-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q8j9eIGGhDtCCQBYnO1/1zzXghT8Ln6Q+P+CMhJQPNMn95EKXOsY/b/oc/Fh4vUU 3GFuFwSxImbD/GglcjWx6w== 0000891618-97-001551.txt : 19970402 0000891618-97-001551.hdr.sgml : 19970402 ACCESSION NUMBER: 0000891618-97-001551 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEMTRAK INC/DE CENTRAL INDEX KEY: 0000882242 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 770295388 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19749 FILM NUMBER: 97572421 BUSINESS ADDRESS: STREET 1: 929 E ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087738156 MAIL ADDRESS: STREET 1: 929 E ARQUES AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ Commission file number 0-19749 CHEMTRAK INCORPORATED (Exact name of Registrant as specified in its charter) DELAWARE 77-0295388 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 929 EAST ARQUES AVENUE, SUNNYVALE, CA 94086 (Address of principal executive offices) (zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 773-8156 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE 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 definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The approximate aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the closing bid price of the Common Stock reported on the Nasdaq National Market was $16,000,000 as of February 28, 1997. The number of shares of Common Stock outstanding as of February 28, 1997 was 11,880,938. DOCUMENTS INCORPORATED BY REFERENCE Part III - Portions of the Registrant's definitive Proxy Statement for the Registrant's Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission, are incorporated by reference to the extent stated herein. Page 1 of Exhibit Index at Page 2 PART I ITEM 1 - BUSINESS. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section. ChemTrak Incorporated ("ChemTrak" or the "Company") conceives, develops, manufactures and markets leading edge and easy-to-use personal medical diagnostic systems for worldwide point-of-care markets. The Company has developed a patented, non-instrumented, hand-held diagnostic technology, the AccuMeter(R) cassette system, an enabling technology applicable to a broad range of general chemistry and immunoassay tests designed to screen and diagnose health conditions with accuracy comparable to physician office and laboratory instrumented tests. The Company has also developed the AWARE(R) home HIV test service, a consumer-access reference laboratory which is designed to provide test results and counseling for a variety of health conditions. The Company markets its products to over-the-counter and professional markets worldwide, directly and through strategic alliances with healthcare and consumer products companies. Currently, ChemTrak's CholesTrak(TM) Home Cholesterol Test, the first United States Food and Drug Administration (the "FDA") approved product of its kind, is available internationally and in most retail pharmacies and mass merchandise outlets in the United States. ChemTrak has also received FDA marketing clearance for its single-use, whole blood, physician's office test for Helicobacter Pylori (H. pylori), the bacterium now recognized as a contributor to duodenal and peptic ulcers in humans. ChemTrak recently announced the United States retail market entry of ColoCARE(R), a home test to detect the early warning signs of colorectal disease and has submitted an application to the FDA for approval to market its AWARE(R) home HIV test service. ChemTrak was founded in 1985 to bring health care closer to the patient by dramatically changing the way many in vitro diagnostic tests are performed. In vitro diagnostic testing is the process of analyzing constituents of blood, urine and other specimens taken from the body. It is the standard diagnostic methodology used to screen for, monitor and diagnose diseases and other medical conditions. Currently, most diagnostic testing is performed in clinical laboratories by skilled technicians, who must process the specimen, measure its volume, add reagents and use sophisticated machines to read and calculate the results. Typically, results are not received by the physician or the patient for one to two days. In contrast, the Company's easy-to-use AccuMeter(R) cassette system permits the physician or the patient to perform quantitative and qualitative diagnostic tests at the physician's office or in the patient's home and to obtain the results within minutes. The AWARE(R) home HIV test service is designed to provide results from a mail-in specimen within days, affording the convenience of at-home use, consumer access and telephone counseling. ChemTrak began marketing the AccuMeter(R) Total Cholesterol Test to the United States physician office market in May 1991, following receipt of clearance from the FDA, and to the international consumer retail and physician office markets in October 1991. In March 1993, the Company received clearance from the FDA for the United States consumer retail market. In January 1994, the Company began marketing the AccuMeter(R) Cholesterol Self-Test through United States consumer catalogues and signed a license and supply agreement for the Total Cholesterol Test with Advanced Care Products, now known as Direct Access Diagnostics ("DAD"), a Johnson & Johnson company, for over-the-counter retail outlets in North America. In December 1995, the Company regained the exclusive rights to market its total cholesterol product in the United States retail market and relaunched it in January 1996 under the trade name CholesTrak(TM). In February 1995, the Company acquired Coonan Clinical Laboratories, Inc. ("CCL") a company engaged in research and development of a home HIV test service. The Company believed that the acquisition of CCL would accelerate the time to market for a home HIV test service product. In 1995 ChemTrak filed a pre-market approval application ("PMA") for the Company's AWARE(R) home HIV test service with the FDA. Amendments were filed in March and August 1996. The test is awaiting FDA approval, while two competitive mail-in home HIV test services have gained approval and begun nationwide marketing in the United States. The Company anticipates approval in 1997. There can be no assurance that the Company will receive FDA marketing approval for the AWARE(R) home HIV test service or that if approved, it will be able to compete with existing products. ChemTrak was incorporated in California in 1985 [and reincorporated in Delaware in 1992]. Its principal offices are located at 929 East Arques Avenue, Sunnyvale, CA 94086 and its telephone number is 408.773.8156. The Company also has a website at WWW.ChemTrak.COM. 2 3 POINT-OF-CARE DIAGNOSTIC MARKETS General The diagnostic testing industry is experiencing rapid growth as health care providers and payors recognize that regular diagnostic testing can result in earlier detection of diseases, more accurate diagnoses and more effective treatment, which in turn help reduce the overall cost of health care. As innovative and cost-effective technology becomes available, diagnostic testing is gradually migrating from high-volume clinical laboratories to point-of-care sites, such as clinics, physician offices, homes and patient's bedsides and emergency rooms. While clinical laboratories will continue to provide batch testing, the Company believes that a new market is emerging for point-of-care diagnostics which will result in more frequent testing. Point-of-care testing eliminates the time and cost associated with utilizing remotely located laboratories, including those associated with specimen collection, preservation, transportation, processing and reporting of results. While the Company's proposed AWARE(R) home HIV test service uses a laboratory at ChemTrak, the Company believes that the privacy and convenience of the home test service will outweigh the time and cost associated with utilizing this laboratory. Consumer Retail Market According to industry sources, the consumer retail market for home health tests in the United States increased from $258 million in 1985 to over $1 billion in 1995, with a growth rate of 13.1% in 1995 alone. It is expected to grow to nearly $3 billion by the year 2000. The North American market for home tests (excluding glucose monitoring) was reported to be worth about $483 million in 1996. Preventive health care is emerging as a primary focus of medical intervention, and consumer self-testing is becoming an important part of health care as individuals become more aware of and involved with their own health. Several self-tests, including tests for blood glucose, pregnancy, ovulation, fecal occult blood and various urine components, have gained prominence as physicians and patients have begun to realize the potential of such tests for promoting improved health care. None of these tests, however, gives accurate, quantitative results without an instrument. The Company believes that the ability to perform accurate, quantitative tests without an instrument will create major new market opportunities for home health screening and monitoring. The Company believes that new technologies, such as its AccuMeter(R) cassette system, and new methodologies, such as its proposed AWARE(R) home HIV test service, which make testing simpler and more convenient, may provide access to this market. ACCUMETER(R) CHOLESTEROL PRODUCTS AccuMeter(R) Total Cholesterol Test ChemTrak's first product, the CholesTrak(TM) home cholesterol test, called the AccuMeter(R) Total Cholesterol Test in professional markets, is designed for the consumer retail and physician office markets and is the first commercially available cholesterol test that can be used in the home. The AccuMeter(R) Total Cholesterol Test received FDA 510(k) clearance for professional use in March 1991 and for consumer use in March 1993. This 1993 clearance allows the CholesTrak(TM) home cholesterol test to be performed by any consumer and is the first such clearance issued by the FDA for a quantitative cholesterol test in the retail market. In many foreign countries, including some of those in which the Company is currently distributing its product, no regulatory clearance is required for distribution of the CholesTrak(TM) home cholesterol test to consumers. The CholesTrak test was launched by ChemTrak's own sales and marketing group to the United States retail market in early 1996. The test is now widely distributed to pharmacy chains, mass merchandisers and wholesalers through a broker network and is supported by national advertising and promotion. The CholesTrak tests are intended for individuals who are already aware they have high cholesterol and are working to lower it through diet and exercise. The test is designed to give them the feedback required to remain motivated. 3 4 HELICOBACTER PYLORI TEST H. pylori is a bacteria that has been identified by a consensus panel of the National Institutes of Health as the causative agent of a large percentage of duodenal and gastric ulcers and is associated with a high incidence of stomach cancer if left untreated. There are an estimated 40 million new cases of H. pylori infection in the United States per year. H. pylori, which afflicts an estimated 40% of the United States population, is found in approximately 90% of patients with duodenal ulcers and 70% of patients with gastric ulcers. Research has shown that once H. pylori is eliminated, the average one-year recurrence rate of ulcers is approximately 10%, compared to a 50% to 70% recurrence rate for ulcers treated with traditional histamine-2 receptor antagonists drugs ("H2RAs") alone. Each year, there are over 40 million office visits for gastritis, one of the symptoms of a possible ulcer, in the United States alone. Last year, the worldwide market for medications containing H2RAs, which are used to treat gastric ulcers, exceeded $7 billion. Currently, H. pylori is often detected either through endoscopy procedures performed by physicians, or by experimental breath tests using special equipment. Clinical laboratories now perform a growing number of direct immunoassays for the antibodies to H. pylori in serum samples. The ChemTrak test is a one-step, whole blood test that will indicate the presence or absence of H. pylori antibodies in minutes during a patient's visit to a physician's office. In 1995, the Company announced it had signed a license and supply agreement with Astra Merck, Inc. (AMI) for sales of ChemTrak's H. pylori test to both professional markets and over-the-counter retail outlets in the United States. The test was cleared by the FDA for professional use in 1996 and then received further 510(k) clearance for improved accuracy claims in March of 1997. The test named Hp Chek(TM) by Astra Merck, will be marketed by 4 5 AMI's sales force alongside the prescription medicine, Prilosec(R), used for the treatment of several acid-related disorders including active duodenal ulcers. ColoCARE(R) Colorectal cancer now accounts for over 55,000 American deaths each year. It is the nation's second leading cancer killer with 131,000 Americans diagnosed annually. According to the American Cancer Society and seven other medical groups, this type of test can be as effective in detecting the early warning signs of colorectal disease as mammograms are for breast cancer detection. If used annually by persons over fifty, it is believed that screening tests for the early warning signs of colorectal disease such as ColoCARE(R), where positive results are followed up by a doctor's visit, could cut deaths by one-third. In February 1997, ChemTrak announced the introduction of ColoCARE(R), a home test for the early warning signs of colorectal disease, which is FDA-cleared, low-priced and clinically accurate. The ColoCARE(R) test is non-invasive, sanitary and easy-to-use. The Company has signed a distribution agreement with this test's developer, Helena Labs. The ColoCARE(R) test is easy to use, sanitary and reliable. Used in the privacy of the bathroom, the user simply removes the test pad from its envelope and drops it into the toilet bowl following a bowel movement and before flushing. Chemicals in the pad cause it to turn blue within 30 seconds if hidden blood is present in detectable amounts. The presence of blood in the stool is a recognized early warning sign of colorectal disease including cancer. The user notes any color change, records the information and flushes the toilet. No sample handling is required. Three consecutive tests are required. If during any of the tests the pad turns blue, a physician should be consulted as soon as possible. The test pad should not change color if blood is not detected. The Company believes that the ColoCARE(R) test has broad market potential. The American Cancer Society reports that early cancer detection is of critical importance. The disease strikes men and women about equally, and those over forty may be at increased risk. As reported in a national news publication, "An easy take home test for colorectal cancer could lower the cost and unpleasantness that deter many Americans from being examined for the nation's second leading cancer killer." FUTURE HIV TEST An estimated 4% of adult Americans, or 7.3 million people, report they have engaged in risk behaviors for HIV infection. Over 33 million HIV tests were performed by clinical laboratories in the United States in 1994. Of the estimated 1 million Americans living with HIV, only 30% to 60% have been tested, and about one-half of those who test positive are tested long after infection, when treatment is less successful. In 1995, the Company filed a PMA with the FDA for the AWARE(R) home HIV test service. The AWARE(R) home HIV test service requires the consumer to provide a dried blood sample on a special collection card. The consumer then sends the card with the sample to the Company's licensed laboratory; the card is identified only by a code number to ensure the consumer's anonymity. To obtain the result, the consumer then calls a special number set up by ChemTrak, using only the code number for identification. Trained counselors employed by ChemTrak will provide the results, and provide information and referrals for further testing. While the Company is still awaiting FDA approval, two competitors received approval for similar systems and have launched them nationwide. There can be no assurance that the Company will receive FDA marketing approval for the AWARE(R) home HIV test service, or that if approved, it will be able to compete with existing products. FUTURE ACCUMETER(R) PRODUCTS The Company believes that its AccuMeter(R) cassette system is an enabling technology and will be applicable to a broad range of general chemistry and immunoassay tests, including the following: Theophylline Test Theophylline is a drug prescribed for use by people suffering from asthma and other respiratory difficulties. Approximately six million patients take theophylline to relieve or prevent symptoms of asthma. The drug is effective only over a limited range: too little is ineffective, too much causes side effects that include headache, nausea, vomiting, low blood pressure, tachyccardia, arrhythmia, and convulsions. Also, the safe and effective range for theophylline varies from patient to patient. Monitoring theophylline levels helps clinicians establish and maintain safe and effective dosages in both acute and chronic treatment, and over 20 million theophylline tests are routinely performed in clinical laboratories in the United States every year, with results sometimes not available for hours or even days. ChemTrak's AccuMeter(R) Theophylline Test enables the physician to monitor theophylline drug levels with ease -- during a single office visit. The test is simple enough to be prescribed for home use to check night-time or early morning concentrations of the drug, information which could improve patient management critically. Theophylline levels must be monitored carefully during therapy, as low levels are ineffective and high levels can be toxic. The Company believes that approximately 25 million theophylline tests are performed annually in the United States. Currently, most theophylline testing requires costly instruments that are not suitable for use either in physician offices or homes. The Company believes that the only existing non-instrumented test requires a complex procedure and exact measurement of the blood sample. ChemTrak's test for quantifying blood levels of theophylline for use in professional settings has been reformulated and completed. The Company is in the process of preparing an FDA 510(k) filing for its theophylline test. Other Future AccuMeter(R) Products Additional tests incorporating the AccuMeter(R) technology that the Company has targeted for future research and development include tests for other infectious diseases. The AccuMeter(R) technology may assist in detecting disease by enabling the detection of low levels of proteins, which is a necessary step in detecting infection. The Company has developed a whole blood , one-step HIV 1/2 test in the AccuMeter(R) format which has the same protocol as the H.pylori test. The test is currently in pre-clinical studies. 5 6 The World Health Organization estimates that currently 11 million people are infected with HIV and that this number will reach 30 million by the year 2000. The Company believes that the AccuMeter(R) technology will be applicable to other infectious disease tests as well. Other future products that the Company may develop include tests for low density lipoprotein ("LDL"), or "bad cholesterol", and glycosylated hemoglobin. Monitoring glycosylated hemoglobin provides information regarding the well being of diabetics over a broader time period than can be achieved by monitoring blood glucose levels alone. An LDL test could serve as a companion product to the Company's total cholesterol tests. The Company has yet to develop prototypes for these additional tests and all are in the early stage of development. There can be no assurance that the Company will develop or complete development of any of its future products, that such products will receive marketing approval by the FDA or foreign regulatory authorities or that any current or future products will be manufactured in commercial quantities or marketed successfully. GOVERNMENTAL REGULATION ChemTrak's products are regulated under the 1976 and 1990 device amendments to the Food, Drug and Cosmetic Act (the "Amendments"), which, among other things, classify devices into three categories (Class I, II and III) over which the FDA maintains increasing levels of regulation. Although some of ChemTrak's products may be classified as Class III, the majority of ChemTrak's products are or are expected to be classified as Class I or II devices. Prior to marketing any of these devices, the Company must obtain pre-clearance from the FDA, either through the notification ("510(k) Notification") process or the pre-market approval application ("PMA") process. If a product is a Class III device, it requires a PMA. The PMA process is lengthy, usually taking approximately 18 to 30 months. The Company believes that the majority of its products can be pre-cleared using the 510(k) Notification process, which takes approximately 90 to 180 days. There can be no assurance that a given product can be pre-cleared using the 510(k) Notification process or that the process will be completed within the usual time frame. The 510(k) Notification process for the CholesTrak(TM) Home Cholesterol Test took 18 months. Because all devices new to the marketplace after 1976 are automatically classified as Class III devices (unless they have been reclassified) in any 510(k) Notification, the Company must, among other things, demonstrate that the product to be marketed is "substantially equivalent" to another legally marketed device in order to obtain reclassification. Test data from clinical trials may be required to demonstrate "substantial equivalence." The Company may commence marketing the product only after the FDA issues a written order finding either that the PMA has been approved or that "substantial equivalence" has been established, which latter event may take longer than the 90-day period estimated for a 510(k) Notification review. By requesting additional data, the FDA can further delay the Company's market introduction of its products. However, there can be no assurance that the Company will obtain the required marketing clearance for any of its development stage products on a timely basis, or at all. Although the Company believes that there are significant markets for its products independent of the United States physician office and over-the-counter consumer retail market, failure to obtain such FDA clearance for its future products could have a material adverse effect on the Company's business, financial condition and results of operations, as well as its relationships with its corporate partners. The Amendments also require the Company to manufacture its products in compliance with the FDA's current Good Manufacturing Practices ("cGMP") regulations and to register its manufacturing facility and its products. The Company has registered its facility and its products with the FDA. The Company has also registered its manufacturing facility with the Department of Health Services of the State of California, as required, and has passed federal and state inspections confirming the Company's compliance with the cGMP regulatory requirements for its products. However, there can be no assurance that the Company's facility will continue to satisfy cGMP regulations. In addition, the manufacture, sale or use of the Company's products are also subject to regulation by other federal entities, such as the Occupational Safety and Health Agency and the Environmental Protection Agency, and by various state agencies. Federal and state regulations regarding the manufacture, sale or use of the Company's products are subject to future change, which could have a material adverse effect on the Company's business, financial condition and results of operations. Certain of ChemTrak's products, when used, may also be regulated under the Clinical Laboratory Improvement Amendments Act of 1988 ("CLIA"). CLIA is intended to insure the quality and reliability of all medical testing in laboratories in the United States, regardless of where these laboratories are located. Final regulations to 6 7 implement CLIA were published in February 1992, effective September 1, 1992, except for participation in proficiency testing which for previously unregulated laboratories were not effective until January 1994. In January 1993, the Department of Health and Human Services published certain revisions to these regulations. The regulations establish requirements for laboratories in the areas of administration, participation in proficiency testing, patient test management, quality control, personnel, quality assurance and inspection. Under these regulations, the specific requirements that a laboratory must meet depend upon the complexity of the tests performed by the laboratory. Laboratory tests are categorized as either waived tests, tests of moderate complexity or tests of high complexity. Laboratories that perform waived tests are not governed by the CLIA regulations, but must obtain a registration certificate with the Health Care Financing Administration ("HCFA"). Laboratories that perform either moderate or high complexity tests must meet the requirements in all areas and are required to obtain either a registration certificate or certification of accreditation from the HCFA. In March 1995, the Center for Disease Control granted waived status for the CholesTrak Total Cholesterol Test, and informed the Company that all tests cleared by the FDA for over-the-counter consumer use are automatically waived. SALES AND MARKETING The Company's marketing strategy is to utilize targeted marketing of its consumer CholesTrak(TM) Home Cholesterol Test, ColoCARE(R) home test for the early warning signs of colorectal disease, its AWARE(R) home HIV test service (pending FDA approval), and future consumer personal diagnostics tests to make direct sales to the consumer as well as through chain drug, mass merchandisers and natural/health food stores in the United States. ChemTrak has agreements with a number of trade relation sales force groups which in turn sell through broker organizations servicing the retail market. These organizations receive a percentage of sales based upon performance. The Company advertises and promotes its products to key population segments. Professional markets in the United States are served through a number of arrangements with pharmaceutical companies and medical product distributors. See "Corporate Partners." Internationally, the Company has a number of arrangements in place for the marketing and sales of its Total Cholesterol Test to consumer retail markets in Europe, Africa and the Pacific Rim area. CORPORATE MARKETING PARTNERS Through its corporate partner alliances, ChemTrak expects to more effectively reach the international consumer retail and United States physician office markets. ChemTrak has non-material distribution arrangements with a number of independent health care supply organizations domestically and worldwide. ChemTrak has in effect material contractual relationships with the following corporate partners:
Corporate Partner Market Country Product - ----------------------------------------------------------------------------------------- Astra Merck Inc. Consumer retail United States H. pylori Physician office Puerto Rico The Boots Company PLC Consumer retail United Kingdom Cholesterol Test Helena Laboratories, Inc. Consumer retail Canada Cholesterol Test Jokoh, Inc. Physician office Japan Theophylline Test Orion Diagnostica Physician office United States Cholesterol Test Selfcare, Inc. Consumer retail All of Europe and AWARE(R) Home Scandinavia HIV Test Service
