LITIGATION
The Company encounters many risks associated with litigation concerning,
among other things, the enforcement of patents and other intellectual property
rights. For information on the risks involved, please see "Part II, Item 1.
Legal Proceedings".
RISKS RELATED TO THE YEAR 2000 ISSUE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
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BACKGROUND. The term "Year 2000 issue" is a general term used to describe
various problems that may result from the improper processing by computer
systems of dates after 1999. These problems arise from the inability of some
hardware and software to distinguish dates before the year 2000 from dates in
and after the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations. The Year 2000 issue affects
virtually all companies and all organizations.
Our efforts to address the Year 2000 issue are focused in the following
areas:
(1) reviewing and taking any necessary steps to attempt to correct
our computer information systems, including software
applications and hardware platforms;
(2) evaluating and making any necessary modifications to other
computer systems that do not relate to information technology
but include embedded technology, such as telecommunications,
security, fire and safety systems; and
(3) communicating with certain significant customers, suppliers
and service providers to determine whether there will be any
interruption in their systems that could affect us.
OUR STATE OF READINESS. We have developed a four-phase plan to address the
Year 2000 issues. The four phases are: (1) awareness, (2) assessment, (3)
remediation, and (4) testing.
AWARENESS. We have made the relevant employees aware of the Year 2000 issue
and collected information from such employees regarding systems that might be
affected. We have established a project team to lead our efforts, and management
oversees the progress with respect to the implementation of the Year 2000 Plan.
In addition, the Year 2000 Plan has been and will be subject to the review of
the Board of Directors.
ASSESSMENT. We have completed an assessment of our standard computer
information systems and we have taken the necessary steps to make our core
computer information systems, in those situations in which we are required to do
so, Year 2000 compliant. We have tested or obtained written verification from
vendors to the effect that our other standard computer information systems
acquired from such vendors correctly distinguish dates before the year 2000 from
dates in and after the year 2000.
In addition, we have completed our evaluation and assessment of our other
computer systems that do not relate to information technology but include
embedded technology, such as telecommunications, security, fire and safety
systems. We have obtained written confirmation from our current vendors and
landlord that these systems are or will be, to the best of their knowledge, Year
2000 compliant.
We have sent letters to our significant customers, suppliers, and service
providers regarding their Year 2000 readiness and have received responses back
from most. We have substantially completed developing contingency plans for
those suppliers and service providers that do not provide satisfactory assurance
regarding their Year 2000 readiness. We do not believe that there is a
significant risk related to the failure of vendors or third-party service
providers to prepare for the Year 2000. However, the costs and timing of
third-party Year 2000 compliance is not within our control and we cannot be
certain of the costs or timing of such efforts or the potential effects of any
failure of our customers, suppliers or service providers to comply.
REMEDIATION. Our primary use of software systems is in our accounting and
electronic data interface ("EDI") software. We also use programmable logic
controls in manufacturing operations at our facility in Inverness, Scotland,
which are Year 2000 compliant. We have received written verification from our
vendor of the accounting software used in our corporate office that the software
is Year 2000 compliant. We have upgraded our EDI software to a version that has
been designed to be Year 2000 Compliant.
TESTING. To attempt to confirm that our computer systems are Year 2000
compliant, we have performed testing of our computer information systems and our
other computer systems that do not relate to information technology but include
embedded technology. We will rely on the written verification from each vendor
of our computer systems that the relevant system is Year 2000 compliant.
Nevertheless, we cannot be certain that the computer systems on which we rely
will correctly distinguish dates before the year 2000 from dates in and after
the year 2000. Any failure to distinguish the dates could have an adverse effect
on our operations. We have tested the software in the FastTAKE blood glucose
monitoring system and believe that it is Year 2000 compliant. We have also
successfully tested our ability to communicate with customers that are not using
EDI software that is Year 2000 compliant.
COSTS TO ADDRESS OUR YEAR 2000 ISSUES. The primary cost of our Year 2000
compliance to date, which has been associated with assessment, remediation, and
testing, has not been significant. Based on our assessment of the Year 2000
issue, we believe that any remaining costs will not have a material adverse
effect on our business, financial condition or results of operations. We expect
to fund any remaining costs of addressing the Year 2000 issue from cash flows
resulting from operations. While we believe that we generally 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.
