<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 June 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
August 2, 1999 was 17,281,372.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
<PAGE>
SELFCARE, INC.
FORM 10-Q
For the Quarterly Period Ended June 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
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
a) Consolidated Statements of Operations for the three months ended
June 30, 1999 and 1998 and the six months ended June 30, 1999
and 1998. 3
b) Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998. 4
c) Consolidated Statements of Cash Flows for the six months ended
June 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 4. Submission of Matters to a Vote of Securities Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net product sales $27,180,725 $29,268,859 $55,957,872 $53,253,730
Grants and other revenue 121,776 1,459,758 542,591 2,065,631
----------- ----------- ----------- -----------
Net revenues 27,302,501 30,728,617 56,500,463 55,319,361
Cost of sales 19,083,359 20,735,557 39,152,344 37,301,981
----------- ----------- ----------- -----------
Gross profit 8,219,142 9,993,060 17,348,119 18,017,380
Operating Expenses:
Research and development 1,358,429 1,849,566 2,583,138 3,412,745
Selling, general and administrative 8,162,742 8,619,339 17,449,431 16,344,587
----------- ----------- ----------- -----------
Total operating expenses 9,521,171 10,468,905 20,032,569 19,757,332
----------- ----------- ----------- -----------
Operating loss (1,302,029) (475,845) (2,684,450) (1,739,952)
Interest expense, including non-cash interest
expense relating to issuance of warrants
and amortization of original issue discount (1,975,821) (2,203,002) (3,857,088) (5,612,874)
Interest income 75,359 146,922 156,793 328,455
Equity in net income of affiliate -- 132,708 -- 237,773
Other income (expense) (58,087) 251,608 (192,086) 1,724,280
----------- ----------- ----------- -----------
Loss before minority interest and dividends and
accretion on mandatorily redeemable preferred
stock of a subsidiary (3,260,578) (2,147,609) (6,576,831) (5,062,318)
Minority interest in subsidiary's (income) loss (1,368) 36,894 (276) 73,683
Dividends and accretion on mandatorily
redeemable preferred stock of a subsidiary (55,878) (28,896) (112,645) (57,979)
----------- ----------- ----------- -----------
Loss before extraordinary loss and income taxes (3,317,824) (2,139,611) (6,689,752) (5,046,614)
Extraordinary loss on modification of
notes payable -- -- (306,092) --
----------- ----------- ----------- -----------
Loss before income taxes (3,317,824) (2,139,611) (6,995,844) (5,046,614)
Provision for income taxes 89,318 46,312 333,621 136,312
----------- ----------- ----------- -----------
Net loss $(3,407,142) $(2,185,923) $(7,329,465) $(5,182,926)
=========== =========== =========== ===========
Basic and diluted net loss per common and
potential common share $(0.22) $(0.18) $(0.53) $(0.47)
====== ====== ====== ======
Basic and diluted weighted average number of
common and potential common shares outstanding 16,565,659 11,956,178 16,107,346 11,131,260
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,768,357 $ 9,199,630
Accounts receivable, net of allowance for doubtful accounts of
$2,082,000 and $1,937,000 in 1999 and 1998, respectively 10,400,383 16,100,680
Inventories (Note 3) 13,722,338 9,949,347
Notes receivable from affiliated company 505,191 727,926
Prepaid expenses and other current assets 2,071,682 1,838,929
------------ ------------
Total current assets 41,467,951 37,816,512
PROPERTY, PLANT AND EQUIPMENT, NET 8,309,754 8,201,864
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE
ASSETS, NET 64,829,589 66,458,857
DEFERRED FINANCING COSTS AND OTHER ASSETS, NET 2,037,576 2,600,244
------------ ------------
$116,644,870 $115,077,477
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 14,559,439 $ 12,071,650
Accounts payable 13,692,179 11,960,808
Accrued expenses and other current liabilities 9,360,195 9,949,416
Current portion of deferred revenue 316,348 726,458
------------ ------------
Total current liabilities 37,928,161 34,708,332
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion 343,987 517,190
Other long-term liabilities 147,000 173,000
Notes payable, net of current portion 50,878,549 50,409,484
------------ ------------
Total long-term liabilities 51,369,536 51,099,674
COMMITMENTS AND CONTINGENCIES (Notes 5 through 8)
MINORITY INTEREST IN SUBSIDIARY 4,342 4,122
------------ ------------
MANDATORILY REDEEMABLE PREFERRED STOCK OF A
SUBSIDIARY 3,830,896 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 7,651,174 --
Common stock, $.001 par value -
Authorized - 40,000,000 shares
Issued - 17,936,576 and 15,852,319 shares in 1999 and 1998,
respectively 17,936 15,852
Additional paid-in capital 111,565,166 107,724,384
Less - Treasury stock, at cost, 743,678 shares (3,724,900) (3,724,900)
Accumulated deficit (97,684,777) (89,089,215)
Accumulated other comprehensive income (loss) (572,462) 82,742
------------ ------------
Total stockholders' equity 17,252,137 15,008,863
------------ ------------
$116,644,870 $115,077,477
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<PAGE>
SELFCARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,329,465) $ (5,182,926)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion on preferred stock of a subsidiary 112,645 57,979
Noncash interest expense related to amortization of original issue discount and
issuance of warrants 174,856 1,579,866
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 (516,336) (2,076,098)
Depreciation and amortization 3,243,846 4,114,576
Equity in net income of affiliate -- (237,773)
Minority interest in subsidiary's income (loss) 276 (73,683)
Changes in assets and liabilities:
Accounts receivable 5,272,253 (6,284,782)
Inventories (3,838,350) (5,129,998)
Prepaid expenses and other current assets (277,554) (1,159,680)
Accounts payable 2,181,722 8,366,753
Accrued expenses and other current liabilities (484,642) 2,386,516
------------ ------------
Net cash used in operating activities (1,232,752) (5,138,094)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,765,123) (723,504)
Cash received from affiliated company as repayment of loan 244,875 81,350
Cash paid for acquisition of Can-Am Care Corporation -- (13,600,000)
Cash paid for purchase of USB '93 Technology Associates Limited Partnership -- (471,354)
Cash paid for investment in Orgenics Ltd. -- (91,089)
Increase in other assets (5,023) (270,430)
------------ ------------
Net cash used in investing activities (1,525,271) (15,075,027)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for deferred financing costs -- (1,886,728)
Net proceeds from issuance of common stock, preferred stock and warrants to
purchase common stock 2,750,124 845,678
Proceeds from borrowings under notes payable 10,698,069 44,023,282
Repayments of notes payable (4,768,152) (28,525,605)
------------ ------------
Net cash provided by financing activities 8,680,041 14,456,627
------------ ------------
FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS (353,291) (29,663)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,568,727 (5,786,157)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,199,630 15,669,898
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,768,357 $ 9,883,741
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for -
Interest $ 2,234,032 $ 1,972,264
============ ============
Income taxes $ 226,500 $ 368,535
============ ============
</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 June 30, 1999, the Company's cash equivalents consisted of
repurchase agreements and 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 June 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:
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
Raw materials $ 2,951,383 $ 2,879,965
Work in-process 922,514 890,483
Finished goods 9,848,441 6,178,899
----------- -----------
$13,722,338 $ 9,949,347
=========== ===========
4) Nonrecurring, Non-cash Income and Expenses
For the six months ended June 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 six months ended June 30, 1999, the Company recognized $175,000 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 six months ended June 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 six months ended June
30, 1998, the Company recognized $1.6 million of non-cash interest expense
for the amortization of the original issue discount on convertible notes.
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 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
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
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 is equal to
or greater than $13.9581 (subject to adjustment as defined in the agreement)
for 20 consecutive trading days preceding any such conversion. During the six
months ended June 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 June 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.
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.
7
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7) Senior Subordinated Convertible Notes (Continued)
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 were to mature 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 six months ended June 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 on May 20, 1999.
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 $247,074 representing
the 7% dividend accrued for the six months ended June 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.
8
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 as the first installment pursuant to
the note repayment terms under the settlement agreement. Payments of
(pound)100,000 and (pound)187,000 are due in August 1999 and November 1999,
respectively.
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 June 30, Six Months Ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(3,407,142) $(2,185,923) $(7,329,465) $(5,182,926)
Premium on Series B Preferred Stock -- -- (808,453) --
Dividends on Series C, D and E Preferred Stock (182,354) -- (459,624) --
----------- ----------- ----------- -----------
Loss available to Common Shareholders $(3,589,496) $(2,185,923) $(8,597,542) $(5,182,926)
=========== =========== =========== ===========
</TABLE>
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 six months ended June 30, 1999 and
1998 was approximately $653,000 and $96,000 less than reported net income,
respectively, and for the three months ended June 30, 1999 and 1998 was
approximately $262,000 less and $145,000 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 six months ended June 30, 1999 and 1998,
respectively, is as follows:
9
<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
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three Months Ended June 30, 1999
Net product sales from external customers $ 14,748,850 $ 9,561,159 $ 2,870,716 $ -- $ 27,180,725
Intersegment net sales 427,187 1,298,361 -- -- 1,725,548
Grant and other revenue -- -- -- 121,776 121,776
---------------------------------------------------------------------------
Total net revenue $ 15,176,037 $ 10,859,520 $ 2,870,716 $ 121,776 $ 29,028,049
EBITDA $ (939,961) $ 1,296,987 $ 935,723 $ (1,117,597) $ 175,152
Six Months Ended June 30, 1999
Net product sales from external customers $ 29,768,137 $ 20,333,033 $ 5,856,702 $ -- $ 55,957,872
Intersegment net sales 555,116 2,470,038 -- -- 3,025,154
Grant and other revenue 316,441 -- -- 226,150 542,591
---------------------------------------------------------------------------
Total net revenue $ 30,639,694 $ 22,803,071 $ 5,856,702 $ 226,150 $ 59,525,617
EBITDA $ (849,842) $ 3,040,693 $ 452,414 $ (2,635,498) $ 7,767
Assets $ 55,545,054 $ 45,326,339 $ 6,351,880 $ 9,421,597 $116,644,870
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At December 31, 1998
Assets $ 47,483,580 $ 45,992,593 $ 6,301,200 $ 15,300,104 $115,077,477
<CAPTION>
Women's Clinical Corporate and
Diabetes Health Diagnostics Other Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three Months Ended June 30, 1998
Net product sales from external customers $ 16,375,611 $ 9,044,592 $ 3,637,112 $ 211,544 $ 29,268,859
Intersegment net sales (3,139) 531,562 24,956 -- 553,379
Grant and other revenue 1,185,929 -- -- 273,829 1,459,758
---------------------------------------------------------------------------
Total net revenue $ 17,558,401 $ 9,576,154 $ 3,662,068 $ 485,373 $ 31,281,996
EBITDA $ (351,097) $ 1,897,464 $ (83,769) $ (852,564) $ 610,034
Six Months Ended June 30, 1998
Net product sales from external customers $ 26,865,944 $ 18,479,785 $ 7,602,252 $ 305,749 $ 53,253,730
Intersegment net sales 455,245 894,421 87,345 -- 1,437,011
Grant and other revenue 1,462,097 -- -- 603,534 2,065,631
---------------------------------------------------------------------------
Total net revenue $ 28,783,286 $ 19,374,206 $ 7,689,597 $ 909,283 $ 56,756,372
EBITDA $ (1,976,214) $ 4,005,328 $ 761,731 $ (1,690,189) $ 1,100,656
</TABLE>
10
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12) Financial Information by Segment (Continued)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
Reconciliation of EBITDA to Net Loss 1999 1998 1999 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
EBITDA $ 175,152 $ 610,034 $ 7,767 $ 1,100,656
Depreciation and amortization expense (1,558,601) (2,060,888) (3,243,846) (4,114,576)
Amortization of deferred revenue 98,692 1,461,368 516,336 2,076,098
Interest expense (1,975,821) (2,203,002) (3,857,088) (5,612,874)
Income taxes (89,318) (46,312) (333,621) (136,312)
Non-cash income related to legal settlement -- -- -- 1,498,844
Other non-cash items (57,246) 52,877 (419,013) 5,238
-------------------------- --------------------------
Net loss $(3,407,142) $(2,185,923) $(7,329,465) $(5,182,926)
========================== ==========================
</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, women's health and infectious disease markets, as well as the
marketing of nutritional supplement products, several of which are targeted
primarily at the women's health market. The Company's existing and planned
products are targeted at the two largest existing markets for self-care
diagnostics, diabetes management and women's health, as well as the emerging
market for self-tests for infectious diseases and agents, including human
immunodeficiency viruses ("HIV"). An important part of the Company's business
strategy is to enter into strategic alliances, joint ventures and licensing
arrangements with third parties, primarily medical products companies, for the
development, manufacture, and distribution of certain products. The Company is
also pursuing a strategy of selective acquisitions of companies, assets and
technologies, which it believes will enhance its ability to deliver innovative
diagnostic products to the marketplace at a low cost.
RESULTS OF OPERATIONS
Net revenues. Net revenues decreased $3.4 million, or 11%, to $27.3
million for the three months ended June 30, 1999 from $30.7 million for the
three months ended June 30, 1998. However, net revenues increased $1.2
million, or 2%, to $56.5 million for the six months ended June 30, 1999 from
$55.3 million for the six months ended June 30, 1998. The decline for the
three months ended June 30, 1999 as compared to the similar period in 1998
was mainly the result of interruptions caused by the launch of the upgraded
FastTake(R) blood glucose monitoring system. The effect of this interruption
on revenue was approximately $3.5 million. The increase in revenues for the
six months ended June 30, 1999 as compared to the six months ended June 30,
1998 was derived primarily from a full six months of sales from Can-Am Care
Corporation ("Can-Am") which the Company acquired in February 1998 and
increased sales of women's health products. Net product sales from the
Company's diabetes management segment increased approximately $2.9 million
for the six months ended June 30, 1999 as compared to the six months ended
June 30, 1998, but decreased $1.6 million for the three months ended June 30,
1999 as compared to the three months ended June 30, 1998 as a result of the
aforementioned interruption. The diabetes management net product sales
accounted for 54% and 53% of the Company's net revenues for the three and six
months ended June 30, 1999, respectively, compared to 53% and 49% of the net
revenues for the three and six months ended June 30, 1998, respectively. Net
product sales from the Company's women's health segment increased $517,000
for the three months ended June 30, 1999 as compared to the three months
ended June 30, 1998 and increased $1.9 million for the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The women's
health product sales accounted for 35% and 36% of the Company's total net
revenues for the three and six months ended June 30, 1999, respectively,
compared to 29% and 33% of the total net revenues for the three and six
months ended June 30, 1998, respectively. The primary factor in the increased
net sales of the women's health segment was an increase in sales of branded
and private label pregnancy and ovulation tests. Another factor of the
increased 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(R) Cardio, SoyCare(TM) for Prostate, Stresstabs(R)
herbal PMS and Stresstabs(R) herbal MENOPAUSE in the first six months of
1999. Net sales of the clinical diagnostic products decreased $766,000 for
the three months ended June 30, 1999 as compared to the three months ended
June 30, 1998 and $1.7 million for the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The decrease in clinical
diagnostic product sales was primarily due to the Company's sale of the
clinical diagnostics business of Cambridge Diagnostics Ireland Limited
("CDIL"), a wholly owned subsidiary in Ireland, in September 1998. The
clinical diagnostic product sales accounted for 11% and 10% of the Company's
total net revenues for the three and six months ended June 30, 1999,
respectively, compared to 12% and 14% of the total net revenues for the three
and six months ended June 30, 1998, respectively. Grant and other revenue was
$122,000 for the three months ended June 30, 1999 compared to $1.5 million
for the three months ended June 30, 1998 and $543,000 for the six months
ended June 30, 1999 compared to $2.1 million for the six months ended June
30, 1998. The Company deferred $3.0 million of a $7.0 million success fee
received from LifeScan in October 1996. The Company recognized the revenue
related to the success fee as FastTake meters were shipped to LifeScan. In
1998, the Company accelerated the recognition of this revenue based on the
change in the estimated life of the then current meter because 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.
Gross profit. Gross profit decreased by $1.8 million or 18% to $8.2
million for the three months ended June 30, 1999 from $10.0 million for the
three months ended June 30, 1998. The interruption caused by the launch of
the upgraded FastTake blood glucose monitoring system resulted in a $1.2
million impact in the absolute amount of gross profit dollars in the quarter
ended June 30, 1999. Gross profit decreased by $669,000 or 4% to $17.3
million for the six months ended June 30, 1999 from $18.0 million for the six
months ended June 30, 1998. The impact of the aforementioned upgraded
FastTake interruption was slightly offset by increased
12
<PAGE>
net sales of other diabetes management products and women's health products in
the first six months of 1999. Gross profit as a percentage of net revenues
decreased to 30% and 31% for the three and six months ended June 30, 1999,
respectively, from 33% of net revenues for both the three and six months ended
June 30, 1998. The decrease in gross profit as a percentage of net revenues was
due to a decrease in the revenue recognized in relation to the success fee from
LifeScan. Gross profit as a percentage of net product sales increased slightly
to 30% for the three months ended June 30, 1999 compared to 29% for the three
months ended June 30, 1998. Gross profit as a percentage of net product sales
was 30% for the six-month periods ended June 30, 1999 and 1998.
Research and development expense. Research and development expense
decreased by $491,000 or 27% for the three months ended June 30, 1999 to $1.4
million from $1.8 million for the three months ended June 30, 1998. For the six
months ended June 30, 1999, research and development expense decreased by
$830,000 or 24% to $2.6 million from $3.4 million for the six months ended June
30, 1998. The decline in research and development expense was primarily due to
decreased expenses because of the Company's sale of the clinical diagnostics
business of CDIL in September 1998. Although research and development expense
has decreased during the first half of 1999, the Company expects to spend
significant and increasing amounts on research and development, especially on
several programs with LifeScan, throughout the remainder of 1999 and 2000.
Selling, general and administrative expense. Selling, general, and
administrative expense decreased $457,000 or 5% to $8.2 million for the three
months ended June 30, 1999 from $8.6 million for the three months ended June 30,
1998. The decrease in selling, general, and administrative expense for the
quarter ending June 30, 1999 as compared to the same period in 1998 is primarily
due to the successful reduction in selling expenses at Orgenics Limited, the
Company's subsidiary in Israel. However, for the six months ended June 30, 1999,
selling, general, and administrative expense increased $1.1 million or 7% to
$17.4 million from $16.3 million for the six months ended June 30, 1998. The
increase was primarily attributable to the effect of a full six 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. Selling, general and administrative expense, as a
percentage of net revenues, was 30% and 31% for the three and six months ended
June 30, 1999, respectively, compared to 28% and 30% for the three and six
months ended June 30, 1998.
Interest expense. For the three and six months ended June 30, 1999, the
Company incurred $2.0 million and $3.9 million, respectively, in interest
expense compared to $2.2 million and $5.6 million for the three and six months
ended June 30, 1998. Interest expense related to the Senior Subordinated
Convertible Notes decreased $384,000 and $2.0 million, respectively, for the
three and six months ended June 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 in the three and six months ended
June 30, 1998, the Company recognized $400,000 and $1.2 million, respectively,
of non-cash interest expense for the amortization of the original issue discount
on Senior Subordinated Convertible Notes. The decrease of 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 expense of $58,000 and
$192,000 for the three and six months ended June 30, 1999, respectively,
compared to other income of $252,000 and $1.7 million for the three and six
months ended June 30, 1998, respectively. Substantially all other 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 six months ended June 30, 1998, the Company recognized
$1.5 million of non-cash income related to 155,724 shares of the Company's
Common Stock received into treasury in connection with the settlement agreement
dated March 6, 1998 by and between the Company, Trinity Biotech PLC, Flambelle
Limited and Eastcourt Limited.
