<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
____________ Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarterly period ended _________________________________________ or
X Transition report pursuant to Section 13 or 15(d)
- - - - - - ------------
of the Securities Exchange Act of 1934
For the transition period from September 1, 1994 to December
--------------------- --------
31, 1994
- - - - - - ---------------
Commission File Number 1-9899
--------------------------
MedChem Products, Inc.
- - - - - - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2471310
- - - - - - --------------------------------------------------------------------------------
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
232 West Cummings Park, Woburn, MA. 01801
- - - - - - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 932-5900
----------------
Former fiscal year ended August 31, 1994
- - - - - - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 _____
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On February 1, 1995, 10,237,589 shares of common stock, par value $0.01 per
share, were outstanding.
<PAGE>
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Balance Sheets as of, December 31, 1994 August 31, 1994
- - - - - - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $157,591 $788,663
Accounts receivable 4,032,487 4,191,352
Inventories 10,739,786 9,394,463
Prepaid expenses and other current assets 1,494,811 1,110,433
- - - - - - --------------------------------------------------------------------------------------------------------------------
Total current assets 16,424,675 15,484,911
- - - - - - --------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 12,466,151 11,799,300
Less accumulated depreciation and amortization 3,021,975 2,798,042
- - - - - - --------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 9,444,176 9,001,258
- - - - - - --------------------------------------------------------------------------------------------------------------------
Note receivable -Anika Research, Inc. 1,000,000 1,000,000
Cost in excess of net assets of businesses acquired 35,887,747 36,375,478
Intangible and other assets 16,274,010 16,633,667
- - - - - - --------------------------------------------------------------------------------------------------------------------
Total Assets $79,030,608 $78,495,314
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,679,607 $1,529,960
Accrued expenses 3,370,893 4,317,910
Note payable - Life Medical Sciences, Inc. 1,000,000 2,000,000
Current installments of long term debt 2,000,000 2,000,000
- - - - - - --------------------------------------------------------------------------------------------------------------------
Total current liabilities 9,050,500 9,847,870
- - - - - - --------------------------------------------------------------------------------------------------------------------
Deferred income taxes 626,809 626,809
Long-term debt, excluding current installments 11,000,000 9,500,000
Convertible subordinated debt 4,103,204 4,103,204
- - - - - - --------------------------------------------------------------------------------------------------------------------
Total liabilities 24,780,513 24,077,883
- - - - - - --------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value: authorized 1,000,000
shares; no shares issued and outstanding - -
Common stock, $.01 par value: authorized
20,000,000 shares; issued 11,213,536 and 11,150,236
shares, respectively 112,135 111,502
Additional paid-in capital 37,493,085 37,307,139
Retained earnings 25,220,017 25,573,932
- - - - - - --------------------------------------------------------------------------------------------------------------------
62,825,237 62,992,573
Treasury stock, 1,024,702 shares, at cost (8,575,142) (8,575,142)
- - - - - - --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 54,250,095 54,417,431
- - - - - - --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $79,030,608 $78,495,314
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Four months ended
----------------------------------
Dec. 31, 1994 Dec. 31, 1993
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales:
Domestic $7,919,874 $7,529,134
International 1,585,968 949,068
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
Total net sales 9,505,842 8,478,202
Cost of sales 3,037,859 2,596,034
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
Gross profit 6,467,983 5,882,168
Operating expenses:
Research and development 656,244 265,373
Selling, general and administrative 5,070,761 3,477,053
Depreciation and amortization 861,399 813,841
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 6,588,404 4,556,267
Income (loss) from operations before interest and income taxes (120,421) 1,325,901
Interest expense, net 412,431 315,248
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations before income taxes (532,852) 1,010,653
Income tax expense (benefit) (178,937) 252,663
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) ($353,915) $757,990
Income (loss) per share, primary and fully diluted: ($0.03) $0.07
Weighted average number of shares outstanding:
Primary and fully diluted 10,189,000 10,349,000
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Four months ended
-----------------------------------
Dec. 31, 1994 Dec. 31, 1993
- - - - - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($353,915) $757,990
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,103,839 1,123,217
Changes in operating assets and liabilities:
Accounts receivable 158,865 1,250,290
Inventories (1,345,323) (1,049,119)
Prepaid expenses and other current assets (384,378) (468,307)
Other assets (32,518) 16,467
Accounts payable and accrued expenses 202,630 (905,025)
- - - - - - ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (650,800) 725,513
- - - - - - ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (666,851) (1,076,987)
- - - - - - ------------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (666,851) (1,076,987)
- - - - - - ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowing under revolving line of credit 2,000,000 --
Principal payments on bank debt (500,000) --
Principal payment on note payable - Life Medical Sciences, Inc. (1,000,000) --
Proceeds from exercise of stock options 186,579 --
- - - - - - ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 686,579 --
- - - - - - ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (631,072) (351,474)
Cash and cash equivalents at beginning of period 788,663 346,099
- - - - - - ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $157,591 ($5,375)
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $317,898 $427,740
Income taxes 399,184 368,254
- - - - - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) Nature of Business
------------------
MedChem Products, Inc. and subsidiaries ("the Company"), develop,
manufacture and market specialty medical products for use in surgical and
non-surgical procedures. The Company's two business groups are the Surgical
Specialties Group and the Drug Delivery Group. The Surgical Specialties
Group is comprised of the Company's Avitene(R) family of topical hemostasis
products used to control bleeding in surgical procedures and the Sure-
Closure product line, acquired in July 1994, used to close skin-deficit
wounds. The Drug Delivery Group is comprised of intravenous ("I.V")catheter
products and disposable medical devices sold to the neonatal, pediatric and
adult markets by the Company's wholly owned subsidiary, Gesco
International, Inc. ("Gesco").