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RISKS PRESENTED BY YEAR 2000 ISSUES. We have evaluated our business critical
systems and we have not identified any specific business functions that we know
will suffer material disruption as a result of Year 2000 related events. It is
possible, however, that we may identify business functions in the future that
are specifically at risk of Year 2000 disruption. The absence of any such
determination at this point represents only our current status of evaluating
potential Year 2000 related problems. This should not be construed to mean that
there is no risk of Year 2000 related problems and should not be construed to
mean that there is no risk of Year 2000 related disruption. Moreover, due to the
unique and pervasive nature of the Year 2000 issue, it is impracticable to
anticipate each of the wide variety of Year 2000 events, particularly outside of
Selfcare, that might arise in a worst case scenario and which might have a
material adverse effect on our business, financial condition and results of
operations.
OUR CONTINGENCY PLANS. We have developed general contingency plans for
significant business risks that might result from Year 2000 related events, if
necessary. Because we have not identified any specific business function that
will be materially at risk of significant Year 2000 related disruptions, we have
not developed detailed contingency plans specific to Year 2000 problems. We will
complete developing specific contingency plans for those suppliers and service
providers that do not provide satisfactory assurance regarding their Year 2000
readiness by November 30, 1999.
The preceding "Year 2000 Readiness Disclosure" contains various
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements represent our
beliefs or expectations regarding future events. All forward-looking statements
involve a number of risks and uncertainties that could cause the actual results
to differ materially from the projected results. Factors that may cause these
differences include, but are not limited to:
- the availability of qualified personnel and other information
technology resources;
- the ability to identify and remediate all date sensitive lines of
computer code or to replace embedded computer chips in affected
systems or equipment; and
- the actions of governmental agencies or other third parties with
respect to Year 2000 problems.
RISKS RELATED TO THE CONVERSION TO THE EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their sovereign currencies and
the Euro and adopted the Euro as their common legal currency. As a result, the
Euro now trades on currency exchanges and is available for 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 that 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, 1999, our accumulated deficit totaled approximately $99.6 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.
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FLUCTUATIONS IN RESULTS OF OPERATIONS; VOLATILITY OF SHARE PRICE
Our annual and quarterly operating results may fluctuate due to factors such
as:
- the timing of new product announcements and introductions by us
and our competitors;
- market acceptance of new or enhanced versions of our products;
- changes in manufacturing costs or other expenses;
- competitive pricing pressures;
- the gain or loss of significant distribution outlets or
customers;
- increased research and development expenses; or
- general economic conditions.
In addition, it is possible that in some future periods the results of our
operations will be below the expectations of the public market. In any such
event, the market price of the common stock could be materially and adversely
affected. Furthermore, the stock market may experience significant price and
volume fluctuations, which may affect the market price of the common stock for
reasons unrelated to our operating performance. The market price of the common
stock may be highly volatile and may be affected by such factors as:
- our quarterly operating results;
- changes in general conditions in the economy, the financial
markets, or the health care industry;
- government regulation in the health care industry;
- changes in other areas such as tax laws;
- sales of substantial amounts of common stock or the perception
that such sales could occur, including as a result of the
conversion or potential conversion of convertible securities
issued by us; or
- other developments affecting us or our competitors.
CONTROL BY CERTAIN STOCKHOLDERS
Our executive officers and directors beneficially owned as of November 1,
1999 approximately 30.8% 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 the Board 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.
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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, 57,842 shares of Series C Convertible
Preferred Stock, 3,030 shares of Series D Convertible Preferred Stock and 13,169
shares of Series E Convertible Preferred Stock.
Our Series B Convertible Preferred Stock contains variable conversion ratio
provisions. The terms of the Series B Convertible Preferred Stock 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 is that
the holders of the convertible securities with variable conversion ratios can
convert such securities into a greater number of shares of our common stock than
previously obtainable by such holder, thereby resulting in an increase in the
potential dilution to all existing common stockholders. Our stock price has
fallen since the issuance of the Series B Convertible Preferred Stock, resulting
in such dilution.