Termination of any of these arrangements with corporate partners could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that these corporate partners will meet their projected sales volumes, that the Company will be successful in retaining these corporate alliances or that it will be able to enter into additional alliances on acceptable terms if at all. 7 8 Astra Merck Inc. (AMI). In March 1995, the Company entered into a multi-year license and supply agreement with AMI to market the Company's H. pylori test in the United States and Puerto Rico. The initial term expires either six years from March 1, 1995 or four years after the first over-the-counter sale, whichever is earlier. After the initial term, the agreement provides for renewal on an annual basis. AMI has been granted exclusive United States marketing rights to ChemTrak's H. pylori test for both professional markets and for over-the-counter retail outlets. In return, ChemTrak is entitled to receive separate cash payments from AMI upon realization of certain milestones ultimately leading to the commercialization of the H. pylori test. The Company will also receive a per unit price for each product it manufactures and sells to AMI. The Agreement calls for AMI to purchase certain minimum quantities during specified periods commencing on the first shipment to the professional market. The agreement may be terminated by either party on sixty days notice if the other party commits a material breach of the agreement. The H. pylori test has received FDA clearance for sale to the professional market with the first shipment expected in April 1997. The Company expects to commence the process of seeking FDA approval for over-the-counter retail sales later in 1997. The Boots Company PLC. In December 1991, the Company entered into a multi-year agreement with The Boots Company PLC ("Boots") for the sale of the AccuMeter cholesterol test under Boots' brand name in the United Kingdom. Boots is a diversified company and includes Boots The Chemists, a 1,069 store pharmacy division of Boots. Helena Laboratories, Ltd. In April 1996, ChemTrak signed an agreement with Helena Laboratories Ltd. for distribution of the home cholesterol test in Canada. Helena Laboratories (Canada) is part of an international clinical diagnostic company currently operating in over 40 countries and its innovative products have been available in Canada for more than 15 years. Helena Laboratories (Canada) has been marketing ColoCARE(R), a unique and patented home test for the early warning signs of colorectal disease, and in the process has created a new category in Canadian pharmacies. Jokoh Co., Ltd. Japan. In May 1996, ChemTrak completed a licensing and distribution agreement with Jokoh Co., Ltd. Japan to introduce ChemTrak's non-instrumented, quantitative, whole-blood test for the asthma drug theophylline into the Japanese marketplace. The Company believes that its AccuMeter(R) Theophylline Test will be, if approved by Japanese authorities, the only non-instrumented, quantitative, whole-blood test for theophylline offered in Japan. Jokoh specializes in clinical laboratory analytical product manufacturing and marketing. Orion Diagnostica. In March 1995, ChemTrak signed an agreement with Orion Diagnostica Inc., the United States division of a Finland-based worldwide manufacturer and marketer of diagnostic tests, granting them the right to market the AccuMeter(R) cholesterol test to physicians offices, hospitals and commercial laboratories through its direct sales force as well as a network of medical surgical sales representatives throughout the United States. Selfcare Inc. In January 1997, ChemTrak announced a pan-European alliance with Selfcare Inc. of Waltham, Massachusetts to market the AWARE(R) home HIV testing and counseling service. The agreement calls for licensing of ChemTrak's AWARE(R) home HIV test service including product design and manufacture, proprietary finger stick device, customized computer sample and results tracking systems, laboratory protocols, professional counselor training and certification programs to Selfcare. As part of the agreement Selfcare will pay for the cost of regulatory submissions in each of the countries of Europe. Selfcare in turn will augment its existing European 8 9 operations with local reference laboratories and counseling centers to provide efficient individualized home HIV testing services throughout Europe. Selfcare does, however, have the option to terminate the agreement if the FDA does not approve ChemTrak's AWARE(R) home HIV test service in 1997. Selfcare, with facilities in Waltham, Massachusetts, Inverness, Scotland, Galway, Ireland and Munich, Germany is engaged in the development, manufacture and marketing of self-test diagnostic products for the diabetes, woman's health and infectious disease markets. Their products are marketed in the United States under Selfcare's own brands and private label brand names. The Boots Company, PLC is permitted to market and distribute products competitive with those of the Company; none of the Company's other corporate partners are permitted to do so. There can be no assurance that the foregoing corporate partner alliances, or any such future arrangements, will not be terminated prematurely by the Company's corporate partners, or that the Company's corporate partners will purchase products or that such corporate partners will successfully market and sell the Company's products. RESEARCH AND DEVELOPMENT - - As of December 31, 1996, the Company employed 10 full time research, development, clinical and regulatory affairs professionals, two of whom hold Ph.D.s. The research and development group focuses on the development of new technologies, application of these technologies to new products, manufacturing process development and manufacturing scale-up. In addition, the research and development group carries out clinical trials and prepares appropriate regulatory filings. PATENTS AND PROPRIETARY TECHNOLOGY The Company has aggressively pursued a patent portfolio to protect its technology. As of the date of this report, the Company had 15 United States patents, with expiration dates between 2007 and 2010, and five patent applications pending. As of December 31, 1996, the Company had received eight foreign patents. The issued patents cover inventions relating to the basic principles of the AccuMeter(R) technology, including blood separation and sample metering, as well as the physical components of the AccuMeter(R) cassette system. The pending patent applications cover additional technologies and applications of the AccuMeter(R) system. The Company's policy is to file patent applications to protect technology, inventions and improvements that are important to the development of its business. The Company also relies upon trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain its competitive position. The patent position of medical device manufacturers, including ChemTrak, is uncertain and may involve complex legal and factual issues. Consequently, the Company does not know whether any of its patent applications will result in the issuance of any further patents, or whether issued patents will provide significant proprietary protection or will not be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy until patents issue, and since publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, ChemTrak cannot be certain that it was the first creator of inventions covered by pending patent applications or that it was the first to file patent applications for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions, which could result in substantial cost to the Company as well as commitment of management resources. There can be no assurance that the Company's patent applications will result in further issued patents or that such issued patents will offer protection against competitors with similar technology. Because the Company's AWARE(R) home HIV test service utilizes existing laboratory technology in analyzing blood samples, it lacks patent protection. While there may be patent protection sought for the proprietary technology of some of the test components, ChemTrak does not expect that this protection would preclude others from marketing similar tests for HIV. ChemTrak has royalty bearing, non-exclusive licenses from Miles Laboratories and Boehringer Mannheim GmbH to practice the AccuMeter(R) technology and is fulfilling its obligations under these licenses. These licenses 9 10 are terminable by ChemTrak with 60 and 90 days written notice, respectively. The Company has also entered into a royalty bearing non-exclusive agreement with AKZO Nobel to practice the sol particle immunoassay technology. The licenses were entered into without any admission that these licenses are required by ChemTrak. ChemTrak requires its employees, consultants and advisors to execute confidentiality agreements upon the commencement of an employment or consulting relationship with the Company. Each agreement provides that all confidential information developed or made known to the individual during the course of the relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived of by an individual shall be the exclusive property of the Company, other than inventions unrelated to the Company's business and developed entirely on the employee's own time. There can be no assurance, however, that these agreements will provide meaningful protection for or adequate remedies for misappropriation of the Company's trade secrets in the event of unauthorized use or disclosure of such information. COMPETITION Currently, ChemTrak's competition in the physician office market consists mainly of clinical laboratories and companies offering instrumented tests. Several major diagnostic companies market instruments to physicians and hospitals that are capable of testing for whole blood cholesterol with accuracy similar to that of ChemTrak's CholesTrak(TM) Total Cholesterol Test. The Company believes, however, that such instruments possess significant disadvantages in that they are expensive to purchase, operate and maintain. In the consumer retail market, the Company is not aware of any existing competing quantitative instrument-free cholesterol tests. The Company knows of a number of United States companies that are developing products that may be used by the physician office or consumer retail markets, some of which may be competitive with the Company's current and proposed products. Specifically, the Company is aware of other United States companies, such as Quidel Corp., Meridien and others that have developed tests for H. pylori that have received FDA marketing clearance for the physician office market. The Company is not aware of any companies that have received FDA marketing clearance for a cholesterol test for the United States consumer retail market other than its own. ChemTrak has knowledge of two other companies that have received FDA approval on home HIV test products similar to the Company's home HIV test service. At least one of these companies, Direct Access Diagnostics, a Johnson & Johnson company, has significantly greater resources than ChemTrak. Both of these companies have launched and advertised their products nationwide. There can be no assurance that the Company's products will be competitive with existing or future products, or that the Company will be able to establish and maintain a profitable price structure for its products. MANUFACTURING ChemTrak currently utilizes an automated production line in its 58,000 square foot facility for the manufacture, assembly and packaging of its Total Cholesterol Test, including approximately 36,000 square feet dedicated to manufacturing. The Company believes that this facility will meet its production requirements at least through 1997 and that suitable additional space will be available when and as needed. The manufacturing process employs chemical and packaging supplies that are generally available from several suppliers. The Company has registered its facility with the FDA and with the Department of Health Services of the State of California and has passed federal and state inspections, confirming the Company's compliance with the current Good Manufacturing Practices regulatory requirements for its products. However, there can be no assurance that the Company's facility will continue to satisfy cGMP regulations. In addition, the manufacture, sale or use of the Company's products are also subject to regulation by other federal entities, such as the Occupational Safety and Health Agency and the Environmental Protection Agency, and by various state agencies. Federal and state regulations regarding the manufacture, sale or use of the Company's products are subject to future change, which could have a material adverse effect on the Company's business, financial condition and results of operations. ENVIRONMENTAL REGULATION Due to the nature of its current and proposed manufacturing processes, the Company is subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. Although the Company believes that it has complied with these laws and regulations in all material respects and has not been required to take any action to correct any noncompliance, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental and health and safety regulations as it continues to increase production to commercial levels. In addition, the landlord of the Company's facility in Sunnyvale, California has advised the Company that the groundwater may be affected by contaminants migrating from an off-site source. 10 11 Although the Company has been indemnified by its landlord as to claims brought by third parties with respect to this contamination and no claims have been asserted, in the event remedial action is required, there can be no assurance that the Company will not have to incur significant costs if the landlord is not adequately funded. REIMBURSEMENT Third party payors can indirectly affect the pricing or the relative attractiveness of the Company's products by regulating the maximum amount of reimbursement they will provide for diagnostic testing services. For example, the reimbursement of fees for diagnostic testing services for Medicare patients in hospitals or in physician offices is included under Medicare's prospective payment system diagnosis related group regulations. If the reimbursement amounts for diagnostic testing services are decreased in the future, it may decrease the amount that physicians are able to charge Medicare patients for such services and consequently the price the Company can charge physicians for its products. The Company cannot predict the reimbursement of fees for diagnostic testing services for Medicare patients, or any other types of patients. Any decreases in reimbursement fees could have a material adverse effect on the Company. EMPLOYEES As of December 31, 1996, the Company had 48 full-time employees with 12 employees devoted to research and development, 22 employees in manufacturing operations, five employees devoted to sales and marketing, and nine devoted to general and administration. None of the employees is covered by a collective bargaining agreement, and management considers relations with its employees to be good. The Company is highly dependent upon a small group of management, manufacturing, marketing and scientific executives, the loss of any of whose services could have a material adverse effect on the Company. The Company has obtained key man life insurance for $1,000,000 on the life of Dr. Prithipal Singh, the Company's co-founder and Chief Technical Officer. Recruiting and retaining qualified manufacturing, marketing and sales personnel and scientists to perform research and development work in the future will also be critical to the Company's success, although there can be no assurance that the Company will be able to do so. TECHNICAL AND BUSINESS ADVISORS The Company periodically draws on the expertise of several advisors and consultants in fields related to the Company's technology and business. The Company's technical and business advisors consult with the Company on a frequent basis. As of January 1, 1997, the following persons were serving as technical and business advisors to the Company: Richard Bastiani, Ph.D., has served as an advisor to the Company since August 1995. Dr. Bastiani is the President of Activated Cell Therapy, Inc. in Mountain View, California. Prior to joining Activated Cell Therapy, Inc. Dr. Bastiani was with Syva Co. for over 23 years where he held various management positions as Vice President, Health Diagnostics Product Division, Vice President, Worldwide Marketing and Sales, and also as President from 1991 to 1994. Ronald Breslow, Ph.D., has served as an advisor to the Company since May 1988. Dr. Breslow, a Professor of Chemistry at Columbia University, is a winner of the Arthur C. Cope and the National Medal of Science awards. Dr. Breslow's research focuses on organic chemistry and synthetic enzymology. Dr. Breslow advises the Company on various aspects of diagnostic technology. Allen D. Cooper, M.D., has served as an advisor to the Company since June 1990. Dr. Cooper is the Director of the Palo Alto Medical Foundation Research Institute and a Professor of Medicine at Stanford University. Dr. Cooper is a specialist in internal medicine and lipid disorders. Dr. Cooper advises the Company regarding patient treatment issues. 11 12 Robert S. Galen, M.D., M.P.H., has served as an advisor to the Company since April 1990. Dr. Galen is a member of the faculty at Case Western Reserve and has served as the Chairman of the Biochemistry Department at the Cleveland Clinic Foundation, Chairman of the American Society of Clinical Pathologists and Chairman of the NCCLS Committee on General Laboratory Practices. Dr. Galen is on the board of directors of a number of companies, including MetPath Investment Company. Dr. Galen advises the Company regarding clinical chemistry issues. John Kaiser has served as an advisor to the Company since 1991. Mr. Kaiser is the President and Chief Executive Officer of Biocircuits Inc., a public company ("Biocircuits"). Prior to joining Biocircuits, Mr. Kaiser was employed by Boehringer Mannheim as President of the Physician's Laboratory Products Division where his responsibilities included cholesterol screening activities. Mr. Kaiser advises ChemTrak on strategic marketing issues. Bertram Rowland, Ph.D., J.D., has served as an advisor to the Company since 1987. Dr. Rowland was a patent attorney with the law firm of Flehr, Hobach, Test, Albritton & Herbert. Dr. Rowland advises the Company on intellectual property matters. Ernest M. Tucker, III, M.D. has served as an advisor to the Company since September 1992. Dr. Tucker is Chairman of the Department of Pathology for the Scripps Clinic and Research Foundation in La Jolla, California. He advises the company regarding technical and clinical issues. In addition to serving as a member of the Board of Directors of ChemTrak, Malcolm Jozoff has served as business advisor since December 1993. EXECUTIVE OFFICERS The executive officers of the Company and their ages as of January 1, 1997 are as follows: PRITHIPAL SINGH, PH.D.... 57 Chairman of the Board and Chief Technical Officer Dr. Singh is a founder of the Company and served as President, Chief Executive Officer and Chairman of the Board of the Company from September 1988 to June 1993 and as Chief Executive Officer and Chairman of the Board from June 1993 to January 1997. He was appointed Chairman of the Board and Chief Technical Officer of the Company in January 1997. From February 1985 to August 1988, Dr. Singh was a Senior Vice President of Idetek, Inc., an animal health care company. Dr. Singh is also a director of Abaxis, Inc., a biopharmaceutical company. EDWARD F. COVELL....52 President and Chief Executive Officer Mr. Covell was appointed President and Chief Executive Officer of ChemTrak in January 1997, after having served as President and Chief Operating Officer from May 1996 when he joined the Company. He was elected a Director of the Company in August 1996. Prior to joining ChemTrak, Mr. Covell was a management consultant from 1994 to 1996, focusing on the OTC medical device market. From 1992 to 1994 he was President and Chief Operating Officer of Medchem Products, Inc., a manufacturer of medical devices serving customers worldwide. Mr. Covell held a series of increasingly responsible positions with Tambrands Inc. from 1980 through 1990, including Corporate Vice President and General Manager of the Diagnostics Division. Tambrands is a consumer healthcare products company. From 1968 to 1980, he served in domestic and international management and product development positions with the Kendall Company, a diversified manufacturing company with worldwide sales of $500 million. 12 13 RODGER RICHEAL.... 51 Senior Vice President Mr. Richeal joined ChemTrak in November 1995. He had been with Abaxis as Vice President of Business Development from 1991 through 1995, having previously been Vice President of Operations, Clinical and Regulatory Affairs. He was employed as an Industry Consultant by Advanced Bioresearch Associates. Prior to 1986, he was Vice President of Operations at Primary Diagnostic Systems and Vice President of Technical Operations and Quality Assurance at Syva Co., (formerly a unit of Syntex Corp., now part of the Behring Diagnostics, Inc., unit of Hoechst AG), where he was employed for more than 11 years. NIQUETTE HUNT....32 Vice President Ms. Hunt jointed ChemTrak in December, 1996 to lead the Company's domestic OTC marketing effort. Prior to joining ChemTrak, she served as a Category Manager for Warner Lambert Company in its Upper Respiratory product group which includes the Sudafed, Benadryl and Actifed franchises. Prior to that she served as the Team Leader/Senior product Manager for the Lubriderm and Benadryl brands. From 1987 to 1993 she was a brand manager for Procter and Gamble in the Health and Beauty Care sector where she managed several leading products including Pantene, Pert Plus, Head & Shoulders and Prell. Prior to joining Procter and Gamble, Ms. Hunt began her career in banking, working for J.P. Morgan. RISK FACTORS This section summarizes certain risks that should be considered by stockholders and prospective investors in the Company. Many of these risks are discussed in other sections of this report. HISTORY OF LOSSES AND ACCUMULATED DEFICIT The Company has incurred operating losses since its inception, largely because of the limited number of revenue-generating products and the high cost of developing and marketing consumer medical devices. At December 31, 1996, ChemTrak had an accumulated deficit of $36.3 million. The Company currently has only one product on the market and expects to launch its H. pylori test and its ColoCare(R) products for public sale in 1997. The extent of revenues generated by these new products is highly uncertain. There can be no assurance that the Company will achieve profitability in 1997, or that profitability, if achieved, can be sustained on an ongoing basis. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING The development and marketing of consumer medical devices is capital intensive. The Company has funded its operations to date through product sales and public and private equity and debt financings. The Company will require substantial additional funding in order to complete the development and marketing activities in which it is currently engaging, and to launch these products in the consumer marketplace. The Company intends to seek additional funding through collaborative agreements with corporate partners or through additional equity or debt financings. There can be no assurance that the Company will be able to enter into such arrangements on acceptable terms, or at all. GOVERNMENT REGULATION The Company's ongoing product development activities, and any future production and marketing of products, are subject to extensive regulation by government authorities in the United States and other countries. The regulatory process can be lengthy and requires the expenditure of substantial resources. There can be no assurances that any product developed by the Company will meet all of the applicable regulatory requirements necessary to receive marketing approval. Moreover, Food and Drug Administration ("FDA") policy may change and additional government regulations may be established that could prevent or delay regulatory approval of the Company's potential products. In addition, a marketed product and its manufacturer are subject to continual review, and later discovery of previously unknown problems with a product or manufacturer may result in restrictions on such product or manufacturer, including withdrawal of the product from the market. In order to market its products abroad, the Company also must comply with foreign regulatory requirements, implemented by foreign health authorities, governing marketing approval. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above, and may introduce additional requirements or risks. There is no assurance that a foreign regulatory body will accept the data developed by the Company for any of its products and approved by the FDA does not ensure approval in other countries. RELIANCE ON SMALL PRODUCT LINE; UNCERTAINTY OF MARKET ACCEPTANCE To date the Company has generated revenue only from sales of the AccuMeter(R) Total Cholesterol Test, and, more recently, the ColoCare(R) test. The Company has generated no sales revenue from its H. pylori test, which is expected to be launched in 1997. Factors which will affect the Company's success include ChemTrak's ability to obtain regulatory clearance for marketing its products and its ability to develop, manufacture and market future products on a timely basis. There can be no assurance that the Company's current product development efforts will be successfully completed, or that products can be manufactured in commercial quantities or marketed successfully. In addition, there can be no assurance that any of the Company's products will gain significant market acceptance among physicians or the general public. With its small product line, development, regulatory or market failures for even a single product are likely to have a material adverse effect on Company operations. RAPID TECHNOLOGICAL CHANGE; HIGHLY COMPETITIVE INDUSTRY Rapid and substantial technological change are expected to continue in the health care industry generally and the diagnostic device industry in particular. There can be no assurance that the Company's products will not become obsolete or that the Company will be able to keep pace with technological developments. The consumer retail and physician office markets are expected to attract a large number of competitors, many of whom have substantially greater resources than ChemTrak. Numerous other companies are developing alternative strategies for cholesterol management, HIV diagnostics, and other areas in which the Company is marketing or intends to market products. These alternative strategies could compete with the Company's programs. There can be no assurance that the Company's competitors will not develop more effective or more affordable products or achieve earlier or more efficient product commercialization than the Company. RELIANCE ON CORPORATE PARTNERS FOR PRODUCT DISTRIBUTION ChemTrak has a broker sales force and also relies on a number of collaborative arrangements with corporate partners for the distribution of its products. Many of these arrangements are terminable by corporate partners at the discretion of those partners. Termination of one or more of these arrangements could have a material adverse effect on the Company's business and financial condition and its results of operations. There can be no assurance that the Company will be able to maintain these arrangements with its corporate partners or, it such arrangements are terminated, that the Company would be able to enter into arrangements with other corporate partners on satisfactory terms, or at all. In addition, there can be no assurance that these corporate partners will meet their projected sales volumes. PATENTS AND PROPRIETARY TECHNOLOGY The patent position of medical device manufacturers, including ChemTrak, is uncertain and may involve complex legal and factual issues. Consequently, the Company does not know whether any of its patent applications will result in the issuance of any further patents, or whether issued patents will provide significant proprietary protection or will not be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy until patents issue, and since publications or discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, ChemTrak cannot be certain that it was the first creator of inventions covered by pending patent applications or that it was the first to file patent applications for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions, which could result in substantial cost to the Company as well as commitment of management resources. There can be no assurance that the Company's patent applications will result in further issued patents or that such patents will offer protection against competitors with similar technology. Because the Company's AWARE(R) home HIV test service utilizes existing laboratory technology in analyzing blood samples, it lacks patent protection. While there may be patent protection sought for the proprietary technology of some of the test components. ChemTrak does not expect that this protection would preclude others from marketing similar tests for HIV. ENVIRONMENTAL REGULATION Due to the nature of its current and proposed manufacturing processes, the Company is subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. Although the Company believes that it has compiled with these laws and regulations in all material respects and has not been required to take any action to correct any noncompliance, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental and health and safety regulations as it continues to increase production to commercial levels. In addition, the landlord of the Company's facility in Sunnyvale, California has advised the Company that the groundwater may be affected by contaminants migrating from an off-site source. Although the Company has been indemnified by its landlord as to claims brought by third parties with respect to this contamination and no claims have been asserted, in the event remedial action is required, there can be no assurance that the Company will not have to incur significant costs if the landlord is not adequately funded. DEPENDENCE ON KEY PERSONNEL The Company is highly dependent upon a small group of management, manufacturing, marketing and scientific executives, the loss of whose services, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has obtained key man life insurance for $1,000,000 on the life of Prithipal Singh, the Company's co-founder and chief technical officer. Recruiting and retaining qualified manufacturing, marketing and sales personnel and scientists to perform research and development work in the future will also be critical to the Company's success, although there can be no assurance that the Company will be able to do so. POTENTIAL IMPACT OF REIMBURSEMENT POLICIES Third party payors can indirectly affect the pricing or the relative attractiveness of the Company's products by regulating the maximum amount of reimbursement they will provide for diagnostic testing services. Fro example, the reimbursement of fees for diagnostic testing services for Medicare patients in hospitals or physician offices is include under Medicare's prospective payment system diagnosis-related group regulations. If the reimbursement amounts for diagnostic testing services are decreased in the future, it may decrease the amount which hospitals or physicians are able to charge Medicare patients for such services and consequently the price the Company can charge physicians for its products. The Company cannot predict the reimbursement of fees for diagnostic testing services for Medicare patients, or any other patients. Any decreases in reimbursement fees could have a material adverse effect on the Company's business, financial condition and results of operations. VOLATILITY OF STOCK PRICE The market price of the shares of Common Stock, like that of other medical technology companies, has been highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new commercial products by the Company or its competitors, changes in governmental regulation, including changes in the current structure of the health care financing and reimbursement systems in the U.S. and abroad, developments in or disputes regarding patent or other proprietary rights, economic and other external factors and general market conditions may have a significant effect on the market price of the Common Stock. MANUFACTURING The Company is required to manufacture its products in compliance with the FDA's cGMP regulations and to register its manufacturing facility and its products. The Company has registered its facility and its products with the FDA. The Company has also registered its manufacturing facility with the Department of Health Services of the State of California, as required, and has passed federal and state inspections confirming the Company's compliance with cGMP regulatory requirements for its products. However, there can be no assurance that the Company's facility will continue to satisfy GMP regulations. In addition, the manufacture, sale or use of the Company's products are also subject to regulation by other federal entities, such as the Occupational Safety and Health Agency and the Environmental Protection Agency, and by various state agencies. Federal and state regulations regarding the manufacture, sale or use of the Company's products are subject to future change, which could have a material adverse effect on the Company's business, financial condition and results of operation. ITEM 2 - PROPERTIES. The Company's corporate offices and principal laboratories are in an approximately 58,000 square foot facility located in Sunnyvale, California. The Company currently occupies the facility under a ten-year lease which commenced in July 1992. The Company believes that its existing facilities will be adequate to meet the Company's needs at least through 1997 and that suitable additional space will be available when and as needed. ITEM 3 - LEGAL PROCEEDINGS. Not applicable. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 13 14 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since February 19, 1992, ChemTrak's Common Stock, par value $.001, has been traded on the Nasdaq National Market under the symbol CMTR. The following table sets forth the range of high and low closing sales prices for ChemTrak Common Stock on the Nasdaq National Market for the periods indicated.
High Low -------- --------- 1996 First Quarter.................. $5.44 $1.25 Second Quarter................. $5.31 $3.94 Third Quarter.................. $4.38 $1.91 Fourth Quarter................. $2.56 $1.34 1995 First Quarter.................. $3.25 $1.81 Second Quarter................. $3.50 $2.13 Third Quarter.................. $2.50 $1.75 Fourth Quarter................. $2.13 $0.75
The approximate number of record holders of the Company's Common Stock as of February 15, 1997 was 600. ChemTrak has not paid any cash dividends since its inception and does not anticipate paying cash dividends in the foreseeable future. On May 13, 1996, the Company sold $5,000,000 of convertible debentures for cash to certain investment firms located outside the United States. The debentures bear a coupon interest rate of 7.5% per annum, payable in cash or shares of the Company's Common Stock, at the Company's option. The debentures are convertible into Common Stock, at the debenture holder's option (subject to certain volume limitations), at a conversion price equal to the lower of 110% of the average daily closing bid price of the Common Stock on the Nasdaq National Market for the ten trading days prior to May 13, 1996 or 82.5% of the average daily closing bid price of the Common stock on the Nasdaq National Market for the ten trading days prior to the conversion date. The Company paid a fee of $300,000 to the Shemano Group, the placement agent. In addition, the Company issued warrants to purchase 78,500 shares of the Company's Common Stock to The Shemano Group, and warrants to purchase 5,000 shares of the Company's Common Stock to Oxhead Advisory Group, Ltd., which assisted in the placement, all exercisable at $5.00 per share. The offering was made in reliance on Regulation S promulgated under the Securities Act of 1933, as amended. During 1996, approximately 1,800,000 shares of the Company's common stock were issued to debenture holders in connection with the conversion of $3,082,000 face amount of debentures, and approximately 100,000 shares of Common Stock were issued to debenture holders in lieu of cash payments of interest on the debentures. These transactions were made in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended. 14 15 ITEM 6 - SELECTED FINANCIAL DATA. The following selected financial data should be read in conjunction with the financial statements and the notes thereto included elsewhere herein.
