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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 00-20871
SELFCARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 04-3164127
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 PROSPECT STREET, WALTHAM, MASSACHUSETTS 02453
(Address of principal executive offices) (Zip Code)
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(781) 647-3900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $0.001 American Stock Exchange
per share par value
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Securities registered pursuant to Section 12(g) of the Act:
___________
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
(persons other than directors, executive officers, and related family entities)
of the registrant based on the closing price of the registrant's stock on the
American Stock Exchange on February 1, 2000 was $105,478,541.
As of March 10, 2000, the Registrant had 20,615,207 shares of common stock,
par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1999 Annual Report to Shareholders which is filed
with the Securities and Exchange Commission as an exhibit hereto and the
definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 2000 are incorporated by reference into
Parts II and III of this Form 10-K.
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PART I
THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES ACT OF 1934. ACTUAL RESULTS OF SELFCARE, INC. AND ITS SUBSIDIARIES
(THE COMPANY OR SELFCARE) COULD MATERIALLY DIFFER FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MAY CAUSE SUCH A DIFFERENCE
INCLUDE, WITHOUT LIMITATION, CHANGES IN PRODUCT DEMAND AND MARKET ACCEPTANCE,
CHANGING ECONOMIC CONDITIONS, RISKS IN PRODUCT AND TECHNOLOGY DEVELOPMENT,
REGULATORY APPROVALS, SIGNIFICANT LITIGATION, THE EFFECT OF THE COMPANY'S
ACCOUNTING POLICIES AND OTHER RISK FACTORS DISCUSSED IN SECTION ENTITLED
"CERTAIN FACTORS AFFECTING FUTURE RESULTS" IN THE COMPANY'S 1999 ANNUAL REPORT
TO SHAREHOLDERS, PORTIONS OF WHICH ARE FILED HEREWITH (EXHIBIT 13.1), AND IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
ITEM 1. BUSINESS.
THE COMPANY
Selfcare, Inc., a Delaware corporation, and its subsidiaries are engaged in
the development, manufacturing and marketing of self-test diagnostic products
for the diabetes, women's health and, to a lesser extent, infectious disease
markets. The Company also markets 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 self-care
diagnostics markets, diabetes management and women's health, in the United
States and Europe.
The Company's history began when it was incorporated in Delaware on
August 25, 1992 and acquired its predecessor company, Superior Sensors, Inc., by
merger on September 15, 1992. In 1995, the Company acquired an equity interest
in Inverness Medical Limited (Inverness), which was formed in 1994 in Scotland,
of which it has since purchased the remaining equity interest. Through their
alliance with LifeScan, Inc. (LifeScan), a subsidiary of Johnson & Johnson, the
Company and Inverness launched their first diabetes management product
FastTake(R), an electrochemical biosensor-based blood glucose monitoring system,
in early 1998. Further, the Company's wholly owned subsidiary, Inverness
Medical, Inc. (IMI), was formed in 1997 for the sole purpose of purchasing and
selling certain acquired consumer products. Since 1997, the Company has grown
substantially through focused marketing, new product development and
organizational growth and its net sales have increased from $50.9 million in
1997 to $125.1 million in 1999.
BUSINESS DEVELOPMENTS IN 1999
During 1999, Inverness, through which the Company manufactures all of its
electrochemical blood glucose strips, completed construction on a major
expansion of its manufacturing and research and development facilities in
Inverness, Scotland. The expansion doubled the plant's size to 103,500 square
feet and increased manufacturing capacity. The construction was financed by
Highlands and Islands Enterprise, a development agency funded by the government
of the United Kingdom.
On January 8, 1999, the Company sold in a private placement 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 to
private investors. The Company raised an aggregate of $7,404,100 in the sale of
these Series C, D and E convertible preferred stock. See Note 18(e) of the
"Notes to Consolidated Financial Statements" included in the Company's 1999
Annual Report to Shareholders (portions of which are filed herewith as Exhibit
13.1).
On January 11, 1999, the Company and the holders of its remaining senior
subordinated convertible notes and warrants (the Convertible Notes and
Convertible Note Warrants, respectively), which were originally issued for gross
proceeds of $10,000,000 in October 1997, agreed to amend the terms of the
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Convertible Notes by changing the maturity date and conversion terms, as well as
canceling the Convertible Note Warrants. Pursuant to the amended terms, the
Company made an immediate payment of $859,049 representing $780,954 of face
value of the 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
canceled Convertible Notes plus a 15% premium. The New Convertible Notes matured
on July 12, 1999, bore interest at 8% and provided for a fixed conversion price
of $2. All of the New Convertible Notes have been converted into shares of the
Company's common stock. See Note 16 of the "Notes to Consolidated Financial
Statements" included in the Company's 1999 Annual Report to Shareholders
(portions of which are filed herewith as Exhibit 13.1).
On January 22, 1999 (Amendment Date), the Company and its remaining
Series B preferred stockholders agreed to amend the terms of the Series B
redeemable preferred stock (Series B Preferred Stock), which were sold for gross
proceeds of $8,000,000 in August 1997. Under the amended terms, the Company
increased, by a one-time 15% premium, the face value of the Series B Preferred
Stock on the Amendment Date. The new conversion ratio for the amended Series B
Preferred Stock is 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 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. Effective January 13,
2000, the Company fixed the conversion price at $2, as the closing bid price per
share had been $3.25 or higher for ten consecutive trading days, as permitted by
the amended terms. All remaining Series B Preferred Stock was converted into
shares of the Company's common stock by early March 2000. See Note 18(d) of the
"Notes to Consolidated Financial Statements" included in the Company's 1999
Annual Report to Shareholders (portions of which are filed herewith as Exhibit
13.1).
On February 8, 1999, the Company reached a settlement of their dispute with
Enviromed plc (Enviromed). The settlement included scheduled loan repayments
from Enviromed to the Company totaling (pound)437,000 (approximately $728,000)
during 1999 and future payments from Enviromed to the Company of up to
(pound)500,000 (approximately $810,000) based upon purchases made by the Company
from an Enviromed subsidiary in excess of certain minimums.
On June 7, 1999, the Company entered into amendments of its product
development and distribution agreements (the Amended Agreements) with LifeScan.
The Amended Agreements set forth the terms and conditions under which the
Company will sell to LifeScan blood glucose monitoring products, including
prices, minimum quantities, exclusivity and other related matters. A full copy
of the Amended Agreements was filed with the SEC as an exhibit to the Company's
Quarterly Report on Form 10-Q for the second quarter of 1999.
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
anticipated increased 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. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 15 of the "Notes to Consolidated
Financial Statements", both of which are included in the Company's 1999 Annual
Report to Shareholders (portions of which are filed herewith as Exhibit 13.1).
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SEGMENTS OF BUSINESS; GEOGRAPHIC AREA
The Company's business is divided into four reportable operating segments:
Diabetes; Women's Health; Clinical Diagnostics; and Other. The Company further
categorizes its sales by major geographic areas of the world. Below are
descriptions of each segment of the Company. Additional information required by
this item is included in Note 21 of "Notes to Consolidated Financial
Statements", which are included in the Company's 1999 Annual Report to
Shareholders (portions of which are filed herewith as Exhibit 13.1).
DIABETES MANAGEMENT
Diabetes management is the largest self-test market for medical diagnostic
products in the world. Over the past twenty years numerous studies have shown
that careful management of blood glucose levels often significantly improves the
health of diabetes patients. Therefore, essential to diabetes management is
accurate measurement of glucose level in the blood stream at regular intervals
during the day. The blood glucose self-test market has grown around the need to
serve diabetes patients with a convenient, fast and accurate means to monitor
blood sugar. The products that serve this market include test systems consisting
of handheld meters and disposable electrode test strips, syringes, lancets and
other disposable items. These products are typically distributed over the
counter at retail drug stores for the self-test market and through distributors
to institutions and managed care organizations.
SYSTEMS. The Company's principal product in the diabetes management
self-test market is an electrochemical biosensor-based blood glucose monitoring
system. LifeScan is the exclusive worldwide distributor of this system and
markets it under the names FastTake, EuroFlash(TM), and PocketScan(TM). The
system consists of a meter and a disposable test strip and incorporates a large,
easy-to-read display to assist visually impaired users. To operate FastTake, the
strip is inserted into the meter, which automatically activates in a standby
mode. The user then places a small blood sample obtained by a finger prick on
the end of the test strip, which senses the size of the necessary sample and
automatically runs the test when the necessary amount of blood is available,
providing results in 15 seconds. Inverness developed the electrochemical
technology for the FastTake test strips and manufactures the test strips at its
facilities in Scotland. A contract manufacturer produces the meters to the
Company's specifications in the United States.
ALTERNATIVE TEST STRIPS. The Company also produces and sells alternative
glucose test strips that are designed to be used in certain meters of other
system manufacturers. The Company is distributing these alternative strips in
Europe through distribution channels established by Selfcare International GmbH
(Selfcare International), the Company's German subsidiary, and in the United
States through Can-Am Care Corporation (Can-Am), a division of the Company's
subsidiary, Inverness Medical, Inc. (IMI).
CAN-AM. Can-Am is the leading supplier of diabetes self-management supplies
sold under store brand labels in the United States. Can-Am distributes a
comprehensive line of diabetes care products, including glucose test strips,
lancets, glucose tablets, syringes and specialty skin creams. Can-Am has no
significant sales outside of North America. Most products are sold under the
private store brand labels of large retail drug chains.
WOMEN'S HEALTH
Women's health is the second largest self-test market for medical diagnostic
products in the United States. In the women's health market, the Company
manufactures and markets home pregnancy detection and ovulation prediction tests
under its IMI label and various private labels. The Company also markets
nutritional supplement products, most of which are targeted primarily at the
women's health market.
PREGNANCY PREDICTION PRODUCTS. The pregnancy self-test kits are marketed in
both stick and cassette versions. The stick version has an exposed wick which
absorbs urine when placed in the urine stream while the cassette version
requires the user to first collect a urine sample in a cup and then utilize an
enclosed
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dropper to place the urine sample in the test well. Both versions employ
identical technology enabling the display of visual results in approximately
three minutes. The majority of pregnancy test kits sold by the Company are
manufactured by the Company's subsidiary, Cambridge Diagnostics Ireland, Ltd.
(Cambridge Diagnostics), in Galway, Ireland and a small quantity is manufactured
by a third party contractor. These test kits are generally sold over the counter
by drug stores and are used by women to test for pregnancy in their own home as
an aid to family planning. The Company believes it is one of the largest
suppliers, measured in total units sold, of pregnancy detection self-test kits
in the United States.
OVULATION PREDICTION PRODUCTS. The Company's ovulation prediction test kit,
marketed as the Early Ovulation Predictor under the IMI and Selfcare brand names
and under private label by various drug store chains and mass merchandisers, is
used by women to test for ovulation in their own home as an aid to family
planning and provides 24 to 48 hour notice of when ovulation is likely to occur.
The early ovulation predictor has an easy-to-use and easily read self-test
cassette that is used by applying a urine sample to the sample well with a
supplied dropper. Clinically accurate results are available in approximately
three minutes. The ovulation prediction test kits are manufactured by Cambridge
Diagnostics in its Galway facilities and a small quantity is manufactured by a
third party contractor. The Company believes it is one of the largest suppliers,
measured in total units sold, of ovulation prediction self-test kits in the
United States.
NUTRITIONAL SUPPLEMENTS. The Company acquired the U.S. rights to a line of
nutritional supplements from American Home Products Corporation in 1997 (the
Nutritional Supplements). These products are marketed by IMI to large drug store
chains and mass market retailers. Included in this product line are
Stresstabs(R) (a B-complex vitamin with folic acid), Stresstabs(R) plus iron,
Ferro-Sequels(R) (an iron supplement) and Posture(R) (a calcium supplement),
which are targeted primarily at the women's health market. Since the Nutritional
Supplements acquisition, the Company has strengthened this line by adding
various products, for example, SoyCare(TM) for Menopause, SoyCare(TM) for Bone
Health, Protegra(R) Cardio and Stresstabs(R) PMS. Many of the ingredients are
formulated at levels at or similar to those documented in scientific studies to
optimize health and nutritional benefits.
CLINICAL DIAGNOSTICS
Orgenics, Ltd. (Orgenics), a wholly owned subsidiary of the Company and an
Israeli limited company, develops, manufactures, and markets self-contained test
kits for the professional market which detect antibodies and infectious agents,
including those associated with AIDS and chlamydia. Orgenics manufactures
professional diagnostic test products based on several proprietary technological
systems including genetic assays, immunoassays, rapid tests and confirmatory
tests using multiple antigens. These tests, or adaptations of them, are
applicable to detecting a wide variety of infectious diseases and agents,
including HIV-1 and HIV-2, hepatitis and chlamydia. Orgenics' products are
designed to enable small-to-medium-sized laboratories to analyze low volumes of
tests economically. Orgenics markets a product called DoubleCheck(TM), a single
sample, compact diagnostic device which, in its first commercialized
application, detects HIV in saliva and blood serum samples in less than ten
minutes, making it suitable for use in physicians' offices and other patient
point-of-care sites. Orgenics' sales offices in Israel, France, Brazil and
Colombia market and distribute its products to professional institutions and
other companies in more than 20 countries, principally in Europe, Latin America,
Africa and Asia.
OTHER
The Company does not conduct any sales activities through its corporate
office in the United States. Revenues and expenses generated by the Company's
corporate office are generally not specifically allocable to the Company's other
reporting segments, diabetes, women's health and clinical diagnostics.
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MARKETING AND SALES
UNITED STATES
DIABETES MANAGEMENT PRODUCTS. All blood glucose measurement systems
manufactured by the Company are marketed through the Company's exclusive
distribution agreement with LifeScan. Can-Am distributes its diabetes care
supplies, including alternative test strips, in the United States under its own
brand and to private label retailers such as Wal-Mart, Rite Aid and Walgreens.
WOMEN'S HEALTH PRODUCTS. The Company markets and distributes its women's
health products, including nutritional supplements, primarily through
independent retail brokers and distributors. The Company markets its
over-the-counter pregnancy and ovulation self-test kits under the IMI label and
a variety of private labels. The Company's sales efforts are currently focused
on large drug, food and mass merchandising retail chains, wholesalers who
service smaller accounts, and internet retailers. The Company currently
contracts with broker agencies geographically distributed across the United
States that represent the Company for these accounts.
INTERNATIONAL
The Company markets and sells its products in several international markets.
In 1999, approximately 17% of the Company's net revenues were to customers in
Europe and 5% of the Company's net sales were to customers in regions other than
North America and Europe.
DIABETES MANAGEMENT PRODUCTS. LifeScan commenced distribution of the
FastTake blood glucose monitoring system in Europe in 1999. The Company also
sells in Europe alternative glucose test strips which are designed to be used in
the meters of other leading manufacturers.
WOMEN'S HEALTH PRODUCTS. Selfcare International markets over-the-counter
women's health self-test kits in Europe through sales offices in Germany and
Belgium.
CLINICAL DIAGNOSTIC PRODUCTS. Orgenics markets self-contained test kits for
the professional market, which detect antibodies and/or infectious agents,
including those associated with AIDS and chlamydia. Orgenics' sales offices in
Israel, France, Brazil and Colombia market and distribute its products to
professional institutions and other companies in more than 20 countries,
principally in Europe, Latin America, Africa and Asia.
MANUFACTURING
The Company has manufacturing facilities in Inverness, Scotland; Galway,
Ireland; and Yavne, Israel.
The Company manufactures exclusively at the Inverness facility in Scotland
the disposable test strips for use with its blood glucose monitoring systems and
certain other competitors' blood glucose monitoring systems. This facility
serves as both manufacturing plant for strip production and research and
development center for electrochemistry technology. Inverness employs 430
full-time employees at its facility, of which 374 are involved in manufacturing.
With the space provided by the completion of a major addition to its facilities
in 1999, the plant has the physical capacity to meet the anticipated production
requirements of the next three years. Can-Am purchases its products from various
manufacturers, including Inverness, and has a supply agreement with A.M.G.
Medical, Inc. in Canada for monolet lancets.
The Company currently manufactures pregnancy self-test products at its
facility in Galway, Ireland, which are then packaged by an independent third
party fulfillment house in the United States. The Company believes that there
are multiple qualified sources for its existing women's health products and for
the materials and components used in the manufacture of its existing products
and, therefore, does not consider it necessary to maintain protected supply
arrangements with any supplier.
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The production facilities of Orgenics are located in Yavne, Israel. Orgenics
manufactures professional diagnostic test products based on several proprietary
technological systems including genetic assays, immunoassays, rapid tests and
confirmatory tests using multiple antigens. These tests, or adaptations of them,
are applicable to detecting a wide variety of infectious diseases and agents,
including HIV-1 and HIV-2, hepatitis and chlamydia.
The Company contracts with third-party manufacturers to produce the
Nutritional Supplements and third-party fulfillment houses to warehouse and ship
the Nutritional Supplements to the Company's customers.
The Company has a manufacturing agreement with a third party electronics
assembler to supply electrochemical blood glucose meters of the Company's
design. These meters, together with the Company's test strips, form the FastTake
blood glucose monitoring system. During 2000, the Company expects to transfer
production of meters to a new contractor located in the Far East. Under terms of
the agreement with the existing supplier, the Company will be required to pay
cancellation fees to that supplier. The Company expects that such fees will be
less than the savings achieved from the transfer of production to the new
supplier.
If the Company should encounter delays or other difficulties in the supply
of any of these products from third parties, these interruptions could have a
material adverse effect on the Company's operations and result in significant
quarter-to-quarter fluctuations. In addition, contract manufacturers that the
Company uses or may use to supply its products in many instances must adhere to
the U.S. Food and Drug Administration's (FDA) Good Manufacturing Practices
(GMPs) regulations which regulate the manufacturing process. Failure to do so
could result in the withdrawal of FDA approval of such manufacturers and
consequent interruptions in the supply of products to the Company.
RESEARCH AND DEVELOPMENT
The Company is focusing its research and development efforts primarily on
the development of its diabetes products, including its electrochemical blood
glucose monitoring system, alternative test strips and non-invasive and
continuous blood glucose measurement technologies. In addition, the Company
devotes a relatively lesser degree of resources to the development of new
products and enhanced features for its lines of women's health and clinical
diagnostic products. Most development activities are carried out by the
Company's research and development departments, which include personnel in
Inverness, Scotland, Waltham, Massachusetts, Galway, Ireland, and Yavne, Israel.
The majority of research personnel are located at Inverness in Scotland, which
employs 41 full-time researchers, including 16 Ph.D.'s. In addition, the Company
employs third party development contractors to supplement the effort and skills
of its own staff.
From time to time, the Company engages in co-development projects with third
parties with respect to new diagnostic products the Company may want to market
in the future. The Company may provide financial development assistance to such
parties and may also utilize its own research and development resources to
design certain portions of such products.
Total research and development expenses for the years ended December 31,
1999, 1998 and 1997 were $6.9 million, $7.4 million and $15.6 million,
respectively. The Company expects that it will spend a significant and
increasing amount on research and development efforts during the year 2000.
PATENTS AND PROPRIETARY TECHNOLOGY; TRADEMARKS
SELF-TEST PRODUCTS
The medical products industry, including the diagnostic testing industry,
places considerable importance on obtaining patent and trade secret protection
for new technologies, products and processes. The
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Company's success will depend, in part, on its ability to obtain patent
protection for its products and manufacturing processes, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties.
The Company holds certain patent rights, has certain patent applications
pending and expects to seek additional patents in the future. However, there can
be no assurance as to its success or timeliness in obtaining any such patents or
as to the breadth or degree of protection that any such patents will afford the
Company. The patent position of medical products and diagnostic testing firms is
often highly uncertain and usually involves complex legal and factual questions.
There is a substantial backlog of patents at the U.S. Patent and Trademark
Office. No consistent policy has emerged regarding the breadth of claims covered
in medical product patents. Accordingly, there can be no assurance that patent
applications relating to the Company's products or technology will result in
patents being issued; that, if issued, such patents will afford adequate
protection to the Company's products; or, if patents are issued to the Company,
that its competitors will not be able to design around such patents. In
addition, the medical products industry, including the diagnostic testing
industry, has been characterized by extensive litigation regarding patents,
licenses and other intellectual property rights. The Company could and has
incurred substantial costs in defending itself against patent infringement
claims and in asserting such claims against others (see "Item 3. Legal
Proceedings"). Under the distribution agreement entered into with LifeScan,
Selfcare has agreed to indemnify LifeScan for any claims that FastTake infringes
any patents. If the outcome of any such litigation is adverse to the Company,
the Company's business could be materially adversely affected.
To determine the priority of inventions, the Company may also have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office, which could also result in substantial costs to the Company.
See "Item 3. Legal Proceedings".
In addition, the Company is sometimes required to obtain licenses to patents
or other proprietary rights of third parties to market its products. No
assurance can be given that licenses required under any such patents or
proprietary rights would be made available on terms acceptable to the Company,
if at all. If the Company does not obtain such licenses, it can encounter delays
in product market introductions while it attempts to design around such patents
or other rights, or be unable to develop, manufacture or sell such products in
certain countries, or at all.
The Company has a number of patents and patent applications covering
relevant portions of its electrochemical technology that is important to its
diabetes business.
The Company also seeks to protect its proprietary technology, including
technology that may not be patented or patentable, in part through
confidentiality agreements and, if applicable, inventors' rights agreements with
its collaborators, advisors, employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise be disclosed to, or discovered by, competitors. Moreover, the Company
may from time to time conduct research through academic advisors and
collaborators who are prohibited by their academic institutions from entering
into confidentiality or inventors' rights agreements.
NUTRITIONAL SUPPLEMENTS
In connection with the acquisition of the Nutritional Supplements, the
Company acquired certain trademarks which, the Company believes, are valuable
assets and are important to the marketing of the Nutritional Supplements.
Substantially all of these trademarks have been registered with the U.S. Patent
and Trademark Office. There can be no assurance, however, that such
registrations will afford adequate protection to the Company and not be
challenged as unenforceable or invalid, or not be infringed. In addition, the
Company could incur substantial costs in defending suits brought against it or
in prosecuting suits, in which the Company asserted rights under such
registrations. If the outcome of such litigation were
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adverse to the Company, the Company's business and results of operations could
be materially adversely affected.
GOVERNMENT REGULATION
SELF-TEST PRODUCTS
The Company's research, development and clinical programs, as well as its
manufacturing and marketing operations, are subject to extensive regulation by
numerous governmental authorities in the United States and other countries. Most
of the Company's self-test products, including those licensed by the Company
from third parties, require governmental approvals for commercialization. New
products may require pre-clinical and clinical trials. Manufacturing and
marketing of many of the Company's products are subject to the rigorous testing
and approval process of the FDA and corresponding foreign regulatory
authorities. The regulatory process, which includes pre-clinical and clinical
testing of many of the Company's products to establish their safety and
effectiveness, can take many years and require the expenditure of substantial
financial and other resources. Data obtained from pre-clinical and clinical
activities are susceptible to varying interpretations that could delay, limit or
prevent regulatory approval. In addition, delays or rejection may be encountered
based upon changes in, or additions to, regulatory policies for device marketing
authorization during the period of product development and regulatory review.
Delays in obtaining such approvals could adversely affect the marketing of
products developed by the Company and the Company's ability to generate
commercial product revenues.
In addition, the Company is required to meet regulatory requirements in
countries outside the United States, which can change rapidly with relatively
short notice, resulting in the Company's products being banned in certain
countries with consequent loss of revenues and income. Foreign regulatory
agencies can also introduce test format changes which, if not quickly addressed
by the Company, can result in restrictions on sales of the Company's products.
Such changes are not uncommon due to advances in basic research and the nature
of certain infectious diseases and agents such as HIV, which is a mutating virus
capable of producing new strains and subtypes. Although it did not cause a
material adverse effect on the Company's sales and income, certain of the
Company's infectious disease diagnostic products were banned or temporarily
banned in France in 1993 and 1999 due to changes in regulatory requirements. As
such, there can be no assurance that there will not be similar actions in the
future.
NUTRITIONAL SUPPLEMENTS
The manufacturing, processing, formulation, packaging, labeling and
advertising of Nutritional Supplements are subject to regulation by one or more
federal agencies, including the FDA, the Federal Trade Commission (FTC) and the
Consumer Product Safety Commission. These activities are also regulated by
various agencies of the states, localities and foreign countries in which
Nutritional Supplements are now sold or may be sold in the future. In
particular, the FDA regulates the safety, manufacturing, labeling and
distribution of dietary supplements, including vitamins, minerals and herbs, as
well as food additives, over-the-counter (OTC) and prescription drugs and
cosmetics. The GMPs promulgated by the FDA are different for food and drug
products. In addition, the FTC has overlapping jurisdiction with the FDA to
regulate the promotion and advertising of dietary supplements, OTC drugs,
cosmetics and foods.
The Dietary Supplement Health and Education Act of 1994 (DSHEA), which
amends the Food, Drug and Cosmetic Act by defining dietary supplements as a new
category of food separate from conventional food, was enacted on October 25,
1994. The FDA has finalized certain regulations to implement DSHEA, including
those relating to nutritional labeling requirements, but has not finalized other
regulations. The finalized regulations require different labeling for the
Nutritional Supplements and, with respect to nutritional supplement products
under development by the Company, impose new notification procedures and
scientific substantiation requirements regarding ingredients, product claims and
safety. The Company cannot determine what effect these regulations will have on
its business in the future. Failure to comply
8
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with applicable FDA requirements could result in sanctions being imposed on the
Company or the manufacturers of its products, including warning letters, product
recalls and seizures, injunctions or criminal prosecution. With respect to
regulations that have not been finalized, the Company anticipates that the FDA
will promulgate specific GMPs to regulate dietary supplements which are modeled
on the current GMPs for food. The Company believes that the manufacture of the
Nutritional Supplements is currently in compliance with the proposed GMPs for
dietary supplements. No assurance can be given that the final GMPs for dietary
supplements will not change in ways that require changes in the manufacture of
the Nutritional Supplements.
THIRD-PARTY REIMBURSEMENT
In both the United States and elsewhere, sales of some of the Company's
products may be dependent in part on the availability of reimbursement from
third-party payors, such as government and private insurance plans. Third-party
payors are increasingly challenging the prices charged for medical products and
services. If the Company succeeds in bringing one or more of such products to
the market, there can be no assurance that these products will be considered
cost-effective, that reimbursement will be available or, if available, that the
level of reimbursement will be sufficient to allow the Company to sell these
products on a profitable basis.
PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE
The testing, manufacturing and marketing of medical diagnostic devices, such
as the Company's blood glucose monitoring systems, entail an inherent risk of
product liability claims. In addition, the marketing of the Nutritional
Supplements may cause the Company to be subjected to various product liability
claims, including, among others, claims that the Nutritional Supplements have
inadequate warnings concerning side effects and interactions with other
substances. Potential product liability claims may exceed the amount of the
Company's insurance coverage or may be excluded from coverage under the terms of
the policy. There can be no assurance that the Company's existing insurance can
be renewed at a cost and level of coverage comparable to that presently in
effect, if at all. In the event that the Company is held liable for a claim,
against which it is not indemnified or for damages exceeding the limits of its
insurance coverage, such claim could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE
SELF-TEST PRODUCTS
The medical products industry, including the diagnostic testing industry, is
rapidly evolving and developments are expected to continue at a rapid pace.
Competition in this industry is intense and expected to increase as new products
and technologies become available and new competitors enter the market. The
Company's competitors in the United States and abroad are numerous and include,
among others, diagnostic testing and medical products companies, universities
and other research institutions. The Company's success depends, in part, upon
developing and maintaining a competitive position in the development of products
and technologies in its area of focus. The Company's competitors may succeed in
developing technologies and products that are more effective than those that
have been or are being developed by the Company or that render the Company's
technologies or products obsolete or noncompetitive. The Company's competitors
may also succeed in obtaining patent protection or other intellectual property
rights that would prevent the Company from developing its potential products, or
in obtaining regulatory approval for the commercialization of their products
more rapidly or effectively than the Company. Finally, many of the Company's
existing or potential competitors have or may have substantially greater
research and development capabilities, clinical, manufacturing, regulatory and
marketing experience and financial and managerial resources than the Company.
9
<PAGE>
In the women's health market, the Company believes that it has developed a
significant market penetration with its private label and branded pregnancy and
ovulation tests. The Company believes that it can continue to compete
effectively in the women's health market based on its planned product line
expansions, supported by its research and development capabilities, its advanced
manufacturing expertise and its established distribution force.
The Company markets alternative test strips that are compatible with other
manufacturers' electrochemical blood glucose monitoring systems. If the Company
succeeds in the alternative strip market, others may attempt to enter this
market with similar products. In addition, the introduction of lower-priced
alternative test strips could lead the manufacturers of the systems, with which
such test strips are compatible, to lower their own test strip prices, thereby
reducing or eliminating the price advantage.
The Company is also aware of several of its competitors who are attempting
to develop a noninvasive blood glucose monitoring technology. Noninvasive blood
glucose monitoring involves methods for measuring blood glucose levels without
the need to draw blood and, in certain proposed configurations, without the need
to utilize disposable components, such as test strips. The Company and several
other manufacturers are pursuing a number of different technological approaches
to noninvasive blood glucose monitoring. These include near-infrared
spectroscopy, which involves shining a beam of near-infrared light to penetrate
the skin and determine the amount of glucose in the blood, and reverse
iontophoresis, which utilizes a "patch" system to extract glucose through the
skin for measurement by an external meter. In addition, several manufacturers
are pursuing minimally invasive approaches to blood glucose monitoring, such as
using a fine needle to withdraw a small sample of interstitial fluid which is
analyzed by use of mid-infrared spectroscopy. The development and successful
introduction of any such products by the Company's competitors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
NUTRITIONAL SUPPLEMENTS
The market for the sale of vitamins and nutritional supplements such as the
Nutritional Supplements is highly competitive. Competition is based principally
upon price, quality of products, customer service and marketing support. There
are numerous companies in the vitamin and nutritional supplement industry
selling products to retailers such as mass merchandisers, drug store chains,
independent drug stores, supermarkets and health food stores. A number of these
companies, particularly manufacturers of nationally advertised brand name
products, are substantially larger than the Company and have greater financial
resources. They could lower prices creating a price war, in which the Company
could only survive a short period of time before encountering adverse effects on
its business, financial conditions and results of operations.
ORGENICS INFECTIOUS DISEASE PRODUCTS
The primary competitors of Orgenics' ImmunoComb line of products are
standard, enzyme-linked immunoabsorbent assay (ELISA) systems such as those
produced by Organon, Inc., Pasteur Sanofi Diagnostics, Abbott, Roche and other
diagnostic tests produced by Abbott and Ortho Diagnostic Systems, Inc. ELISA
tests are generally used by high-volume batch processors such as blood banks and
other centralized laboratories. In addition, there are other rapid testing
systems, generally for HIV, based upon immunoconcentration, which can provide
results in five to ten minutes. In contrast to ImmunoComb, an immunoassay-based
test which can be used to test simultaneously multiple samples for multiple
analytes, the immunoconcentration systems are single sample and mostly single
analyte systems. The Company believes that other characteristics of the
immunoconcentration systems are that: (i) the single sample presentation results
in production costs per test that are two to three times more expensive than
those of ImmunoComb, and (ii) the procedure for each immunoconcentration test
limits the number of tests that can be processed at one time resulting in less
flexibility in the number of samples that can be processed at
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one time. The Company believes that Orgenics' DoubleCheck HIV test is
competitive with single analyte immunoconcentration tests in speed, but will
offer greater sensitivity at a lower cost.