Dividends and accretion on mandatorily redeemable preferred stock of a
subsidiary and minority interest. Inverness Medical Limited, the Company's
subsidiary in Inverness, Scotland, accrued $56,000 and $113,000 for the three
and six months ended June 30, 1999, respectively, representing a 6% dividend
payable and accretion on the outstanding cumulative redeemable preference
shares, as compared to $29,000 and $58,000 for the three and six months ended
June 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 certain of the Company's
subsidiaries was income of $1,400 and $300 for the three and six months ended
June 30, 1999, respectively, as compared to losses of $37,000 and $74,000 for
the three and six months ended June 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.
Income taxes. For the three and six months ended June 30, 1999, the
Company recorded provisions of $89,000 and $334,000, respectively, for income
taxes compared to $46,000 and $136,000 for the three and six months ended June
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.
13
<PAGE>
Net loss. For the three months ended June 30, 1999, the Company had a net
loss of $3.4 million or $0.22 per common and potential common share compared to
a net loss of $2.2 million or $0.18 per common and potential common share for
the three months ended June 30, 1998. For the six months ended June 30, 1999,
the Company had a net loss of $7.3 million or $0.53 per common and potential
common share compared to a net loss of $5.2 million or $0.47 per common and
potential common share for the six months ended June 30, 1998. The results for
the six-month periods ending June 30, 1999 and 1998 included significant
non-recurring, non-cash charges and income as detailed above. Additionally, the
loss per share for the three months ended June 30, 1999 includes dividends of
approximately $182,000 on Series C, D and E Convertible Preferred Stock and the
loss per share for the six months ended June 30, 1999 includes premiums of
approximately $808,000 on Series B Convertible Preferred Stock and dividends of
approximately $460,000 on Series C, D and E Convertible Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 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 June 30, 1999, the Company had cash and cash equivalents of $14.8
million, a $5.6 million increase from December 31, 1998. The Company used
cash of $1.2 million in operating activities in the six months ended June 30,
1999. The Company incurred a net loss of $7.3 million during the period, but
the net loss includes non-cash expenses of $3.2 million. Other uses of cash
in operating activities included increases in inventories, prepaid expenses
and other current assets and decreases in accrued expenses and other current
liabilities totaling approximately $4.6 million. Cash was provided for
operations in part by a decrease in accounts receivable of $5.3 million and
an increase in accounts payable of $2.2 million. The increase in inventories
and decrease in accounts receivable was significantly impacted by the
anticipation of, and interruption in, the launch of the upgraded FastTake
system.
During the six months ended June 30, 1999, the Company received
proceeds of $307,000 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 $10.7 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 $792,000 of proceeds received from borrowings under notes
payable were obtained for the purchase of facilities by CDIL in Ireland. The
Company also repaid approximately $4.8 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 six months ended June 30, 1999, the Company used $1.8 million
to purchase property, plant and equipment. The Company received $245,000
((pound)150,000) from Enviromed, an affiliated company, in February 1999 as the
first installment pursuant to the note repayment terms under the settlement
agreement (see Note 9 of the "Notes to Consolidated Financial Statements").
Payments of (pound)100,000 and (pound)187,000 are due in August 1999 and
November 1999, respectively.
14
<PAGE>
Based upon its current operating plans, the Company believes that its
existing capital resources will be adequate to fund its operations and scheduled
debt payments for the remainder of the year. The Company 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 for such projects or
strategies. No assurance can be given that additional capital will be available,
or, if available, that it will be available on acceptable terms. If additional
funds are raised by issuing equity securities, further dilution to then existing
stockholders will result. If adequate funds are not available, the Company may
not be able to pursue desirable research and development programs unless it
obtains funds through arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of its technologies or
products which the Company would otherwise pursue on its own.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
There are various risks, including those described below, which may
materially impact your investment in Selfcare or may in the future, and, in
some cases, already do, materially affect us and our business, financial
condition and results of operations. You should consider carefully these
factors with respect to your investment in the Company's securities. This
section includes or refers to certain forward-looking statements; you should
read the explanation of the qualifications and limitations on such
forward-looking statements which begins on page 22.
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.
Nutritional Supplement Lines Acquisition. On February 19, 1997, we
purchased from American Home Products Corporation the U.S. rights to several
nutritional supplement product lines. We are also developing additional
nutritional supplement products and plan to expand sales of these nutritional
supplements. In order to do this, we paid and expect to continue to pay
substantial marketing and promotional expenses and allowances in 1999 and in
future years. We cannot guarantee that these expenditures and allowances will
result in an increase or maintenance of the existing revenue levels from the
nutritional supplement lines or new product lines. Furthermore, except for our
existing promotional efforts with respect to the nutritional supplement lines,
we have not conducted a national advertising campaign of the scope or magnitude
equal to the ongoing and planned promotional efforts for the nutritional
supplement lines. There is a risk that our efforts may not be successful or
cost-efficient.
The Can-Am Acquisition. On February 18, 1998, Inverness Medical, Inc., a
subsidiary of Selfcare, purchased Can-Am Care Corporation, a leading supplier of
diabetes care products. We have decreased, and expect to continue to decrease,
certain expenses by, among other things, eliminating duplicative management
functions and combining our distribution channels with those of Can-Am. Although
we believe that synergies are present between our existing distribution channels
and those of Can-Am, we cannot be certain that the integration of the Can-Am
product line with our product lines will lead to increased overall revenue or
decreased spending as a percentage of revenue, or that the integration will
result in other benefits customarily pursued in a strategic acquisition.
Accordingly, we may not 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.
15
<PAGE>
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(R) 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:
o any of the products under development will prove to be safe or
effective in clinical trials;
o we will be able to obtain regulatory approval to market any of
our products that are in development or contemplated;
o any of such products can be manufactured at acceptable cost
and with appropriate quality; or
o any of such products, if and when approved, can be
successfully marketed.
Risks Related to the LifeScan Alliance
In 1995, we entered into an exclusive worldwide alliance and distribution
agreement with LifeScan, Inc., a subsidiary of Johnson & Johnson, 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(R), our proprietary
electrochemical blood glucose monitoring system for the management of diabetes,
and upgraded FastTake systems. 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. Although the FastTake product appears to be gaining acceptance,
we cannot assure you that the market will fully accept FastTake or that any
acceptance will continue. Any failure by us to produce or failure of LifeScan to
market and distribute FastTake successfully could have a material adverse effect
on our business, financial condition and results of operations.
Dependence Upon Key Personnel
Our future success is highly dependent on the services of Ron Zwanziger,
the Chairman, President and Chief Executive Officer, and certain other members
of management. Due to the specialized scientific nature of our business, our
future success depends in large part upon our ability to attract and retain
highly skilled scientific, managerial and marketing personnel, particularly as
we continue to develop and expand our activities. We face significant
competition for such personnel from other companies, research and academic
institutions, government entities and other organizations. We cannot be certain
that we will be able to hire or retain the personnel we require for continued
growth. The loss of Mr. Zwanziger or one or more of the management or scientific
employees could have a negative impact on our ability to manage and operate
effectively.
Dependence on Patents and Proprietary Technology; Trademarks
Obtaining patent and trade secret protection for new technologies,
products and processes is important in the medical products and diagnostic
testing industries. Our success depends, in part, on our ability to obtain
patent protection for our products and manufacturing processes, to preserve our
trade secrets and to operate without infringing the proprietary rights of
others.
Patents and Trademarks. We hold certain patent rights, have certain patent
applications pending, and expect to seek additional patents in the future.
However, we cannot be certain that we will be successful or timely in obtaining
any such patents. The patent position of medical products and diagnostic testing
companies is often highly uncertain and usually involves complex legal and
factual questions. Furthermore, the U.S. Patent and Trademark Office has not set
forth a consistent policy regarding the breadth of claims covered in medical
products patents. Therefore, we cannot be certain that any issued patents will
provide adequate protection for our products. If such patents are limited in
scope, our competitors may be able to design around such patents.
In the medical products industry, including the diagnostic product
industry, there is extensive litigation regarding patents, licenses and other
intellectual property rights. We periodically incur, and will likely continue to
incur, costs related to defending potential infringement claims or asserting
such claims against others. To determine the priority of inventions, we may also
have to participate in interference proceedings to determine the scope of
patents issued by the Patent and Trademark Office which could also result in
substantial costs.
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In April of 1998, Abbott Laboratories, Inc. filed a lawsuit against us
and Princeton BioMeditech Corporation, which manufactures our pregnancy
detection and ovulation prediction products. Abbott alleges that these
products infringe a patent under which Abbott claims to have exclusive
rights. In October 1998, Abbott filed a lawsuit against us alleging that our
glucose monitoring system, FastTake, 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:
o developing technologies and products that are more effective
than our products or that render our technologies or products
obsolete or noncompetitive;
o obtaining patent protection or other intellectual property
rights that would prevent us from developing our potential
products; or
o obtaining regulatory approval for the commercialization of
their products more rapidly or effectively than we are able to
do so.
Many of our existing or potential competitors have or may have
substantially greater research and development capabilities, clinical,
manufacturing, regulatory and marketing experience and financial and managerial
resources.
We are seeking to develop and market generic test strips which are
compatible with other manufacturers' electrochemical blood glucose monitoring
systems including Excel(TM), which is compatible with the ExacTech(TM) system
sold by MediSense, Inc. Others may attempt to enter this market with similar
products or the manufacturers of the systems with which such test strips are
compatible may lower their own test strip prices. This would reduce or
eliminate our competitive price advantage.
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 trips such as FastTake and Excel.
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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.
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 resubmitted it for testing in
September 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
removal of DoubleCheck and Genie II from the market in France will have a
material adverse impact on its sales, operations or financial performance
even if those products remain off the French Market for an extended period of
time. 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.
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The Dietary Supplement Health and Education Act of 1994 enacted on October
25, 1994, defines dietary supplements as a new category of food separate from
conventional food. The FDA has finalized certain regulations to implement the
Dietary Supplement Health and Education Act of 1994, including those relating to
nutritional labeling requirements, but it has not finalized other regulations.
Under the Dietary Supplement Health and Education Act of 1994, we are required
to have different labeling for the nutritional supplement lines and, with
respect to nutritional supplement products under development, we are subject to
new notification procedures and scientific proof requirements regarding
ingredients, product claims and safety. We cannot determine how, or if, these
regulations will affect business in the future. If we do not comply with
applicable FDA requirements, the FDA could impose sanctions and penalties,
including warning letters, product recalls and seizures, injunctions or criminal
prosecution. Although not yet final, we anticipate that the FDA will enact
specific standards under the law to regulate the manufacturing of dietary
supplements. The current proposal standards are similar to the current standards
for food and we believe that the current manufacturing process of our
nutritional supplement lines will be in compliance with the proposed standards
for dietary supplements. However, we cannot be certain that the final standards
for dietary supplements will not change in ways that require changes in the
manufacture of the nutritional supplement lines.
Litigation
The Company encounters many risks associated with litigation concerning,
among other things, the enforcement of patents and other intellectual property
rights. For information on the risks involved, please see "Part II, Item 1.
Legal Proceedings".
Risks Related to the Year 2000 Issue
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
Background. The term "Year 2000 issue" is a general term used to describe
various problems that may result from the improper processing by computer
systems of dates after 1999. These problems arise from the inability of some
hardware and software to distinguish dates before the year 2000 from dates in
and after the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations. The Year 2000 issue affects
virtually all companies and all organizations.
Our efforts to address the Year 2000 issue are focused in the
following areas:
(1) reviewing and taking any necessary steps to attempt to correct
our computer information systems, including software
applications and hardware platforms;
(2) evaluating and making any necessary modifications to other
computer systems that do not relate to information technology
but include embedded technology, such as telecommunications,
security, fire and safety systems; and
(3) communicating with certain significant customers, suppliers
and service providers to determine whether there will be any
interruption in their systems that could affect us.
Our State of Readiness. We have developed a four-phase plan to address the
Year 2000 issues. The four phases are: (1) awareness, (2) assessment, (3)
remediation, and (4) testing.
Awareness. We have made the relevant employees aware of the Year 2000
issue and collected information from such employees regarding systems that
might be affected. We have established a project team to lead our efforts,
and management 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.
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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 are in the process of 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.
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
develop specific contingency plans for those suppliers and service providers
that do not provide satisfactory assurance regarding their Year 2000 readiness
by September 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:
o the availability of qualified personnel and other information
technology resources;
o 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
o the actions of governmental agencies or other third parties
with respect to Year 2000 problems.
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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 which are members of the European Union. In
addition, it is likely that there will be a greater transparency of pricing in
the participating countries, making Europe a more competitive environment. Our
European subsidiaries may need to respond by adjusting their business and
financial strategies. The effect of any such adaptations or adjustments has not
been quantified at this time. However, we do not believe that the consequences
of the Euro conversion will have a material effect on us, although no assurances
can be given that it will not.
We have manufacturing facilities in Galway, Ireland; Yavne, Israel; and
Inverness, Scotland, and sales and marketing offices in Germany and Belgium, and
we market our products in several international markets.
Limited Operating History; History of Operating Losses and Accumulated Deficit;
Uncertain Profitability
We have not had significant profits since we began operations. As of June
30, 1999, our accumulated deficit totaled approximately $97.7 million. In order
to continue developing products, we must expend substantial resources to conduct
research and pre-clinical and clinical development programs, to establish
manufacturing facilities, sales and marketing capabilities, and to establish
additional quality control and regulatory and administrative capabilities. We
may lose substantial and, perhaps, increasing amounts of money over the next
several years as our product programs expand and various clinical trials
commence. We do not know when, or if, we will make money because our
profitability depends on a number of uncertainties.
Fluctuations in Results of Operations; Volatility of Share Price
Our annual and quarterly operating results may fluctuate due to
factors such as:
o the timing of new product announcements and introductions by
us and our competitors;
o market acceptance of new or enhanced versions of our
products;
o changes in manufacturing costs or other expenses;
o competitive pricing pressures;
o the gain or loss of significant distribution outlets or
customers;
o increased research and development expenses; or
o 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:
o our quarterly operating results;
o changes in general conditions in the economy, the financial
markets, or the health care industry;
o government regulation in the health care industry;
o changes in other areas such as tax laws;
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o 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
o other developments affecting us or our competitors.
Control by Certain Stockholders
Our executive officers and directors beneficially owned as of February
1, 1999, approximately 27.3% 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.
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:
o our ability to develop new products and integrate new product
lines;
o our ability to manage growth;
o our ability to successfully market new products in general;
o our ability to obtain debt and equity financing;
o our ability to successfully prosecute and defend litigation;
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o general economic conditions; and
o 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.
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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(R) 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.
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 as the first installment pursuant to
the note repayment terms under the settlement agreement. Payments of
(pound)100,000 and (pound)187,000 are due in August 1999 and November 1999,
respectively.
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 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
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 canceled Convertible Notes plus a 15% premium.
The New Convertible Notes were to mature 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
provided the Series B preferred stockholders a 15% premium on the face value
of the preferred stock on the date of the amendment to the terms of the
Series B Preferred Stock, subject to shareholder approval. The amended terms
were approved at the Company's annual meeting of shareholders on May 20,
1999. The conversion price of the amended Conversion Shares of common stock
will be equal to the aggregate stated value ($1,000 per share), plus any
accrued but unpaid premium through the date of such conversion, divided by a
conversion price equal to the lower of $2.00 or the Variable Conversion Price
(defined as the average of the five lowest closing bid prices of the common
stock during the 30 trading days preceding such conversion) then in effect.
In the event the price per share rises to $3.25 or higher for any ten
consecutive trading days after 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 and repurchase agreements
with original maturities of 90 days or less. At June 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 June 30, 1999, the assets related
to non-dollar-denominated currencies were approximately $30.5 million.
ITEM 4. Submission of Matters to a Vote of Securities Holders
The annual meeting of stockholders of the Company was held on May 20,
1999. The following items were submitted to a vote of securities holders at
the annual meeting:
(I) Jonathan J. Fleming, John F. Levy and Peter Townsend were
re-elected as directors of the Company. The other directors
whose term of office continued after the meeting were: Carol
R. Goldberg, Robert Oringer, Edward B. Roberts, Willard L.
Umphrey and Ron Zwanziger.
(II) The amendment to the Restated Certificate of Incorporation to
change the terms of the Series B Convertible Preferred Stock,
par value $.001 per share, contained in the Certificate of
Incorporation was authorized and approved.
(III) The issuance of Series B Preferred Stock in connection with
the settlement of certain obligations of the Company to the
holders of the Series B Preferred Stock was authorized and
approved.
(IV) The issuance of the Senior Subordinated Convertible Notes,
issued on October 27, 1997, and the portion of the original
notes amended and issued by the Company on January 11, 1999 in
connection with the settlement of certain obligations of the
Company to the holders of the notes were ratified and
approved.
(V) The issuance of the Series C Convertible Preferred Stock,
Series D Convertible Preferred Stock and Series E Convertible
Preferred Stock, each with par value of $.001 per share, and
the participation by certain officers and directors of the
Company in the private placement of the Series C Preferred
Stock and the Series E Preferred Stock were ratified and
approved.
(VI) The amendment of the Company's 1996 Amended and Restated Stock
Option and Grant Plan (the "Plan") to increase the number of
shares authorized for issuance under the Plan from 1,500,000
shares to 2,250,000 shares of common stock, par value $.001
per share, of the Company was approved.
(VII) The selection of Arthur Andersen LLP as the Company's
independent auditors for the 1999 fiscal year ending December
31, 1999 was ratified.
The following table summarizes the votes for, against or withheld and the
number of abstentions and broker non-votes with regard to each matter voted
upon:
Class: Common Shares
<TABLE>
<CAPTION>
Against or
Matter For Withheld Abstentions Broker Non-Votes
------ --- -------- ----------- ----------------
<S> <C> <C> <C> <C>
Election of:
Mr. Fleming 13,170,023 280,771 0 0
Mr. Townsend 13,169,923 280,871 0 0
Mr. Levy 13,169,023 281,771 0 0
Approval of Amendment to Restated
Certificate of Incorporation 8,823,057 222,632 106,125 4,298,980
</TABLE>
27
<PAGE>
Class: Common Shares (continued)
<TABLE>
<CAPTION>
Against or
Matter For Withheld Abstentions Broker Non-Votes
------ --- -------- ----------- ----------------
<S> <C> <C> <C> <C>
Approval of Issuance of Series B Preferred
Stock 8,829,065 169,022 153,727 4,298,980
Approval of Amendment and Issuance of
Senior Subordinated Convertible Notes 8,860,383 189,195 102,236 4,298,980
Ratification of Series C, D, and E
Convertible Preferred Stock 8,813,638 177,969 160,207 4,298,980
Approval of Amendment of 1996 Amended and
Restated Stock Option and Grant Plan 12,888,755 375,445 96,594 90,000
Ratification of Selection of Auditors 13,263,504 46,213 51,077 90,000
</TABLE>
Class: Preferred Shares
<TABLE>
<CAPTION>
Against or
Matter For Withheld Abstentions Broker Non-Votes
------ --- -------- ----------- ----------------
<S> <C> <C> <C> <C>
Approval of Amendment to Restated
Certificate of Incorporation 2,450 0 0 0
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit Number Title
10.1 Amended and Restated Master Agreement, dated as of
June 7, 1999, by and among the Company, Johnson &
Johnson Development Corporation and LifeScan, Inc.