Years Ended December 31, ------------------------------------------------------ 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------ (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Net revenues: Product revenues .................... $ 2,463 $ 2,171 $ 7,780 $ 2,662 $ 4,559 Funded research and other revenues .. 598 4,725 2,540 2,048 1,390 ------------------------------------------------------ Total revenues ................... $ 3,061 $ 6,896 $ 10,320 $ 4,710 $ 5,949 Operating loss ...................... (7,010) (3,529) (1,308) (9,820) (6,506) Net loss ............................ (7,826) (3,269) (1,065) (9,240) (5,696) Net loss per share .................. $ (.77) $ (.34) $ (.12) $ (1.01) $ (.65) Shares used in computing net loss per share ............................ 10,228 9,649 9,225 9,192 8,712
December 31, ----------------------------------------------------------- 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments .. $ 4,692 $ 6,254 $ 7,773 $ 6,821 $ 13,646 Working capital .............. 4,656 5,944 7,816 7,990 15,276 Total assets ................. 8,841 10,383 13,308 13,304 22,322 Convertible Debentures........ 2,135 -- -- -- -- Accumulated deficit .......... (36,308) (28,482) (25,213) (24,148) (14,908) Total stockholders' equity (1) 5,030 9,018 11,345 12,232 21,202
- ------------------------------ (1) Since its inception the Company has not declared any cash dividends. 15 16 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section and in the sections "Business" and "Risk Factors." OVERVIEW ChemTrak began marketing the AccuMeter(R) Cholesterol Self-Test through United States consumer catalogs in January 1994. In January 1994, the Company signed a license and supply agreement with Direct Access Diagnostics ("DAD") to market the Company's Total Cholesterol Test to over-the-counter retail outlets in the United States, Canada, Mexico and Puerto Rico. In June 1994, DAD began shipping the AccuMeter(R) Total Cholesterol Test to United States pharmacies under the Johnson & Johnson Advanced Care(TM) Cholesterol Test brand name. In December 1995 the Company concluded its relationship with DAD and regained the North American retail marketing rights for its Total Cholesterol Test and received a one-time payment of $3.6 million from DAD. The fiscal year 1996 completed the first full year in which the Company directly marketed and distributed its cholesterol product in the United States. The Company received, in July 1996, clearance from the FDA to market its H. pylori test for use in the physician office laboratory. The first shipment to Astra Merck, as part of the 1995 agreement, is expected to be delivered in April 1997. In 1995, the Company filed, with the FDA, its pre-market approval application ("PMA") for the Company's AWARE(R) home HIV test service. The Company acquired technology from Coonan Clinical Labs for a home HIV test service. The Company expects that the AWARE(R) home HIV test service will add to the Company's strategy to be a leader in the over-the-counter testing market. As of December 31, 1996, ChemTrak had an accumulated deficit of approximately $36,308,000. The ability of the Company to achieve profitability is highly dependent upon numerous factors including, but not limited to, the Company's ability to directly market and distribute its cholesterol product in the United States, successful completion of the Company's regulatory approval process to market in the United States products under development, principally its AWARE(R) home HIV test service, and the Company's ability to provide product in sufficient, cost effective quantities. Due to the uncertainty of these factors, it is difficult to reliably predict when such profitability may occur, if at all. Until such time as it achieves profitability, the Company is likely to require additional capital to finance it operations. The development and marketing of consumer medical devices is capital intensive. The Company has funded its operations to date through product sales and public and private equity and debt financings. The Company will require substantial additional funding in order to complete the development and marketing activities in which it is currently engaging, and to launch these products in the consumer marketplace. The Company intends to seek additional funding through collaborative agreements with corporate partners or through additional equity or debt financings. There can be assurance that the Company will be able to enter into such arrangements on acceptable terms, or at all. The Company has historically experienced significant fluctuations in its operating results and anticipates that these fluctuations may continue. The market price of the shares of the Company's common stock, like that of other emerging medical technology companies, has been highly volatile. Various factors including, but not limited to, fluctuations in the Company's operating results, technical and regulatory developments, and general market and economic factors, may have a significant effect on the market price of the Company's common stock. In March 1997, the Company has determined that its previously reported operating results and balance sheet data for the three-month periods ended June 30, 1996 and September 30, 1996 require adjustment. Revisions to these quarters have been made to reflect recent SEC guidance relating to debt that is convertible to equity at a discount to market. As a result of the SEC's recent position, the Company is adjusting it quarterly reports subsequent to the completion of its May 1996 private placement of $5,000,000 of convertible debentures that are convertible into common stock at the lower of 100% of the common stock price at the time of closing or 82.5% of the common stock price at certain defined conversion dates. The Company is adjusting its quarterly and annual results of operations to reflect deemed non-cash interest expense of $875,000 ($656,250 and $218,750 in the quarters ended June 30, 1996 and September 30, 1996, respectively). RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NET REVENUES Net revenues were $3,061,000 in 1996, consisting of $2,463,000 from product sales and $598,000 from funded research and other revenue, compared with net revenues of $6,896,000 in 1995, consisting of $2,171,000 from product sales and $4,725,000 from funded research and other revenue. The decrease in net revenues in 1996 16 17 from 1995 was due to a reduction in funded research and other revenue as a result of the 1995 one time cancellation payment from DAD of $3,600,000. Net revenues for 1994 were $10,320,000, consisting of $7,780,000 from product sales and $2,540,000 from funded research and other revenue. The decrease in net revenues in 1995 compared with 1994 was primarily due to reduced product unit sales consisting of shipments of the Total Cholesterol Test to DAD for sale in the U.S. over-the-counter retail market. In December 1995, ChemTrak concluded its agreement with DAD and ChemTrak regained the exclusive North American retail marketing rights for its home cholesterol test. Under the terms of the agreement, ChemTrak received a one-time payment of $3,600,000 and also regained the marketing rights to its test for the High Density Lipoprotein (HDL) or "good cholesterol" which had been cleared for professional use by the FDA. DAD ceased shipments in December 1995 and ChemTrak resumed shipment of its CholesTrak(TM) test to the same drug chains, mass merchandisers and wholesalers in January 1996. Cost of Product Sales In 1996, the cost of product sales was $3,201,000 compared with $3,191,000 in 1995 and $5,441,000 in 1994. The increase in the cost of product sales in 1996 compared with 1995 was principally due to an increase in production resulting from higher levels of product shipments. As a result of low product sales in 1996 and 1995, the cost of product sales in those years exceeded product sales due to fixed costs associated with the Company's production facilities and equipment. The larger cost of product sales in 1994 compared to 1995 and 1996 was due primarily to significantly higher production as a result of the launch of the Total Cholesterol Test in the United States by DAD. Research and Development The Company incurred research and development expenses of $2,439,000 in 1996 and $4,293,000 in 1995, compared to $2,299,000 in 1994. The decrease in research and development expenses in 1996 compared with 1995 was primarily due to costs associated with the acquisition of Coonan Clinical Laboratories, Inc. The Company recorded a $1,500,000 charge in 1995 for in-process research and development effort associated with CCL's technology. Marketing, General and Administrative Marketing, general and administrative expenses increased to $4,431,000 in 1996, from $2,941,000 in 1995 and $3,888,000 in 1994. The increases in 1996 were primarily due to increased marketing activities to support the Company's efforts to support its products on a direct to wholesaler basis. The decreases in 1995 compared with 1994 were primarily the result of decreased personnel costs. Interest Expense Interest expense in 1996 is the result of the Company's issuance of convertible debentures that allow holders to convert their debentures into common stock at a 17.5% discount to the then fair market value of the Company's common stock. The Company has accounted for this non-cash charge in accordance with recent SEC guidance. Interest Income Interest income was $59,000 in 1996 compared to $260,000 in 1995 and $243,000 in 1994. The decrease in 1996 compared to 1995 and 1994 was primarily due to lower effective interest rates and lower cash balances. LIQUIDITY AND CAPITAL RESOURCES From August 1985 through January 1992 ChemTrak was financed through private placements of equity securities. In February 1992, the Company completed an initial public offering of Common Stock, raising net proceeds of approximately $23,536,000. In 1996, approximately $4.7 million in net proceeds was obtained from the sale of convertible debentures. As of December 31, 1996, including the receipt of approximately $4.7 million of proceeds from the debenture sales, the Company had cash, cash equivalents and short-term investments of $4,692,000. During 1996, the Company had a net decrease of $6.1 million of cash and cash equivalents associated with its operations primarily as a result of the Company's operating loss during 1996. The development and marketing of medical devices is capital intensive. The Company currently has funded its operations to date through product sales and public and private equity and debt financings. The Company will require substantial additional funding in fiscal 1997 in order to complete development and marketing activities in which its is currently engaging and to launch these products in the consumer marketplace. The Company intends to seek additional funding through collaborative agreements with corporate partners or through additional equity or debt financing. 17 18 The Company believes that its existing capital resources, together with internally generated funds and funded research, will need to be augmented by funds received through collaboration agreements or equity or debt financing to meet its current budgeted operating needs as well as requirements for property, plant and equipment until at least the end of 1997 (see "Risk Factors: Future Capital Needs; Uncertainty of Additional Funding"). If such funding cannot be obtained, the Company will implement cost cutting measures to ensure the continuity of operations through at least the end of 1997. The Company's success is dependent on its ability to achieve profitable operations, reduce discretionary operating expenses and to obtain additional funds to support its operations. There can be no assurance that the Company will achieve profitable operations or successfully reduce discretionary expenses by a sufficient amount on a timely basis or that additional funds will be available when and as required by the Company on acceptable terms or at all. The Company does not believe that inflation has had a material impact on its business. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's Financial Statements and notes thereto appear on pages F-1 to F-16 of this Form 10-K Annual Report. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS. The information required by this item (with respect to Directors) is incorporated by reference from the information under the caption "Election of Directors" contained in the Company's Definitive Proxy Statement which will be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company's 1997 Annual Meeting of Stockholders (the "Proxy Statement"). The required information concerning Executive Officers of the Company is contained in Item 1, Part I of this Report. ITEM 11 - EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference from the information under the caption "Executive Compensation" contained in the Proxy Statement. 18 19 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference from the information under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference from the information under the caption "Certain Transactions" contained in the Proxy Statement. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) Index to Financial Statements. The Financial Statements required by this item are submitted in a separate section beginning on page F-1 of this report. Page Report of Ernst & Young LLP F-1 Balance Sheets at December 31, 1996 and 1995 F-2 Statements of Operations -- Years ended December 31, 1996, 1995 and 1994 F-3 Statements of Stockholders' Equity -- Years ended December 31, 1996, 1995 and 1994 F-4 Statements of Cash Flows -- Years ended December 31, 1996, 1995 and 1994 F-5 Notes to Financial Statements F-6 (2) All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. (3) Exhibits -- Number 2.1 Agreement and Plan of Reorganization among the Registrant, ChemTrak Acquisition Subsidiary, Inc., Coonan Clinical Laboratories, Inc. and Stephen J. Coonan, dated December 21, 1994, as amended January 20, 1995. (6) 3.1 Amended and Restated Certificate of Incorporation of the Registrant. (1) 3.2 Bylaws of the Registrant. (1) 4.1 Reference is made to Exhibits 3.1 and 3.2. 10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and officers, with related schedule. (1) 10.2+ 1988 Stock Option Plan, as amended. (2) 19 20 10.3+ Form of Incentive Stock Option under the Option Plan, as amended. (1) 10.4+ Form of Non-Qualified Stock Option under the Option Plan, as amended. (1) 10.5 Form of Notice of Exercise under the Option Plan, as amended. (1) 10.6 Investor Rights Agreement between the Registrant and the Series A Purchasers, the Series C Purchasers, the Series D Purchasers, Interhealth, and two of the Registrant's founders, dated June 4, 1991. (1) 10.10* Distribution Agreement between the Registrant and A. Menarini SRL, dated as of July 1991. (1) 10.11* Letter from the Registrant to The Boots Company PLC, dated December 5, 1991, and letter from The Boots Company PLC to the Company, dated October 24, 1991. (1) 10.15 Lease Agreement between the Registrant and PM-DE, dated as of January 23, 1992. (1) (7) 10.16+ 1991 Employee Stock Purchase Plan. (1) 10.17+ 1992 Non-Employee Directors' Stock Option Plan ("Directors' Plan"). (3) 10.18+ Form of Non-Statutory Option under the Directors' Plan. (3) 10.24* Agreement between the Registrant and Miles Inc., dated April 22, 1993. (4) 10.31 1993 Equity Incentive Plan. (5) 10.35* Distribution and Supply Agreement, dated as of March 1, 1995 between the Registrant and Astra Merck Inc. (8) 20 21 10.36** Distribution Agreement between ChemTrak and Helena Laboratories (Canada) Ltd. dated April 25, 1996 (the "Helena Agreement"). 10.37** Agreement between ChemTrak and Organon Teknike B.V., dated December 1, 1996 (the "Teknika Agreement"). 10.38** Development and Distribution Agreement between ChemTrak and Selfcare, Inc., dated December 31, 1996 (the "Selfcare Agreement"). 23.1 Consent of Ernst & Young LLP, Independent Auditors. 25.1 Power of Attorney. Reference is made to page 24. (3) 27.1 Financial Data Schedule - --------------- * Confidential treatment granted for portions of this document. ** Confidential treatment has been requested for portions of this document. + Compensatory Plan. (1) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form S-1 (File No. 33-44673), as amended. (2) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form S-8 (File No. 33-55326). (3) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form S-8 (File No. 33-55324). (4) Incorporated by reference to the indicated exhibit in the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993. (5) Incorporated by reference to the indicated exhibit in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (6) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form S-3 (File No. 33-90324). (7) Lease assigned to MP Arques, Inc. as part of the purchase of the property from PM-DE. (8) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form 10-K for the fiscal year ended December 31, 1995. 21 22 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 on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 31st day of March 1997. CHEMTRAK INCORPORATED By: /s/ Prithipal Singh, Ph.D. ------------------------------- Prithipal Singh, Ph.D. Chairman of the Board POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Prithipal Singh, Ph.D. his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. 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.
Signature Title Date - ---------------------------------- ---------------------- -------------- /s/ Prithipal Singh, Ph.D. Chairman of the Board March 31, 1997 - ---------------------------------- Prithipal Singh, Ph.D. /s/ Edward F. Covell President, Chief Executive Officer March 31, 1997 - ---------------------------------- and Chief Accounting Officer Edward F. Covell (Principal executive officer and principal financial and accounting officer) /s/ Malcolm Jozoff Director March 31, 1997 - ---------------------------------- Malcolm Jozoff /s/ Robert P. Kiley Director March 31, 1997 - ---------------------------------- Robert P. Kiley /s/ David Rubinfien Director March 31, 1997 - ---------------------------------- David Rubinfien /s/ Gordon Russell Director March 31, 1997 - ---------------------------------- Gordon Russell
22 23 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders ChemTrak Incorporated We have audited the accompanying balance sheets of ChemTrak Incorporated as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ChemTrak Incorporated at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Palo Alto, California January 17, 1997 F-1 24 CHEMTRAK INCORPORATED BALANCE SHEETS ASSETS
December 31, ---------------------------- 1996 1995 ------------ ------------ Current assets: Cash and cash equivalents $ 4,125,000 $ 4,251,000 Short-term investments 567,000 2,003,000 Accounts receivable, net of allowance for doubtful accounts of $44,000 in 1996 and $49,000 in 1995 485,000 136,000 Inventories 540,000 434,000 Prepaid expenses and other current assets 320,000 245,000 ------------ ------------ Total current assets 6,037,000 7,069,000 Property and equipment, net 2,738,000 3,248,000 Other assets 66,000 66,000 ------------ ------------ Total assets $ 8,841,000 $ 10,383,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 289,000 $ 632,000 Accrued payroll and benefits 199,000 121,000 Other accrued liabilities 788,000 258,000 Accrued royalties 105,000 114,000 ------------ ------------ Total current liabilities 1,381,000 1,125,000 Accrued rent 295,000 240,000 Convertible debentures 2,135,000 -- Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value: 5,000,000 authorized; none issued and outstanding -- -- Common stock, $.001 par value; 40,000,000 shares authorized, 11,707,051 and 9,724,343 shares issued and outstanding in 1996 and 1995, respectively 12,000 10,000 Additional paid-in capital 41,375,000 37,528,000 Deferred compensation (49,000) (38,000) Accumulated deficit (36,308,000) (28,482,000) ------------ ------------ Total stockholders' equity 5,030,000 9,018,000 ------------ ------------ Total liabilities and stockholders' equity $ 8,841,000 $ 10,383,000 ============ ============
See accompanying notes. F-2 25 CHEMTRAK INCORPORATED STATEMENTS OF OPERATIONS
Years Ended December 31, ---------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Net revenues: Product sales $ 2,463,000 $ 2,171,000 $ 7,780,000 Funded research and other revenues 598,000 4,725,000 2,540,000 ----------- ----------- ----------- Total net revenues 3,061,000 6,896,000 10,320,000 ----------- ----------- ----------- Cost and expenses: Cost of product sales 3,201,000 3,191,000 5,441,000 Research and development 2,439,000 4,293,000 2,299,000 Marketing, general and administrative 4,431,000 2,941,000 3,888,000 ----------- ----------- ----------- Total costs and expenses 10,071,000 10,425,000 11,628,000 ----------- ----------- ----------- Operating loss (7,010,000) (3,529,000) (1,308,000) Interest income, net 59,000 260,000 243,000 Interest expense (875,000) -- -- ----------- ----------- ----------- Net loss $(7,826,000) $(3,269,000) $(1,065,000) =========== =========== =========== Net loss per share $ (0.77) $ (0.34) $ (0.12) =========== =========== =========== Shares used in calculating per share amounts 10,228,000 9,649,331 9,225,267 =========== =========== ===========
See accompanying notes. F-3 26 CHEMTRAK INCORPORATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL -------------------- PAID-IN DEFERRED ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY ---------- ------- ----------- ------------ ------------ ----------- Balance at January 1, 1994.................. 9,210,809 9,000 36,471,000 (100,000) (24,148,000) 12,232,000 Shares issued upon exercise of stock purchase plan and stock options......... 31,259 128,000 128,000 Amortization of deferred compensation..... 50,000 50,000 Net loss.................................. (1,065,000) (1,065,000) ---------- ------- ----------- --------- ------------ ----------- Balance at December 31, 1994................ 9,242,068 9,000 36,599,000 (50,000) (25,213,000) 11,345,000 Shares issued in conjunction with the acquisition of CCL...................... 449,986 1,000 900,000 901,000 Shares issued upon exercise of stock purchase plan and stock options......... 32,289 63,000 63,000 Amortization of deferred compensation and net issuances/cancellations of certain stock options........................... (34,000) 12,000 (22,000) Net loss.................................. (3,269,000) (3,269,000) ---------- ------- ----------- --------- ------------ ----------- Balance at December 31, 1995................ 9,724,343 10,000 37,528,000 (38,000) (28,482,000) 9,018,000 Shares issued upon conversion of convertible debentures ................. 1,880,718 2,000 3,145,000 3,147,000 Additional paid in capital related to discount conversion feature on convertible debentures....... -- -- 539,000 -- -- 539,000 Shares issued upon exercise of stock purchase plan and stock options......... 101,990 148,000 148,000 Amortization of deferred compensation and net issuances/cancellations of certain stock options................... 15,000 (11,000) 4,000 Net loss (7,826,000) (7,857,000) ---------- ------- ----------- --------- ------------ ----------- Balance at December 31, 1996................ 11,707,051 $12,000 $41,375,000 $(49,000) $(36,308,000) $5,030,000 ========== ======= =========== ========= ============ ===========
See accompanying notes. F-4 27 CHEMTRAK INCORPORATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Operating activities: Net loss .............................................. $(7,826,000) $(3,269,000) $(1,065,000) Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Interest expense and financing charges on Debentures....................................... 1,121,000 -- -- Depreciation and amortization...................... 832,000 1,055,000 817,000 Loss on disposal of fixed assets................... -- 137,000 -- Accrued rent....................................... 55,000 54,000 78,000 Stock option compensation and other................ 4,000 (22,000) 50,000 Purchase of in-process research and development for common stock................................. -- 901,000 -- Changes in operating assets and liabilities: Accounts receivable................................ (349,000) 462,000 (316,000) Inventories........................................ (106,000) 554,000 666,000 Prepaid expenses and other current assets.......... (75,000) (11,000) (37,000) Other assets....................................... -- -- (9,000) Accounts payable................................... (343,000) (186,000) 479,000 Accrued payroll and benefits....................... 78,000 (399,000) 210,000 Other accrued liabilities.......................... 521,000 (67,000) 224,000 Deferred revenue................................... -- -- (100,000) ----------- ----------- ----------- Net cash and cash equivalents provided by (used in) operating activities................ (6,088,000) (791,000) 997,000 ----------- ----------- ----------- Investing activities: Purchase of available for sale securities.......... -- (506,000) (1,486,000) Proceeds from available for sale securities........ 1,436,000 3,996,000 1,651,000 Acquisition of property and equipment, net......... (322,000) (791,000) (173,000) ----------- ----------- ----------- Net cash and cash equivalents provided by (used in) investing activities................ 1,114,000 2,699,000 (8,000) ----------- ----------- ----------- Financing activities: Proceeds from issuance of common stock, net........ 148,000 63,000 128,000 Proceeds from sale of convertible debentures, net.. 4,700,000 -- -- ----------- ----------- ----------- 4,848,000 63,000 128,000 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents... (126,000) 1,971,000 1,117,000 Cash and cash equivalents at beginning of period....... 4,251,000 2,280,000 1,163,000 ----------- ----------- ----------- Cash and cash equivalents at end of period............. $ 4,125,000 $ 4,251,000 $ 2,280,000 =========== =========== =========== Supplemental disclose of non-cash financing activities: Conversion of convertible debentures and accrued interest to common stock........................... $ 3,686,000 $ -- $ -- =========== =========== ===========
See accompanying notes. F-5 28 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS December 31, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS ChemTrak operates in one industry segment and is engaged in the development, manufacturing and marketing of easy-to-use diagnostic tests for the worldwide point-of-care markets. The Company has funded its operations to date through product sales and public and private equity and debt financings. The Company will require substantial additional funding during 1997 in order to meet its current budgeted operating needs and to complete the development and marketing activities in which it is currently engaging, and to launch these products in the consumer marketplace. The Company intends to seek additional funding through collaborative agreements with corporate partners or through additional equity or debt financings. If the Company is not able to enter into such arrangements management believes that certain discretionary spending cuts can be implemented to ensure the continuity of operations through at least the end of 1997. There can be no assurance that the Company will be able to enter into such arrangements on acceptable terms, or at all or will be able to successfully reduce discretionary spending by a sufficient amount on a timely basis. REVENUES Product revenues are generally recognized at the time of shipment to customers or distributors. License revenues are recorded when earned. Funded research and other revenues are recorded upon the completion of specific milestones or when associated performance obligations are complete. CASH AND CASH EQUIVALENTS Cash equivalents are highly liquid investments consisting primarily of investment grade commercial paper placed with high-quality financial institutions with original maturities of less than 90 days at the date of acquisition and insignificant interest rate risks. SHORT-TERM INVESTMENTS The Company invests cash in excess of current operating requirements primarily in highly rated investments. Such investments have maturities of more than 90 days and yield interest at prevailing interest rates at the time of acquisition. The Company has classified its entire investment portfolio including cash equivalents as available-for-sale. Although the Company may not dispose of all of the securities in its investment portfolio within one year, the Company's investment portfolio is available for current operations and, therefore, has been classified as a current asset. Investments in the available-for-sale category are carried at fair value. At December 31, 1996 and 1995, short-term investments consisted of U.S. government and agency securities of $567,000 and $2,003,000, respectively. The Company adopted Statement of Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity Securities" for investments held as of or acquired after January 1, 1994. In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. F-6 29 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHORT-TERM INVESTMENTS (CONTINUED) Gross unrealized gains and losses and net realized gains and losses were not significant at December 31, 1996 or 1995. The cost basis of investments is adjusted for amortization of premiums and discounts to maturity, which is included in interest income. The cost of securities sold is based on the specific identification method. The maturities of the Company's short-term investments at December 31, 1996 and 1995 are shown as follows:
1996 1995 ---------- ---------- Due in 1 year or less $ 567,000 $1,498,000 Due after 1 year through 3 years -- 505,000 ---------- ---------- Total debt securities $ 567,000 $2,003,000 ========== ==========
INVENTORIES Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. DEPRECIATION AND AMORTIZATION Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets (principally five years). Effective January 1, 1994, the Company changed the amortization period for leasehold improvements from five years or life of the lease, whichever is shorter, to 10 years or life of the lease, whichever is shorter. The impact of the change in estimated useful lives for leasehold improvements results in decreased annual amortization of $324,000 for periods ending in mid-1998. NET LOSS PER SHARE Net loss per share is based on the weighted average number of shares of common stock outstanding. Stock options and warrants are not included in the computation since their inclusion would be antidilutive. STOCK BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees. In most cases the exercise price is equal to the fair value of the shares at the date of the grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally recognizes no compensation expense for the stock option grants. F-7 30 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. ACQUISITION OF IN-PROCESS RESEARCH AND DEVELOPMENT On February 3, 1995, the Company completed the acquisition of Coonan Clinical Laboratories, Inc. ("CCL") through a merger of CCL into a wholly owned subsidiary of ChemTrak, which was later dissolved by ChemTrak, in which all of the outstanding shares of capital stock of CCL were exchanged for 449,986 newly issued shares of ChemTrak common stock plus $400,000 in cash. The Company recorded a $1,500,000 charge in 1995 for in-process research and development which is included in research and development in the Company's statement of operations. CCL's technology was comprised of efforts associated with a future filing with the FDA for a home HIV test. CCL was a development stage company with insignificant net assets and operations which consisted of approximately $100,000 of research and development expense incurred during 1994 and until the time of the acquisition. 3. INVENTORIES Inventories consist of the following:
December 31, --------------------------- 1996 1995 -------- -------- Raw materials $289,000 $145,000 Work-in-process 63,000 41,000 Finished goods 188,000 248,000 -------- -------- $540,000 $434,000 ======== ========
F-8 31 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 4. CUSTOMER INFORMATION The Company has entered into distribution arrangements with certain corporate partners. The Company granted certain corporate partners exclusive distribution rights for select markets, including through December 15, 1995, the U.S. consumer retail market for the Company's cholesterol products. The Company has agreed to supply the corporate partners with their product requirements at contracted selling prices. Under two such agreements the Company has received funded research payments. The Company had an arrangement with Direct Access Diagnostics, a division of Johnson & Johnson, for distribution of the Total Cholesterol Test in the domestic over-the-counter market in 1994 and most of 1995. This arrangement was terminated in December of 1995 and the Company received a final payment of $3.6 million from Direct Access Diagnostics which is included in funded research and other revenues in the statements of operations. Net sales to Direct Access Diagnostics represented 71% and 77% of total net sales for the years ended December 31, 1995 and 1994, respectively. With this agreement terminated, the Company has directly entered the U.S. retail market and relaunched its Total Cholesterol Test under the trade name CholesTrak(TM). Total export sales, primarily to European customers, were approximately $360,000, $417,000 and $1,850,000 in 1996, 1995 and 1994 respectively. The Company performs ongoing credit evaluations of its customers and in some cases requires letters of credit for its export sales. Generally, no collateral is required and credit losses have historically been within managements' expectations. The Company recorded bad debt provisions of $4,000 in 1996, zero in 1995 and $63,000 in 1994. F-9 32 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 5. PROPERTY AND EQUIPMENT Property and equipment balances are stated at cost and comprise the following:
December 31, ------------------------------- 1996 1995 ----------- ----------- Machinery and equipment $ 3,830,000 $ 3,826,000 Furniture and fixtures 173,000 170,000 Leasehold improvements 2,798,000 2,799,000 Construction-in-progress 946,000 629,000 ----------- ----------- 7,747,000 7,424,000 Less accumulated depreciation and amortization (5,009,000) (4,176,000) ----------- ----------- $ 2,738,000 $ 3,248,000 =========== ===========
6. COMMITMENTS AND CONTINGENCIES LICENSES The Company has entered into license agreements that allow the Company to use certain technologies in its products. The agreements require the Company to pay royalties based upon sales of the subject products with aggregate royalties ranging from 5.5% to 6.0% of sales of the subject products. The agreements expire upon the expiration of the related patents and are cancelable by the Company upon six to twelve months written notice. LITIGATION The Company is a party to various legal actions (including patent claims) that have occurred in the normal course of business. In the opinion of management, the outcomes of these actions will not have a material effect on the financial position, cash flows or results of operations of the Company. F-10 33 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS December 31, 1996 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) LEASES The Company leases facilities and equipment under noncancelable lease agreements. The Company's facility lease expires in June 2002. Future minimum lease payments at December 31, 1996, were as follows:
Operating Lease ------------------- 1997 $ 650,000 1998 683,000 1999 683,000 2000 789,000 2001 789,000 Thereafter 394,000 ---------- Total minimum lease payments $3,988,000 ==========
In August 1996, the Company subleased a portion of its facilities to a third party through September 1997. Sublease rental income was $64,000 for the year ended December 31, 1996. Aggregate future minimum rentals to be received under the noncancelable sublease total approximately $128,000 at December 31, 1996. Rent expense was approximately $667,000, in each 1996 and 1995 and $634,000 for the year ended December 31, 1994. F-11 34 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 7. CONVERTIBLE DEBENTURES In May 1996, the Company issued $5,000,000 of convertible debentures resulting in net proceeds to the company of $4,700,000 after deducting selling commissions. The debentures, which are due in May 1998, are convertible into Common Stock at the lower of 110% of the average closing prices during the ten-day trading period ending with the initial debenture funding date, or 82.5 percent of the similarly-defined average ten-day market price ending with the conversion date. The Company has the option to convert the amount of periodic interest due on the convertible debentures, computed at the rate of 7.5% per annum, into common stock of the Company in lieu of cash payments. Through December 31, 1996, all interest obligations on the debentures have been settled by the issuance of common stock. As of December 31, 1996, total principal of $3,082,000 had been converted into approximately 1,800,000 shares of common stock and approximately 100,000 shares were issued to settle interest obligations. As part of its compensation for the sale of the convertible debentures, the placement agent received $300,000 and a warrant to purchase 83,500 shares of the Company's common stock at $5.00 per share. The Company attributed a value of $67,000 to the Warrant which has been recorded as additional interest paid in capital. The Company has determined that its previously reported operating results and balance sheet data for the three-month periods ended June 30, 1996 and September 30, 1996 require adjustment. Revisions to these quarters have been made to reflect recent Securities and Exchange guidance relating to debt that is convertible to equity at a discount to market. The accompanying financial statements reflect deemed non-cash interest expense of $875,000 ($656,250 and $218,750 in the quarters ended June 30, 1996 and September 30, 1996, respectively). F-12 35 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 8. STOCKHOLDERS' EQUITY STOCK OPTIONS The 1988 Stock Plan authorizes the Board of Directors to grant options for the purchase of the Company's common stock to directors, officers, employees and consultants. The Company has authorized 983,333 shares of common stock for grant under the plan. Options are generally granted at an exercise price of no less than the fair market value per share on the date of grant. The options generally become exercisable over a three-year period and have a maximum term of ten years from date of grant. In 1992, the Board of Directors, with the approval of the Shareholders of ChemTrak Incorporated, adopted the 1992 Non-Employee Directors' Stock Option Plan authorizing 50,000 shares of common stock for grant on a formula basis to members of the Board of Directors. Options are granted at an exercise price that is no less than the fair market value per share on the date of grant. The options are exercisable ratably over a four-year period. The 1993 Equity Incentive Plan approved 450,000 shares of common stock for options, generally to be granted at no less than the fair market value per share on the date of grant. The options will generally become exercisable over a three year period commencing one year from the grant date and may remain outstanding for a ten year period. The Company may also grant stock bonuses and stock appreciation rights under the plan. The options outstanding, as well as the options granted, exercised and canceled, are summarized for each of the above plans in the table below. In addition, the weighted average prices for options outstanding each year and the option prices for shares granted, exercised and cancelled are shown.