EMPLOYEES
As of December 31, 1999, the Company and its subsidiaries had a total of 704
full-time employees, of which 45 employees are located in the United States. In
addition, the Company utilizes the services of a number of consultants
specializing in research and development in the Company's targeted markets,
regulatory compliance, strategic planning, marketing and legal matters.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal corporate administrative offices are housed in
10,000 square feet of leased space in Waltham, Massachusetts. The lease for this
facility expires on December 31, 2001 and monthly rent is $8,333. Six month
notification is required by either party for termination of the leasehold. The
Company also leases facilities in Brussels, Belgium for a marketing and sales
office and for warehousing, and in Munich, Germany for offices and warehouse
space. The lease for the Company's facility in Belgium covers 262 square feet of
space, provides for monthly rent of $670, expires on September 30, 2003 and is
terminable on six months notice every three years. The lease for the Company's
facility in Germany covers 1,247 square feet of space, provides for rent of
$6,200 per month through June 15, 2000 and $4,300 per month thereafter through
May 20, 2007. The Company believes that these facilities are adequate for its
operations in the foreseeable future.
The Company owns manufacturing operations in Scotland, Ireland and Israel.
The Inverness, Scotland facility consists of 103,500 square feet and includes
areas for manufacturing, warehousing, research and development, and
administrative offices. The Company currently manufactures FastTake strips and
alternative blood glucose strips at the Inverness facility. The Inverness
facility lease expires in 2019, with an option to purchase at the higher of the
open market value of the premises or approximately $8,884,000. Annual rent of
the Inverness facility amounts to approximately $1,131,000. Cambridge
Diagnostics operates a 40,000 square foot facility located in Galway, Ireland,
half of which is owned by the Company and half of which is leased from a private
developer under a lease that expires in 2026. The Galway facility houses the
manufacturing, warehousing and research and development of pregnancy and
ovulation testing products. Aggregate annual mortgage and rent payments of the
Galway facility amount to approximately $232,000.
The FDA regulates companies that manufacture commercial medical devices and
requires that such companies manufacture such devices in a properly designed
environment. Both the Inverness and Galway facilities are designed and
constructed to comply with the FDA's regulations and requirements necessary for
approvals and commercial sales within the United States. The Company, as
required by the FDA, has registered both of these facilities, ensuring that they
are in compliance prior to commercial sales in the United States. Each
registered facility is required to submit to an FDA inspection no less
frequently than every two years. The facility in Galway has maintained ISO 9002
certification since August 1996 and the Inverness facility has maintained ISO
9001 certification since May 1998.
Orgenics houses its executive offices and development and manufacturing
operations in a leased facility of approximately 10,000 square feet in Yavne,
Israel. The lease for this facility expires in 2006 and carries rent of
approximately $25,000 per month. The facility includes a number of specialized
features and equipment, including environmentally controlled areas, customized
production equipment, and computerized systems for purchasing, inventory and
materials tracking. Orgenics also maintains small sales offices in Paris,
France, Sao Paulo, Brazil, and Bogota, Columbia. The lease for the Paris office
runs through 2006 and carries monthly rent of approximately $6,000, which is
linked to the French building cost index. The lease for the Sao Paulo office is
for one year with monthly rent of approximately $2,000 and an option for another
year. The lease for the Bogota office is for one year with monthly rent of
approximately $1,000
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with a non-limited option to renew. The Company believes the existing facilities
are adequate for Orgenics' operations in the foreseeable future.
The Company has insurance coverage for the properties and equipment that it
owns or houses.
ITEM 3. LEGAL PROCEEDINGS.
ABBOTT LABORATORIES AND ABBOTT LABORATORIES, LIMITED V. LIFESCAN CANADA LTD.,
LIFESCAN, INC. AND SELFCARE, INC.
On November 23, 1999, Abbott Laboratories and Abbott Laboratories, Limited
(Abbott) commenced a lawsuit against the Company, LifeScan Canada Ltd. (LifeScan
Canada) and LifeScan in the Canadian Federal Court, Trial Division, Court No.
T-2061-99. The Statement of Claim alleges that LifeScan Canada sells electrode
strips for use in the FastTake blood glucose monitoring system supplied by
Selfcare to LifeScan. It is also alleged that the sale of such electrode strips
in Canada infringes Canadian Patent No. 1,226,036 issued to Genetics
International, Inc., an alleged predecessor in title of Abbott. Abbott is
seeking an injunction against the manufacture, importing, offering for sale and
selling of FastTake electrode strips in Canada, as well as damages or the
profits of the defendants arising from the sales of such electrode strips in
Canada. In its Statement of Defense and Counterclaim, Selfcare denies
infringement and attacks the validity of the patent on a number of grounds.
Abbott has not filed a defense to Selfcare's Counterclaim, and the parties have
not yet commenced documentary discovery. At this stage of the litigation, it is
not possible to predict the outcome of the action. A final ruling adverse to
Selfcare could involve Selfcare being prevented from selling its FastTake
electrode strips in Canada and could include Selfcare paying to Abbott either an
amount equal to the profit generated from all sales of FastTake electrode strips
in Canada or Abbott's damages.
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 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...".
Discovery in the case is continuing. 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 manufactured 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
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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 PBM-Selfcare LLC (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.
ABBOTT LABORATORIES ET ANOTHER V. CORBRIDGE GROUP PTY LTD AND SELFCARE PTY LTD.
In November 1999, Abbott commenced a lawsuit against the Company's
Australian subsidiary, Selfcare Pty Ltd. and Corbridge, its Australian
distributor, in the Federal Court of Australia. The complaint alleges that the
Selfcare(R) ET disposable test strips (ET Test Strips) supplied by the Company
to Corbridge infringe Australian Patent No. 572,138 (the Test Strip Patent)
issued to Abbott's predecessor in title on May 5, 1988 (and assigned to Abbott
only a few weeks prior to commencement of the proceedings). These test strips
are marketed in Australia solely for use with a sensor device manufactured and
marketed by Abbott's Australian subsidiary. Abbott is seeking damages and an
injunction against supply of the test strips in Australia. Abbott also sought to
enjoin the defendants from the importation and supply of these blood glucose
test strips in Australia during the pendency of the infringement litigation. On
November 29, 1999, the court denied Abbott's motion for a preliminary injunction
and on December 17, 1999, ordered an unusually fast track preparation for a
final trial to be held from April 26 to May 5, 2000 inclusive in Sydney,
Australia.
It is unlikely that any ruling against the Australian defendants could have
an adverse impact on the Company's sales, operations or financial performance
elsewhere in the world, and based on a review of the Abbott claims by Australian
counsel, the Company believes that the ET Test Strips do not infringe the Test
Strip Patent and that Abbott's claims will be dismissed. Furthermore, the
Australian defendants have counter claimed against Abbott seeking revocation of
the Test Strip Patent as well as damages and injunctive relief for breaches of
Australian antitrust law and misleading conduct prohibitions. The Company
believes that its counter claims have good prospects of success and that, under
Australian law, Abbott will be required to pay a large portion of the
defendants' legal costs incurred in the proceedings.
BAYER CORPORATION V. SELFCARE, INC., INVERNESS MEDICAL, INC. AND CAN-AM CARE
CORPORATION
On January 18, 2000, Bayer Corporation (Bayer) filed suit (Case No:
00CV0040) in the United States District Court for the Northern District of
Indiana (District Court) alleges claims in trademark infringement, trade dress
infringement and unfair competition arising out of the Company's marketing in
late 1999 of its new Excel GE blood glucose test strips intended for use with
Bayer's Glucometer Elite(R) meters. Bayer seeks an injunction which would
require the Company to change the packaging of its Excel GE product and also
seeks damages, costs and attorneys' fees. The District Court has set a hearing
on the injunction for late April 2000. The Company denies all of the claims and
has instructed counsel to vigorously defend the action. The Company does not
believe that an adverse outcome would have a
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material impact on the Company's sales, operations or financial performance and
expects to be able to resolve the matter through a negotiated settlement.
BECTON, DICKINSON AND COMPANY V. SELFCARE, INC. ET. AL.
On January 3, 2000, Becton, Dickinson and Company (Becton Dickinson) filed
suit against the Company in U.S. District Court for the District of Delaware
alleging that certain pregnancy and ovulation test kits sold by the Company
infringe U.S. Patent Nos. 4,703,017 and 5,591,645. A complaint has not yet been
served. The Company is engaging in discussions with Becton Dickinson to resolve
the matter amicably and does not believe that this matter will have a material
adverse impact on the Company's sales, operations or financial performance.
CAMBRIDGE BIOTECH CORPORATION AND CAMBRIDGE AFFILIATE CORPORATION V. RON
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, Cambridge Diagnostics, 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 Cambridge Diagnostics 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, Cambridge Diagnostics,
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 and the case is currently inactive. The Company
believes that CBC's complaint against the Company, Mr. Zwanziger, and Cambridge
Diagnostics 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 Cambridge Diagnostics'
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.
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 its sales, operations or
financial performance.
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MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. V. SELFCARE, INC., INVERNESS MEDICAL,
INC. AND CAN-AM CARE CORPORATION
On March 2, 2000, Matsushita Electric Industrial Co., Ltd. (Matsushita)
filed suit (Case Number 00-143) in the United States District Court for the
District of Delaware against the Company and two of its subsidiaries. The
complaint alleges patent infringement of a patent used in connection with the
manufacture and distribution of the Company's Excel GE test strips for use with
the Bayer Glucometer Elite(R) meter. The Company intends to defend the action
vigorously. 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 Matsushita patent by the Company's outside patent
counsel, the Company believes that its Excel GE test strips do not infringe the
Matsushita Patent and that Matsushita's claims will be proven to be without
merit.
SOLA WUNMI ENTERPRISES, LTD. V. ORGENICS, S.A. (FRANCE) AND ORGENICS, LTD.
(ISRAEL)
In late fall 1999, Sola Wunmi Enterprises, Ltd., a Nigerian corporation,
filed litigation in France against the Company's subsidiaries, Orgenics, S.A.
and Orgenics, Ltd. claiming damages for the breach of an alleged exclusive
distribution agreement for the supply of HIV test kits in Nigeria. The Company
believes that the claim is without merit, and, based on pre-litigation
discussions with the claimant, the Company believes that the case can be
resolved for an amount which will not have a material adverse impact on the
Company's sales, operations or financial performance.
Because of the nature of the Company's business, the Company at any
particular time may be subject to consumer product claims or be a defendant in
various other lawsuits arising in the ordinary course of its business, including
employment matters, and expects that this will continue to be the case in the
future. These lawsuits generally seek damages, sometimes in substantial amounts,
for personal injuries or other commercial or employment 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock (Common Stock) is traded on the American Stock
Exchange (AMEX) under the symbol "SLF". The following table sets forth, for the
periods indicated, the high and low closing prices of the Common Stock on AMEX.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Year ended December 31, 1999--
1st Quarter................................................. $ 5.5000 $2.0000
2nd Quarter................................................. $ 4.9375 $2.8750
3rd Quarter................................................. $ 3.5625 $2.3750
4th Quarter................................................. $ 4.3125 $2.5625
Year ended December 31, 1998--
1st Quarter................................................. $11.1250 $8.6250
2nd Quarter................................................. $11.6875 $9.2500
3rd Quarter................................................. $ 9.7500 $3.3750
4th Quarter................................................. $ 3.8125 $1.6250
</TABLE>
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<PAGE>
On March 10, 2000, there were 304 holders of record of the Company's Common
Stock. The closing price of the Company's Common Stock on March 10, 2000 was
$8.5625.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends on Common Stock in
the foreseeable future. Payment of future dividends, if any, on the Common Stock
will be at the discretion of the Company's Board of Directors after taking into
account various factors, including the Company's financial condition, operating
results, current and anticipated cash needs and plans for expansion.
RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued unregistered securities to a limited number of
persons, as described in the Quarterly Reports on Form 10-Q filed by the Company
during 1999. The Company did not issue any unregistered securities during the
fourth quarter of 1999. No underwriters or underwriting discounts or commissions
were involved. There was no public offering in any such transaction and the
Company believes that each transaction was exempt from the registration
requirements of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the caption "Selected Financial Data"
included in the Company's 1999 Annual Report to Shareholders (portions of which
are filed herewith as Exhibit 13.1) is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in the
Company's 1999 Annual Report to Shareholders (portions of which are filed
herewith as Exhibit 13.1) is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The information set forth under the subcaption "Quantitative and Qualitative
Disclosures about Market Risks" contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's 1999 Annual Report to Shareholders (portions of which
are filed herewith as Exhibit 13.1) is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company and its subsidiaries
included in the Company's 1999 Annual Report to Shareholders (portions of which
are filed herewith as Exhibit 13.1) are incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding directors, executive officers and significant
employees of the Company included in the Company's definitive Proxy Statement to
be filed pursuant to Regulation 14A in connection with its 2000 Annual Meeting
of Shareholders (the Proxy Statement) is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information regarding executive compensation included in the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information regarding security ownership of certain beneficial owners
and management included in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information regarding certain relationships and related transactions
included in the Proxy Statement is incorporated herein by reference.
17
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The response to this portion of Item 14 is set forth under Item 8.
2. Financial Statement Schedules.
None.
3. Exhibits (* documents filed herewith; + confidential treatment
requested).
<TABLE>
<CAPTION>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
3.2 Amended and Restated By-laws (incorporated by reference to
Exhibit 3.2 to the Company's registration statement on Form
SB-2, No. 333-4830-NY)
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation as filed with the Secretary of State of the
State of Delaware May 20, 1999 (incorporated by reference to
Exhibit 4.1 to Report on Form 8-K dated May 20, 1999)
4.1 Specimen certificate for shares of Common Stock, par value
$0.001 per share, of the Company (incorporated by reference
to Exhibit 4.1 to the Company's Registration statement on
Form SB-2, No. 333-4830-NY)
4.2 Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock as filed with the
Secretary of State of the State of Delaware January 8, 1999
(incorporated by reference to Exhibit 4.1 to Current Report
on Form 8-K dated January 19, 1999)
4.3 Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock as filed with the
Secretary of State of the State of Delaware January 8, 1999
(incorporated by reference to Exhibit 4.1 to Current Report
on Form 8-K dated January 19, 1999)
4.4 Certificate of Designations, Preferences and Rights of
Series E Convertible Preferred Stock as filed with the
Secretary of State of the State of Delaware January 8, 1999
(incorporated by reference to Exhibit 4.1 to Current Report
on Form 8-K dated January 19, 1999)
9.1 Voting Agreement, dated May 13, 1996, by and among the
stockholders of Selfcare, Inc. who are signatories thereto
(incorporated by reference to Exhibit 9.1 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.1 Amended and Restated Master Agreement, dated as of June 7,
1999, by and among Johnson & Johnson Development
Corporation, LifeScan, Inc. and Selfcare, Inc. (incorporated
by reference to Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1999)
10.2 Amended and Restated Sales Distribution Agreement for
Testing System for Glucose in Humans, dated as of June 7,
1999, between LifeScan, Inc. and Selfcare, Inc.
(incorporated by reference to Exhibit 10.2 to the Company's
quarterly report on Form 10-Q for the quarter ended June 30,
1999)
10.3 Investment Agreement, dated as of November 10, 1995, by and
between Johnson & Johnson and Selfcare, Inc. (incorporated
by reference to Exhibit 10.4 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
</TABLE>
18
<PAGE>
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10.4 Master Agreement, dated as of November 30, 1994, among
Selfcare, Inc., Cambridge Biotech Limited (Cambridge
Diagnostics Ireland Limited) and Cambridge Biotech
Corporation (incorporated by reference to Exhibit 10.5 to
the Company's registration statement on Form SB-2, No.
333-4830-NY)
10.5 Sale and Subscription Agreement, dated as of November 30,
1994, between Cambridge Biotech Limited (Cambridge
Diagnostics Ireland Limited), Cambridge Biotech Corporation
and Selfcare, Inc. (incorporated by reference to Exhibit
10.6 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.6 Indemnification Agreement dated as of November 30, 1994, by
and between, Cambridge Biotech Corporation and Cambridge
Biotech Limited (Cambridge Diagnostics Ireland Limited)
(incorporated by reference to Exhibit 10.7 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.7 Shareholders' Agreement, dated November 30, 1994, by and
among Selfcare, Inc., Cambridge Biotech Corporation and
Cambridge Biotech Affiliated Corporation (Cambridge
Affiliate Corporation) (incorporated by reference to Exhibit
10.14 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.8 Management Agreement, dated November 30, 1994, between
Cambridge Biotech Affiliated Corporation (Cambridge
Affiliate Corporation) and Cambridge Biotech Limited
(Cambridge Diagnostics Ireland Limited) (incorporated by
reference to Exhibit 10.15 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.9 Manufacturing Agreement, dated November 30, 1994, between
Cambridge Biotech Affiliated Corporation (Cambridge
Affiliate Corporation) and Cambridge Biotech Limited
(Cambridge Diagnostics Ireland Limited) (incorporated by
reference to Exhibit 10.16 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.10 Sales Agent Agreement, dated November 30, 1994, between
Cambridge Biotech Affiliated Corporation (Cambridge
Affiliate Corporation) and Cambridge Biotech Limited
(Cambridge Diagnostics Ireland Limited) (incorporated by
reference to Exhibit 10.17 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.11 Stock Purchase Agreement, dated as of March 8, 1994, among
Selfcare, Inc., Ron Zwanziger and Enviromed plc
(incorporated by reference to Exhibit 10.18 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.12 Guarantee of Selfcare, Inc., dated June 11, 1995, in favor
of Highlands and Islands Enterprises (incorporated by
reference to Exhibit 10.24 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.13 Guarantee of Selfcare, Inc., dated June 11, 1995, in favor
of Inverness and Nairn Enterprise Company (incorporated by
reference to Exhibit 10.25 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.14 Investment and Loan Agreement, dated December 24, 1995, by
and between Orgenics Ltd. and Selfcare, Inc. (incorporated
by reference to Exhibit 10.26 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.15 Form of Option Agreement by and between Selfcare, Inc. and
stockholders of Orgenics, Ltd. and Orgenics International
Holdings, B.V., together with letter amendment thereto dated
July 11, 1996 (incorporated by reference to Exhibit 10.27 to
the Company's registration statement on Form SB-2, No.
333-4830-NY)
</TABLE>
19
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10.16 Grant Agreement, dated February 21, 1992, among The
Industrial Development Authority of Ireland, Cambridge
Biotech Limited (Cambridge Diagnostics Ireland Limited) and
Cambridge Biotech Corporation (incorporated by reference to
Exhibit 10.28 to the Company's registration statement on
Form SB-2, No. 333-4830-NY)
10.17 Grant Agreement, dated October 2, 1992, among The Industrial
Development Authority of Ireland, Cambridge Biotech Limited
(Cambridge Diagnostics Ireland Limited) and Cambridge
Biotech Corporation (incorporated by reference to Exhibit
10.29 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.18 Grant Agreement, dated December 5, 1995, among The
Industrial Development Authority of Ireland, Cambridge
Biotech Limited (Cambridge Diagnostics Ireland Limited) and
Cambridge Biotech Corporation (incorporated by reference to
Exhibit 10.30 to the Company's registration statement on
Form SB-2, No. 333-4830-NY)
10.19 Employment Agreement, dated October 15, 1991, between
Superior Sensors, Inc. (Selfcare, Inc.) and Kenneth D. Legg,
Ph.D. (incorporated by reference to Exhibit 10.31 to the
Company's registration statement on Form SB-2, No.
333-4830-NY)
10.20 Employment Agreement, dated November 13, 1994, between
Selfcare International GmbH and Otto Wahl (incorporated by
reference to Exhibit 10.33 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.21 Selfcare, Inc. 1992 Stock Plan (incorporated by reference to
Exhibit 10.34 to the Company's registration statement on
Form SB-2, No. 333-4830-NY)
10.22 Selfcare, Inc. 1994 Incentive and Non-qualified Stock Option
Plan (incorporated by reference to Exhibit 10.35 to the
Company's registration statement on Form SB-2, No.
333-4830-NY)
10.23 Selfcare, Inc. Amended and Restated 1996 Stock Option and
Grant Plan (incorporated by reference to Exhibit 4.1 to the
Company's registration statement on Form S-8, No. 333-15583)
*10.24 First Amendment to the Selfcare, Inc. Amended and Restated
1996 Stock Option and Grant Plan dated May 20, 1999
10.25 Selfcare, Inc. Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.37 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.26 Standard form Commercial Lease, dated July 15, 1992, between
Superior Sensors, Inc. (Selfcare, Inc.) and Nova Realty
Associates (incorporated by reference to Exhibit 10.38 to
the Company's registration statement on Form SB-2, No.
333-4830-NY)
*10.27 First Amendment to Lease Agreement between Selfcare, Inc.
(formerly, Superior Sensors, Inc.) and Nova Realty
Associates dated August 9, 1999
10.28 Form of lease between Highlands and Islands Enterprises and
Hebocraft Limited (Inverness Medical Limited) (incorporated
by reference to Exhibit 10.40 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.29 Lease for Selfcare, Inc.'s facility in Brussels, Belgium
(incorporated by reference to Exhibit 10.42 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
10.30 Lease for Selfcare International GmbH's facility in Munich,
Germany (incorporated by reference to Exhibit 10.43 to the
Company's registration statement on Form SB-2, No.
333-4830-NY)
</TABLE>
20
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10.31 Joint Venture Agreement, dated March 8, 1994, between
Enviromed plc. and Selfcare, Inc. (incorporated by reference
to Exhibit 10.41 to the Company's registration statement on
Form SB-2, No. 333-4830-NY)
10.32 Manufacturing Agreement, dated June 3, 1996, between Nova
Biomedical Corporation and Selfcare, Inc. (incorporated by
reference to Exhibit 10.45 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
10.33 Form of Cambridge Diagnostics Warrants, together with
schedule of warrantholders (incorporated by reference to
Exhibit 10.47 to the Company's registration statement on
Form SB-2, No. 333-4830-NY)
10.34 Agreement between Inverness Medical Limited (formerly,
Hebocraft Limited) and Highlands and Islands Enterprise,
dated May 31, 1995 (incorporated by reference to Exhibit
10.47 to the Company's registration statement on Form SB-2,
No. 333-4830-NY)
10.35 Agreement between Inverness Medical Limited (formerly,
Hebocraft Limited) and Inverness & Nairn Local Enterprise
Company, dated May 31, 1995 (incorporated by reference to
Exhibit 10.48 to the Company's registration statement on
Form SB-2, No. 333-4830-NY)
10.36 Supply Agreement dated August 27, 1996, by and between
Selfcare, Inc., Selfcare International GmbH and A. Menarini
Industrie Parmaceutiche Riunite S.r.L. (incorporated by
reference to Exhibit 10.50 to the Company's quarterly report
on Form 10-QSB for the period ended September 30, 1996)
10.37 Asset Purchase Agreement dated as of January 14, 1997, by
and between American Home Products Corporation, American
Cyanamid Company, A.H. Robbins Company, Incorporated and
Selfcare, Inc. and Selfcare Acquisition Corp. with certain
exhibits (incorporated by reference to Exhibit 10.53 to the
Company's registration statement on Form SB-2, No.
333-19911)
10.38 Agreement between EN PLC Limited Partnership and Selfcare,
Inc. dated October 17, 1996, together with an amendment
thereto dated as of January 1, 1997 (incorporated by
reference to Exhibit 10.54 to the Company's registration
statement on Form SB-2, No. 333-19911)
10.39 Securities Purchase Agreement, dated as of October 27, 1997,
by and between Selfcare, Inc., Elliott Associates, L.P. and
Westgate International, L.P. (incorporated by reference to
Exhibit 99.5 to Selfcare, Inc.'s 10-QSB for the quarter
ending September 30, 1997)
10.40 Registration Rights Agreement, dated as of October 27, 1997,
by and between Selfcare, Inc., Elliott Associates, L.P. and
Westgate International, L.P. (incorporated by reference to
Exhibit 99.5 to Selfcare, Inc.'s 10-QSB for the quarter
ending September 30, 1997)
10.41 Form of Senior Subordinated Convertible Note due October 28,
2002 (incorporated by reference to Exhibit 99.7 to Selfcare,
Inc.'s 10-QSB for the quarter ending September 30, 1997)
10.42 Form of Common Stock Purchase Warrant Certificate, dated as
of October 27, 1997 (incorporated by reference to Exhibit
99.8 to Selfcare, Inc.'s 10-QSB for the quarter ended
September 30, 1997)
10.43 Registration Rights Agreement dated August 26, 1997, by and
among the Company and Capital Ventures International, CC
Investments LDC, and Proprietary Convertible Investments
Group, Inc. (incorporated by reference to Exhibit 99.1 to
Selfcare Inc.'s registration statement on Form S-3, file no.
333-37961)
</TABLE>
21
<PAGE>
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10.44 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock of Selfcare, Inc.
(incorporated by reference to Exhibit 99.1 to Selfcare
Inc.'s registration statement on Form S-3, file no. 333-
37961)
10.45 Securities Purchase Agreement, dated August 26, 1997, by and
among the Company and Capital Ventures International, CC
Investments LDC, and Proprietary Convertible Investments
Group, Inc. (incorporated by reference to Exhibit 99.1 to
Selfcare Inc.'s registration statement on Form S-3, file no.
333-37961)
10.46 Form of Warrant to Purchase Shares of Common Stock of the
Company issued to Capital Ventures International, CC
Investments LDC and Proprietary Convertible Investments
Group, Inc. (incorporated by reference to Exhibit 99.1 to
Selfcare Inc.'s registration statement on Form S-3, file no.
333-37961)
+10.47 Form of Amendment to Agreement between Selfcare, Inc. and
Princeton BioMeditech Corporation dated August 6, 1997
(incorporated by reference to the Company's report on Form
10-QSB for the period ending September, 30, 1997)
10.48 Form of Stock Purchase Agreement dated February 18, 1998, by
and among Can-Am Care Corporation, Selfcare, Inc., Selfcare
Consumer Products, Inc. (Inverness Medical, Inc.) and the
stockholders of Can-Am Care Corporation (incorporated by
reference to Exhibit 2.1 to the Company's report on Form 8-K
dated February 18, 1998)
10.49 Form of Supply Agreement dated as of February 18, 1998, made
by and between A.M.G. Medical Inc. and Can-Am Care
Corporation (incorporated by reference to Exhibit 10.74 to
Selfcare, Inc.'s Form 10-KSB for the year ended December 31,
1997)
10.50 Form of Management Services Agreement dated February 18,
1998, made by and between A.M.G. Medical Inc. and Can-Am
Care Corporation (incorporated by reference to Exhibit 10.75
to Selfcare, Inc.'s Form 10-KSB for the year ended December
31, 1997)
10.51 Form of Employment Agreement dated February 18, 1998, made
by and between Selfcare Consumer Products, Inc. (Inverness
Medical, Inc.), Selfcare, Inc., and Herbert Cover
Corporation (incorporated by reference to Exhibit 10.76 to
Selfcare, Inc.'s Form 10-KSB for the year ended December 31,
1997)
10.52 From of Employment Agreement dated February 18, 1998, made
by and between Selfcare Consumer Products, Inc. (Inverness
Medical, Inc.), Selfcare, Inc., and Robert Oringer
(incorporated by reference to Exhibit 10.77 to Selfcare,
Inc.'s Form 10-KSB for the year ended December 31, 1997)
10.53 Form of 6% Non-Negotiable Promissory Note, principal amount
$500,000, dated February 18, 1998, between Selfcare, Inc.
and Robert Oringer (incorporated by reference to Exhibit
10.78 to Selfcare, Inc.'s Form 10-KSB for the year ended
December 31, 1997)
10.54 Form of 6% Non-Negotiable Promissory Note, principal amount
$500,000, dated February 18, 1998, between Selfcare, Inc.
and Cover Family Trust (incorporated by reference to Exhibit
10.79 to Selfcare, Inc.'s Form 10-KSB for the year ended
December 31, 1997)
10.55 Form of Credit Agreement dated as of February 18, 1998,
among Selfcare Consumer Products, Inc. (Inverness Medical,
Inc.), as the Borrower, Selfcare, Inc., as the Guarantor,
Certain Financial Institutions, as the Lenders, and The
Chase Manhattan Bank, as the Agent for the Lenders
(incorporated by reference to Exhibit 10.80 to Selfcare,
Inc.'s Form 10-KSB for the year ended December 31, 1997)
</TABLE>
22
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10.56 Form of Securities Purchase Agreement dated June 26, 1998,
among Selfcare, Inc., certain named purchasers, and certain
other parties (incorporated by reference to Exhibit 10.1 to
the Company's report on Form 10-Q for the period ending June
30, 1998)
10.57 Form of 13% Subordinated Note issued by the Company in
connection with the Securities Purchase Agreement dated June
26, 1998 (incorporated by reference to Exhibit 10.2 to the
Company's report on Form 10-Q for the period ending June 30,
1998)
10.58 Form of Warrant to Purchase Shares of Common Stock of the
Company issued in connection with the Securities Purchase
Agreement dated June 26, 1998 (incorporated by reference to
Exhibit 10.2 to the Company's report on Form 10-Q for the
period ending June 30, 1998)
10.59 Stock Purchase Agreement, dated February 18, 1998, by and
among Selfcare, Inc., Selfcare Consumer Products, Inc.
(Inverness Medical, Inc.), Can-Am Care Corporation, and the
Stockholders party thereto (incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K dated February 18,
1998)
10.60 Form of Patent License Agreements, dated September 1, 1998,
between the Company and Becton, Dickinson and Company dated
September 1, 1998 (incorporated by reference to Exhibits
10.1 and 10.2 to the Company's report on Form 10-Q for the
period ending September, 30, 1998)
*10.61 Master Lease Agreement For Equipment, dated February 23,
2000, between Salem Capital Corporation, Selfcare, Inc. and
Inverness Medical Limited
11.1 Statement regarding computation of per share earnings
(included in the "Notes to Consolidated Financial
Statements" in the Company's 1999 Annual Report to
Shareholders, portions of which are filed herewith as
Exhibit 13.1)
*13.1 Consolidated Financial Information of the Company's 1999
Annual Report to Shareholders (only those portions of the
Annual Report incorporated by reference in this document are
deemed filed)
13.2 Report of Independent Public Accountants, Arthur Andersen
LLP (included in the Company's 1999 Annual Report to
Shareholders, portions of which are filed herewith as
Exhibit 13.1)
*21.1 List of Subsidiaries of Registrant as of March 28, 2000
*23.1 Consent of Arthur Andersen LLP
*27.1 Financial Data Schedule
99.1 Judgment and Opinion of U.S. Bankruptcy Court (D. Mass. W.
Division), In re: Cambridge Biotech Corporation, Chapter 11
Case No. 94-43054-JFQ, entered September 1, 1995.
(incorporated by reference to Exhibit 99.2 to the Company's
registration statement on Form SB-2, No. 333-4830-NY)
99.2 Order of Approval of Scheme of Arrangement by The High Court
of Ireland (incorporated by reference to Exhibit 99.3 to the
Company's registration statement on Form SB-2, No.
333-4830-NY)
99.3 Order of U.S. Bankruptcy Court (D. Mass. W. Division), In
re: Cambridge Biotech Corporation, Chapter 11 Case No.
