FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1997
Commission File Number 0-26694
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0945003
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
655 East Medical Drive, Bountiful, Utah 84010
(Address of principal executive offices)
(Zip Code)
(801) 298-3360
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of November 3, 1997
----- ----------------------------------
Common Stock, $.02 par value 9,379,842
<PAGE>
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
Assets 1997 1996
- ------
------------------- -------------------
Current assets:
<S> <C> <C>
Cash $ 344,687 $ 252,694
Accounts receivable 84,662 1,159
Inventories 29,038 15,710
Related-party receivable 2,316 -
Prepaid expenses and other 136,600 96,813
------------------- -------------------
Total current assets 597,303 366,376
Property and equipment, net 1,282,411 1,186,977
Other assets, net 246,265 295,486
=================== ===================
Total assets $ 2,125,979 $ 1,848,839
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 119,042 $ 100,686
Accrued liabilities 140,534 161,784
Amounts due to related parties - 73,152
------------------- -------------------
Total current liabilities 259,576 335,622
Deferred royalty revenues 1,750,000 -
------------------- -------------------
Total liabilities 2,009,576 335,622
------------------- -------------------
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized, no
shares outstanding - -
Common stock, $.02 par value; 50,000,000 shares authorized,
9,379,842 and 8,656,653 shares outstanding, respectively 187,597 173,133
Additional paid-in capital 11,151,315 9,540,928
Series C warrants to purchase common stock 310,994 -
Common stock subscriptions receivable (209,200) (209,200)
Receivable from stockholder (182,577) -
Deferred consulting expense (40,200) (40,200)
Deficit accumulated during the development stage (11,101,526) (7,951,444)
------------------- -------------------
Total stockholders' equity 116,403 1,513,217
------------------- -------------------
Total liabilities and stockholders' equity $ 2,125,979 $ 1,848,839
=================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
-----------------------------------------
September 30, September 30,
1997 1996
------------------ -------------------
Operating Revenues:
<S> <C> <C>
Sales $ 13,963 $ 2,487
Development fees 250,000 -
------------------ -------------------
Total Operating Revenues 263,963 2,487
Cost of Sales 9,199 2,673
------------------ -------------------
254,764 (186)
------------------ -------------------
Operating expenses:
Selling, general and administrative 879,922 795,686
Research and development 322,013 341,337
Write-off of operating assets 89,918 -
------------------ -------------------
Total operating expenses 1,291,853 1,137,023
------------------ -------------------
Loss from operations (1,037,089) (1,137,209)
Interest income, net 10,349 18,567
Other income 206 6,459
------------------ -------------------
Net loss (1,026,534) (1,112,183)
Less preference stock dividends - -
================== ===================
Net loss applicable to common shares $ (1,026,534) $ (1,112,183)
================== ===================
Net loss per common share $ (.11) $ (.13)
================== ===================
Weighted average number of common shares
outstanding 9,288,539 8,589,153
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
Condensed Consolidated Statements of Operations
(Unaudited)
Period from
Inception
Nine Months Ended (November 19,
----------------------------------------- 1993) to
September 30, September 30, September 30,
1997 1996 1997
------------------ ------------------- -------------------
Operating Revenues:
<S> <C> <C> <C>
Sales $ 177,123 $ 72,854 $ 732,786
Development fees 250,000 - 250,000
------------------ ------------------- -------------------
427,123 72,854 982,786
Cost of sales 136,241 62,562 522,338
------------------ ------------------- -------------------
290,882 10,292 460,448
----------------- ------------------- -------------------
Operating expenses:
Selling, general and administrative 2,458,715 1,904,625 8,116,642
Research and development 914,524 968,515 3,274,299
Write-off of operating assets 92,557 - 419,992
------------------ ------------------- -------------------
Total operating expenses 3,465,796 2,873,140 11,810,933
------------------ ------------------- -------------------
Loss from operations (3,174,914) (2,862,848) (11,350,485)
Interest income, net 16,949 102,467 237,657
Other income 7,883 31,459 39,471
------------------ ------------------- -------------------
Net loss (3,150,082) (2,728,922) (11,073,357)
Less preference stock dividends - - (28,169)
================== =================== ===================
Net loss applicable to common shares $ (3,150,082) $ (2,728,922) $ (11,101,526)
================== =================== ===================
Net loss per common share $ (.35) $ (.32)
================== ===================
Weighted average number of common shares
outstanding 9,028,821 8,581,680
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Increase (Decrease) in Cash
Period from
Inception
Nine Months Ended (November 19,
----------------------------------- 1993) to
September 30, September 30, September 30,
1997 1996 1997
---------------- ---------------- ---------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (3,150,082) $ (2,728,922) $ (11,073,357)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 165,287 134,411 472,669
Common stock issued for services 212,500 - 231,000
Noncash consulting expense - 93,800 93,800
Loss on disposition of assets 92,557 - 421,283
Changes in operating assets and liabilities:
Accounts receivable (83,503) 349,506 (84,662)
Related-party receivable (2,316) (39,219) (2,316)
Inventories (13,328) 537 (29,038)
Prepaid expenses and other (39,637) (84,664) (136,600)
Accounts payable and accrued liabilities (2,894) (401,386) 259,576
Amounts due to related parties (73,152) - -
Deferred royalty revenues 1,750,000 - 1,750,000
---------------- ---------------- ---------------
Net cash used in operating activities (1,144,568) (2,675,937) (8,097,645)
---------------- ---------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (304,207) (570,263) (1,966,482)
Purchase of patents and technology - (2,644) (356,146)
Loan made to stockholder (182,577) - (182,577)
---------------- ---------------- ---------------
Net cash used in investing activities (486,784) (572,907) (2,505,205)
---------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants
and exercise of common stock options 1,723,345 8,775 9,096,405
Proceeds from stock subscriptions - 50,300 330,300
Net proceeds from preferred stock - - 1,135,832
Net borrowings on stockholder loans - - 385,000
---------------- ---------------- ---------------
Net cash provided by financing activities 1,723,345 59,075 10,947,537
---------------- ---------------- ---------------
Net increase (decrease) in cash 91,993 (3,189,769) 344,687
Cash at beginning of period 252,694 4,251,584 -
================ ================ ===============
Cash at end of period $ 344,687 $ 1,061,815 $ 344,687
================ ================ ===============
Supplemental Disclosures of Noncash Investing and
Financing Activities:
Dividends on redeemable preference stock $ - $ - $ 548,000
Common stock issued for subscription receivable - - 548,000
Conversion of stockholder debt to common stock - - 485,000
Acquisition of technology and patents for
stockholder payable - - 100,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Interim Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows as of the
dates and for the periods presented herein have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's December 31,
1996 Annual Report on Form 10-K. The results of operations for the three and
nine months ended September 30, 1997, are not necessarily indicative of the
operating results that may result for the year ending December 31, 1997. The
accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements in its December 31, 1996 Annual
Report on Form 10-K.