Shares Available Number of Weighted Avg. for Grant Shares Exercise Price ---------- --------- -------------- Balance December 31, 1993 514,873 763,231 $4.70 Granted (263,500) 263,500 $5.07 Exercised -- (9,992) $2.20 Canceled 25,250 (25,250) $4.36 ----------------------------------------------------- Options at December 31, 1994 276,623 978,989 $4.84 Granted (821,600) 821,600 $1.83 Exercised -- (2,888) $2.08 Canceled 750,088 (750,088) $4.52 ----------------------------------------------------- Options at December 31, 1995 205,111 1,047,613 $2.71 Granted (450,941) 450,941 $2.99 Exercised -- (69,287) $1.35 Canceled 297,226 (297,226) $2.95 ----------------------------------------------------- Options at December 31, 1996 51,396 1,132,041 $2.84 =====================================================
F-13 36 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 8. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED) The range of exercise prices for options outstanding at December 31, 1996 was $0.75 to $9.75. The range of exercise prices for options is wide due primarily to fluctuations in the price of the Company's stock over the period of grants. The following table summarizes information about stock options outstanding at December 31, 1996:
Weighted Average Weighted Number Remaining Average Range of Outstanding at Contractual Life Exercise Number Weighted Exercise Prices 12/31/96 (Yrs) Price Exercisable Average - --------------- -------------- ---------------- -------- ----------- -------- $0.75 - $2.125 521,325 8.77 $1.47 301,485 $1.38 $2.25 - $4.75 564,716 7.82 $3.81 272,132 $3.83 $5.00 - $9.75 46,000 6.68 $6.69 25,713 $8.82 --------- ----- ------- ----- 1,132,041 $2.84 599,330 $2.81
STOCK-BASED COMPENSATION As permitted under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FASB 123), the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for stock-based awards to employees. Under APB 25, the Company generally recognizes no compensation expense with respect to such awards. Pro forma information regarding net income and earnings per share is required by FASB 123 for awards granted after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of FASB 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions: 37 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 8. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED)
Options ESPP ---------------- -------------- 1996 1995 1996 1995 Expected life (years) 5.0 5.0 0.5 0.5 Risk-free interest rate 6.5% 6.6% 5.6% 6.0% Expected volatility 0.85 0.85 0.85 0.85
For pro forma purposes, the estimated fair value of the Company's stock-based awards to employees is amortized over the options' vesting period (for options) and the six-month purchase period (for stock purchases under the ESPP). The Company's pro forma information follows:
Net loss As reported $7,826,000 $3,269,000 Pro forma 8,053,000 3,471,000 Primary loss per share As reported $(0.77) $(0.34) Pro forma (0.79) (0.36)
Because FASB 123 is applicable only to awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until approximately 1999. The weighted-average fair value of options whose exercise price equals the market price on the date of grant was $2.04 and $1.10 per share during 1996 and 1995, respectively. The weighted-average fair value of options whose exercise price is less than the market price on the grant date was $3.40 and $1.90 per share during 1996 and 1995, respectively. EMPLOYEE STOCK PURCHASE PLAN In December 1991, the Company adopted the 1991 Employee Stock Purchase Plan (the "Purchase Plan") and 200,000 shares of common stock were reserved for issuance under the Purchase Plan. The Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). F-15 38 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 8. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED) The Purchase Plan is administered by the Board of Directors or a committee appointed by the Board of Directors. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions not to exceed 15% of an employee's compensation and at a price equal to 85% of the lower of the fair market value of the common stock as of the first day or as of the last day of each six-month offering period. Under the Purchase Plan, 32,703, 29,401, and 21,399 shares were issued in 1996, 1995 and 1994, respectively. DEFERRED COMPENSATION For certain options granted, the Company recognizes as compensation for accounting purposes, the excess of the deemed value of the common stock issuable upon exercise of such options over the aggregate exercise price of these options. The deferred compensation is being amortized ratably over the vesting period of such options. The amount charged to operations was $19,000, $61,000 and $50,000 in 1996, 1995 and 1994, respectively. 9. INCOME TAXES The Company has no tax provision for the years ended December 31, 1996, 1995 and 1994. A reconciliation of the income tax provision at the U.S. federal statutory rate (34%) to the income tax provision at the effective tax rate is as follows:
Years Ended December 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- --------- Income taxes computed at the federal statutory rate $(2,661,000) $(1,111,000) $(880,000) Operating losses not utilized 2,661,000 1,111,000 880,000 ----------- ----------- --------- $ -- $ -- $ -- =========== =========== =========
As of December 31, 1996, the Company has federal and state net operating loss carryforwards of approximately $31,000,000 and $9,000,000, respectively. The federal net operating loss carryforwards will expire in the years 2002 through 2011, and the state net operating loss carryforwards will expire in the years 1997 through 2000. The Company has federal and state research and experimentation credits of approximately $700,000 and $300,000, respectively, that will expire in the years 2004 through 2011. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. F-16 39 CHEMTRAK INCORPORATED NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 9. INCOME TAXES (CONTINUED) Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred taxes consisted of the following at:
December 31, ------------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Deferred tax assets: Net operating losses $ 11,093,000 $ 9,270,000 $ 7,910,000 Research credit carryforwards 991,000 1,022,000 837,000 Other individually immaterial items 2,193,000 1,559,000 2,077,000 ------------ ------------ ------------ Total deferred tax assets 14,277,000 11,851,000 10,824,000 Valuation allowance (14,277,000) (11,851,000) (10,824,000) ------------ ------------ ------------ Total net deferred tax assets $ -- $ -- $ -- ============ ============ ============
F-17 40 EXHIBIT INDEX EXHIBIT NUMBER 2.1 Agreement and Plan of Reorganization among the Registrant, ChemTrak Acquisition Subsidiary, Inc., Coonan Clinical Laboratories, Inc. and Stephen J. Coonan, dated December 21, 1994, as amended January 20, 1995. (6) 3.1 Amended and Restated Certificate of Incorporation of the Registrant. (1) 3.2 Bylaws of the Registrant. (1) 4.1 Reference is made to Exhibits 3.1 and 3.2. 10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and officers, with related schedule. (1) 10.2+ 1988 Stock Option Plan, as amended. (2) 10.3+ Form of Incentive Stock Option under the Option Plan, as amended. (1) 10.4+ Form of Non-Qualified Stock Option under the Option Plan, as amended. (1) 10.5 Form of Notice of Exercise under the Option Plan, as amended. (1) 10.6 Investor Rights Agreement between the Registrant and the Series A Purchasers, the Series C Purchasers, the Series D Purchasers, Interhealth, and two of the Registrant's founders, dated June 4, 1991. (1) 10.10* Distribution Agreement between the Registrant and A. Menarini SRL, dated as of July 1991. (1) 10.11* Letter from the Registrant to The Boots Company PLC, dated December 5, 1991, and letter from The Boots Company PLC to the Company, dated October 24, 1991. (1) 10.15 Lease Agreement between the Registrant and PM-DE, dated as of January 23, 1992. (1) (7) 10.16+ 1991 Employee Stock Purchase Plan. (1) 10.17+ 1992 Non-Employee Directors' Stock Option Plan ("Directors' Plan"). (3) 10.18+ Form of Non-Statutory Option under the Directors' Plan. (3) 10.24* Agreement between the Registrant and Miles Inc., dated April 22, 1993. (4) 41 10.31 1993 Equity Incentive Plan. (5) 10.35* Distribution and Supply Agreement, dated as of March 1, 1995 between the Registrant and Astra Merck Inc. (8) 10.36** Distribution Agreement between ChemTrak and Helena laboratories (Canada) Ltd. dated April 25, 1996 (the "Helena Agreement"). 10.37** Agreement between ChemTrak and Organon Teknika B.V., dated December 1, 1996 (the "Teknika Agreement"). 10.38** Development and Distribution Agreement between ChemTrak and Selfcare, Inc., dated December 31, 1996 (the "Selfcare Agreement"). 23.1 Consent of Ernst & Young LLP, Independent Auditors. 25.1 Power of Attorney. Reference is made to page 24. (3) 27.1 Financial Data Schedule - -------------------------------------------------------------------------------- * Confidential treatment granted for portions of this document. ** Confidential treatment has been requested for portions of this document. + Compensatory Plan. (1) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form S-1 (File No. 33--44673), as amended. (2) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form S-8 (File No. 33-55326). (3) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form S-8 (File No. 33-55324). (4) Incorporated by reference to the indicated exhibit in the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993. (5) Incorporated by reference to the indicated exhibit in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (6) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form S-3 (File No. 33-90324). (7) Lease assigned to MP Arques, Inc. as part of the purchase of the property from PM-DE. (8) Incorporated by reference to the indicated exhibit in the Registrant's Registration Statement on Form 10-K for the fiscal year ended December 31, 1995. EX-10.36 2 DISTRIBUTION AGREEMENT WITH HELENA LABORATORIES 1 Exhibit 10.36 DISTRIBUTION AGREEMENT THIS DISTRIBUTION AGREEMENT (the "Agreement") is effective as of the 25th day of April, 1996, by and between HELENA LABORATORIES (CANADA) LTD., ("Distributor"), with its principal place of business at Unit #2., 6725 Milcreek Drive, Mississauga, Ontario, L5N 5V3 Canada, and CHEMTRAK INCORPORATED, a Delaware corporation ("ChemTrak") with its principal place of business at 929 E. Arques Avenue, Sunnyvale, California 94086, USA for the purpose of defining the rights and duties of the parties in connection with the distribution by Distributor of ChemTrak's CholesTrak Total Cholesterol Test. NOW, THEREFORE, for good and valuable consideration, the parties hereby agree as follows: AGREEMENT 1. DEFINITIONS. Capitalized terms shall have the meanings set forth in Exhibit A hereto. 2. APPOINTMENT AND ACCEPTANCE. a. GRANT OF DISTRIBUTORSHIP RIGHTS. (i) ChemTrak appoints Distributor, and Distributor accepts such appointment, as the sole distributor for the Product in the Exclusive Markets in the Territory. ChemTrak shall not appoint any other distributor for the Product in the Exclusive Markets in the Territory and shall not itself Sell the Product in the Exclusive Markets in the Territory. (ii) ChemTrak agrees to refer all bona fide inquiries regarding the Sale of the Product in the Exclusive Markets in the Territory received by it to Distributor. Distributor shall refer to ChemTrak any inquiry which Distributor may receive from outside of the Exclusive Markets or the Territory for the purchase of Products or any other ChemTrak products. b. SALE OF COMPETING PRODUCTS BY DISTRIBUTOR. In consideration for the rights granted to Distributor pursuant to Section 2(a) above, Distributor agrees that during the term of this Agreement, it will not develop or contract to develop using ChemTrak's Proprietary Information (as defined in Section 8(b) of this agreement), manufacture, sell, license, lease or otherwise distribute any product that is directly competitive with the Product in the Exclusive Markets in the Territory. 1. 2 3. ORDERING, FORECASTS, DELIVERY AND ACCEPTANCE. a. ORDERS. Within [*] the date of the signing of this Agreement, Distributor will provide to ChemTrak a purchase order covering the purchase of the Product [*]. Thereafter, beginning on [*] and on [*], Distributor will provide ChemTrak with an order for the [*] (such that on [*] an order is submitted for the [*], etc.). ChemTrak will accept or reject an order from Distributor within 15 days after receipt of the order. Accepted orders will be noncancellable. Once the order is accepted, Distributor will have the right to request an up to [*] increase or decrease in the size of the order by providing 30 days written notice to ChemTrak. Distributor may use its standard purchase order form to order products; however, any such form shall reference this Agreement and the terms and conditions of this Agreement will supersede any different or additional terms on such order. b. DELIVERY. ChemTrak will use its best efforts, consistent with its obligations to other customers, to process and ship all orders in accordance with requested delivery dates. ChemTrak guarantees that the Product delivered to Distributor will have a minimum shelf life of [*]. All orders will be shipped freight [*] (as defined in Incoterms, Publ. No. 350 of the International Chamber of Commerce); risk of loss for the Product passes to [*]. If required, [*] will insure the shipments against damage to, or loss of, Products. Such insurance shall be at [*] expense and shall be paid for by [*] at the time of shipment. [*] shall make any claims for damage or loss in transit through the carrier and any insurance proceeds payable in respect of any loss incurred shall be paid to [*]. c. INSPECTION AND REJECTION. Distributor shall promptly upon receipt visually inspect all Products for obvious defects and for any damage done during shipment and may reject any Products which fail substantially to meet the Product Specifications. If Distributor does not reject a shipment of Products within 30 days of receipt, such shipment will be deemed to have been accepted, except for latent defects which are not reasonably detectable at the time of acceptance. Rejected shipments shall be returned freight collect to ChemTrak via a carrier designated by ChemTrak within 15 days of rejection. As promptly as possible after receipt by ChemTrak of properly rejected goods, ChemTrak shall repair or replace the rejected goods at ChemTrak's expense. d. MINIMUMS. In consideration for the appointment as Distributor, Distributor will purchase the following minimum quantity of Products in the following periods; provided, however, that any excess amount purchased in a period may be applied to the required minimum amount in the next subsequent period: - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2. 3
TERM PRODUCT QUANTITY ---- ---------------- Date of Agreement to 12/31/96 [*] 12 months ending 12/31/97 [*] 12 months ending 12/31/98 [*]
Failure by Distributor to present purchase orders equal to any required minimum for the periods defined above shall be cause for termination by ChemTrak pursuant to Section 10(b) hereof or, alternatively, ChemTrak, at its sole option, may deem any such shortfall to have been ordered by Distributor. e. FORECASTS; REPORTS. Distributor will provide [*] forecasts of sales [*], or any shorter remaining period of the Agreement, and shall update these forecasts on a [*] basis. Distributor will also provide quarterly reports of actual sales within 20 days of the end of each quarter. Names of customers, addresses, telephone numbers and purchase history, excluding individual retail customers, will be provided to ChemTrak upon termination of this Agreement. 4. PRICES AND PAYMENT TERMS. a. PRICE. Distributor agrees to pay ChemTrak [*] per Bulk Unit and [*] per Bulk Unit for a bilingual Bulk Unit with Distributor supplied artwork. b. PAYMENT TERMS. (i) For the first [*] from the effective date of this Agreement, all payments for Product shall be [*]. (ii) After the expiration of the initial six-months period, all payments for Product shall be [*]. ChemTrak shall notify Distributor of the actual date of each shipment of Product at least 5 days in advance of such shipment. (iii) [*] will pay all non-U.S. export charges, import duties, any and all sales, use, excise, value added or other taxes or assessments imposed by any governmental authority upon or applicable to any sale to Distributor under this Agreement, and all costs and charges for transportation, brokerage, handling and insurance of the Products from the point of shipment. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3. 4 5. MARKETING, REDISTRIBUTION. a. PROMOTION AND MARKETING. (i) Distributor agrees to use diligent efforts to Sell the Product and to include in all related advertising materials all reasonably applicable proprietary rights' notices and any other notices of ChemTrak as they appear on or in the Product. (ii) For the first [*] from the effective date of this Agreement, ChemTrak will provide, at Distributor's expense, packaging for the Product to be sold by Distributor in the Exclusive Markets in the Territory. After the expiration of such period, Distributor will be responsible for packaging the Product for resale in the Exclusive Markets in the Territory, including, without limitation, designing and producing all packaging materials and product inserts all in forms to be approved in writing by ChemTrak prior to first use of such materials by Distributor. ChemTrak will furnish Distributor with a reasonable supply of its sales literature, books, catalogues and the like in English in order to aid Distributor in effectively carrying out its activities under this Agreement. All such material so provided shall remain the property of ChemTrak and, upon request, Distributor will return same to ChemTrak. Distributor will translate all such materials used by Distributor to market the Product in the Territory into the language or languages necessary for proper marketing. Any such translations will be solely owned by ChemTrak and Distributor will use such translations solely in connection with the Sale of the Product in the Exclusive Markets in the Territory. Distributor will furnish a copy of each such translation to ChemTrak. (iii) Distributor will maintain an inventory of Product sufficient to provide replacement Product to its customers for any defective Product. Distributor will replace all defective Product returned to it by its customers, and return all such defective Product to ChemTrak. If the Product was returned by a customer because of some latent defect which was not reasonably detectable at the time of acceptance of the Product by Distributor, Distributor shall be entitled to the remedies provided in Section 3(c). In all other cases, Distributor shall replace the Product at its own expense. (iv) Distributor will comply with all health registration laws, regulations and orders of any government within the Territory and with all other governmental requirements applicable to its sales activities in the Territory with respect to the Product. Distributor will provide ChemTrak with all information it shall reasonably request, including copies of any filings made in connection therewith and any available Territory clinical data, in connection with Distributor's compliance with this paragraph. ChemTrak will, [AT DISTRIBUTOR'S EXPENSE], furnish Distributor with such assistance and cooperation as may reasonably be requested in connection with compliance with such governmental requirements, including without limitation providing to Distributor all available United States data for clinical trials performed by ChemTrak in connection with the Product. (v) All expenses incurred by Distributor in connection with the performance of its obligations hereunder will be borne solely by Distributor. Distributor will be - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4. 5 responsible for appointing its own employees, agents and representatives, who will be compensated by Distributor. (vi) Distributor may provide promotional Products to its customers free of charge. b. TRADEMARKS. To the extent reasonably required by Distributor to perform its obligations pursuant to this Agreement, ChemTrak grants to Distributor a non-transferable, non-sublicensable, royalty-free license to use during the term of this Agreement the trademarks and trade names in listed in Exhibit D hereto (collectively the "ChemTrak Trademarks") with respect to the Product, solely in connection with Distributor's marketing and distribution of the Product in the Exclusive Markets in the Territory under this Agreement. Distributor acknowledges the validity of the ChemTrak Trademarks and ChemTrak's ownership thereof. Distributor may use its own brand name and logo on the Products in addition to or instead of the ChemTrak Trademarks in any manner approved by ChemTrak, such approval not to be unreasonably withheld. 6. PRODUCT WARRANTY. a. ChemTrak warrants that the Product supplied by ChemTrak under this Agreement will be of merchantable quality, free from defects in materials and workmanship and will substantially conform to the Product Specifications for a period of time from shipment of Product to Distributor as is applicable to such Product Specifications. In no event shall ChemTrak be liable under this Agreement for any failure of any Product to meet the Product Specifications due to improper use, storage or shipment by Distributor or by anyone receiving the Product directly or indirectly from Distributor. b. EXCEPT AS SET FORTH IN SECTION 6(a) ABOVE, CHEMTRAK MAKES NO WARRANTIES WITH RESPECT TO THE PRODUCT, EXPRESS OR IMPLIED, AND SPECIFICALLY, WITHOUT LIMITATION, CHEMTRAK DISCLAIMS ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS SET FORTH ABOVE, CHEMTRAK NEITHER ASSUMES NOR AUTHORIZES ANY PERSON TO ASSUME ANY LIABILITY OR WARRANTY IN CONNECTION WITH THE PRODUCT. IN THE EVENT OF ANY BREACH BY CHEMTRAK OF THE WARRANTY SET FORTH IN SECTION 6(a) ABOVE, DISTRIBUTOR'S SOLE REMEDY WILL BE [*]. IN THE EVENT ANY LIABILITY IS IMPOSED ON CHEMTRAK [BY DISTRIBUTOR] FOR ANY REASON WHATSOEVER IN CONNECTION WITH ITS SUPPLY OF PRODUCT HEREUNDER, THE AGGREGATE AMOUNTS PAYABLE BY CHEMTRAK BY REASON THEREOF WILL NOT EXCEED [*]. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5. 6 c. If Distributor makes any warranty or representation inconsistent with or in addition to the warranties stated in this Section 6, Distributor will, at its own expense, defend and hold ChemTrak harmless from any claim to the extent it is based upon such inconsistent or additional warranty or representation. 7. INDEMNITY. Each party hereby agrees to indemnify, defend and hold the other party harmless from any third party claim, lawsuit, legal proceeding, settlement or judgement, including, without limitation, reasonable attorneys' fees and costs incurred in the defense of the same, resulting from or arising out of any death of or personal injury to any person due to the negligence, recklessness, or wilful misconduct of the other party or such other party's officers, employees or agents. 8. PROPRIETARY RIGHTS. a. OWNERSHIP OF PROPRIETARY RIGHTS. ChemTrak will retain all of its fights or title to and ownership of all copyrights, trademarks, trade secrets, patents, and all other intellectual property embodied in the Product. Except as otherwise expressly provided in this Agreement, Distributor will have no right, rifle or interest in the intellectual property embodied in the Product. b. CONFIDENTIAL INFORMATION. Each party agrees that it will treat accordingly all verbal and written communications from the other party which are designated, or which should reasonably be regarded in the normal commercial view, as constituting business secrets or proprietary information ("Proprietary Information"). Each party agrees to refrain from disclosing or making available to any third party any of the other party's Proprietary Information without the other party's written consent and to impose upon its employees and agents the same obligations with respect to the other party's proprietary information as it employs with respect to its own confidential information. No such obligations of confidence will extend to information which (a) is publicly available; (b) is independently developed by the receiving party; (c) is already in the receiving party's possession; or (d) is rightfully received from a third party. The provisions of this Section 8 will survive the termination of this Agreement. 9. COMPLIANCE WITH LAWS. a. EXPORT LAW COMPLIANCE. Distributor understands and recognizes that the Product and other materials made available to it hereunder may be subject to the export administration regulations of the United States Department of Commerce and other United States government regulations, as amended from time to time, related to the export of technical data and equipment and products produced therefrom. Distributor agrees to comply with all such regulations in connection with the distribution of the Product. Distributor agrees to cooperate with ChemTrak and to provide ChemTrak with such reasonable assistance, at no charge to ChemTrak, as is required in order to comply with the export administration regulations of the United States. 6. 7 b. FOREIGN CORRUPT PRACTICES ACT. Distributor hereby agrees that it will comply with the requirements of the U.S. Foreign Corrupt Practices Act, as amended from time to time, (the "Act") and will refrain from any payments to third parties which would cause Distributor or ChemTrak to violate the Act. Distributor hereby further agrees to indemnify and hold ChemTrak harmless from any breach of this Section . c. LICENSES AND PERMITS. Distributor and ChemTrak will take all actions (including the preparation and filing of all requisite applications, certificates and the like) required by law with respect to, and will use their best efforts to obtain, any and all required non-U.S. governmental authorizations, including without limitation any import licenses and foreign exchange permits. Each party will provide reasonable evidence of compliance with required non-U.S. governmental authorization, registrations and the like to the other party upon request. As among the parties, ChemTrak will not be liable if any authorization is delayed, denied, revoked, restricted or not renewed; Distributor will bear all such risks and costs caused thereby. 10. TERM, TERMINATION, AND EFFECT OF TERMINATION. a. TERM. Except as provided in Section 10(b), this Agreement and the licenses and rights granted hereunder will be effective for a term of 3 years, and shall be automatically renewed thereafter for additional 1 year periods provided that (i) Distributor has fulfilled its minimum purchase obligation agreed upon with ChemTrak on or before September 30 of each year and (ii) the parties mutually agree to minimums for each extension year. b. EARLY TERMINATION BY EITHER PARTY. Either party may terminate this Agreement upon written notice to the other party (i) if the other party commits any material breach of this Agreement which the other party fails to cure within 60 days following written notice from the non-breaching party specifying such breach; (ii) (A) all or a substantial portion of the assets of the other party are transferred to an assignee for the benefit of creditors or to a receiver or to a trustee in bankruptcy, (B) a proceeding is commenced by or against the other party for relief under bankruptcy or similar laws and such proceeding is not dismissed within 60 days, or (C) the other party is adjudged bankrupt; or (iii) the other party permanently ceases to conduct business. c. EARLY TERMINATION BY DISTRIBUTOR. Distributor may terminate this Agreement, upon 60 days written notice to ChemTrak, if ChemTrak consistently fails to meet requested delivery dates as specified on accepted purchase orders. Consistent failure to meet requested delivery dates shall be defined for the purposes of this Agreement as [*] past the requested and approved delivery date. d. SURVIVING OBLIGATIONS. Termination or expiration of this Agreement will not (i) affect any other rights of either party which may have accrued up to the date of such termination or expiration, (ii) relieve either party of its obligations under Section 8(b) (Confidential Information) or Section 7 (Indemnity), (iii) relieve Distributor of its obligation to pay to ChemTrak sums due prior to termination or expiration of this Agreement. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7. 