94-43054-JFQ, entered November 18, 1994 (incorporated by
reference to Exhibit 99.4 to the Company's registration
statement on Form SB-2, No. 333-4830-NY)
</TABLE>
23
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99.4 Note Amendment Agreement dated January 11, 1999, by and
Among Company, Elliot Associates, L.P. and Westgate
International, L.P., amending certain Senior Subordinated
Convertible Notes (incorporated by reference to Exhibit 99.2
to Current Report on Form 8-K dated January 19, 1999)
99.5 Amended and Restated Senior Subordinated Convertible Note
dated January 11, 1999, delivered by the Company to Elliot
Associates, L.P. (incorporated by reference to Exhibit 99.3
to Current Report on Form 8-K dated January 19, 1999)
99.6 Amended and Restated Senior Subordinated Convertible Note
dated January 11, 1999, delivered by the Company to Westgate
International, L.P. (incorporated by reference to Exhibit
99.3 to Current Report on Form 8-K dated January 19, 1999)
</TABLE>
(b) The Company filed no reports on Form 8-K during the last quarter of the
period covered by this Annual Report on Form 10-K.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
SELFCARE, INC.
Date: March 28, 2000 By: /s/ RON ZWANZIGER
-----------------------------------------
Ron Zwanziger
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President, Chief Executive
/s/ RON ZWANZIGER Officer and Director
------------------------------------------- (Principal Executive March 28, 2000
Ron Zwanziger Officer)
/s/ JEFFREY A. TEMPLER Chief Financial Officer
------------------------------------------- (Principal Financial March 28, 2000
Jeffrey A. Templer Officer)
/s/ CAROL R. GOLDBERG Director
------------------------------------------- March 28, 2000
Carol R. Goldberg
/s/ JOHN F. LEVY Director
------------------------------------------- March 28, 2000
John F. Levy
/s/ ROBERT ORINGER Director
------------------------------------------- March 28, 2000
Robert Oringer
/s/ EDWARD B. ROBERTS Director
------------------------------------------- March 28, 2000
Edward B. Roberts
/s/ PETER TOWNSEND Director
------------------------------------------- March 28, 2000
Peter Townsend
/s/ WILLARD LEE UMPHREY Director
------------------------------------------- March 28, 2000
Willard Lee Umphrey
</TABLE>
25
<PAGE>
EXHIBIT 10.24
FIRST AMENDMENT
TO THE
SELFCARE, INC.
AMENDED AND RESTATED 1996 STOCK OPTION AND GRANT PLAN
Upon the recommendation of the Board of Directors of Selfcare, Inc. (the
"Company"), the shareholders of the Company, by the affirmative vote of a
majority of the shareholders entitled to vote thereon and present in person or
by proxy at the Company's Annual Meeting of Shareholders held May 20, 1999, did
amend the Selfcare, Inc. Amended and Restated 1996 Stock Option and Grant Plan
(the "Plan") such that, effective as of such date, the first sentence of
Paragraph (a) of SECTION 3 of the Plan, entitled "STOCK ISSUABLE UNDER THE PLAN
MERGERS: SUBSTITUTION," shall be and read as follows:
"The maximum number of shares of Stock reserved and available for
issuance under the Plan shall be 2,250,000 shares."
The terms and conditions of the Plan are otherwise unchanged.
<TABLE>
<S> <C>
/s/ KENNETH D. LEGG
------------------------------------------------
Kenneth D. Legg, Secretary
</TABLE>
Dated: May 20, 1999
<PAGE>
EXHIBIT 10.27
FIRST AMENDMENT TO LEASE AGREEMENT
among
NOVA REALTY ASSOCIATES and SELFCARE, INC.
THIS AMENDMENT, dated as of August 9,1999 is by and between NOVA REALTY
ASSOCIATES ("the Landlord") and SELFCARE, INC. (the "Tenant"), parties to a
Lease Agreement dated as of September 23, 1996 (the "Lease Agreement").
WHEREAS, the Landlord and the Tenant have entered into the Lease Agreement;
WHEREAS, the Landlord and the Tenant now desire to amend the Lease Agreement in
certain respects;
NOW THEREFORE, the Landlord and the Tenant hereby agree as follows:
1. Amendments. The Lease Agreement is amended as follows:
1.1 ARTICLE I of the Lease Agreement is hereby amended to amend and
restate the following subjects:
"COMMENCEMENT DATE" - at the expiration of the original lease term
(December 31, 1999), as stated in the Lease Agreement, COMMENCEMENT DATE
shall mean January 1, 2000.
"RENT COMMENCEMENT DATE" - at the expiration of the original lease
term (December 31, 1999), as stated in the Lease Agreement, RENT
COMMENCEMENT DATE shall mean January 1, 2000.
"TERM EXPIRATION DATE" - at the expiration of the original lease term
(December 31, 1999), as stated in the Lease Agreement, TERM EXPIRATION DATE
shall mean December 31, 2001.
"TERM" shall mean (2) two years.
1.2 ARTICLE II of the Lease Agreement is hereby amended to amend and
restate the following subject:
"TERM" - at the expiration of the original lease term (December 31,
1999), as stated in the Lease Agreement, TERM shall mean commencing on
January 1, 2000 the "Commencement Date" and continuing until the Term
Expiration Date, December 31, 2001 unless sooner terminated as provided in
the Lease Agreement and the First Amendment to the Lease Agreement dated
August 9, 1999.
<PAGE>
1.3 ARTICLE VIII of the Lease Agreement is hereby amended to amend and
restate the following subject:
"TERMINATION OF LEASE AGREEMENT" - The Landlord or the Tenant reserves
the right to terminate the Lease Agreement by giving the other party (180)
days notice in writing.
1.4 ARTICLE X of the Lease Agreement is hereby amended to amend:
"OPTION TO EXTEND" - at the expiration of the original lease term
(December 31, 1999), as stated in the Lease Agreement, OPTION TO EXTEND
(specifically, paragraph 10.13 in its entirety) shall be stricken from the
Lease Agreement.
All other articles, paragraphs and provisions of the original Lease
Agreement remain unchanged and in force.
EXECUTED as a sealed instrument on this the 9th day of August, 1999.
LANDLORD: NOVA REALTY ASSOCIATES
By: /s/ Frank Manganaro
---------------------------
Its: General Partner
---------------------------
TENANT: SELFCARE, INC.
By: /s/ Kenneth D. Legg
---------------------------
Its: Vice President
---------------------------
<PAGE>
Exhibit 10.61
MASTER LEASE AGREEMENT FOR EQUIPMENT
THIS AGREEMENT dated February 23, 2000, between SALEM CAPITAL CORPORATION,
having its principal place of business at 482 Lowell Street, Lynnfield,
Massachusetts 01940-1621, United States of America (hereinafter referred to as
the "Lessor") and SELFCARE, INC. having its principal place of business at 200
Prospect Street, Waltham, Massachusetts 02453, United States of America, and
INVERNESS MEDICAL LIMITED, having its principal place of business at Beechwood
Park North, Inverness, IV2 3ED, Scotland, United Kingdom (hereinafter
collectively referred to as the "Lessee").
Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor the
machines and features (the "Equipment") described in the Equipment Schedules now
or hereafter executed and attached from time to time by Lessor and Lessee
covering such items of Equipment as are delivered to and accepted by Lessee on
or prior to the Final Delivery Date for each item of Equipment. Each Equipment
Schedule, with Attached Certificate of Acceptance and such other attachments as
are referred to in the Equipment Schedule shall constitute a separate Lease
incorporating all the terms and conditions of this Agreement.
The terms "Date of Certificate of Acceptance", "Daily Lease Rate Factor", "Basic
Lease Rate Factor", "Overdue Rate", "Interim Rent Date", "First Basic Rent
Date", "Last Basic Rent Date", "Expiration Date", "Casualty Value", and
"Lessor's Cost" shall have the meaning set forth in the relevant Equipment
Schedule.
SECTION 1. TERM OF LEASE
Upon delivery of the Equipment, Lessee shall inspect such Equipment and, if it
is found to be in good order, execute and deliver to Lessor a Certificate of
Acceptance in the form attached to the Equipment Schedule. All items of
Equipment listed on such Certificate of Acceptance shall be deemed accepted by
Lessee and shall be deemed to conform to this Agreement despite any defect. The
Lease term shall commence on the date of Lessee's execution of such Certificate
of Acceptance. The Lease term shall end on the Expiration Date unless otherwise
terminated or extended pursuant to the provisions of this Agreement.
SECTION 2. RENTAL CHARGES AND OTHER REQUIRED PAYMENTS
a) Lessee shall pay to Lessor as Basic Rent ("Basic Rent") for each item of
Equipment, the following:
i) On the Interim Rent Date, an amount equal to the Daily Lease Rate
Factor multiplied by the Lessor's Cost of each item of equipment for
each day from and including the date of the Certificate of Acceptance
to and including the day immediately preceding the Interim Rent Date;
- --------------------------------------------------------------------------------
Page 1 of 23
<PAGE>
ii) On the First Basic Rent Date, and on each Basic Rent Date thereafter, to
and including the Last Basic Rent Date, an amount equal to the Basic Lease Rate
Factor multiplied by the Lessor's Cost of each item of equipment.
b) Lessee shall pay the following amounts (herein referred to as "Supplemental
Rent" and, together with Basic Rent, as "Rent"):
i) On or before the applicable due date, all taxes, however designated,
which are levied or imposed by any governmental authority upon the
Equipment or its sale, purchase, ownership or use, or upon Rent on
this Agreement, including but not limited to sales or use taxes,
personal property taxes, privilege or excise taxes, franchise taxes ad
valorem or value-added taxes, leasing taxes, and stamp taxes, together
with any penalties, fines or interest thereon, excluding, however,
income taxes measured solely by the net income of Lessor. To the
extent permitted by applicable law, Lessee shall prepare (in such
manner as will show Lessor's ownership of the Equipment) and timely
file all tax returns required in connection with taxes payable by
Lessee hereunder. With respect to any such tax return required to be
filed by Lessor, Lessee shall notify Lessor of such requirement and
furnish Lessor with all forms and information necessary for proper and
timely filing of such returns. Lessee shall inform Lessor as to any
governmental jurisdiction imposing personal property taxes on the
Equipment, and as to the amount of such taxes.
ii) On or before the date required by the terms hereof (or upon Lessor's
demand if no such date is specified herein), any other amount which
the Lessee is obligated to pay hereunder, including but not limited to
indemnity payments and payments of Casualty Value.
c) On any payment of Basic Rent, Supplemental Rent, Other Required Payment and
Casualty Value Payment, which is not paid on its due date, Lessee shall pay
to Lessor late charges computed from such payments due date until paid, at
the overdue Rate (computed on the basis of a 360-day year).
SECTION 3. NET LEASE
This Lease is a net lease and Lessee's obligation to pay all Rent shall be
absolute and unconditional and, except as expressly provided herein, shall not
be subject to any abatement, reduction, defense, counterclaim, set-off, or
recoupment, including any present or future claim against Lessor or the
manufacturer of the Equipment. Except as expressly provided herein, this Lease
shall not terminate for any reason, including any defect in the Equipment or
Lessor's title thereto or any destruction or loss of use of any item of
Equipment.
SECTION 4. OWNERSHIP OF EQUIPMENT
- --------------------------------------------------------------------------------
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<PAGE>
The Equipment shall at all times remain the property of Lessor and may be
removed by Lessor at any time after termination of this Agreement.
Lessee shall affix tags, decals or plates to the Equipment indicating Lessor's
ownership, which type of tag, decal or plate and location may be specified by
Lessor, and Lessee shall not permit their removal or concealment. Lessee shall
cause each item of Equipment to be kept numbered with the serial number
specified in the Equipment Schedule. Lessee shall provide to Lessor any document
(including UCC financing statements and landlord or mortgagee waivers)
reasonably requested by Lessor for the purpose of evidencing or protecting
Lessor's title and interest in the Equipment. Lessee shall, at its own expense,
protect and defend Lessor's title in the Equipment against all claims and liens
of Lessee's creditors and keep the Equipment free and clear of all claims, liens
and encumbrances except those resulting from the agreements or acts of Lessor
and not resulting from Lessee's failure to perform its obligations under this
Agreement.
SECTION 5. POSSESSION
Lessor warrants to Lessee that Lessee shall be entitled, as against all persons
claiming by, through or under Lessor, to possess the Equipment subject to the
terms of this Agreement so long as Lessee is not in default hereunder.
Upon expiration or termination of this Lease, Lessee at its sole cost and
expense shall return the Equipment to Lessor at a place within 1,500 miles of
Inverness, Scotland, designated by Lessor and in as good condition as when
delivered to Lessee, reasonable wear and tear excepted, subject to the terms of
this Agreement. At the time of such return, Lessee shall at its own expense
effect such repairs including any necessary engineering changes as are required
for the Equipment to remain qualified for manufacturer's contract maintenance at
then standard rates.
SECTION 6. MAINTENANCE
a) Lessee, when possible, shall enter into and maintain in force a
manufacturer's maintenance agreement covering maintenance of the Equipment.
Such maintenance agreement shall commence upon expiration of the
manufacturer's free maintenance period, if any. Lessee shall furnish Lessor
with a copy of such maintenance agreement upon demand. Lessee will cause
the manufacturer to keep the Equipment in good working order in accordance
with the terms of the maintenance agreement and to make all necessary
adjustments and repairs to the Equipment, and the manufacturer is hereby
authorized to accept the directions of Lessee with respect to the
Equipment. Lessee agrees to allow the manufacturer full and free access to
the Equipment. Lessee covenants that the Equipment will at all times be
used and operated in accordance with
- --------------------------------------------------------------------------------
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<PAGE>
manufacturer instructions and in compliance with any restriction contained
in manufacturer warranties regarding the Equipment.
b) All maintenance and service charges related to the Equipment shall be borne
by Lessee.
c) The required suitable electric current to operate the Equipment and a
suitable place of installation shall be furnished by Lessee. The
installation facilities shall be as specified in the manufacturer's
installation manual and shall at all times meet the minimum standard as
established in the jurisdiction where the Equipment will be located. Lessee
shall furnish all supplies consumed or required by the Equipment.
SECTION 7. LOCATION AND USE OF EQUIPMENT
a) During the term of the lease, the Equipment shall be located at the address
indicted in the Certificate of Acceptance. No Equipment shall be removed
from the above address without the prior written consent of Lessor. Any
relocation of the Equipment shall be at the risk and the expense of the
Lessee and in accordance with the Manufacturer's specifications.
b) Lessee covenants and warrants that during the period that any Equipment is
leased to Lessee hereunder, such Equipment will at all times be used and
operated in compliance with the laws of the jurisdictions in which it is
located, and in compliance with all acts, rules, regulations, and orders of
any commission, board or other legislative, administrative, or judicial
body or officer having power to regulate or supervise the use or operation
of the Equipment. Lessee shall not install or use the Equipment in such
manner or in such circumstances that any part of the Equipment is deemed to
be an accession to other personal property or deemed to be real property or
a fixture thereon.
SECTION 8. INSURANCE
During the period that any Equipment is leased to Lessee hereunder, Lessee will
at all times and at its expense carry and maintain or cause to be carried and
maintained insurance for loss of or damage to the Equipment caused by fire,
lightning, sprinkler breakage, tornado and windstorms, explosion, smoke and
smudge, aircraft and motor vehicle damage, strikes, riots and civil commotion,
burglary and theft, vandalism and malicious mischief, and other casualty events
customarily insured against with respect to similar equipment, in an amount not
less than the Casualty Value of the Equipment. Lessee shall also carry and
maintain or cause to be carried and maintained at its expense public liability
insurance covering the Equipment, in such amounts and against such risks as is
customary with respect to similar equipment. Lessee shall furnish appropriate
evidence of such insurance to Lessor naming Lessor as an additional insured and
naming Lessor's Assignee as loss payee. All required insurance shall provide for
ten (10) days' notice to Lessor and its assign of any cancellations
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<PAGE>
and shall not modify nor alter said insurance without prior written consent of
Lessor and its Assignee.
SECTION 9. RISK OF LOSS, EVENT OF LOSS
Lessee hereby assumes and shall bear the entire risk of loss or damage including
but not limited to destruction, theft, or governmental taking of any item of
Equipment ("Event of Loss"), whether partial or complete and whether or not
covered by insurance. No such loss or damage shall relieve Lessee of any of its
obligations under this Lease. Lessee shall immediately notify Lessor of any
Event of Loss involving the Equipment.
If an Event of Loss occurs with respect to any item of Equipment, Lessee, at the
option of Lessor, shall:
a) repair or restore the equipment to good repair, condition and working
order; or
b) replace the Equipment with identical equipment in good repair, condition
and working order; or
c) pay Lessor in cash the Casualty Value for such item as set forth in the
relevant Equipment Schedule.
Upon payment of the Casualty Value and all other amounts due hereunder with
respect to such, this Lease shall terminate with respect to the item of
Equipment for which Lessor has received payment, and Lessee shall become
entitled to such item of equipment AS-IS, WHERE-IS, without any warranty,
express or implied, with respect to any matter whatsoever. If Lessee has paid
the Casualty Value and such other amounts with respect to such item of Equipment
and if Lessee is not in default hereunder, property damage insurance proceeds
from such Event of Loss shall be paid to Lessee up to the amount of said
Casualty Value.
SECTION 10. ENFORCEMENT OF WARRANTY
a) Upon receipt of written request from Lessee, and so long as this Agreement
shall remain in force, Lessor shall take all reasonable action requested by
Lessee to enforce any manufacturer's warranty, express or implied, issued
on or applicable to the Equipment, which is enforceable by Lessor in its
own name, provided, however, that Lessor shall not be obligated to resort
to litigation to enforce any such warranty unless Lessee shall pay all
expenses in connection therewith.
b) Similarly, if any such warranty shall be enforceable by Lessee in its own
name, Lessee hereby agrees, upon receipt of written request from Lessor and
so long as this Agreement
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<PAGE>
shall remain in force, to take all reasonable action requested by Lessor to
enforce any such warranty.
c) Lessor hereby assigns to Lessee any warranty rights which Lessor may have
against the manufacturer with respect to the Equipment, to the extent such
warranty rights are assignable, which assignment shall remain effective so
long as Lessee is not in default hereunder. With respect to such warranty
rights as are not assignable, Lessor hereby appoints Lessee as its agent
and attorney-in-fact for purpose of enforcing such warranty rights at
Lessee's expense.
SECTION 11. DISCLAIMER OF WARRANTIES
LESSOR LEASES THE EQUIPMENT AS-IS, WHERE-IS, IN WHATEVER CONDITION IT MAY BE,
WITHOUT ANY AGREEMENT, WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED. WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, LESSOR EXPRESSLY DISCLAIMS ANY IMPLIED
WARRANTY OF MERCHANTABILITY, FITNESS OR ADEQUACY FOR ANY PARTICULAR PURPOSE OR
USE, QUALITY, PRODUCTIVENESS OR CAPACITY. LESSOR HEREBY ASSIGNS TO LESSEE (TO
THE EXTENT TO WHICH THE SAME MAY BE ASSIGNABLE), ANY WARRANTY OF THE
MANUFACTURER RELATIVE TO THE EQUIPMENT.
SECTION 12. INDEMNIFICATION
Lessor and its successors and assigns shall not be liable to Lessee for, and
Lessee shall indemnify and hold Lessor and its successors and assigns harmless
with respect to any third party, from any liability (including liability for
negligence), claim, loss, damage or expense (including litigation expense) of
any kind or nature caused, directly or indirectly, by
i) the inadequacy of any Equipment for any purpose,
ii) any deficiency or defect in any Equipment,
iii) the use or performance of any Equipment,
iv) any interruption or loss of service, use or performance of any Equipment,
v) any patent, trademark, or copyright infringement relating to the
Equipment, or
vi) any loss of business of other consequential damage whether or not
resulting from any of the foregoing.
IN PARTICULAR, LESSOR AND ITS SUCCESSORS AND ASSIGNS SHALL NOT BE LIABLE FOR
INJURIES TO PERSONS OR DAMAGE TO THE EQUIPMENT
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<PAGE>
OR OTHER PROPERTY UNDER ANY THEORY OF STRICT LIABILITY, AND LESSEE SHALL
INDEMNIFY AND SAVE LESSOR AND ITS SUCCESSORS AND ASSIGNS HARMLESS FROM ANY SUCH
LIABILITY AND ALL COSTS AND EXPENSES IN DEFENDING THE SAME.
All of Lessor's rights under this Section 12 shall survive the termination of
this Agreement, however, Lessee shall not be required to indemnify Lessor for
claims arising from events that occur after the Equipment has been redelivered
to Lessor.
SECTION 13. MODIFICATIONS OF EQUIPMENT
a) Provided the manufacturer permits changes, alterations, modifications or
attachment to the Equipment (hereinafter called "Equipment Change") and
consents to the Equipment Change in writing and such Equipment Change does
not adversely affect the operation of the Equipment in relation to its
normal use and purpose and a copy of the approval of the Equipment Change
is delivered to Lessor and its Assignee, the Lessee may, at its own
expense, make or cause to be made alterations or attachments to the
Equipment, so long as such alterations or attachments do not interfere with
the normal operation of the Equipment. Lessee, if Lessor so directs in
writing, shall remove any such alteration or attachment, and the Equipment
shall be restored to its original condition, reasonable wear and tear
accepted, upon termination of this Agreement. If an alteration or
attachment interferes with the normal and satisfactory operation or
maintenance of any part of the Equipment, Lessee shall, upon notice from
Lessor to that effect, promptly remove the alteration or attachment and
restore the Equipment to its normal condition.
b) If Lessee desires to add special features or model changes ("Additional
Special Features") to the Equipment subsequent to the commencement of this
Lease, Lessee shall either:
i) give Lessor an opportunity to obtain such Additional Special Features
at Lessor's expense and lease such Additional Special Features to
Lessee upon such terms and conditions as Lessor and Lessee agree to (it
being understood that the monthly rental for such Additional Special
Features must be sufficient to cover Lessor's related monthly debt
payments, that any such Additional Special Features obtained by Lessor
shall be deemed to be part of the Equipment, and that Lessee shall be
responsible for all related transportation and installation charges, to
the extent provided in Section 14); or
ii) upon Lessor's prior written consent (which consent will not be
unreasonably withheld), purchase and install such Additional Special
Features at Lessee's own expense with no rent due Lessor for such
Additional Special Features, but such Additional Special Features shall
be subject to the provisions of this Section 13, as if they were
alterations or attachments. Upon termination of this Agreement, Lessor
may direct in writing that Lessee remove such Additional Special
Features.
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<PAGE>
c) All alterations, attachments and Additional Special Features shall become
the property of Lessor.
SECTION 14. TRANSPORTATION EXPENSES
All transportation and installation expenses incurred in connection with
delivery of the Equipment to Lessee are to be paid by Lessee. Necessary packing
cases for the return of the Equipment, and such labor as may be necessary for
pacing and unpacking the Equipment when in the possession of Lessee, shall be
furnished by Lessee at its expenses. Lessee shall pay transportation expenses
incurred in connection with redelivery to Lessor.
SECTION 15. INSPECTION AND REPORTS
a) Upon request, Lessee shall permit Lessor or persons designated by Lessor to
inspect the Equipment.
b) Lessee shall immediately notify Lessor of any accident arising out of the
alleged or apparent improper manufacturing, functioning or operation of the
Equipment, the time, place and nature of the accident and damage, the names
and addresses of parties involved persons injured, witnesses and owners of
property damaged, and such other relevant information as may be known, and
shall promptly advise Lessor of all correspondence, papers, notices and
documents received by Lessee in connection with any claim or demand related
to improper manufacturing, functioning or operation of the Equipment or
charging Lessor with liability, and shall aid in the investigation and
defense of all such claims and shall aid in the recovery of damages from
third persons.
c) Lessee will furnish to Lessor and any assignee of Lessor
i) within one hundred twenty (120) days after the end of each of Lessee's
fiscal years, the annual financial statement of Lessee, including a
balance sheet and an income and retained earnings statement for the
fiscal year covered thereby, setting forth in comparative form, the
figures for the previous fiscal year, all in reasonable detail and duly
certified by Lessee's independent certified public accountant,
ii) copies of such financial statements and reports as Lessee shall send to
its stockholders or file with the Securities and Exchange Commission or
any governmental agency substituted therefor, and
iii) such other information respecting the financial condition and affairs
of Lessee as may be necessary to determine compliance with the terms
and conditions of this Lease.
SECTION 16. EVENTS OF DEFAULT AND LESSOR'S REMEDIES
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<PAGE>
a) Should:
i) Lessee fail to pay any Basic Rent or other amount due under this
Agreement within ten (10) days of the applicable due date;
ii) Lessee attempt to remove, sell, transfer, encumber, part with
possession of, assign or sublet (except as expressly permitted by the
provisions hereof) the Equipment or any part thereof;
iii) any representation or warranty made by Lessee in this Agreement or in
any document or certificate furnished to Lessor in connection herewith
prove to have been incorrect in any material respect when made;
iv) Lessee fail in the performance of any other of its obligations under
this Agreement for a continuous period of thirty (30) days after
receipt by Lessee of written notice thereof from Lessor;
v) Lessee cease doing business as a going concern;
vi) a petition be filed by or against Lessee under the Federal Bankruptcy
Act or any amendment thereto (including a petition for reorganization
or arrangement) which shall not have been discharged within sixty (60)
days after such filing;
vii) a receiver be appointed for Lessor or its property;
viii) Lessee commit an act of bankruptcy, become insolvent, make an
assignment for the benefit of creditors, or offer a composition of any
of its indebtedness;
ix) the issuance of any writ or order of attachment or execution or other
legal process against any Equipment which is not discharged or
satisfied with fifteen (15) days; or
x) to the extent that Lessee is a corporation, if a controlling interest
of the stock of Lessee is transferred (whether in increments or on one
occasion) to persons or other legal entities other than those holding
said controlling interest at the date of execution of this Agreement,
then in any such event (herein referred to as an "Event of Default"),
Lessor may, at its option, exercise any one or more of the remedies set
forth in subsection (b) of this Section 16 (in addition to any other remedy
Lessor may have under applicable law). Failure of Lessee to pay or perform
any obligation under any Agreement with Lessor shall constitute a default
as to all Agreements between Lessor and Lessee.
b) Upon the occurrence or continuation of any Event of Default as specified in
subsection (a) of this Section 16, Lessor may:
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<PAGE>
i) declare immediately due and payable by Lessee, as liquidated damages
for loss of a bargain, an amount equal to the Casualty Value of the
Equipment at the date of the occurrence of any event of default,
ii) terminate this Agreement;
iii) take possession of the Equipment during Lessee's normal working hours
without demand or notice, wherever the Equipment may be located,
without court order or other process of law (Lessee hereby waiving any
right it may have to notice and hearing before repossession). Lessee
hereby waives any and all damages occasioned by such taking of
possession. Any taking of possession pursuant to this subsection 16(b)
shall not in itself constitute termination of this Agreement and shall
not, in any event, relieve Lessee of its obligations hereunder.
Lessee shall reimburse Lessor for all reasonable expenses (including attorney's
fees) incurred by Lessor in enforcing its rights under this Section 16. Any
overdue rent, and any unpaid Casualty Value payable as liquidated damages
pursuant to clause (i) of this subsection 16(b), shall bear interest at the
Overdue Rate until paid in full. Upon taking possession of the Equipment, Lessor
may, at its option and without notice to Lessee lease the repossessed Equipment
to any third party on such terms and conditions as Lessor may determine, or sell
said Equipment at public auction or at private sale.
In the event that Lessor leases or sells repossessed Equipment, the Net Proceeds
(as defined below) shall first be credited to amounts due and owing by Lessee,
and shall then be used to reimburse Lessee for any liquidated damage payment
made by Lessee pursuant to clause (i) of this subsection 16(b). Lessor shall
retain any surplus. Lessee shall remain liable for an amount equal to the
Casualty Value of the Equipment at the date of an occurrence of an Event of
Default less the Net Proceeds. As used in this subsection 16(b), "Net Proceeds"
shall mean the cash sale price of the Equipment, or the aggregate rent payable
pursuant to a lease of the Equipment discounted at the rate of twelve (12%)
percent less all costs and expenses (including reasonable attorneys' fees and
disbursements) incurred by Lessor as a result of Lessee's default and Lessor's
exercise of its remedies with respect thereto. Lessor's rights and remedies in
respect of any of the terms and conditions of this Lease shall be cumulative and
non-exclusive and shall be in addition to any and all other rights and remedies
which may be provided by law.
Lessee acknowledges and agrees, for itself and for all successors and assigns
including any bankruptcy trustees of Lessee (hereinafter collectively referred
to as the "Benefited Parties"), knowingly, voluntarily and intentionally
stipulate and agree, to the fullest extent allowed by law and with the full
intention that such stipulation and agreement shall survive the filing of any
bankruptcy, that, in the event any of the Benefited Parties become a debtor or
debtor in possession in a case under the United States Bankruptcy Code (11
U.S.C. ss.101 et seq.), then pursuant to 11 U.S.C. ss.362(d)(1) and (2) Lessor
shall be entitled to the immediate termination oF the automatic stay to permit
Lessor to exercise all of Lessor's legal rights and remedies against Lessee
under the lease, including, without limitation, the right to repossess the
leased equipment and to setoff and apply to any amounts owed by Lessee to Lessor
any
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<PAGE>
security deposit or other sums delivered to Lessor by Lessee from time to time
as security for the Lessee's performance under the lease.
SECTION 17. SUBLEASES AND ASSIGNMENTS
a) Lessee may sublet the Equipment if Lessee notifies Lessor of the proposed
new location of the Equipment and receives Lessor's prior written consent.
No such sublease shall in any way discharge or diminish any of Lessee's
obligations under this Agreement. Each sublease shall be approved in form
and content by Lessor (including, without limitation, any provisions
granting such sub-lessee an option to terminate such sublease) and shall
expressly provide that it is subject and subordinate to this Lease. No
amendment or modification of any of the terms and conditions of such
sublease shall be made without the prior written consent of Lessor.
b) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and (to the extent specified
in any assignment) assigns. Lessee shall not assign this Agreement without
the prior written consent of Lessor. Lessor may assign any or all of its
rights under this Agreement, and Lessee agrees to acknowledge in writing
any such assignment within five (5) days after receipt of written notice
thereof.
c) So long as Lessor's rights hereunder are assigned to any Assignee, Lessee
may not assert against any such Assignee any defense, counterclaim,
recoupment, or set-off Lessee may have against Lessor. Lessee agrees that
it will not seek to cancel or terminate this Agreement (except as expressly
permitted in this Agreement) or otherwise avoid its obligations hereunder
as against such Assignee, and further agrees that it will pay to such
Assignee all Rent Due hereunder and assigned to such Assignee, without
regard to any such defense, counterclaim, recoupment, or set-off, and will
not seek to recover any part of the same from such Assignee. However,
nothing herein shall be construed to prevent Lessee from exercising against
Lessor any claim for damages or injunctive relief that Lessee may have
against Lessor.
SECTION 18. LESSEE'S AND LESSOR'S WARRANTIES
a) Lessee hereby warrants and represents to Lessor, its successors and
assigns:
i) that Lessee's execution and performance of this Agreement have been
duly authorized by all necessary corporate action and are not in
conflict with Lessee's charter or by-laws, or with any indenture,
contract or agreement by which it is bound, or with any statue,
judgment, decree, rule or regulation binding upon it;
ii) that no consent or approval of any trustee or holder of any
indebtedness or obligation of Lessee, and no consent or approval of any
governmental authority, is necessary (or,
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<PAGE>
if required, has been obtained) for Lessee's execution or performance of this
Agreement; and
iii) that this Agreement is valid and binding and enforceable against Lessee
in accordance with its terms, subject to enforcement limitations
imposed by rules of equity or by bankruptcy or similar laws.