(2) Basis of Presentation
---------------------
The accompanying consolidated financial statements for the four month
transition period ended December 31, 1994 and the comparable period for
1993 have been prepared by the Company without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion
of the Company, these consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the consolidated financial position of the Company as of
December 31, 1994, and the consolidated results of the Company's operations
and their cash flows for the four month transition period ended December
31, 1994 and 1993.
The accompanying consolidated financial statements and related notes should
be read in conjunction with the Company's annual financial statements filed
with the Annual Report on Form 10-K. The four months ended December 31,
1994 comprise the four month ("transition period") resulting from a recent
change in the Company's year end from August 31, to December 31. On January
1, 1995 the Company started a new calendar year and will begin reporting on
a calendar quarter and year basis.
Certain reclassifications were made to the 1993 period consolidated
financial statements to conform to the
5
<PAGE>
transition period 1994 presentation.
(3) Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, August 31,
1994 1994
------------ ----------
<S> <C> <C>
Raw materials $1,737,472 $2,325,484
Work in process 2,768,512 2,898,490
Finished goods 6,233,802 4,170,489
----------- ----------
Total inventories $10,739,786 $9,394,463
=========== ==========
(4) Long-Term Debt
--------------
Long term debt consists of the following:
December 31, August 31,
1994 1994
----------- ----------
$7,000,000 bank revolving line
of credit at the bank's prime
rate or cost of funds rate
plus two percent (8.50% at
December 31, 1994), secured
by tangible and intangible
property, payable by June, 1996. $4,000,000 $2,000,000
Term loan payable to a bank,
interest at the bank's prime
rate plus one-half of one
percent or LIBOR plus two percent
(8.50% at December 31, 1994),
payable in quarterly installments
of $500,000, with a final installment
of $4,500,000 on May 1, 1997,
secured by tangible and intangible
property. 9,000,000 9,500,000
----------- ----------
Total long-term debt 13,000,000 11,500,000
Less: current installments 2,000,000 2,000,000
----------- -----------
Long-term debt
less current installments $11,000,000 $ 9,500,000
=========== ===========
</TABLE>
6
<PAGE>
The Company has obtained a waiver, through November 30, 1995, of a covenant
pertaining to the ratio of indebtedness to net cash flow and a waiver,
through December 31, 1994, of a covenant pertaining to profitability.
(5) Contingencies
-------------
The Company's 1992 tax return is currently under review by the Internal
Revenue Service and the Commonwealth of Massachusetts is also scheduled to
audit the Company's state tax returns for that year.
The Company is currently involved in three pending product liability claims
related to its Drug Delivery Business. At this time the Company cannot
estimate the exposure on its financial statements, if any, if the Company
were unsuccessful in its defense of these claims. However, the Company
feels that its product liability insurance is adequate to cover any
liability that may arise from these claims.
7
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Overview
------------------
The Company's net loss for the four month period ended December 31, 1994
was $353,915, or $0.03 per share, versus net income of $757,990, or $0.07
per share, for the comparable period last year. Operating cash flow, before
interest and income taxes for the transition period decreased to $983,418
from $2,449,118 for the comparable period last year.
As previously reported, Avitene sales have been depressed for several
quarters due in large part to overstocked inventories at some of the
Company's wholesale distributors. During the transition period, the
estimated overstocked position at distributors decreased by approximately
$1,800,000. The Company believes that this overstock was substantially
eliminated by December 31, 1994, and that Avitene sales in 1995 will begin
to approach a level approximately commensurate with hospital demand.
The four months ended December 31, 1994 comprise the four month
("transition period") resulting from a recent change in the Company's year
end from August 31, to December 31.
Results of Operations
---------------------
Total net sales for the transition period ended December 31, 1994 increased
12% to $9,505,842 from $8,478,202 in the comparable period last year.
Domestic sales from the Company's Surgical Specialties Group, consisting of
Avitene and Sure-Closure products, declined $350,038, or 9%. This decline
was primarily attributable to the decline in Avitene sales of $1,264,238
due to the overstocked position at the Company's Avitene distributors as
discussed above, which was mostly offset by sales of the recently acquired
Sure-Closure product line. Domestic sales of Drug Delivery products from
the Company's Gesco subsidiary increased 22% to $4,177,727 in the
transition period from $3,436,949 in the prior year. International sales of
Avitene to the Company's Japanese distributor amounted to $562,593, of the
total $636,900 increase in international sales compared to the same period
last year.