(2) Net Loss Per Common Share
Net loss per common share is based on the weighted average number of
common shares outstanding. Stock options, warrants and preferred shares prior to
conversion are not included in the calculation because their inclusion would be
antidilutive, thereby reducing the net loss per common share.
(3) Distribution Agreement
The Company entered into an agreement (the "Distribution Agreement")
with New Alliance of Independent Medical Distributors, Inc., dba Alliance
Medical ("Alliance Medical"), effective September 9, 1997. The Distribution
Agreement provides for the Company to manufacture and Alliance Medical to market
and sell in the United States, the Company's ExtreSafe(R) Lancet Strip. The
initial term of the Distribution Agreement is for a period of three years with
annual renewal terms thereafter. The Distribution Agreement requires that
Alliance Medical purchase minimum quantities of the ExtreSafe(R) lancet strip
from the Company during the initial three year term at specified prices.
(4) Quantum Imaging Corporation
The Company and Zerbec, Inc. ("Zerbec"), as joint venturers, formed
Quantum Imaging Corporation ("QIC") to develop, manufacture, and market an
improved filmless digitized imaging system. Pursuant to the terms of the joint
venture agreement, until and unless at least $3,000,000 in funding is raised,
Zerbec has the right to acquire two-thirds of SHP's interest in QIC for one
dollar (the "Zerbec Option"). Zerbec had previously agreed to an extension of
the date on which the Zerbec Option could be exercised. On November 4, 1997, an
agreement was entered into granting to the Company an option to acquire Zerbec's
interest in QIC (the "SHP Option") as discussed in Note 6. The Zerbec Option
cannot be exercised as long as SHP has a right to exercise the SHP Option.
(5) Contingencies
In April 1997, the Company entered into an agreement with Leerink Swann
& Company ("Leerink"), whereby Leerink agreed to assist the Company in raising
funds in a private placement of equity securities. Sufficient funding was
6
<PAGE>
deposited into escrow to hold an initial closing, but the closing did not occur.
Leerink alleges that the Company refused to close on the placement. The Company
alleges that the closing did not occur because Leerink, as a condition precedent
to closing, made certain pre-closing demands that went far beyond the terms of
the agreement and which demands Company management believes were not in the best
interest of the Company or its stockholders. In August 1997, Leerink filed suit
in the United States District Court for the District of Massachusetts alleging
breach of contract and violation of M.G.L. c.93A, ss.11. Leerink is seeking
money damages, warrants to purchase shares of the Company's common stock,
attorneys' fees and costs. Thereafter, the Company filed a counterclaim alleging
breach of contract and violation of M.G.L. c.93A, ss.11. The Company is seeking
money damages, attorneys' fees and costs. The Company believes that Leerink's
claims are without merit and that the Company will ultimately prevail. The
litigation is in the early stages, is subject to all of the risks and
uncertainties of litigation and the outcome cannot presently be predicted.
Specifically, there is no assurance that the Company will be successful in this
lawsuit or that the lawsuit will be resolved on acceptable terms, and the
Company may incur significant costs in asserting its claims and defenses.
The Company is not engaged in any other legal proceedings.
(6) Subsequent Event
On November 4, 1997, the Company entered into an agreement (the "Option
Agreement") with Zerbec. The Option Agreement provides that if the Company makes
a payment to Zerbec of $250,000 no later than November 30, 1997, the Company
will have the option to acquire all of the shares of QIC common stock currently
owned by Zerbec. The terms of the Option Agreement provide that in addition to
the November payment, if SHP elects to exercise its option, SHP will pay Zerbec
$1,750,000 on or before April 1, 1998 and $1,500,000 on or before July 1, 1998.
Up to one-half of the amount of both payments may be paid, at the option of the
Company, with the Company's common stock with the fair market value of the
Company's common stock being determined by averaging the daily closing price
over the last five trading days prior to January 15, 1998. Any shares of the
Company's common stock issued pursuant to this arrangement will have certain
piggy-back and/or demand registration rights and will have resale limitations.