8 e. EFFECT OF TERMINATION. Upon the effective date of termination of this Agreement for whatever reason: (i) the right of Distributor to act as a sales representative and distributor of the Product in the Exclusive Markets and in the Territory will cease and Distributor will immediately discontinue all use in the Exclusive Markets and in the Territory of ChemTrak's trade names and trademarks in connection with the Product. Distributor will return to ChemTrak all price lists, catalogs, sales literature, operating and service manuals, advertising literature and other materials relating to the Product originally provided by ChemTrak to Distributor. However, for materials produced by Distributor, Distributor will destroy such materials which relate solely to the Product. Notwithstanding the foregoing, Distributor will have the right, for a period not to exceed 180 days, to sell any Product remaining in inventory to the extent the same are not repurchased by ChemTrak pursuant to clause (ii) below or, in the event that this Agreement is terminated by Distributor pursuant to Section 10(b) for an additional 270 days solely with respect to the fulfillment of firm standing orders as proven by documentation presented to ChemTrak; (ii) in the event the Agreement either terminates at the end of 3 years (or any extension term) or is terminated by ChemTrak pursuant to Section 10(b), if desired by ChemTrak, ChemTrak may repurchase from Distributor all of the Product (to the extent that the same are in new and original condition) then in Distributor's inventory, F.O.B. Distributor's facilities, and ChemTrak will repay to Distributor the actual price paid by Distributor to ChemTrak for such returned products less any and all amounts then owing and uncontested, for whatever reason, from Distributor to ChemTrak; (iii) except to the extent of selling its remaining inventory of Product as permitted by clause (i) above, after termination Distributor will not represent or hold itself out as being any authorized distributor or sales representative for the Product in the Exclusive Markets or in the Territory or engage in any practices which might make it appear that Distributor is still such an authorized distributor or sales representative; (iv) Distributor will promptly assign or cause to be assigned to ChemTrak, or its designee, every health registration or permit obtained pursuant to Section 5 (a)(iv). In the event such assignment is not permitted by law, Distributor will cooperate in the cancellation of such registrations and permits standing in its names and the reissuance of such registrations and permits to ChemTrak or its nominee; (v) Distributor will transfer to ChemTrak at Distributor's cost any rights it may have to any trademarks or trade names of ChemTrak; and (vi) Distributor will provide to ChemTrak a copy of its customer list for the Product including names, addresses, telephone numbers and purchase history excluding individual retail customers. 8. 9 f. ChemTrak will have no obligation to Distributor by reason of the termination of this Agreement. Distributor hereby agrees not to assert any claim by reason of such termination of this Agreement. Neither party, by reason of the termination of this Agreement, will be liable to the other because of any damages, expenditure, loss of profits, or prospective profits of any kind or nature, sustained or arising out of such termination or for any investments related to the performance of this Agreement or the goodwill created in the course of the performance under this Agreement. g. No termination of this Agreement will in any manner whatsoever release, or be construed as releasing, any party from any liability to the other arising out of or in connection with a party's breach of, or failure to perform any covenant, agreement duty or obligation contained in this Agreement. Neither party will be relieved from any obligations vested prior to the date of termination of this Agreement. 11 GOVERNING LAW, DISPUTE RESOLUTION, VENUE AND OFFICIAL LANGUAGE. a. DISPUTE RESOLUTION. In the event of any dispute between the parties arising under or related to this Agreement (a "Dispute"), the presidents (or a direct assignee of each of the presidents reporting to the president) of the parties hereto will negotiate in good faith in an effort to resolve such Dispute for a period of [*] following written notification from the other party describing in reasonable detail the matter in dispute. Upon the expiration of the [*] period with the Dispute remaining unsolved, either party may proceed under Subsection (b) below. b. ARBITRATION. Any Dispute not resolved pursuant to Section 11(a) and which involves only ChemTrak and Distributor and no third party shall be settled by [*] arbitration in the manner described in this Subsection. The arbitration shall be conducted pursuant to Commercial Arbitration Rules of the American Arbitration Association (the "ASSOCIATION"). Notwithstanding those rules, the following provisions shall apply to any arbitration hereunder. (i) ARBITRATOR. The arbitration shall be conducted by a panel of three arbitrators (the "PANEL"). The Panel shall be selected from a pool of retired independent U.S. federal judges to be presented to the parties by the Association. (ii) PROCEEDINGS. The parties (i) acknowledge that the issues that may arise in any Dispute may involve a number of complex matters and (ii) confirm their intention that each party will have the opportunity to conduct complete discovery with respect to all material issues involved in a Dispute. The Panel shall not award punitive damages to either party and the parties shall be deemed to have waived any right to such damages. The Panel shall, in rendering its decision, apply the substantive law of the State of California, without regard to its conflict of laws provisions, except that the interpretation of and enforcement of this Section 11 shall be governed by the Federal Arbitration Act. The Panel shall apply the Federal Rules of Evidence to the hearing. The proceeding shall take place in San Jose, California. (iii) AWARD. The Panel is empowered to award any remedy allowed by law, including money damages, multiple damages, prejudgment interest and attorneys' fees, and to - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9. 10 grant final, complete, interim, or interlocutory relief, including injunctive relief but excluding punitive damages. (iv) COSTS. Each party shall bear its own legal fees. The Panel shall assess its costs, fees and expenses against the party losing the arbitration unless it believes that neither party is the clear loser, in which case the Panel shall divide its fees, costs and expenses according to its sole discretion. (v) SURVIVABILITY. Any duty to arbitrate under this Agreement shall remain in effect and enforceable after termination of the contract for any reason. c. APPLICABLE LAW; ENGLISH LANGUAGE. This Agreement is made in accordance with and shall be governed and construed under the laws of the State of California, as applied to agreements executed and performed entirely in California by California residents and in no event shall this Agreement be governed by the United Nations Convention on Contracts for the International Sale of Goods. The official text of this Agreement and any Exhibit or any notice given or accounts or statements required by this Agreement shall be in English. In the event of any dispute concerning the construction or meaning of this Agreement, reference shall be made only to this Agreement as written in English and no to any other translation into any other language. 12. LIMITATION OF LIABILITY. EACH PARTY WILL ONLY BE LIABLE TO THE OTHER PARTY FOR DAMAGES THAT ARE DIRECTLY ATTRIBUTABLE TO ITS MATERIAL BREACH OF THIS AGREEMENT, OR ITS GROSSLY NEGLIGENT OR INTENTIONAL ACT OR OMISSION. NOTWITHSTANDING THE FOREGOING, NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR INDIRECT DAMAGES OF ANY KIND WHATSOEVER (INCLUDING WITHOUT LIMITATION LOST PROFITS OR SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY GOODS SOLD OR DELIVERED TO DISTRIBUTOR. NOTHING IN THIS AGREEMENT WILL CREATE ANY LIABILITY OF EITHER OR BOTH PARTIES TO ANY THIRD PARTY OR PARTIES. 13. MISCELLANEOUS. a. NO AGENCY, NO JOINT VENTURE - INDEPENDENT CONTRACTOR. Distributor will act as independent contractor under the terms of this Agreement. Distributor is not, and will not be deemed to be, employee, agent, co-venturer or legal representative of ChemTrak for any purpose. Distributor will not be entitled to enter into any contracts in the name of, or on behalf of ChemTrak, nor will Distributor be entitled to pledge the credit of ChemTrak in any way or hold itself out as having authority to do so. b. ASSIGNMENT. Neither this Agreement nor any right or obligation arising hereunder may be assigned, in whole or in part, by Distributor without the prior written consent of ChemTrak; provided, however, that Distributor may assign to an Affiliate without such consent but with written notice to ChemTrak, and, additionally, ChemTrak's consent to an assignment by 10. 11 Distributor to any successor by merger or sale of substantially all of its business units to which this Agreement relates shall not be unreasonably withheld. Any assignment or purported assignment in contravention of this Section 13(b) will be void and of no effect. c. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Exhibits hereto, set forth and constitute the final, complete and entire agreement between the parties hereto with respect to the subject matter hereof, supersede any and all prior agreements, understandings, promises and representations made by either party to the other concerning the subject matter hereof and the terms applicable hereto and are intended as a complete and exclusive statement of the terms of the agreement between the parties. This Agreement may not be released, discharged, amended or modified in any manner except by an instrument in writing signed by duly authorized officers of both parties. d. SEVERABILITY. If any provision of this Agreement is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, such provision will be construed or deemed amended to conform to applicable laws so as to be valid, legal and enforceable and to conform to the maximum extent possible to the intention of the parties including, without limitation, by deleting such provision. e. BENEFITS OF THIS AGREEMENT. Except as expressly provided for herein, nothing in this Agreement will be construed to give to any person or entity other than Distributor and ChemTrak any legal or equitable right, remedy or claim under this Agreement. This Agreement will be for the sole and exclusive benefit of Distributor and ChemTrak. f. WAIVER. No waiver of any right under this Agreement will be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any breach or failure to perform will be deemed to be a waiver of any future such right or of any other right arising under this Agreement. g. HEADINGS. Section headings contained in this Agreement are included for convenience only and form no part of the agreement between the parties. h. NOTICES. Notices, consents and the like required or permitted hereunder will be in writing and will be sent to the addresses set forth below or to such other addresses as the parties may hereafter specify, and will be deemed given on the earlier of: (i) physical delivery to a party, including confirmed delivery by facsimile or telex; or (ii) upon delivery after sending by expedited courier. Copies of notices will be sent to the appropriate address as set forth below: 11. 12 To ChemTrak: ChemTrak Incorporated 929 E. Arques Avenue Sunnyvale, CA U.S.A. 94086 Attention: President With a copy to: Cooley Godward Castro Huddleson & Tatum Five Palo Alto Square, Suite 400 Palo Alto, CA 94306 U.S.A. Attention: Barbara Kosacz To Distributor: Helena Laboratories (Canada) Ltd. Unit #2 6725 Millcreek Drive Mississauga, Ontario L5N 5V3 Canada Attention: Mark Thomson, President i. FORCE MAJEURE. Each of the parties hereto will not be liable for any failure or delay in performance hereunder where such failure or delay is due, in whole or in pan, to any cause beyond its reasonable control, including but not limited to Acts of God, fire, flood, warfare, labor disputes or other similar catastrophic events. j. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be an original and all of which will constitute together but one and the same document. k. AUTHORITY TO ENTER INTO AND EXECUTE AGREEMENT. Each party represents and warrants to the other that they have the right and lawful authority to enter into this Agreement for the purposes herein and that there are no other outstanding agreements or obligations inconsistent with the terms and provisions hereof. l. PATENT MARKING. Distributor agrees to include on the Products and on all packaging materials and Product labelling patent marking as reasonably requested by ChemTrak. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above mentioned. CHEMTRAK INCORPORATED HELENA LABORATORIES (CANADA) LTD. By: /s/ Alene Holztman By: /s/ Mark Thomson -------------------------- ------------------------------- Title: Vice President Title: President -------------------------- ------------------------------- 12. 13 EXHIBIT A DEFINITIONS a. "Territory" shall mean Canada. b. "Product" shall mean ChemTrak's CholesTrak Total Cholesterol Test as described on Exhibit B. c. "Product Specifications" shall mean the specifications pertaining to the Product included in Exhibit B. ChemTrak may from time to time, by written notice to Distributor, make modifications to the Product which do not materially adversely affect the performance or functionality of the Product without otherwise affecting the terms of this Agreement and without incurring any responsibility or liability to Distributor. d. "Sell", "Sale" or "Sold" shall mean to sell, lease, distribute, market or otherwise dispose including giveaway, and to use in connection with those activities. e. "Exclusive Markets" shall mean, collectively, distribution of the Product for sale to any and all brokers and wholesalers that serve chain drug and mass merchandisers, and natural and health food stores. "Exclusive Markets" expressly does not include sales to hospitals, physicians, catalogs, computer software companies, pharmaceutical companies, and Canadian government or military. f. "Bulk Unit" shall mean one (1) Product cassette in a sealed foil pouch with desiccant and one (1) conversion (result) card in mmols per cassette, either in English only or in both English and French, as appropriate. g. "Affiliate" shall mean any entity that directly or indirectly Owns, is Owned by or is under common Ownership with, a party to this Agreement, where "Own" or "Ownership" means direct or indirect possession of greater than fifty (50%) of the outstanding voting securities of a corporation or a comparable equity interest in any other type of entity. 13. 14 EXHIBIT B PRODUCT DESCRIPTION AND SPECIFICATIONS "Product" referred to includes one CholesTrak test cassette for total cholesterol (with result chart printed in English) in an individual foil pouch, or: One CholesTrak test cassette for total cholesterol in bilingual package (with result chart printed bilingual). Artwork for package and result chart to be supplied by buyer, subject to Section 5(a)(ii). The Product shall meet the description and be consistent with ChemTrak's Premarket Notification 510(k)s received by the FDA on February 19, 1991 and October 4, 1991, with the following performance characteristics, which will be included in a ChemTrak Certificate of Analysis accompanying each lot of Bulk Units supplied to Distributor:
TEST SPECIFICATIONS RESULTS - ---- -------------- ------- Conversion Chart Assay Range [*] Correlation with Reference Method Slope [*] Correlation Coefficient (r(2)) [*] Whole Blood Accuracy and Precision Test Accuracy (Estimated % Bias in mg/dL based on NCCLS Document EP9-T) at Low Level (190+/-15 mg/dL) within [*] bias at Medium Level (250+/-15 mg/dL) within [*] bias at High Level (350+/-15 mg/dL) within [*] bias Precision at Low Level (190+/-15 mg/dL) Not more than [*] at Medium Level (250+/-15 mg/dL) Not more than [*] at High Level (350+/-15 mg/dL) Not more than [*] Reliability (After 5 - 7 days at 37(degree)C/95%RH) [*]
- ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 14. 15
TEST SPECIFICATIONS RESULTS - ---- -------------- ------- Microbial Wicking Buffer shows no growth after [*] . Pull Force Not more than [*] Functional Failures Not more than [*]
- ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 15. 16 EXHIBIT C ORDER FORECAST (IN '000S OF UNITS) Month 1 [*] Month 2 Month 3 Month 4 [*] Month 5 Month 6 Month 7 [*] Month 8 Month 9 Month 10 [*] Month 11 Month 12 - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 16. 17 EXHIBIT D CHEMTRAK TRADEMARKS CholesTrak(TM) 17. EX-10.37 3 AGREEMENT WITH ORGANON TECHNIKA 1 EXHIBIT 10.37 AGREEMENT This Agreement is entered into this 1st day of December 1996, by and between ORGANON TECHNIKA BV (hereinafter referred to as "Teknika"), a corporation of the Netherlands having its principal place of business at Boseind 15, 5281 RM Boxtel, the Netherlands, represented by Dr. R. Salsmans, and CHEMTRAK (hereinafter referred to as "Licensee"), a corporation of the USA, having its registered offices at 929 E. Arques Avenue, Sunnyvale, CA 94086-4520, USA, represented by Dr. Prithipal Singh, WHEREAS, Teknika is the equitable owner of all the right, title and interest in and to certain interest in and to certain Sol Particle Immuno Assay Patent Rights (as hereinafter defined) owned by its ultimate holding company Akzo Nobel NV (a corporation organized under the laws of the Netherlands) including the exclusive right to grant licenses under such PATENT RIGHTS. WHEREAS, LICENSEE desires to obtain a license from Teknika under the Patent Rights, for the purposes stated herein below. NOW THEREFORE, the parties agree as follows: 1.0 Definitions 1.1. The term "SPIA" means gold sol particle immuno assay. 1.2 The term "SPIA Technology" means a technology employing the SPIA principle, including, but not limited to, the information contained in the patents and patent applications included in the Patent Rights. 1.3 The term "Licensed Products" shall mean tests as specified in Addendum A, the manufacture, use or sale of which would, in the absence of the license granted hereunder infringe, contribute to the infringement of, or induce the infringement of any claim of the Patent Rights which has neither expired nor been declared invalid by a court of competent jurisdiction from which no appeal has been or may be taken. 1.4 The term "Patent Rights" shall mean the patents and patent applications relating to SPIA Technology as are specified in Addendum B. 1.5 The term "Net Sales" means [*]. Sales or other transfers of Licensed Products to Affiliated Companies or between Affiliated Companies and resold to third parties, shall [*] - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 [*] In the event that Licensed Products are sold as part of an individualized kit consisting of up to two tests, lancets, swabs, disinfectant and user instructions, the gross amount invoiced on the sale of Licensed Products in such individualized kit format shall be calculated either by [*], or by [*] whichever results in the [*] Net Sales price. 1.6 The term "Territory" shall mean worldwide. 1.7 The term "Affiliated Company" means any company which, by means of ownership of a majority of share or at lest 50% interest in income or otherwise, directly or indirectly controls, is controlled by or is under common control with either party. 2. Licensing of Patent Rights 2.1 Teknika hereby grants to LICENSEE a non-transferable, non-exclusive license under the Patent Rights, without the right to sublicense, for the sole purpose of manufacturing, using and/or selling Licensed Products under its own label in the Territory for the life of this Agreement. 2.2 Notwithstanding the foregoing, Teknika herewith specifically agrees that LICENSEE will have the right, by way of exception, to manufacture a specific Licensed Product in the form of an H. Pylori test, under the trademark HpChek and under the label of the third party defined in Addendum C hereto (OEM manufacture). Such OEM manufacture shall be permitted only and exclusively for the aforesaid H. Pylori test utilizing the trademark HpChek, for and on behalf of the third party defined in Addendum C and for no other party. The Licensed Product so manufactured will be marketed and distributed by the third party referred to in Appendix C. 2.3 LICENSEE hereby agrees to take and accept the aforesaid license as embodied in this Agreement. 3.0 Royalties, Records and Accounting 3.1 In consideration of the rights granted and under Article 2., LICENSEE shall pay Teknika upon execution of this Agreement a non-refundable, non deductible lump sum payment of [*]. to be paid in two equal installments: [*] - upon signature, and [*] - on the first anniversary of the signature date, which payment shall not act as prepaid royalties creditable toward any running royalties due under this Paragraph as and when such royalties are due and payable. 3.2 Furthermore, LICENSEE shall pay Teknika as from the first day of commercial sale, a running royalty as follows. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3 (i) [*] of the Net sales of Licensed Products other than the Licensed Product referred to in this Article under (ii) here below; (ii) [*] of Net Sales of Licensed Product referred to in Article 2.2 above. 3.3 LICENSEE agrees to keep or cause to be kept accurate records and books of account in accordance with good accounting practice, showing the information required to permit calculation of Net Sales and the royalties under this Article. These books and records shall be preserved for at least four (4) years from the date of the royalty payments to which they pertain. 3.4 On or before the 45th day of each calendar quarter during the term hereof, LICENSEE shall prepare and send to Teknika royalty reports for the previous quarter. Said Net Sales and reports shall indicate total sales and Net Sales per country under this Agreement for the previous calendar quarter, per Licensed Product, and shall show the amount of royalty due with sufficient information to enable confirmation by Teknika, and LICENSEE shall include payment of the amount of royalties shown to be due with such report. 3.5 Upon ten (10) days written notice and not more than once per calendar year, LICENSEE agrees to permit one or more Certified Public Accountant(s) appointed by Teknika (except one to whom LICENSEE has a reasonable objection), to enter upon the premises or LICENSEE during all usual business hours of LICENSEE at any time following the 60th day of any calendar quarter in order to inspect files records pertaining to Net Sales and royalties under this Agreement, and to make on LICENSEE's premises and retain copies of any and all parts of the records and accounts kept by LICENSEE pursuant to this Article, including invoices which are relevant to any report required to be rendered by LICENSEE. Said copies shall be provided to the Certified Public Accountant(s) at no expense to Teknika. Said Certified Public Accountant(s) shall keep all information received from LICENSEE confidential; however, it will provide Teknika with the Net Sales, per country, for each type of Licensed Product, specifying the sales and the application of the appropriate royalty rate so that royalties due Teknika may be calculated. The information obtained by the Certified Public Accountant(s) shall be retained for a period of four (4) years from date of the royalty payment to which it relates, or 2 years from the date of receipt by the Certified Public Accountant(s), whichever is longer. In the event any audit results in a change upward in any royalty payment of as much a five percent (5%) for any annual period, LICENSEE shall pay the costs of such audit for such annual period, otherwise such audit shall be at Teknika's expenses. 3.6 Payment of all royalties hereunder shall be made in Dutch Guilders at the mean rate of exchange existing on the last day of the quarter to which the payment applies as published in the Wall Street Journal (European Edition). 4. Duration 4.1 This Agreement shall become effective as of the date of signing by both parties to this Agreement and shall remain in effect until the last to expire of the Patent Rights. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4 4.2 In the event either party breaches this Agreement, in addition to all other rights and remedies which either party may have the party not in default may terminate this Agreement by written notice. Such termination shall become effective on the date set forth in the notice of termination, but in no event shall it be earlier than [*] from the date of mailing thereof and shall have no effect if the breach has been cured within the said period of notice. 4.3 The termination of this Agreement shall not relieve LICENSEE from its obligation to pay Teknika all royalties that shall have accrued up to the effective date of termination. 5. Assignment Teknika shall have the right to assign this Agreement to, or delegate its obligations hereunder to be performed by [*], provided that [*]. This Agreement is [*] LICENSEE [*]. 6. Entirety Clause As of the date hereof, this agreement supersedes all previous oral and written agreements between the parties, and constitutes the only and entire understanding to exist between the parties with respect to the subject matter of this Agreement, and no amendment shall be implied or proven from or evidenced by negotiations between the parties heretofore or hereinafter conducted or agreements of the parties heretofore or hereafter executed, unless in writing and signed by the parties hereto. 7. Warranty 7.1 Teknika represents and warrants to LICENSEE that it has the full right and power to grant the license to LICENSEE to set forth in this Agreement. Teknika further warrants and represents that there are no other colloidal gold patents owned or controlled by Teknika which cover the Licensed Products. 7.2 Except as specifically set forth in paragraph 7.1 herein, Teknika makes no representations or warranties, either express or implied, arising by law or otherwise, including, but not limited to, implied warranties of merchantability or fitness for a particular purpose. In no event will Teknika have any obligation or liability arising from tort, or for loss of revenue or profit, or for incidental or consequential damages. In particular, with no limitation, nothing in this Agreement will be construed as: (i) A warranty or representation by Teknika [*]. (ii) A warranty or representation that anything made, used, sold or otherwise disposed of under the license granted in this Agreement [*]; - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5 (iii) Conferring the right to use in advertising, publicity, or otherwise any trademark, trade name, or any contraction, abbreviation, simulation, or adaptation thereof, of Teknika; or (iv) Conferring by implication, estoppel, or otherwise any license or rights under any patents of Teknika other than the Patent Rights, regardless of whether the patents are dominant or subordinate to the Patent Rights. 7.3 In the event LICENSEE becomes aware of infringement of the Licensed Patents by a third party, it will immediately notify Teknika thereof. Teknika intends to use such reasonable efforts, as it in its sole discretion determines, to pursue infringers and enforce its rights under its Licensed Patents. LICENSEE, at Teknika's request, shall render all reasonable assistance and cooperation in that regard. Any reasonable out of pocket expenses incurred at the request of Teknika with regard to furnishing such assistance and cooperation (e.g., travel and lodging expenses) shall be reimbursed by Teknika. Any recoveries resulting from such action by Teknika shall be Teknika's property. 8. Applicable Law: Severability 8.1 This Agreement shall be deemed to have been made in and shall be construed in accordance with the laws of the Kingdom of the Netherlands, for all matters other than scope and validity of the PATENT RIGHTS, as to which the laws of the particular country where the Patent Rights are in dispute shall apply. 8.2 All disputes arising in connection with the present Agreement shall be finally settled at the competent court of "s-Hertogenbosch, The Netherlands. 9 Miscellaneous Provisions 9.1 All notices which shall or may be given hereunder shall be in writing in English and shall be prepared registered mail addressed to the recipient at the addresses herein stated, or at such other address as a party may from time to time designate: Organon Teknika B.V. c/o Organon Teknika N.V. Veedijk 58 2300 Turnhout Belgium Attn: President and ChemTrak 929 E. Arques Avenue Sunnyvale, CA 94086-4520 USA Attn: President 6 9.2 Payment of lump sum fees and royalties, due under this Agreement are to be made to Organon Teknika B.V., Boxtel, the Netherlands, to its account with [*]. 9.3 Confidentiality Each party to this Agreement agrees that any information obtained by it form the other party pursuant to this Agreement shall be kept in the strictest confidence and shall only be used for the proper performance of this Agreement, except that this obligation shall not apply to: a) information which is in or becomes part of the public domain otherwise than by breach of this Agreement, or b) information which the recipient can show was in its possession at the date of signing of this Agreement; or c) information which was received by the recipient on a nonconfidential basis from a third party having the legal right to transmit the same. The foregoing obligation shall cease five (5) years after termination or expiration of this Agreement. As agreed at Boxtel, As agreed at Sunnyvale, ORGANON TEKNIKA, B.V. CHEMTRAK Dr. R. Salsmans Dr. Prithipal Singh President Chairman and CEO A.J.F. Stap Executive Vice President Corporate Development & Program Management - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7 ADDENDUM A LICENSED FIELD OF USE: [*] - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 ADDENDUM B SPIA PATENT SERIES