8
<PAGE>
Gross profit, as a percentage of net sales, for the four months ended
December 31, 1994, decreased to 68% from 69% in the comparable period last
fiscal year. The decrease was primarily attributable to the increase in
Gesco and international Avitene(R) sales as a proportion of total sales for
the current period as these sales have lower gross margins than domestic
Avitene(R) sales.
Research and development expense (includes regulatory and clinical trial
expenses) increased $390,871 to $656,244 for the transition period ended
December 31, 1994 from $265,373 in the prior year due mainly to the
research and development being conducted in connection with the Sure-
Closure product line. The Company expects an increase in research and
development expenses due to the addition of the Sure-Closure product line
and increased product development related to its Drug Delivery product line
in calendar 1995 in comparison to the twelve month period ended August 31,
1994.
Selling, general and administrative expenses increased $1,593,708 to
$5,070,761 for the four month period ended December 31, 1994 from
$3,477,053 in the prior year. The increase is attributable to the expansion
and training of the national Surgical Specialty sales force and marketing
expenses resulting from the addition of the Sure-Closure product line. The
Company expects no significant increases in selling, general and
administrative expenses as a percent of sales for the full 1995 calendar
year in comparison to the twelve month period ended August 31, 1994.
Depreciation and amortization expense for the transition period totaled
$861,399 compared to $813,841 in the comparable period in the prior year.
The Company's effective tax rate for the transition period was 34% versus
25% in the comparable period last fiscal year. The increase in the
effective tax rate was due to a decrease in operating income from the
Avitene(R) product line which receives a favorable tax benefit as a result
of the section 936 election available on Avitene(R) sales as compared to
the same period last year.
Liquidity and Capital Resources
-------------------------------
The Company generated operating cash flow before interest and income taxes,
of $983,418 in the transition period versus $2,449,118 in the comparable
period last year.
The Company currently has a revolving line of credit agreement whereby the
bank will lend the Company up to
9
<PAGE>
$7,000,000 at the bank's prime rate or cost of funds rate plus two percent
and a $10,000,000 term loan. At December 31, 1994 there was $4,000,000
outstanding under this line and $9,000,000 outstanding under the term loan.
The line of credit expires in June 1996 and the $10,000,000 term loan is
payable to the bank in quarterly installments of $500,000 through 1997,
with a final payment of $4,500,000 due on May 1, 1997. The $4,103,204 of
convertible subordinated debt issued to Gesco's principal sellers is
convertible at the option of the holders into common stock at $11.73 per
share. The note can be prepaid in whole, but not in part, at par at the
Company's option, and is payable in full on August 4, 1997. In connection
with the purchase of the Sure-Closure product line, the Company issued a
note payable to Life Medical Sciences, Inc, in the principal amount of
$2,000,000. The first installment of $1,000,000 on the non-interest bearing
note was paid on October 27, 1994, with the remaining installment paid on
January 27, 1995.
During the transition period ended December 31, 1994, the Company continued
to build the level of Avitene(R) finished goods, for approximately
$1,300,000 in anticipation of the termination of the finished goods
manufacturing contract with Alcon Laboratories, which terminated on
December 31, 1994. The Company has funded approximately $4,050,000 of this
planned inventory build-up from operating cash flow since the first quarter
of fiscal 1994. The Company believes it has sufficient Avitene(R) finished
goods inventory levels based on the anticipated demand until the fourth
quarter of calendar 1995, by which time the Company's new Avitene(R)
finished goods manufacturing facility is expected to be in full operation.
The Company believes that cash flow generated from its operating
activities, as well as funds available under its bank line of credit, will
be sufficient to enable the Company to conduct its operations and repay its
indebtedness.
Management continues to evaluate potential acquisitions and other
opportunities to expand and diversify the Company's product lines, although
there are no present agreements to enter into any such transactions. In the
event that the Company enters into any such transactions in the future,
additional financing may be required.
10
<PAGE>
PART II: OTHER INFORMATION
-----------------
ITEM 1: THROUGH ITEM 4: NOT APPLICABLE
ITEM 5: OTHER INFORMATION
On December 1, 1994, the Company and the MedTech Group, Inc.
("MedTech"), entered into a Strategic Alliance Agreement engaging
MedTech as its exclusive, worldwide manufacturer of the disposable
skin stretching devices and other molded plastic medical devices
relating to its Sure-Closure product line. This agreement supersedes
all prior oral or written agreements, commitments or understanding
with respect to the matters provided herein. Refer to Item 6: Exhibit
No. 12.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
----------- -----------
11 Computation of earnings per
share
12 Strategic Alliance Agreement
between the Company and The
MedTech Group, Inc.
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K with the Commission on
October 20, 1994 that reported the change in fiscal year from the year
ending August 31 to the year ending December 31.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDCHEM PRODUCTS, INC.