10.2 Amended and Restated Sales Distribution Agreement for
Testing System for Glucose in Humans between
LifeScan, Inc. and the Company.
27.1 Financial Data Schedule
b. Reports on Form 8-K:
The Company filed a report on Form 8-K dated May 20, 1999, in
connection with the shareholders' approval of matters at the Company's
annual meeting of shareholders on May 20, 1999 and the conversion of the
amended Senior Subordinated Convertible Notes into shares of the Company's
common stock by the noteholders.
28
<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: August 16, 1999 /s/ Duane L. James
------------------
Duane L. James,
Chief Accounting Officer and an
authorized officer
29
<PAGE>
Exhibit 10.1
Information from this exhibit has been
omitted and filed separately with the
Securities and Exchange Commission.
AMENDED AND RESTATED
MASTER AGREEMENT
by and among
JOHNSON & JOHNSON DEVELOPMENT CORPORATION,
LIFESCAN, INC.
and
SELFCARE, INC.
As of June 7, 1999
<PAGE>
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS 4
ARTICLE II [DELIBERATELY LEFT BLANK] 6
ARTICLE III NOVEL GLUCOSE SYSTEMS
AND 510(k) NOTIFICATION PROCEDURES 6
3.1 NOVEL GLUCOSE SYSTEMS 6
3.2 510(K) NOTIFICATION PROCEDURES..................................................................6
3.3 LICENSING OF SELFCARE TECHNOLOGY................................................................7
ARTICLE IV REPRESENTATIONS........................................................................................7
4.1 AUTHORIZATION...................................................................................8
ARTICLE V CONFIDENTIALITY.........................................................................................8
5.1 CONFIDENTIAL INFORMATION........................................................................8
5.2 CONFIDENTIALITY OBLIGATION......................................................................9
5.3 NO IMPLIED RIGHTS...............................................................................9
5.4 RESTRICTIONS ON JJDC AND LIFESCAN...............................................................9
5.5 RESTRICTIONS ON SELFCARE.......................................................................10
5.6 SPECIFIC PERFORMANCE; SPECIAL REMEDY...........................................................10
ARTICLE VI COOPERATION; ARBITRATION..............................................................................11
6.1 COOPERATION....................................................................................11
6.2 ARBITRATION....................................................................................11
ARTICLE VII MISCELLANEOUS........................................................................................12
7.1 HEADINGS.......................................................................................12
7.2 ENTIRE AGREEMENT...............................................................................12
7.3 MODIFICATION AND WAIVER........................................................................12
7.4 COUNTERPARTS...................................................................................12
7.5 RIGHTS OF PARTIES..............................................................................12
7.6 NOTICES........................................................................................12
7.7 PAYMENTS.......................................................................................13
7.8 ASSIGNMENT.....................................................................................13
7.9 SUCCESSORS AND ASSIGNS.........................................................................14
7.10 GOVERNING LAW; CONSENT TO JURISDICTION.........................................................14
7.11 SEVERABILITY...................................................................................14
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
7.12 PRESS RELEASES AND ANNOUNCEMENTS...............................................................14
7.13 EXPENSES OF THE PARTIES........................................................................14
7.14 NO IMPLIED WAIVERS: RIGHTS CUMULATIVE..........................................................14
7.15 RELATIONSHIP OF THE PARTIES....................................................................15
7.16 TERM. 15
</TABLE>
3
<PAGE>
AMENDED AND RESTATED
MASTER AGREEMENT
This AMENDED AND RESTATED MASTER AGREEMENT ("Master Agreement") is made
as of June 7, 1999 by and among Selfcare, Inc., a Delaware corporation
("Selfcare"), Johnson & Johnson Development Corporation ("JJDC"), a New Jersey
corporation, and LifeScan, Inc., a California corporation ("LifeScan"). Terms
used herein or in the other Transaction Agreements (as hereinafter defined) and
not defined therein have the meanings set forth in Article I hereof. This
Agreement supersedes that certain Master Agreement dated as of November 10, 1995
(the "Original Master Agreement") by and among Selfcare. LifeScan and JJDC.
WHEREAS, Selfcare is developing electrochemical testing systems for
measuring glucose in humans;
WHEREAS, LifeScan has supported and desires to continue to support the
financing or such development in consideration of Selfcare's agreement, subject
to the terms and conditions set forth in the Transaction Agreements:
WHEREAS, in furtherance of the foregoing (i) simultaneously with the
execution of the Original Master Agreement. JJDC and Selfcare entered into an
Investment Agreement (the "Investment Agreement") pursuant to which JJDC loaned
to Selfcare the amounts described therein and acquired shares of common stock of
Selfcare, and (ii) subject to the terms and conditions set forth in the Original
Master Agreement, LifeScan paid certain product milestone payments to Selfcare
and entered into a certain Sales Distribution Agreement dated as of October 9,
1996 (the "Original Glucose Distribution Agreement"); and
WHEREAS, contemporaneously with the execution of this Agreement,
Selfcare and LifeScan are entering into an Amended and Restated Sales
Distribution Agreement (the "Glucose Distribution Agreement") which amends and
supersedes the Original Glucose Distribution Agreement.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
The following terms have the following meanings indicated or referred
to below:
"Affiliate" means, with respect to a party, any Person that, directly
or indirectly, is Controlled by such party or that Controls such party or that
is under common Control with such party.
4
<PAGE>
"Confidential Information" - See Section 5.1 hereof.
"Control" or words of like import means the power directly or
indirectly through one or more intermediaries which one controls, to direct or
cause the direction of the management and policies of Person, whether through
the ownership of voting securities or partnership interests or by contract or
otherwise: provided, however, that "Control" shall not be deemed to exist in the
case of a joint venture partnership or other jointly owned enterprise in which
two Persons which are not otherwise Affiliates of each other share such power
equally, unless either of such Persons has the power to direct the day-to-day
operations of such enterprise notwithstanding the opposition of other Person.
"Disclosing Party - See Section 5.1 hereof.
"Distribution Agreements" or "Distribution Agreement" means the Glucose
Distribution Agreement and any other distribution agreement which Selfcare and
LifeScan may enter into and which is expressly identified as a Distribution
Agreement that is subject to the terms of this Agreement.
"Established Person" means any Person which had, prior to its first
purchase of Complete System Products from Selfcare, more than $100,000,000 in
annual worldwide sales in the market for home use testing of blood glucose.
"FDA" means the Federal Food and Drug Administration, U.S. Department
of Health and Human Services, or the successor thereto.
"510(k) Notification" means a pre-market notification filing made with
the FDA under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, and
any amendments to such act, or any other regulatory filing required by the FDA
as a precondition to the commercial marketing of the product at issue.
"Glucose Distribution Agreement" - See Recitals.
"Instrument" means an electronic meter to which is attached a Test
Strip.
"Investment Agreement" - See the Recitals hereof.
"Person" means any individual, corporation, partnership or other
entity.
"Proper Form" - See Section 3.2 hereof
"Receiving Party" - See Section 5.1 hereof
"Related Component" means, with respect to any Glucose System, any
supply or component used with such system which chemically or physically
interacts with the Test Strips
5
<PAGE>
or Instruments comprising parts of such system and which are manufactured by or
specifically for Selfcare.
"System" means a Glucose System, or any other product or products
expressly identified as "System" in a Distribution Agreement.
"Transaction Agreements" means this Agreement, the Investment
Agreement, the Distribution Agreements, the Credit Agreement and the SC Note.
Each capitalized term used herein and not otherwise defined shall have
the meaning accorded it in the Glucose Distribution Agreement.
ARTICLE II
[DELIBERATELY LEFT BLANK]
ARTICLE III
NOVEL GLUCOSE SYSTEMS
AND 510(k) NOTIFICATION PROCEDURES
3.1 NOVEL GLUCOSE SYSTEMS. A "Novel Glucose System" shall mean a
Glucose System that lacks either (i) the need to use a Test Strip, or (ii)
measurement of an in vitro fluid sample. If Selfcare files a 510(k) Notification
in Proper Form with respect to a Novel Glucose System, Selfcare shall provide
LifeScan with a copy of such filing within three (3) business days after such
filing and shall thereafter notify LifeScan within three (3) business days after
receipt from the FDA of notice of the FDA's acceptance thereof for filing. At
any time after receipt of such notice from Selfcare and until two years after
Selfcare shall have delivered to LifeScan notice that it has received FDA
Clearance for such System, LifeScan may, in its sole discretion, elect to
require Selfcare to submit to LifeScan a proposed form of distribution agreement
with respect to such System reflecting the terms outlined in Exhibit B and other
appropriate terms, and negotiate in good faith with LifeScan the terms of such
an agreement. If LifeScan fails to make such election within 90 days after
Selfcare shall have delivered to LifeScan notice that it has received such
notice of acceptance for filing, Selfcare shall be free to commercialize such
Novel Glucose System in such manner as it may deem appropriate. Notwithstanding
the foregoing, any contract or agreement entered into by Selfcare with respect
to distribution of such Novel Glucose System shall be expressly subject to the
rights of LifeScan under this Section 3.1. Further, Selfcare shall not sell such
System to any Established Person, unless such restriction is prohibited by
applicable law and shall terminate sales of such System within 90 days after
receipt of notice given by LifeScan within such two-year period exercising
LifeScan's continuing right to require Selfcare to enter into a Distribution
Agreement with respect to such Systems.
6
<PAGE>
3.2 510(K) NOTIFICATION PROCEDURES. After preparation of a draft 510(k)
Notification with respect to a System and before its filing with the FDA.
Selfcare shall submit such draft to LifeScan and [OMITTED] or if he is
unavailable [OMITTED] of [OMITTED] or if such consultants are unavailable and
LifeScan timely submits a list of proposed alternates as required below in this
Section 3.2, to a consultant selected as provided below. If Such Consultants are
unavailable to review the 510(k) Notification, LifeScan shall, within 20 days
after receipt of notice from Selfcare that they are unavailable, deliver written
notice to Selfcare proposing three consultants meeting the qualifications set
forth below. Selfcare shall select the consultant from such list. If LifeScan
fails timely to deliver such list, Selfcare may select a consultant meeting such
qualifications, except that such consultant may have rendered services to
Affiliates of Johnson & Johnson. Except as provided in the preceding sentence,
any consultant other than the individuals named above which is selected to
review a draft 510(k) Notification shall have at least 10 years' experience in
handling or advising with respect to submissions to the FDA pursuant to Section
510(k) and FDA policies regarding the 510(k) approval practice, and shall
deliver a certification to the parties that such consultant has not within the
past three years, rendered services to Selfcare or any of its Affiliates or any
Affiliate of Johnson & Johnson, and has agreed to review such draft 510(k)
Notification as required by this Section 3.2. The consultant that reviews any
draft 510(k) Notification shall be instructed to complete its review and render
its decision within ten business days and that such draft 510(k) Notification
should be found acceptable if (i) the device described therein is in all
material respects in accordance with the specifications for such System agreed
upon by Selfcare and LifeScan and (ii) the data set forth or referred to in such
draft 510(k) Notification reasonably supports the claims made therein. Where
such consultant finds that either such condition is not satisfied, he or she
shall provide a report setting forth in reasonable detail such deficiency or
deficiencies and the steps that need be taken in order to remedy such deficiency
or deficiencies. In the case of Project A, Project B and Project C, Selfcare
shall thereupon take such steps (provided such steps are commercially
reasonable), amend the 510(k) Notification accordingly and resubmit such 510(k)
Notification to such expert for review and approval (with a copy to LifeScan)
prior to its submission to the FDA. The fees of any such consultant shall be
shared equally by LifeScan and Selfcare. Notwithstanding anything to the
contrary set forth herein, a 510(k) Notification shall be deemed to be in
"Proper Form" if, and only if, (i) it is approved by any consultant retained
pursuant to this Section 3.2, or (ii) the parties agree in writing that it is in
"Proper Form."
3.3 LICENSING OF SELFCARE TECHNOLOGY. Selfcare agrees that any license
it may grant or any technology relating to Test Strips (as defined in the
Glucose Distribution Agreement) which are subject to the Glucose Distribution
Agreement shall contain provisions designed to preserve for LifeScan exclusive
distribution rights granted to LifeScan under such Distribution Agreement and
Selfcare will not grant to any Person any such rights which are exclusive to
LifeScan under any of the Transaction Agreements.
7
<PAGE>
ARTICLE IV
REPRESENTATIONS
4.1 AUTHORIZATION. Each party hereto represents that it has full power
to execute, deliver and perform this Agreement and the other Transaction
Agreements. Each of this Agreement and the Glucose Distribution Agreement
delivered as of the date of this Agreement has been (and each Distribution
Agreement which may be entered into in the future will be) duly executed and
delivered by such party and is (or will be) the legal, valid and, assuming due
execution by the other parties hereto and thereto, binding obligation of such
party, enforceable against such party in accordance with its terms, subject as
to enforcement of remedies to applicable bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting creditors' rights generally. The
execution, delivery and performance of this Agreement and the other Transaction
Agreements has been duly authorized by all necessary corporate action of such
party.
ARTICLE V
CONFIDENTIALITY
5.1 CONFIDENTIAL INFORMATION. As used herein, "Confidential
Information" means: (i) all information communicated by one party (the
"Disclosing Party") to the other or an Affiliate of the other or any of their
respective officers, employees, agents or representatives (collectively, the
"Receiving Party"), considered by the Disclosing Party to be confidential and
proprietary and, if disclosed in writing, marked "Confidential," or, if
disclosed orally or visually by the Disclosing Party, identified by it as being
confidential at the time of disclosure and confirmed in writing within thirty
(30) days thereof; or (ii) any information which as of this date constitutes
Confidential Information under that certain Confidentiality Agreement between
Selfcare and LifeScan dated June 7, 1995, it being understood that although such
agreement was superseded by the Original Master Agreement, such Confidential
Information thereunder as of the date of the Original Master Agreement remained
subject to the Original Master Agreement and remains subject to the provisions
of this Agreement, or (iii) the description of the Original Glucose System (as
the same was modified by the 510(k) Notification filed with the FDA with respect
thereto), the other electrochemical test systems set forth in the schedules to
the Original Master Agreement or the schedules to the Glucose Distribution
Agreement; or (iv) the terms of this Agreement. Notwithstanding the foregoing,
Confidential Information does not include:
(a) information which at the time of disclosure was
published, known publicly, or otherwise in the public
domain;
(b) information which after disclosure, is published,
becomes known publicly, or otherwise becomes part of
the public domain through no fault of the Receiving
Party;
8
<PAGE>
(c) information which prior to the time of disclosure is
known to the Receiving Party as evidenced by its
written records;
(d) information which after disclosure is made available
to the Receiving Party, in good faith and without
restrictions on further disclosure by a third party
not known by the Receiving Party to be under any
obligation of confidentiality to the Disclosing
Party; and
(e) information which is subsequently developed by the
Receiving Party independently, without recourse to
information described hereunder or to information
that was disclosed by a third party under an
obligation of confidentiality to the Disclosing
Party.
5.2 CONFIDENTIALITY OBLIGATION. Each party agrees on behalf of itself,
its successors and assigns, and its Affiliates, and their respective officers,
employees, agents and representatives that all Confidential Information of the
Disclosing Party shall be maintained by the Receiving Party in confidence,
subject to disclosure only to the extent and in a manner necessary in order to
accomplish in a reasonable way one or more of the purposes of any of the
Transaction Documents. Each party further agrees that Confidential Information
of the Disclosing Party shall be used by the Receiving Party only during the
term of this Agreement and only for planning marketing and sales of, and testing
the efficiency and quality of, the products and technology that are subject to
the Distribution Agreements and for such other purposes as are consistent with
other written agreements between the Disclosing Party and the Receiving Party.
Each Receiving Party shall use same the standard of care to protect the
confidentiality of Confidential Information of a Disclosing Party as it uses to
protect its own confidential information and shall limit disclosure of such
information by it to those of its and its Affiliates, officers, employees,
agents and representatives who have an actual need to know and have a written
obligation to protect the confidentiality of such information on substantially
the same terms as set Forth herein. Upon termination of this Agreement for any
reason, each Receiving Party will cease making use of Confidential Information
of a Disclosing Party and at the Disclosing Party's request return to it all of
its written Confidential Information (including documentation prepared by such
party and containing Confidential Information or the other party) and all copies
thereof, except that a Receiving Party may keep one copy of all Confidential
Information it has received in its legal files for archival purposes only.
5.3 NO IMPLIED RIGHTS. The disclosure of Confidential Information under
any Transaction Agreement shall not result in any right or license being granted
to the Receiving Party unless expressly stated therein.
5.4 RESTRICTIONS ON LIFESCAN. In consideration of the sensitive and
confidential information regarding Selfcare's technology and research and
development which Selfcare has provided and may provide to LifeScan pursuant to
the Transaction Agreement and otherwise in the course of their relationship.
LifeScan agree that until the later of (i) five years from the date hereof or
(ii) three years from the termination of this Agreement, LifeScan will not, and
9
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will cause its Affiliates and each of the officers, employees, agents and
representatives of any of them not to, directly or indirectly: (i) attempt to
hire any then-current employee of Selfcare, assist in such hiring by any other
Person, or encourage any, such then-current employee to terminate his or her
relationship with Selfcare; or (ii) whether as owner, partner, shareholder,
consultant, agent, employee, co-venturer or otherwise, develop, manufacture,
purchase, sell or distribute, anywhere in the world (except for manufacturing,
purchases, sales and distributions in accordance with the Distribution
Agreements) any electrochemical blood glucose testing system or component
(including, without limitation, any test strip) or any other product of any
nature, in each case, which incorporates, or is based on, directly or
indirectly, Confidential Information of Selfcare or technology or know-how that
would not have been developed but for the use or knowledge of Confidential
Information of Selfcare.
5.5 RESTRICTIONS ON SELFCARE. Selfcare agrees that until the later of
(i) five years from the date hereof or (ii) three years from the termination of
this Agreement, Selfcare will not, and will cause its Affiliates and each of the
officers, employees, agents and representatives of any of them not to, directly
or indirectly, attempt to hire any then-current employee of LifeScan, assist in
such hiring by any other Person, or encourage any such then-current employee to
terminate his or her relationship with LifeScan. It is not the current intention
of Selfcare to receive from LifeScan, or of LifeScan to provide to Selfcare,
Confidential Information of LifeScan related to research and development
conducted by or for LifeScan. Nonetheless, in view of the prospect that
disclosure of such Confidential Information of LifeScan may be made in
connection with the Transaction Agreements and otherwise in the Course of their
relationship with Selfcare, Selfcare agrees that, except as provided below in
this Section 5.5. until the later of (i) five years from the date hereof, or
(ii) three years From the termination of this Agreement, Selfcare will not, and
will cause its Affiliates and each of the officers, employees, agents and
representatives of any of them not to directly or indirectly. whether as owner,
partner, shareholder, Consultant, agent, employee, co-venturer or otherwise,
develop, manufacture, purchase, sell or distribute anywhere in the world (except
for manufacturing, purchases sales and distributions in accordance with the
Distribution Agreements) any electrochemical blood glucose testing system or
component (including, without limitation, any test strip) or any other product
of any nature, in each case, which incorporates, or is based on, directly or
indirectly. Confidential Information of LifeScan or technology or know-how that
would not have been developed but for the use or knowledge of Confidential
Information of LifeScan. Nothing herein shall in any way restrict Selfcare's
right, to the extent permitted under the terms of any Distribution Agreement, to
manufacture and sell any electrochemical blood glucose testing system or
component and any such System or component may incorporate or be based on,
directly or indirectly, Confidential Information or technology or know-how of
LifeScan provided by LifeScan to Selfcare.