Upon Lessor's request, Lessee shall submit to Lessor an opinion of Lessee's
counsel that the above warranties and representations are true.
b) Lessor hereby warrants and represents to Lessee, it successors and assigns:
i) that Lessor's execution and performance of this Agreement have been
duly authorized by all necessary corporate or partnership action and
are not in conflict with Lessor's charter and by-laws or partnership
agreement, or with any indenture, contract or agreement by which it is
bound, or with any statute, judgment, decree, rule or regulation
binding upon it;
ii) that no consent or approval of any trustee or holder of any
indebtedness or obligation of Lessor, and no consent or approval of any
governmental authority, is necessary for Lessor's execution or
performance of this Agreement;
iii) that this Agreement is valid and binding and enforceable against Lessor
in accordance with its terms, subject to enforcement limitations
imposed by rules of equity or by bankruptcy or similar laws; and
iv) Lessor is the owner of the Equipment and said Equipment is free and
clear of all liens and encumbrances, except the lien of and security
interest granted by Lessor to its Assignee.
Upon Lessee's request, Lessor shall submit to Lessee an opinion of Lessor's
counsel that the above warranties and representations are true.
SECTION 19. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of
and jurisdiction shall be in the Commonwealth of Massachusetts.
SECTION 20. AMENDMENTS
This Agreement constitutes the entire agreement between Lessor and Lessee with
respect to the Equipment and may be amended or modified only by a writing signed
by the parties hereto or their respective successors and assigns.
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<PAGE>
SECTION 21. ADDRESS FOR COMMUNICATIONS
Any communication in connection with this Agreement shall be made in writing to
the address shown in the first paragraph of this Agreement, or to such other
address as has been most recently designated in writing by one party to the
other. Unless otherwise specified herein any notice or communication shall
become effective when deposited in the United States mail properly addressed
with proper postage for first-class mail prepaid.
SECTION 22. UNIFORM COMMERCIAL CODE DOCUMENTATION
Lessee agrees to execute such Uniform Commercial Code ("UCC") financing
statements and other documents deemed necessary by Lessor or its Assignees to
perfect and protect the interests of Lessor and its Assignees in the Lease and
the Equipment. With respect to each Lease, there shall be a single executed
original Equipment Schedule, which shall be marked "Original" and all other
counterparts shall be marked "Conformed Copy". To the extent that this Lease may
constitute chattel paper (as defined in the Uniform Commercial Code) no security
interest may be created through the possession of any counterpart of the
Equipment Schedule other than the Original.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed.
<TABLE>
<CAPTION>
SALEM CAPITAL CORPORATION SELFCARE, INC.
(LESSOR) (LESSEE)
<S> <C>
By /s/ ELLEN F. KENNEDY By /s/ JEFFREY A. TEMPLER
------------------------------ ------------------------------
Print Name ELLEN F. KENNEDY Print Name JEFFREY A. TEMPLER
------------------------------ ------------------------------
Title PRESIDENT Title CHIEF FINANCIAL OFFICER
------------------------------ ---------------------------
Date MARCH 8, 2000 Date MARCH 6, 2000
------------------------------ ---------------------------
INVERNESS MEDICAL LIMITED
(LESSEE)
By /s/ STUART PATERSON
------------------------------
Print Name STUART PATERSON
--------------------
Title DIRECTOR OF FINANCE
--------------------------
Date FEBRUARY 25, 2000
---------------------------
</TABLE>
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<PAGE>
EQUIPMENT SCHEDULE NO. 1
To Master Lease Agreement for Equipment
Dated February 23, 2000,
Between SALEM CAPITAL CORPORATION as "Lessor" and
SELFCARE, INC. and
INVERNESS MEDICAL LIMITED collectively as "Lessee"
This Equipment Schedule hereby incorporates by reference, as though set forth in
its entirety, the provisions of the Master Lease Agreement for Equipment, dated,
February 23, 2000, between SALEM CAPITAL CORPORATION ("Lessor") and SELFCARE,
INC. and INVERNESS MEDICAL LIMITED (collectively as "Lessee") (the "Agreement").
1. EQUIPMENT
EQUIPMENT LOCATION: Inverness Medical Limited
Beechwood Park North
Inverness, IV2 3ED, Scotland
a. EQUIPMENT VENDOR: Various manufacturers
<TABLE>
<CAPTION>
QUANTITY DESCRIPTION COST
<S> <C> <C>
1 Lamination System $330,000
1 Web Steering Guide 25,000
1 Ink Dispenser 20,000
1 Modifications to Kinematics 10,000
1 Enzyme Print Line Printer 180,000
1 Inks Reagents Preparation 25,000
1 Inks Reagents Preparation 30,000
1 Vial Vision System 35,000
---------
LESSOR'S COST: $655,000
</TABLE>
2. DEFINITIONS
o The BASIC RENT shall be $12,894.33
o The BASIC RENT DATE shall be the first day of each calendar month (to and
including the Last Basic Rent Date) or the first business day thereafter
when the first falls on a non-business day.
o FIRST BASIC RENT DATE: The first day of the month following acceptance of
the entire Equipment Schedule.
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<PAGE>
o LAST BASIC RENT DATE: The first day of the 60th month following acceptance
of the entire Equipment Schedule.
o BASIC LEASE RATE FACTOR: 0.019686
o DAILY LEASE RATE FACTOR: 0.000656
o INTERIM RENT DATE: The first day of the first month following acceptance of
the Equipment.
o EXPIRATION DATE: The last day of the 60th month following acceptance of the
entire Equipment Schedule.
o OVERDUE RATE: Five (5%) Percent of Basic Rent Payment.
o The CASUALTY VALUE OF THE EQUIPMENT shall be the Lessor's Cost of each item
of Equipment suffering an Event of Loss, multiplied by the percentage set
out in Attachment A to this Equipment Schedule opposite the Basic Rent date
immediately preceding such Event of Loss.
3. PROVISIONS
The following attachments apply to this Equipment Schedule only:
o Attachment A Casualty Values
o Attachment B Certificate of Acceptance
o Attachment C Lessee's Option to Purchase or Renew
o Attachment D Additional Payment Terms
<TABLE>
<CAPTION>
SALEM CAPITAL CORPORATION SELFCARE, INC.
(LESSOR) (LESSEE)
<S> <C>
By /s/ ELLEN F. KENNEDY By /s/ JEFFREY A. TEMPLER
----------------------------- -----------------------------
Print Name ELLEN F. KENNEDY Print Name JEFFREY A. TEMPLER
--------------------- ---------------------
Title PRESIDENT Title CHIEF FINANCIAL OFFICER
-------------------------- --------------------------
Date MARCH 8, 2000 Date MARCH 6, 2000
--------------------------- ---------------------------
INVERNESS MEDICAL LIMITED
(LESSEE)
By /s/ STUART PATERSON
-----------------------------
Print Name STUART PATERSON
---------------------
Title DIRECTOR OF FINANCE
--------------------------
Date FEBRUARY 25, 2000
---------------------------
</TABLE>
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<PAGE>
ATTACHMENT A
To Master Lease Agreement for Equipment
Dated February 23, 2000,
Between SALEM CAPITAL CORPORATION as "Lessor" and
SELFCARE, INC. and
INVERNESS MEDICAL LIMITED collectively as "Lessee"
As it relates to Equipment Schedule No. 1
CASUALTY VALUES
<TABLE>
<CAPTION>
Basic Applicable
RENT DATE PERCENTAGE
--------- ----------
<S> <C> <C>
On or before #:
1 106.50
2 105.50
3 104.50
4 103.50
5 102.50
6 101.50
7 100.50
8 99.50
9 98.50
10 97.50
11 96.50
12 95.50
13 94.50
14 93.50
15 92.50
16 91.50
17 90.50
18 89.50
19 88.50
20 87.50
21 86.50
22 85.50
23 84.50
24 83.50
25 82.50
26 81.50
27 80.50
28 79.50
29 78.50
30 77.50
31 76.50
32 75.50
33 74.50
34 73.50
35 72.50
36 71.50
37 70.50
38 69.50
39 68.50
40 67.50
41 66.50
42 65.50
43 64.50
44 63.50
45 62.50
46 61.50
47 60.50
48 59.50
49 58.50
50 57.50
51 56.50
52 55.50
53 54.50
54 53.50
55 52.50
56 52.00
57 52.50
58 51.50
- --------------------------------------------------------------------------------
Page 16 of 23
<PAGE>
59 50.50
60 50.00
</TABLE>
- --------------------------------------------------------------------------------
Page 17 of 23
<PAGE>
<TABLE>
<CAPTION>
SALEM CAPITAL CORPORATION SELFCARE, INC.
(LESSOR) (LESSEE)
<S> <C>
By /s/ ELLEN F. KENNEDY By /s/ JEFFREY A. TEMPLER
----------------------------- -----------------------------
Print Name ELLEN F. KENNEDY Print Name JEFFREY A. TEMPLER
--------------------- ---------------------
Title PRESIDENT Title CHIEF FINANCIAL OFFICER
-------------------------- --------------------------
Date MARCH 8, 2000 Date MARCH 6, 2000
-------------------------- ---------------------------
INVERNESS MEDICAL LIMITED
(LESSEE)
By /s/ STUART PATERSON
-----------------------------
Print Name STUART PATERSON
---------------------
Title DIRECTOR OF FINANCE
--------------------------
Date FEBRUARY 25, 2000
---------------------------
</TABLE>
- --------------------------------------------------------------------------------
Page 18 of 23
<PAGE>
ATTACHMENT B
To Master Lease Agreement for Equipment
Dated February 23, 2000,
Between SALEM CAPITAL CORPORATION as "Lessor" and
SELFCARE, INC. and
INVERNESS MEDICAL LIMITED collectively as "Lessee"
As it relates to Equipment Schedule No. 1
CERTIFICATE OF ACCEPTANCE
CONDITION OF EQUIPMENT
The Lessee Certifies that all items of Equipment described below have been
delivered to the location indicated below, tested and inspected by the Lessee,
found to be in good order, and accepted as items of Equipment under the
Agreement, all on the date indicated.
EQUIPMENT
EQUIPMENT LOCATION: Inverness Medical Limited
Beechwood Park North
Inverness, IV2 3ED, Scotland
a. EQUIPMENT VENDOR: Various Manufacturers
<TABLE>
<CAPTION>
QUANTITY DESCRIPTION SERIAL #
<S> <C> <C>
1 Lamination System
1 Web Steering Guide
1 Ink Dispenser
1 Modifications to Kinematics
1 Enzyme Print Line Printer
1 Inks Reagents Preparation
1 Inks Reagents Preparation
1 Vial Vision System
</TABLE>
The Lessee hereby represents and warrants to Lessor that no Event of Default or
event which, with the giving of notice or the lapse of time, or both, would
become such an Event of Default under the Agreement has occurred, and is
continuing and there are in full force and effect, any insurance policies with
respect to the Equipment required to be obtained under terms of the Agreement.
- --------------------------------------------------------------------------------
Page 19 of 23
<PAGE>
SELFCARE, INC.
(LESSEE)
By______________________________________
Print Name______________________________
Title___________________________________
Date____________________________________
INVERNESS MEDICAL LIMITED
(LESSEE)
By______________________________________
Print Name______________________________
Title___________________________________
Date____________________________________
- --------------------------------------------------------------------------------
Page 20 of 23
<PAGE>
ATTACHMENT C
To Master Lease Agreement for Equipment
Dated February 23, 2000,
Between SALEM CAPITAL CORPORATION as "Lessor" and
SELFCARE, INC. and
INVERNESS MEDICAL LIMITED collectively as "Lessee"
As it relates to Equipment Schedule No. 1
LESSEE'S OPTION TO PURCHASE OR RENEW
Provided that this Lease Agreement has not been earlier terminated and Lessee is
not in material default hereunder, the following steps shall be taken in order
to make an informed judgment as to exercising one of the options set forth
below:
(a) At least one hundred eighty (180) days prior to the expiration of the then
current term of the lease (whether the original term or a renewal term),
Lessee shall notify Lessor in writing of Lessee's interest in continued use
of the Equipment beyond the current term of the Lease by leasing for a
renewal term of specified duration (which shall be at least one [1] year)
or by purchasing.
(b) At least one hundred fifty (150) days prior to the expiration of the then
current term, Lessor and Lessee shall consult together for the purpose of
determining the "Fair Rental Value" and the "Fair Market Value" of the
Equipment as of the end of such current term. The Fair Rental Value and the
Fair Market Value shall be determined on the basis of, and shall be equal
in amount to, the value which would be obtained in an arms-length
transaction between an informed and willing renter-user or buyer-user as
the case may be, under no compulsion to rent or sell, and in such
determinations, costs of removal from Lessee's premises shall not be a
deduction from such values. Fair Rental Value shall be determined on the
basis of a renewal term of the duration specified in Lessee's notice to
Lessor pursuant to subsection (a) above.
(c) If ninety (90) days prior to the expiration of the then current term Lessor
and Lessee have not agreed upon a determination of the Fair Rental Value
and the Fair Market Value of the Equipment, such undetermined values shall
be determined in accordance with the foregoing definition by a qualified
independent appraiser selected by Lessor. The appraiser so selected shall,
at the expense of Lessee, make such determination within a period of thirty
(30) days following appointment and shall promptly communicate such
determination in writing to Lessor and Lessee. The determination so made
shall be conclusively binding upon both Lessor and Lessee.
(d) Following determination of Fair Rental Value and Fair Market Value as
provided above, and provided that Lessee is not then in material default
under this Lease Agreement, Lessee shall have the right to elect one of the
following options as to the Equipment.
- --------------------------------------------------------------------------------
Page 21 of 23
<PAGE>
(i) Purchase of Equipment at the end of the current term for a price
equal to the Fair Market Value by notifying Lessor in writing at
least thirty (30) days prior to the expiration of the current term
of Lessee's election to purchase, and by paying to Lessor the Fair
Market Value in cash on or prior to the expiration of said term;
(ii) Lease of the Equipment for a renewal term by notifying Lessor in
writing, at least thirty (30) days prior to the expiration of the
current term, of Lessee's election to extend the term of the Lease
Agreement for the renewal term specified in Lessee's notice to
Lessor pursuant to subsection (a) above, and by paying the Fair
Rental Value therefor payable monthly in advance.
(e) If Lessee shall not have elected either option under the foregoing
subsection (d), Lessee shall return the Equipment to Lessor at the end of
the current term of the Lease Agreement.
<TABLE>
<CAPTION>
SALEM CAPITAL CORPORATION SELFCARE, INC.
(LESSOR) (LESSEE)
<S> <C>
By /s/ ELLEN F. KENNEDY By /s/ JEFFREY A. TEMPLER
----------------------------- -----------------------------
Print Name ELLEN F. KENNEDY Print Name JEFFREY A. TEMPLER
--------------------- ---------------------
Title PRESIDENT Title CHIEF FINANCIAL OFFICER
----------- --------------------------
Date MARCH 8, 2000 Date MARCH 6, 2000
-------------------------- ---------------------------
INVERNESS MEDICAL LIMITED
(LESSEE)
By /s/ STUART PATERSON
-----------------------------
Print Name STUART PATERSON
---------------------
Title DIRECTOR OF FINANCE
---------------------------
Date FEBRUARY 25, 2000
---------------------------
</TABLE>
- --------------------------------------------------------------------------------
Page 22 of 23
<PAGE>
ATTACHMENT D
To Master Lease Agreement for Equipment
Dated February 23, 2000,
Between SALEM CAPITAL CORPORATION as "Lessor" and
SELFCARE, INC. and
INVERNESS MEDICAL LIMITED collectively as "Lessee"
As it relates to Equipment Schedule No. 1
ADDITIONAL PAYMENT TERMS
LESSEE HEREBY AGREES TO DIRECT ALL PAYMENTS BY LIFESCAN, INC. INTO A TRUST
ACCOUNT. ON THE FIRST DAY OF EACH MONTH, WHEN FUNDS ARE AVAILABLE, TRUSTEE SHALL
FIRST PAY TO LESSOR THOSE AMOUNTS DUE UNDER THE TERMS OF THE LEASE AND ANY
SCHEDULES ATTACHED. TRUSTEE SHALL THEN RELEASE THE REMAINING FUNDS TO LESSEE.
Should Lessee, through its Trustee, fail to make any payments to Lessor due
hereunder, then Lessor may direct Lessee to enforce the provisions of Section
3.8 of the Amended and Restated Sales Distribution Agreement for Testing System
for Glucose in Humans, between LifeScan, Inc. and Selfcare, Inc., dated June 7,
1999, and the Credit Support Letter from LifeScan, Inc., copies of which are
attached hereto, whereby LifeScan, Inc. agrees to make said payments directly to
Lessor consistent within the terms of said Section 3.8.
<TABLE>
<CAPTION>
SALEM CAPITAL CORPORATION SELFCARE, INC.
(LESSOR) (LESSEE)
<S> <C>
By /s/ ELLEN F. KENNEDY By /s/ JEFFREY A. TEMPLER
---------------------------- ----------------------------
Print Name ELLEN F. KENNEDY Print Name JEFFREY A. TEMPLER
-------------------- ----------------------------
Title PRESIDENT Title CHIEF FINANCIAL OFFICER
------------------------- -------------------------
Date MARCH 8, 2000 Date MARCH 6, 2000
------------------------- --------------------------
INVERNESS MEDICAL LIMITED
(LESSEE)
By /s/ STUART PATERSON
-----------------------------
Print Name STUART PATERSON
--------------------
Title DIRECTOR OF FINANCE
-------------------------
Date FEBRUARY 25, 2000
--------------------------
</TABLE>
- --------------------------------------------------------------------------------
Page 23 of 23
<PAGE>
EXHIBIT 13.1
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL INFORMATION
1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Selected Financial Data..................................... F-1
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. F-1
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-14
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-15
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. F-16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-18
Notes to Consolidated Financial Statements.................. F-20
Report of Independent Public Accountants.................... F-52
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1999 1998 1997 1996 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenue.................................. $125,874 $117,984 $52,250 $19,063 $ 7,239
Gross profit................................. 42,627 40,903 25,973 8,105 1,674
Operating income (loss)...................... 331 (10,309) (18,768) (17,648) (5,560)
Net loss..................................... (9,072) (18,778) (24,710) (28,578) (10,097)
Net loss per common share.................... $ (0.66) $ (1.55) $ (3.36) $ (6.00) $ (2.61)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
(IN THOUSANDS) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total assets................................. $114,837 $115,077 $95,372 $41,089 $13,692
Debt obligations (1)......................... 60,375 62,481 59,903 8,833 10,500
Mandatorily redeemable preferred stock....... 3,944 3,718 1,868 1,754 1,644
Total stockholders' equity (deficit)......... $ 18,120 $ 15,009 $ 5,441 $12,079 $(5,230)
</TABLE>
SEE DISCUSSION OF BUSINESS ACQUISITIONS MATERIALLY AFFECTING THE
COMPARABILITY OF THE INFORMATION ABOVE AT NOTES 4, 5 AND 6 TO THE "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS".
- ------------------------
(1) See discussion of debt obligations at Note 11 of the "Notes to Consolidated
Financial Statements".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUES. Net revenues in 1999 increased $7.9 million or 7% to $125.9
million from $118.0 million in 1998. The primary reason for the increase in
revenues was the increased sales of products for diabetes management, especially
our FastTake(R) blood glucose monitoring system. Net sales from our diabetes
management segment were $71.2 million in 1999, an increase of $14.0 million or
25% as compared to net sales of $57.2 million in 1998. The net sales of products
for diabetes management accounted for 57% of our net revenues in 1999 compared
to 48% of the net revenues in 1998. Net sales from our women's health segment
were $42.8 million in 1999, an increase of $2.3 million or 6% as compared to
$40.5 million in 1998. Although the net sales of women's health products
increased from 1998, they accounted for the same percentage (34%) of our net
revenues due to the faster growth in the diabetes segment. The increase in the
women's health segment is attributed primarily to two factors. We experienced a
full year of sales of SoyCare(TM), a line of nutritional supplements for
menopause and bone health introduced in July 1998. The second 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. Other revenues were
derived from the net sales of clinical diagnostics products and the recognition
of deferred revenue. Net sales of the clinical diagnostic products for 1999 were
$11.1 million, a decrease of $4.8 million or 30% from net sales of $15.9 million
in 1998. The decrease in diagnostic product sales is primarily due to our sale
of the diagnostics business line of our wholly owned subsidiary in Ireland,
Cambridge Diagnostics Ireland, Ltd. (Cambridge Diagnostics), in September 1998.
Additionally, a decline in sales of our wholly owned subsidiary in Israel,
Orgenics Ltd. (Orgenics), accounted for $2.1 million of the decline in
diagnostic product revenues. This was due primarily to a one time non-recurring
sale of HIV test kits for $1.6 million during 1998. Grant and other revenue was
approximately $742,000 in 1999, a decrease of $3.2 million or 81% from grant and
other revenue of $3.9 million in 1998. In 1999, we recognized $316,000 of
revenue related to a $7.0 million success fee received from LifeScan, Inc.
(LifeScan), an affiliate of Johnson and Johnson Development Corporation, in
October 1996, versus $2.7 million in 1998. The amortization of this success fee
was complete in March 1999. Approximately $398,000 of the revenues for 1999 was
attributable
F-1
<PAGE>
to the amortization of deferred revenue associated with certain development and
capital grants relating to our manufacturing facility in Inverness, Scotland. In
1998, we recognized $1.2 million revenue in connection with development and
capital grants, most of which related also to the Inverness facility.
GROSS PROFIT. Total gross profit for 1999 increased $1.7 million or 4% to
$42.6 million from $40.9 million in 1998. However, gross profit on net product
sales for 1999 increased $4.9 million or 13% to $41.9 million from $37.0 million
in 1998. The increase in gross profit was primarily attributable to the increase
in sales of FastTake. Gross profit percentage of net product sales increased to
33% in 1999 from 32% in 1998. Gross profit on net sales of the diabetes
management segment was $14.8 million or 21% of the net sales of the diabetes
management segment for 1999 compared to $7.8 million or 14% of the net sales of
the diabetes management segment for 1998. Gross profit on the women's health
segment was $20.9 million or 49% of the net sales of women's health products in
1999 compared to $20.2 million or 50% of the net sales of women's health
products in 1998. The profit increase was primarily due to higher sales of
pregnancy and ovulation tests. Gross profit from net sales of clinical
diagnostics and other products, and the recognition of deferred revenue was $6.9
million in 1999 compared to $12.8 million in 1998. The decrease was primarily
attributable to the decrease in revenue recognized on the aforementioned
LifeScan success fee received in 1996 and the sale of Cambridge Diagnostics'
diagnostics business in September 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1999
decreased $474,000 or 6% to $6.9 million from $7.4 million in 1998. The decrease
was primarily due to our sale of the diagnostics business line of Cambridge
Diagnostics in September 1998. Research and development expenses related to
diabetes products at our subsidiary in Scotland, Inverness Medical Limited
(Inverness), increased by $1.0 million but were more than offset by a reduction
in research and development expenses of the clinical diagnostics business. We
expect to spend significant and increasing amounts on research and development
in the area of diabetes, and specifically glucose monitoring, throughout 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased $900,000 or 2% to $35.4 million from $36.3
million in 1998. The decrease was primarily attributable to a reduction in
expenses associated with the clinical diagnostic business. Selling, general and
administrative expense as a percentage of net revenues decreased to 28% of net
revenues for 1999 from 31% of net revenues for 1998.
NET CHARGE ON BUSINESS DISPOSITION, ASSET IMPAIRMENT AND RESTRUCTURING
ACTIVITIES. There were no charges for business disposition, asset impairment or
restructuring activities in 1999. A loss on disposition of a business was
recorded in 1998. (See "Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997".)
INTEREST EXPENSE. Interest expense decreased $1.5 million to $8.1 million
in 1999 from $9.6 million in 1998. In 1999, we recognized $327,000 of non-cash
interest expense for the amortization of the original issue discount on
convertible notes and warrants compared to $1.8 million of non-cash interest
expense recognized in 1998 for the amortization of the original issue discount
on convertible notes and warrants.
INTEREST AND OTHER (EXPENSE) INCOME, NET. Interest income decreased by
$222,000 to $363,000 in 1999 from $585,000 in 1998, primarily due to the
decrease in cash balances. In addition, we incurred realized and unrealized
losses totaling $853,000 in 1999 due to foreign currency fluctuation. In 1998,
we recognized $1.5 million of non-cash income related to 155,724 shares of our
Common Stock received into treasury in connection with the settlement agreement
dated March 6, 1998 by and among Selfcare, Trinity Biotech plc (Trinity),
Flambelle Limited and Eastcourt Limited. We also recognized a $237,000 gain in
1998 related to our 29.9% equity in the net profit of Enviromed plc.
DIVIDENDS AND MINORITY INTEREST. In 1999, our subsidiary, Inverness,
accrued $226,000 representing a 6% dividend payable on its outstanding
cumulative redeemable preference shares, as compared to $146,000 for 1998. In
October 1998, an additional 1,000,000 shares of 6% cumulative redeemable
F-2
<PAGE>
preference stock of Inverness were issued to Inverness & Nairn Local Enterprise
Company (INLEC), a development agency funded by the government of the United
Kingdom, for approximately $1.7 million. Minority interest in certain of our
subsidiaries was less than $1,000 in 1999 compared to $100,000 in 1998. We now
own 100% of Orgenics, either directly or indirectly, as compared to our prior
year's 99.8% ownership.
EXTRAORDINARY LOSS. In the first quarter of 1999, we recorded an
extraordinary loss of approximately $306,000 ($228,000 of which is non-cash
expense) for the modification of the terms of the Senior Subordinated
Convertible Notes issued during October 1997 (see Note 16 of the "Notes to
Consolidated Financial Statements").
INCOME TAXES. In 1999, we recorded provisions of $245,000 for income taxes
compared to $544,000 in 1998. The provisions predominately reflect certain state
income taxes relating to our subsidiaries, Inverness Medical, Inc. (IMI) and
Can-Am Care Corporation (Can-Am), as well as capital gains taxes in Ireland
relating to the business disposition of Cambridge Diagnostics. In 1999, we also
recognized a $300,000 benefit related to the establishment of a state deferred
tax asset. See the discussion of Income Taxes under "Liquidity and Capital
Resources" below.
NET LOSS. Net loss for 1999 was approximately $9.1 million or $0.66 per
common share as compared to $18.8 million or $1.55 per common share for 1998.
The net loss in 1999 and 1998 includes non-recurring, non-cash charges and
income as described above. Excluding the non-recurring, non-cash charges and
income results in a net loss of $8.4 million or $0.62 per common share in 1999
as compared to $10.9 million or $0.91 per common share in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues in 1998 increased $65.7 million or 126% to
$118.0 million from $52.3 million in 1997. The primary reason for the increase
in revenues was the addition of Can-Am acquired in February 1998 and the sales
of the FastTake system, which we primarily started shipping in 1998. Net sales
from our diabetes management segment were $57.2 million in 1998, an increase of
$56.8 million as compared to net sales of $434,000 in 1997. The diabetes
management net product sales accounted for 48% of our net revenues in 1998
compared to just 1% of the net revenues in 1997. Net sales from our women's
health segment were $40.5 million in 1998, an increase of $8.6 million or 27% as
compared to $31.8 million in 1997. Although the net sales of women's health
products increased from 1997, they accounted for a smaller percentage of our net
revenues due to the introduction of the diabetes management products. The
women's health product sales accounted for 34% of our total net revenues in 1998
compared to 61% of the total net revenues in 1997. The increase in the net sales
in the women's health segment is attributed primarily to three factors. In 1998,
we experienced the effect of a full year's net sales of our Nutritional
Supplements compared with 10 1/2 months of sales from the acquisition of this
product line in February, 1997. Secondly, we introduced SoyCare, a new line of
nutritional supplements for menopause and bone health, in July 1998. The third
factor in the increased net sales of the women's health segment was an increase
in sales of private label pregnancy and ovulation tests. Other revenues were
derived from the net sales of clinical diagnostics products and the recognition
of deferred revenue. Net sales of the clinical diagnostic products for 1998 were
$15.9 million, a decrease of $2.2 million or 13% from net sales of $18.1 million
in 1997. The decrease in diagnostic product sales is partly due to our sale of
the diagnostics business of Cambridge Diagnostics in September 1998 in addition
to a general decline in the sales of the clinical diagnostics products. Grant
and other revenue amounted to $3.9 million in 1998, an increase of $2.5 million
or 187% from grant and other revenue of $1.4 million in 1997. In 1998, we
recognized $2.7 million of revenue related to a $7.0 million success fee
received from LifeScan in October 1996. Approximately $1.2 million of the
revenues for 1998 were attributable to the amortization of deferred revenue
associated with certain development and capital grants relating to the Inverness
facility. In 1997,
F-3
<PAGE>
there was $1.1 million revenue recognized in connection with the grants, most of
which related to the Inverness facility.
GROSS PROFIT. Gross profit for 1998 increased $14.9 million or 57% to $40.9
million from $26.0 million in 1997. The increase in gross profit was primarily
attributable to the sales of FastTake and the inclusion of the products sold by
Can-Am which we acquired in February 1998. Gross profit as a percentage of net
revenues decreased to 35% in 1998 from 50% in 1997. The decrease in the gross
profit as a percentage of net revenues is attributed to the sale of meters for
the FastTake system, which are sold at cost. Gross profit on net sales of the
diabetes management segment was $7.8 million or 14% of the net sales of the
diabetes management segment for 1998. Gross profit on the women's health segment
was $20.2 million or 50% of the net sales of women's health products in 1998
compared to $15.9 million or 50% of the net sales of women's health products in
1997. The $4.3 million increase was primarily due to increases in the sales of
the nutritional supplements, including sales of SoyCare, a new product
introduced in 1998. Gross profit from net sales of clinical diagnostics and
other products, and the recognition of deferred revenue was $12.8 million in
1998 compared to $10.4 million in 1997. The increase was primarily attributable
to the revenue recognized on the aforementioned LifeScan success fee.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1998
decreased $8.2 million or 53% to $7.4 million from $15.6 million in 1997. The
decrease was primarily due to the transition in December 1997 of the FastTake
system from research and development into production.
CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT. A portion of the purchase
price of our acquisition of Orgenics was allocated to in-process research and
development projects that did not achieve technological feasibility and did not
have future alternative uses. The total charge for in-process research and
development was $7.7 million of which $3.3 million was expensed in 1997. There
were no charges for in-process research and development in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $10.5 million or 41% to $36.3 million from
$25.8 million in 1997. The increase was primarily attributable to the
acquisition of Can-Am and marketing efforts and the hiring of additional staff
to support the sales of the women's health products, especially SoyCare.
Additionally, legal expenses were higher in 1998 due to litigation (See "Item 3.
Legal Proceedings" included in our 1999 Annual Report on Form 10-K). Selling,
general and administrative expense as a percentage of net revenues decreased in
1998 from 1997. Selling, general and administrative expense was 31% of net
revenues for 1998 compared to 49% for 1997.
NET CHARGE ON BUSINESS DISPOSITION, ASSET IMPAIRMENT AND RESTRUCTURING
ACTIVITIES. On September 30, 1998, we sold the clinical diagnostics business of
our subsidiary, Cambridge Diagnostics, to Trinity for consideration of 555,731
shares of our Common Stock, which was then owned by Trinity, $230,000 in cash
and other consideration valued at approximately $43,000. We recorded a gain of
approximately $1.2 million as a result of the sale of the assets. In the fourth
quarter of 1998, we recorded impairment charges totaling $7.8 million reflecting
the change in the fair value of certain assets that were no longer expected to
contribute to our profitability. In 1998, we also recorded a $810,000
restructuring charge related to the discontinuance of development and
manufacture of diabetes management products at Cambridge Diagnostics.