DATE: February 14, 1995 BY:/s/Edward J. Quilty
-----------------------------
Edward J. Quilty
President
Chief Executive Officer
DATE: February 14, 1995 BY:/s/John J. McDonough
-----------------------------
John J. McDonough
Vice President
Chief Financial Officer
12
<PAGE>
EXHIBIT 11
MedChem Products, Inc. and Subsidiaries
Computation of Primary and Fully Diluted Earnings Per Share
<TABLE>
<CAPTION>
Four months ended
December 31,
1994 1993
------------ ------------
<S> <C> <C>
Net income (loss) ($353,915) $757,990
PRIMARY :
- - - - - - -------
Weighted average number of common
shares outstanding 10,188,834 10,089,384
Dilutive effect of outstanding
stock options 0 259,229
------------ ------------
Weighted average number of common
shares as adjusted 10,188,834 10,348,613
Primary earnings (loss) per share ($0.03) $0.07
============ ============
FULLY DILUTED:
- - - - - - -------------
Weighted average number of common
shares outstanding 10,188,834 10,089,384
Dilutive effect of outstanding
stock options 0 259,229
------------ ------------
Weighted average number of common
shares as adjusted 10,188,834 10,348,613
Fully diluted earnings (loss) per share ($0.03) $0.07
============ ============
</TABLE>
<PAGE>
EXHIBIT 12
STRATEGIC ALLIANCE AGREEMENT
This Strategic Alliance Agreement is entered into as of DECEMBER 1st, 1994
between The MedTech Group, Inc. a New Jersey corporation whose principal offices
are at 6 Century Road, South Plainfield, NJ 07080-1396 ("MedTech") and MedChem
Products, Inc., a Massachusetts corporation whose principal offices are at 232
West Cummings Park, Woburn, MA 01801 ("MedChem").
BACKGROUND
On July 29, 1994, MedChem acquired substantially all of the assets of Life
Medical Sciences, Inc. ("LMS") relating to LMS' Sure-Closure mechanical skin-
stretching system. From July 1, 1993 until July 29, 1994, LMS had an oral
arrangement with MedTech whereby MedTech using its technical manufacturing
expertise in the manufacture of complete disposable medical devices manufactured
PRODUCTS (as defined below).
NOW, THEREFORE, in consideration of the mutual covenants contained herein and
for other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
I. Products
PRODUCTS refers to the disposable skin stretching devices and other molded
plastic medical devices which are listed on Exhibit A. Exhibit A may be
--------- ---------
amended from time to time to add additional PRODUCTS upon the mutual
written agreement of both parties. It is MedChem's intention to work with
MedTech to develop products in the range of Appropriate Technology (as
defined in Section III) and to add additional products to Exhibit A as and
---------
when appropriate terms with respect to the manufacture of such products
are agreed upon by both parties.
II. Engagement of MedTech
MedChem hereby engages MedTech as its exclusive, worldwide manufacturer of
PRODUCTS in accordance with the terms and conditions of this Agreement,
subject to Section V below. In furtherance of this engagement, MedChem
hereby grants to MedTech during the term of this Agreement, a limited,
exclusive license to manufacture PRODUCTS in accordance with the
specifications and procedures set forth in Exhibits A, B, C, and D.
---------- - - -
MedTech shall have no other intellectual property rights in or to the
PRODUCTS, their design, method of operation, or proprietary process of
manufacture as
<PAGE>
described in Section XVIII below, except for the manufacturing license
granted herein. Such manufacturing license shall terminate upon the
termination or expiration of this Agreement for any reason. The license
granted herein is for manufacture only and does not include a license or
right to sell or resell these PRODUCTS except as directed by MedChem in
writing.
III. Appropriate Technology
The scope of this Agreement is limited to products for which MedTech has
demonstrated appropriate technology, skills and resources. MedTech's
technology, skills and resources at this time are in the area of molding,
assembly and packaging of complete, disposable, plastic medical devices.
IV. Mutual Cooperation
As part of the strategic alliance, both companies will be flexible in
satisfying each other's requirements and will cooperate to meet the needs
of the final customer. MedTech and MedChem shall establish a team
consisting of appropriate members of both companies who will be
responsible for establishing milestones, reporting delays, and smoothing
the transition to the development and manufacture of PRODUCTS.
V. Ancillary Agreements
The parties acknowledge that MedChem is obligated, under certain
circumstances, to have PRODUCTS manufactured in Israel in accordance with
the terms of the Agreement dated June 20, 1992 between The Technion
Research and Development Foundation, Ltd. ("Technion") and LMS modified by
the letter agreement dated March 2, 1994 between Technion, Dimotech, Ltd.
("Dimotech") and LMS, the letter agreement dated March 13, 1994 between
the Ministry of Industry Trade/Office of the Chief Scientist and Technion
and the letter agreement dated April 21, 1984 between Technion, Dimotech
and LMS (collectively, the "Israel Agreement"), which Israel Agreement was
assigned by LMS to MedChem. In such event, MedChem may terminate the
exclusivity of its engagement of MedTech immediately in the event that
MedTech fails to comply with MedChem's request to manufacture (or arrange
for the manufacture of) PRODUCTS in Israel. MedChem will make every
reasonable effort to provide the longest possible advance notice of such
requirements to MedTech, and will provide every reasonable assistance to
MedTech in complying therewith. In the event that MedTech is unable to
comply,
-2-
<PAGE>
MedChem shall be free to engage any other party to manufacture PRODUCTS in
Israel in compliance with the Israel Agreement.