5.6 SPECIFIC PERFORMANCE; SPECIAL REMEDY. It is specifically understood
and agreed that any breach of the provisions of this Article V by LifeScan, on
the one hand, or Selfcare, on the other, is likely to result in irreparable
injury to the other, that the remedy at law alone will not be an adequate remedy
for such breach and that, in addition to any other remedy it may have, the
non-violating party shall be entitled to enforce the specific performance of
this
10
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Article V by the other and to seek both temporary and permanent injunctive
relief (to the extent permitted by law), without the necessity of proving actual
damages; provided, however, that such equitable relief may be obtained prior to
arbitration in accordance with Section 6.2 hereof only to the extent necessary
to preserve the STATUS QUO ANTE while the parties pursue arbitration. Any other
form of equitable relief shall only be obtained as part of an award in
arbitration pursuant to Section 6.2 hereof.
ARTICLE VI
COOPERATION; ARBITRATION
6.1 COOPERATION. In connection with the administration of the
Transaction Agreements, and their successful operation for the benefit of both
parties hereto, the parties agree to cooperate in good faith. In furtherance
thereof each of LifeScan and Selfcare shall designate representatives to meet at
least once each calendar quarter with the representatives of the other party,
with such meetings alternating between the respective facilities of the two
parties. Each party may elect to designate either two or three representatives.
If either party elects to designate three representatives, it shall give notice
thereof to the other party, and the other party shall then also be entitled to
designate three representatives. The representatives of each party shall be its
chief executive officer (or if none, its president) and a person or persons (as
the case may be) with direct reporting responsibility to him or her.
In addition to the foregoing, Selfcare will make its personnel
available to consult and coordinate with product managers of LifeScan on an
ongoing, day-to-day basis in connection with the development of any products
subject to the Distribution Agreements and the purchases and resale thereof by
LifeScan. LifeScan shall have the right, subject to reasonable prior notice and
coordination with Selfcare to conduct quality assurance audits prior to the
initial introduction of any product under a Distribution Agreement, on an annual
basis thereafter and more frequently if reasonably required in light of specific
circumstances including without limitation in the event of a product recall.
6.2 ARBITRATION. Except for claims arising under Article V of this
Agreement, any claim, dispute or disagreement arising from or relating to this
Agreement or any other Transaction Agreement or any transaction contemplated
herein or therein or the validity, construction, meaning, enforceability of
performance of any such agreement or any of its provisions, or the intent of the
parties in entering into this Agreement or any other Transaction Agreement or
any of their respective provisions, or any matter as to which the parties shall,
in a Transaction Agreement, have agreed to agree and shall fail to reach
agreement thereon prior to the time such agreement is required, shall be
resolved solely by binding arbitration in accordance with the rules of the CPR
Center for Dispute Resolution, or successor organization. The arbitration shall
be held in the Borough of Manhattan, New York City, New York, before a single
arbitrator who shall have had no dealings with any party or any of its
Affiliates for the three years prior to the arbitration, and who shall have
substantial business experience in the medical products and/or pharmaceuticals
industry. Within two weeks after
11
<PAGE>
the appointment of the arbitrator, each party shall submit to the arbitrator,
with a copy to the other party, a detailed explanation of the dispute or matter
and a proposal of terms for the resolution of such dispute or matter, and a
hearing shall be held before the arbitrator within one week thereafter. Each
party shall be limited to such amount of time for the presentation of its case
at the hearing, and the hearing shall be sequenced in such a manner, as the
arbitrator shall determine to be commercially reasonable. The arbitrator shall
select one of such proposals within two business days thereafter. The selected
proposal shall become the arbitrator's final and binding decision and award,
without any modification. In no event shall such arbitrator be empowered to
grant special punitive or exemplary damages. Any information relating to a
party's technology disclosed in connection with any arbitration proceeding shall
constitute Confidential Information and shall be subject to the prohibitions on
use and disclosure set forth in Section 5.2.
ARTICLE VII
MISCELLANEOUS
7.1 HEADINGS. The Subject headings of the sections paragraphs and
subparagraphs or this Agreement and any Transaction Agreement are included for
purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
7.2 ENTIRE AGREEMENT. Except as provided below, this Agreement and the
other Transaction Agreements and any other agreement referred to herein or
therein constitute, on and as of the date hereof the entire agreement between
the parties pertaining to the subject matter set forth herein and supersede all
prior and contemporaneous agreements, representations, warranties and
understandings of the parties.
7.3 MODIFICATION AND WAIVER. No supplement, modification or amendment
of this Agreement or any other Transaction Agreement shall be binding unless
executed in writing by the parties hereto or thereto, as the case may be. No
waiver of any of the provisions of this Agreement or any other Transaction
Agreement shall be binding unless executed in writing by the party making the
waiver and such waiver shall be effective only in the instance given and shall
not be effective with respect to the same or any similar event thereafter.
7.4 COUNTERPARTS. This Agreement and each other Transaction Agreement
may be executed in counterparts, each of which shall be deemed an original, and
all of which together shall constitute one and the same agreement.
7.5 RIGHTS OF PARTIES. Nothing in this Agreement or any other
Transaction Agreement, whether express or implied, is intended to confer any
rights or remedies on any Person other than the parties to this Agreement and
their respective permitted successors and assigns.
12
<PAGE>
7.6 NOTICES. All notices, deliveries, requests, claims, demands and
other communications hereunder and under any other Transaction Agreement shall
be in writing and shall be given in person, or by registered or certified mail
(postage prepaid, return receipt requested), to the relevant party as follows:
If to Selfcare: Selfcare, Inc.
200 Prospect Street
Waltham, MA 02154
Attention: President
Telephone No: (617) 647-3900
With a copy (which copy shall not constitute
notice) to:
Goodwin, Procter & Hoar
53 State Street
Exchange Place
Boston, MA 02109
Attention: Martin Carmichael III, P.C.
If to LifeScan: LifeScan, Inc.
1000 Gibraltar Drive
Milpitas, CA 95035
Attention: President
Telephone: (408) 956-4700
with a copy (which copy shall not constitute notice) to:
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Attention: Office of General Counsel
Telephone: (732) 524-2440
or to such other address as one party may have furnished to the other parties in
writing in accordance herewith, except that notices of changes of address shall
only be effective upon receipt. All such notices, deliveries, requests, claims,
demands and other communications shall be deemed to have been given upon receipt
thereof if such day is a business day or, if not a business day, on the next
succeeding business day.
7.7 [intentionally omitted]
7.8 ASSIGNMENT. No assignment of any rights or delegation of any
obligations of any party under this Agreement or any other Transaction Agreement
may be made without the
13
<PAGE>
prior written consent of the other party, which consent, in the case of an
assignment by one party hereto to an Affiliate of such party, shall not be
unreasonably withheld provided that the assigning party guarantees, pursuant to
a written agreement satisfactory to the other party in the exercise of
reasonable business judgment, the payment and performance obligations hereunder
or such Affiliate or such party agrees to remain liable for such obligations.
7.9 SUCCESSORS AND ASSIGNS. This Agreement and each Transaction
Agreement shall be binding upon, and inure solely to the benefit of the parties
hereto and their respective permitted successors and assigns.
7.10 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement and each
Transaction Agreement shall be governed by and construed in accordance with the
laws of the State of New York. The parties hereto irrevocably submit to the
jurisdiction of the courts of the State of New York and the Federal District
Court sitting in the Borough of Manhattan, New York City, New York for any
matter not subject solely to arbitration pursuant to Section 6.2 hereof,
including with limitation, the enforcement of any award rendered in such
arbitration.
7.11 SEVERABILITY. If any provision of this Agreement or any other
Transaction Agreement should be held invalid, illegal or unenforceable in any
respect in any jurisdiction, then, to the fullest extent permitted by law, (i)
all other provisions hereof or thereof shall remain in full force and effect in
such jurisdiction and shall be liberally construed in order to carry out the
intentions of the parties hereto or thereto as nearly as may be possible and
(ii) such invalidity, illegality or unenforceability shall not affect the
validity, legality or enforceability of such provision in any other
jurisdiction. To the extent permitted by applicable law, the parties hereby
waive any provision of law that would render any provision hereof or of any
other Transaction Agreement prohibited or unenforceable in any respect.
7.12 PRESS RELEASES AND ANNOUNCEMENTS. No press release relating to
this Agreement or any other Transaction Agreement or the transactions
contemplated hereby or thereby, or other general announcement to the employees,
customers or suppliers of the parties, will be issued without the joint approval
of Selfcare and LifeScan, which approval shall not be unreasonably withheld.
7.13 EXPENSES OF THE PARTIES. All expenses incurred by or on behalf of
a party in connection with the authorization, preparation and proposed
consummation of this Agreement or any other Transaction Agreement including,
without limitation, all fees and expenses of agents, representatives, counsel
and accountants employed by a party, shall be borne solely by the party who
shall have incurred such fees and expenses.
7.14 NO IMPLIED WAIVERS; RIGHTS CUMULATIVE. No failure on the part of a
party to exercise and no delay in exercising any right, power, remedy or
privilege under this Agreement or any other Transaction Agreement or provided by
statute or at law or in equity or otherwise, including, without limitation, the
right or power to terminate this Agreement or any other Transaction Agreement,
shall impair, prejudice or constitute a waiver of any such right,
14
<PAGE>
power remedy or privilege or be construed as a waiver of any breach of any
Transaction Agreement or as an acquiescence therein, nor shall any single or
partial exercise of any such right, power, remedy or privilege preclude any
other or further exercise thereof or the exercise of any other right, power,
remedy or privilege.
7.15 RELATIONSHIP OF THE PARTIES. Nothing contained in this Agreement
or any other Transaction Agreement is intended or is to be construed to
constitute the parties as partners or joint venturers. No party hereto shall
have any express or implied right or authority to assume or create any
obligations on behalf of or in the name of the other party or to bind any other
party to any contract agreement or undertaking with any third party.
7.16 TERM. The term of this Agreement shall expire upon the termination
of all Distribution Agreements and the Credit Agreement. Upon such expiration
all rights and obligations of the parties hereunder and under any other
Transaction Agreement then in effect shall terminate except for rights and
obligations arising under any of Article V, Section 6.2 and Article VII hereof.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of this 7 day of June, 1999.
Johnson & Johnson Development Corporation
By: /s/ Ting Pau Oei
----------------------------------------
Name: Ting Pau Oei
Title: Vice President
Johnson & Johnson Dev. Corp.
LifeScan, Inc.
By: /s/ Richard J. Wiesner
----------------------------------------
Name: Richard J. Wiesner
Title: WW President
Selfcare, Inc.
By: /s/ Ron Zwanziger
----------------------------------------
Name: Ron Zwanziger
Title: CEO
16
<PAGE>
Exhibit 10.2
Information from this exhibit has been
omitted and filed separately with the
Securities and Exchange Commission
AMENDED AND RESTATED
SALES DISTRIBUTION AGREEMENT
for
TESTING SYSTEM
for
GLUCOSE IN HUMANS
between
LIFESCAN, INC.
and
SELFCARE, INC.
as of June 7, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS AND REVISIONS TO GLUCOSE SYSTEM.....................................................1
1.1 Commercialization of Officinal Glucose System...................................................1
1.2 510(k) Notifications............................................................................1
1.3 Definitions.....................................................................................1
1.4 Specifications..................................................................................3
ARTICLE II SUPPLY OF LS PRODUCTS...........................................................................4
2.1 Supply of LS Products...........................................................................4
2.2 Supply Exclusivity..............................................................................5
2.3 Safely Stock....................................................................................5
2.4 Forecasts and Purchase Orders...................................................................6
ARTICLE III CAPACITY PLANNING...............................................................................7
3.1 Capacity Plan Concepts..........................................................................7
3.2 Proposed and Binding Capacity Plan Definitions..................................................7
3.3 Base Capacity...................................................................................7
3.4 Capital Requirements Notices....................................................................9
3.5 Acceptance and Rejection of Capital Requirements Notices........................................9
3.6 Credit for Capital Expenditure Make-up Payments................................................10
3.7 Cooperation Regarding Capital Expenditure Make-up Payments.....................................11
3.8 Sales Shortfall Payments.......................................................................12
ARTICLE IV MARKET DEVELOPMENT RIGHTS......................................................................13
4.1 Initial Sales Restrictions.....................................................................13
4.2 Reserved Marketing Rights......................................................................13
4.3 Failure to Purchase Yearly Minimum.............................................................14
4.4 Yearly Minimums................................................................................15
4.5 Termination of Section 4.1(c) Restriction......................................................17
4.6 Introduction of Competing Electrochemical System...............................................17
4.7 Novel Glucose Systems..........................................................................18
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARTIES......................................................18
ARTICLE VI PRICE..........................................................................................18
6.1 LS Products Other Than LS Strips...............................................................19
6.2 Base Strip Prices..............................................................................19
6.3 Payment in Local Currency for LS Strips........................................................20
6.4 Adjustment Based on LS Resale Price............................................................20
6.5 Adjustment Based on Selfcare Profitability.....................................................20
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII FAILURE BY SELFCARE TO SUPPLY........................................................................20
7.1 Definitions Relating to Self-help Licensing....................................................20
7.2 License on Supply Default......................................................................21
7.3 Communications Following Force Majeure.........................................................21
7.4 Rights Following Force Majeure.................................................................22
7.5 Restoration of Supply by Selfcare..............................................................22
7.6 Terms, Royalties...............................................................................22
7.7 Cooperation....................................................................................23
7.8 Exclusive Remedy...............................................................................23
7.9 Business Interruption Insurance................................................................23
ARTICLE VIII CERTAIN COVENANTS..................................................................................24
8.1 LifeScan Covenants.............................................................................24
8.2 Selfcare Covenants.............................................................................24
8.3 Indemnification................................................................................25
ARTICLE IX AGREEMENTS REGARDING TECHNOLOGY......................................................................26
9.1 Infringement of Selfcare's Technology..........................................................26
9.2 U.S. and European Patent Convention Patent Conflicts...........................................26
9.3 Patent Conflicts in Other Countries............................................................27
9.4 Technical Information Necessary for Marketing..................................................27
ARTICLE X MISCELLANEOUS.........................................................................................27
10.1 Invoicing. Shipping and Payment................................................................27
10.1 Product Warranties.............................................................................28
10.2 Agreement Term.................................................................................29
10.3 Termination....................................................................................29
10.4 Miscellaneous..................................................................................29
ARTICLE XI DEVELOPMENT PLAN.....................................................................................30
11.1 Additional LS Products.........................................................................30
11.2 Milestone......................................................................................30
ARTICLE XII CREDIT FACILITY.....................................................................................30
12.1 Initial Loan...................................................................................30
12.2 Additional Loans...............................................................................31
12.3 Use of Funds...................................................................................32
12.4 Repayment of Loan..............................................................................33
ARTICLE XIII CONFIDENTIAL INFORMATION...........................................................................33
13.1 Confidential Information.......................................................................33
</TABLE>
(ii)
<PAGE>
ARTICLE I
DEFINITIONS AND REVISIONS TO GLUCOSE SYSTEM
1.1 COMMERCIALIZATION OF ORIGINAL GLUCOSE SYSTEM. LifeScan and Selfcare
acknowledge that pursuant to the Original Sales Distribution Agreement, they
commercialized the 1996 System and that for purposes of the Master Agreement,
they agreed that the "Glucose System" meant the 1996 Glucose System, as the same
may have been or may be modified with the written approval of LifeScan or
pursuant to Section 3.5 from the Master Agreement. The parties note that
payments made and required to be made by LifeScan under the Master Agreement and
the payment for surrender and conversion of the Convertible Promissory Notes by
Johnson & Johnson Development Corporation pursuant to the Investment Agreement
were governed by the definition of Glucose System set forth in those Agreements.
The parties do not intend to duplicate the requirement of such payments and such
payment, surrender and conversion based on the definition of Glucose System set
forth in the Master Agreement and the Investment Agreement. Selfcare and
LifeScan anticipate agreeing in the future to make changes from time to time in
the specification for the Glucose System or Glucose Systems covered by this
Distribution Agreement. LS Product produced by Selfcare for LifeScan which
deviates from the required specification in minor respects or which does not yet
comply with agreed changes shall be deemed to comply with the requirements of
this Agreement so long as such LS Product meets applicable regulatory
requirements and is accepted for purchase by LifeScan. In such a case the
provisions of Article VII shall not apply based solely on any such minor
deviations.
1.2 510(k) NOTIFICATIONS. Selfcare shall prepare a draft 510(k)
Notification with respect to each Glucose System developed or sold under this
Distribution Agreement and Section 3.5 of the Master Agreement will apply to
each such 510(k) Notification. Selfcare and LifeScan anticipate agreeing in the
future to make changes from time to time in the specifications for the such
Glucose Systems. An LS Product produced by Selfcare for LifeScan which deviates
from the required specification in minor respects or which does not yet comply
with agreed changes shall be deemed to comply with the requirements of this
Distribution Agreement and the applicable specifications so long as such LS
Product meets applicable regulatory requirements and is accepted for purchase by
LifeScan for commercial sale. In such a case the provisions of Article VII shall
not apply based solely on any such minor deviations.
1.3 DEFINITIONS. The following terms have the meanings indicated or
referred to below, Other capitalized terms used herein and not defined herein
have the meanings ascribed thereto in the Master Agreement.
"Additional Loan"- See Section 12.2
"Base Strip Prices" - See Section 6.2.
"Binding Capacity Plan" - See Section 3.2.
Restated Distribution Agreement in Word as executed 3
<PAGE>
"Capital Expenditure Make-up Payment" - See Section 3.5.
"Capital Requirements Notice" - See Section 3.4.
"Commercial Quantities" of LS Products shall mean such amount of LS Products as
is specified pursuant to Section 2.3 for a fully committed product launch (and
not merely, for example, a market testing phase).
"Compatible Product" means any Instrument, Test Strip or Related Component which
is designed to be used with LS Instruments or LS Strips, or, in the case of Test
Strips, which is capable of providing a test result with any one or more LS
Instruments, whether or not designed for such use.
"Credit Agreement" shall mean the Credit Agreement between LifeScan and Selfcare
in the form of Exhibit C hereto.
"Credit Year"- see Section 3.6.
"Event of Default" shall have the meaning set forth in the Credit Agreement.
"Force Majeure" means any act of God, accident, explosion, fire, storm,
earthquake, flood, drought, peril of the sea, riot, embargo, war or foreign,
federal, state or municipal order of general application, seizure (other than as
a result of non-compliance of the seized materials with applicable regulatory
requirements), requisition or allocation, any failure or delay of
transportation, shortage of or inability to obtain supplies, equipment, fuel or
labor or any other circumstances or event beyond the reasonable control of the
party relying upon such circumstance or event. For purposes of clarification,
poor operating results or financial condition not resulting from an event
described in the prior sentence shall not constitute events of Force Majeure.
"Glucose System"- See Preamble.
"Initial Loan" - See Section 12.1
"LS Instrument" - See Section 2.1.
"LS Products" - See Section 2.1.
"LS Strip" - See Section 2.1.
"Market Introduction" means any of (i) any sales, (ii) giveaways or (iii)
pre-sale promotional advertising by LifeScan or any such activities by an
Affiliate of LifeScan, in each case, continuing for more than 30 days after the
date on which Selfcare gives notice of such activities to LifeScan.
Restated Distribution Agreement in Word as executed 4
<PAGE>
"Novel Glucose System" shall mean a Glucose System that lacks either (i) the
need to use a Test Strip, or (ii) measurement of an in vitro fluid sample.
"Payment Year" - see Section 3.6.