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.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ABBOTT LABORATORIES V. LIFESCAN, INC. AND SELFCARE, INC.
In late October 1998, Abbott commenced a lawsuit against the Company and
LifeScan in the United States District Court for the District of Massachusetts.
The complaint alleges that the disposable test strips used in the
FastTAKE(Registered 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 the Company's 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. Currently, discovery is continuing
and no date has been set for trial.
ABBOTT LABORATORIES V. SELFCARE, INC. AND PRINCETON BIOMEDITECH CORPORATION
In April 1998, Abbott commenced a lawsuit against the Company and Princeton
BioMeditech Corporation ("PBM"), which manufactures certain products for the
Company, in an action filed in the United States District Court for the District
of Massachusetts ("District Court"), asserting patent infringement arising from
the Company and PBM's manufacture, use and sale of products that Abbott claims
are covered by one or more of the claims of U.S. Patent Nos. 5,073,484 and
5,654,162 (the "Pregnancy Test Patents") to which Abbott asserts that it is the
exclusive licensee. Abbott claims that certain Selfcare products relating to
pregnancy detection and ovulation prediction infringe the Pregnancy Test
Patents. Abbott is seeking an order finding that the Company and PBM infringe
the Pregnancy Test Patents, an order permanently enjoining the Company and PBM
from infringing the Pregnancy Test Patents, compensatory damages to be
determined at trial, treble damages, costs, prejudgment and post-judgment
interest on Abbott's compensatory damages, attorneys' fees, and a recall of all
existing Company or PBM products found to infringe the Pregnancy Test Patents.
On August 5, 1998, the court denied Abbott's motion for a preliminary
injunction. On March 31, 1999, the District Court granted a motion by the
Company, PBM, and the LLC, the joint venture between the two companies, filed 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 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.
Thereafter, Pasteur successfully moved for dismissal on grounds that the issues
between it and CBC should be litigated in France. The plaintiffs' appeal from
that ruling is pending. Trinity has moved for dismissal on grounds that the
issues between it and CBC should be litigated in Ireland or, instead, should be
arbitrated. The plaintiffs have opposed this motion, but there has been no
ruling on Trinity's motion. The Company believes that CBC's complaint against
the Company, Mr. Zwanziger, and CDIL is without merit and intends to defend the
action vigorously. The Company has filed an Answer denying the material
allegations of the Complaint along with a Counterclaim to declare its actions
lawful and valid and to redress harm that may result if the court invalidates
the sale of CDIL's diagnostics business to Trinity despite CBC's representations
to Selfcare that it had the right to make such a sale. The Company does not
believe that an adverse outcome would have a material impact on the Company's
sales, operations or financial performance.
24
<PAGE>
ENVIROMED PLC V. SELFCARE, INC.
The Company had been involved in a dispute with Enviromed plc
("Enviromed") with respect to a joint venture agreement entered into between
the Company and Enviromed in March 1994 and other agreements (collectively,
the "Disputed Enviromed Agreements") entered into between the Company and
Enviromed and its wholly-owned subsidiary Cranfield Biotechnology Ltd.
("Cranfield") and the issuance of shares of Common Stock to Enviromed in
connection therewith. In connection with this dispute, the Company informed
Enviromed that, due to the failure of Enviromed and Cranfield to perform
their obligations under the Disputed Enviromed Agreements, the Company
disputed Enviromed's ownership of the Common Stock held of record by
Enviromed. On July 5, 1996, Enviromed filed suit against the Company and the
representatives of the underwriters (the "IPO Representatives") of Selfcare's
initial public offering in United States District Court for the Southern
District of New York alleging breach of a registration rights agreement
relating to the Common Stock held of record by Enviromed. Enviromed claimed
that its rights under a registration rights agreement were breached in
connection with the Company's initial public offering and requested damages,
injunctive relief and a declaratory judgment that Enviromed is the lawful
owner of the shares. The Company filed counterclaims against Enviromed
arising out of the failure of Enviromed and Cranfield to perform their
obligations under the Disputed Enviromed Agreements. On 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 (pound)437,000
in notes owed to Selfcare by Enviromed was rescheduled, and (iii) Enviromed
agreed to pay Selfcare an amount up to a maximum of (pound)500,000, 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. The Company received
(pound)150,000 ($245,000) in February 1999 and (pound)100,000 ($159,000) in
August 1999 as the first and second installments, respectively, pursuant to
the note repayment terms under the settlement agreement. A final payment of
(pound)187,000 plus accrued interest is due in November 1999.