VI. Competitive Standards
It is the intent of this Agreement to seek mutual profitability of both
parties. This Agreement, therefore, is predicated on the ability of
MedTech to remain competitive with industry standards in its manufacturing
procedures and pricing structure. If MedChem demonstrates through
reference to competitive technology or price quotes from other
manufacturers that MedTech has become non-competitive, then MedChem and
MedTech will work in good faith to resolve such non-competitiveness,
including without limitation amending any terms of this Agreement, while
recognizing that MedTech may have invested in product development and may
therefore have a reasonable expectation of recovering such investment
within a reasonable time. If the non-competitiveness of MedTech cannot be
resolved to the satisfaction of MedChem, then the non-competitiveness of
MedTech shall be deemed non-performance by MedTech with respect to Section
XX and accordingly MedChem shall have the right to terminate this
Agreement as provided therein.
VII. Product Specifications and Manufacturing Procedures
MedChem and MedTech will cooperate in the development and/or modification
of the detailed Product Specifications and Manufacturing Procedures for
PRODUCTS set forth on Exhibits A and B attached hereto. The Product
---------- -
Specifications and Manufacturing Procedures may be amended from time to
time by either party with the prior written approval of the other (which
approval shall not be unreasonably withheld or delayed); provided that in
the event the parties cannot agree to any amendments to such Product
Specifications and Manufacturing Procedures, this Agreement may be
terminated in accordance with the provisions of Section XX. Any mutually
approved amendments or additions to the Product Specifications and
Manufacturing Procedures shall be attached as exhibits hereto and
considered incorporated herein.
A. Product Specifications. MedTech shall manufacture each PRODUCT in
accordance with the applicable specifications ("Specifications") for
such PRODUCT as set forth in the appropriate part of Exhibit A
---------
attached hereto.
-3-
<PAGE>
B. Manufacturing Procedures. MedTech shall comply with the engineering,
manufacturing, testing, warehousing and shipping procedures set forth
in Exhibit B attached hereto. The procedures set forth in Exhibit B
------- - ---------
shall apply to the manufacture, testing, storage and shipping of all
PRODUCTS unless specifically otherwise stated in Exhibit A.
---------
C. Quality Assurance. MedTech shall be responsible for ensuring that the
quality of the PRODUCTS is at all times consistent with the
applicable Specifications. MedTech shall develop and implement
quality assurance procedures and shall incorporate in such procedures
any elements reasonably requested by MedChem.
D. Customer Complaints and Returned PRODUCTS. MedTech and MedChem shall
comply with the procedures set forth in Exhibit C with respect to
---------
responding to customer complaints and handling returned PRODUCTS.
VIII. Forecasts and Orders
A. Upon execution of this agreement, MedChem shall provide to MedTech a
non-binding forecast of its requirements for PRODUCTS for the
following twelve (12) months and a purchase order with quantities and
delivery dates for the initial three months of such 12-month period.
Thereafter, MedChem will provide by the first day of each month, a
non-binding rolling three (3) month forecast of PRODUCT requirements
and a binding purchase order for the third month. MedChem and MedTech
may mutually agree to adjust purchase orders if required.
B. MedChem shall submit purchase orders in writing to MedTech at the
address set forth above. Purchase orders may be submitted by
telecopy. MedChem shall use best efforts to submit purchase orders as
far in advance in practicable.
C. In recognition of the forecast variability associated with new
PRODUCTS, MedTech shall maintain a 20% surge capacity at all times
and shall maintain adequate safety stocks of critical components to
ensure uninterrupted supply of PRODUCTS in the event that MedChem's
requirements exceed its forecast by up to 50%. Critical components
will be specifically identified by MedChem, and MedChem will bear the
cost of safety stock for these components.
-4-
<PAGE>
D. MedTech shall have two months after receiving a written purchase
order to deliver PRODUCTS in accordance with such purchase order and
Section X. Within 14 days after such delivery, MedTech shall deliver
an invoice to MedChem stating in reasonable detail the manufacturing
lot identification, quantity, model and price (per Exhibit D) of
---------
PRODUCTS delivered along with a Finished Device History Checklist and
a Certificate of Compliance with respect to such delivery in
accordance with the terms of Exhibit C attached hereto (the
---------
"Delivery Invoice").
E. Whenever MedTech's performance is delayed or prevented, MedTech shall
promptly notify MedChem and provide an updated schedule of delivery.
Any delay in PRODUCT delivery, except for a delay covered by
paragraph E of Section XXI, shall entitle MedChem to delay payment
for such PRODUCT by a period of time equal to the delivery delay.
Repeated delays in PRODUCT delivery shall be grounds for the
termination of this Agreement in accordance with Section XX below. In
the event that MedChem's requirements exceed the current delivery
schedule at any time, MedChem may request delivery of such PRODUCTS
in less than two months, and MedTech shall make all reasonable
efforts to meet MedChem's requirements.