There can be no assurance that the Company will be able to exercise the
option and successfully complete the acquisition on the above terms. As a
result, the Company's ownership interest in QIC may decrease as a result of its
or the Company's inability to complete the acquisition as previously described.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the condensed consolidated
financial statements, related notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1996. Wherever in this discussion the term "Company" is used, it should be
understood to refer to Specialized Health Products International, Inc. ("SHPI")
and Specialized Health Products, Inc., its wholly owned subsidiary, ("SHP") on a
consolidated basis, except where the context clearly indicates otherwise. Prior
to the July 1995 acquisition wherein SHP became a wholly owned subsidiary of
SHPI, SHPI had no operations.
Overview
The Company is a development stage company and, since inception, has
incurred losses from operations. As of September 30, 1997, the Company had
cumulative net losses totaling $11,011,608. To date, the Company's principal
focus has been the design, development, testing, and evaluation of its Safety
Cradle(R) sharps container, ExtreSafe(R) Lancet Strip, ExtreSafe(R) medical
needle withdrawal technology, intravenous flow gauge, blood collection device,
filmless digitized imaging technology and other products, and the design and
development of molds and production processes.
Financial Position
The Company had $344,687 in cash as of September 30, 1997. This
represented an increase of $91,993 from December 31, 1996. Working capital as of
September 30, 1997, increased to $337,727 as compared to $30,754 at December 31,
1996. These increases were largely due to the receipt of net proceeds of
$1,539,570 from the completion of a private placement of securities by the
Company that closed on March 31, 1997, the receipt of $220,000 from the exercise
of common stock options, and the receipt of $1,750,000 in advanced royalties and
$250,000 in development fees from Becton, Dickinson and Company Infusion Therapy
division ("BDIT"). If the Company's operations continue to generate a negative
cash flow, the Company will be required to obtain additional funding or
significantly reduce operating expenditures. See "Liquidity and Capital
Resources."
Results of Operations
During the three and nine months ended September 30, 1997, the Company
had net sales of $13,963 and $177,123, respectively, compared with $2,487 and
$72,854 for the comparable periods from the prior year. Substantially all of the
sales during these periods related to the Company's sharps containers. In
addition, the Company received development fees from BDIT in September 1997
totaling $250,000 which have been reflected as revenue during the three and nine
months ended September 30, 1997, with no revenue from similar sources during the
comparable periods in the prior year.
Sales for the three months ended September 30, 1997 were $13,963,
compared with sales of $123,682 and $39,478 for the quarterly periods ended June
30, 1997 and March 31, 1997, respectively. Sales for the third quarter were down
primarily because of a reduction in orders from Becton Dickinson and Company
Sharps Disposal Systems ("BDSDS") under the parties' exclusive distribution
agreement relating to the Company's Safety Cradle(R) sharps container products
(the "BDSDS Distribution Agreement"). BDSDS, however, did not order the minimum
required amount of product under the terms of the BDSDS Distribution Agreement
and, therefore, BDSDS exclusive distribution rights became nonexclusive. In
addition, the Company gave notice of termination of the BDSDS Distribution
Agreement, as it is authorized to do in the case of BDSDS' failure to purchase
the minimum amount of product required by the BDSDS Distribution Agreement. The
Company gave notice of termination in order to negotiate better terms on a
distribution agreement. Both BDSDS and SHP have been working diligently to
8
<PAGE>
negotiate an agreement with the proper focus and strategy to accelerate sales of
the Company's sharps containers into the home healthcare market. In the
meantime, BDSDS is selling sharps containers under the terms of the original
agreement.
Entering into the BDSDS Distribution Agreement created certain risks
for the Company. These include, among other things the risk(s): (i) associated
with reliance on BDSDS for sales of the products, and therefore reliance on
BDSDS' marketing ability, marketing plans, credit-worthiness and selling
efforts; (ii) that because the products are being marketed under BDSDS' label,
any goodwill associated with the products may inure to the benefit of BDSDS
rather than the Company; (iii) associated with the Company having only limited
protection from changes in manufacturing costs (other than with respect to raw
materials costs) during the initial term of the BDSDS Distribution Agreement;
and (iii) that because the Company is reliant on BDSDS for all or substantially
all of its container sales, the Company's ability to effectively negotiate with
BDSDS concerning pricing or other terms in connection with any possible
extension of the BDSDS Distribution Agreement may be limited. In addition, there
is a risk that the Company may not be able to reinstate a BDSDS Distribution
Agreement. Until the BDSDS situation is resolved, sales of the Company's Safety
Cradle(R) sharps containers may be minimal.
In May 1997, the Company entered into an agreement (the "License
Agreement") with BDIT relating to a single application (the "Technology") of the
Company's ExtreSafe(R) safety needle withdrawal technology. Pursuant to the
terms of the License Agreement, BDIT made payments of $1,750,000 and $250,000 to
the Company in June and September 1997, respectively, and is required to make an
additional payment of $2,000,000 upon the earlier of the date of the first sales
by BDIT of a product utilizing the Technology or April 5, 1998. Of these total
payments, $3,750,000 million represents advanced royalties for sales occurring
before the year 2002 and the $250,000 represents a product development fee. BDIT
is also required to pay ongoing royalties to the Company based on sales of
products utilizing the Technology. In addition, beginning in BDIT's fiscal year
2002, BDIT is required to pay minimum royalties in order to maintain exclusive
rights under the License Agreement.
Entering into the License Agreement created certain risks for the
Company. These include, among other things: (i) reliance on BDIT for sales of
the products, and therefore reliance on BDIT's marketing ability, marketing
plans, credit-worthiness and selling efforts; and (ii) any goodwill associated
with the products may inure to the benefit of BDIT rather than the Company.