"Person" means any individual, corporation, partnership or other
entity.
"Product Expansion Loan" - see Section 3.8.
"Project A/Project B/Project C" shall mean each of those certain
Glucose Systems having the respective specifications set forth in Schedule 4.4.
"Proposed Capacity Plan" - See Section 3.2.
"SC Note" - See Section 12. 1 (b).
"Strip-Based System" means a Glucose System that employs Test Strips.
"Test Strip" means, for purposes of this Distribution Agreement and the
Master Agreement, a single-use disposable electrochemical sensor which (i) is
designed to be used in conjunction with an Instrument for obtaining test results
from an in-vitro fluid sample and (ii) constitutes or is contained in a
disposable component of a Glucose System [OMITTED].
"Yearly Minimum" - See Section 4.4.
1.4 SPECIFICATIONS. (a) The parties shall employ diligent efforts in
good faith to discuss and agree upon specifications for each of Project A,
Project B and Project C within the timeframes set forth below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
PROJECT TARGET DATE FOR AGREEMENT
UPON SPECIFICATIONS
---------------------------------------------------------------------
<S> <C>
A one month after the date hereof
---------------------------------------------------------------------
B three months after the date hereof
---------------------------------------------------------------------
C five months after the date hereof
---------------------------------------------------------------------
</TABLE>
(b) If the parties are unable to agree upon all or any
material element of the specifications for an LS Product described above by the
stated Target Date, the dates for satisfaction of conditions with respect to
such product set forth in Sections 2.3(b), 4.4 and 11.2, as appropriate, shall
be delayed by the same amount of time. In a case where the parties are unable to
agree upon all or any material part of such specifications within 10 days after
the irrelevant Target Date, each party shall by the date 20 days after such
Target Date submits proposal for such specification or for such material element
in dispute to dispute resolution
Restated Distribution Agreement in Word as executed 5
<PAGE>
pursuant to Section 6.2 of the Master Agreement and the disputed specification
or material element shall be finally determined through such process with the
following exception. For purposes of these disputes, each party shall submit to
the arbitrator such party's proposal for such specification or material element
and the arbitrator shall be required to select one party's entire version or the
other's without change within 30 days after the date required for submission of
such proposals. The proposal thus selected shall be binding for all purposes
under this Distribution Agreement.
ARTICLE II
SUPPLY OF LS PRODUCTS
2.1 SUPPLY OF LS PRODUCTS. Selfcare and LifeScan agree that, after
Selfcare has given notice to LifeScan that it is prepared to commence commercial
production of LS Products and thereafter during the term of this Distribution
Agreement, LifeScan shall have the right to purchase from Selfcare on the terms
and conditions set forth herein and resell the LS Products. LS Products shall be
manufactured by or at the direction of Selfcare for purchase and resale by
LifeScan under this Distribution Agreement. LS Products shall not be resold by
LifeScan except (i) under a brand name and trade dress that is proprietary to
LifeScan or an Affiliate, or (ii) on a private label basis under a brand name
and trade dress that is proprietary to any Person which is not ah LS Established
Person.
"LS Products" means Instruments, Test Strips and Related Components, in
each case which meet the applicable specifications for (i) the 1996 System,
Project A, Project B, or Project C or (ii) any other Strip-Based System which
LifeScan has agreed to purchase from Selfcare and Selfcare has agreed to supply
to LifeScan, and in each case shall include without limitation improvements,
enhancements and changes thereto and may include without limitation one or more
complete Glucose Systems.
"LS Instruments" means Instruments which meet the applicable
specifications for the 1996 System, Project A, Project B, or Project C or any
other Strip-Based System which LifeScan has agreed to purchase from Selfcare and
Selfcare has agreed to supply to LifeScan.
"LS Strips" means Test Strips which meet the applicable specifications
for (i) the 1996 System, Project A, Project B, or Project C or (ii) any other
Strip-Based System which LifeScan has agreed to purchase from Selfcare and
Selfcare has agreed to supply to LifeScan.
"LS Established Person" means any Person which had, prior to its first
purchase from LifeScan of LS Products or other glucose in humans measurement
devices, more than $100,000,000 in annual worldwide sales in the market for home
use testing of glucose in humans.
2.2 SUPPLY EXCLUSIVITY. Except as permitted by Article VII, during the
term of this Distribution Agreement, neither LifeScan nor any Affiliate of
LifeScan shall purchase from any supplier other than Selfcare any Compatible
Product.
Restated Distribution Agreement in Word as executed 6
<PAGE>
2.3 SAFETY STOCK. (a) For LS Strips commercially distributed on the
date hereof and, at and after January 1, 2002, for LS Instruments commercially
distributed on the date hereof, Selfcare shall maintain at its facilities an
inventory of LS Products in finished final packaged form available to deliver to
LifeScan sufficient to satisfy the greater of (i) two (2) times the average
monthly purchases by LifeScan over the most recent past six (6) months, or (ii)
two (2) times the monthly average of LifeScan's committed orders over the most
recent past six (6) months.
(b) For types of LS Products first commercially distributed by
LifeScan after the date hereof:
(i) LifeScan shall provide notice to Selfcare of the
amount of such LS Products it shall require for such
commercial launch of such LS Products. LifeScan shall
provide such notice not later than [OMITTED] in the
case of Project A, not later than [OMITTED] in the
case of Project B, and not later than [OMITTED] in
the case of Project C, and for other such LS
Products, not later than six months prior to the date
on which LifeScan and Selfcare agree to begin
distribution of such LS Products in Commercial
Quantities; and
(ii) Selfcare shall provide such Commercial Quantities of
such LS Products by such date and shall have
available in finished goods inventory from and after
January 1, 2002 a safety stock of such LS Products
equal to or exceeding the then next two months'
forecasted purchases of such LS Products by LifeScan.
(c) In the event that LifeScan shall not have timely specified
the amount designated as Commercial Quantities of an LS Product, Selfcare may
reasonably determine such amount of such LS Product.
(d) Except as otherwise permitted by this paragraph or as
LifeScan may otherwise consent, Selfcare shall not fail to maintain an amount of
safety stock of LS Products at least equal to that required under paragraphs (a)
and (b) above. A failure by Selfcare to observe the requirements of paragraph
(a) or (b) above with respect to an LS Product shall not constitute a breach of
the provisions of such paragraph, (i) for the first 12 months after initial
distribution of such LS Product in Commercial Quantities, and (ii) for the first
six months after commencement of sale to LifeScan by Selfcare of commercial
quantities of such LS Product for which the specifications have changed to a
significant extent, provided that in both such cases Selfcare is exercising
reasonable commercial efforts to maintain the quantities of such LS Product
required by such paragraph. If LifeScan shall so direct, Selfcare shall arrange
to maintain the safety stock of LS Instruments described in the previous
sentence in the form of component parts at the manufacturer. LifeScan shall
purchase on a "first-in, first-out" basis the minimum quantity of such safety
stock of LS Products that meet the applicable specifications therefor that are
maintained pursuant to paragraphs (a) and (b) above.
Restated Distribution Agreement in Word as executed 7
<PAGE>
(e) The parties anticipate that from time to time LS Products
in commercial distribution will be changed and improved as the parties discuss
and agree upon changes to the respective specifications therefor. Within a
reasonable period prior to and at the time when the parties agree to such
changes, it will be necessary to adjust production to change over from LS
Products with the prior specifications to LS Products having the new
specifications. In the event that any such agreed change in specifications is
not a result of a safety issue or material deficiency in the performance of an
LS Product, each party shall use reasonable commercial efforts to accommodate
the commercial needs and requests of the other in adjusting binding orders,
forecasts, inventories and production schedules to produce appropriate amounts
of the LS Products with the new specifications and to end, or if the parties
shall so agree to curtail, production of LS Products with the prior
specifications as soon as reasonably practicable. In the event that any such
agreed change in specifications is a result of a safety issue or material
deficiency in the performance of an LS Product, each party shall use diligent
efforts in good faith to adjust binding orders, forecasts, inventories and
production schedules to produce appropriate amounts of the LS Products with the
new specifications and to end, or if the parties so agree to curtail, production
of LS Products with the prior specifications as soon as reasonably practicable,
and in any event within the timeframe if any required under applicable laws and
governmental regulations.
2.4 FORECASTS AND PURCHASE ORDERS. On or prior to June 30, September
30, December 31 and March 31 of each year, LifeScan shall provide Selfcare with
a written forecast of LifeScan's purchase requirements with respect to LS
Products to be purchased by it during the next twelve (12) months. The amount of
LS Products forecasted to be purchased by LifeScan in the first six months
covered by such forecast shall constitute a firm order for such LS Products. If
the amount of LS Products forecasted in the first three months of such forecast
period differs from that set forth in the prior quarterly forecast, such changed
amount shall constitute an offer to Selfcare to amend the prior period's
purchase order. Such offer shall, however, be deemed to have been rejected
unless accepted by Selfcare by notice within five days after receipt. With
respect to the fourth, fifth and sixth month covered by such forecast, the
amounts of LS Products set forth in such forecast shall constitute a purchase
order for LS Products to be delivered during such months. LifeScan's forecast of
its purchase requirements for the second half of each such 12-month period shall
be advisory only.
ARTICLE III
CAPACITY PLANNING
3.1 CAPACITY PLAN CONCEPTS. From time to time LifeScan may, pursuant to
this Article III, submit forecasts, referred to as Proposed Capacity Plans, to
Selfcare for the purpose of establishing the volumes of LS Products which, if
subsequently ordered by LifeScan and not delivered by Selfcare, will under
certain circumstances entitle LifeScan to exercise certain rights under its
Self-help License pursuant to Article VII. If such forecasts for LS Strips
exceeds certain levels, Selfcare shall be entitled, pursuant to this Article
III, to require LifeScan to make certain payments, referred to as Capital
Expenditure Make-up
Restated Distribution Agreement in Word as executed 8
<PAGE>
Payments, if LifeScan confirms its volume projections and thereafter its orders
fall short by certain amounts. It is not the intention of the parties to permit
any such Capital Expenditure Make-up Payments with respect to the additional
capacity Selfcare intends to create through the Product Expansion Loans referred
to in Section 3.8 as and when such additional capacity becomes available.
3.2 PROPOSED AND BINDING CAPACITY PLAN DEFINITIONS. "Proposed Capacity
Plan" means, for any calendar year and for any LS Products, the amount thereof,
stated in terms of an average monthly purchase requirement, forecast in good
faith by LifeScan to be ordered for delivery during such calendar year in a
written projection of which LifeScan has given Selfcare notice as required
below. LifeScan shall deliver Proposed Capacity Plans to Selfcare one year prior
to the commencement of the calendar year to which they apply. Proposed Capacity
Plans must be explicitly identified with bold print in the cover letter or
transmittal form transmitting the document, and on each page of the document
proposed to constitute the Proposed Capacity Plan, as a"Proposed Capacity Plan
pursuant to the Sales Distribution Agreement for Testing System for Glucose in
Humans."
"Binding Capacity Plan" means with respect to any calendar year (i) in
the case of LS Strips, the Proposed Capacity Plan for such calendar year unless
Selfcare has given a Capital Requirements Notice in response to it which has not
been accepted by LifeScan, in which event the Binding Capacity Plan for such
calendar year for LS Strips shall be such other amount as LifeScan and Selfcare
shall agree and in the absence of any such agreement, the Yearly Minimum for
such calendar year pursuant to Section 4.4 and (ii) in the case of any other LS
Products, the Proposed Capacity Plan for such calendar year.
3.3 BASE CAPACITY.
(a) If Selfcare shall provide the notice described in Section
3.8(a), the Capital Requirements Notice provided for under Section 3.4(b) shall
be rescinded and "Base Capacity" shall mean with respect to a Proposed Capacity
Plan for a calendar year, the greater of (i) the highest Binding Capacity Plan
for any then-prior calendar year with respect to which Selfcare has given a
Capital Requirements Notice which has been accepted by LifeScan and (h) the
amount set forth as follows:
Restated Distribution Agreement in Word as executed
9
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEAR NUMBER OF LS STRIPS PER MONTH
- ------------------------------------------------------------------------------------------------------------
<S> <C>
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------------
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------------
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------------
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------------
Thereafter [OMITTED] of the number of LS Strips
purchased by LifeScan during the 12
calendar month period preceding the date of
delivery of such Proposed Capacity Plan
divided by 12, provided that the resulting
Base Capacity does not exceed [OMITTED]
[OMITTED] LS Strips per Month
- ------------------------------------------------------------------------------------------------------------
Upon reaching or exceeding purchases of [OMITTED] of the number of LS Strips
[OMITTED] LS Strips per Month purchased by LifeScan during the 12
calendar month period preceding the date of
delivery of such Proposed Capacity Plan
divided by 12
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(b) If Selfcare shall not provide the notice described in
Section 3.8(a), "Base Capacity" means with respect to a Proposed Capacity Plan
for a calendar year, the greater of (i) the highest Binding Capacity Plan for
any then-prior calendar year with respect to which Selfcare has given a Capital
Requirements Notice which has been accepted by LifeScan and (ii) the amount set
forth as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEAR NUMBER OF LS STRIPS PER MONTH
- ------------------------------------------------------------------------------------------------------------
<S> <C>
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------------
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------------
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------------
Thereafter [OMITTED] of the number of LS Strips
purchased by LifeScan during the 12
calendar month period preceding the date
of delivery of such Proposed Capacity Plan
divided by 12
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Restated Distribution Agreement in Word as executed 10
<PAGE>
3.4 CAPITAL REQUIREMENTS NOTICES.
(a) If the average monthly purchase requirement for LS Strips
projected by LifeScan in its Proposed Capacity Plan for a calendar year exceeds
the applicable Base Capacity, Selfcare may give written notice (a "Capital
Requirements Notice") to LifeScan within sixty (60) days after receipt of such
Proposed Capacity Plan, indicating the capital expenditures that Selfcare
reasonably estimates in good faith that it will need to make in order to meet
LifeScan's projected demand. Any such Capital Requirements Notice must be based
upon calculations that assume that all incremental additional manufacturing
capacity purchased with the proceeds of the Product Expansion Loans referred to
in Section 3.8 would be dedicated to the requirements of LifeScan. If Selfcare
fails to deliver a Capital Requirements Notice to LifeScan with respect to a
Proposed Capacity Plan, it shall become a Binding Capacity Plan and Selfcare
shall not be entitled to require LifeScan to make Capital Expenditure Make-up
Payments pursuant to Section 3.5 with respect to such Binding Capacity Plan.
(b) From and after the date hereof:
(i) LifeScan shall be deemed to have provided to Selfcare
under Section 3.5 a Proposed Capacity Plan for
[OMITTED] LS Strips for the year 2001; and
(ii) Selfcare shall be deemed to have given and LifeScan
to have accepted a Capital Requirements Notice in the
amount of Two Million Five Hundred Thousand British
Pounds Sterling (2,500,000 f) with respect to such
plan, which shall constitute a Binding Capacity Plan
for purposes of Section 3.5.
(c) The Proposed Capacity Plan, the Capital Requirements
Notice and the acceptance thereof provided for in paragraph (b) of this Section
shall be deemed rescinded and of no force or effect if Selfcare shall have
provided the notice described in Section 3.8(a).
3.5 ACCEPTANCE AND REJECTION OF CAPITAL REQUIREMENTS NOTICES. If
LifeScan does not accept a Capital Requirements Notice by giving notice to
Selfcare within 30 days after receipt thereof, such Capital Requirements Notice
shall be deemed rejected. If Selfcare gives a Capital Requirements Notice and it
is rejected, Selfcare shall not be required to supply more LS Strips in the
calendar year to which the Capital Requirements Notice relates than the greater
of (i) the applicable Yearly Minimum or (ii) the maximum amount Selfcare can
economically produce without incurring capital expenditures other than those
necessary to maintain existing capacity. Such a rejected Proposed Capacity Plan
in response to which such Capital Requirements Notice was given shall not be
effective for any purpose hereunder. If LifeScan accepts a Capital Requirements
Notice given in response to a Proposed Capacity Plan for a calendar year by
notice to Selfcare, such Proposed Capacity Plan shall become a Binding Capacity
Plan and if LifeScan thereafter fails to order for delivery during such calendar
year at least 90% of the number of strips projected to be purchased by LifeScan
in such Binding Capacity Plan, then LifeScan shall make a payment (a "Capital
Expenditure Make-up
Restated Distribution Agreement in Word as executed 11
<PAGE>
Payment") to Selfcare, promptly after written demand therefor, in an amount
determined by the following formula:
CEMP = Cap Ex X (Required - - Actual -)/Required -
where,
CEMP = Capital Expenditure Make-up Payment with respect to a
calendar year
Cap Ex = the lesser of the capital expenditures estimated
by Selfcare in its Capital Requirements Notice or the
actual capital expenditures made by Selfcare to
increase LS Strip production capacity in response to
the Binding Capacity Plan for such calendar year
Required - = the amount by which 90% of the Binding Capacity Plan
for the calendar year at issue exceeds, in the case
of calendar years through 2002, the Base Capacity for
such year and in the case of calendar years
thereafter, the total number of LS Strips projected
to be purchased by LifeScan in the Binding Capacity
Plan for the calendar year prior to the year at issue
Actual A the amount by which LifeScan's total
purchases of LS Strips in the applicable Current Year
exceeds, in the case of calendar years through 2002,
the Base Capacity for such year and in the case of
calendar years thereafter, the total number of LS
Strips projected to be purchased by LifeScan in the
Binding Capacity Plan for the calendar year prior to
the year at issue
For example with respect to a calendar year after 2002, if the Binding
Capacity Plan for the prior year is [OMITTED] the Binding Capacity Plan for the
calendar year at issue is [OMITTED] Selfcare gives and LifeScan accepts a
Capital Requirements Notice starting that Selfcare will be required to make
capital expenditures of [OMITTED] to meet such increased demand and actually
spends somewhat more, and LifeScan's actual purchases in the year at issue are
[OMITTED] LifeScan will be obligated to make a Capital Expenditure Make-up
Payment of [OMITTED] calculated as follows:
Cap Ex = [OMITTED]
Required - = [OMITTED]
Actual - = [OMITTED]
CEMP
3.6 CREDIT FOR CAPITAL EXPENDITURE MAKE-UP PAYMENTS. If LifeScan makes
a Capital Expenditure Make-up Payment with respect to purchases of LS Strips for
a calendar year (the "Payment Year"), then in each following calendar year
thereafter (a "Credit Year") in which LifeScan purchases more LS Strips than it
did in any prior year commencing with the year with respect to which such
Capital Expenditure Make-up Payment was required, LifeScan shall
Restated Distribution Agreement in Word as executed 12
<PAGE>
be entitled to a credit against payments next due for LS Strips purchased
thereafter. The amount of any such credit shall equal the amount by which such
Capital Expenditure Make-up Payment exceeds the amount which would have been
required had LifeScan's purchases of LS Strips in the Payment Year been equal to
its purchases in the Credit Year, reduced by any credits taken with respect to
any prior Credit Years.