IX. Pricing and Payment
A. Pricing. In consideration of the full range of services described
herein, and recognizing that MedTech may have invested in product
development, MedChem shall pay to MedTech the per unit purchase price
for each PRODUCT determined in accordance with the price list set
forth on Exhibit D attached hereto. The price list set forth on
---------
Exhibit D shall remain in effect for one year following its effective
---------
date. For each year thereafter during the term of this Agreement, the
parties shall negotiate in good faith and agree on a new price list
and Exhibit D shall be modified accordingly. Failure to agree on a
---------
new price list shall constitute grounds for termination of the
Agreement pursuant to Section XX below.
In the event that either party demonstrates extraordinary and precipitous
changes in the business environment of either MedTech or MedChem, either party
may request that the price list be renegotiated at any time. In such
circumstances, failure to agree on a new price list within 60 days shall
constitute grounds for termination of the Agreement pursuant to Section XX
below.
-5-
<PAGE>
B. Payment. MedChem shall make payments of the purchase price for
PRODUCTS within 30 days following the delivery by MedTech to MedChem
of the Delivery Invoice.
X. Delivery
A. All PRODUCTS shall be packaged, marked and otherwise prepared for
shipment by MedTech in suitable containers in accordance with sound
commercial practices. MedTech shall mark on containers all necessary
handling, loading and shipping instructions. An itemized packing list
and bills of lading shall be included with each shipment.
B. All sales of PRODUCTS are F.O.B. MedTech's premises in South
Plainfield, New Jersey. Title to and risk of loss for PRODUCTS
purchased shall pass to MedChem upon the earlier of delivery to
MedChem or delivery to a carrier for shipment to MedChem.
C. All PRODUCTS shall be received subject to MedChem's inspection,
testing, approval and acceptance at its premises, notwithstanding any
inspection or testing at MedTech's premises or any prior payment for
such PRODUCTS. PRODUCTS rejected as not conforming may be returned to
MedTech at MedTech's risk and expense and shall be replaced by
MedTech upon such terms as are agreed to by MedTech and MedChem.
XI. Returned Goods
A. MedChem shall establish and maintain a returned goods policy and
protocol for PRODUCTS sold to MedChem's customers as set forth in
Exhibit C attached hereto. MedTech assumes no responsibility or
---------
authority to respond to customer requests or inquiries regarding
PRODUCTS and will forward all such inquiries to MedChem.
B. MedTech will evaluate returned goods at the request of MedChem and
will determine whether such returned goods can be safely returned to
inventory.
C. MedChem shall promptly notify MedTech of any return of defective
PRODUCTS so that any appropriate remedial actions can be initiated.
Likewise, MedTech shall promptly notify MedChem of any return of any
defective PRODUCTS.
-6-
<PAGE>
XII. Quality Assurance and Customer Complaints
A. MedTech has agreed that the PRODUCTS shall meet the Specifications as
set forth in Exhibits A, B and C.
---------- - -
B. MedChem shall be responsible for responding to and maintaining
documentation of field complaints of PRODUCTS in accordance with the
policies set forth on Exhibit C. MedChem shall promptly notify
---------
MedTech of any field complaints so that any appropriate actions can
be initiated.
C. MedTech shall forward to MedChem copies of any complaints,
expressions of dissatisfaction, or other similar information about
which MedTech becomes aware with respect to PRODUCTS in accordance
with the policies set forth on Exhibit C. MedTech, at its expense,
---------
shall assist MedChem in investigating such complaints and related
matters, and shall provide necessary information with respect to such
matters to MedChem.
D. Although MedChem is responsible for responding to and maintaining
documentation of field complaints for PRODUCTS, a file containing all
complaints and other information required by the Food and Drug
Administration's ("FDA's") Good Manufacturing Practices ("GMPs") with
respect to complaints must be kept at MedTech per section 820.198 of
the GMP regulation.
E. MedChem shall implement and maintain an appropriate Medical Device
Reporting system in accordance with the policies set forth on Exhibit
-------
C. Preparation, submission, and documentation of Medical Device
-
Reports ("MDRs") shall be the sole responsibility of MedChem. MedTech
shall assist MedChem as necessary in the conduct of any
investigations, evaluations or corrective actions associated with
MDRs.
XIII. Regulatory Compliance
A. MedTech shall fully comply with the FDA's Good Manufacturing
Practices regulation, 21 CFR 820, as presently in effect, as well as
with any future changes thereto.
B. MedTech will implement a quality control system no later than
November 1995 that will be consistent with ISO9002 requirements and
with the European Medical Devices Directive [93-42 EEC], particularly
the Product Vigilance provisions thereof. In addition, MedTech will
-7-
<PAGE>
fully support MedChem in the preparation of all foreign and domestic
regulatory applications. The quality control system will be subject
to inspection and certification by a European Notified Body to be
selected by MedChem.
C. In order to assure that MedTech is satisfying its regulatory
responsibilities, MedChem shall have the right to audit, with at
least one week's advance notice provided to MedTech, those
manufacturing and other operations related to PRODUCTS. Additionally,
MedTech shall provide notice to MedChem of any inspection by the FDA
that involves MedTech operations with respect to these PRODUCTS.
MedTech shall provide to MedChem a copy of any FDA communications
that relate to PRODUCTS or the manufacture of PRODUCTS.