The ExtreSafe(R) Lancet Strip has previously been assembled manually by
the Company with automated assembly beginning in November 1997. Automated
equipment will be moved from its place of origin to be installed at the site of
an independent third-party manufacturer that will manufacture the ExtreSafe(R)
Lancet Strip under a contract with the Company in December of 1997. The
automated production equipment is not yet in full operation. The costs of manual
assembly have exceeded the related revenues from the minimal sales of the
ExtreSafe(R) Lancet Strip. The use of automated production equipment is expected
to substantially reduce the cost to manufacture the ExtreSafe(R) Lancet Strip
and increase manufacturing capacity.
In September 1997, the Company entered into an agreement (the "Alliance
Agreement") with New Alliance of Independent Medical Distributors, Inc. dba
Alliance Medical ("Alliance Medical") which provides for the Company to
manufacture and Alliance Medical to market and sell the ExtreSafe(R) Lancet
Strip on an exclusive basis in hospitals, alternative-site (e.g., homecare,
plasma centers and blood banks) and consumer markets in the United States. The
Alliance Agreement provides for an initial term of three years including annual
minimum purchase quantities at specified prices, with annual renewal terms
thereafter. The Company does not expect to realize significant sales under the
Alliance Agreement until January 1998, after automated equipment is in place and
operating and following an incubation period for verification of product
sterility. However, there have been some sales of the manually assembled product
to Alliance Medical, principally for market assessment and development purposes.
The Company is seeking additional parties to market and distribute the
ExtreSafe(R) Lancets Strip in foreign markets. There is no assurance that the
9
<PAGE>
Company will enter into any other arrangements or realize sufficient sales from
the Alliance Medical arrangement with respect to the marketing and distribution
of ExtreSafe(R) Lancet Strips.
Research and development ("R&D") expenses were $322,013 and $914,524
for the three and nine months ended September 30, 1997, compared with $341,337
and $968,515 for the comparable periods from the prior year. The Company's R&D
efforts in the nine months ended September 30, 1997, focused on completing final
development of the ExtreSafe(R) Lancet Strip, development relating to several
products utilizing the ExtreSafe(R) medical needle withdrawal technology and
development work on the filmless digitized imaging technology (which was
performed by QIC, but which was funded by the Company). The Company's efforts in
the nine months ended September 30, 1996, were focused on refining the design of
production molds for its Safety Cradle(R) sharps container products, on the
design and development of its ExtreSafe(R) Lancet Strip, on initial development
of its ExtreSafe(R) medical needle withdrawal technology and funding development
work on the filmless digitized imaging technology.
If the Company had had adequate funding, R&D expenditures during these
periods would have been greater than they actually were. Funding constraints
also set back the anticipated dates on which the Company's products under
development will be brought to market. Further reductions in R&D expenditures
are not anticipated unless funding constraints require the Company to make such
reductions. Reductions in R&D expenditures would comprise primarily reductions
in R&D staff. Such staff reductions could have a material adverse effect on
product development and on the Company. Management does not intend to downsize.
Selling, general and administrative expenses were $879,922 and
$2,458,715 for the three and nine months ended September 30, 1997, compared with
$795,686 and $1,904,625 for the comparable periods from the prior year. The
increases in expenditures between the 1997 and 1996 periods resulted primarily
from an increased number of employees, amounts paid to financial advisors and
public relations firms and legal and accounting fees.
The Company does not expect that selling, general and administrative
expenses will be reduced below current levels without reducing the number of
employees, terminating its relationship with its financial advisors or reducing
the number of and scope of patent applications in the United States and abroad.
Such reductions may have a material adverse effect on the sale and
commercialization of the Company's products. Management does not intend to
downsize, terminate its relationship with its financial advisors or limit the
number or scope of the Company's patent filings.
Net interest income was $10,349 and $16,949 for the three and nine
months ended September 30, 1997, compared with $18,567 and $102,467 for the
comparable periods from the prior year. The difference in net interest income
between said periods relates mainly to interest earned on funds on deposit. As
funds on deposit have decreased so has the net interest income. Unless the
Company generates additional cash through product sales or financings, net
interest income during the remainder of 1997 will be substantially less than in
1996.
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of equity securities, proceeds from the exercise of common
stock options, receipt of advanced royalties and a distribution fee received
under the License Agreement. From inception through September 30, 1997, the
Company had received net proceeds of approximately $10,948,000 through financing
activities. As of September 30, 1997, the Company's liabilities totaled
$2,009,576, which included $1,750,000 in deferred royalty revenues relating to
the License Agreement. The Company had working capital as of September 30, 1997,
of $337,727 and the Company used net cash in operating activities of
approximately $1,144,568 during the nine months ended September 30, 1997.
10
<PAGE>
The Company's working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including the costs
to complete development and bring the ExtreSafe(R) medical needle withdrawal
technology, intravenous flow gauge, blood collection device and other products
to commercial viability, and the level of sales of and marketing for the Safety
Cradle(R) sharps containers and ExtreSafe(R) Lancet Strip.
In order to maintain current levels of spending for the next twelve
months the Company will need to raise additional funds through one or more of
the following sources: a private offering, product sales, licensing
arrangements, distribution agreements, option and warrant exercises or otherwise
(the "Funding Sources"). Management believes that it will be successful in
raising additional funding through the Funding Sources and is in negotiations
with respect thereto. The Company will not, however, have funding necessary to
continue operations if additional amounts are not received from the Funding
Sources by December 31, 1997, if spending is not substantially reduced. There is
no assurance that any Funding Sources will provide operating funds or that, if
funding is received, the terms of such financing will be favorable to the
Company.