INTEREST EXPENSE. Interest expense increased $4.1 million to $9.6 million
in 1998 from $5.5 million in 1997. In 1998, we recognized $1.8 million of
non-cash interest expense for the amortization of the original issue discount on
convertible notes and warrants. In 1997, we recognized $498,000 of non-cash
interest expense for the amortization of the original issue discount on
convertible notes and warrants. The increase in interest expense is due to new
financing activities in 1998 that are described in this section under the
caption of "Liquidity and Capital Resources" and also due to a full year of
interest expense on the Subordinated Revenue Royalty Notes issued in mid-1997.
F-4
<PAGE>
INTEREST AND OTHER (EXPENSE) INCOME, NET. Interest income decreased by
$383,000 to $585,000 in 1998 from $968,000 in 1997, primarily due to the
decrease in cash balances. We also recognized $1.5 million of non-cash income
related to 155,724 shares of our Common Stock received into treasury in
connection with the settlement agreement dated March 6, 1998 by and among
Selfcare, Trinity, Flambelle Limited and Eastcourt Limited. We recognized a
$237,000 gain in 1998 related to our 29.9% equity in the net profit of Enviromed
plc compared to a $327,000 loss recognized in 1997. We incurred an unrealized
loss of $717,000 in 1997 on the translation of intercompany receivables.
Fluctuations in foreign currency did not significantly impact revenue
performance measured in U.S. dollars for 1998. Substantially all sales are paid
in the functional currency of the selling entity.
DIVIDENDS AND MINORITY INTEREST. For 1998, our subsidiary, Inverness,
accrued $146,000 representing a 6% dividend payable on its outstanding
cumulative redeemable preference shares, as compared to $114,000 for 1997. In
October 1998, an additional 1,000,000 shares of 6% cumulative redeemable
preference stock of Inverness were issued to INLEC for approximately $1.7
million. Minority interest in certain of our subsidiaries was $100,000 in 1998
and $181,000 in 1997.
EXTRAORDINARY LOSS. In 1997, we incurred a non-cash charge of $579,000 for
the extinguishment of debt related to the Cambridge Diagnostics Notes and EN PLC
Notes (see Notes 8 and 12 of the "Notes to Consolidated Financial Statements"),
which were exchanged for convertible notes.
INCOME TAXES. In 1998, we recorded provisions of $544,000 for income taxes
compared to $196,000 for 1997. The 1998 provision reflects certain state income
taxes relating to IMI and Can-Am, as well as capital gains taxes in Ireland
relating to the business disposition of Cambridge Diagnostics. Substantially all
of the 1997 provision relates to state income taxes.
NET LOSS. Net loss for 1998 was approximately $18.8 million or $1.55 per
common share as compared to $24.7 million or $3.36 per common share in 1997. The
net loss in 1998 and 1997 includes non-recurring, non-cash charges and income as
described above. Excluding the non-cash charges and income results in a net loss
of $10.9 million or $0.91 per common share in 1998 as compared to $20.0 million
or $2.50 per common share for 1997. These losses reflect continued spending on
research and development, expansion of our sales and marketing efforts, the
hiring of additional staff to support our operations and significant interest
expense on our debts.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, we received funds through our
alliance with LifeScan and private placements of convertible preferred stock.
On June 7, 1999, we entered into amendments of our product development and
distribution agreements (the Amended Agreements) with LifeScan. Under the
Amended Agreements, we are to develop and supply to LifeScan additional products
for monitoring blood glucose in humans. Upon the execution of the Amended
Agreements, LifeScan provided us with an initial loan of (pound)6,250,000
(approximately $9,900,000) to fund the increased costs related to the
anticipated production levels. LifeScan has also committed to make additional
loans of up to (pound)8,125,000 (approximately $13,000,000) to us upon the
accomplishment of certain milestones relating to the new products we are 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 we sell to LifeScan commencing on
the date of the initial loan. Additionally, LifeScan has agreed to provide
credit enhancements, related to the anticipated increase in production levels,
for our further borrowings of up to $10,000,000 from a commercial bank to fund
additional manufacturing capacity for the products covered by the Amended
Agreements.
On January 8, 1999, we sold in a private placement 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
F-5
<PAGE>
preferred stock to investors at an aggregate purchases price of $7.4 million
(see Note 18(e) of the "Notes to Consolidated Financial Statements"). Of the
gross proceeds, we received approximately $4.9 million in advance during
December 1998.
We received $1.6 million in June 1995 as an investment by INLEC in 1,000,000
shares of 6% Cumulative Redeemable Preference Shares (the Inverness Preference
Shares) of Inverness to finance a portion of the start-up costs relating to the
facility in Inverness, Scotland. The Inverness Preference Shares held by INLEC
(including cumulative dividends) are reflected in the accompanying consolidated
balance sheets as mandatorily redeemable preferred stock of a subsidiary. We
must redeem all 1,000,000 Inverness Preference Shares by June 23, 2000. If we
cannot legally redeem the Inverness Preference Shares on that date, we must
redeem the shares as soon as legally permissible at a price of approximately
$1.91 per share plus any accrued and unpaid dividends. Upon liquidation of
Inverness, the holders of the Inverness Preference Shares are entitled to
receive approximately $1.59 per share, plus any accrued and unpaid dividends;
thereafter, the ordinary stockholders shall equally share with the holders of
the Inverness Preference Shares in the remaining assets to be distributed. The
holders of the Inverness Preference Shares do not have any voting rights.
Additionally, in October 1998, we received $1.7 million from INLEC, for another
1,000,000 Inverness Preference Shares. The additional Inverness Preference
Shares must be redeemed in October 2003 and contain the same terms as the
Inverness Preference Shares that were issued in 1995.
On February 18, 1998, IMI acquired Can-Am, a leading supplier of diabetes
care products, for approximately $27.9 million, consisting of $13.6 million in
cash, notes in the aggregate principal amount of $2 million (subject to
potential premiums of up to an additional $2 million in the aggregate based upon
increases in our common stock during the term of the Notes) and approximately
1.1 million shares of our Common Stock.
To fund the cash portion of the purchase price for Can-Am, our subsidiary,
IMI, entered into a $42 million credit agreement with Chase Manhattan Bank
(Chase Credit Agreement). The Chase Credit Agreement consists of a $37 million
term loan and a $5 million revolving line of credit. Of the proceeds from this
term loan, IMI used $32 million to finance the cash portion of the Can-Am
purchase price and to refinance its then existing bank debt with Fleet National
Bank. The remaining $5 million was used to fund working capital.
The Chase Credit Agreement requires compliance with various financial and
non-financial covenants for both Selfcare and IMI. The primary financial
covenants pertain to, among other things, interest coverage, debt services
coverage, leverage, and earnings before interest, taxes, depreciation and
amortization (EBITDA). We were in compliance with such covenants at
December 31, 1999.
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 0.50% to 2.00% (as amended subsequent to year-end), or the LIBOR
rate plus a spread from 2.00% to 3.50% (as amended subsequent to year-end). The
spreads depend on IMI's ratio of senior funded debt to EBITDA.
Borrowings under the Chase Credit Agreement are secured by IMI's stock, and
the assets of IMI, Can-Am, Selfcare and our other subsidiaries. Borrowings under
the revolving line of credit are based on certain percentages of eligible
assets, as defined in the Chase Credit Agreement. IMI is required to pay an
annual fee of .375% for the unused portion of the revolving line of credit. The
revolving line of credit expires on February 18, 2002. At December 31, 1999, the
unused balance of the revolving line of credit was approximately $1,800,000.
IMI is required to make quarterly principal payments ranging from $1.3
million to $1.95 million through December 31, 2003. IMI made four quarterly
principal payments totaling $6.2 million in 1999. IMI must also make mandatory
prepayments on the term loan if it meets certain cash flow thresholds, sell
assets outside of the ordinary course of business, issue or sell indebtedness or
issue stock, as defined in the
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credit agreement. At December 31, 1999, IMI estimates that it will make such
mandatory prepayments in the amount of approximately $2,523,000 in 2000, which
it intends to finance by drawing upon the available revolving line of credit
balance.
On June 26, 1998, we entered into a securities purchase agreement to sell
Units (the Units) having an aggregate purchase price of $10.2 million. Each Unit
consists of (i) $25,000 in principal amount of a Subordinated Note (individually
a Note and collectively the Notes) and (ii) a warrant (individually a Warrant
and collectively the Warrants) to acquire such number of shares of our Common
Stock as is determined by dividing $3,750 by the Exercise Price (as hereinafter
defined) as of the date of issuance of such Warrant. The "Exercise Price" as of
a particular date means the average of the closing prices for shares of our
Common Stock on the American Stock Exchange for the five trading days
immediately preceding such date. The Notes are due on the second anniversary of
their date of issuance and the Warrants may be exercised, in whole or in part,
at any time on or prior to the fifth anniversary of their issuance.
The Notes bear interest at a rate equal to 13% per annum and are payable
quarterly on the first day of each quarter. Interest or principal which is not
paid when due shall bear interest, compounded daily, at the rate of 18%.
Whenever we make a payment of principal under the Notes, we shall at the same
time pay a premium (the Premium) equal to 5% of the principal amount then being
paid. We may prepay the Notes, in whole or in part, at any time after December
31, 1998 so long as we at the same time pay the holder of the Notes the Premium
with respect to the principal amount then being prepaid.
On June 26, 1998, we sold Units consisting of an aggregate of $4.9 million
of Notes and Warrants exercisable for 72,588 shares at $10.125 per share. On
July 17, 1998, we sold Units consisting of an aggregate of $2.45 million of
Notes and Warrants exercisable for 40,330 shares at $9.1125 per share. On
August 28, 1998, we sold Units consisting of an aggregate of $2.85 million of
Notes and Warrants exercisable for 68,813 shares at $6.2125 per share. The total
of the principal and Premium due to be paid on the Notes between June 26 and
August 28, 2000 equals approximately $10.7 million.
Pear Tree Royalty Company, Inc. (Pear Tree Royalty Company), as the
authorized representative of the holders of the Notes, received a Warrant, at
each closing at which Units were sold, for a number of shares equal to one-third
of the aggregate number of shares issuable under the other Warrants issued at
such closing. Mr. Umphrey, one of our Directors, is also a Director and
shareholder of Pear Tree Royalty Company. As such, Pear Tree Royalty Company
received a Warrant for 24,196 shares on June 26, 1998, a Warrant for 13,443
shares on July 17, 1998, and a Warrant for 22,938 shares on August 28, 1998.
At December 31, 1999, we had cash and cash equivalents of $5.2 million, a
$4.0 million decrease from December 31, 1998. Cash used for operations in 1999
was $5.2 million due largely to net losses of $9.1 million in 1999. However, the
net loss for 1999 included $6.0 million of non-cash items. Other uses of cash in
operating activities included increases in both accounts receivable and
inventory totaling approximately $7.6 million reflecting our working capital
needs related to the increase in our sales. Cash was provided for operations in
part by a net increase in accounts payable, accrued expenses and other
liabilities totaling approximately $5.2 million.
During 1999, we used $3.8 million to purchase property and equipment.
Approximately $2.3 million of the purchased property and equipment was for the
Inverness facility. We received approximately $740,000 ((pound)437,000) from
Enviromed plc, an affiliated company, in 1999 as repayment of notes.
As of December 31, 1999, we had approximately $16.4 million and $48.1
million of domestic and foreign net operating loss carryforwards, respectively,
and approximately $99,000 of research and development tax credit carryforwards,
which expire at various dates through 2019. These losses and tax credits are
available to reduce federal taxable income and federal income taxes,
respectively, in future years, if any. These losses and tax credits are subject
to review and possible adjustment by the Internal Revenue Service and may be
limited in the event of certain cumulative changes in ownership interests of
significant
F-7
<PAGE>
shareholders over a three-year period in excess of 50%. We have recorded a
valuation allowance against substantially all of the deferred tax asset to
reflect uncertainties that might affect the realization of the deferred tax
asset.
Based upon our operating plans, we believe that our existing capital
resources will be adequate to fund our operations and scheduled debt obligations
for at least the next 12 months. We have an agreement with an equipment leasing
company to fund additional manufacturing capacity at our facility in Inverness,
Scotland. We believe that we will be able to fund our 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 we were to encounter delays in achieving the milestones necessary
for receiving the funding from LifeScan, we would need to seek alternative
financing arrangements or delay the project spending. In addition, we may expand
our 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. 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, we
may not be able to pursue desirable research and development programs unless we
obtain funds through arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our technologies or products which
we would otherwise pursue on our own.
CERTAIN FACTORS AFFECTING FUTURE RESULTS
There are various risks, including those described below, which may
materially impact your investment in our Company 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 our securities. This section includes or
refers to certain forward-looking statements; you should read the explanation of
the qualifications and limitations on such forward-looking statements discussed
on page F-12.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO CONTINUE TO EXPAND OUR RESEARCH AND
DEVELOPMENT EFFORTS AND GROW OUR BUSINESS.
We anticipate that during 2000, we may need to raise additional capital to
help fund research and development of new technologies (beyond the
aforementioned activities related to LifeScan), through borrowing, or the
issuance of debt or equity securities, or in connection with agreements which
might be made with one or more collaborative partners. We are not certain that
such additional financing will be available, or, if available, that it will be
available on acceptable terms. For additional information on our liquidity and
capital needs, please see the section entitled Liquidity and Capital Resources
in this section "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
WE ONLY RECENTLY INTRODUCED ONE OF OUR NEW PRODUCTS AND WE CANNOT BE CERTAIN
THAT IT WILL GAIN MARKET ACCEPTANCE.
On September 17, 1999, we received notification of Federal and Drug
Administration (FDA) clearance for our low cost alternative electrochemical
blood glucose monitoring test strip, Excel(TM) GE, for use with Glucometer
Elite(R) meters sold by Bayer. We commenced shipments of Excel GE in October
1999. Our future results of operations depend to some extent on our ability to
market and sell Excel GE. Additionally, we cannot assure you that the market
will fully accept Excel GE.
F-8
<PAGE>
WE DEPEND ON OUR RELATIONSHIP WITH LIFESCAN TO DISTRIBUTE CERTAIN OF OUR
EXISTING PRODUCTS, AS WELL AS FUTURE PRODUCTS, AND TO FUND CERTAIN NEW PRODUCT
INITIATIVES.
We depend on our relationship with LifeScan (as discussed below) to
distribute certain of our existing products, as well as future products, and for
funding certain new product initiatives.
In 1995, we entered into an exclusive worldwide alliance and distribution
agreement with LifeScan, which was amended in June 1999 (see Note 15 of the
"Notes to Consolidated Financial Statements"). Under the terms of the alliance
with LifeScan, we develop and manufacture and LifeScan distributes FastTake, our
proprietary electrochemical blood glucose monitoring system for the management
of diabetes, and any new systems consisting of new meters and disposable strips.
We commenced shipments of FastTake in December 1997 and the first upgrade of
FastTake in July 1999. FastTake is currently the most successful product in our
diabetes line of business. Our future results of operations depend to a
substantial degree on LifeScan's ability to market and sell FastTake as well as
any other new systems. Although the FastTake product appears to be gaining
acceptance, we cannot assure you that the market will fully accept FastTake or
that any acceptance will continue. Additionally, under the terms of the alliance
with LifeScan, LifeScan is to make additional funding to us when we reach
certain milestones with our development of future products for LifeScan. As we
cannot assure the success of reaching such milestones in the development of
future products, we cannot guarantee that LifeScan will make such additional
funding to us. Any failure by us to develop and produce or failure of LifeScan
to market and distribute FastTake as well as several additional new systems
successfully could have a material adverse effect on our business, financial
condition and results of operations. It would also affect our ability to repay
loans received from LifeScan.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.
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.
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR PROPRIETARY RIGHTS
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR
COSTS.
Substantial litigation over intellectual property rights exists in our
industry. We expect that products in our industry may be increasingly subject to
third-party infringement claims as the number of competitors grows and the
functionality of products and technology in different industry segments
overlaps. Third parties may currently have, or may eventually be issued, patents
that our products or technology may infringe. Any of these third parties might
make a claim of infringement against us. Any litigation could result in the
expenditure of significant financial resources and the diversion of management's
time and resources. In addition, litigation in which we are accused of
infringement may cause negative publicity, have an impact on prospective
customers, cause product shipment delays, require us to develop non-infringing
technology or enter into royalty or license agreements, which may not be
available on acceptable terms, or at all. If a successful claim of infringement
were made against us and we could not develop non-infringing technology or
license the infringed or similar technology on a timely and cost-effective
basis, our business could be significantly harmed and we could be exposed to
legal actions by our customers.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE.
SELF-TEST PRODUCTS. The medical products 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
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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: (i) developing technologies and products
that are more effective than our products or that render our technologies or
products obsolete or noncompetitive; (ii) obtaining patent protection or other
intellectual property rights that would prevent us from developing our potential
products; or (iii) obtaining regulatory approval for the commercialization of
their products more rapidly or effectively than we are able to do so. Also, 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.
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.
VARIOUS FACTORS MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.
Factors relating to our business make our future operating results uncertain
and may cause them to fluctuate from period to period. Such factors include:
(i) the timing of new product announcements and introductions by us and our
competitors; (ii) market acceptance of new or enhanced versions of our products;
(iii) changes in manufacturing costs or other expenses; (iv) competitive pricing
pressures; (v) the gain or loss of significant distribution outlets or
customers; (vi) increased research and development expenses; or (vii) general
economic conditions.
OUR SHARE PRICE MAY BE VOLATILE DUE TO OUR OPERATING RESULTS, AS WELL AS FACTORS
BEYOND OUR CONTROL.
Our share price may be volatile due to our operating results, as well as
factors beyond our control. 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 factors
such as: (i) our quarterly operating results; (ii) changes in general conditions
in the economy, the financial markets, or the health care industry;
(iii) government regulation in the health care industry; (iv) changes in other
areas such as tax laws; (v) 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 (vi) other
developments affecting us or our competitors.
YEAR 2000 COMPLIANCE COSTS AND RISKS ARE DIFFICULT TO ACCESS AND COULD IMPACT
OUR BUSINESS.
The Year 2000 problem arose as a result of the fact that many existing
computer programs and embedded chip technology systems were developed using only
the last two digits, rather than four, to define the applicable year. Thus, any
information technology (IT) systems with time-sensitive software might recognize
a date using "00" as the year 1900 rather than the year 2000, which could result
in miscalculations and system failures. In addition, companies were at risk from
Year 2000 failures on the part of third parties with which they interact.
F-10
<PAGE>
Our Company uses a significant number of IT systems that are essential to
our operations. For this reason, we developed and implemented a four-phase plan
to address our Year 2000 issues and to insure that our IT systems would function
properly in the 2000 and thereafter. We believe that we have successfully
rendered IT systems Year 2000 compliant. Since January 1, 2000, we have not
experienced disruptions to our business operations as a result of Year 2000
compliance problems or otherwise and have not received reports of any material
Year 2000 compliance problems with any third parties with which we have material
interactions. Although we do not believe that we have continued exposure to the
Year 2000 issue, we cannot give assurances that we will not detect unanticipated
Year 2000 compliance issues in the future. Additionally, we have tested the
software in our product, the FastTake blood glucose monitoring system, and
believe that it is Year 2000 compliant.
The primary cost of our Year 2000 compliance to date, which has been
associated with assessment, remediation, and testing, has not been significant.
We believe that if there are additional costs, any such 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.
The preceding "Year 2000 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 of expectations
regarding future events. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources; the ability to identify and remediate all date
sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment; and the actions of governmental agencies or other
third parties with respect to Year 2000 problems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
discussed in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
INTEREST RATE RISK
We are exposed to market risk from changes in interest rates primarily
through our investing and borrowing activities. In addition, our ability to
finance future acquisition transactions may be impacted if we are not able to
obtain appropriate financing at acceptable rates.
Our investing strategy, to manage interest rate exposure, is to invest in
short-term, highly liquid investments. Currently, our short-term investments are
in money market funds with original maturities of 90 days or less. At December
31, 1999, the fair value of our short-term investments approximated market
value.
In February 1998, our subsidiary, IMI, entered into a $42 million credit
agreement with Chase. The Chase 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 0.50% to 2.00% (as amended
subsequent to year-end), or the LIBOR rate plus a spread from 2.00% to 3.50% (as
amended subsequent to year-end). The spreads depend on IMI's ratio of senior
funded debt to EBITDA. IMI entered into an interest rate Swap Agreement with an
effective date of March 31, 1998. This agreement protects approximately 50% of
IMI's term loan against LIBOR interest rates rising over 7.5%. This agreement is
effective through March 30, 2001. If the LIBOR rate increases one percentage
point, as compared to the rate at December 31, 1999, we estimate an increase in
our interest expense of approximately $246,000 in the year 2000. If the LIBOR
rate
F-11
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increases two percentage points, as compared to the rate at December 31, 1999,
we estimate an increase in our interest expense of approximately $414,000 in the
year 2000.
FOREIGN CURRENCY RISK
We face 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 our business, financial condition and results of
operation. In 1999, the net impact of foreign currency changes was a loss of
$853,000. We do not use derivative financial instruments or other financial
instruments to hedge economic exposures or for trading. Historically, our
primary exposures have been related to the operations of our European
subsidiaries. However, the sales of FastTake, our lead diabetes management
product, are denominated in the currency in which the manufacturing costs are
incurred. The loan received from LifeScan in June 1999 is denominated in British
Pounds Sterling and therefore we are exposed to fluctuations between the British
Pound and U.S. Dollar. The introduction of the Euro as a common currency for
members of the European Monetary Union has taken place in our fiscal year 1999.
We have not determined the impact, if any, that the Euro will have on foreign
exposure. We intend to hedge against fluctuations in the Euro if this exposure
becomes material. At December 31, 1999, our assets related to
non-dollar-denominated currencies amounted to approximately $28.2 million.
CAUTIONARY STATEMENT PURSUANT TO PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995--"SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS
We may from time to time make certain forward-looking statements in
publicly-released materials, both written and oral. Forward-looking statements
do not relate strictly to historical or current facts and may be identified by
their use of words like "plans", "expects", "will", "anticipates", "estimates"
and other words of similar meaning. Such statements may address, among other
things, the Company's strategy for growth, product development, regulatory
approvals, market position, expenditures and financial results.
Forward-looking statements are based on current expectations of future
events. We cannot guarantee that expectations expressed in forward-looking
statements will be realized. Some important factors that could cause our actual
results to differ materially from those projected in any such forward-looking
statements are as follows:
- Economic factors, including inflation and fluctuations in interest rates
and foreign currency exchange rates and the potential effect of such
fluctuations on revenues, expenses and resulting margins;
- Competitive factors, including technological advances achieved and patents
attained by competitors and generic competition;
- Domestic and foreign healthcare changes resulting in pricing pressures,
including the continued consolidation among healthcare providers, trends
toward managed care and healthcare cost containment and government laws
and regulations relating to sales and promotion, reimbursement and pricing
generally;
- Government laws and regulations, affecting domestic and foreign
operations, including those relating to trade, monetary and fiscal
policies, taxes, price controls, regulatory approval of new products and
licensing;
- Difficulties inherent in product development, including the potential
inability to successfully continue technological innovation, complete
clinical trials, obtain regulatory approvals in the United States and
abroad, gain and maintain market approval of products and the possibility
of encountering infringement claims by competitors with respect to patent
or other intellectual property rights which can preclude or delay
commercialization of a product;
F-12
<PAGE>
- Significant litigation adverse to our Company including product liability
claims, patent infringement claims, and antitrust claims;
- Product efficacy or safety concerns resulting in product recalls or
declining sales;
- The impact of business combinations, including acquisitions and
divestitures, and organizational restructuring consistent with evolving
business strategies; and
- Issuance of new or revised accounting standards by the American Institute
of Certified Public Accountants, the Financial Accounting Standards Board
or the Securities and Exchange Commission;
The foregoing list sets forth many, but not all, of the factors that could
impact upon our ability to achieve results described in any forward-looking
statements. Investors are cautioned not to place undue reliance on such
statements that speak only as of the date made. Investors also should understand
that it is not possible to predict or identify all such factors and that this
list should not be considered a complete statement of all potential risks and
uncertainties. Investors should also realize that if underlying assumptions
prove inaccurate or unknown risks or uncertainties materialize, actual results
could vary materially from our projections. We do not undertake any obligation
to update any forward-looking statements as a result of future events or
developments.