INTERVENTION, INC V. SELFCARE, INC. AND COMPANION CASES
In May, 1999, Intervention, Inc., a California corporation, filed separate
suits in California Contra Costa County Superior Court against the Company, four
of its private label customers and its major competitors and their private label
customers alleging that under Section 17200 of the California Business and
Professions Code the defendants' labeling on their home pregnancy tests is
misleading as to the level of accuracy under certain conditions. The plaintiff
seeks restitution of profits on behalf of the general public, injunctive relief
and attorneys' fees. The Company is defending its private label customers under
agreement and believes that the actions are without merit and intends to defend
them vigorously. The Company does not believe that an adverse ruling against the
Company would have a material adverse impact on sales, operations or financial
performance.
Because of the nature of the Company's business, the Company at any
particular time may be subject to consumer product claims or be a defendant in
various other lawsuits arising in the ordinary course of its business and
expects that this will continue to be the case in the future. These lawsuits
generally seek damages, sometimes in substantial amounts, for personal injuries
or other commercial claims. The Company believes that any adverse ruling in such
lawsuits would not have a material adverse effect on its sales, operations or
financial performance.
ITEM 2. CHANGES IN SECURITIES
On January 8, 1999, the Company sold in a private placement 57,842 shares of
Series C Convertible Preferred Stock, par value $.001 per share, 3,030 shares of
Series D Convertible Preferred Stock, par value $.001 per share, and 13,169
shares of Series E Convertible Preferred Stock, par value $.001 per share, of
the Company (collectively, the "Preferred Shares") to private investors (the
"Preferred Investors") at an aggregate purchase price of $7,404,100. The
Preferred Investors include certain officers and directors of the Company. Each
Preferred Share accrues a dividend of 7% per annum (the "Dividend"). The
Preferred Shares are convertible into shares of Common Stock. The actual number
of shares of Common Stock issuable upon conversion of a Preferred Share is equal
to the aggregate stated value per share (i.e., $100), plus any accrued but
unpaid Dividend (unless the Company elects to pay such Dividend in cash) through
the date of such conversion, divided by a conversion price initially equal to
$1.8125 per share of Series C Convertible Preferred Stock, $2.00 per share of
Series D Convertible Preferred Stock, and $3.028 per share of Series E
Convertible Preferred Stock (in each case, the "Conversion Price"). The
Conversion Price is subject to adjustment for stock splits, stock dividends,
recapitalization and similar transactions. Any Preferred Share not previously
converted will automatically convert into Common Stock on January 8, 2002. The
issuance of the Preferred Shares was approved at the Company's annual meeting of
shareholders on May 20, 1999. The Company claimed an exemption from the
registration requirements of the Securities Act by reason of Regulation D
promulgated thereunder, based on the private nature of the transaction and the
financial sophistication of the purchasers, all of whom had access to complete
information concerning the Company and acquired the securities for investment
and not with a view to the distribution thereof. U.S. Boston Capital acted as
placement agent for a portion of the offering of the Preferred Shares for a
commission of $47,000. Willard L. Umphrey, a Director of the Company, is the
Chairman, President, Treasurer and a Director of U.S. Boston Capital.