If funding from the Funding Sources does not materialize, the Company
can and would expect to reduce operating costs and capital expenditures by
focusing primarily on its sharps container, lancet and other products that are
or soon will be ready to sell. The Company's failure, however, to produce or
sell sufficient quantities of its products, raise additional funds from the
Funding Sources, or sufficiently reduce its costs of operations and capital
expenditures will materially and adversely affect the Company's cash flows and
financial condition. In addition, the Company's cash reserves are minimal and if
additional funds from the Funding Sources do not materialize by December 31,
1997, the Company will exhaust its funds if spending is not substantially
reduced. In addition, management may expend cash at relatively high rates by
maintaining or increasing spending if management determines that additional
funding is likely to be obtained. If the anticipated funding is not obtained,
such continued expenditures may materially and adversely affect the Company's
financial condition.
Trading Market
The Company's common stock is currently traded on the Nasdaq Small-Cap
Market System. In order to continue to qualify its stock for quotation on the
Nasdaq Small-Cap Market, a company must have, among other things, $2 million in
net tangible assets or a market capitalization of $35 million. As a result, the
Company does not currently meet the listing requirements and will be delisted if
it does not raise additional funds from the Funding Sources or if sales do not
increase substantially. The Company's is attempting to rectify this situation.
In the event of delisting, trading, if any, in the Company's securities
would be expected to be conducted in the over-the-counter market in what is
commonly referred to as the "pink sheets" or the "Electronic Bulletin Board." As
a result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of the Company's securities. The loss of
continued price quotations as provided by the Nasdaq System could also cause a
decline in the price of the Common Stock, a loss of news coverage of the Company
and difficulty in obtaining subsequent financing.
Quantum Imaging Corporation
On November 4, 1997, the Company entered into the Option Agreement with
Zerbec. The Option Agreement provides that if the Company makes a payment to
Zerbec of $250,000 no later than November 30, 1997, the Company will have the
option to acquire all of the shares of QIC common stock currently owned by
Zerbec. The terms of the Option Agreement provide that in addition to the
November payment, if SHP elects to exercise its option SHP will pay Zerbec
$1,750,000 on or before April 1, 1998 and $1,500,000 on or before July 1, 1998.
Up to one-half of the amount of both payments may be paid, at the option of the
Company, with the Company's common stock with the fair market value of the
Company's common stock being determined by averaging the daily closing price
over the last five trading days prior to January 15, 1998. Any shares of the
11
<PAGE>
Company's common stock issued pursuant to this arrangement will have certain
piggy-back and/or demand registration rights and will have resale limitations.
There can be no assurance that the Company will be able to exercise the
option and successfully complete the acquisition on the above terms. As a
result, the Company's ownership interest in QIC may decrease as a result of its
or the Company's inability to complete the acquisition as previously described.
Forward-Looking Statements
When used in this Form 10-Q, in other filings by the Company with the
SEC, in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases "would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various risks and uncertainties, including but not
limited to risk of product demand, market acceptance, economic conditions,
competitive products and pricing, difficulties in product development,
commercialization and technology, and other risks. Furthermore, manufacturing
delays may result from additional mold redesigns or delays may result from the
failure to timely obtain FDA approval to sell future products. In addition,
significant sales through BDIT, BDSDS and Alliance Medical or otherwise may not
commence as anticipated due to delays by BDIT, BDSDS and Alliance Medical or
otherwise. If and when product sales commence, sales may not reach the levels
anticipated. As a result, the Company's actual results for future periods could
differ materially from those anticipated or projected.
Unless otherwise required by applicable law, the Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
In April 1997, the Company entered into an agreement with Leerink Swann
& Company ("Leerink"), whereby Leerink agreed to assist the Company in raising
funds in a private placement of equity securities. Sufficient funding was
deposited into escrow to hold an initial closing, but the closing did not occur.
Leerink alleges that the Company refused to close on the placement. The Company
alleges that the closing did not occur because Leerink, as a condition precedent
to closing, made certain pre-closing demands that went far beyond the terms of
the agreement and which demands Company management believes were not in the best
interest of the Company or its stockholders. In August 1997, Leerink filed suit
in the United States District Court for the District of Massachusetts alleging
breach of contract and violation of M.G.L. c.93A, ss.11. Leerink is seeking
money damages, warrants to purchase shares of the Company's common stock,
attorneys' fees and costs. Thereafter, the Company filed a counterclaim alleging
breach of contract and violation of M.G.L. c.93A, ss.11. The Company is seeking
money damages, attorneys' fees and costs. The litigation is in the early stages,
is subject to all of the risks and uncertainties of litigation and the outcome
cannot presently be predicted. Specifically, there is no assurance that the
Company will be successful in this lawsuit or that the lawsuit will be resolved
on acceptable terms, and the Company may incur significant costs in asserting
its claims and defenses.
12
<PAGE>
The Company is not engaged in any other legal proceedings.
Item 2. Changes in Securities.
On September 8, 1997, the Board of Directors authorized the issuance of
100,000 shares of common stock to an unrelated individual as compensation for
consulting services rendered. The placement was made in reliance on various
exemptions from registration, including Section 4(2) of the Securities Act of
1933 and/or Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Securityholders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a)
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3(i).1 Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3(i).1 of the
Company's current report on Form 8-K, dated July 28,
1995)
3(i).2 Certificate of Amendment of Certificate of Incorporation
of the Company (Incorporated by reference to Exhibit
3(i).2 of the Company's annual report on Form 10-K, dated
December 31, 1996)
3(i).3 Articles of Incorporation of Specialized Health Products,
Inc. ("SHP") (Incorporated by reference to Exhibit 3(i).2
of the Company's Form 10-K, dated December 31, 1995)
3(i).4 Articles of Amendment of SHP (Incorporated by reference
to Exhibit 3(i).3 of the Company's Form 10-K, dated
December 31, 1995)
3(ii).1 Amended and Restated Bylaws of the Company (Incorporated
by reference to Exhibit 3(ii).1 of the Company's annual
report on Form 10-K, dated December 31, 1996)
3(ii).2 Bylaws of SHP (Incorporated by reference to Exhibit
3(ii).2 of the Company's Form 10-K, dated December 31,
1995)
4.1 Form of Series A Warrant Certificate (Incorporated by
reference to Exhibit 4.1 of the Company's Annual Report
on Form 10-K, dated December 31, 1995).