F-13
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SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET PRODUCT SALES................................... $125,131,088 $114,081,599 $ 50,891,221
GRANTS AND OTHER REVENUE............................ 742,415 3,902,019 1,359,150
------------ ------------ ------------
Net revenue....................................... 125,873,503 117,983,618 52,250,371
COST OF SALES....................................... 83,246,433 77,080,920 26,277,645
------------ ------------ ------------
Gross profit...................................... 42,627,070 40,902,698 25,972,726
------------ ------------ ------------
OPERATING EXPENSES:
Research and development.......................... 6,905,900 7,379,796 15,632,789
Charge for in-process research and development.... -- -- 3,303,300
Selling, general and administrative............... 35,390,211 36,289,959 25,804,761
Net charge on business dispositions, asset
impairments and restructuring activities (Note
10)............................................. -- 7,542,083 --
------------ ------------ ------------
42,296,111 51,211,838 44,740,850
------------ ------------ ------------
Operating income (loss)......................... 330,959 (10,309,140) (18,768,124)
INTEREST EXPENSE, INCLUDING AMORTIZATION OF ORIGINAL
ISSUE DISCOUNT (NOTE 16).......................... (8,092,611) (9,565,235) (5,486,835)
INTEREST AND OTHER (EXPENSE) INCOME, NET............ (532,470) 1,786,807 433,990
------------ ------------ ------------
Loss before dividends and accretion on mandatorily
redeemable preferred stock of a subsidiary...... (8,294,122) (18,087,568) (23,820,969)
DIVIDENDS AND ACCRETION ON MANDATORILY REDEEMABLE
PREFERRED STOCK OF SUBSIDIARY..................... (225,996) (145,924) (114,099)
------------ ------------ ------------
Loss before extraordinary loss and income taxes... (8,520,118) (18,233,492) (23,935,068)
EXTRAORDINARY LOSS ON MODIFICATION AND EARLY
EXTINGUISHMENT OF DEBT (NOTES 8, 12 AND 16)....... (306,092) -- (579,354)
------------ ------------ ------------
Loss before income taxes.......................... (8,826,210) (18,233,492) (24,514,422)
PROVISION FOR INCOME TAXES.......................... 245,342 544,232 195,872
------------ ------------ ------------
Net loss.......................................... $ (9,071,552) $(18,777,724) $(24,710,294
============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON AND POTENTIAL
COMMON SHARE...................................... $ (0.66) $ (1.55) $ (3.36)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF COMMON
AND POTENTIAL COMMON SHARES OUTSTANDING........... 16,819,731 12,214,986 7,990,666
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
ASSETS ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. 5,233,594 $ 9,199,630
Accounts receivable, net of reserves of approximately
$2,623,000 and $1,937,000 in 1999 and 1998,
respectively............................................ 20,557,573 16,100,680
Inventories............................................... 12,367,265 9,949,347
Notes receivable from affiliated company.................. -- 727,926
Prepaid expenses and other current assets................. 1,573,509 1,463,929
------------ ------------
Total current assets.................................... 39,731,941 37,441,512
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 9,779,498 8,201,864
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET....... 63,281,897 66,458,857
DEFERRED FINANCING COSTS AND OTHER ASSETS, NET.............. 2,043,218 2,975,244
------------ ------------
$114,836,554 $115,077,477
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.......................... $ 21,483,140 $ 12,071,650
Accounts payable.......................................... 16,550,984 11,960,808
Accrued expenses and other current liabilities............ 10,119,326 9,949,416
Current portion of deferred revenue....................... 251,447 726,458
------------ ------------
Total current liabilities............................... 48,404,897 34,708,332
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion.................. 204,770 517,190
Other long-term liabilities............................... 161,000 177,122
Notes payable, net of current portion..................... 38,892,273 50,409,484
------------ ------------
Total long-term liabilities............................. 39,258,043 51,103,796
COMMITMENTS AND CONTINGENCIES (NOTE 17)
MANDATORILY REDEEMABLE PREFERRED STOCK OF A SUBSIDIARY...... 3,944,247 3,718,251
------------ ------------
SERIES B CONVERTIBLE PREFERRED STOCK, $0.001 PAR VALUE:
Authorized and issued--8,000 shares
Outstanding--3,580 and 4,880 shares in 1999 and 1998,
respectively.......................................... 5,109,841 5,651,235
------------ ------------
ADVANCE ON SERIES C AND E PREFERRED STOCK................... -- 4,887,000
STOCKHOLDERS' EQUITY:
Series C, D and E preferred stock, $0.001 par
value--Authorized--88,500 shares
Issued and outstanding--74,041 shares in 1999........... 7,912,447 --
Common stock, $0.001 par value--
Authorized--40,000,000 shares
Issued--18,952,960 and 15,852,319 shares in 1999 and
1998, respectively.................................... 18,953 15,852
Additional paid-in capital................................ 113,794,227 107,724,384
Less--Treasury Stock, at cost, 743,678 shares............. (3,724,900) (3,724,900)
Accumulated deficit....................................... (100,205,500) (89,089,215)
Accumulated other comprehensive income.................... 324,299 82,742
------------ ------------
Total stockholders' equity.............................. 18,119,526 15,008,863
------------ ------------
$114,836,554 $115,077,477
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK
-------------------- ---------------------
NUMBER $.001 NUMBER $.001 ADDITIONAL
OF PAR OF PAR PAID-IN
SHARES VALUE SHARES VALUE CAPITAL
-------- --------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............................. 5,200 $ 5 5,975,263 $ 5,975 $ 55,233,847
Issuance of common stock, net of issuance costs of
approximately $2,078,000.............................. -- -- 1,813,201 1,813 16,051,352
Conversion of Series A convertible preferred stock to
common stock.......................................... (4,800) (5) 508,019 508 126,039
Issuance of common stock in connection with the purchase
of Orgenics, Ltd...................................... -- -- 90,344 90 1,068,230
Issuance of common stock related to warrants issued in
connection with Cambridge Diagnostics Notes........... -- -- 1,142,635 1,143 (1,143)
Exercise of common stock options and warrants........... -- -- 151,927 152 280,954
Purchase of treasury stock.............................. -- -- -- -- --
Original issuance discount on convertible notes and
accretion on Series B preferred stock pertaining to
guaranteed discount upon conversion and valuation of
warrants.............................................. -- -- -- -- 2,966,967
Deferred compensation related to grants of common stock
options............................................... -- -- -- -- 27,453
Amortization of deferred compensation related to grants
of common stock options............................... -- -- -- -- --
Reversal of accrued dividends on Series A convertible
preferred stock....................................... -- -- -- -- --
Changes in cumulative translation adjustment............ -- -- -- -- --
Net loss................................................ -- -- -- -- --
------ --------- ---------- ------- ------------
Total comprehensive loss
BALANCE, DECEMBER 31, 1997.............................. 400 -- 9,681,389 9,681 75,753,699
Issuance of common stock................................ -- -- 737,156 738 1,341,205
Conversion of preferred stock and notes to common
stock................................................. (400) -- 3,838,424 3,838 14,641,043
Issuance of common stock for the acquisition of Can-Am
Care Corporation...................................... -- -- 1,108,333 1,108 10,597,326
Issuance of common stock for Core Immuno-Assay
technology............................................ -- -- 487,017 487 4,565,291
Warrants issued with subordinated debt.................. -- -- -- -- 825,820
Common stock received in legal settlement (Note 8)...... -- -- -- -- --
Common stock received in business disposition (Note
10(b))................................................ -- -- -- -- --
Common stock repurchased from related party............. -- -- -- -- --
Change in cumulative translation adjustment............. -- -- -- -- --
Net loss................................................ -- -- -- -- --
------ --------- ---------- ------- ------------
Total comprehensive loss
BALANCE, DECEMBER 31, 1998.............................. -- $ -- 15,852,319 $15,852 $107,724,384
<CAPTION>
TREASURY STOCK
---------------------- ACCUMULATED
NUMBER OTHER
DEFERRED OF ACCUMULATED COMPREHENSIVE
COMPENSATION SHARES COST DEFICIT INCOME
------------- -------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............................. $ -- (15,600) $ (15,200) $(43,318,898) $173,565
Issuance of common stock, net of issuance costs of
approximately $2,078,000.............................. -- -- -- -- --
Conversion of Series A convertible preferred stock to
common stock.......................................... -- -- -- (126,542) --
Issuance of common stock in connection with the purchase
of Orgenics, Ltd...................................... -- -- -- -- --
Issuance of common stock related to warrants issued in
connection with Cambridge Diagnostics Notes........... -- -- -- -- --
Exercise of common stock options and warrants........... -- -- -- -- --
Purchase of treasury stock.............................. -- ( 16,597) (196,260) -- --
Original issuance discount on convertible notes and
accretion on Series B preferred stock pertaining to
guaranteed discount upon conversion and valuation of
warrants.............................................. -- -- -- (2,049,545) --
Deferred compensation related to grants of common stock
options............................................... (27,453) -- -- -- --
Amortization of deferred compensation related to grants
of common stock options............................... 27,453 -- -- -- --
Reversal of accrued dividends on Series A convertible
preferred stock....................................... -- -- -- 21,773 --
Changes in cumulative translation adjustment............ -- -- -- -- (101,294)
Net loss................................................ -- -- -- (24,710,294) --
------- -------- ----------- ------------ --------
Total comprehensive loss
BALANCE, DECEMBER 31, 1997.............................. -- (32,197) (211,460) (70,183,506) 72,271
Issuance of common stock................................ -- -- -- -- --
Conversion of preferred stock and notes to common
stock................................................. -- -- -- (127,985) --
Issuance of common stock for the acquisition of Can-Am
Care Corporation...................................... -- -- -- -- --
Issuance of common stock for Core Immuno-Assay
technology............................................ -- -- -- -- --
Warrants issued with subordinated debt.................. -- -- -- -- --
Common stock received in legal settlement (Note 8)...... -- (155,724) (1,498,844) -- --
Common stock received in business disposition (Note
10(b))................................................ -- (555,731) (2,014,525) -- --
Common stock repurchased from related party............. -- (26) (71) -- --
Change in cumulative translation adjustment............. -- -- -- -- 10,471
Net loss................................................ -- -- -- (18,777,724) --
------- -------- ----------- ------------ --------
Total comprehensive loss
BALANCE, DECEMBER 31, 1998.............................. $ -- (743,678) $(3,724,900) $(89,089,215) $ 82,742
<CAPTION>
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY LOSS
------------- --------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996.............................. $12,079,294 $ --
Issuance of common stock, net of issuance costs of
approximately $2,078,000.............................. 16,053,165 --
Conversion of Series A convertible preferred stock to
common stock.......................................... -- --
Issuance of common stock in connection with the purchase
of Orgenics, Ltd...................................... 1,068,320 --
Issuance of common stock related to warrants issued in
connection with Cambridge Diagnostics Notes........... -- --
Exercise of common stock options and warrants........... 281,106 --
Purchase of treasury stock.............................. (196,260) --
Original issuance discount on convertible notes and
accretion on Series B preferred stock pertaining to
guaranteed discount upon conversion and valuation of
warrants.............................................. 917,422 --
Deferred compensation related to grants of common stock
options............................................... -- --
Amortization of deferred compensation related to grants
of common stock options............................... 27,453 --
Reversal of accrued dividends on Series A convertible
preferred stock....................................... 21,773 --
Changes in cumulative translation adjustment............ (101,294) (101,294)
Net loss................................................ (24,710,294) (24,710,294)
----------- ------------
Total comprehensive loss $(24,811,588)
BALANCE, DECEMBER 31, 1997.............................. 5,440,685 --
Issuance of common stock................................ 1,341,943 --
Conversion of preferred stock and notes to common
stock................................................. 14,516,896 --
Issuance of common stock for the acquisition of Can-Am
Care Corporation...................................... 10,598,434 --
Issuance of common stock for Core Immuno-Assay
technology............................................ 4,565,778 --
Warrants issued with subordinated debt.................. 825,820 --
Common stock received in legal settlement (Note 8)...... (1,498,844) --
Common stock received in business disposition (Note
10(b))................................................ (2,014,525) --
Common stock repurchased from related party............. (71) --
Change in cumulative translation adjustment............. 10,471 10,471
Net loss................................................ (18,777,724) (18,777,724)
----------- ------------
Total comprehensive loss $(18,767,253)
BALANCE, DECEMBER 31, 1998.............................. $15,008,863
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ----------------------
NUMBER $.001 $.001 ADDITIONAL
OF PAR NUMBER OF PAR PAID-IN DEFERRED
SHARES VALUE SHARES VALUE CAPITAL COMPENSATION
-------- ---------- ----------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998... -- $ -- 15,852,319 $15,852 $107,724,384 $ --
Issuance of common stock..... -- -- 561,646 563 868,931 --
Issuance of Series C, D, & E
convertible preferred
stock, net of issuance
costs of $73,711........... 74,041 7,404,100 -- -- (73,711) --
Dividends accrued on Series
C, D, & E convertible
preferred stock............ -- 508,347 -- -- -- --
Accretion on Series E
preferred stock pertaining
to guaranteed discount upon
conversion................. -- -- -- -- 212,550 --
Conversion of senior
subordinated convertible
notes into common stock,
net of unamortized
financing costs............ -- -- 1,715,328 1,715 3,195,686 --
Conversion of Series B
convertible preferred stock
to common stock............ -- -- 823,667 823 1,866,387 --
Premium accrued upon terms
amendment of Series B
convertible preferred
stock...................... -- -- -- -- -- --
Changes in cumulative
translation adjustment..... -- -- -- -- -- --
Net loss..................... -- -- -- -- -- --
------- ---------- ----------- ------- ------------ -------
Total comprehensive loss -- -- -- -- -- --
BALANCE, DECEMBER 31, 1999... 74,041 $7,912,447 18,952,960 $18,953 $113,794,227 $ --
======= ========== =========== ======= ============ =======
<CAPTION>
TREASURY STOCK
------------------------- ACCUMULATED
NUMBER OTHER TOTAL
OF ACCUMULATED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES COST DEFICIT INCOME EQUITY LOSS
----------- ----------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998... (743,678) $(3,724,900) $ (89,089,215) $ 82,742 $15,008,863 $ --
Issuance of common stock..... -- -- -- -- 869,494 --
Issuance of Series C, D, & E
convertible preferred
stock, net of issuance
costs of $73,711........... -- -- -- -- 7,330,389 --
Dividends accrued on Series
C, D, & E convertible
preferred stock............ -- -- (508,347) -- -- --
Accretion on Series E
preferred stock pertaining
to guaranteed discount upon
conversion................. -- -- (212,550) -- -- --
Conversion of senior
subordinated convertible
notes into common stock,
net of unamortized
financing costs............ -- -- -- -- 3,197,401 --
Conversion of Series B
convertible preferred stock
to common stock............ -- -- (56,429) -- 1,810,781 --
Premium accrued upon terms
amendment of Series B
convertible preferred
stock...................... -- -- (1,267,407) -- (1,267,407) --
Changes in cumulative
translation adjustment..... -- -- -- 241,557 241,557 241,557
Net loss..................... -- -- (9,071,552) -- (9,071,552) (9,071,552)
----------- ----------- ------------- ----------- ----------- -----------
Total comprehensive loss -- -- -- -- -- $(8,829,995)
===========
BALANCE, DECEMBER 31, 1999... (743,678) $(3,724,900) $(100,205,500) $ 324,299 $18,119,526
=========== =========== ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(9,071,552) $(18,777,724) $(24,710,294)
Adjustments to reconcile net loss to net cash used in
operating activities:
Accretion on preferred stock of a subsidiary.............. 225,996 145,924 114,099
Noncash portion of net charge on business dispositions,
asset impairments and restructuring activities.......... -- 7,289,459 --
Loss on disposal of fixed assets.......................... 20,218 838,000 --
Noncash interest expense related to amortization of
original issue discount................................. 327,124 1,788,116 497,702
Noncash income related to legal settlement................ -- (1,498,844) --
Noncash compensation expense related to issuance of common
stock options........................................... -- -- 27,453
Noncash portion of extraordinary loss on
modification/extinguishment of debt..................... 227,997 -- 579,354
Write-off of in-process research and development
expense................................................. -- -- 3,303,300
Amortization of deferred revenue.......................... (714,872) (3,902,019) (1,406,078)
Depreciation and amortization............................. 6,255,080 8,779,108 6,597,051
Deferred income taxes..................................... (300,000) -- --
Equity in net (income) loss of affiliate.................. -- (237,366) 327,000
Minority interest in subsidiary's loss.................... (538) (100,107) (181,017)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable..................................... (4,866,828) (6,344,661) (2,402,314)
Inventories............................................. (2,695,807) (665,745) (3,129,256)
Prepaid expenses and other current assets............... 186,328 168,622 (228,394)
Accounts payable........................................ 4,980,483 817,370 1,347,664
Accrued expenses and other current liabilities.......... 263,239 (166,788) 3,406,759
----------- ------------ ------------
Net cash used in operating activities..................... (5,163,132) (11,866,655) (15,856,971)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (3,794,874) (1,442,480) (5,400,952)
Increase in other assets.................................... (5,020) (332,723) (2,622,715)
Cash loaned to affiliated company........................... -- -- (742,105)
Cash received from affiliate as repayment of loan........... 740,077 163,625 --
Cash paid for purchase of Nutritional Supplement Lines...... -- -- (31,067,580)
Cash paid for purchase of Orgenics, Ltd..................... (19,630) -- (8,417,325)
Cash received from business disposition..................... -- 230,000 --
Cash paid for Core Immuno Assay technology.................. -- (471,354) --
Cash paid for purchase of Can-Am Care Corporation........... -- (15,317,628) --
----------- ------------ ------------
Net cash used in investing activities..................... (3,079,447) (17,170,560) (48,250,677)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for deferred financing cost....................... (74,647) (1,934,835) (1,677,749)
Net proceeds from sale of common stock, preferred stock and
warrants to purchase common stock......................... 3,293,254 7,073,474 24,084,022
Proceeds from borrowings under notes payable................ 11,094,679 50,598,402 51,406,273
Repayments of notes payable................................. (10,598,855) (35,489,810) (10,556,994)
Increase in deferred revenue................................ -- 703,876 --
Purchase of treasury stock.................................. -- (71) (196,260)
Proceeds from sale of preferred stock of a subsidiary....... -- 1,680,400 --
----------- ------------ ------------
Net cash provided by financing activities................. 3,714,431 22,631,436 63,059,292
----------- ------------ ------------
FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS........ 562,112 (64,489) 259,600
----------- ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (3,966,036) (6,470,268) (788,756)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 9,199,630 15,669,898 16,458,654
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 5,233,594 $ 9,199,630 $ 15,669,898
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.................................................. $5,893,826 $ 7,591,165 $ 3,590,446
========== =========== ===========
Income taxes.............................................. $ 417,426 $ 506,134 $ 21,600
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
On October 24, 1996, the Company acquired 57.1% of the
assets and liabilities of Orgenics, Ltd.; in 1997 and
1999, the Company acquired all of the remaining shares--
Fair value of net assets.................................. $ -- $ -- $ 1,113,201
In-process research and development....................... -- -- 3,303,300
Goodwill.................................................. 39,260 -- 4,873,824
Issuance of common stock.................................. (19,630) -- (873,000)
---------- ----------- -----------
CASH PAID FOR ACQUISITION OF ORGENICS, LTD.................. $ 19,630 $ -- $ 8,417,325
========== =========== ===========
On February 19, 1997, the Company acquired the Nutritional
Supplement Lines from American Home Products Corporation--
Goodwill.................................................. $ -- $ -- $15,467,580
Trademarks................................................ -- -- 21,600,000
Note payable to AHP....................................... -- -- (6,000,000)
---------- ----------- -----------
CASH PAID FOR PURCHASE OF NUTRITIONAL SUPPLEMENT LINES...... $ -- $ -- $31,067,580
========== =========== ===========
On February 18, 1998, the Company acquired Can-Am Care
Corporation--
Accounts receivable....................................... $ -- $ 2,812,000 $ --
Inventories............................................... -- 3,766,000 --
Other current assets...................................... -- 313,000 --
Fixed assets.............................................. -- 32,000 --
Goodwill.................................................. -- 26,916,062 --
Accounts payable.......................................... -- (5,923,000) --
Note payable to Can-Am shareholders....................... -- (2,000,000) --
Issuance of common stock.................................. -- (10,598,434) --
---------- ----------- -----------
CASH PAID FOR ACQUISITION OF CAN-AM CARE CORPORATION........ $ -- $15,317,628 $ --
========== =========== ===========
FORGIVENESS OF ACCOUNTS RECEIVABLE AS CONSIDERATION FOR A
NONCOMPETE AGREEMENT IN CONNECTION WITH ORGENICS PURCHASE
OF THE MINORITY INTEREST IN ITS BRAZILIAN SUBSIDIARY...... $ -- $ -- $ 1,375,000
========== =========== ===========
EARLY EXTINGUISHMENT OF CERTAIN NOTES PAYABLE............... $ -- $ -- $ 4,580,940
========== =========== ===========
ORIGINAL ISSUE DISCOUNT ON NOTES PAYABLE PERTAINING TO
GUARANTEED DISCOUNT UPON CONVERSION....................... $ -- $ -- $ 1,994,265
========== =========== ===========
ACCRETION, PREMIUMS AND DIVIDENDS ON PREFERRED STOCK........ $2,044,733 $ 127,985 $ 2,154,314
========== =========== ===========
SHARES ISSUED IN CONNECTION WITH PURCHASE OF CORE IMMUNO
ASSAY TECHNOLOGY.......................................... $ -- $ 4,565,778 $ --
========== =========== ===========
CONVERSION OF PREFERRED STOCK AND NOTES TO COMMON STOCK..... $5,008,182 $14,516,896 $ --
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) DESCRIPTION OF BUSINESS
Selfcare, Inc. (a Delaware corporation) and its subsidiaries (the Company)
are engaged in the development, manufacturing and marketing of self-test
diagnostic products for the diabetes, women's health and, to a lesser extent,
infectious disease markets. The Company also markets 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 self-care diagnostics markets, diabetes management and women's health,
in the United States and Europe.
Inverness Medical Limited (Inverness) manufactures test strips for use in
blood glucose monitoring meters. Inverness develops and distributes such meters
and test strips through its alliance with LifeScan, Inc. (LifeScan), an
affiliate of Johnson and Johnson Development Corporation (JJDC), primarily in
the United States, Canada and Europe. The Company also sells various
diabetes-related home health care products in the United States through its
subsidiary Can-Am Care Corporation (Can-Am).
The Company manufactures most of its pregnancy detection and ovulation
prediction self test products at Cambridge Diagnostics Ireland, Ltd. (Cambridge
Diagnostics). Inverness Medical, Inc. (IMI, formerly Selfcare Consumer Products,
Inc.), the Company's primary operating subsidiary in the United States
distributes such women's health products, along with certain nutritional
supplement products.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
the Company and its wholly owned subsidiaries, the most significant of which
include Cambridge Diagnostics (an Irish corporation), Inverness (a Scottish
corporation), IMI (a Delaware corporation), and Orgenics Ltd. (Orgenics, an
Israeli corporation) and its subsidiaries. Also included in the accompanying
consolidated financial statements is the Company's 49% minority interest in
Cambridge Affiliate Corporation (Cambridge Affiliate) (see Note 9) and its 29.9%
interest in Enviromed, plc (Enviromed) (see Note 8), both of which are accounted
for under the equity method. All material intercompany balances and transactions
have been eliminated in consolidation.
(B) ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) FOREIGN CURRENCIES
All assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars using the exchange rate at each balance sheet date
while income and expense accounts are translated using the average rates of
exchange during each period. Cumulative translation gains or losses are
reflected as a separate component of consolidated stockholders' equity. Foreign
currency exchange transaction losses of
F-20
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$853,000, $33,000 and $717,000 in 1999, 1998 and 1997, respectively, are
reflected as a component of interest and other (expense) income, net, in the
accompanying consolidated statements of operations.
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less at the date of acquisition to be cash
equivalents. Cash equivalents consisted of money market funds as of
December 31, 1999 and 1998.
(E) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
(F) DEPRECIATION AND AMORTIZATION
The Company records property, plant and equipment at historical cost.
Depreciation and amortization are computed using the straight-line method based
on the following estimated useful lives of the related assets: Machinery,
laboratory equipment and tooling (1-16 years); Buildings (20 years); Leasehold
improvements (lesser of term of lease or useful life of asset); Furniture and
fixtures (7-10 years); Computer equipment (3-6 years).
(G) GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
The Company is amortizing goodwill and trademarks related to the acquisition
of the Nutritional Supplement Lines and Can-Am using the straight-line method
over 25 years, their estimated useful lives (see Notes 5 and 6). Goodwill
relating to the Company's investment in Enviromed (see Note 8) is being
amortized over 15 years. The intangible asset pertaining to the Company's core
immuno-assay technology is being amortized over 15 years. The Company recorded
amortization expense of approximately $3,216,000, $4,415,000 and $2,643,000 in
1999, 1998 and 1997, respectively, related to goodwill, trademarks and other
intangible assets.
The Company examines the carrying value of its long-lived and intangible
assets to determine whether there are any impairment losses. If indicators of
impairment were present in long-lived and intangible assets used in operations,
and future cash flows were not expected to be sufficient to recover the assets'
carrying amount, an impairment loss would be charged to expense in the period
identified. During 1998, the Company recorded an impairment charge associated
with certain goodwill and trademarks pertaining to a specific Nutritional
Supplement, the goodwill associated with Orgenics, the goodwill associated with
the Company's investment in Enviromed and certain other long-lived assets held
by Cambridge Diagnostics (see Note 10). The Company believes that the remaining
carrying value of these assets are realizable as of December 31, 1999 and 1998.
(H) INCOME TAXES
The Company follows the asset and liability method for accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using the enacted
tax rates and laws that are expected to be in effect when the differences are
expected to reverse.
F-21
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) REVENUE RECOGNITION
The majority of the Company's revenues are derived from product sales.
Product revenue is recognized upon shipment to customers, at which time title is
transferred, less a reserve for estimated product returns. The Company has
recognized deferred revenue relating to its LifeScan agreement as unfulfilled
obligations are met (see Note 15). The Company has recorded deferred revenue in
the accompanying consolidated balance sheets relating to amounts received in
advance on certain contracts and grants (see Notes 7 and 17 (b)). The Company
records the related revenue on funded grants relating to facilities and
equipment over their estimated useful lives and related costs based on the
occurrence of such costs.
(J) STOCK COMPENSATION ARRANGEMENTS
The Company accounts for its stock compensation arrangements under the
provision of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and intends to continue doing so. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
(K) NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss less
preferred stock accretion, premiums and dividends by the weighted average number
of common shares outstanding during each year. Diluted net loss per share is the
same as basic net loss per share, as the effects of the Company's potential
common stock (7,221,219, 7,283,387 and 5,335,267 shares in 1999, 1998 and 1997,
respectively) are antidilutive.
(L) POSTRETIREMENT BENEFITS
The Company does not have any obligations for postretirement or
postemployment benefits, as defined by SFAS No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, as it does not currently offer such
benefits. However, Orgenics does provide certain severance benefits (see Note
17(g)).
(M) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company invests its excess cash primarily in high quality
securities and limits the amount of credit exposure to any one financial
institution. The Company does not require collateral or other securities to
support customer receivables; however, it performs ongoing credit evaluations of
its customers and maintains allowances for potential credit losses. The Company
had one significant customer during 1999 and 1998 representing 31.7% and 28.3%,
respectively, of net revenue. This customer represents 27.7% and 25.8% of the
accounts receivable balance at December 31, 1999 and 1998, respectively. The
Company had no significant customers during 1997. The Company has no significant
off-balance-sheet or concentration of credit risks such as foreign exchange
contracts, option contracts or other foreign hedging arrangements. See Note 21
for financial information by geographic area and business segment.
F-22
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(N) DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents, accounts
receivable and debt. The estimated fair value of these financial instruments
approximates their carrying value at December 31, 1999 and 1998. The estimated
fair values have been determined through information obtained from market
sources and management estimates. The Company does not have any material
derivative or other financial instruments.
(O) RECLASSIFICATIONS
Certain prior-year account balances have been reclassified to be consistent
with the current year's presentation.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. As amended in June
1999, the statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The Company does not expect adoption of this statement to
have a material impact on its consolidated financial position or results of
operations.
F-23
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(3) OTHER BALANCE SHEET INFORMATION
Components of other selected captions in the Consolidated Balance Sheets at
December 31 consisted of:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INVENTORIES:
Raw materials............................................... $ 3,223,461 $ 2,879,965
Work-in-process............................................. 1,675,700 890,483
Finished goods.............................................. 7,468,104 6,178,899
----------- -----------
$12,367,265 $ 9,949,347
=========== ===========
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Machinery, laboratory equipment and tooling................. $12,461,074 $11,018,090
Buildings................................................... 1,159,074 --
Leasehold improvements...................................... 820,631 731,882
Furniture and fixtures...................................... 549,703 606,293
Computer equipment.......................................... 1,797,283 1,548,018
----------- -----------
16,787,765 13,904,283
Less: Accumulated depreciation and amortization............. 7,008,267 5,702,419
----------- -----------
$ 9,779,498 $ 8,201,864
=========== ===========
INTANGIBLES:
Goodwill.................................................... $47,086,262 $47,047,002
Trademarks.................................................. 21,059,405 21,059,405
Other intangible assets..................................... 5,757,465 5,757,465
----------- -----------
73,903,132 73,863,872
Less: Accumulated amortization.............................. 10,621,235 7,405,015
----------- -----------
$63,281,897 $66,458,857
=========== ===========
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Compensation and compensation-related....................... $ 1,807,562 $ 2,345,034
Professional fees........................................... 794,882 860,008
Advertising and marketing................................... 1,828,928 893,448
Interest payable............................................ 1,100,689 528,646
Other....................................................... 4,587,265 5,322,280
----------- -----------
$10,119,326 $ 9,949,416
=========== ===========
</TABLE>
(4) ACQUISITION OF ORGENICS
In 1996 and 1997, the Company gradually acquired 99.8% of the equity
interest in Orgenics. The aggregate purchase price was approximately
$18,367,000, which consisted of the following: the conversion of a $1,000,000
debenture that was convertible into redeemable preferred shares of Orgenics,
$15,339,000 in cash, options to purchase 85,800 shares of the Company's common
stock having a fair value of $1,056,000, 73,747 shares of the Company's common
stock (with a fair value of $872,000, net of treasury
F-24
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(4) ACQUISITION OF ORGENICS (CONTINUED)
stock repurchases) and direct acquisition costs of $100,000. In 1999, the
Company acquired the remaining 0.2% minority interest of Orgenics through
$20,000 in cash and issuance of 1,660 shares of its common stock with fair value
of $20,000. The aggregate purchase price of approximately $18,407,000, using the
purchase method of accounting, was allocated based on the relative fair values
of the assets acquired as follows:
<TABLE>
<S> <C>
Fair value of net assets.................................... $ 2,533,000
In-process research and development......................... 7,700,000
Goodwill.................................................... 8,174,000
-----------
$18,407,000
===========
</TABLE>
As discussed in Notes 2(g) and 10(c), the Company recorded an impairment
charge in 1998 pertaining to Orgenics' goodwill.
In 1996 and 1997, the portion of the purchase price allocated to in-process
research and development projects that had not reached technological feasibility
and did not have a future alternative use was charged to expense. The amount
allocated to in-process research and development projects represents the
estimated fair value related to these projects determined by an independent
appraisal. Proven valuation procedures and techniques were used in determining
the fair market value of each intangible asset. To bring these projects to
technological feasibility, high-risk development and testing issues will need to
be resolved that will require substantial additional effort and testing.
(5) ACQUISITION AND FINANCING OF NUTRITIONAL SUPPLEMENT LINES
On February 19, 1997, the Company acquired the Nutritional Supplement Lines
from American Home Products Corporation (AHP) and paid a total of $36,000,000 in
cash as consideration. Including direct acquisition costs, the total purchase
price was approximately $37,100,000, which was allocated to intangible assets:
approximately $15,500,000 to trademarks and $21,600,000 to goodwill. The
acquisition was accounted for using the purchase method of accounting. The
Company funded the $30,000,000 cash portion of the purchase price with bank
debt, the AHP Term Loan and the AHP Bridge Loan (collectively, the Acquisition
Facility) with original principal amounts of $25,000,000 and $5,000,000,
respectively. The remaining $6,000,000 was in the form of a note payable from
the Company to AHP, which the Company repaid during 1998. In connection with the
Acquisition Facility, the Company obtained from the bank a $5,000,000 revolving
credit line. As a part of the Can-Am acquisition described in Note 6(a), the
Company refinanced its obligations under these agreements with another bank in
February 1998 (see Note 6(b)).
As discussed in Notes 2(g) and 10(e), the Company recorded an impairment
charge in 1998 relating to a specific nutritional supplement.
(6) ACQUISITION AND FINANCING OF CAN-AM
(A) CAN-AM ACQUISITION
On February 18, 1998, IMI purchased all of the outstanding stock of Can-Am
and entered into a new bank lending agreement (Note 6(b)). The aggregate
purchase price of approximately $27,900,000 consisted of the following:
$13,600,000 in cash, 1,108,333 shares of the Company's common stock with a fair
value of
F-25
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(6) ACQUISITION AND FINANCING OF CAN-AM (CONTINUED)
$10,600,000, a $2,000,000 subordinated note payable to former Can-Am
shareholders and closing costs of approximately $1,700,000. IMI allocated the
aggregate purchase price to the acquired assets and assumed liabilities
approximately as follows:
<TABLE>
<S> <C>
Accounts receivable.................................... $ 2,812,000
Inventory.............................................. 3,766,000
Other current assets................................... 313,000
Fixed assets........................................... 32,000
Goodwill............................................... 26,900,000
Liabilities assumed.................................... (5,923,000)
-----------
$27,900,000
===========
</TABLE>
In connection with the purchase of Can-Am, Can-Am's shareholders granted a
right of first refusal to the Company to purchase the assets or stock of an
entity under common control, A.M.G. Medical, Inc. (AMG). AMG historically
performed certain administrative, management and manufacturing functions for
Can-Am and, concurrent with the purchase of Can-Am, Can-Am and AMG entered into
formal management services and supply agreements. Under the terms of the
management services agreement, AMG will continue to provide such administrative
and management services to Can-Am on an arm's-length basis. The management
services agreement provides a mechanism to adjust charges for services based on
the needs of Can-Am and an arbitration provision in the event the parties cannot
agree on such charges. Under the terms of the supply agreement, Can-Am must
purchase 100% of its requirements for monolet compatible lancets from AMG,
unless AMG is unable to meet Can-Am's requirements. Further, Can-Am's president
entered into an employment agreement with the Company to continue managing Can-
Am for three years at an annual salary of $150,000.
Both the stock and promissory note issued by the Company are subject to
adjustment in certain circumstances. The number of shares issued may be reduced
based on the occurrence of certain events, as defined. The principal amount of
the promissory note is subject to adjustment based on the performance of the
Company's common stock. The computation of the ultimate principal due on the
maturity date, February 19, 2001, will yield an amount not less than $2,000,000
nor greater than $4,000,000.
The acquisition of Can-Am was accounted for using the purchase method of
accounting. The consolidated statements include Can-Am's operating results from
the date of acquisition. For unaudited pro forma financial information
reflecting the Can-Am Acquisition, see Note 6(c).
(B) REFINANCING
Concurrent with the acquisition of Can-Am, IMI entered into a $42,000,000
credit agreement (IMI Credit Agreement) with a bank; the Company is the
guarantor of all obligations due under the IMI Credit Agreement. The IMI Credit
Agreement consists of a $37,000,000 term loan and a $5,000,000 revolving line of
credit. Of the proceeds from this term loan, IMI used $32,000,000 to finance the
cash portion of the Can-Am purchase price (Note 6(a)) and refinance the then
existing bank debt which resulted from the acquisition of the Nutritional
Supplement Lines (see Note 5). The remaining $5,000,000 was used for working
capital purposes.
F-26
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(6) ACQUISITION AND FINANCING OF CAN-AM (CONTINUED)
The term loan and revolving line of credit allow IMI to borrow funds at
varying rates, including options to borrow at an alternate base rate, as
defined, plus a spread from 0.50% to 2.00% (as amended subsequent to year-end),
or the LIBOR (6.14% at December 31, 1999) plus a spread from 2.00% to 3.50% (as
amended subsequent to year-end). The spreads depend on IMI's ratio of
senior-funded debt to earnings before interest expense, taxes, depreciation and
amortization (EBITDA). Borrowings are secured by IMI's stock and the assets of
IMI and Can-Am. The Company's guarantee is secured by certain of the Company and
its other subsidiaries' assets. Borrowings under the revolving line of credit
are based on certain percentages of eligible assets, as defined. IMI is required
to pay an annual fee of 0.375% for the unused portion of the revolving line of
credit. At December 31, 1999, the unused balance of the revolving line of credit
was approximately $1,800,000. The revolving line of credit expires on February
18, 2002. IMI is required to make quarterly principal payments ranging from
$1,300,000 to $1,950,000 through December 31, 2003, with payments of $1,433,333
beginning on June 30, 1998. IMI must also make mandatory prepayments on the term
loan if they meet certain cash flow thresholds, sell assets not in the ordinary
course of business, issue or sell indebtedness or issue stock, as defined. At
December 31, 1999, IMI estimates that it will make such mandatory prepayments in
the amount of approximately $2,523,000 in the year 2000, which it intends to
finance by drawing upon the available revolving line of credit balance. Because
IMI is not required to repay the balance of the revolving line of credit until
2002, such balance, along with the estimated mandatory prepayments, is
classified as long-term liabilities in the accompanying balance sheet at
December 31, 1999 and 1998.
The IMI Credit Agreement requires compliance with various financial and
nonfinancial covenants for both IMI and the Company. The primary financial
covenants pertain to, among other things, interest coverage, debt services
coverage, leverage and EBITDA. Both IMI and the Company were in compliance with
such covenants at December 31, 1999.
(C) UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents selected unaudited financial information of the
Company and Can-Am (see Note 6(a)) as if the acquisition had occurred on January
1, 1998. The unaudited pro forma results are not necessarily indicative of
either actual results that would have occurred had the acquisition been
consummated on January 1, 1998 or of future results.
<TABLE>
<CAPTION>
1998
------------
(UNAUDITED)
<S> <C>
Pro forma net revenue................................. $120,450,663
============
Pro forma loss before extraordinary loss and taxes.... $(18,026,066)
============
Pro forma net loss.................................... $(18,604,869)
============
Pro forma basic and diluted net loss per common and
potentially common share............................ $ (1.52)
============
Pro forma basic and diluted weighted average number of
common and potentially common shares outstanding.... 12,214,986
============
</TABLE>
F-27
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(7) INVESTMENT IN INVERNESS MEDICAL LIMITED
On May 31, 1995, the Company invested approximately $1,588,000 to fund
initial operations and to acquire a 50% interest in Inverness. Inverness was
founded on November 1, 1994 and had no significant activities, assets or
liabilities at the time of the Company's investment. Inverness & Nairn Local
Enterprise Company (INLEC) holds the remaining 50% interest in Inverness and
also paid $1,588,000 for 1,000,000 shares of 6% cumulative redeemable preference
shares (the Original Preference Shares). During 1998, the Company invested an
additional $1,680,000 for an additional 1,000,000 shares of common stock. INLEC
also invested approximately $1,680,000 for an additional 1,000,000 shares of 6%
cumulative redeemable preference shares (the 1998 Preference Shares). This
investment is consolidated by the Company since it owns 100% of Inverness'
ordinary shares. The Original and 1998 Preference Shares (Preference Shares)
held by INLEC (including cumulative dividend) are reflected in the accompanying
consolidated balance sheets as mandatorily redeemable preferred stock of a
subsidiary.