25
<PAGE>
On January 11, 1999, the Company and Convertible Noteholders agreed to amend
the terms of the Convertible Notes by changing the maturity date and conversion
terms, as well as canceling the related warrants. Pursuant to the amended terms,
which were approved at the Company's annual meeting of shareholders on May 20,
1999, 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 amended and replaced Convertible Notes plus a 15% premium. The
New Convertible Notes matured on July 12, 1999, bore an interest rate of 8% and
provided for a fixed conversion price of $2.00. All of the New Convertible Notes
were converted into Common Stock as of May 25, 1999.
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 increased by a 15%
premium the face value of the preferred stock on the date of the amendment to
the terms of the Series B Preferred Stock, subject to shareholder approval. The
amended terms were approved at the Company's annual meeting of shareholders on
May 20, 1999. The conversion ratio for the amended Series B Preferred Stock to
common stock was amended to be 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") for shares converted prior to
July 20, 1999 and (ii) in the case of conversions after July 20, 1999, a
conversion price equal to the lower of $2.00 or the Variable Conversion Price
(defined as the average of the five lowest closing bid prices of the common
stock during the 30 trading days preceding such conversion) then in effect. In
the event the closing bid price per share rises to $3.25 or higher for any ten
consecutive trading days after May 20, 1999, 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. The Company may redeem at least a
majority of the outstanding Series B Preferred Stock at its option at the face
amount, plus accrued premium and any conversion default payments, in the event
the price of the Company's common stock is less than $2.00 for at least ten
consecutive trading days prior to the date of such redemption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those discussed in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
INTEREST RATE RISK
The Company is exposed to market risk from changes in interest rates
primarily through its investing and borrowing activities. In addition, the
Company's ability to finance future acquisition transactions may be impacted if
the Company is unable to obtain appropriate financing at acceptable rates.
The Company's investing strategy, to manage interest rate exposure, is to
invest in short-term, highly liquid investments. Currently, the Company's
short-term investments are in money market funds with original maturities of 90
days or less. At September 30, 1999, the fair value of the Company's short-term
investments approximated market value.
In February, 1998, the Company's subsidiary, IMI, entered into a $42 million
credit agreement with Chase Manhattan Bank. The credit agreement consists of a
$37 million term loan and a $5 million revolving line of credit. The term loan
and revolving line of credit allow IMI to borrow funds at varying rates,
including options to borrow at an alternate base rate plus a spread from 0.25%
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 above 7.5%. This agreement is effective through March 30, 2001.
26
<PAGE>
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 leading 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 currency exposure. The Company intends
to hedge against fluctuations in the Euro if this exposure becomes material. At
September 30, 1999, the assets related to non-dollar-denominated currencies were
approximately $25.6 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NUMBER TITLE
<S> <C>
27.1 Financial Data Schedule
</TABLE>
b. REPORTS ON FORM 8-K:
The Company filed no reports on Form 8-K during the three-month period
ended September 30, 1999.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SELFCARE, INC.
Date: November 12, 1999 /s/ Duane L. James
------------------
Duane L. James,
Chief Accounting Officer and an authorized officer
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE PERIOD ENDING SEPTEMBER 30, 1999 AND IS QUALIFIED
IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,311,481
<SECURITIES> 0
<RECEIVABLES> 20,962,954
<ALLOWANCES> 2,444,000
<INVENTORY> 12,767,436
<CURRENT-ASSETS> 40,721,443
<PP&E> 15,955,782
<DEPRECIATION> 6,980,695
<TOTAL-ASSETS> 115,636,544
<CURRENT-LIABILITIES> 47,323,058
<BONDS> 41,585,474
3,887,764
14,041,608
<COMMON> 18,059
<OTHER-SE> 8,332,515
<TOTAL-LIABILITY-AND-EQUITY> 115,636,544
<SALES> 89,004,945
<TOTAL-REVENUES> 89,646,695
<CGS> 60,957,161
<TOTAL-COSTS> 31,196,147
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,002,891
<INCOME-PRETAX> (8,509,178)
<INCOME-TAX> 348,516
<INCOME-CONTINUING> (8,857,694)
<DISCONTINUED> 0
<EXTRAORDINARY> (306,092)
<CHANGES> 0
<NET-INCOME> (9,163,786)
<EPS-BASIC> (0.64)
<EPS-DILUTED> (0.64)
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