4.2 Form of Series B Warrant Certificate (Incorporated by
reference to Exhibit 4.2 of the Company's Annual Report
on Form 10-K, dated December 31, 1995).
13
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
4.3 Form of Series C Warrant Certificate (Incorporated by
reference to Exhibit 4.3 of the Company's Amendment No. 1
to its Form S-3/A Registration Statement, dated April 18,
1997)
10.1 Placement Agreement between the Company, SHP and U.S.
Sachem Financial Consultants, L.P., dated June 23, 1995
(Incorporated by reference to Exhibit 10.2 of the
Company's Form 10-K, dated December 31, 1995)
10.2 Form of Employment Agreement with Executive Officers
(Incorporated by reference to Exhibit 10.3 of the
Company's Form 10-K, dated December 31, 1995)
10.3 Form of Indemnity Agreement with Executive Officers and
Directors (Incorporated by reference to Exhibit 10.4 of
the Company's Form 10-K, dated December 31, 1995)
10.4 Form of Confidentiality Agreement (Incorporated by
reference to Exhibit 10.5 of the Company's Form 10-K,
dated December 31, 1995)
10.5 Joint Venture Agreement between SHP and Zerbec, Inc.,
dated October 30, 1995 (Incorporated by reference to
Exhibit 10.6 of the Company's Form 10-K, dated December
31, 1995)
10.6 Distribution Agreement between SHP and Becton, Dickinson
and Company (Incorporated by reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K, dated August
26, 1996)
10.7 License Agreement between SHP and Becton, Dickinson and
Company (Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K, dated June 4, 1997)
10.8 Distribution Agreement between SHP and New Alliance of
Independent Medical Distributors, Inc., dated September
9, 1997.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
14
<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 hereunto duly authorized.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.:
By /s/ David A. Robinson
Date: 11/14/97 ----------------------------
David A. Robinson
President, Chief Executive Officer, Director
Date: 11/14/97 By /s/ Charles D. Roe
-----------------------------
Charles D. Roe
Vice President, Chief Financial Officer
15
(Distribution Agreement between SHP and New Alliance
of Independent Medical Distributors, Inc.)
<PAGE>
NEW ALLIANCE OF INDEPENDENT MEDICAL DISTRIBUTORS, INC.
d.b.a. Alliance Medical
DISTRIBUTION AGREEMENT
PARTIES
This Distribution Agreement is made and entered into by and between New Alliance
of Independent Medical Distributors, Inc., a Texas corporation having its
principal offices at 3429 Executive Center Dr., #255, Austin, Texas 78731
(hereinafter referred to as: "Alliance"), and Specialized Health Products, Inc.,
a Utah corporation having its principal offices at 655 E. Medical Drive,
Bountiful, UT 84010 (hereinafter referred to as: "SHP").
PREAMBLE
WHEREAS, Alliance acts as a centralized purchasing agent for its member-owners
who are distributors of medical products in the US, and
WHEREAS, Alliance desires to appoint SHP as a manufacturer of products to
Alliance for sale through Alliance's members on the terms and conditions set
forth below and SHP desires to accept the appointment;
RECITATION
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, Alliance and SHP agree as follows:
1 DEFINITIONS
1.1 "Agreement" means this contract and all of the exhibits
annexed hereto, as may be modified from time to time during
the Term of this Agreement.
1.2 "Members" means the member-owners of Alliance (presently Amtec
Medical, Inc.; Bio-Medical Resources, Inc.; Capitol Medical,
Inc.; Clinical Technology, Inc.; Davis Enterprises; Hinck
Medical, Inc.; IMS, Inc; Medical Marketing, Inc.; Medspec
Inc.; Medtec Medical, Inc.; New England Medical Specialties;
and Westcon Medical Industries, Inc.), and each such member or
new member, for so long as each is a member of Alliance.
1.3 "Product(s)" means those products listed in Exhibit A
including Alliance or SHP labeled products and other Products
added to this Agreement from time to time.
1.4 "Territory" shall mean the United States and shall include all
hospital markets, consumer product markets, and alternate site
markets e.g. homecare markets, same day surgery facilities,
physician offices, plasma collection facilities, blood banks
and independent laboratories.
1.5 "Term" means that period of time or periods of time set forth
in Section 6 of this Agreement. 1.6 "Sales Minimums" means
minimum Product purchases by the Alliance during the Term of
this Agreement as listed in Exhibit B of this agreement.
1.7 "Sub-Distributors" means non-Alliance distributor.