MedTech agrees that it will meet any reasonable foreign manufacturing
obligations that apply to PRODUCTS made by MedTech for MedChem that
are intended to be sold outside the United States.
XIV. Tooling
A. Capital equipment purchased by MedTech to manufacture PRODUCTS is the
property of MedTech. MedChem may elect to purchase through MedTech
certain capital equipment necessary for the manufacture of PRODUCTS.
B. All tools, dies, molds, patterns, jigs, masks and other equipment and
materials furnished by MedChem to MedTech or paid for by MedChem,
directly or indirectly, and any replacements, shall remain MedChem's
property. MedTech shall plainly identify such property as MedChem's
property and shall not use such property except in performing this
Agreement.
C. Any capital equipment purchased through MedTech must be authorized in
writing by MedChem. MedChem shall reimburse MedTech for such
purchases as follows: 50% downpayment, 25% upon first piece
inspection, and 25% upon final approval by MedChem of molded parts or
assemblies.
D. Before accepting plastic injection molds owned by MedChem, MedTech
will perform validation procedures to ensure acceptability. MedChem
shall pay for necessary modifications to the mold to ensure that
acceptable
-8-
<PAGE>
parts are produced. No such modifications will be performed without a
written purchase order authorization from MedChem.
XV. Sharing Information
It is in the interest of both parties to reduce the manufacturing cost of
PRODUCTS manufactured by MedTech for MedChem and to share in the benefits of
such cost reductions. To that end, MedChem agrees to continue to invest in
design effort and tooling expenses to reduce cost, and MedTech agrees to make
available to MedChem information related to PRODUCTS which MedChem needs to
analyze or evaluate manufacturing costs or return on investment.
XVI. Product Warranty and Indemnity
A. Product Warranty MedTech warrants that PRODUCTS shall be
----------------
manufactured in conformance with the Specifications and Procedures
attached hereto as Exhibits A, B and C and shall be free of liens
---------- - -
and encumbrances. These warranties shall survive any delivery,
inspection, acceptance, payment or resale of PRODUCTS and shall
extend to MedChem and its customers. In the event of the breach of
this warranty, MedTech shall replace non-conforming PRODUCTS, at its
expense, or refund the purchase and freight price for same. The
product warranty set forth herein is in lieu of all other warranties
and representations, whether express or implied, including without
limitation, implied warranties of merchantability and fitness for a
particular purpose.
B. Indemnification. MedTech shall indemnify and hold harmless MedChem
---------------
from and against all actual and direct damages, costs, and expenses
(including reasonable attorney's fees and disbursements) incurred by
MedChem resulting from any negligence, willful misconduct, or
material breach of this Agreement by MedTech, subject to an overall
limit of $1,000,000.
C. Limitation of MedTech Liability. MedTech shall not under any
-------------------------------
circumstances be liable to MedChem for any special, indirect,
punitive, or consequential damages of any nature whatsoever,
including, without limitation, any lost revenues or profits of
MedChem or any other party resulting or arising out of the sale or
use of PRODUCTS.
-9-
<PAGE>
D. Notice of Complaints. Each of MedTech and MedChem shall promptly
--------------------
notify the other of any PRODUCT deficiencies or field complaints, of
which it has knowledge, regarding any MedTech related work.
XVII. Insurance
A. Each party agrees to maintain at least $1,000,000 of product
liability insurance and to provide the other of evidence with
coverage upon request.
B. MedTech will insure all MedChem property located on MedTech's
premises against loss or damage for an amount equal to its
replacement cost and with MedChem named as loss payee, including but
not limited to molds, fixtures, tooling, critical component safety
stock and inventory.
C. MedTech agrees that all MedChem property located on MedTech's
premises shall be held at MedTech's risk and, to the extent furnished
by MedChem to MedTech or paid for by MedChem, directly or indirectly,
or a replacement thereof, shall be returned to MedChem or its
designee upon the earlier of MedChem's request or the termination or
completion of this Agreement.
XVIII. Confidentiality and Intellectual Property
A. MedTech and MedChem shall at all times maintain each other's
CONFIDENTIAL INFORMATION in strict confidence. MedTech shall also
maintain any CONFIDENTIAL INFORMATION provided to it by LMS on or
after November 1992 and prior to July 29, 1994 in strict confidence
in accordance with the terms of this Agreement. Neither party shall
use or disclose CONFIDENTIAL INFORMATION to any person or entity
outside of its organization without prior written consent of the
other party. The Providing Party shall disclose CONFIDENTIAL
INFORMATION received by it under this Agreement only to persons
within its organization who have a need to know such CONFIDENTIAL
INFORMATION in the course of the performance of their duties and who
are bound to protect the confidentiality of such CONFIDENTIAL
INFORMATION. It shall be a condition of granting the consent that any
third party to whom CONFIDENTIAL INFORMATION is to be disclosed must
agree in advance in writing to maintain such CONFIDENTIAL INFORMATION
in strict confidence and not to release or disclose such CONFIDENTIAL
INFORMATION to any other party without the prior written consent of
the Providing Party (as defined below).