Country Patent No. Expiration Date - ------- --------- --------------- Australia [*] [*] Austria [*] [*] Belgium [*] [*] Canada [*] [*] Denmark [*] [*] Finland [*] [*] France [*] [*] Germany [*] [*] Greece [*] [*] Hungary [*] [*] Ireland [*] [*] Israel [*] [*] Italy [*] [*] Luxembourg [*] [*] Mexico [*] [*] Philippines [*] [*] Portugal [*] [*] South Africa [*] [*] Spain [*] [*] Sweden [*] [*] U.S.A. [*] [*] Switzerland [*] [*] The Netherlands [*] [*] U.K. [*] [*]
- ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 ADDENDUM C LICENSEE'S marketing partner in the United States for the H. Pylori test ("HpChek") is: Astra Merck, Inc. Wayne, PA EX-10.38 4 DEVELOPMENT AND DISTRIBUTION AGREEMENT W/ SELFCARE 1 Exhibit 10.38 DEVELOPMENT AND DISTRIBUTION AGREEMENT between CHEMTRAK INCORPORATED and SELFCARE, INC. 2 TABLE OF CONTENTS
PAGE ARTICLE 1. DEFINITIONS ................................................ 1 1.1 "Affiliate" ................................................ 1 1.2 "ChemTrak Technology" ...................................... 1 1.3 "Commercialization Costs" .................................. 2 1.4 "Confidential Information" ................................. 2 1.5 "Counseling Service" ....................................... 2 1.6 "HIV Product" .............................................. 2 1.7 "Net Sales" ................................................ 3 1.8 "Purchase Price" ........................................... 3 1.9 "Royalty" .................................................. 3 1.10 "Sample Collection Kit" .................................... 3 1.11 "Software" ................................................. 3 1.12 "Standard Cost of Goods" ................................... 3 1.13 "Territory" ................................................ 3 1.14 "Testing Facility" ......................................... 3 1.15 "True Home HIV Test" ....................................... 3 ARTICLE 2. GRANT OF RIGHTS; EXCLUSIVITY ............................... 4 2.1 License Grants to Selfcare ................................. 4 2.2 Covenant Not to Sell Competitive Products .................. 5 2.3 Loss of Exclusivity ........................................ 5 2.4 Selfcare Affiliates ........................................ 6 ARTICLE 3. DEVELOPMENT OF THE HIV PRODUCT ............................. 7 3.1 General Responsibilities ................................... 7 3.2 Testing Facilities; Counseling Service ..................... 8 3.3 Clinical Trials Supply ..................................... 8 3.4 Plan; Reports .............................................. 9 3.5 Publications ............................................... 9 ARTICLE 4. SUPPLY OF SAMPLE COLLECTION KITS ........................... 9 4.1 Purchases of Sample Collection Kits ........................ 9 4.2 Orders ..................................................... 9 4.3 Purchase Price; Payment .................................... 10 4.4 Delivery ................................................... 10 4.5 Acceptance ................................................. 11 ARTICLE 5. MARKETING, SALE AND DISTRIBUTION OF HIV PRODUCTS ........... 11
i. 3 TABLE OF CONTENTS (CONTINUED)
PAGE 5.1 Marketing Efforts .......................................... 11 5.2 Sales and Advertising Activities ........................... 12 5.3 Pricing .................................................... 12 5.4 Packaging .................................................. 12 5.5 General Conduct ............................................ 12 ARTICLE 6. REPORTS; FORECASTS; MARKETING PLANS ........................ 13 6.1 Reports .................................................... 13 6.2 Forecasts .................................................. 13 6.3 Marketing Plans and Reports ................................ 13 6.4 Confidential Information ................................... 14 ARTICLE 7. PAYMENTS ................................................... 14 7.1 Expenses ................................................... 14 7.2 License Fee ................................................ 14 7.3 Sales Milestone Payments ................................... 14 7.4 Royalties .................................................. 14 7.5 Manner and Place of Payment ................................ 15 7.6 Records and Audit of Sales and Expenses .................... 15 ARTICLE 8. CONFIDENTIALITY ............................................ 16 8.1 Nondisclosure Obligations .................................. 16 8.2 Exceptions ................................................. 16 8.3 Authorized Disclosure ...................................... 16 8.4 Terms of this Agreement .................................... 17 ARTICLE 9. INTELLECTUAL PROPERTY ...................................... 17 9.1 Ownership of Intellectual Property ......................... 17 9.2 Defense of Intellectual Property Suits ..................... 17 9.3 Expenses and Remedies ...................................... 18 9.4 Disclaimer ................................................. 18 9.5 Prosecution of Intellectual Property Suits ................. 19 ARTICLE 10.TERM AND TERMINATION; CHANGE OF CONTROL .................... 19 10.1 Term ....................................................... 19 10.2 Change of Control .......................................... 19 10.3 Termination for Material Breach ............................ 20 10.4 Consequences of Termination ................................ 20
ii. 4 TABLE OF CONTENTS (CONTINUED)
PAGE 10.5 No Other Rights Upon Termination ........................... 22 10.6 Surviving Obligations ...................................... 22 ARTICLE 11. WARRANTIES; INDEMNIFICATION ................................ 22 11.1 Sample Collection Kit Warranty ............................. 22 11.3 Warranty Disclaimers and Limitations ....................... 23 11.4 Indemnification ............................................ 23 11.5 Insurance .................................................. 24 ARTICLE 12. REPRESENTATIONS AND WARRANTIES ............................. 24 12.1 Representation and Warranties of ChemTrak .................. 24 12.2 Representations and Warranties of Selfcare ................. 25 ARTICLE 13. MISCELLANEOUS .............................................. 25 13.1 Assignment ................................................. 25 13.2 Export Law Compliance ...................................... 25 13.3 Foreign Corrupt Practices Act .............................. 26 13.4 Benefits and Binding Nature of Agreement ................... 26 13.5 Entire Agreement; Amendments ............................... 26 13.6 No Other Terms and Conditions .............................. 26 13.7 Force Majeure .............................................. 26 13.8 Notice ..................................................... 26 13.9 English Language; Governing Law ............................ 27 13.10 Waiver ..................................................... 27 13.11 Severability ............................................... 27 13.12 Rights and Remedies Cumulative ............................. 28 13.13 Independent Contractors .................................... 28 13.14 Counterparts ............................................... 28
iii. 5 DEVELOPMENT AND DISTRIBUTION AGREEMENT THIS DEVELOPMENT AND DISTRIBUTION AGREEMENT (the "Agreement") is made as of December 31, 1996 (the "Effective Date") by and between CHEMTRAK INCORPORATED, a Delaware corporation ("ChemTrak"), and SELFCARE, INC. ("Selfcare"), a Delaware corporation. ChemTrak and Selfcare are sometimes referred to herein as a "Party" or the "Parties." RECITALS WHEREAS, ChemTrak has developed a mail-in HIV test (the "HIV PRODUCT," as further defined in Article 1 below) and has conducted certain trials directed toward obtaining regulatory approval to commercially sell the HIV Product in the United States shortly following the Effective Date; and WHEREAS, Selfcare has substantial experience in the distribution, marketing and sale of health care products in the Territory (as defined below) and is willing to conduct activities necessary to obtain applicable regulatory approvals for the HIV Product in the Territory and to establish one or more central laboratory testing facilities and a counseling service in connection with the HIV Product; and WHEREAS, ChemTrak wishes to designate Selfcare, and Selfcare wishes to be designated, as ChemTrak's exclusive distributor for the HIV Product in the Territory, on the terms and conditions set forth in this Agreement. NOW THEREFORE, in consideration of the foregoing premises and the covenants set forth below, the Parties hereby agree as follows: ARTICLE 1 DEFINITIONS As used herein, the following terms shall have the following meanings: 1.1 "AFFILIATE" shall mean an entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with ChemTrak or Selfcare. 1.2 "CHEMTRAK TECHNOLOGY" shall mean all inventions, patent applications, patents, know-how, technology, trade secrets, processes, data, methods or other information, the Software, and any physical, chemical or biological material, in each case which ChemTrak owns, controls or has a license to (with a right to sublicense) and which is useful in the use, sale or distribution of the HIV Product in the Territory, as listed in Exhibit B. 1. 6 1.3 "COMMERCIALIZATION COSTS" shall mean expenses identifiable to marketing, promoting, selling and distributing the HIV Product in the Territory and performing testing, reporting and counseling services incident to the sale of HIV Products, specifically including expenses of advertising the HIV Product, specialized training of the sales force with respect to the HIV Product in particular, salaries and commissions of the sales force to the extent time is dedicated to the HIV Product, costs of financing receivables and inventories of the HIV Product, costs of shipping and insuring Sample Collection Kits from ChemTrak to Selfcare, reasonable allocation of overhead identifiable to such activities, all recurring and annual regulatory fees and expenses, costs of pursuing and maintaining trademark protection in the Territory pursuant to Section 9.1, and such other expenses as the Parties may agree in writing to include as Commercialization Costs. All such costs shall be determined in accordance with generally accepted accounting principles consistently applied. "Commercialization Costs" shall specifically exclude expenses deducted from gross invoices under the definition of "Net Sales," the Purchase Price paid to ChemTrak for Sample Collection Kits, the license fee and milestone payments made by Selfcare to ChemTrak under this Agreement, and costs of establishing Regulatory Approvals for the HIV Product and the Testing Facilities and Counseling Service in advance of commercial sales. 1.4 "CONFIDENTIAL INFORMATION" shall mean, subject to the exceptions set forth in Section 8.2, any information or materials received by one Party from the other Party. In particular, Confidential Information shall be deemed to include, but not be limited to, the ChemTrak Technology, any know-how, data, process, technique, formula or biological or physical material relating to the HIV Product and any research project, work in process, future development, scientific, engineering, manufacturing, marketing, business plan, financial or personnel matter relating to either Party, its present or future products, sales, suppliers, customers, employees, investors or business, whether in oral, written, graphic or electronic form, to the extent provided by one Party to the other. 1.5 "COUNSELING SERVICE" shall have the meaning assigned in Section 1.6. 1.6 "HIV PRODUCT" shall mean that Aware(TM) brand mail-in HIV test which has been developed by ChemTrak, consisting of a blood sample home preparation kit (the "SAMPLE COLLECTION KIT"), procedures for analysis of the blood sample at a mail-in central laboratory (a "TESTING FACILITY," as further described in Section 3.2) and reporting of results to customers, and a counseling service (the "COUNSELING SERVICE," as further described in Section 3.2) for discussion of results with customers, as further described in regulatory materials submitted by ChemTrak to the U.S. Food and Drug Administration ("FDA") prior to the Effective Date. "HIV Product" shall also include any future modification, line extension or improved version of such product developed by ChemTrak during the term of this Agreement, but excluding any mail-in HIV urine or saliva test, and any True Home HIV Test. 2. 7 1.7 "NET SALES" shall mean the gross invoices delivered by Selfcare and its Affiliates for the sale of HIV Products to independent third parties who are not Affiliates of either Selfcare or any Selfcare Affiliate, less the following deductions: (1) Prompt payment or other trade or quantity discounts actually allowed and taken in such amounts as are customary in the trade; and (2) Taxes, tariffs and duties levied on shipments or sales of the HIV Product (other than franchise or income taxes on the income of Selfcare and withholding taxes, if any, on Royalty payments made hereunder) actually paid or withheld. 1.8 "PURCHASE PRICE" shall have the meaning assigned in Section 4.4. 1.9 "ROYALTY" shall mean [*]: Net Sales, plus any other compensation invoiced, earned or received in respect of the offer, sale or distribution of HIV Products, [*]. 1.10 "SAMPLE COLLECTION KIT" shall have the meaning assigned in Section 1.6. 1.11 "SOFTWARE" shall mean ChemTrak's proprietary software, in machine executable object code form only, for tracking blood samples received from customers, the results of all tests performed to determine the presence of HIV and the disclosure of results to customers, as used in ChemTrak's studies performed in pursuit of U.S. regulatory approval for the HIV Product. 1.12 "STANDARD COST OF GOODS" shall mean the costs to produce the Sample Collection Kit as set forth on Exhibit A. Such costs shall be consistent with generally accepted accounting principles, as applied by ChemTrak in its financial statements. 1.13 "TERRITORY" shall mean Europe, including all European countries, all Scandinavian countries, all the countries of Eastern Europe and the Commonwealth of Independent States (all previous USSR territories). 1.14 "TESTING FACILITY" shall have the meaning assigned in Section 1.6. 1.15 "TRUE HOME HIV TEST" shall mean any product which permits an end user to prepare a bodily fluid sample and conduct a test to determine the presence of HIV in such sample, in each case without the assistance of a laboratory facility. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3. 8 ARTICLE 2 GRANT OF RIGHTS; EXCLUSIVITY 2.1 LICENSE GRANTS TO SELFCARE. (a) Subject to the terms and conditions of this Agreement, ChemTrak hereby grants to Selfcare a license under the ChemTrak Technology to offer and sell the HIV Product in the Territory, including but not limited to the right to perform HIV testing, and to use the Software solely for the purpose of performing such testing, at a Testing Facility for purchasers of the HIV Product, for the term of this Agreement. This license shall be exclusive except as otherwise provided in Section 2.3 below. Selfcare may sublicense or otherwise transfer such rights (without the right to grant further sublicenses or otherwise transfer such rights) to third parties only with ChemTrak's prior written consent, which shall not be unreasonably withheld. Selfcare will provide ChemTrak with a complete copy of the proposed sublicense agreement at the time Selfcare solicits ChemTrak's consent to the sublicense. (b) As a condition of the license rights set forth in this Agreement, Selfcare shall use the Software in connection with all HIV testing in the Territory unless the parties mutually agree that a modified version of the Software will be used. Selfcare shall not copy the Software in any manner, except that Selfcare may make one working copy, and one copy for back-up purposes, for each Testing Facility. Selfcare shall not distribute or provide the Software or any copy thereof to any third party without the prior written consent of ChemTrak. Further, Selfcare shall not modify the Software in any way, including without limitation by making any localizations, without the prior written consent of ChemTrak, which consent shall not be unreasonably withheld. Selfcare shall not reverse engineer or reverse compile the Software and shall not use the Software in any manner other than pursuant to the license granted above in this Section 2.1(b). Immediately upon the expiration or any termination of this Agreement or at a later time specified by ChemTrak, Selfcare shall return all copies of the Software to ChemTrak and make no further use of the Software. (c) Subject to the terms and conditions of this Agreement, ChemTrak hereby grants to Selfcare an exclusive license to use the mark Aware(TM) in connection with the offer, sale and distribution of the HIV Product in the Territory for the term of this Agreement. As a condition of the license rights set forth in this Agreement, Selfcare agrees that the Aware(TM) mark shall be used in connection with such activities and no other marks, including the ChemTrak(R) mark, shall be used unless the parties mutually agree on such use in advance. ChemTrak shall retain ownership of and all rights in the Aware(TM) mark and shall own and retain all rights in any alternative or additional brand name(s) which the parties may agree to use (collectively, the "MARKS"). In order to assure the quality of goods marketed under the Marks, ChemTrak shall have the right to 4. 9 inspect Selfcare's facilities during normal business hours, after giving reasonable notice of such intent. Selfcare shall conduct its business in a manner which will enhance the reputation and goodwill attached to the Marks, and all goodwill shall inure to the benefit of ChemTrak as owner of the Marks. (d) Selfcare agrees to use the ChemTrak Technology and the Marks only to offer, sell and distribute the HIV Product in the Territory for the term of this Agreement and not for any other purpose. 2.2 COVENANT NOT TO SELL COMPETITIVE PRODUCTS. Selfcare hereby covenants not to market, sell or distribute, directly or indirectly through one or more third parties, any mail-in HIV blood test product other than the HIV Product in any country in the Territory where Selfcare has an exclusive license [*]; provided, however, that this covenant will not apply in the event that this Agreement is terminated by Selfcare pursuant to Section 10.3 for ChemTrak's material breach of this Agreement. The restriction on the sale of mail-in HIV blood tests does not apply to mail-in urine or saliva tests. Selfcare hereby acknowledges that the ChemTrak Technology, particularly ChemTrak's proprietary Software and the data and regulatory strategy reflected in ChemTrak's filings with the U.S. FDA regarding the HIV Product, has been maintained by ChemTrak as highly confidential and constitutes ChemTrak's proprietary and extremely valuable trade secret information. Selfcare further acknowledges that it has not previously engaged in development or marketing of any mail-in HIV test product, and the ChemTrak Technology confers upon Selfcare a substantial competitive advantage in obtaining regulatory approval and market acceptance of a mail-in HIV test product in the Territory. Accordingly, Selfcare and ChemTrak each acknowledge and agree that the [*] is reasonable and necessary to protect the commercial value of ChemTrak's proprietary trade secrets provided to Selfcare under this Agreement. 2.3 LOSS OF EXCLUSIVITY. ChemTrak will have the option, upon ninety (90) days advance written notice, to convert Selfcare's exclusive rights to offer, sell and distribute the HIV Product in each country in the Territory into non-exclusive rights in any of the following events: (a) Selfcare fails to file for Regulatory Approval in such country by a date determined as follows. Set forth on Exhibit C are projected dates by which the parties expect Selfcare will file for regulatory approval to commercially sell the HIV Product in the major European countries listed on Exhibit C. If at any time Selfcare believes that it will likely not be able to make such a filing by such date, then Selfcare shall immediately notify ChemTrak and the parties shall meet and confer regarding the reasons for such delay and available means to expedite such filings. The parties will seek to mutually - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5. 10 agree on a plan and new timetable for making such filing. If the parties are unable to agree on such a plan and timetable, then ChemTrak will have the option to convert Selfcare's rights in such country to non-exclusive effective six (6) months after the date set forth on Exhibit C if Selfcare has not made the required regulatory filing by the end of such 6-month period. (b) Selfcare fails to launch a commercially reasonable marketing campaign designed to generate substantial demand for HIV Products and commence commercial sales of the HIV Product in such country within six (6) months after receiving Regulatory Approval in such country. (c) Selfcare's market share for the HIV Product in such country, as measured on the second and each subsequent anniversary of the date of Selfcare's first commercial sale of an HIV Product in such country, is less than [*] of the percentage of the market that each competitor would have if all had equal market share. For example, if as of such anniversary there are three competitors in the market, then ChemTrak may convert the license to non-exclusive if Selfcare's market share is less than [*] as of such date [*] For purposes of this paragraph, the relevant market shall consist of all mail-in HIV blood tests, and each separate brand shall constitute one competitor in the market. In order to enable ChemTrak to calculate market share, Selfcare shall provide ChemTrak upon request with all relevant information available to Selfcare. 2.4 SELFCARE AFFILIATES. (a) All costs, expenses, revenues and proceeds incurred or received by any Selfcare Affiliate shall be deemed to be incurred or received by Selfcare for purposes of all financial calculations and obligations under this Agreement. Notwithstanding any other terms of this Agreement, the Parties agree that all payments due from Selfcare to ChemTrak hereunder shall be made by Selfcare and not any Selfcare Affiliate. (b) The Parties agree that the goals with respect to non-U.S. income or withholding tax liability shall be to minimize the aggregate amount of non-U.S. income and withholding tax liabilities incurred by the Parties collectively with respect to commercialization of the HIV Product in the Territory, and to allocate such tax burdens equally between the Parties as provided herein. In that regard: (i) If any non-U.S. income or withholding tax liability is incurred by either Party with respect to operations conducted pursuant to this Agreement (e.g., such Party could not avoid the tax liability by applying current operating losses or net operating loss carryforwards resulting from operations related to the sale of the HIV - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6. 11 Product pursuant to the Agreement), then (A) when Selfcare incurs the non-U.S. tax liability, the full amount of such liability shall be [*] and (B) when ChemTrak incurs the non-U.S. tax liability, the full amount of such liability shall be [*]. The Parties acknowledge that any tax credit related to the HIV Product will [*] if the tax credit is used by Selfcare to avoid paying taxes in any jurisdiction for operations related to the sale of HIV Products pursuant to this Agreement. (ii) The Parties also agree that each may either (A) avoid potential non-U.S. income or withholding tax liability by applying current operating losses and net operating loss carry forwards that result from its operations with respect to the HIV Product, and/or (B) avoid paying non-U.S. income or withholding taxes by applying tax credits resulting from operations with respect to the HIV Product. (iii) If either Party could apply any tax credits arising in any jurisdication other than the United States related to the HIV Product against income in any jurisdiction that is not related to the sale of HIV Products pursuant to this Agreement, then it shall promptly notify the other Party. The Parties agree to meet with each other along with their tax advisors and to take all commercially reasonable steps to permit such credit to be used by one Party and to permit the other Party to obtain [*] of such credit. ARTICLE 3 DEVELOPMENT OF THE HIV PRODUCT 3.1 GENERAL RESPONSIBILITIES. Selfcare shall have sole responsibility for diligently pursuing Regulatory Approval of the HIV Product throughout the Territory as soon as practicable, and for bearing all costs associated therewith. Selfcare shall prepare, file and pursue diligently all regulatory applications necessary to obtain such Regulatory Approvals. ChemTrak will provide Selfcare with a copy of all documentation required by the U.S. FDA in connection with its review of the HIV Product, including a right to reference all applications, registrations, and supporting documents submitted and received by ChemTrak, and will provide assistance in connection with the pursuit of Regulatory Approvals in the Territory according to a plan to be mutually agreed upon. Such assistance will be provided without charge to Selfcare. Selfcare shall have the right to use such information solely for the purpose of pursuing Regulatory Approvals and commercializing HIV Products in the Territory during the term of this Agreement; provided, however, that ChemTrak will provide Selfcare access to this information after the termination or expiration of this Agreement to permit Selfcare to comply with regulatory requirements applicable to HIV Products sold by Selfcare during the term of this Agreement and to defend against product liability and other suits pertaining to such - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7. 