1.8 "Confidential Information" means any data or information, oral
or written, treated as confidential that relates to either
party's (or, if either party is bound to protect the
confidentiality of any other person's information, such other
person's) past, present, or future research, development or
business activities, including any unannounced products(s) and
service(s), and including any information relating to
services, developments, inventions, processes, plans,
financial information, customer and SHP lists, forecasts, and
projections. Notwithstanding the foregoing, Confidential
Information shall not be deemed to include information that
(1) is publicly available or in the public domain at the time
disclosed; (2) is or becomes publicly available or enters the
public domain through no fault of the party receiving such
information; (3) is rightfully communicated to the recipient
by persons not bound by confidentiality obligations with
respect thereto; (4) is already in the recipient's possession
free of any confidentiality obligations with respect thereto
at the time of disclosure; (5) is independently developed by
the recipient; (6) is, in the opinion of counsel to a party
hereto, is required by law to be disclosed, or (7) is approved
for release or disclosure by the disclosing party without
restriction.
1.9 "Intellectual Property Rights" means the legal rights or
interests relating to the Products evidenced by or embodied in
(1) any idea, design, concept, technique, invention,
discovery, or improvement, regardless of patentability, but
including patents, patent applications, trade secrets, and
<PAGE>
know-how; (2) any work of authorship, regardless of
copyrightability, but including copyrights and any moral
rights recognized by law; and (3) any other similar rights, in
each case on a worldwide basis.
2 APPOINTMENT OF DISTRIBUTOR
2.1 SHP appoints Alliance as SHP's distributor for sale and
support of SHP Products in the Territory. Alliance will be the
exclusive hospital, alternate-site (e.g. homecare, plasma
centers, blood banks, same day surgery center, physician
office) and consumer market distributor for Products in the
Territory. If Alliance fails to purchase the Sales Minimums of
SHP Products as set forth in Exhibit B herein, then, at the
option of SHP (which election can be made any time during the
remaining term of this Agreement), (i) any exclusive
distribution rights Alliance may possess shall be converted
into a nonexclusive right to sell SHP Products; or (ii) this
Agreement shall be terminated.
2.2 All rights not specifically granted to Alliance hereunder are
reserved by SHP. Except as expressly provided hereunder in
connection with the distribution of the SHP Products, SHP does
not convey any Intellectual Property Rights to Alliance
hereunder.
2.3 SHP agrees to comply with the terms of this Agreement and with
all existing sales policies of Alliance that Alliance has
given SHP notice of prior to the date hereof in writing and
other policies that SHP may agree to in writing from time to
time.
2.4 Alliance shall be entitled to appoint such sub-distributors,
including its Members that may be necessary to ensure the
effective distribution and support of the Products in the
Territory. The legal relationship between Alliance and
sub-distributors is independent of any relationship between
Alliance and SHP, and no legally binding relationship shall be
deemed to exist between SHP and any such sub-distributors
unless SHP enters into a binding written agreement with such
sub-distributors.
2.5 Nothing in this Agreement shall be construed to constitute
either party the agent or employee of the other party for any
purpose whatsoever. All sales to Alliance under this Agreement
are and shall be sales between Alliance as Agent-Buyer, and
SHP as Seller.
3 OBLIGATIONS OF ALLIANCE
In addition to all other obligations of Alliance set forth in this
Agreement, including any and all Exhibits expressly incorporated herein by
reference, Alliance expressly agrees on behalf of its Members, officers,
directors, managers, employees and sub-distributors, if any, during the
Term, as follows:
3.1 Alliance shall use commercially reasonable efforts to sell and
promote the use of Product in the Territory.
3.2 Alliance shall provide Product and such services to Alliance's
customers as is customary in the trade in the Territory of
of Alliance and as necessary to reasonably meet the needs of
a customer.
3.3 Alliance shall train, develop and maintain customer service
and sales support capable of providing prompt and effective
technical services to users of Product in the Territory.
3.4 Alliance shall maintain such inventories of equipment, tools,
literature and technical documentation that are adequate to
support the sales and service of Product.
3.5 Alliance shall permit SHP to inspect Alliance's facilities,
from time to time, and shall arrange for SHP to inspect the
Members facilities.
3.6 Upon specific requests by SHP, Alliance shall provide SHP with
written reports about competitive products and other relevant
data affecting SHP's business in the Territory. SHP may supply
Alliance with appropriate forms for this purpose.
3.7 Alliance shall have in effect all licenses, permits and
authorizations from all governmental agencies within the
Territory necessary to the performance of its obligations and
shall comply with all applicable laws, rules and regulations
affecting its activities including, but not limited to FDA,
product tracking, forwarding product complaints to SHP and
other regulatory requirements.
3.8 Alliance may not use the name "Specialized Health Product" in
its corporate name. Alliance is hereby granted, during the
Term of this Agreement or until withdrawn in writing by SHP,
2
<PAGE>
whichever comes first, authority to use the name "Specialized
Health Products, Inc." in literature, advertising, promoting
and/or merchandising SHP Product. Alliance agrees to follow
current SHP's requests with regard to the form and style of
its name when and if used by Alliance.
3.9 Alliance shall in all cases order from SHP at least the number
of Products each equal to the Sales Minimums as listed in
Exhibit B and will begin effective the 1st day of the month
following availability of product from automated assembly
equipment
3.10 Alliance shall distribute SHP Products with all packaging,
warranties, disclaimers, and agreements intact as shipped by
SHP.
4 OBLIGATIONS OF SHP
4.1 SHP shall use its commercially reasonable efforts to obtain
the best available shipping dates and to ship in accordance
with Alliance's shipping requests. SHP shall use commercially
reasonable efforts to maintain an "adequate" stocking
inventory of all Product at its corporate warehouse. Should
orders for SHP Products exceed SHP's available inventory, SHP
will allocate its available inventory and make deliveries on a
basis SHP deems equitable, in its sole discretion, and without
liability to Alliance or Alliance members on account of the
method of allocation chosen or its implementation.