For example, continuing the example in Section 3.5, if in the first
year after LifeScan makes the Capital Expenditure Make-up Payment of [OMITTED]
LifeScan's purchases of LS Strips are [OMITTED] LifeScan shall be entitle to a
credit calculated as follows:
Cap Ex = [OMITTED]
Required - = [OMITTED]
Actual - = [OMITTED]
CEMP = [OMITTED]
Credit = [OMITTED]
If in the second ear after LifeScan makes the Capital Expenditure
Make-up Payment of [OMITTED] LifeScan's purchases of LS Strips are [OMITTED]
LifeScan shall be entitled to a credit calculated as follows:
Cap Ex = [OMITTED]
Required - = [OMITTED]
Actual - = [OMITTED]
CEMP = [OMITTED]
Credit = Difference in payment - prior credit or [OMITTED]
3.7 COOPERATION REGARDING CAPITAL EXPENDITURE MAKE-UP PAYMENTS.
LifeScan acknowledges that its obligation to make Capital Expenditure Make-up
Payments is intended in part to facilitate financing which Selfcare may seek for
the purpose of obtaining capital to expand its production capacity of LS Strips
to meet LifeScan's demand. Prior to disclosing to any potential source of
financing other than a bank, insurance company, pension fund or other
institutional lender, any of the terms of any Transaction Agreement, however,
Selfcare shall require that such potential source of financing agree to be
subject to confidentiality obligations that are substantially equivalent to
those binding upon Selfcare under Article V of the Master Agreement. LifeScan
agrees to permit an assignment of Selfcare's rights to such payment to finance
such capital expenditures and to deliver such further instruments as Selfcare or
a proposed source of financing may reasonably require to obtain any such
financing, including an agreement not to exercise any right of set off against
any assignee of the right to receive Capital Expenditure Make-up Payments
providing financing to Selfcare. LifeScan shall not, however, be required to
incur any out-of-pocket expense or otherwise waive any right or claim against
Selfcare.
Restated Distribution Agreement in Word as executed 13
<PAGE>
3.8 SALES SHORTFALL PAYMENTS.
(a) At any time on or prior to the date 190 days after the
date hereof, Selfcare may elect to avail itself of the benefits of paragraph (b)
of this Section by giving notice to LifeScan of a financial institution of
recognized standing (the "Bank") which Selfcare has asked to provide financing
to Selfcare in reliance on the provisions of this Section 3.8. Any such
financings (together with any refinancings thereof that do not increase the
aggregate principal amount outstanding) shall constitute "Product Expansion
Loans". Selfcare anticipates that its manufacturing capacity for LS Strips shall
be increased as described in Schedule 3.8 as a result of the Product Expansion
Loans. In order to induce the Bank to advance the Product Expansion Loans to
Selfcare, Selfcare may assign to the Bank its rights under this Section 3.8.
(b) In the event that LifeScan shall fail for any calendar
quarter after 1999 to purchase and pay for at least the respective Target Amount
of LS Strips for such calendar quarter set forth below, LifeScan shall pay over
to Selfcare, or at the direction of Selfcare, directly to such holder of the
loan or to an agent of such holder, as Selfcare may designate in order to obtain
Product Expansion Loans, within 15 days after the end of such calendar quarter
an amount calculated as follows:
[OMITTED] multiplied by the difference, if positive, of (i)
the applicable Target Amount of LS Strips for the then-prior
calendar quarter, less (ii) actual purchases of LS Strips by
LifeScan with respect to such calendar quarter.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
YEAR/QUARTER TARGET AMOUNT OF LS STRIPS
------------------------------------------------------------------------------
<S> <C>
[OMITTED] [OMITTED]
------------------------------------------------------------------------------
[OMITTED] [OMITTED]
------------------------------------------------------------------------------
[OMITTED] [OMITTED]
------------------------------------------------------------------------------
[OMITTED] [OMITTED]
------------------------------------------------------------------------------
[OMITTED] [OMITTED]
------------------------------------------------------------------------------
[OMITTED] [OMITTED]
------------------------------------------------------------------------------
</TABLE>
Notwithstanding the foregoing, no such payment by LifeScan need be made for a
calendar quarter where aggregate purchases of LS Strips by LifeScan for such
calendar year to date meet or exceed the aggregate of the Target Amounts for the
calendar quarters ending with the calendar quarter at issue. For purposes only
of the payment requirement set forth in this paragraph, no reduction in the
required amounts of purchases of LS Strips shall be made except in cases in
which the failure to manufacture or deliver such LS Strips arises or results
Restated Distribution Agreement in Word as executed 14
<PAGE>
from (i) the willful breach by Selfcare of a term or condition of this
Distribution Agreement, or (ii) an event or condition covered by Selfcare's
business interruption insurance.
(c) Selfcare shall cause the Bank to issue to LifeScan a
notice promptly and in any event within ten business days after the Product
Expansion Loans have been repaid. Upon and after repayment of the Product
Expansion Loans, LifeScan shall recover the aggregate amount, if any, paid under
paragraph (b) by deducting from the invoice price of each LS Strip purchased by
LifeScan the amount of 0.0125 British Pounds Sterling until such aggregate
amount has been repaid in full. Notwithstanding anything to the contrary set
forth herein, Selfcare shall repay to LifeScan any amount outstanding under this
paragraph and theretofore unpaid upon the earliest of (i) three years after the
date of repayment of the Product Expansion Loans, or (ii) the date of
termination of this Distribution Agreement for any reason, or (iii) an Event of
Default shall have occurred under the SC Note. Any such repayment under the
previous sentence shall be in cash by wire transfer to the account of LifeScan
provided by notice to Selfcare.
ARTICLE IV
MARKET DEVELOPMENT RIGHTS
4.1 INITIAL SALES RESTRICTIONS. As an inducement to LifeScan to invest
the monies and management resources necessary to develop the market for LS
Products, Selfcare agrees that, except as provided in Sections 4.2, 4.3, 4.4,
4.5, 4.6 and 4.7, neither Selfcare nor any of its Affiliates shall, to the
extent such restrictions are permitted by applicable law, sell anywhere in the
world other than to LifeScan:
(a) Compatible Products, or
(b) Complete System Products; or
(c) Test Strips.
4.2 RESERVED MARKETING RIGHTS. No term of this Distribution Agreement
shall prohibit Selfcare or any of its Affiliates from:
(a) manufacturing and selling Test Strips which are not
Compatible Products where (i) the Test Strips are designed to be used with a
meter or other system which (A) is manufactured by or for a third party, and (B)
together with related Test Strips manufactured by or for such third party, have
been distributed commercially in either the United States or the European Union
for at least two years, and (ii) such sales of Test Strips are made to
wholesalers, to retail outlets, to health maintenance organizations or similar
managed care organizations or directly to consumers; and
(b) performing its existing contractual obligations, all of
which are described or copies of which are set forth in Schedule 4.2, to
manufacture and sell Test Strips for
Restated Distribution Agreement in Word as executed 15
<PAGE>
measuring glucose in humans designed to be used, and usable, only with
Instruments not manufactured or sold by Selfcare, provided, however, that
Selfcare shall not voluntarily renew or extend any such contractual obligation
or any other arrangement it may have with third par-ties, written or oral,
formal or informal, to the extent that Selfcare's performance of its obligations
thereunder would constitute a breach of its obligations under this Distribution
Agreement if such obligations had been originally entered into after the date
hereof. This provision is in no way intended to cause or induce Selfcare to
violate any current contractual obligation with a third party binding upon
Selfcare.
By way of clarification, Test Strips that satisfy the requirements of
paragraph (a) of this Section for one type or model of Instrument manufactured
by or for a third party may also be distributed and sold for use with other
types or models of Instruments manufactured by or for such third party. None of
the foregoing, however, shall constitute a license or permission of use under
any patent, patent application or other intellectual property rights owned or
used by or licensed to LifeScan or JJDC or any of their Affiliates.
4.3 FAILURE TO PURCHASE YEARLY MINIMUM. (a) If LifeScan shall fail to
purchase the applicable Yearly Minimum of LS Strips with respect to a calendar
year, the restrictions set forth in Sections 4.1(b) and 4.1(c) shall terminate
and thereafter Selfcare shall be free to sell Complete System Products and Test
Strips, in each of the foregoing cases, other than Compatible Products anywhere
in the world, but shall not sell Complete System Products to or through an
Established Person. On or before January 31 of each calendar year, LifeScan
shall be entitled to order LS Strips and pay for such LS Strips at the time of
placing an order for the purpose of satisfying its Yearly Minimum purchase
requirements for the previous calendar year. LifeScan may elect, by giving
notice to such effect to Selfcare not later than March 1 of each year, to have
the purchases made during the prior January counted, in whole or in part, as
purchases in the prior year. LS Strips shall be deemed to be "Purchased" for
purposes of the preceding sentence only when paid for by LifeScan, regardless of
whether they have been delivered. Selfcare shall not be obligated to deliver LS
Strips ordered pursuant to this Section 4.3 sooner than it is able to do so
exercising commercially reasonable efforts. To the extent that the failure of
LifeScan to purchase any portion of a Yearly Minimum of such LS Strips arises or
results from an event of Force Majeure or a failure by Selfcare to fulfill its
obligations under the terms of this Distribution Agreement, LifeScan shall be
excused from any obligation to purchase and pay for such portion.
(a) In the event that LifeScan fails to purchase the
applicable Yearly Minimum of LS Strips and LifeScan is not excused from such
obligation pursuant to paragraph (a) of this Section, the aggregate principal
amount of the Initial Loan and any Additional Loans shall be reduced by an
amount calculated as follows:
0.00937 British Pounds Sterling multiplied by the difference,
if positive, of (i) the Yearly Minimum for LS Strips for the
then-prior calendar year required pursuant to Section 4.4(b),
as modified by paragraphs (a), (c), (d) and (e) of Section
4.4, less (ii) actual orders for LS Strips by LifeScan with
respect to such
Restated Distribution Agreement in Word as executed 16
<PAGE>
calendar year (including without limitation any such orders
through January 31 of the then-current calendar year that are
counted toward the Yearly Minimum for the prior calendar year
pursuant to Section 4.3 and excluding any such orders through
January 31 of the prior calendar year that were included
toward minimum purchases for the next-prior calendar year).
4.4 YEARLY MINIMUMS.
(a) The Yearly Minimums of LS Strips set forth in this Section
are dependent upon satisfaction of the following conditions (collectively, the
"Conditions"), as scheduled, for each of Project A, Project B and Project C: (i)
receipt by Selfcare of approval of an appropriate 510(k) Notification for each
such LS Product to permit commercial distribution in the United States, and (ii)
manufacture and delivery to LifeScan by Selfcare of at least the required
minimum Commercial Quantities of such products. If Selfcare shall fail to meet
any one or more of such conditions for Project A, Project B and/or Project C,
the Yearly Minimums set forth in paragraph (b) below shall be reduced as
provided in paragraphs (c), (d) and/or (e) below respectively. Any such
reduction of Yearly Minimums for LS Strips for delay with respect to more than
one project shall be cumulative up to the aggregate applicable Yearly Minimum
for LS Strips.
(b) The Yearly Minimum of LS Strips shall be the applicable
amount indicated in the following table (subject to adjustment as otherwise
provided in this Section):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR NUMBER OF LS STRIPS
- ------------------------------------------------------------------------------------------------------
<S> <C>
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------
[OMITTED] [OMITTED]
- ------------------------------------------------------------------------------------------------------
[OMITTED] and each year [OMITTED] of the number of LS Strips purchased from Selfcare
thereafter during the prior year, provided, however, that if Market
Introduction has occurred anywhere in the world with respect
to any home use test system not provided by Selfcare which is
designed to measure glucose in humans and is based on a
technology other than reflectance or non-electrochemical
visually-read techniques, the applicable percentage shall be
[OMITTED] instead of [OMITTED].
- ------------------------------------------------------------------------------------------------------
</TABLE>
(c) If the Conditions with respect to Project A shall not have
been satisfied (other than resulting from a failure of performance by LifeScan):
Restated Distribution Agreement in Word as executed 17
<PAGE>
(i) by [OMITTED] but are satisfied by [OMITTED] the
Yearly Minimums of LS Strips shall be reduced for the years
[OMITTED] and [OMITTED] by [OMITTED] and [OMITTED]
respectively, which reduction amounts shall be pro rated
according to the ratio of (A) the number of days elapsed
between [OMITTED] and the date on which all conditions with
respect to Project A shall have been satisfied to (B) the
number of days between [OMITTED] and [OMITTED];
(ii) by [OMITTED] but are satisfied by [OMITTED], the
Yearly Minimums of LS Strips shall be reduced (without any
proration) for the years [OMITTED] and [OMITTED] by [OMITTED],
[OMITTED] and [OMITTED], respectively; or
(iii) by [OMITTED], the yearly Minimums of LS Strips
shall be reduced (without any proration) for the years
[OMITTED], [OMITTED] and [OMITTED] by [OMITTED], [OMITTED] and
[OMITTED], respectively.
(d) If the Conditions with respect to Project B shall not have
been satisfied (other than resulting from a failure of performance by LifeScan):
(i) by [OMITTED] but are satisfied by [OMITTED] the
Yearly Minimums of LS Strips shall be reduced for the years
[OMITTED] and [OMITTED] by [OMITTED] and [OMITTED]
respectively, which reduction amounts shall be pro rated
according to the ratio of (A) the number of days elapsed
between [OMITTED] and the date on which all Conditions with
respect to Project B shall have been satisfied to (B) the
number of days between [OMITTED] and [OMITTED];
(ii) by [OMITTED] but are satisfied by [OMITTED] the
Yearly Minimums of LS Strips shall be reduced (without any
proration) for the years [OMITTED] and [OMITTED] by [OMITTED]
and [OMITTED], respectively; or
(iii) by [OMITTED] the Yearly Minimums of LS Strips
shall be reduced (without any proration) for the years
[OMITTED] and [OMITTED] by [OMITTED] and [OMITTED],
respectively.
(e) If the Conditions with respect to Project C shall not have
been satisfied (other than resulting from a failure of performance by LifeScan):
(i) by [OMITTED], but are satisfied by [OMITTED], the
Yearly Minimums of LS Strips shall be reduced for the years
[OMITTED] and [OMITTED] by [OMITTED] and [OMITTED]
respectively, which reduction amounts shall be pro rated
according to the ratio of (A) the number of days elapsed
between [OMITTED] and the date on which all Conditions with
respect to Project C shall have been satisfied to (B) the
number of days between [OMITTED] and [OMITTED];
Restated Distribution Agreement in Word as executed 18
<PAGE>
(ii) by [OMITTED], but are satisfied by [OMITTED],
the Yearly Minimums will be reduced (without any proration)
for the years [OMITTED] and [OMITTED] by [OMITTED] and
[OMITTED], respectively; or
(iii) by [OMITTED], the Yearly Minimums of LS Strips
shall be reduced (without any proration) for the years
[OMITTED] and [OMITTED] by [OMITTED] and [OMITTED],
respectively.
(f) In no event shall the application of paragraphs (c), (d)
and (e) above reduce the Yearly Minimum for any calendar year below [OMITTED].
4.5 TERMINATION OF SECTION 4.1(c) RESTRICTION. The restriction set
forth in Section 4.1(c) shall terminate and Selfcare shall be free to sell Test
Strips, other than Compatible Products, anywhere in the world after the last to
occur of the following:
(i) December 31, 2002;
(ii) the date as of which Selfcare shall have repaid
the aggregate principal amount of the Initial Loan and of any
Additional Loans and all interest accrued and unpaid thereon;
and
(iii) March 1 of a year after 2002 following a
calendar year with respect to which the total revenues
(including without limitation amounts credited to such
calendar year pursuant to Section 4.3 and excluding any such
amounts through January 31 of the prior calendar year that
were included toward minimum purchases for the next-prior or
calendar year pursuant to Section 4.3) received by Selfcare
and its Affiliates from LifeScan shall not have been at least
the greater of (A) [OMITTED] with at least 75% of the amount
arising from the sale of Test Strips), or (B) 80% of the
amount of purchases of LS Products by LifeScan for the prior
calendar year (with at least 75% of such amount arising from
the sale of Test Strips).
4.6 INTRODUCTION OF COMPETING ELECTROCHEMICAL SYSTEM.
(a) If there is a Market Introduction on or before December
31, 1999 anywhere in the world by LifeScan or any Affiliate of LifeScan of any
electrochemical testing system designed to be capable of home use to measure
glucose in humans and which is not supplied by Selfcare, then all restrictions
set forth in Section 4.1 shall terminate.
(b) If such Market Introduction occurs during the years 2000
or 2001, the restriction set forth in Section 4.1(b) and Section 4.1(c) shall
terminate and thereafter Selfcare shall be free to sell Complete System Products
and/or Test Strips, in each case other than Compatible Products, anywhere in the
world.
Restated Distribution Agreement in Word as executed 19
<PAGE>
4.7 NOVEL GLUCOSE SYSTEMS. The parties agree that Section 3.1 of the
Master Agreement shall continue in full force and effect but that the definition
of "Novel Glucose System" shall be as set forth in this Distribution Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARTIES
5.1 Selfcare represents and warrants as follows:
(a) Selfcare has full power to execute, deliver and perform
this Distribution Agreement, the Credit Agreement and the SC Note.
(b) The Distribution Agreement has been, and, when executed
and delivered, the SC Note and the Credit Agreement will be, duly executed and
delivered by Selfcare and is, or in the case of the SC Note and the Credit
Agreement will be, the legal, valid and binding obligation of Selfcare,
enforceable in accordance with its terms, subject as to enforcement of remedies
to applicable bankruptcy, insolvency, and reorganization laws and to moratorium
and similar laws from time to time in effect. The execution, delivery and
performance of this Distribution Agreement has been, and the execution, delivery
and performance of the Credit Agreement and the SC Note will be upon their
delivery, duly authorized by all necessary corporate action of Selfcare.
Schedule 4.2 sets forth Selfcare's obligations described in Section 4.2(b),
correctly and completely with respect to the identity of all contracting
parties, and correctly with respect to the substance of such agreements except
for material excised in order to maintain the confidentiality of certain
technical information not relevant to this Distribution Agreement.
5.2 LifeScan represents and warrants as follows:
(a) LifeScan has full power to execute, deliver and perform
this Distribution Agreement and the Credit Agreement.
(b) The Distribution Agreement has been and, when executed and
delivered, the Credit Agreement will be, duly executed and delivered by LifeScan
and is, or in the case of the Credit Agreement will be, the legal, valid and
binding obligation of LifeScan, enforceable in accordance with its terms,
subject as to enforcement of remedies to applicable bankruptcy, insolvency, and
reorganization laws and to moratorium and similar laws from time to time in
effect. The execution, delivery and performance of this Distribution Agreement
has been, and the execution, delivery and performance of the Credit Agreement
will be, upon its delivery, duly authorized by all necessary corporate action of
LifeScan.
ARTICLE VI
PRICE
Restated Distribution Agreement in Word as executed 20
<PAGE>
6.1 LS PRODUCTS OTHER THAN LS STRIPS. The base price for LS Products
other than LS Strips purchased by LifeScan hereunder shall be as set forth in
Schedule 6.1 hereto for the LS Products described therein. The base price for LS
Products other than those described in Schedule 6.1 and LS Strips purchased by
LifeScan hereunder shall be the cost at which such LS Products would be valued,
on a "first-in, first-out" basis under United States generally accepted
accounting principles but including appropriate allocations of overhead, for
reporting on the audited balance sheet of Selfcare at the end of the accounting
period in which such LS Product is manufactured. Selfcare shall be entitled to
select from time to time such accounting period not longer than a calendar year
as it may elect for the purpose of this Section 6.1 so long as in changing
accounting periods, no cost item shall be taken into account more than once.
Unless LifeScan otherwise requests, Selfcare will contract for products other
than LS Strips solely in U.S. Dollars. If Selfcare is permitted to contract for
products other than LS Strips in a currency other than U.S. Dollars, pricing for
LS Products pursuant to Section 6.1 shall be calculated based on the currencies
in which such costs are incurred by Selfcare and shall be converted to U.S.
Dollars at the prices at which such currencies could be purchased with U.S.