At the option of the Company and subject to certain limitations on each
redemption, the Preference Shares may be redeemed for approximately $1.67 per
share, plus any accrued and unpaid annual dividends of approximately $0.097 per
share. The Company must redeem all 1,000,000 Original Preference Shares by June
23, 2000, and all 1,000,000 1998 Preference Shares by October 2003. If the
Company cannot legally redeem the Preference Shares on those dates, as defined,
it must redeem the shares as soon as legally permissible at a price of
approximately $1.91 per share plus any accrued and unpaid dividends. Upon
liquidation of Inverness, holders of the Preference Shares are entitled to
receive approximately $1.59 per preference share, plus any accrued and unpaid
dividends, out of funds legally available. Thereafter, the ordinary stockholders
shall equally share with the holders of the Preference Shares in the remaining
assets to be distributed. The holders of the Preference Shares do not hold any
voting rights.
Under a related agreement, Highlands and Islands Enterprise (HIE), a party
related to INLEC, constructed a 50,500-square-foot facility, which was completed
in February 1996, and another 53,000 square foot extension to that facility,
which was completed in April 1999, for Inverness to use for manufacturing its
products. Inverness has entered into a 20-year facility lease commencing in
April 1999, with an option to purchase the facility and the new extension at the
higher of fair market value or 5,500,000 British pounds sterling (approximately
$8,900,000 at December 31, 1999). Total rent due under the lease of the facility
and the new extension is 700,000 British pounds sterling (approximately
$1,100,000 at December 31, 1999) per year, subject to increases every five
years, dependent upon then current market rates, as defined. The Company is
guarantor to HIE for these payments if Inverness defaults on its payments.
In addition, INLEC has committed to provide Inverness with 3,100,000 British
pounds sterling, of which 2,513,000 British pound sterling (approximately
$4,059,000) has been received through December 31, 1999, for the purpose of
outfitting the facility with required equipment, providing training for the
Inverness work force and certain other defined costs. These funds shall be
permanently invested in Inverness, so long as no events of default by Inverness
occur within five years of the funding. Events of default are defined as the
insolvency of Inverness, defined changes in ownership of Inverness and certain
other similar related criteria. Should a default occur within five years of the
receipt of the funding by INLEC to Inverness, the Company will be liable to
INLEC for a declining portion, as defined, of the amounts paid by INLEC.
Inverness recognizes as revenue the funded amounts relating to the facility
and equipment over the estimated useful life of the facility and equipment and
amounts related to training and other costs, based on when such costs are
incurred. Inverness recognized grant revenue of approximately $396,000,
F-28
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(7) INVESTMENT IN INVERNESS MEDICAL LIMITED (CONTINUED)
$1,555,000 and $1,128,000 during the years ended December 31, 1999, 1998 and
1997, respectively, which are included in grants and other revenue in the
accompanying consolidated statements of operations. Unearned amounts of
approximately $428,000 and $847,000 at December 31, 1999 and 1998, respectively,
are included in deferred revenue in the accompanying consolidated balance
sheets.
(8) TRANSACTIONS WITH ENVIROMED AND EN PLC LIMITED PARTNERSHIP
In October 1995, EN PLC Limited Partnership (EN PLC) was formed by the
Company's president and a group of investors for the purpose of purchasing
ordinary shares of Enviromed. As of May 1, 1996, EN PLC had acquired 27.0% of
Enviromed's outstanding voting stock. In October 1996, the Company purchased
200,000 common shares of Enviromed and entered into an agreement with EN PLC
(the EN PLC Agreement), pursuant to which the Company purchased 7,961,386 shares
of Enviromed held by EN PLC for approximately $3,800,000. As a result of the
purchase, along with a subsequent purchase of an additional 100,000 shares of
Enviromed, the Company's ownership interest in Enviromed increased to 28.9%. The
Company's purchase price for these shares was based on their quoted market price
at the date of the Company's acquisition of such shares from EN PLC. On January
1, 1997, the Company and EN PLC entered into an amendment to the EN PLC
Agreement, pursuant to which the Company agreed to issue two promissory notes,
in principal amounts of approximately $2,800,000 and $1,000,000, respectively.
In consideration of the amendment, the Company agreed to issue to EN PLC a
warrant to purchase 15,401 shares of common stock at an exercise price of
$12.875 per share. The warrant is exercisable at any time prior to January 1,
2002. In accordance with SFAS No. 123, the Company recorded deferred financing
costs of approximately $107,000 in connection with the grant of these warrants.
On December 12, 1997, certain EN PLC shareholders agreed to exchange their
existing promissory notes for new promissory notes, whereby certain January and
April 1998 principal payments of approximately $1,600,000 converted into common
stock upon the earlier of the election of the noteholder or June 10, 1998; the
terms of the subsequent principal payments remained unchanged. The conversion
price represented a 15% discount to the market price on the date the new
promissory notes were issued. The holders of the new promissory notes could not
have received cash payments in lieu of conversion. The Company accounted for
this transaction as an early extinguishment of debt and the issuance of two new
instruments, the new promissory notes and a forward contract to purchase common
stock. Accordingly, the Company recorded the value of the forward contract as a
component of stockholders' equity, the new promissory notes at their fair value
and an extraordinary loss of $206,000 on the retirement of the original
promissory notes. The new promissory notes were repaid in full during 1999.
During 1998, the Company acquired an additional 300,000 shares of Enviromed
(see Note 10(b)), increasing the Company's ownership to 33% (and its voting
interest to 29.9%).
Following the Company's acquisition of its ownership interest in Enviromed,
the Company has accounted for its investment under the equity method. Pursuant
to APB Opinion No. 18, THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON
STOCK, the Company accounted for the excess of its investment over its pro rata
share of Enviromed's net assets as goodwill; the Company is amortizing such
goodwill over 15 years, its estimated useful life. During 1998, the Company
determined that its investment in Enviromed suffered a permanent impairment and
wrote down its investment by approximately $1,958,000 (see Note 10(d)).
F-29
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(8) TRANSACTIONS WITH ENVIROMED AND EN PLC LIMITED PARTNERSHIP (CONTINUED)
The Company has been involved in a dispute with 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 the issuance of shares of
common stock to Enviromed in connection therewith. On March 23, 1998, the
Company entered into a settlement agreement with certain parties, to whom
Enviromed had sold the Company's common stock, whereby the parties agreed that
such parties have title to 80% of the common stock in dispute, or 622,898
shares, and the Company has title to the remaining 20% of said shares, or
155,724 shares. The parties agreed to dismiss the lawsuit with prejudice and the
parties agreed to release each other from any liability arising out of the
lawsuit. When originally issued to Enviromed, 185,094 of the total 778,622
shares of common stock related to the acquisition of certain manufacturing
rights; the fair value of such shares was previously recorded as an expense by
the Company. Accordingly, the Company recorded the fair value of the shares
recovered, approximately $1,500,000, as a part of this settlement agreement as a
component of other income in the accompanying consolidated statement of
operations in 1998.
(9) TRANSACTIONS BETWEEN CAMBRIDGE DIAGNOSTICS AND CAMBRIDGE AFFILIATE
Concurrent with the Company's 1994 acquisition of Cambridge Diagnostics,
Cambridge Diagnostics entered into a series of agreements with Cambridge
Affiliate. Cambridge Affiliate is 49%-owned by Selfcare and 51%-owned by the
successor corporation of the company that sold Cambridge Diagnostics to the
Company in 1994. Cambridge Affiliate was formed to allow Cambridge Diagnostics
access to certain nonassignable technologies, pursuant to the terms of the 1994
acquisition. Cambridge Diagnostics accounts for its investment in Cambridge
Affiliate under the equity method. Under the terms of the agreements mentioned
above, Cambridge Diagnostics manufactured and sold products on behalf of and
managed the affairs of Cambridge Affiliate. During 1998 and 1997, Cambridge
Diagnostics paid royalties of $62,000 and $86,000, respectively, and earned
total sales, manufacturing and management fees of $2,211,000 and $3,351,000,
respectively, under the terms of these agreements. Following the disposition of
certain assets pertaining to its disease diagnostic business and subsequent
reorganizations in 1998 (see Note 10(b)), Cambridge Diagnostics has not
conducted and will not conduct any significant future business with Cambridge
Affiliate.
F-30
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(10) NET CHARGE ON BUSINESS DISPOSITIONS, ASSET IMPAIRMENTS AND RESTRUCTURING
ACTIVITIES
The components of the net charge on business dispositions, asset impairments
and restructuring activities in 1998 are as follows:
<TABLE>
<S> <C>
Bankruptcy of majority-owned subsidiary..................... $ 147,614
Gain on sale of Cambridge Diagnostics product line.......... (1,232,492)
Asset impairments and restructuring activities at Cambridge
Diagnostics............................................... 810,486
Impairment of Orgenics' goodwill............................ 5,000,000
Impairment of investment in Enviromed....................... 1,957,724
Impairment of intangible assets relating to the Nutritional
Supplement Lines.......................................... 858,751
-----------
$ 7,542,083
===========
</TABLE>
(A) BANKRUPTCY OF MAJORITY-OWNED SUBSIDIARY
As of December 31, 1998, the Company owned a 61.7% interest in Jmar Ames,
Inc. (Jmar), a distributor of certain consumer products. In December 1998, the
Jmar Board of Directors (with the Company's approval) voted to file for Chapter
7 bankruptcy. In February 1999, the bankruptcy petition was filed. The Company
recorded as an expense $148,000 in 1998, representing its share of the
write-down of the Jmar assets and expenses relating to the assumption of certain
Jmar liabilities that the Company had guaranteed.
(B) SALE OF CAMBRIDGE DIAGNOSTIC PRODUCT LINE
On September 30, 1998, Cambridge Diagnostics signed an agreement with
Trinity Biotech, Ltd. (Trinity) whereby Cambridge Diagnostic agreed to sell
certain assets pertaining to Cambridge Diagnostics' infectious disease
diagnostic business, primarily inventories, equipment and its ongoing business.
In return for these assets Cambridge Diagnostics received consideration of
approximately $2,300,000 consisting of 555,731 shares of the Company's stock,
300,000 shares of Enviromed stock (a 33%-owned investee of the Company (see Note
8)) and $230,000 in cash. The Company recorded a gain on the sale of the
business of approximately $1,232,000 in 1998.
After the sale of these assets, the Company reorganized the remaining
business conducted by Cambridge Diagnostics during the fourth quarter of 1998.
As a result of this reorganization, Cambridge Diagnostics' future activities
will consist of manufacturing certain consumer products for other Company
subsidiaries, primarily IMI. Its activities will no longer include the
manufacture of disease diagnostic products for unrelated customers. In
connection with this strategic reorganization, Cambridge Diagnostics incurred
expenses of approximately $268,000 pertaining to severance, outplacement and
related obligations, of which $199,000 and $69,000 were paid during 1999 and
1998, respectively. Cambridge Diagnostics also wrote off the net book value of
certain fixed assets and leasehold improvements relating to the discontinued
activities for which it has no alternative future use. The total asset
impairment charge was approximately $437,000. The balance of this charge relates
to legal and advisory fees related to the reorganization.
F-31
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(10) NET CHARGE ON BUSINESS DISPOSITIONS, ASSET IMPAIRMENTS AND RESTRUCTURING
ACTIVITIES (CONTINUED)
(C) IMPAIRMENT OF ORGENICS' GOODWILL
During the fourth quarter of 1998, the Company determined that Orgenics'
goodwill had suffered an impairment of value (see Note 2(g)). Orgenics'
declining financial performance and short-term outlook (both earnings and gross
cash flows) suggested that impairment had occurred. The Company performed an
impairment test using a discounted future cash flow model and recorded an
impairment charge of $5,000,000 in 1998, which fully eliminated the Orgenics'
goodwill balance.
(D) IMPAIRMENT OF INVESTMENT IN ENVIROMED
During the fourth quarter of 1998, the Company determined that its
investment in Enviromed had suffered an impairment (see Note 8). The protracted
decline in Enviromed's market price and the absence of qualitative factors that
would indicate a recovery suggested that such an impairment had occurred. The
Company recorded a loss of approximately $1,958,000 to write down the Company's
investment to its estimated fair value in 1998. The Company's estimate of fair
value was determined by reviewing the market value of Enviromed's stock.
(E) IMPAIRMENT OF INTANGIBLE ASSETS RELATING TO THE NUTRITIONAL SUPPLEMENT LINES
Goodwill and trademarks relating to the purchase of the Nutritional
Supplement Lines are being amortized over 25 years. During 1998, the Company
recorded an impairment charge of approximately $859,000 relating to one
discontinued Nutritional Supplement Line (see Note 2(g)). The impairment charge
represents the remaining net book value of the goodwill and trademark values
assigned to this product line.
F-32
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(11) NOTES PAYABLE
The Company has the following debt outstanding as of December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Term loan--IMI (Note 6(b)).................................. $26,500,000 $32,700,000
Revolving line of credit--IMI (Note 5 and 6(b))............. 3,226,050 3,905,565
Note payable to former Can-Am shareholders (Note 6(a))...... 2,000,000 2,000,000
Promissory note payable to EN PLC (Note 8).................. -- 405,643
Subordinated revenue royalty notes (Note 13)................ 7,500,000 7,500,000
Subordinated promissory notes (Note 14)..................... 10,032,801 9,728,555
Promissory note payable to LifeScan (Note 15)............... 8,483,121 --
Senior subordinated convertible notes (Note 16)............. -- 3,778,154
Bank debt--Orgenics......................................... 1,716,000 2,318,000
Mortgage loans.............................................. 864,593 --
Other miscellaneous notes payable........................... 52,848 145,217
----------- -----------
60,375,413 62,481,134
Less--Current portion....................................... 21,483,140 12,071,650
----------- -----------
$38,892,273 $50,409,484
=========== ===========
</TABLE>
Each of the debt instruments listed above is discussed in the notes to the
consolidated financial statements as referenced, except as follows:
(A) BANK DEBT--ORGENICS
Orgenics has approximately $1,716,000 of notes payable to certain financial
institutions outstanding at December 31, 1999. The outstanding balance is
collateralized by certain Orgenics assets. The notes bear interest at rates
ranging from 5% to 8.5% and are payable monthly through 2003. Orgenics has
granted liens on all of its assets, insurance rights, share capital, goodwill
and shares of a subsidiary as collateral for certain debt.
(B) MORTGAGE LOANS
During 1999, Cambridge Diagnostics financed the purchase of one of its
manufacturing buildings through a mortgage loan (Cambridge Diagnostic Loan) with
the seller. The outstanding balance is $505,782 at December 31, 1999 and is
collateralized by the building. The Cambridge Diagnostic Loan bears interest at
6% and is payable semiannually through 2003. During 1999, Inverness purchased
homes for two of its officers, which serve as their residences during their
employment period at Inverness. Inverness financed the purchases of the
residences through two mortgage loans (Inverness Loans) with a Scottish bank.
The total outstanding balance of the Inverness Loans at December 31, 1999 is
$358,811 and is collateralized by the two homes. The Inverness Loans bear
interest at the bank's prime (5.50% at December 31, 1999) plus 1.75% and are
payable quarterly through 2014.
F-33
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(11) NOTES PAYABLE (CONTINUED)
(C) MATURITIES OF LONG-TERM DEBT
Maturities of long-term debt and obligation at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000........................................................ $21,650,339
2001........................................................ 12,801,080
2002........................................................ 10,418,275
2003........................................................ 7,910,591
2004........................................................ 24,121
Thereafter.................................................. 7,738,206
-----------
60,542,612
Less--Unamortized original issue discount................... 167,199
-----------
$60,375,413
===========
</TABLE>
(12) CAMBRIDGE DIAGNOSTIC NOTES
On December 12, 1997, the notes payable issued in connection with the 1994
acquisition of Cambridge Diagnostics to individual investors were exchanged for
new promissory notes (the New Cambridge Diagnostic Notes). Under the terms of
the New Cambridge Diagnostic Notes, the noteholders received the right to
convert the New Cambridge Diagnostic Notes, plus accrued interest at an annual
rate of 10%, into common stock at a conversion price of $7.23 at any time
through the maturity date (June 12, 1998). The conversion price represented a
15% discount to the market price on the date the New Cambridge Diagnostic Notes
were issued.
The Company accounted for this transaction as an early extinguishment of
debt and the issuance of two new instruments: the New Cambridge Diagnostic Notes
and a forward contract to purchase common stock. Accordingly, in 1997, the
Company recorded the value of the forward contract as a component of
stockholders' equity, the New Cambridge Diagnostic Notes at their fair value and
an extraordinary loss of $373,000 on the retirement of the original notes.
On June 12, 1998, all of the existing New Cambridge Diagnostic Notes and
accrued interest were automatically converted into 428,713 shares of common
stock.
(13) SUBORDINATED REVENUE ROYALTY NOTES
In June 1997, the Company sold subordinated revenue royalty notes (Royalty
Notes) having an aggregate issue price of $7,500,000. Each Royalty Note entitles
the holder thereof (each, a Royalty Noteholder) to payments relating to net
revenue of the Company during each fiscal quarter the Royalty Note is
outstanding, which payments are pro rated with respect to the number of days the
Royalty Note is outstanding during such fiscal quarter (each, a Royalty
Payment). The Company is obligated to make Royalty Payments until the total
amount of Royalty Payments equals four times the aggregate issue price of the
Royalty Note (the Total Repayment Amount). In addition, the Company may elect to
prepay the Royalty Notes, as described below.
F-34
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(13) SUBORDINATED REVENUE ROYALTY NOTES (CONTINUED)
The quarterly Royalty Payment for each $25,000 of issue price will equal the
greater of (i) 0.005% of net revenues of the Company during such fiscal quarter
or (ii) $1,300. Until the Total Repayment Amount has been paid, the Company will
pay Royalty Payments to each Royalty Note as follows: (i) the first payment was
made in August 1998, after the closing of the fourth full fiscal quarter during
which such Royalty Note was outstanding and covered Royalty Payments for such
fiscal quarter and the prior fiscal quarters during which such Royalty Note was
outstanding; and (ii) the Royalty Payment for each subsequent fiscal quarter has
been and will be made on or before the forty-fifth day after the closing of such
fiscal quarter. Based on the estimated repayment schedules, the Company imputed
interest rates ranging from 29.2% to 30.5% and recorded interest expense of
approximately $2,495,000, $2,210,000 and $904,000 in 1999, 1998 and 1997,
respectively. The Company made royalty payments of approximately $1,160,300 and
$2,287,500 during 1999 and 1998, respectively, with an additional payment of
$543,000 made on February 15, 2000. On February 15, 1999 and May 15, 1999,
certain Royalty Noteholders elected to convert the minimum cash royalty payments
due to them into 5,980 shares of Series C or E Preferred Stock (see Note 18(e)).
If the Company elects to prepay the amount due under the Royalty Notes or if
an event of default (as defined) is not cured within 30 days after notice to the
Company, the Company will pay an amount equal to the greater of (i) 1.5 times
the issue price of Royalty Notes minus all Royalty Payments made by the Company
prior to the date of payment (but excluding any amount paid as Late Payment
Interest, as defined below) or (ii) an amount equal to the issue price of the
Royalty Notes plus an annualized internal rate of return on the issue price
equal to 30% calculated from the issue date of the Royalty Notes to the date of
payment, minus all Royalty Payments made by the Company prior to the date of
payment (but excluding any amount paid as Late Payment Interest, as defined
below).
The Royalty Notes will bear interest only in the event of a late Royalty
Payment, an event of default or a prepayment. If a Royal Payment is not made
within 45 days of the end of the relevant fiscal quarter, the overdue amount
will accrue interest (Late Payment Interest) at the rate of 18% per annum,
compounded daily, accruing from the date such Royalty Payment is due to the date
the Royalty Payment, including late payment interest thereon, is made. Any such
late-payment interest will be payable on demand.
U.S. Boston Capital Corporation (U.S. Boston Capital), the former president
of which is a director of the Company, acted as a placement agent for the
offering of the Royalty Notes. As compensation for its services as placement
agent, U.S. Boston Capital received a cash commission of $600,000, which the
Company has recorded as deferred financing costs and will amortize over the
estimated 14-year life of the Royalty Notes. In addition, Pear Tree Royalty
Company, Inc., an affiliate of U.S. Boston Capital, receives 1% of payments as
additional compensation for its services.
(14) SUBORDINATED PROMISSORY NOTES
During June 1998, the Company entered into a securities purchase agreement
pursuant to which it sold units (the Units) having an aggregate purchase price
of $10,200,000. Each Unit consists of (i) $25,000 in principal amount of a
subordinated promissory note (Subordinated Promissory Notes) and (ii) a warrant
to acquire shares of the Company's common stock. In the aggregate, the Company
issued warrants to purchase 181,731 shares of common stock with exercise prices
ranging from $6.21 to $10.13 per share. The Subordinated Promissory Notes are
due on the second anniversary of their date of issuance and the warrants may be
exercised at any time on or prior to the fifth anniversary of their issuance.
F-35
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(14) SUBORDINATED PROMISSORY NOTES (CONTINUED)
The Subordinated Promissory Notes bear interest at a rate equal to 13% per
year, which is payable quarterly on the first day of each quarter, beginning
October 1, 1998. Whenever the Company makes a payment of principal under the
Subordinated Promissory Notes, it shall at the same time pay a premium equal to
5% of the principal amount then being paid. The Subordinated Promissory Notes
may be prepaid by the Company in whole or in part at any time after
December 31, 1998.
U.S. Boston Capital, a related party (see Note 13), acted as placement agent
for the offering of the Subordinated Promissory Notes. As compensation for its
services as placement agent, U.S. Boston Capital received cash commissions
totaling $612,000, which the Company recorded as deferred financing costs and is
amortizing over the two-year life of the Subordinated Promissory Notes. In
addition, three directors of the Company purchased Units with an aggregate issue
price of $775,000 during 1998.
Pear Tree Royalty Company, Inc., as the authorized representative of the
Subordinated Promissory Noteholders, received warrants to purchase 60,577
shares. A director of the Company is also a director and shareholder of Pear
Tree Royalty Company. The value of these warrants is $217,820, which the Company
recorded as deferred financing costs and is amortizing over the two-year life of
the Subordinated Promissory Notes. Upon issuance of the Subordinated Promissory
Notes and warrants the Company allocated a total of $826,000 of the proceeds to
the warrants and is amortizing the related original issuance discount and
deferred financing costs over the two-year life of the Notes.
(15) LIFESCAN AGREEMENTS
On June 7, 1999, the Company entered into an amended and restated agreement
(the Amended Master Agreement) with JJDC and LifeScan. The Amended Master
Agreement includes an amended glucose sales distribution agreement
(collectively, the Amended Agreements). Under the Amended Agreements, the
Company is to develop and supply to LifeScan additional products for monitoring
blood glucose in humans. The Amended Agreements replaces the corresponding
original agreements (the Original Agreements) that the Company had entered into
with JJDC and LifeScan in 1995 and 1996.
As part of the Original Agreements, JJDC provided for $13,700,000 of
advances to the Company in 1995, which converted into 201,622 shares of the
Company's common stock in 1996. Upon conversion of the advances, LifeScan also
paid the Company a success fee of $7,000,000. In addition, the Company must
issue to JJDC, for no additional consideration, shares of common stock equal to
5% of any additional common stock issued pursuant to the exercise of rights to
acquire common stock outstanding as of November 10, 1995 (the total of all
shares so issued, the Conversion Shares). The precise number of Conversion
Shares depends on the number of shares of common stock that the Company is
required to issue in connection with the vesting and exercise of options and
warrants that were outstanding on November 10, 1995. Through December 31, 1999,
JJDC has received an additional 109,012 shares of common stock. The Company
estimates that JJDC will ultimately receive an additional 144,642 shares of
common stock. Upon the receipt of the $7,000,000 success fee, the Company
deferred $3,000,000 based on management's estimate of its future commitments
under the distribution agreement. During 1998, the Company's product development
plans led it to change the original estimate, as the product to which the
deferred revenue pertains was replaced in the first quarter of 1999.
Accordingly, the Company accelerated the amortization of this amount to reflect
the new estimate.
F-36
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(15) LIFESCAN AGREEMENTS (CONTINUED)
The Company has also agreed to share with LifeScan certain licensing costs
incurred by LifeScan associated with the first product launch. Originally, the
Company agreed to fund its share of such costs ($3,750,000) via product
discounts granted on future product sales to LifeScan. However, subsequently the
Company and LifeScan agreed to a funding schedule whereby the Company will make
fixed quarterly payments through December 31, 2000. The Company records such
amounts as cost of sales in the period incurred, as the Company does not have an
obligation to pay the balance of its share of the costs if its relationship with
LifeScan were to cease. As of December 31, 1999, $2,250,000 remained to be
funded by the Company.
As part of the Amended Agreements, the Company and LifeScan entered into a
promissory note (LifeScan Note) on June 7, 1999, whereby LifeScan provided the
Company with an initial loan (Initial Loan) of 6,250,000 British pounds sterling
(approximately $9,900,000) to fund the anticipated production levels. Under the
LifeScan Note, LifeScan also committed to make additional loans (Additional
Loans) of up to 8,125,000 British pounds sterling (approximately $13,000,000) to
the Company upon the accomplishment of certain milestones relating to new
products the Company is to develop for LifeScan. At December 31, 1999, the
Company has not yet reached such milestones and, therefore, has not received any
of the Additional Loans. Interest on the outstanding principal balance of the
LifeScan Note accrues at 11% per year and is payable on the last day of each
calendar quarter starting after the date of the Initial Loan. Any amounts due
under the LifeScan Note but unpaid will bear interest of 13.5% per year from the
due date until paid. The aggregate principal amount of the LifeScan Note is
being repaid by deducting 0.0125 British pounds sterling (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. In addition to the LifeScan
Note, 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.
(16) SENIOR SUBORDINATED CONVERTIBLE NOTES
On October 28, 1997, the Company sold, in a private placement, senior
subordinated convertible notes (the Convertible Notes) having an aggregate face
value of $10,000,000 and warrants (the Convertible Note Warrants) to purchase up
to 106,700 shares of its 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 the Company's common stock traded at
any time during the five trading days immediately preceding such date.
Shoreline Pacific Institutional Finance (Shoreline), the Institutional
Division of Financial West Group, 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 its
common stock with the same terms as the Convertible Note Warrants to certain
designees of Shoreline (Shoreline Warrants). The Company recorded
F-37
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(16) SENIOR SUBORDINATED CONVERTIBLE NOTES (CONTINUED)
both the commission and the value of the Shoreline Warrants, an aggregate of
$600,000, as deferred financing costs. Such costs are included as a component of
other assets and are being amortized over the life of the Convertible Notes.
Upon issuance of the Convertible Notes and Convertible Note Warrants, the
Company allocated $662,657 of the proceeds to the Convertible Note Warrants and
amortized the related original issuance discount over 270 days, the period for
which the original terms of the conversion were most beneficial to the
Convertible Noteholders. Also, pursuant to the conversion terms whereby the
Convertible Noteholders were guaranteed a discount after the 180th day, the
Company recorded an additional original discount of $1,185,864, which represents
the maximum guaranteed return available to the Convertible Noteholders on the
issuance date. This portion of the original issuance discount was also amortized
over 270 days in a manner consistent with the sliding scale discount.
Amortization of the aggregate original issuance discount was $1,350,818 and
$497,703 in 1998 and 1997, respectively.
The original terms of the Convertible Notes provided for a formula-based
conversion price. During 1998, Convertible Noteholders converted their
Convertible Notes representing an aggregate face value of $6,221,846 into
2,313,822 shares of common stock.
In January 1999, the Company and Convertible Noteholders agreed to amend the
terms of the Convertible Notes by changing the maturity date and conversion
terms, as well as canceling the Convertible Note Warrants. Pursuant to the
amended terms, the Company made an immediate payment of $859,049 representing
$780,954 of face value of the original Convertible Notes plus a 10% premium. The
remaining Convertible Notes were amended and replaced with amended notes (the
New Convertible Notes). The face value of the New Convertible Notes is equal to
the face value of the canceled Convertible Notes plus a 15% premium. The New
Convertible Notes matured on July 12, 1999, bore interest at 8% and provided for
a fixed conversion price of $2. The Company accounted for this transaction
following the provisions of Emerging Issues Task Force (EITF) Issue No. 96-19,
DEBTOR'S ACCOUNTING FOR A MODIFICATION OR EXCHANGE OF DEBT INSTRUMENTS, and
recorded an extraordinary loss of approximately $306,000, net of the amount
deemed to have been paid to reacquire the Convertible Note Warrants. Since the
new conversion feature was less beneficial to the Convertible Noteholders than
that to which they were entitled on the date of the amendment, the Company did
not perform any further accounting for such conversion feature. As of December
31, 1999, all of the New Convertible Notes have been converted into shares of
the Company's common stock.
F-38
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
The Company has operating lease commitments for certain of its facilities
and equipment that expire through 2026. The following schedule outlines future
minimum annual rental payments under these leases at December 31, 1999:
<TABLE>
<S> <C>
2000................................................... $ 1,898,000
2001................................................... 1,873,000
2002................................................... 1,770,000
2003................................................... 1,576,000
2004................................................... 1,546,000
Thereafter............................................. 18,434,000
-----------
$27,097,000
===========
</TABLE>
Rent expense relating to these operating leases was approximately
$1,508,000, $1,406,000, and $778,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
(B) INDUSTRIAL DEVELOPMENT AUTHORITY OF IRELAND GRANTS
Prior to the Company's acquisition of Cambridge Diagnostics, Cambridge
Diagnostics received certain capital expenditure and revenue grants from the
Industrial Development Authority of Ireland (the IDA). Cambridge Diagnostics
recognizes revenue on the capital expenditure grants over the estimated useful
lives of the related assets and on revenue grants as the related costs are
incurred.
As a condition to retaining the grants, the IDA requires Cambridge
Diagnostics to maintain a certain number of employees in Ireland. The IDA also
prohibits the Company from disposing of assets or terminating business
activities that were funded by the grants within 10 years of such grants. Due to
the sale of its infectious disease diagnostic business (see Note 10(b)),
Cambridge Diagnostics may not be in compliance with the IDA requirements. As a
result, the IDA could require Cambridge Diagnostics to repay capital expenditure
and revenue grants totaling 307,770 Irish pounds (approximately $394,000 at
December 31, 1999). The IDA historically has not pursued its right to recoup
these grants from Cambridge Diagnostics and, as of December 31, 1999, Cambridge
Diagnostics management believes that the IDA is unlikely to do so, provided that
Cambridge Diagnostics does not terminate its operations in Ireland. Accordingly,
as management believes that repayment is not probable, Cambridge Diagnostics has
not provided for a potential liability for the repayment of these grants. If the
IDA did pursue its rights to recoup these grants, it would not have a material
adverse effect on the Company or Cambridge Diagnostics.