-10-
<PAGE>
B. "CONFIDENTIAL INFORMATION" means information or data provided by
either MedTech, MedChem (or in the case of LMS, prior to July 29,
1994) (the "Providing Party") to the other (the "Receiving Party")
that concerns the discoveries, designs, inventions, improvements,
know-how, and ideas of the Providing Party, except to the extent that
------
any such CONFIDENTIAL INFORMATION (a) is known or becomes known to
the general public other than as a result of unauthorized disclosure
by the Receiving Party or by persons to whom the Receiving Party has
made such information available; or (b) is received by the Receiving
Party on a non-confidential basis from a third party who to the best
knowledge of the Receiving Party, lawfully possessed and disclosed
such information.
C. MedTech acknowledges and agrees that, as between the parties hereto,
MedChem is the owner of all right and title to (a) the design of
PRODUCTS, including patent rights, trade secrets and similar rights
and interests, and (b) the PRODUCT trademarks as specified in Exhibit
-------
A and (c) the PRODUCT SPECIFICATIONS (collectively, the "MedChem
-
Proprietary Rights"). MedTech agrees (a) not to contest or challenge
in any way the MedChem Proprietary Rights, (b) to reproduce on the
PRODUCTS (or their packaging) any proprietary notice designated by
MedChem with respect to the MedChem Proprietary Rights, and (c) to
cooperate in good faith with MedChem in safeguarding and protecting
the MedChem Proprietary Rights. MedTech further agrees that MedChem
shall be the sole owner of any improvements to or new models of
PRODUCTS and MedTech shall execute and deliver to MedChem any
documents and instruments requested by MedChem to convey to MedChem
any rights that MedTech may have in any such improvements or new
models.
D. MedChem represents and warrants to MedTech that it has sufficient
right, title and interest in and to the PRODUCTS to grant to MedTech
the licenses and rights contained in this Agreement, and that, to the
best of MedChem's knowledge, the manufacture and sale to MedChem by
MedTech of PRODUCTS pursuant to this agreement shall not infringe any
patent, trademark, copyright, trade secret or other proprietary
rights of any third party. MedChem shall indemnify and hold MedTech
harmless from and against any and all claims, damages, judgements,
expenses and losses (including reasonable attorney's fees) arising
from claims by any third party alleging that MedTech's manufacture or
sale to MedChem of PRODUCTS in accordance with this agreement
infringes such third party's proprietary rights.
-11-
<PAGE>
E. The parties acknowledge that proprietary manufacturing processes used
in connection with PRODUCTS will in some cases be jointly developed
by both parties and in other cases be developed individually. All
manufacturing processes that are (i) jointly developed or (ii)
individually developed by MedTech and funded in any substantial
manner by MedChem will be jointly owned by both parties and both
parties shall have full rights to the use thereof except that MedTech
------
shall not use such processes in the manufacture of any competing
products.
XIX. Term
This Agreement shall be effective as of the date set forth above and shall
remain in effect through November 1, 1999. Thereafter, the term of this
Agreement shall automatically renew for successive one year terms (or such
longer renewal terms as the parties might agree in writing) each
commencing July 1 unless (i) this Agreement is earlier terminated pursuant
to Section XX below or (ii) either party shall have notified the other in
writing, no later than 180 days prior to the expiration of the initial
term or the then current renewal term, as the case may be, if it's intent
not to renew.
XX. Termination
A. Either party may terminate this agreement for cause in the event of a
material breach of this Agreement or non-performance by the other
party where such breach or non-performance is not cured within 30
days after written notice of such breach is delivered by the
terminating party to the breaching party or in the event that the
parties cannot agree as to any amendments or modifications to any of
the Exhibits attached hereto. In the event that MedChem is the
terminating party, or this Agreement is being terminated pursuant to
Section IX.A above, MedChem may elect to defer the effective date
------------
of termination for up to 180 days by so notifying MedTech in writing,
and during such extension period this Agreement shall remain in
effect and the price list set forth in Exhibit D may be increased by
---------
MedTech as it deems reasonably necessary but not more than 15% above
the last mutually approved price list.
B. In the event of termination resulting from the event of non-
performance on the part of MedChem, MedTech shall be reimbursed for
its reasonable and accountable costs of raw material, work-in-
progress, and finished goods upon termination and these shall become
the property of
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> SEP-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 158
<SECURITIES> 0
<RECEIVABLES> 4,032
<ALLOWANCES> 0
<INVENTORY> 10,739
<CURRENT-ASSETS> 16,425
<PP&E> 12,466
<DEPRECIATION> 3,022
<TOTAL-ASSETS> 79,031
<CURRENT-LIABILITIES> 9,051
<BONDS> 0
<COMMON> 112
0
0
<OTHER-SE> 54,138
<TOTAL-LIABILITY-AND-EQUITY> 79,031
<SALES> 9,506
<TOTAL-REVENUES> 9,506
<CGS> 3,038
<TOTAL-COSTS> 3,038
<OTHER-EXPENSES> 6,588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 412
<INCOME-PRETAX> (533)
<INCOME-TAX> (179)
<INCOME-CONTINUING> (354)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (354)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