Dollars prevailing at the time Selfcare prepares invoices for such LS Products.
6.2 BASE STRIP PRICES. In each calendar year, the base price per LS
Strip (the "Base Strip Prices") purchased by LifeScan hereunder shall depend on
the annualized total number of LS Strips of all types sold by Selfcare and
purchased by LifeScan during such year, as set forth below, subject to reduction
as provided in this Section 6.2:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Number of Test Strips Price per strip in British Price per strip in U.S. Dollar
Purchased During Such Pounds Sterling
Calendar Year (on an
annualized basis)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Fewer than [OMITTED] [OMITTED] [OMITTED]
- ---------------------------------------------------------------------------------------------------
[OMITTED] to [OMITTED] [OMITTED] [OMITTED]
- ---------------------------------------------------------------------------------------------------
[OMITTED] to [OMITTED] [OMITTED] [OMITTED]
- ---------------------------------------------------------------------------------------------------
[OMITTED] to [OMITTED] [OMITTED] [OMITTED]
- ---------------------------------------------------------------------------------------------------
[OMITTED] to [OMITTED] [OMITTED] [OMITTED]
- ---------------------------------------------------------------------------------------------------
[OMITTED] to [OMITTED] [OMITTED] [OMITTED]
- ---------------------------------------------------------------------------------------------------
[OMITTED] to [OMITTED] [OMITTED] [OMITTED]
- ---------------------------------------------------------------------------------------------------
[OMITTED] to or more [OMITTED] [OMITTED]
- ---------------------------------------------------------------------------------------------------
</TABLE>
*This price shall be reduced by an additional [OMITTED] British Pounds
Sterling (or [OMITTED] if paid in U.S. Dollars) for each calendar quarter during
which LifeScan has at least a [OMITTED] market share in the United States of
sales of Test Strips similar to LS Strips. Markets are shall be determined by
reference to a report of IMS Market Services or other similar vendor of
recognized national reputation agreed upon by the parties.
The price to be paid by LifeScan for LS Strips ordered in any year
shall be the applicable Base Strip Price (adjusted through the date of invoicing
as provided in Section 6.4,
Restated Distribution Agreement in Word as executed 21
<PAGE>
Section 6.5, Section 11.2 and Section 12.4). Prices invoiced by Selfcare during
each calendar year shall be based upon annualized estimates of purchases of LS
Strips for each 12-month period beginning on the date hereof and on each annual
anniversary of such date. Adjustments in payments for LS Strips shall be made by
the parties within 30 days after the later of (i) the close of each calendar
year based on the quantities of LS Strips actually purchased, or, (ii) if
applicable, the date of any adjustment to such purchases for such calendar year
required pursuant to Section 4.3. If Test Strips are provided in a disposable
component [OMITTED] the disposable component shall be provided by Selfcare at no
additional charge. If Test Strips are provided in a reusable component, such
reusable component shall constitute a Related Component and shall be priced in
accordance with Section 6. 1.
6.3 PAYMENT IN LOCAL CURRENCY FOR LS STRIPS. LifeScan will be invoiced
in Pounds Sterling and pay in Pounds Sterling for LS Strips which have
production costs in Pounds Sterling. LifeScan will be invoiced in U.S. Dollars
and pay in U.S. Dollars for LS Strips which have production cost in U.S.
Dollars. If Selfcare manufactures outside of United Kingdom and United States,
it will not be protected on currency fluctuations unless LifeScan otherwise
agrees.
6.4 ADJUSTMENT BASED ON LS RESALE PRICE. Each calendar year (a "Price
Year") the strip prices shall be increased (but never decreased) in proportion
to the increase, if any, in the LS Resale Price from (i) the calendar year
beginning two years prior to such Price Year to (ii) the calendar year beginning
one year prior to such Price Year provided that if the LS Resale Price shall
decrease from one calendar year to the next, the LS Resale Price shall be deemed
to have remained at the level in effect prior to such decrease until thereafter
exceeded.
"LS Resale Price" means the weighted average world-wide net price at
which LifeScan resells LS Strips.
6.5 ADJUSTMENT BASED ON SELFCARE PROFITABILITY. If the sale of LS
Strips to LifeScan on the pricing terms provided in this Distribution Agreement
ceases to be profitable for Selfcare, the parties agree that in lieu of the
price otherwise applicable under this Distribution Agreement, the price for LS
Strips shall be such amount as gives Selfcare a commercially reasonable profit.
The Parties agree to negotiate in good faith with regard to any such price
adjustment. The determination of the amount of such profit shall include
comparison with other Selfcare product lines as well as other similar OEM
arrangements, and shall take into account reasonable allocations of Selfcare's
overhead but shall exclude any payments of principal or interest on any loans,
including without limitation the Product Expansion Loans. If Selfcare claims
that it is entitled to a pricing adjustment under this Section 6.5, LifeScan
shall be entitled to audit Selfcare's books and records to the extent necessary.
to verify Selfcare's claims with regard to its profitability.
Restated Distribution Agreement in Word as executed 22
<PAGE>
ARTICLE VII
FAILURE BY SELFCARE TO SUPPLY
7.1 DEFINITIONS RELATING TO SELF-HELP LICENSING. "Required Amount"
means, with respect to any calendar year, the lesser of (i) the amount of LS
Product ordered by LifeScan for delivery during such period or (ii) the amount
of product forecast to be ordered by LifeScan for delivery during such calendar
year, in the Binding Capacity Plan, in each case calculated ratably on a monthly
basis.
A "Supply Default" shall occur if:
(a) Selfcare fails to ship to LifeScan on a cumulative basis
during any period of four consecutive calendar months (the "First Period") the
Required Amount of any LS Products for such First Period; and
(b) after notice of such failure by LifeScan to Selfcare,
Selfcare fails, during the course of the four consecutive calendar months
immediately following such notice (the "Second Period"), to ship to LifeScan an
amount of such LS Products equal to the lesser of (i) the amount of such product
for which LifeScan requests delivery during the Second Period and (ii) the sum
of the Required Amount for the Second Period and the short fall in Selfcare's
deliveries of such product from the Required Amount during the First Period.
"Self-help License" means a nonexclusive license on the terms set forth
in this Article VII of Selfcare's rights in patents and know-how used in making,
using or selling the LS Products as to which either a Supply Default has
occurred or Selfcare's production capabilities have been affected by Force
Majeure, whichever is applicable, to make, use and sell such LS Products for so
long as Selfcare fails to supply the Required Amount of such LS Products. Any
such license shall permit LifeScan to authorize others to make any such LS
Products exclusively for LifeScan so long as such parties agree to terms to
protect the confidentiality of Selfcare's Confidential Information that are
substantially equivalent to those set forth in Article V of the Master
Agreement. In no event, however, shall LifeScan be entitled to authorize any
Person other than Persons which are Affiliates of LifeScan, for so long as they
remain Affiliates, to print Test Strips.
7.2 LICENSE ON SUPPLY DEFAULT. Selfcare hereby grants to LifeScan a
Self-help License, but LifeScan shall not exercise any right under such license
unless and until Selfcare shall have acknowledged, or an arbitrator pursuant to
Section 6.2 of the Master Agreement, shall have determined (i) that a Supply
Default shall have occurred other than as a result of Force Majeure or (ii) that
the conditions to the exercise by LifeScan of its rights under the Self-help
License pursuant to Section 7.3 or 7.4 have been satisfied.
7.3 COMMUNICATIONS FOLLOWING FORCE MAJEURE. If Selfcare becomes aware
that as a result of Force Majeure, a Supply Default is likely to occur, Selfcare
will give notice to LifeScan indicating the extent to which its capability of
supplying LS Products has been
Restated Distribution Agreement in Word as executed 23
<PAGE>
affected, together with an estimate of the time anticipated for Selfcare to
restore its manufacturing capability in order to meet the applicable Binding
Capacity Plan. If such period is less than eight (8) months from the date of the
occurrence of the Force Majeure, Selfcare shall diligently attempt to restore
its production capabilities and LifeScan shall not be entitled to exercise any
of its rights under the Self-help License. If Selfcare estimates that it will
take more than eight (8) months from the date of the occurrence of the Force
Majeure to restore such manufacturing capability, LifeScan may, if it determines
in good faith that it could build an alternative manufacturing capability for
the affected LS Products in a shorter time frame, give notice (a "Supply Timing
Notice") to such effect to Selfcare within thirty (30) days after receipt of
Selfcare's estimate. Within thirty (30) days after receipt of such notice,
Selfcare shall elect whether to reduce its estimate to the period estimated by
LifeScan to build such capability, and failing to give a notice, shall be deemed
to have elected not to alter its estimate.
7.4 RIGHTS FOLLOWING FORCE MAJEURE. If LifeScan has given a Supply
Timing Notice and Selfcare fails to elect to reduce its estimate to the period
estimated by LifeScan to build its own capability, or if following the
occurrence of a Force Majeure affecting the supply of LS Products, Selfcare
fails diligently to attempt to re-establish its supply capabilities, LifeScan
shall be permitted to exercise all of its rights under the Self-help License. If
Selfcare elects to reduce its estimate to meet LifeScan's estimated time to
start a supply of the affected LS Product and thereafter fails within a time
period equal to one hundred and fifteen percent (115%) of the period from the
occurrence of the Force Majeure until the revised estimated date to have
production capability restored, to restore such production capability and resume
supply of LS Products to LifeScan in the Required Amount, then (i) LifeScan
shall be entitled to exercise its rights under the Self-help License, and (ii)
Selfcare will, if it elects to commence resupplying such product, supply without
charge LS Product in an amount equal to the average monthly portion of the
Required Amount of such LS Product in effect during the time Selfcare was
rebuilding its production facilities, multiplied by the number of months which
Selfcare estimated if Would take to rebuild.
7.5 RESTORATION OF SUPPLY BY SELFCARE. If LifeScan is permitted
pursuant to this Article VII to exercise its rights under the Self-help License,
Selfcare shall no longer be required to supply the LS Product with respect to
which LifeScan has become so permitted. Selfcare, however, shall be entitled to
restart supplying such LS Products as provided in this Section 7.5. If after
LifeScan has become entitled to exercise its rights under the Self-help License
pursuant to this Article VII, LifeScan expends funds in order to establish a
production capability as permitted by such license, then, except as provided
below in this Section 7.5, Selfcare must, in order to require LifeScan to
discontinue establishment of or use of such production capability and restart
purchases of the affected LS Products from Selfcare, agree to reimburse LifeScan
with the amount it has expended on equipment, personnel and other out of-pocket
costs (collectively, "Self-help Costs") in establishing such production
capability, such reimbursement to be in eight (8) equal quarterly payments
commencing three (3) months after Selfcare restarts supplying LifeScan. If
LifeScan has become entitled to exercise its rights under the Self-help License
pursuant to this Article VII and fails to establish a supply capability
sufficient to meet the applicable Required Amount within 115 % of the period
Restated Distribution Agreement in Word as executed 24
<PAGE>
specified in LifeScan's Supply Timing Notice, then LifeScan shall not be
entitled to reimbursement of its Self-help Costs if Selfcare elects to restart
supply of the applicable LS Products.
7.6 TERMS, ROYALTIES. Any LS Products produced by LifeScan pursuant to
the Self-help License granted hereby must be sold by it only in the manner
provided for in Section 2.1 hereof and otherwise in accordance with all of the
terms of this Distribution Agreement. LifeScan shall not pay for such LS
Products in accordance with Article VI but rather shall pay a royalty to
Selfcare equal to: (1) with respect to LS Products other than LS Strips, 5.0% of
LifeScan's gross sales revenue of such LS Products sold, net of returns,
discounts and allowances, and (1i) with respect to LS Strips, the greater of (x)
5.0% of LifeScan's gross sales revenue of LS Strips sold, net of returns,
discounts and allowances or (y) on a per strip basis, Selfcare's average per
strip gross margin for the calendar year immediately preceding the date on which
the conditions giving rise to LifeScan's night to exercise its Self-help License
occur; provided that, in the event that Selfcare willfully failed to deliver the
requisite amount of LS Strips, then such royalty shall be the amount specified
in clause (x), even if the amount specified in clause (y) is greater.
7.7 COOPERATION. Pursuant to the Self-help License, LifeScan shall have
the right to receive from Selfcare the tangible embodiment of the information
and intellectual property licensed under the Self-help License, including
without limitation copies of all specifications, drawings, notebooks and bills
of materials, such assistance as LifeScan may reasonably require in its exercise
of rights under such Self-help License, including, without limitation, providing
LifeScan with appropriate know-how and training in the manufacture of LS
Products. It is the intention of LifeScan and Selfcare that the Self-help
License constitutes a license of intellectual property as defined in Title 11,
U.S. Code, and that LifeScan receive all of the benefits of Section 365(n) of
the Bankruptcy Code (or successor statute or provision) with respect to such
license. Further, all rights, powers and remedies of LifeScan provided herein
are in addition to and not in substitution for any and all other rights, powers
and remedies now or hereafter existing at law or in equity (including without
limitation Title 11, U.S. Code) in the event of a filing of a petition for
relief by or with respect to Selfcare under such Title 11 (or successor
statute). LifeScan will reimburse Selfcare's reasonable and necessary
out-of-pocket expenses incurred in connection with such assistance. Such license
and any communications pursuant thereto is subject to the confidentiality
provisions set forth in the Master Agreement. Except as contemplated by the
definition of Self-help License, LifeScan shall not grant sublicenses of the
license granted to it pursuant to this Article VII.
7.8 EXCLUSIVE REMEDY. The exercise by LifeScan of its rights under the
Self-help License shall be the sole and exclusive remedy for failure of Selfcare
to supply LS Product, unless such failure was willful on the part of Selfcare,
in which case LifeScan shall have the benefit of any additional remedy to which
it may be entitled by law.
7.9 BUSINESS INTERRUPTION INSURANCE. If Selfcare shall have made the
election described in Section 3.8(a) hereof, then from the date of such election
through December 31,
Restated Distribution Agreement in Word as executed 25
<PAGE>
2003, Selfcare shall maintain business interruption insurance for its operations
with a responsible insurance carrier in amounts as are commercially reasonable
for similarly-situated businesses, and in any event, in an amount no less than
sufficient to pay the amount that would have been payable by LifeScan but for
the provisions of clause (ii) of the last sentence of Section 3.8(b) hereof.
Selfcare shall provide to LifeScan within five days after request therefor a
certificate of insurance evidencing such coverage or a copy of the policy of
business interruption insurance then in force.
ARTICLE VIII
CERTAIN COVENANTS
8.1 LIFESCAN COVENANTS. LifeScan agrees that it will:
(a) Keep Selfcare apprised of the development by LifeScan of
marketing plans and strategies for the sale of LS Products and allow Selfcare
the opportunity to comment on same and meet with officers and staff in charge of
such plans and strategies. LifeScan shall report at least quarterly, and shall
report reasonably promptly after request by Selfcare, information regarding LS
Products sales, performance, returns and warranty problems.
(b) Sell LS Products only in compliance with and to the extent
permitted by applicable law and the applicable product specifications. LifeScan
shall communicate to Selfcare information it learns about the effect of, the
introduction of or any amendment or change of interpretation of any law,
statute, regulation, order or ordinance applicable in any jurisdiction in which
LifeScan sells or markets LS Products which may relate to the manufacturing,
labeling or packaging of LS Products.
(c) Not act in any way that would give the impression that it
has the authority to bind Selfcare in any respect whatsoever.
(d) Not make any oral or written representations or claims
which are inconsistent to any material extent with the specifications, operating
instructions, warranties, or representations given or made by Selfcare with
respect to LS Products.
(e) Promptly give written notice to Selfcare of any breach of
a provision hereof by LifeScan of which it may become aware or of any sales,
giveaways or pre-sale promotional advertising by LifeScan or, to the extent that
the president of LifeScan becomes aware thereof, any such activities by an
Affiliate of LifeScan, anywhere in the world with respect to any home use test
system not provided by Selfcare which is designed to measure glucose. in humans
and is based on a technology other than reflectance or non-electrochemical
visually-read techniques.
Restated Distribution Agreement in Word as executed 26
<PAGE>
8.2 SELFCARE COVENANTS. Selfcare agrees that it will:
(a) Comply with the terms of any approval from the FDA which
are required in order to manufacture and sell to LifeScan LS Products. Selfcare
shall communicate to LifeScan information it learns about the effect of, the
introduction of or any amendment or change of interpretation of any law,
statute, regulation, order bearing on the FDA Clearance for LS Products.
(b) Not act in any way that would give the impression that it
has authority to bind LifeScan in any respect whatsoever.
(c) Except as may be required by applicable law, not make any
public announcements for the purpose of selling LS Products to parties other
than LifeScan stating that LS Products are manufactured by Selfcare or directly
comparing LS Products with other products manufactured by Selfcare.
(d) Promptly give written notice to LifeScan of any breach by
Selfcare hereunder of which it may become aware.
8.3 INDEMNIFICATION.
(a) Selfcare shall indemnify and hold harmless LifeScan and
its Affiliates and their officers, directors and employees from and against any
and all claims, losses, damages, judgments, costs, awards, expenses (including
reasonable attorneys' fees) and liabilities of every kind (collectively,
"Losses") arising directly out of or resulting directly from any breach by
Selfcare of any of its warranties, guarantees, representations, obligations or
covenants contained herein.
(b) LifeScan shall indemnify and hold harmless Selfcare and
its Affiliates and their officers, directors and employees from and against any
and all Losses arising directly out of or resulting directly from any breach by
LifeScan of any of its warranties, guarantees, representations, obligations or
covenants contained herein.
(c) Each indemnified party agrees to give the indemnifying
party proper written notice of any matter upon which such indemnified party
intends to base a claim for indemnification (an "Indemnity Claim") under Article
8. The indemnifying party shall have the right to participate jointly with the
indemnified party in the indemnified party's defense, settlement or other
disposition of any Indemnity Claim. With respect to any Indemnity Claim relating
solely to the payment of money damages and which would not result in the
indemnified party's becoming subject to injunctive or other equitable relief or
otherwise adversely affect the business of the indemnified party in any manner,
and as to which the indemnified party shall have acknowledged in writing the
obligation to indemnify the indemnified party hereunder, the indemnifying party
shall have the sole right to defend, settle or otherwise dispose of such
Indemnity Claim, on such terms as the indemnifying party, in its
Restated Distribution Agreement in Word as executed 27
<PAGE>
sole discretion, shall deem appropriate, provided that the indemnifying party
shall provide reasonable evidence of its ability to pay any damages claimed and
with respect to any such settlement shall have obtained the written release of
the indemnified party from the Indemnity Claim. The indemnifying party shall
obtain the written consent of the indemnified party, which shall not be
unreasonably withheld, prior to ceasing to defend, settling or otherwise
disposing of any Indemnity Claim if as a result thereof the indemnified party
would become subject to injunctive or other equitable relief or the business of
the indemnified party would be adversely affected in any manner.
(d) Each party shall maintain comprehensive general liability
insurance in an aggregate amount of at least $20,000,000 with such insurers and
upon such terms as are reasonably acceptable to the other party, listing such
party as a named insured under the policy and requiring that such party receive
thirty (30) days' prior written notice from the insurer prior to the
cancellation or diminution of coverage under such policy.
(e) This Section 8.3 shall survive any termination of this
Agreement.