(C) LEGAL PROCEEDINGS
Because of the nature of its business, the Company may from time to time be
subject to consumer product claims or be a defendant in various other lawsuits
arising in the ordinary course of its business and expects that this will
continue to be the case in the future. These lawsuits generally seek damages,
sometimes in substantial amounts, for personal injuries or other commercial
claims.
On March 2, 2000, Matsushita Electric Industrial Co., Ltd. (Matsushita)
filed suit against the Company and two of its subsidiaries alleging infringement
of a patent used in connection with the
F-39
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) COMMITMENTS AND CONTINGENCIES (CONTINUED)
manufacture and distribution of the Company's blood glucose test strips for use
with the Bayer Glucometer Elite-Registered Trademark- meters. The Company
intends to defend the action vigorously. 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 Matsushita patent by the
Company's outside patent counsel, the Company believes that its test strips do
not infringe the Matsushita Patent and that Matsushita's claims will be proven
to be without merit.
On January 18, 2000, Bayer Corporation (Bayer) filed a suit against the
Company and two of its subsidiaries claiming trademark infringement, trade dress
infringement and unfair competition arising out of the Company's marketing in
late 1999 of its new blood glucose test strips intended for use with Bayer's
Glucometer Elite-Registered Trademark- meters. Bayer seeks an injunction that
requires the Company to change the packaging of its new product, damages, costs
and attorneys' fees. The Company denies all of the claims and intends to
vigorously defend the action. The Company does not believe that an adverse
outcome would have a material impact on its sales, operations or financial
performance.
On January 3, 2000, Becton, Dickinson and Company (Becton Dickinson, see
Note 17(e) for discussion of relationship to the Company) filed suit against the
Company alleging that certain pregnancy and ovulation test kits sold by the
Company infringe two U.S. patents. A complaint has not yet been served. The
Company is engaged in discussions with Becton Dickinson to resolve the matter
and does not believe that this matter will have a material adverse impact on the
Company's sales, operations or financial performance.
During 1998 and 1999, Abbott Laboratories (Abbott) commenced several patent
infringement lawsuits against the Company and certain of the Company's business
partners. Abbott claims that certain of the Company's products relating to
various blood glucose monitoring systems, pregnancy detection and ovulation
prediction infringe patents that Abbott claims to have rights to in the United
States, Canada and Australia. In all cases, Abbott is seeking injunction against
the Company's sales of such products in the respective countries and
reimbursement of certain damages. The Company intends to defend these lawsuits
vigorously. Although the Company believes that Abbott's claims will be proven to
be without merit, a final ruling of certain of these suits against the Company
could have a material adverse impact on the Company's sales, operations or
financial performance.
In late 1999, Sola Wunmi Enterprises, Ltd. (Sola), a Nigerian corporation,
filed litigation against Orgenics claiming damages for the breach of an alleged
exclusive distribution agreement for the supply of HIV test kits in Nigeria. The
Company believes that the claim is without merit and, based on pre-litigation
discussions with the claimant, the Company believes that the case can be
resolved for an amount which will not have a material adverse impact on the
Company's sales, operations or financial performance.
In May 1999, Intervention, Inc., a California corporation, filed separate
suits against the Company and certain of the Company's major customers and
competitors alleging that 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 its agreements with these customers, 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 its sales, operations or financial performance.
F-40
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 22, 1999, in connection with Cambridge Diagnostic's sale of its
infectious disease business (see Note 10(b)), Cambridge Biotech Corporation
(CBC) and Cambridge Affiliate (see Note 9 for discussion of relationship to the
Company) filed suit against the Company, the Company's Chief Executive Officer,
Cambridge Diagnostics, Trinity and Pasteur Sanofi Diagnostic (Pasteur) alleging
that the sale of the business was not properly authorized and, therefore, CBC
would loose the benefit of certain patented licenses from Pasteur. CBC is
requesting the sale agreement to be null and void, to have the license between
Pasteur and CBC declared to be in full force, to recover damages caused by the
actions of the Company, its Chief Executive Officer and Pasteur. On January 25,
1999, the Court denied CBC's motion. The suit is currently inactive. The Company
believes that CBC's claim is without merit and intends to defend the action
vigorously. The Company does not believe that an adverse ruling against the
Company would have a material adverse impact on its sales, operations or
financial performance.
On November 15, 1997, Medical Selfcare, Inc. (Medical) served process on the
Company asserting service mark and trade name infringement, unfair competition,
dilution and related claims arising from the Company's use of the mark
"Selfcare" for certain of its products. On June 30, 1998, the Company and
Medical reached a settlement agreement, whereby the Company received a payment
of $275,000 which was recognized as other income during 1998. In return for the
settlement, the Company is obligated to phase out its use of the name Selfcare.
The Company intends to obtain shareholders' approval to change its name to
Inverness Medical Technology, Inc. in 2000.
(D) AGREEMENT WITH PRINCETON BIOMEDITECH CORPORATION (PBM)
On August 6, 1997, the Company and PBM, along with wholly owned subsidiaries
of each, formed a limited liability company, PBM-Selfcare LLC (the LLC), in
which each party owns a 50% interest, and entered into a joint venture and a
series of related technology transfer and licensing agreements to develop a
comprehensive strategy to commercially exploit products and related intellectual
property in the area of pregnancy detection and ovulation prediction
(collectively, the Joint Venture Agreement). Under the Joint Venture Agreement,
PBM contributed intellectual property and the Company agreed to spend up to
$2,000,000 on an as-needed basis to cover expenses incurred by the LLC in
enforcing the rights of the LLC in the intellectual property. To date, the
Company has not incurred material costs pursuant to the Joint Venture Agreement.
(E) LICENSE AGREEMENTS WITH BECTON DICKINSON
The Company entered into two patent license agreements with Becton
Dickinson, which are effective April 1, 1998 until the last of the patents
expire. The agreements grant the Company the rights to manufacture and sell
products incorporating certain patented technology, as defined by the agreement.
The Company is to pay royalties on the net sales of products incorporating the
licensed technology at a rate of 6% until December 31, 1998, 6.25% on the first
$108,000,000 of net sales beginning January 1, 1999 and 5.25% thereafter,
extending through the expiration of the patents. During 1999 and 1998, the
Company paid royalties of approximately $1,001,000 and $212,000, respectively,
under this agreement and had approximately $584,000 accrued at December 31,
1999. In December 1999, the Company gave Becton Dickinson a written notice to
terminate these license agreements effective January 1, 2000, prior to the
expiration of the patents. As a result of this early termination, Becton
Dickinson has filed suit against the Company (see Note 17(c)).
F-41
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(F) ORGENICS ROYALTY COMMITMENT
Orgenics finances its research and development expenditures in Israel under
programs sponsored by the Chief Scientist of the Ministry of Trade of Israel for
the support of research and development projects. In the event that development
of the products in which the Chief Scientist participates is successful,
Orgenics will be obligated to pay royalties at the rate of 2% to 3% of the sales
of products developed with funds provided by the Chief Scientist, up to an
amount equal to 100% of the Chief Scientist's research and development grants to
such projects. The balance of the maximum contingent royalty as of December 31,
1999 was approximately $2,100,000. Orgenics does not have any liability to the
State of Israel for amounts received in support of unsuccessful programs or
unsaleable products.
(G) ORGENICS SEVERANCE OBLIGATIONS
Orgenics' liability for severance pay, pursuant to Israeli law is provided
by managers' insurance policies and by severance pay funds. Severance expenses
were $156,000, $166,000 and $248,000 in 1999, 1998 and 1997, respectively. The
related liability is not material at December 31, 1999.
France has a government-run mandatory pension plan to which contributions
are made monthly by both the employee and employer based on the gross monthly
salary. Orgenics' liability for its employees in France is fully covered by
these contributions.
In addition, pursuant to industry employment agreements, a lump-sum
severance is payable upon retirement to employees still in the service of
Orgenics' French subsidiary at the date of retirement. There were no such
obligations outstanding as of December 31, 1999.
(18) STOCKHOLDERS' EQUITY
(A) STOCK OPTIONS
In 1999, the Company amended the restated 1996 Stock Option and Grant Plan
(Amended 1996 Plan), which had replaced both the Company's 1992 and 1994 Plans
when it was first adopted in 1996. The Amended 1996 Plan may be administered by
the Board of Directors or by an Option Committee, as defined, to grant incentive
stock options, nonqualified stock options, restricted stock, unrestricted stock,
stock appreciation rights (SAR), performance share awards and dividend
equivalent rights. The Company has reserved a total of 2,250,000 shares of
common stock for future grant under the Amended 1996 Plan. At December 31, 1999,
the Company has authority to issue options to purchase up to 348,480 shares of
common stock under the Amended 1996 Plan. The key terms of the Amended 1996 Plan
include the granting of incentive stock options or nonqualified stock options
with a term of up to 10 years and the granting of stock appreciation rights,
restricted stock, unrestricted stock, performance share awards and dividend
equivalent rights. The Amended 1996 Plan also provides for option grants to
nonemployee directors and automatic acceleration of all options and stock
appreciation rights upon a change in control.
F-42
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) STOCKHOLDERS' EQUITY (CONTINUED)
The following is a summary of all stock option activity during the three
years ended December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1...................... 4,548,831 $5.10 4,144,938 $4.75 4,173,061 $ 4.47
Granted................ 1,725,180 4.23 664,691 6.64 130,200 10.33
Exercised.............. (217,946) 1.51 (192,406) 2.22 (148,898) 1.84
Terminated............. (813,896) 11.60 (68,392) 7.30 (9,425) 2.41
--------- ----- --------- ----- --------- ------
Outstanding at December
31..................... 5,242,169 $3.96 4,548,831 $5.10 4,144,938 $ 4.75
========= ===== ========= ===== ========= ======
Exercisable at December
31..................... 3,096,181 $3.21 3,066,748 $3.13 2,800,661 $ 2.49
========= ===== ========= ===== ========= ======
</TABLE>
The following represents additional information related to stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICE SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- -------------- --------- ------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$1.15-1.54........... 403,827 4.38 $ 1.47 403,827 $1.47
2.27-2.94........... 2,326,602 6.37 2.51 1,886,862 2.46
3.00-4.62........... 870,400 7.23 3.61 511,650 3.73
5.00-7.33........... 1,106,392 9.61 5.01 4,794 7.33
8.50-13.88.......... 534,948 6.81 10.51 289,048 9.59
--------- ----- ------ --------- -----
5,242,169.. 7.09 $ 3.96 3,096,181 $3.21
========= ===== ====== ========= =====
</TABLE>
The weighted average fair value under the Black-Scholes option pricing model
of options granted during 1999, 1998 and 1997 is $1.63, $3.67 and $5.33,
respectively.
F-43
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) STOCKHOLDERS' EQUITY (CONTINUED)
The Company has computed the pro forma disclosures required under SFAS No.
123 for stock options and warrants granted after January 1, 1995 using the
Black-Scholes option pricing model prescribed by SFAS No. 123. The assumptions
used during the three years ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.9% 5.0% 6.0%
Expected dividend yield........................... -- -- --
Expected lives.................................... 6 years 5 years 5 years
Expected volatility............................... 78% 64% 51%
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss--
As reported....................... $ (9,071,552) $(18,777,724) $(24,710,294)
Pro forma......................... (10,521,109) (21,380,111) (26,269,519)
Net loss per share--
As reported....................... $ (0.66) $ (1.55) $ (3.36)
Pro forma......................... (0.75) (1.76) (3.56)
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
(B) WARRANTS
The following is a summary of all warrant activity during the three years
ended December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
--------- -------------- ----------------
<S> <C> <C> <C>
Warrants outstanding and exercisable, December 31,
1996................................................ 2,088,980 $ 1.54-12.88 $ 2.21
Granted............................................. 267,979 10.13-13.96 11.93
Exercised........................................... 1,145,664 2.93 2.93
--------- ------------ ------
Warrants outstanding and exercisable, December 31,
1997................................................ 1,211,295 1.54-13.96 2.26
Granted............................................. 242,308 6.21-10.13 8.42
Exercised........................................... 438,841 1.54- 2.53 1.54
--------- ------------ ------
Warrants outstanding and exercisable, December 31,
1998................................................ 1,014,762 1.54-13.96 4.03
Exercised........................................... 148,889 2.53 2.53
Cancelled........................................... 128,696 2.53-10.13 8.83
--------- ------------ ------
Warrants outstanding and exercisable, December 31,
1999................................................ 737,177 $ 1.54-13.96 $ 7.16
========= ============ ======
</TABLE>
The majority of the warrants included in the table above were issued in
connection with debt and equity financings, or amendments thereto, of which
32,930 were issued to officers or directors of the Company and outstanding at
December 31, 1999. The value of warrants issued in connection with debt
financings and amendments have yielded original issue discounts and additional
interest expense of $327,124, $1,788,116 and $497,702 in 1999, 1998 and 1997,
respectively.
F-44
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) STOCKHOLDERS' EQUITY (CONTINUED)
(C) EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (the Stock Purchase
Plan) in 1996, pursuant to which it has reserved 250,000 shares of common stock
for issuance thereunder. Under the Stock Purchase Plan, eligible employees will
be able to purchase shares of the Company's common stock at 85% of fair market
value, as defined, subject to certain limitations. The Company has issued
213,423 shares under the Stock Purchase Plan as of December 31, 1999.
(D) 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
(Series B Preferred Stock) and warrants (Warrants) to purchase an aggregate of
114,628 shares of common stock (Warrant Shares) for gross proceeds of
$8,000,000. Upon the issuance of the Series B Preferred Stock and the Warrants,
the Company allocated $310,045 of the proceeds to the Warrants. Also, pursuant
to the conversion terms whereby the Series B Preferred Stockholders were
guaranteed a discount after May 24, 1998, the Company has recorded aggregate
accretion of $2,049,545, which represents the maximum guaranteed return
available to Series B Preferred Stockholders. This accretion was charged
directly to accumulated deficit during 1997. The terms of the Series B Preferred
Stock provided for a formula-based conversion price, as defined. During 1998,
3,120 shares of Series B Preferred Stock were converted into 809,809 shares of
common stock.
On January 22, 1999 (Amendment Date), the Company and the Series B preferred
stockholders agreed to amend the terms of the Series B Preferred Stock. Under
the amended terms, the Company increased, by a one-time 15% premium, the face
value of the Series B Preferred Stock on the Amendment Date. The Company
recorded the value of the one-time premium, approximately $794,000, as a charge
to retained earnings on the Amendment Date. The conversion ratio for the amended
Series B Preferred 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 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. Effective January 13, 2000, the Company fixed the conversion price at
$2, as the closing bid price per share had been $3.25 or higher for ten
consecutive trading days, as permitted by the amended terms.
Both the original and amended Series B Preferred Stock accrues an additional
premium of 6% per annum. During 1999 and 1998, the Company recorded
approximately $530,000 and $128,000, respectively, as a charge to retained
earnings, representing the 6% premium on Series B Preferred Stock converted into
common stock.
As of December 31, 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.
Due to the redemption provision described above, the Company classified the
Series B Preferred Stock outside of stockholders' equity in the accompanying
consolidated balance sheets.
F-45
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) STOCKHOLDERS' EQUITY (CONTINUED)
In early 2000, all of the remaining shares of Series B Preferred Stock were
converted into shares of the Company's common stock.
(E) 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 (Preferred Investors) at an
aggregate purchases price of $7,404,100. The issuance of the Preferred Shares
was approved by the shareholders on May 20, 1999. The Preferred Investors
include certain officers and directors of the Company. Each Preferred Share
accrues a dividend of 7% per annum (Dividend). The Company has recorded
approximately $508,000 in dividends during 1999. 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.
Of the gross proceeds, the Company received Series C and E Preferred Stock
proceeds of approximately $4,887,000 during December 1998 from certain officers,
directors and previous investors of the Company. Because the Company and these
investors effectively entered into an oral agreement regarding the terms of the
investment prior to December 31, 1998, the Company recorded this amount as an
advance on Series C and E Preferred Stock in 1998 and reclassified this amount
to the respective series of Preferred Stock when the shares were issued in 1999.
The advance was classified outside of stockholders' equity because the Preferred
Stock was potentially redeemable until the issuance thereof was approved by the
Company's shareholders on May 20, 1999.
The Conversion Prices for the Series C and Series D Preferred Stock
represent the closing price of the Company's common stock on the dates that the
parties agreed to the terms of the investment. The Conversion Price for the
Series E Preferred Stock represents a 15% discount to the fair value of the
common stock on the day prior to the applicable agreement. The Company accounted
for this guaranteed return of $212,550 in January 1999 and has amortized such
return through April 30, 1999, the earliest date on which the Preferred Shares
were allowed to be converted as described above.
Certain of the Preferred Shares issued served to extinguish then existing
debt obligations. 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.
F-46
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(19) LOSS PER COMMON SHARE
During 1999, the Company recorded approximately $213,000 and $508,000
representing the 15% guaranteed conversion discount of the Series E Preferred
Stock and the 7% dividends on the Series C, D and E Preferred Stock,
respectively. Additionally, in 1999, the Company recorded approximately $794,000
and $530,000 representing the 15% and 6% premium, respectively, on the Series B
Preferred Stock. During 1998, the Company recorded approximately $128,000
representing the 6% premium on the Series B Preferred Stock. During 1997, the
Company recorded accretion of approximately $2,050,000 representing the 5%
conversion discount on the Series B Preferred Stock. The Company also recorded
approximately $105,000 of dividends on its Series A Preferred Stock, all of
which were converted into common stock as of December 31, 1998.
The following table sets forth the computation of net loss per common and
common equivalent shares:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss............................................ $ (9,071,552) $(18,777,724) $(24,710,294)
Dividends on Series A Preferred Stock............... -- -- (104,769)
Premium on Series B Preferred Stock................. (1,323,836) (127,985) (2,049,545)
Accretion and dividends on Series C, D and E
Preferred Stock................................... (720,897) -- --
------------ ------------ ------------
Loss attributable to common shareholders.......... $(11,116,285) $(18,905,709) $(26,864,608)
============ ============ ============
Basic and diluted net loss per common and potential
common share...................................... $ (0.66) $ (1.55) $ (3.36)
============ ============ ============
Basic and diluted weighted average number of common
shares outstanding................................ 16,819,731 12,214,986 7,990,666
============ ============ ============
</TABLE>
(20) INCOME TAXES
The 1999 tax provision of $245,000 consists of current state taxes of
$642,000, foreign tax refunds of $(97,000) and a deferred tax benefit of
$(300,000) relating to the Company's state tax deferred asset. The 1998 tax
provision of approximately $544,000 represents current state taxes of $283,000,
foreign taxes of $47,000 and capital gains taxes of $214,000 due in Ireland upon
the business disposition described in Note 10(b). The tax provision of
approximately $196,000 for 1997 relates entirely to state taxes currently
payable.
F-47
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(20) INCOME TAXES (CONTINUED)
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. The income tax effects of these temporary differences at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets--
Nondeductible reserves.................................... $ 858,000 $ 218,000
Net domestic and foreign operating loss and tax credit
carryforwards........................................... 10,445,000 17,416,000
------------ ------------
11,303,000 17,634,000
------------ ------------
Deferred tax liabilities--
Deferred revenue.......................................... -- (152,000)
Depreciation.............................................. (10,000) (66,000)
------------ ------------
(10,000) (218,000)
------------ ------------
Valuation allowance......................................... (10,993,000) (17,416,000)
------------ ------------
Net deferred tax asset...................................... $ 300,000 $ --
============ ============
</TABLE>
As of December 31, 1999, the Company has available domestic and foreign net
operating loss carryforwards of approximately $16,436,000 and $48,060,000,
respectively, and federal research and development credit carryforwards of
approximately $99,000 to reduce future income taxes, if any. These carryforwards
expire on various dates through 2019 and are subject to review and possible
adjustment by the appropriate taxing authorities. Pursuant to the Tax Reform Act
of 1986, the utilization of net operating loss carryforwards for tax purposes
may be subject to an annual limitation if a cumulative change of ownership of
more than 50% occurs over a three-year period. As a result of the Company's
recent preferred stock financings, such a change in ownership has occurred. As a
result of this ownership change, the utilization of substantially all of the
Company's domestic net operating loss carryforwards will be limited to
approximately $4,500,000 per year. The Company has recorded a valuation
allowance against substantially all of the deferred tax asset to reflect
uncertainties that might affect the realization of this deferred tax asset.
(21) FINANCIAL INFORMATION BY SEGMENT
Under SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, 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 and members of
Senior Management. The Company's reportable operating segments are Diabetes,
Women's Health, Clinical Diagnostics and Other.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on earnings before interest expense, taxes, depreciation and
amortization (EBITDA). Revenues are attributed to geographic areas based on
where the customer is located.
F-48
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(21) FINANCIAL INFORMATION BY SEGMENT (CONTINUED)
Segment information for the years ended December 31, 1999, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
WOMEN'S CLINICAL CORPORATE
1999 DIABETES HEALTH DIAGNOSTICS AND OTHER TOTAL
- ---- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net product sales from external customers........ $71,237,423 $42,813,963 $11,079,702 $ -- $125,131,088
Grant and other revenue.......................... 316,441 -- -- 425,974 742,415
----------- ----------- ----------- ----------- ------------
Total net revenue.............................. 71,553,864 42,813,963 11,079,702 425,974 125,873,503
EBITDA........................................... 2,677,551 6,564,983 773,442 (4,677,815) 5,338,161
Depreciation and amortization.................... 2,414,978 2,118,625 507,635 1,213,842 6,255,080
Interest income--
External....................................... 162,963 10,452 15,000 174,324 362,739
Intersegment................................... 81,772 4,743 -- 1,582,515 1,669,030
----------- ----------- ----------- ----------- ------------
Total interest income.......................... 244,735 15,195 15,000 1,756,839 2,031,769
Interest expense--
External....................................... 4,326 2,653,449 252,000 5,182,836 8,092,611
Intersegment................................... 1,339,528 270,002 -- 59,500 1,669,030
----------- ----------- ----------- ----------- ------------
Total interest expense......................... 1,343,854 2,923,451 252,000 5,242,336 9,761,641
Other items--
Extraordinary loss............................. -- -- -- (306,092) (306,092)
Income taxes..................................... 421,925 2,322,165 50,000 (2,548,748) 245,342
Assets........................................... 55,257,241 44,397,523 5,698,264 9,483,526 114,836,554
Expenditures for property, plant and equipment... 2,315,324 1,321,161 127,000 31,389 3,794,874
1998
Net product sales from external customers........ $57,215,716 $40,451,437 $15,852,391 $ 562,055 $114,081,599
Grant and other revenue.......................... 2,689,609 -- -- 1,212,410 3,902,019
----------- ----------- ----------- ----------- ------------
Total net revenue.............................. 59,905,325 40,451,437 15,852,391 1,774,465 117,983,618
EBITDA........................................... (3,949,964) 8,373,838 934,913 (3,047,265) 2,311,522
Depreciation and amortization.................... 2,426,135 2,058,805 3,498,170 795,998 8,779,108
Interest income--
External....................................... 89,165 43,025 103,238 349,351 584,779
Intersegment................................... -- 80,453 -- 1,607,514 1,687,967
----------- ----------- ----------- ----------- ------------
Total interest income.......................... 89,165 123,478 103,238 1,956,865 2,272,746
Interest expense--
External....................................... 6,667 2,975,774 241,000 6,341,794 9,565,235
Intersegment................................... 1,370,828 317,139 -- -- 1,687,967
----------- ----------- ----------- ----------- ------------
Total interest expense......................... 1,377,495 3,292,913 241,000 6,341,794 11,253,202
Other items--
Net charge on business dispositions, asset
impairments and restructuring activities..... -- 858,751 4,577,994 2,105,338 7,542,083
Equity in net income of affiliate.............. -- -- -- 237,366 237,366
Income taxes..................................... 37,841 156,000 260,841 89,550 544,232
Assets........................................... 47,483,580 45,992,593 6,301,200 15,300,104 115,077,477
Expenditures for property, plant and equipment... 814,061 136,718 256,931 234,770 1,442,480
</TABLE>
F-49
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(21) FINANCIAL INFORMATION BY SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
WOMEN'S CLINICAL CORPORATE
1997 DIABETES HEALTH DIAGNOSTICS AND OTHER TOTAL
- ---- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net product sales from external customers........ $ 434,476 $31,817,105 $18,122,176 $ 517,464 $50,891,221
Grant and other revenue.......................... -- -- -- 1,359,150 1,359,150
------------ ----------- ----------- ----------- -----------
Total net revenue.............................. 434,476 31,817,105 18,122,176 1,876,614 52,250,371
EBITDA........................................... (14,263,131) 5,300,334 2,863,947 (3,208,548) (9,307,398)
Depreciation and amortization.................... 953,342 2,023,830 3,011,310 608,569 6,597,051
Interest income--
External....................................... 97,420 186,867 148,531 535,522 968,340
Intersegment................................... 5,948 58,219 -- 1,049,472 1,113,639
------------ ----------- ----------- ----------- -----------
Total interest income.......................... 103,368 245,086 148,531 1,584,994 2,081,979
Interest expense--
External....................................... 322,245 1,831,841 698,906 2,633,843 5,486,835
Intersegment................................... 463,460 650,179 -- -- 1,113,639
------------ ----------- ----------- ----------- -----------
Total interest expense......................... 785,705 2,482,020 698,906 2,633,843 6,600,474
Other items--
Charge for in-process research and
development.................................. -- -- 3,303,300 -- 3,303,300
Noncash compensation charge.................... -- -- -- 167,938 167,938
Equity in net loss of affiliate................ -- -- -- (327,000) (327,000)
Income taxes..................................... (13,938) 175,000 34,373 437 195,872
Assets........................................... 14,505,278 46,142,091 18,820,221 15,904,093 95,371,683
Expenditures for property, plant and equipment... 3,773,561 414,967 976,409 236,015 5,400,952
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF EBITDA TO NET LOSS 1999 1998 1997
- ------------------------------------ ------------- ------------- -------------
<S> <C> <C> <C>
EBITDA........................................... $ 5,338,161 $ 2,311,522 $ (9,307,398)
Depreciation and amortization expense............ (6,255,080) (8,779,108) (6,597,051)
Amortization of deferred revenue................. 714,872 3,902,019 1,359,150
Interest expense................................. (8,092,611) (9,565,235) (5,486,835)
Income taxes..................................... (245,342) (544,232) (195,872)
Other noncash items.............................. (531,552) (6,102,690) (4,482,288)
------------- ------------- -------------
Net loss......................................... $ (9,071,552) $ (18,777,724) $ (24,710,294)
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
REVENUE BY GEOGRAPHIC AREA 1999 1998 1997
- -------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
United States...................................... $ 96,611,586 $ 95,649,297 $ 31,721,014
Germany............................................ 5,978,353 2,302,177 1,002,511
France............................................. 4,979,313 4,362,890 4,733,787
Italy.............................................. 4,299,597 1,129,247 124,740
Other.............................................. 14,004,654 14,540,007 14,668,319
------------ ------------ ------------
$125,873,503 $117,983,618 $ 52,250,371
============ ============ ============
</TABLE>
F-50
<PAGE>
SELFCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(21) FINANCIAL INFORMATION BY SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
LONG-LIVED TANGIBLE ASSETS BY GEOGRAPHIC AREA 1999 1998
- --------------------------------------------- ---------- ----------
<S> <C> <C>
United Kingdom.............................................. $6,438,202 $5,678,913
Ireland..................................................... 1,396,123 228,084
Israel...................................................... 1,164,000 1,297,000
United States............................................... 480,300 745,565
Other....................................................... 300,873 252,302
---------- ----------
$9,779,498 $8,201,864
========== ==========
</TABLE>
(22) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts receivable
reserve account:
<TABLE>
<CAPTION>
BALANCE AT OTHER UNCOLLECTIBLE BALANCE AT
BEGINNING OF PROVISION FOR ADDITIONS TO ACCOUNTS END OF
PERIOD BAD DEBT ALLOWANCES (1) WRITTEN OFF PERIOD
------------ ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December
31,
1999............... $1,936,858 $ 895,272 $ -- $ (209,615) $2,622,515
1998............... 1,550,469 392,355 25,700 (31,666) 1,936,858
1997............... 316,219 1,281,054 -- (46,804) 1,550,469
</TABLE>
- ------------------------
(1) Additions arising through the acquisition of Can-Am in 1998
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Selfcare, Inc.:
We have audited the accompanying consolidated balance sheets of Selfcare, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Selfcare, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 2, 2000
F-52
<PAGE>
Exhibit 21.1
List of Subsidiaries
March 28, 2000
<TABLE>
<CAPTION>
State or Jurisdiction
Name of Subsidiary of Incorporation % of ownership
- ------------------ ---------------- --------------
<S> <C> <C>
Selfcare Europe Ltd England (U.K.) 100%(no operations)
Selfcare International GmbH Germany 100%
Selfcare Development Verwaltungsgesellschaft GmbH Germany 100%(sub of SC International)
Selfcare Development GmbH & Co. KG Germany 70%(sub of SC International)
Bvba Selfcare Benelux sprl Belgium 100%(sub of SC International)
Cambridge Diagnostics Ireland Ltd. Ireland 100%
Cambridge Affiliate Corporation State of Delaware 49%
Selfhelp Israel, Ltd. Israel 100%(no operations)
Inverness Medical Limited Scotland (U.K.) 100% of common/voting stock (1)
Orgenics, Ltd. (2) Israel 100%(direct & indirect)
Orgenics International Holdings B.V. The Netherlands 100%(3)
Enviromed, plc England (U.K.) 29.9%
Inverness Medical, Inc. ("IMI") State of Delaware 100%
Can-Am Care Corporation State of New York 100%(sub of IMI)
Selfcare Technology, Inc. State of Delaware 100%(4)
Storebrands.net State of Delaware 100%
Selfcare Pty Limited Australia 100% (no operations)
</TABLE>
Note: Each subsidiary does business under its own name, as listed above.
- ----------
(1) preferred stock owned by Inverness and Nairn Enterprise (a Scottish
development agency)
(2) Orgenics, Ltd has subsidiaries in France (Orgenics France S.A., 100%
owned), Brazil (Orgenics Do Brasil Ltda, and Orgenics Reagentes para
Laboratorios Ltda -both 100% owned), Columbia (Orgenics Columbia-branch,
100% owned) and Israel (Orgenics Biosensors Ltd, and Orgenics O.S.A.
(1997) Ltd, both 100% owned).
(3) Only material assets are the shares of Orgenics Ltd. that it owns.
(4) Owns 50% (Joint Venture) of PBM-Selfcare, LLC
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report in this Form 10-K into the Company's previously filed Registration
Statement File Nos. 333-37961, 333-45535, 333-15583, 333-17855, 333-45523 and
333-95471.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,233,594
<SECURITIES> 0
<RECEIVABLES> 23,180,573
<ALLOWANCES> 2,623,000
<INVENTORY> 12,367,265
<CURRENT-ASSETS> 39,731,941
<PP&E> 16,787,765
<DEPRECIATION> 7,008,267
<TOTAL-ASSETS> 114,836,554
<CURRENT-LIABILITIES> 48,404,897
<BONDS> 38,892,273
3,944,247
13,022,288
<COMMON> 18,953
<OTHER-SE> 10,188,126
<TOTAL-LIABILITY-AND-EQUITY> 114,836,554
<SALES> 125,131,088
<TOTAL-REVENUES> 125,873,503
<CGS> 83,246,433
<TOTAL-COSTS> 42,296,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,092,611
<INCOME-PRETAX> (8,520,118)
<INCOME-TAX> 245,342
<INCOME-CONTINUING> (8,765,460)
<DISCONTINUED> 0
<EXTRAORDINARY> (306,092)
<CHANGES> 0
<NET-INCOME> (9,071,552)
<EPS-BASIC> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