12 HIV Products. Selfcare shall copy ChemTrak on all correspondence with regulatory authorities in the Territory, and ChemTrak shall have an irrevocable right to reference all applications, registrations and supporting documentation submitted and received by Selfcare. (a) U.S. REGULATORY APPROVAL. ChemTrak shall keep Selfcare informed of the progress of efforts to obtain Regulatory Approval from the U.S. FDA. ChemTrak will notify Selfcare promptly of any delays in obtaining approval and consult with Selfcare on the resolution of any outstanding issues. At the sole option of Selfcare, Selfcare may terminate the Agreement upon sixty (60) days notice if ChemTrak fails to obtain Regulatory Approval in the United States within [*] of the Effective Date. 3.2 TESTING FACILITIES; COUNSELING SERVICE. Prior to obtaining the first Regulatory Approval in the Territory, Selfcare shall establish or contract for a single central laboratory (or more as Selfcare determines is reasonable or necessary) to conduct HIV testing in accordance with the protocols and procedures described in ChemTrak's submissions to the U.S. FDA or amended, as required by a country's regulatory authorities, (a "TESTING FACILITY"). ChemTrak shall provide Selfcare with a copy of the Software for use at each such facility for the processing of HIV Tests during the term of this Agreement. At such time Selfcare shall also establish a counseling service to report results to customers and provide appropriate counseling regarding the results, again as provided in ChemTrak's submissions to FDA or amended, as required by a country's regulatory authorities, (the "COUNSELING SERVICE"). Selfcare shall bear all costs associated with establishing the Testing Facilities and the Counseling Service, including any additional requirements of the countries in the Territory. ChemTrak shall have the right to inspect the Testing Facilities and Counseling Service during normal business hours (after giving reasonable notice) in order to ensure that each is operating in the manner described in ChemTrak's FDA documentation or amended, as required by a country's regulatory authorities, and in accordance with all applicable regulatory standards. 3.3 CLINICAL TRIALS SUPPLY. Subject to the terms of this Agreement, ChemTrak shall use diligent efforts to supply or cause to be supplied to Selfcare, and Selfcare shall purchase from ChemTrak, Selfcare's requirements of Sample Collection Kits for use in Territory Development activities, including clinical studies. ChemTrak will provide such product units to Selfcare for a purchase price equal to [*]; provided that such product units are made available to study subjects for [*]. If the compensation paid exceeds such amount, the Parties shall mutually determine an appropriate purchase price for such product units. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8. 13 3.4 PLAN; REPORTS. (a) Within 90 days following the Effective Date, Selfcare shall prepare a detailed plan describing activities to be undertaken to pursue Regulatory Approvals for the HIV Product in the Territory and to establish the Testing Facilities and Counseling Service. ChemTrak shall have the right to review and comment on such plan before Selfcare makes any contact with any regulatory agency pertaining to the HIV Product in the Territory. Once agreed between the parties, Selfcare shall conduct its regulatory activities regarding the HIV Product as provided in the plan. However, Selfcare reserves the right to modify the plan, as required by regulatory circumstances, following consultation with ChemTrak. (b) Selfcare shall report to ChemTrak at least once each calendar quarter, but not later than thirty (30) days following the end of such calendar quarter, on the progress of such activities. Selfcare will notify ChemTrak as soon as practicable in the event of any substantial changes in the development activities described in the plan and in the event any Regulatory Approval is received for any country in the Territory. 3.5 PUBLICATIONS. Selfcare and ChemTrak shall cooperate in the preparation and publication of papers in support of development and marketing activities in the Territory. Neither Party shall present, publish or otherwise disclose any information regarding the HIV Product in the Territory except with the prior written consent of the other. Each party shall make available to the other at no cost a copy of any publications or other marketing support materials which such Party produces for its purposes. ARTICLE 4 SUPPLY OF SAMPLE COLLECTION KITS 4.1 PURCHASES OF SAMPLE COLLECTION KITS. Subject to the terms of this Agreement, ChemTrak shall use diligent efforts to supply Selfcare, and Selfcare shall purchase from ChemTrak, Selfcare's requirements of Sample Collection Kits in such quantities as Selfcare shall order pursuant to this Article 4. All Sample Collection Kits supplied by ChemTrak shall conform to specifications to be agreed upon by the parties in accordance with applicable Regulatory Approvals. ChemTrak will provide the blood collection card and its proprietary finger stick device for inclusion in each Sample Collection Kit; Selfcare shall be responsible for including instruction leaflets and for final packaging and labeling, including any text not in English. 4.2 ORDERS. Within thirty (30) days after the receipt of the first Regulatory Approval for HIV Product in a country in the Territory, Selfcare shall submit to ChemTrak an initial purchase order for a mutually agreed upon number of Sample Collection Kits based on the predicted number necessary to launch the product. 9. 14 ChemTrak shall use diligent efforts to deliver such Sample Collection Kits as soon as practicable thereafter, but in no event longer than 60 days after the date of such purchase order. Beginning on the first day of each calendar quarter thereafter, Selfcare shall provide ChemTrak with a firm purchase order specifying the number of Sample Collection Kits desired, on a monthly basis, for the following quarter and a proposed shipment date for such units of no less than 60 days from the date of such purchase order (each, a "Purchase Order"). ChemTrak will accept any such Purchase Order from Selfcare within five (5) days after receipt of such Purchase Order at its principal place of business. 4.3 PURCHASE PRICE; PAYMENT. Selfcare shall pay to ChemTrak a price (the "PURCHASE PRICE") for purchase of Sample Collection Kits equal to [*]. ChemTrak shall invoice Selfcare for such amount as of the date of shipment. All payments for Sample Collection Kits shall be due within forty-five (45) days after the date of Selfcare's receipt of a confirmed faxed copy of ChemTrak's invoice and confirmed shipment for such Sample Collection Kits. 4.4 DELIVERY. (a) ChemTrak shall use diligent efforts, consistent with its other shipment obligations and manufacturing capacity, to ship all Sample Collection Kits ordered by Selfcare on or before the requested shipment date, to the extent such date is at least fifteen (15) days after the date ChemTrak accepts the Purchase Order for such shipment. The shipping and packaging method used will be at the discretion of ChemTrak, subject to written approval of Selfcare. Deliveries shall be made F.O.B. ChemTrak's facility (ICC Incoterms 1990) and shall be shipped to Selfcare's address as set forth in this Agreement, or as otherwise directed by Selfcare in writing. All Sample Collection Kits will be shipped by ChemTrak freight collect, or if prepaid, such freight will be subsequently billed to Selfcare. If requested by Selfcare, ChemTrak will insure the shipments against damage to or loss of Sample Collection Kits and will subsequently bill Selfcare for such shipping insurance. Selfcare will reimburse ChemTrak for shipping and insurance expenses, if any, within forty-five (45) days after the date of such invoices. ChemTrak reserves the right to deliver in advance of estimated delivery dates. Selfcare shall make any claims for damage or loss in transit through the carrier and any insurance proceeds payable in respect of any loss incurred shall be paid to Selfcare. (b) If at any time ChemTrak is unable to supply total worldwide demand for Sample Collection Kits, ChemTrak shall allocate available Sample Collection Kits (or components thereof) to the Territory pro rata with other markets outside the Territory based upon relative market share, as measured by the most recent quarterly or annual sales figures for which data is reasonably available. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 10. 15 (c) In the event that ChemTrak, whether by reason of Force Majeure or otherwise, either (1) fails in any quarter to deliver to Selfcare at least fifty percent (50%) of the amount of Sample Collection Kits ordered by Selfcare or (2) fails in each of two consecutive quarters to deliver to Selfcare at least eighty percent (80%) of the amounts ordered by Selfcare for each of such quarters, notwithstanding the obligation of Selfcare to purchase from ChemTrak all Sample Collection Kits, Selfcare shall be entitled for the duration of the term of this Agreement to seek alternate sources of supply for the Sample Collection Kits (or components thereof) to be used, sold or otherwise distributed in the Territory pursuant to the license granted herein, and such license shall be deemed to include such right. In particular, if Selfcare seeks alternate sources for ChemTrak's proprietary finger stick device, Selfcare will have a non-exclusive, worldwide license to make such devices or have them made by a third party. In the event that Selfcare exercises its right to use alternate sources of supply, the cost of securing Sample Collection Kits (or components thereof) from alternate sources of supply shall be deemed to be a Commercialization Cost. 4.5 ACCEPTANCE. Selfcare shall inspect all Sample Collection Kit shipments received from ChemTrak for visible damage promptly upon receipt thereof at the shipping destination and may reject any Sample Collection Kit Units which are damaged or fail to comply with the specification agreed by the parties. Sample Collection Kits not rejected by written notification to ChemTrak within sixty (60) days after receipt by Selfcare shall be deemed to have been accepted. Rejected goods shall be returned freight prepaid to ChemTrak within fifteen (15) days after rejection. As promptly as possible after receipt by ChemTrak of properly rejected goods, ChemTrak shall, at ChemTrak's option, (i) replace the rejected goods at ChemTrak's expense, or (ii) grant Selfcare a credit for such rejected goods equal to the price paid therefor. Such replacement or credit shall be ChemTrak's sole responsibility and obligation to Selfcare for nonconforming Sample Collection Kits. The party shipping the goods pursuant to this section shall bear the entire risk of loss for goods during shipment. Any insurance proceeds payable in respect of any loss incurred shall be paid to the party bearing the risk of loss for such goods to the extent of the loss incurred. For properly rejected goods, ChemTrak will prepay transportation charges back to Selfcare and shall reimburse Selfcare for any reasonable costs of transportation for returning such goods; for all other goods, Selfcare shall pay transportation charges in both directions. ARTICLE 5 MARKETING, SALE AND DISTRIBUTION OF HIV PRODUCTS 5.1 MARKETING EFFORTS. Selfcare agrees to use diligent efforts to promote the sale, marketing and distribution of the HIV Products in the Territory, including undertaking a commercially reasonable advertising campaign in connection with the launch and sale of HIV Products. Selfcare shall provide ChemTrak with a copy of its 11. 16 marketing plan as provided in Section 6.3 for ChemTrak's review and comment. Selfcare agrees to consider in good faith ChemTrak's comments regarding advertising, marketing promotion and sales efforts. 5.2 SALES AND ADVERTISING ACTIVITIES. Selfcare shall provide ChemTrak with written copies of all advertising claims which Selfcare intends to make in connection with HIV Products prior to making any such claim to any third party. The parties shall mutually agree upon all claims, and either party shall have the right to prohibit the making of any particular claim for regulatory, ethical or marketing reasons. Selfcare agrees that no claims prohibited by applicable law or regulation will be made in connection with HIV Products. 5.3 PRICING. Selfcare shall notify ChemTrak of the price(s) it intends to charge third parties for HIV Product at least ninety (90) days prior to commencing commercial sales in any country. To the extent required under applicable European Union regulations, Selfcare shall charge the same price for HIV Product in countries in the Territory that are members of the European Union. The parties shall discuss optimal pricing strategies and Selfcare shall consider any comments ChemTrak may have in good faith, provided that Selfcare shall remain ultimately responsible for determining the price. 5.4 PACKAGING. Selfcare will be responsible for packaging Sample Collection Kits for resale under this Agreement, including, without limitation, designing and producing all packaging materials and product inserts, all in forms to be approved in writing by ChemTrak prior to first use by Selfcare, such approval not to be unreasonably withheld. Copyright and other proprietary rights related to amended packaging, labeling, and inserts shall remain the exclusive property of Selfcare and may not be used by ChemTrak without the express written consent of Selfcare; provided, however, that ChemTrak shall own the brand name under which the product is sold, as provided in Section 2.1(c). Notwithstanding the foregoing, ChemTrak shall provide Selfcare with copies of all packaging materials and product inserts which ChemTrak uses in connection with the HIV Product outside the Territory. 5.5 GENERAL CONDUCT. Selfcare covenants that it shall not solicit sale of HIV Products, or advertise or keep a stock of HIV Products, outside of the Territory. Selfcare shall not, directly or indirectly, without the prior written authorization of ChemTrak, (i) contact any of ChemTrak's suppliers or vendors of HIV Product components, or (ii) initiate any contact with any federal, state or local regulatory agency or entity outside the Territory about the HIV Product. Selfcare shall conduct its efforts under this Agreement in compliance with all regulatory requirements applicable to the offer, distribution and sale of HIV Product. Selfcare shall comply with all health registration laws, regulations and orders of any government entity within the Territory and with all other governmental requirements relating to the promotion, marketing and sale of the HIV Product in the 12. 17 Territory. The parties agree to cooperate in all respects, including providing all information and documents in each party's possession, to assure compliance with adverse event reporting requirements and similar regulations applicable to the HIV Product, on a worldwide basis, including but not limited post-approval requirements imposed by the U.S. FDA by PMA approval order or regulation pursuant to 21 CFR Part 814, Subpart E, and medical device reporting obligations under 21 CFR Part 803. Each party shall notify the other within 20 days of becoming aware of any reportable adverse events or device malfunctions associated with the HIV Products, or sooner to the extent applicable regulatory requirements require reporting to government officials in a time less than 20 days. In addition, each party will assist the other in investigating any such reportable events, as reasonably requested, in order to comply with the applicable regulatory requirements. ARTICLE 6 REPORTS; FORECASTS; MARKETING PLANS 6.1 REPORTS. Each party shall keep the other fully informed of all governmental activities and plans which potentially or actually affect the sale of the HIV Products in the Territory. Selfcare shall provide to ChemTrak from time to time, but no less than annually, written reports of any known third party activities relating to the manufacture, sale or distribution of products that are competitive with HIV Products in the Territory, including all available information relating to pricing, new products and product promotions. At a minimum, such reports shall be submitted to ChemTrak by confirmed facsimile within thirty (30) days after the end of each calendar year. 6.2 FORECASTS. Beginning thirty (30) days after receipt of the first Regulatory Approval for HIV Products in the Territory, and on the first day of each calendar quarter thereafter, Selfcare shall furnish to ChemTrak a nonbinding rolling twelve (12)-month forecast of its anticipated purchases of Sample Collection Kits and sales of HIV Products for each country in the Territory. 6.3 MARKETING PLANS AND REPORTS. Prior to First Commercial Sale and at the beginning of each calendar year thereafter, Selfcare shall submit to ChemTrak in writing whatever annual marketing plan detailing Selfcare's proposed marketing and pricing strategy and tactics for the HIV Product during the following year has been developed by Selfcare for its internal use. In addition, Selfcare shall submit to ChemTrak (a) quarterly sales reports detailing Selfcare's sales of the HIV Product in the preceding quarter, which reports shall be submitted to ChemTrak within thirty (30) days after the end of each quarter; and (b) copies of any market research reports relating to HIV Product sales and HIV Product competition which Selfcare commissions or otherwise obtains, which reports shall be submitted to ChemTrak promptly after receipt thereof by Selfcare. 13. 18 6.4 CONFIDENTIAL INFORMATION. All reports, forecasts and plans generated by or for Selfcare with respect to the HIV Product and provided to ChemTrak under this Article 6 (collectively, the "Marketing Data") shall constitute Confidential Information of Selfcare, as defined under Article 8 hereof. Such Marketing Data shall be kept confidential in accordance with Article 8 but may be used by ChemTrak, only with express written consent from Selfcare, not to be unreasonably withheld, in connection with the commercialization of HIV Products. ARTICLE 7 PAYMENTS 7.1 EXPENSES. All expenses incurred by Selfcare in connection with its obligations under this Agreement will be borne solely by Selfcare, subject to recovery of certain expenses out of Net Sales of HIV Product as provided in Section 7.4. Selfcare will be responsible for appointing its own employees, agents and representatives, who will be compensated by Selfcare. ChemTrak shall only be obliged to incur expenses under Section 3.1 (Regulatory Assistance), Section 3.3, Article 4 (Supply of Sample Collection Kits) and Article 9 (Intellectual Property), subject to reimbursement of certain expenses by Selfcare as provided in such sections. 7.2 LICENSE FEE. Selfcare shall pay to ChemTrak a license fee of [*] upon execution of this Agreement. This license fee shall be non-refundable and shall not be creditable against any future payments due to ChemTrak. 7.3 SALES MILESTONE PAYMENTS. In addition to the Royalty payments provided for in Section 7.4, Selfcare shall, upon the achievement of the events set forth below, make the following payments to ChemTrak: (a) [*] upon obtaining Regulatory Approval in the first of the U.K., Germany or France; and (b) [*] upon achieving the first [*] in Net Sales from the sale of HIV Products in the Territory. Payments made pursuant to this Section 7.3 shall be non-refundable and shall not be creditable against any future payments. 7.4 ROYALTIES. Within thirty (30) days after the end of each calendar quarter, Selfcare shall deliver a report to ChemTrak detailing Selfcare's Net Sales made in such quarter and all other compensation invoiced, earned or received in respect of the offer, sale or distribution of HIV Products in such quarter, and [*] with line items for each of the deductions described in the definition of - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 14. 19 "Net Sales" and for each of the categories of [*]. For purposes of calculating quarterly Royalty payments, all receipts and deductions included in Net Sales shall be recognized as of the date of invoice and [*]. Together with Selfcare's report due 30 days after the end of each quarter, Selfcare shall pay the Royalty for such quarter to ChemTrak. If [*] shall be carried forward to the next quarter and set off against future Royalty payments. 7.5 MANNER AND PLACE OF PAYMENT. Any payments to ChemTrak shall be made in U.S. Dollars by wire transfer at such bank in the United States as ChemTrak shall specify from time to time. Payments shall be made for the amount of U.S. Dollars reported by ChemTrak (in the case of expense reimbursement) or agreed by the Parties (in the case of a Purchase Price). Exchange conversion of foreign currencies will be the responsibility of Selfcare; provided that for purposes of calculating U.S. Dollar payments to be made by Selfcare to ChemTrak hereunder all revenues received and costs paid in foreign currencies shall be deemed converted to U.S. Dollars at the exchange rate for each currency that is the average of the daily spot rate reported by the U.S. edition of the Wall Street Journal for each trading day during the reporting period. 7.6 RECORDS AND AUDIT OF SALES AND EXPENSES. Each Party will maintain complete and accurate records regarding sales, costs, expenses and payments applicable to HIV Products, in sufficient detail to enable the other Party to confirm the accuracy of payments due under this Agreement. In particular, Selfcare shall keep separate records of each of the categories of costs specifically referenced in the definition of Commercialization Costs. Such records shall be open, during reasonable business hours for a period of three (3) years from creation of the record, for examination at the other Party's expense and not more often than once each year by a certified public accountant from a major recognized accounting firm selected by the other Party for the sole purpose of verifying the correctness of calculations made under this Agreement. The accounting expense shall be paid by the Party requesting the audit. If material discrepancies (in excess of 5%) are identified in such audit, the audited Party shall bear the accounting expense. Any records or accounting information received from the other Party shall be Confidential Information. The terms of this section shall survive any termination or expiration of this Agreement for a period of three (3) years. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 15. 20 ARTICLE 8 CONFIDENTIALITY 8.1 NONDISCLOSURE OBLIGATIONS. During the term of this Agreement, and for a period of three (3) years after termination hereof, each Party will maintain all Confidential Information in trust and confidence and will not disclose any Confidential Information to any third party or use any Confidential Information for any unauthorized purpose. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Confidential Information shall not be used for any purpose or in any manner that would constitute a violation of any laws or regulations, including without limitation the export control laws of the United States. Confidential Information shall not be reproduced in any form except as required to accomplish the intent of this Agreement. No Confidential Information shall be disclosed to any employee, agent, consultant, sublicensee or supplier who does not have a need for such information. To the extent that disclosure is authorized by this Agreement, the disclosing Party will obtain prior agreement from its employees, agents, consultants, sublicensees or suppliers to whom disclosure is to be made to hold in confidence and not make use of such information for any purpose other than those permitted by this Agreement. Each Party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. 8.2 EXCEPTIONS. Confidential Information shall not include any information which: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its written records; (c) is hereafter furnished to the receiving Party by a third party, as a matter of right and without restriction on disclosure; or (d) is the subject of a written permission to disclose provided by the disclosing Party. 8.3 AUTHORIZED DISCLOSURE. Notwithstanding any other provision of this Agreement, each Party may disclose Confidential Information if such disclosure: (a) is in response to a valid order of a court or other governmental body of the United States or any political subdivision thereof; provided, however, that the responding Party shall first have given notice to the other Party hereto and shall have 16. 21 made a reasonable effort to obtain a protective order requiring that the Confidential Information so disclosed be used only for the purposes for which the order was issued; (b) is otherwise required by law, provided that the Disclosing Party take all available steps to designate the information as confidential and to prevent further disclosure by the recipient; or (c) is otherwise necessary to file or prosecute patent applications, prosecute or defend litigation or comply with applicable governmental regulations or otherwise establish rights or enforce obligations under this Agreement, but only to the extent that any such disclosure is necessary, provided that the Disclosing Party take all available steps to designate the information as confidential and to prevent further disclosure by the recipient. 8.4 TERMS OF THIS AGREEMENT. The Parties agree that the material financial terms of this Agreement will be considered Confidential Information of both Parties. However, each Party shall have the right to disclose the material financial terms of this Agreement to any potential acquirer, merger partner, or other bona fide potential financial or strategic partner, subject to a requirement of best efforts to secure confidential treatment of such information. ARTICLE 9 INTELLECTUAL PROPERTY 9.1 OWNERSHIP OF INTELLECTUAL PROPERTY. ChemTrak shall retain all of its rights, title and interest in and to all ChemTrak Technology, including but not limited to the Software, and all modifications and improvements to the foregoing. ChemTrak shall also own all right, title and interest in all copyrights, trademarks, including but not limited to the Aware(TM) trademark, and trade names and all other industrial and intellectual property embodied in or related to the HIV Product, except as otherwise expressly provided in this Agreement. ChemTrak shall file for and pursue trademark protection for the Aware(TM) mark in countries in the Territory where HIV Products are sold, at Selfcare's expense, subject to recovery as a Commercialization Cost. ChemTrak shall also file for and pursue patent protection for the finger stick device in countries in the Territory where the Parties agree patent protection would be advantageous. Selfcare shall bear the initial costs of obtaining and maintaining such patent prosecution, and such costs shall be Commercialization Costs. 9.2 DEFENSE OF INTELLECTUAL PROPERTY SUITS. If a third party asserts that a patent, trademark or other proprietary right owned by it is infringed or otherwise violated by the offer, distribution or sale of the HIV Product in the Territory, the Party against whom such a claim was asserted shall immediately provide the other Party notice of such 17. 22 claim and the related facts in reasonable detail. ChemTrak shall have the first right, but not the obligation, to act to resolve the issue through negotiation and to control the defense of any legal proceeding. If ChemTrak assumes the defense, Selfcare shall cooperate with ChemTrak and shall have the right to be represented separately by counsel of its own choice. If ChemTrak fails to notify Selfcare, within thirty (30) days after receiving notice that a complaint has been filed with a court of competent jurisdiction (but in any event reasonably in advance of any deadline for responding to the complaint), that ChemTrak will assume control of the defense, then Selfcare shall have the right, but not the obligation, to so control the defense by counsel of its own choice. If Selfcare assumes the defense, ChemTrak shall cooperate with Selfcare and shall have the right to be represented separately by counsel of its own choice. 9.3 EXPENSES AND REMEDIES. ChemTrak shall bear [*] expenses incurred by ChemTrak or Selfcare in the defense of suits described in Section 9.2, including but not limited to attorneys' fees and expenses. If Selfcare assumes the defense pursuant to Section 9.2, Selfcare shall not enter into any settlement that may adversely affect the HIV Product outside the Territory, or require ChemTrak to make any payment to a third party or Selfcare, without the prior written consent of ChemTrak. If ChemTrak assumes the defense, ChemTrak may settle any such suit at any time in any manner that does not materially adversely affect Selfcare. ChemTrak shall notify Selfcare in writing in the event it proposes to resolve the matter in any other manner, and the Parties shall discuss available options in good faith and each shall use all commercially reasonable efforts to reach a mutually agreed upon resolution within forty five (45) days after the date of ChemTrak's notice. Such actions may include (i) procuring the right from such third party to sell or use the HIV Product, with any running royalty obligations to be subject to approval by both Parties (not to be unreasonably withheld) and, if approved, to be included in Commercialization Costs, (ii) replacing the HIV Product with a functionally equivalent product that does not violate the third party's rights, or (iii) modifying the HIV Product to make it functionally equivalent and not violate such rights. If the Parties are unable to reach agreement on how to resolve such matter after the above discussion period, and either Party reasonably determines that continued sale of the HIV Product in the Territory would infringe or violate the third party's rights, then such Party may cease performance under this Agreement immediately upon written notice to the other Party and this Agreement shall terminate thirty (30) days after the date of such notice. 