ARTICLE IX
AGREEMENTS REGARDING TECHNOLOGY
9.1 INFRINGEMENT OF SELFCARE'S TECHNOLOGY. LifeScan and Selfcare shall
each notify, the other as soon as practicable after it becomes aware of any
infringement by a third party of, or unlawful use by a third party of,
Selfcare's proprietary technology. Either party may prosecute and defend any
action or proceeding which it deems necessary in connection with any
infringement by a third party of a patent-protected technology incorporated in
LS Products. Any and all damages recovered in any such action shall first be
applied to pay all costs and expenses of any such action. Any remaining recovery
shall be shared by both parties in accordance with the damage sustained by each
as a result of such infringement. If the recovery in any such action is not
sufficient to pay any and all costs of such action or proceeding, such costs
shall become entirely by the parties which incurred them. In any such case, the
party initiating the prosecution shall afford the other party an opportunity to
be involved in all proceedings.
9.2 U.S. AND EUROPEAN PATENT CONVENTION PATENT CONFLICTS. Selfcare
agrees to defend, at its own expense, and to pay all costs and damages awarded
against LifeScan based on, any and all claims by third parties arising from
actual or alleged infringement by LS Products of any U.S. patent or patent
issued by a participant in the European Patent Convention; provided that
Selfcare's obligation to pay such costs and damages under this Section 9.2 shall
not apply to the extent that such actual or alleged infringement arises out of
modifications to LS Products made by LifeScan; and provided that Selfcare's
obligation to pay such costs and damages shall be subject to and limited by the
following provisions of this Section 9.2. In the event that LifeScan receives a
claim or notice of a claim that is or may be subject to indemnification under
this Section 9.2, LifeScan shall (i) give Selfcare prompt written notice of such
claim or notice of claim, (ii) cooperate with Selfcare at Selfcare's
Restated Distribution Agreement in Word as executed 28
<PAGE>
expense in every reasonable manner in the defense of such claim, and (iii)
permit Selfcare to assume and control the defense thereof at Selfcare's cost and
expense,, provided that LifeScan shall have the right, at its option and at its
expense, to participate in the defense of such claim through counsel of its own
choosing. If infringement is held to exist, or if either party determines that a
finding of infringement is likely, the parties agree to discuss in good faith
alternative arrangements under which the liability of the parties could be
reduced, including possible revisions to the infringing material so as to make
it non-infringing, or arranging to procure for LifeScan the right to continue
using the infringing material to the extent permitted by this Distribution
Agreement, provided that neither party shall be obligated to agree to any
particular alternative arrangements under this sentence and neither party shall
have any liability for failing to agree upon any such alternative arrangements.
Notwithstanding anything else in this Distribution Agreement, if LifeScan is not
enjoined from selling LS Products as a result of any actual infringement of a
U.S. patent or patent issued by a participant in the European Patent Convention,
Selfcare's liability to LifeScan under this Section 9.2 shall be limited to
future amounts payable by LifeScan to Selfcare hereunder in respect of purchases
of LS Products, and shall be collected by LifeScan solely by set-off against
such amounts as they accrue, provided that if there exist any unpaid amounts due
under this Section 9.2 at the termination of this Distribution Agreement,
Selfcare shall be required to pay such amount in cash up to the amount of its
liability under this Section 9.2 upon such termination.
9.3 PATENT CONFLICTS IN OTHER COUNTRIES. At least sixty (60) days prior
to commencement of the sale of LS Products outside of the United States and
countries which are participants in the European Patent Convention, LifeScan
shall give notice to Selfcare indicating that it plans to commence the sale of
LS Products in such a country. Following such notice, Selfcare will arrange for
a search of patent conflicts in each such country and, after completion of such
search, notify LifeScan whether it is prepared to expand the provisions of
Section 9.2 to apply to such country's patents. If LifeScan gives a notice
contemplated by this Section 9.3 and Selfcare fails thereafter to notify
LifeScan that it is prepared to expand the application of Section 9.2 to apply
to the patents of such country, then LifeScan shall not sell LS Products in such
country and the minimum purchase obligations of LifeScan pursuant to Section 4.4
shall be equitably adjusted.
9.4 TECHNICAL INFORMATION NECESSARY FOR MARKETINg. Selfcare shall
furnish to LifeScan any technical information or instructions necessary for the
marketing of LS Product. LifeScan acknowledges and agrees that all such
technical information communicated by Selfcare to LifeScan shall be the
exclusive property of Selfcare and shall be deemed to be "Confidential
Information" within the meaning of Article V of the Investment Agreement.
LifeScan further acknowledges and recognizes that Selfcare claims exclusive
ownership of its proprietary technology relating to the Glucose System and
further undertakes that it will not represent that it has any title to or right
of ownership in such technology.
Restated Distribution Agreement in Word as executed 29
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1 INVOICING. SHIPPING AND PAYMENT.
(a) Selfcare shall advise LifeScan of relevant addresses for
orders. All LS Products supplied are F.O.B. Selfcare's warehouse facilities as
they may be from time to time. LifeScan shall bear all risk of loss or damage to
LS Products after loading on board the carrier at the F.O.B. point or after
delivery to LifeScan at the F.O.B. point. LifeScan shall be liable for all
shipping, air freight, insurance, handling charges and other transportation fees
and tariffs and any other impost imposed by any government or instrumentality,
except for any such measured by the net income of Selfcare.
(b) Except as otherwise provided in Section 6.3, payments for
LS Instruments shall be made in U.S. Dollars by LifeScan to Selfcare for each
shipment of LS Instruments not later than thirty (30) days after the date of the
invoice therefor which shall not be earlier than the date of shipping by
Selfcare, hereof except that in the case of purchase prices which cannot be
determined until a later date (e.g., the cost of certain LS Instruments based on
a GAAP Inventory cost, the cost of LS Strips based on annual purchases), the
parties shall agree on an estimated cost, which LifeScan shall remit in
accordance with the requirements of this paragraph, and appropriate adjustments
shall be promptly made after determination of the definitive purchase prices.
Payments shall be by check drawn on the regular account of LifeScan.
(c) Except as otherwise provided in Section 6.3, payments for
LS Products other than LS Instruments shall be made in British Pounds Sterling
or in such currency as the parties may agree by LifeScan to Selfcare for each
shipment of such LS Products not later than thirty (30) days after the date of
the invoice therefor which shall not be earlier than the date of shipping by
Selfcare.
(d) Affiliates of LifeScan identified by notice to Selfcare
shall be permitted to order LS Products under this Distribution Agreement. Such
purchases shall be deemed those of LifeScan for all purposes hereunder.
10.2 PRODUCT WARRANTIES. Selfcare represents and warrants to LifeScan
that all LS Product supplied in connection with this Distribution Agreement
shall be of merchantable quality, fit for the purpose intended by this
Distribution Agreement and free from defects in material and workmanship and
shall be manufactured and provided by Selfcare (i) in accordance and conformity
with any applicable FDA Clearance, or in the absence of thereof, in accordance
with the definition of the Glucose System and (ii) in compliance with all
applicable federal, state or municipal statutes, laws, rules or regulations,
including those relating to the environment, food or drugs and occupational
health and safety. Without limiting the foregoing, Selfcare represents and
warrants that it shall comply with all present and future statutes, laws,
ordinances and regulations relating to the manufacture, assembly and supply of
Restated Distribution Agreement in Word as executed 30
<PAGE>
LS Products being provided hereunder, including, without limitation, those
enforced by the FDA (including compliance with good manufacturing practices).
Further, Selfcare shall make no changes: (i) that require a filing with or
notice to the FDA or other relevant governmental health regulatory authorities,
or (ii) that Selfcare believes would be material to the raw materials,
components, vendors or methods of manufacture of any LS Product, without in
either of the foregoing cases the prior consent of LifeScan, such consent not to
be unreasonably withheld. In the event that any LS Products, upon delivery, do
not conform as aforesaid, LifeScan's remedy shall be limited to the repair or
replacement (at Selfcare's option) of such nonconforming LS Products within a
reasonable period of time. In no event shall Selfcare be liable for indirect,
consequential or money damages, whether in contract, tort or otherwise. LifeScan
agrees that it will deal directly with its customers concerning warranty matters
relating to LS Products, and Selfcare will not be required to participate in
such dealings.
10.3 AGREEMENT TERM. The term of this Distribution Agreement shall
commence on the date hereof and shall remain in effect through December 31,
2010. The term of this Distribution Agreement may be extended by LifeScan for an
additional term or terms of five years by notice to Selfcare not less than six
months prior to the scheduled end of the term including without limitation any
renewal term, provided that for each of the three years prior to the end of such
term the number of LS Strips purchased by LifeScan from Selfcare shall have
increased by an average annual rate of at least 10% over the then prior 36 month
period.
10.4 TERMINATION.
(e) This Distribution Agreement shall remain in effect as
stated in Section 10.3, PROVIDE, HOWEVER, that either party may terminate this
Distribution Agreement upon the occurrence of any of the following:
(i) the other party makes a general assignment for
the benefit of creditors, is insolvent, shall have been
adjudicated a bankrupt, shall have filed a voluntary petition
for bankruptcy or for reorganization or effectuated a plan or
other similar arrangement with creditors, shall have filed
against it proceedings for an adjudication in bankruptcy or
reorganization, or shall have applied for or permitted the
employment of a receiver or trustee or custodian for any of
its property or assets;
(ii) there is by the other party a material default,
breach or failure to perform any of the obligations,
warranties or representations set forth in this Distribution
Agreement, and such default, breach or failure to perform
shall continue for a period of thirty (30) days after notice
thereof from the other party;
Restated Distribution Agreement in Word as executed 31
<PAGE>
(iii) nonpayment of any sums due from the other party
hereunder within thirty (30) days after such sums become due
and payable, after reasonable means have been employed to
collect such sums; or
(iv) the Yearly Minimum pursuant to Section 4.4 for
any full calendar year after [OMITTED] is less than [OMITTED]
Test Strips, other than as a result of a failure of
performance by Selfcare.
10.5 MISCELLANEOUS.
(f) This Distribution Agreement is one of the Transaction
Agreements that are subject to the terms and conditions set forth in the Master
Agreement.
(g) Any obligations incurred or amounts owed under Articles
11, VIII or IX or Section 10.1 or 10.2 of the Original Distribution Agreement
prior to the date hereof shall continue in force until satisfied.
(h) Notwithstanding anything to the contrary set forth in any
Transaction Agreement, LifeScan may assign to the Affiliate that makes the loans
provided for under Article XII all or any portion of its rights and duties under
this Distribution Agreement.
ARTICLE XI
DEVELOPMENT PLAN
11.1 ADDITIONAL LS PRODUCTS. Selfcare shall begin promptly after the
date hereof to develop the products described in Schedule 4.4. The
specifications for each such system set forth in such Schedule shall be subject
to such amendments, modifications and additions as may be requested by LifeScan
from time to time subject to the consent of Selfcare, such consent not to be
unreasonably withheld. Selfcare shall consider in good faith each such
amendment, modification and addition requested by LifeScan. Where Selfcare
concludes that adoption of a particular amendment, modification or addition to a
Specification would have a material likelihood of resulting in a delay in
satisfying the relevant conditions by dates set forth in Section 2.3(b)(i),
Section 4.4 and/or Section 11.2, Selfcare shall notify LifeScan of that and may
decline to adopt such amendment, modification or addition unless or until the
parties shall agree upon a mutually-acceptable extension of such dates to
account for such expected delay.
11.2 MILESTONES. In the event that (i) the Conditions with respect to
Project A shall not have been satisfied by [OMITTED] or (ii) the Conditions with
respect to Project B shall not have been satisfied by [OMITTED] or (iii) the
Conditions with respect to Project C shall not have been satisfied by [OMITTED]
LifeScan may increase the rate of repayment of the Initial Loan and any
Additional Loans by deducting from the invoice price of each LS Strip [OMITTED]
per LS Strip for each such project as to which such conditions shall not have
been satisfied, but any such increased repayment under this Section shall not
exceed [OMITTED] per LS Strip in the aggregate.
Restated Distribution Agreement in Word as executed 32
<PAGE>
ARTICLE XII
CREDIT FACILITY
12.1 INITIAL LOAN.
(a) Upon satisfaction by Selfcare of the conditions described
in paragraph (b) of this Section, LifeScan shall advance to Selfcare or to an
Affiliate designated by Selfcare a loan in the principal amount of Six Million
Two Hundred Fifty Thousand British Pounds Sterling ( 6,250,000 E) (the "Initial
Loan") by wire transfer to the account of Selfcare as follows:
If Selfcare requests that payment be made directly to Selfcare, to:
The Chase Manhattan Bank, New York, New York
ABA #: 021-000-021 Account #: 11463 7164
Account Name: Selfcare, Inc.
Otherwise, payment shall be made to Inverness Medical, Ltd., its Affiliate, to:
The Royal Bank of Scotland
36 St. Andrews Square
Edinburgh EH2 2YI3
Scotland
Account No: 10056783
Sort Code: 83-06-08
Account Name: Inverness Medical, Ltd.
(b) The conditions to the Initial Loan shall be as follows:
(i) the representations and warranties of Selfcare
set forth in Article V of this Distribution Agreement shall be
true and correct on and as of the date of such loan as if made
on such date;
(ii) Selfcare shall have provided to LifeScan a
certificate in the form of Exhibit A from the President and
the Chief Financial Officer of Selfcare dated as of the date
of such loan;
(iii) Selfcare shall have executed and delivered to
LifeScan the Credit Agreement in the form of Exhibit B hereto
and a note in the form of Exhibit C hereto (the "SC Note")
dated the date of such loan.
Restated Distribution Agreement in Word as executed 33
<PAGE>
12.2 ADDITIONAL LOANS.
(a) (i) Within ten days after the receipt by Selfcare of FDA
Clearance with respect to the LS Product that meets the specifications set forth
under the heading "Project A" in Schedule 4.4 (as they may be amended pursuant
to Section 11. 1 above), LifeScan shall advance to Selfcare the amount of
2,031,250 British Pounds Sterling.
(ii) Within ten days after the commencement by
LifeScan of sales in the United States of Commercial
Quantities of an LS Product that meets the specifications set
forth under the heading "Project A" in Schedule 4.4 (as they
may be amended pursuant to Section 11. 1 above) and
satisfaction of the conditions set forth in paragraph (c) of
this Section, LifeScan shall advance to Selfcare the amount of
Two Million Thirty-one Thousand Two Hundred Fifty British
Pounds Sterling (2,0 3 1,2 5 0 f).
(b) (i) Within ten days after the receipt by Selfcare of FDA
Clearance with respect to the LS Product that meets the specifications set forth
under the heading "Project, B" in Schedule 4.4 (as they may be amended pursuant
to Section 11. 1 above), LifeScan shall advance to Selfcare the amount of Two
Million Thirty-one Thousand Two Hundred Fifty British Pounds Sterling (2,031,250
L).
(ii) Within ten days after the commencement by
LifeScan of sales in the United States of Commercial
Quantities of an LS Product that meets the specifications set
forth under the heading "Project B" in Schedule 4.4 (as they
may be amended pursuant to Section 11. 1 above) and
satisfaction of the conditions set forth in paragraph (c) of
this Section, LifeScan shall advance to Selfcare the amount of
Two Million Thirty-one Thousand Two Hundred Fifty British
Pounds Sterling (2,031,250 L).
(c) The conditions to each of the additional loans described
in paragraphs (a) and (b) of this Section shall be as follows:
(i) the representations and warranties of Selfcare
set forth in Article IV of the Master Agreement shall be true
and correct in all material respects on and as of the date of
such additional loan as if made on the date such additional
loan shall be made and there shall not then be in existence a
default, or an event or condition which with notice or the
passage of time or both would constitute a material default,
by Selfcare under any Transaction Agreement;
(ii) Selfcare shall have provided to LifeScan a
certificate in the form of Exhibit A from the President and
the Chief Financial Officer of Selfcare dated as of the date
of such loan; and
Restated Distribution Agreement in Word as executed 34
<PAGE>
(iii) Selfcare shall have executed and delivered to
LifeScan the SC Note.
(d) Each amount advanced pursuant to paragraphs (a), (b) and
(c) above shall be an "Additional Loan" and, collectively, the "Additional
Loans". LifeScan shall provide the amount of each Additional Loan that may be
required to be made under this Section 12.2 by wire transfer to the account of
Selfcare in accordance with the instructions provided under Section 12.1 above
or as otherwise directed in writing by notice of Selfcare to LifeScan.
12.3 USE OF FUNDS.
(a) Selfcare may expend not more than [OMITTED] the proceeds
of the Initial Loan for [OMITTED].
(b) The remaining aggregate proceeds of the Initial Loan and
any additional loans shall be used exclusively in pursuit of the development
program described in Article XI above.
12.4 REPAYMENT OF LOAN.
(a) The aggregate principal amount of the Initial Loan and any
additional loans shall be repaid by deducting 0.0125 British Pounds Sterling
from the invoice price of each LS Strip purchased from Selfcare at and after the
date of such Initial Loan until such Initial Loan and any such additional loans
and all accrued interest have been paid in full. Upon any failure by Selfcare to
make a payment of interest when due, the amount of such interest shall be added
to the principal of such loans and the invoice price of each LS Strip shall be
reduced by an additional 0.0125 British Pounds Sterling until payment of such
interest (and any interest accrued on such amount).
(b) Upon the first to occur of (i) the date of termination of
this Distribution Agreement for any reason, (ii) an Event of Default shall have
occurred under the SC Note, or (iii) the fifth annual anniversary of the date of
this Distribution Agreement, the then-outstanding aggregate principal amount of
the Initial Loan and any Additional Loans, together with any accrued and unpaid
interest thereon, shall be immediately due and payable in cash by wire transfer
to the account of LifeScan provided by notice to Selfcare.
ARTICLE XIII
CONFIDENTIAL INFORMATION
13.1 CONFIDENTIAL INFORMATION. During the term of this Distribution
Agreement, Selfcare shall not disclose to a third party other than LifeScan and
its Affiliates any confidential information or trade secrets of Selfcare or
LifeScan applicable to the design, manufacture, marketing, sale or use of LS
Products or of other products for the measurement
Restated Distribution Agreement in Word as executed 35
<PAGE>
of glucose in humans, if such disclosure is for the purpose of enabling such
third party to make or market any product which Selfcare itself would not be
permitted to make or market under the terms of this Agreement.
IN WITNESS WHEREOF, Selfcare and LifeScan have executed this
Distribution Agreement on the day first above written.
Selfcare, Inc.
By: /s/ Ron Zwanziger
---------------------------------
Name: Ron Zwanziger
Title: CEO
LifeScan, Inc.
By: /s/ Richard J. Wiesner
---------------------------------
Name: Richard J. Wiesner
Title: W W President
Restated Distribution Agreement in Word as executed 36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE PERIOD ENDING JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 14,768,357
<SECURITIES> 0
<RECEIVABLES> 12,482,383
<ALLOWANCES> 2,082,000
<INVENTORY> 13,722,338
<CURRENT-ASSETS> 41,467,951
<PP&E> 14,503,116
<DEPRECIATION> 6,193,362
<TOTAL-ASSETS> 116,644,870
<CURRENT-LIABILITIES> 37,928,161
<BONDS> 50,878,549
3,830,896
13,910,972
<COMMON> 17,936
<OTHER-SE> 9,583,027
<TOTAL-LIABILITY-AND-EQUITY> 116,644,870
<SALES> 55,957,872
<TOTAL-REVENUES> 56,500,463
<CGS> 39,152,344
<TOTAL-COSTS> 20,032,569
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,857,088
<INCOME-PRETAX> (6,689,752)
<INCOME-TAX> 333,621
<INCOME-CONTINUING> (7,023,373)
<DISCONTINUED> 0
<EXTRAORDINARY> (306,092)
<CHANGES> 0
<NET-INCOME> (7,329,465)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
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