9.4 DISCLAIMER. THE FOREGOING PROVISIONS OF THIS ARTICLE 9 STATE THE ENTIRE LIABILITY AND EXCLUSIVE REMEDY OF THE PARTIES AND THEIR CUSTOMERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE HIV PRODUCTS OR ANY PART THEREOF. - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 18. 23 9.5 PROSECUTION OF INTELLECTUAL PROPERTY SUITS. If either party believes that a third Party is infringing any patent, copyright, trademark or other intellectual property right belonging to the parties and applicable to the HIV Product in the Territory, it shall promptly notify the other Party. The Parties shall meet and discuss whether to take action to abate the infringement and, if so, what actions to take, which Party will take such actions and how related expenses will be borne between the Parties. If either Party elects to initiate such a suit, the other Party shall cooperate in the action and have the right but not the obligation to bear up to one-half the expenses of the suit, provided that such Party undertakes in writing within ninety (90) days after the suit is initiated to bear a stated percentage of such costs. Any recovery or settlement obtained in such an action shall be used first to reimburse each Party pro rata for litigation expenses. Any remaining recovery will be allocated between the parties in proportion to the share of litigation expenses they bore. ARTICLE 10 TERM AND TERMINATION; CHANGE OF CONTROL 10.1 TERM. This Agreement shall become effective on the Effective Date and shall remain in effect for a period of five (5) years from the date of Selfcare's first commercial sale of HIV Product in any country listed on Exhibit C (the "Fifth Anniversary"), unless it is renewed by agreement of the parties or automatically as provided below. The Agreement will automatically renew for a period of two (2) years if, as of the date sixty (60) days prior to the Fifth Anniversary, Selfcare's market share for the HIV Product throughout the five (5) countries listed on Exhibit C, in the aggregate, is at least equal to [*], determined by dividing Selfcare's net sales (as reported for financial purposes) of HIV Products in such countries over the previous twelve (12) month period by the total net sales (as reported for financial purposes) of all sellers of mail-in HIV blood tests in such countries. The same test will be applied as of the date sixty (60) days before the two-year renewal term expires. If the test is met, the Agreement will renew for subsequent two-year terms in the same manner. 10.2 CHANGE OF CONTROL. (a) If Selfcare undergoes an Acquisition Transaction (as defined below), ChemTrak shall have the right to terminate this Agreement upon six (6) months prior written notice to Selfcare. (b) If ChemTrak undergoes an Acquisition Transaction, ChemTrak (or the surviving entity in the Acquisition Transaction) shall have the right to assume from Selfcare all rights licensed to Selfcare under this Agreement, as follows. If ChemTrak elects to assume such role, it shall so notify Selfcare in writing within six (6) months of the closing of ChemTrak's Acquisition Transaction. Promptly following delivery of such - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 19. 24 notice, the parties shall meet to mutually select a recognized investment banking firm with substantial relevant industry expertise to (i) select three (3) reasonable methods of determining the value of this Agreement to Selfcare as of the date of ChemTrak's election notice to Selfcare and (ii) to calculate such valuation using each of the three (3) methods and provide a report to each Party. For the purposes of this valuation, Selfcare is deemed to have met the requirements for maintaining an exclusive license in each country in the Territory, without regard to whether Selfcare has actually sought Regulatory Approval or marketed a product in each country in the Territory. ChemTrak shall have the option to terminate this Agreement and obtain all licenses, rights, information, materials, contract rights and assistance from Selfcare as may be necessary or useful to enable ChemTrak to take over Selfcare's position of exclusive distributor and seller of HIV Products in the Territory (to "Assume the Business"), at the average of the three (3) valuations calculated by the investment banker. If ChemTrak is interested in exercising such option, it shall so notify Selfcare within thirty (30) days of receiving the three valuation figures from the investment banker. Promptly following delivery of such a notice, the parties shall negotiate in good faith the details of a transaction for ChemTrak to assume the business at such a valuation. If the parties are unable or unwilling to close such a transaction within ninety (90) days of ChemTrak's notice, then ChemTrak may submit the matter to binding mediation to resolve the terms of such transaction. (c) An "ACQUISITION TRANSACTION" shall mean a merger or consolidation of a Party with or into any other entity, including a reverse triangular merger involving such Party, a sale of all or substantially all of the assets or business of such Party, or a similar transaction, or a sale of the business unit to which this Agreement relates, whereby the controlling shareholders of a Party before the transaction own less than 50% of the shares of the Party after the transaction. 10.3 TERMINATION FOR MATERIAL BREACH. If either Party is in material breach of this Agreement, the non-breaching Party may give written notice to the breaching Party of its intention to terminate this Agreement, and this Agreement shall terminate sixty (60) days after the giving of such notice unless during the 60-day period the breach has been cured. If the allegedly breaching Party files a court action or initiates an arbitration proceeding denying the breach, then both Parties shall continue to perform this Agreement pending resolution of such action. 10.4 CONSEQUENCES OF TERMINATION. Upon the effective date of expiration or early termination of this Agreement, the following shall occur: (a) TERMINATION OF LICENSES. The licenses set forth in Section 2.1 shall terminate and Selfcare shall immediately discontinue all marketing, sales and distribution of the HIV Product in the Territory. Selfcare shall discontinue all use in the Territory of ChemTrak's trade name and trademarks, and the ChemTrak Technology, including the 20. 25 Software. Selfcare shall return all copies of the Software in any form to ChemTrak. Notwithstanding the foregoing, Selfcare shall have the right, for a period not to exceed ninety (90) days, to sell any HIV Products remaining in inventory to the extent the same are not repurchased by ChemTrak pursuant to Section 10.3(c) below. Selfcare shall also have the obligation to complete testing, report results and provide counseling services for any customers to whom Selfcare has sold Sample Collection Kits. Except to the extent of selling its remaining inventory as permitted by Section 10.3(c) below, after termination Selfcare shall not represent or hold itself out as being an authorized distributor or sales representative for the HIV Product in the Territory or engage in any practices which might make it appear that Selfcare is such an authorized distributor or sales representative. (b) ACCRUED RIGHTS AND OBLIGATIONS. The rights of either party which may have accrued up to the date of such termination shall not be affected, and Selfcare shall not be relieved of (i) any obligation for any sums due to ChemTrak for HIV Products covered by Purchase Orders accepted prior to expiration or termination and due to be delivered within the ninety (90) day period following the effective date of such expiration or termination (including any amount due but not yet paid, with all such amounts being nonrefundable and not subject to any setoff or similar right) or (ii) any confidentiality obligation under Article 8 hereof. The due date of all outstanding invoices to Selfcare for HIV Products shall automatically be accelerated to become due and payable by immediate wire transfer on the effective date of termination, even if longer terms have been previously agreed to. ChemTrak may, at its sole option, (i) cancel all orders or portions thereof remaining unshipped as of the effective date of termination and (ii) repurchase Selfcare's remaining inventory of HIV Products in accordance with Section 10.4(c) below. (c) REPURCHASE OF INVENTORY. ChemTrak shall have the right, but not the obligation, to repurchase from Selfcare all of the HIV Product (to the extent that the same are in new and original condition) then in Selfcare's inventory, F.O.B. Selfcare's facilities, whereupon ChemTrak shall repay to Selfcare the actual price paid by Selfcare to ChemTrak for such returned HIV Products less any and all amounts owing and uncontested, for whatever reason, from Selfcare to ChemTrak. (d) CONFIDENTIAL INFORMATION. Each party shall return to the other or destroy, at the other party's instruction, all Confidential Information of the other party, with the exception of records required to be maintained to be in compliance with U.S. FDA regulations and other regulations applicable to the Territory, including advertising matter; provided, however, that in the event of early termination for any reason other than material breach by ChemTrak, ChemTrak shall have the right to retain copies of, and use for its own internal marketing purposes, any Marketing Data (as defined under Section 6.3), provided Selfcare has given prior written consent. 21. 26 (e) INSPECTION RIGHT. Each party shall make available for copying and inspection by a third party auditor all books and records of such party required to be kept pursuant to Section 7.6 for a period of one (1) year following the effective date of termination. 10.5 NO OTHER RIGHTS UPON TERMINATION. Neither party hereto shall be responsible to the other for compensation, damages, or otherwise by reason of termination of this Agreement, except for termination due to material breach pursuant to Section 10.3, at any time, except as provided herein. Selfcare understands and acknowledges that any contracts or other arrangements it enters into with any third parties with respect to the HIV Products will be subject and subordinate to the rights of termination set forth in this Agreement. 10.6 SURVIVING OBLIGATIONS. Termination or expiration of this Agreement shall not relieve either party of its obligations under Sections 2.2, 7.6, 10.4, 10.5, 10.6 and Articles 8, 11 and 13 hereof. ARTICLE 11 WARRANTIES; INDEMNIFICATION 11.1 SAMPLE COLLECTION KIT WARRANTY. ChemTrak warrants that the Sample Collection Kits supplied by ChemTrak under this Agreement will be of merchantable quality and will strictly conform to the Sample Collection Kit specifications mutually agreed to by the parties. In no event shall ChemTrak be liable under this Agreement for any failure of any Sample Collection Kit to meet the specifications due to improper use, storage or shipment by Selfcare or anyone receiving the Sample Collection Kit directly or indirectly from Selfcare. (a) INTELLECTUAL PROPERTY WARRANTY. ChemTrak warrants that it has the authority and right to grant the rights licensed to Selfcare, with respect to any of the intellectual property defined in Section 9.1. 11.2 SELFCARE WARRANTIES. Selfcare warrants that all testing of blood samples conducted under this Agreement will be carried out strictly in accordance with the procedures described in the PMA submitted by ChemTrak to the U.S. FDA for the HIV Product (or amended, as required by a country's regulatory authorities) and in accordance with all applicable requirements of regulatory authorities in the Territory. Selfcare further warrants that all reporting of results to customers and counseling services provided under this Agreement will be carried out in a professional manner in accordance with applicable regulatory requirements and professional standards prevalent in the Territory, including all requirements and standards concerning confidentiality of results. 22. 27 11.3 WARRANTY DISCLAIMERS AND LIMITATIONS. EXCEPT AS SET FORTH IN SECTION 11.1 ABOVE, CHEMTRAK MAKES NO WARRANTIES WITH RESPECT TO THE HIV PRODUCT, EXPRESS OR IMPLIED, AND SPECIFICALLY WITHOUT LIMITATION, CHEMTRAK DISCLAIMS ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR FREEDOM FROM INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. EXCEPT AS SET FORTH ABOVE, CHEMTRAK NEITHER ASSUMES NOR AUTHORIZES ANY PERSON TO ASSUME ANY LIABILITY OR WARRANTY IN CONNECTION WITH THE HIV PRODUCTS. IN THE EVENT OF A BREACH BY CHEMTRAK OF THE WARRANTY SET FORTH IN THE FIRST PARAGRAPH OF SECTION 11.1 ABOVE, SELFCARE'S SOLE REMEDY WILL BE TO RETURN THE AFFECTED HIV PRODUCTS FOR REPAIR, REPLACEMENT OR CREDIT OF THE PURCHASE PRICE, AT CHEMTRAK'S OPTION. 11.4 INDEMNIFICATION. (a) ChemTrak hereby agrees to defend, indemnify and hold Selfcare and its agents and employees harmless from and against any and all liabilities, expenses and/or loss, including reasonable attorneys' fees ("Losses") resulting directly or indirectly from third party suits, claims, actions or demands, to the extent such suits, claims actions or demands result from (i) the failure of Sample Collection Kits supplied by ChemTrak to meet the warranty set forth in the first paragraph of Section 11.1, (ii) breach of the intellectual property warranty set forth in Section 11.1(a), except to the extent that Sections 9.2 and 9.3 apply to any such third party action, (iii) the application of HIV Product testing procedures carried out as described in the PMA submitted by ChemTrak to the U.S. FDA for the HIV Product, or (iv) the recklessness, gross negligence, or willful misconduct of ChemTrak or its officers, employees or agents, and in each case do not result from the recklessness, negligence or wrongdoing of Selfcare or its officers, employees or agents. (b) Selfcare hereby agrees to defend, indemnify and hold ChemTrak and its agents and employees harmless from and against any and all liabilities, expenses and/or loss, including reasonable attorneys' fees ("Losses") resulting directly or indirectly from third party suits, claims, actions or demands, to the extent such suits, claims actions or demands result from (i) the sale or distribution of HIV Products by Selfcare (other than losses provided for in Section 9.3) or use by any purchasers, including any improper sales by Selfcare to customers who are located in any territory outside the Territory, (ii) the breach of any representation made or warranty given by Selfcare with respect to the HIV Product to customers (other than the labeling for the HIV Product as approved by applicable regulatory authorities in the Territory) or to ChemTrak under this Agreement, including the warranties made in Section 11.2, (iii) services rendered by Selfcare in connection with the HIV Product, including but not limited to counseling services, or (iv) 23. 28 the recklessness, gross negligence, or willful misconduct of Selfcare or its officers, employees or agents, and do not result from matters subject to indemnification by ChemTrak under Section 11.4(a) above. (c) If a Party intends to seek indemnification under this Section 11.4, it shall so notify the other Party. The Party seeking indemnification under this Article 11 (the "Indemnified Party") shall (i) give the other Party (the "Indemnifying Party") notice of the relevant claim, (ii) cooperate with the Indemnifying Party, at the Indemnifying Party's expense, in the defense of such claim, and (iii) give the Indemnifying Party the right to control the defense and settlement of any such claim, except that the Indemnifying Party shall not enter into any settlement that adversely affects the Indemnified Party's rights or interest without the Indemnified Party's prior written approval. The Indemnified Party shall have no authority to settle any claim on behalf of the Indemnifying Party. 11.5 INSURANCE. Prior to any distribution of HIV Products, Selfcare shall obtain and maintain in effect insurance policies providing general liability, product liability and contractual liability coverage. Each such insurance policy shall provide coverage sufficient to cover all claims with respect to any HIV Products sold under this Agreement and to cover Selfcare's indemnification obligation under this Agreement and shall name ChemTrak, its directors, officers, employees and agents as additional insureds. At the request of ChemTrak, Selfcare will provide ChemTrak with complete copies of such policies in order for ChemTrak to confirm that such policies provide sufficient coverage. Selfcare shall notify ChemTrak at least thirty (30) days prior to any expiration or termination of any such policy. ARTICLE 12 REPRESENTATIONS AND WARRANTIES 12.1 REPRESENTATION AND WARRANTIES OF CHEMTRAK. ChemTrak hereby represents and warrants as follows: (a) CORPORATE POWER. ChemTrak is duly organized and validly existing under the laws of the state of Delaware and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. (b) DUE AUTHORIZATION. ChemTrak is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. (c) BINDING AGREEMENT. This Agreement is a legal and valid obligation binding upon ChemTrak and is enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by ChemTrak does not conflict with any agreement, instrument or understanding, oral or written, to which it is a Party or by which 24. 29 it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it. 12.2 REPRESENTATIONS AND WARRANTIES OF SELFCARE. Selfcare hereby represents and warrants as follows: (a) CORPORATE POWER. Selfcare is duly organized and validly existing under the laws of Delaware and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. (b) DUE AUTHORIZATION. Selfcare is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. (c) BINDING AGREEMENT. This Agreement is a legal and valid obligation binding upon Selfcare and is enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by Selfcare does not conflict with any agreement, instrument or understanding, oral or written, to which it is a Party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it. ARTICLE 13 MISCELLANEOUS 13.1 ASSIGNMENT. Neither Party shall assign any of its rights or delegate any of its duties under this Agreement without the prior written consent of the other, except that either Party may assign this Agreement without such consent to any Affiliate or successor by merger or sale of substantially all of its business unit to which this Agreement relates. Section 10.2 sets forth additional provisions regarding a change of control of either party. Any attempted assignment or delegation in contravention of this Article shall be void and of no effect. 13.2 EXPORT LAW COMPLIANCE. Selfcare understands and recognizes that the HIV Products and other materials made available to it hereunder may be subject to the export administration regulations of the United States Department of Commerce and other United States government regulations related to the export of medical HIV Products. Selfcare represents that it is familiar with and agrees to comply with all such regulations, including any future modifications thereof, in connection with the distribution of the HIV Product. Selfcare agrees that it will not sell or distribute the HIV Product or clinical data relating to the HIV Product without complying with all applicable regulations. Selfcare hereby agrees to indemnify and hold ChemTrak harmless from any breach of this Section 13.2. 25. 30 13.3 FOREIGN CORRUPT PRACTICES ACT. Selfcare hereby agrees that it shall comply with the requirements of the United States Foreign Corrupt Practices Act and shall refrain from any payments to third parties which would cause ChemTrak or Selfcare to violate such Act. Selfcare hereby agrees to indemnify and hold harmless ChemTrak from any breach of this Section 13.3. 13.4 BENEFITS AND BINDING NATURE OF AGREEMENT. This Agreement shall be binding upon, and inure to the benefit of, the successors, executors, heirs, representatives, administrators and permitted assigns of the Parties hereto. 13.5 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with all exhibits attached and referenced herein, embodies the final, complete and exclusive understanding between the Parties, and replaces and supersedes all previous agreements, understandings or arrangements between the Parties with respect to its subject matter, including but not limited to the Confidentiality Agreement between the parties dated June 26, 1996 and the non-binding Letter of Intent between the parties dated as of August 28, 1996, as amended. All information exchanged by the parties prior to the Effective Date pursuant to the Confidentiality Agreement shall be deemed to be Confidential Information subject to the terms of this Agreement, including but not limited to Article 8. No modification or waiver of any terms or conditions hereof, nor any representations or warranties shall be of any force or effect unless such modification or waiver is in writing and signed by an authorized officer of each Party hereto. 13.6 NO OTHER TERMS AND CONDITIONS. The Parties intend that this Agreement set forth all of the terms and conditions applicable to the sale of the HIV Product and accordingly agree that all provisions, terms and conditions of any purchase order, sales or order acknowledgment, invoice or other business form or document (a "Form"), unless an amendment to this Agreement in accordance with Section 13.5 hereof, shall be superseded hereby and therefore shall be disregarded and have no force and effect. If a Form purports to be conditioned in any manner on agreement to and/or acceptance of any provisions, terms and conditions other than those set forth herein, then such condition is hereby waived. In no event shall either Party be bound by any provisions, terms or conditions relating to the subject matter of this Agreement not set out herein. 13.7 FORCE MAJEURE. Neither Party shall be liable to the other for its failure to perform any of its obligations under this Agreement, except for payment obligations, during any period in which such performance is delayed because of, or rendered impracticable or impossible due to, unforeseen circumstances beyond its reasonable control, including without limitation, acts of God, fire, flood, war or labor unrest. 13.8 NOTICE. All notices concerning this Agreement shall be written in the English language and shall be deemed to have been received (a) two (2) days after being 26. 31 properly sent by commercial overnight courier, or (b) one (1) day after being transmitted by confirmed facsimile, in each case addressed to the address below: If to ChemTrak: ChemTrak Incorporated 929 E. Arques Avenue Sunnyvale, California 94086-4520 Attention: President Telephone: (408) 773-8156 Facsimile: (408) 524-9464 If to Selfcare: Selfcare, Inc. 200 Prospect Street Waltham, Massachusetts 02154 Attention: President Telephone: (617) 647-3900 Facsimile: (617) 647-3939 13.9 ENGLISH LANGUAGE; GOVERNING LAW. This Agreement has been prepared in the English language and the English language shall control its interpretation. All information to be provided by the parties to each other shall be in English, and Selfcare shall be responsible for all necessary translation. This Agreement shall be governed by the laws of the State of California as applied to agreements executed and performed entirely in California by California residents. 13.10 WAIVER. Any waiver (express or implied) by either Party of any default or breach of this Agreement shall not constitute a waiver of any other or subsequent default or breach. 13.11 SEVERABILITY. Each Party hereby agrees and acknowledges that this Agreement fairly sets forth the business understanding of the Parties. In the event that any provision of this Agreement shall be unenforceable or invalid under any applicable law or be so held by applicable court decision, the Parties shall change such provision or this Agreement so as to best accomplish the overall allocation of economic and other benefits between the Parties reflected in this Agreement, within the limits of applicable law or applicable court decisions. 27. 32 13.12 RIGHTS AND REMEDIES CUMULATIVE. Except as expressly provided herein, the rights and remedies provided in this Agreement shall be cumulative and not exclusive of any other rights and remedies provided by law or otherwise. 13.13 INDEPENDENT CONTRACTORS. Each Party shall act as an independent contractor under the terms of this Agreement. Neither Party is, nor shall it be deemed to be, an employee, agent, co-venturer, franchisee or legal representative of the other for any purpose. Neither Party shall be entitled to enter into any contracts in the name of, or on behalf of the other, nor shall either Party be entitled to pledge the credit of the other in any way or hold itself out as having authority to do so. 13.14 COUNTERPARTS. This Agreement may be executed in counterparts with the same force and effect as if each of the signatories had executed the same instrument. IN WITNESS WHEREOF, the Parties have each caused this Agreement to be signed and delivered by their duly authorized representatives as of the date first written above. CHEMTRAK INCORPORATED SELFCARE, INC. By: /s/ Edward F. Covell By: /s/ Anthony H. Hall ----------------------------- ------------------------------ Name: Edward F. Covell Name: Anthony H. Hall ----------------------------- ------------------------------ Title: President Title: Chief Financial Officer ----------------------------- ------------------------------ 28. 33 EXHIBIT A STANDARD COST OF GOODS Standard Cost of Goods: a. Direct and Indirect Materials b. Direct and Indirect Labor c. Payments made to Third Parties d. Overhead (Indirect Production Costs) - expenses incurred in support of the manufacturing operation as well as those caused by the process of converting raw materials into HIV Product units. Items to be included in overhead shall be consistent with Generally Accepted Accounting Principles consistently applied, and shall include but not be limited to: Operations administration, purchasing, engineering, maintenance, utilities, building and grounds, quality assurance (including samples), receiving and stores department expenses, shipping department expenses, freight, depreciation (building and equipment). Also included are some labor related overhead expenses such as: Retirement Plan Costs, Payroll Taxes, Vacation Pay, Sick Leave, Holiday Pay, Separation Pay, Shift Premium (incentive for other than the day shift work), Overtime Premium (i.e. - incremental portion over straight time pay). 34 EXHIBIT B CHEMTRAK TECHNOLOGY [*] the "Software," as defined in the Agreement PMA # BP950003, together with three supplements filed to date with FDA Physical Elements of the complete Sample Collection Kit: Finger Stick Device Blood Collection Card, with bar code Directions for Use Information About AIDS insert Tyvek Bag for Collection Card Return package - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 35 EXHIBIT C REGULATORY FORECASTS France: [*] Germany: [*] Italy: [*] Spain: [*] United Kingdom: [*] - ------- [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements of ChemTrak, Inc. (Forms S-8, File Numbers 33-55326, 33-45912, 33-55324, 33-82784) of our report dated January 17, 1997, with respect to the financial statements of ChemTrak, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. Palo Alto, California March 28, 1997 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements in the Annual Report on Form 10-K of ChemTrak Incorporated from the year ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 4,125,000 567,000 485,000 0 540,000 320,000 2,738,000 0 8,841,000 1,381,000 0 0 0 12,000 5,018 8,841,000 2,463,000 598,000 3,201,000 3,201,000 6,870,000 0 875,000 (7,826,000) 0 (7,826,000) 0 0 0 (7,826,000) (0.77) (0.77)
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