4.2 SHP shall acknowledge Alliance orders promptly and provide
timely shipping information. Timely shall mean notice within
one (1) business day to the Alliance Member of any backorders,
including an expected ship date.
4.3 SHP shall, as promptly as practicable, give Alliance notice
of any elimination, addition, alteration in design or
discontinuation of any SHP or Alliance labeled Product. SHP
shall be free to make any of the foregoing changes, and
Alliance shall have no claim against SHP for its failure to
furnish to Alliance product of a design or type previously
sold but discontinued or changed by SHP.
4.4 SHP shall make available to Alliance, for use by Alliance
only for purposes of this Agreement, such technical
information, data, technology, analyses, laboratory reports
and other information in respect of Product for Alliance to
fulfill its obligation.
4.5 SHP will provide Alliance technical and practical training as
needed. SHP shall endeavor to provide such training regionally
at an Alliance facility.
4.6 SHP shall supply, at its cost, reasonable quantities of
product literature in the English language, as well as samples
of advertising materials, color separations, and English
language text.
4.7 SHP shall have in effect all licenses, permits and
authorizations from all governmental agencies within the
Territory necessary to the performance of its obligations and
shall comply with all applicable laws, rules and regulations
affecting its activities including, but not limited to FDA,
product tracking and other regulatory requirements.
4.8 SHP may not use the name "Alliance" in its corporate name. SHP
is hereby granted, during the Term of this Agreement or until
withdrawn in writing by Alliance, whichever comes first,
authority to use the name "Alliance Medical" in literature,
advertising, promoting and/or merchandising the Product. SHP
agrees to follow current Alliance "Corporate Style Guide"
in using Alliance name in advertising and promotion. Alliance
will provide to SHP the official "Corporate Style Guide" upon
acceptance of this Agreement.
4.9 SHP shall permit Alliance to inspect SHP's facilities, from
time to time.
4.10 Upon notification from Alliance to SHP regarding defective
Product, SHP will respond directly to the Alliance Customer of
such defective Product within two (2) business days of
notification by Alliance. An explanatory, written response
shall be provided by SHP to the Alliance Customer with a copy
submitted to Alliance.
5 PRICE, TERMS OF SALE, and REBATES
Price
5.1 Alliance's purchase price shall be in accordance with prices
established in Exhibit A. SHP will protect all pricing for
twelve (12) months from date of signed agreement. SHP may
change the Alliance Price Schedule after the twelve months
3
<PAGE>
upon giving Alliance written notice at least ninety (90) days
in advance of the effective date of any such price change. Any
new prices will be effective for all orders accepted by SHP
after the effective date as specified in such notice.
5.2 Prices set forth in Exhibit "A" do not include taxes of any
nature. Alliance shall pay such sales taxes when invoiced by
SHP or will supply appropriate tax exemption certificates in a
form reasonably satisfactory to SHP.
Terms of Sale
5.3 Upon acceptance by SHP of orders from Alliance Members, SHP
shall sell to Alliance, and Alliance shall purchase from SHP,
the Product ordered at the sale prices in effect at time of
acceptance of order.
5.4 Alliance shall place firm, written purchase orders for the
Product (at SHP's address written above, or at an address of
SHP as subsequently designated in writing by SHP) specifying
the types and quantities of Product desired and the required
dates of delivery if different from SHP's established shipping
schedule. All orders shall be subject to acceptance or
rejection by SHP and shall comply with Exhibit A of the
Agreement. SHP shall not unreasonably reject an order. Unless
Alliance clearly advises SHP to the contrary in writing, SHP
may make partial shipments of Alliance's orders, to be
separately invoiced and paid for when due. Delay in delivery
of any installment shall not relieve Alliance of its
obligation to accept the remaining deliveries, unless canceled
pursuant to this Agreement.
5.5 It is understood that Alliance Members may use their normal
purchase order forms with respect to their purchase of
Products. Purchase orders may specify, among other things, the
description and quantities of the products ordered, the method
of shipment, the requested shipment dates, and the destination
to which products shall be shipped. The terms of such purchase
orders shall not conflict with the terms of this Agreement.
5.6 SHP will invoice Alliance upon shipment of Products ordered
by Alliance Members. Payment shall be due thirty (30) days
after the date of invoice. SHP reserves the right, upon
written notice to Alliance, to declare all sums immediately
due and payable in the event of a breach by Alliance of any of
its obligations to SHP.
5.7 Alliance, upon written notice, may authorize SHP to suspend
Product shipment to any Member (under terms of this Agreement)
as a result of Member resignation, of Member non-payment of
invoice(s), or other circumstances deemed appropriate by
Alliance. SHP will allow Alliance ninety (90) days to remedy a
Member non-payment situation. As long as payment remains
delinquent by the individual Alliance Member, SHP may, in
addition to any other right or remedy provided by law or this
Agreement, require any further shipment to delinquent Member
to be prepaid.
5.8 SHP reserves the right to cancel or suspend any orders placed
by Alliance or Alliance members and accepted by SHP, or refuse
or delay shipment thereof, if Alliance fails (1) to make any
payment as provided herein or in any invoice; or (2) otherwise
to comply with the terms and conditions of this Agreement.
5.9 Interest shall accrue on any delinquent amounts owed to
SHP by Alliance hereunder at the rate of 1.5 percent (1.5%)
per month, or the maximum rate permitted by applicable law,
whichever is less.
5.10 SHP Products shall be shipped by SHP F.O.B. point of shipment.
Alliance or the Alliance member shall be responsible for and
shall pay all shipping, freight, and insurance charges, which
charges SHP may require be paid in advance. All risk of loss
or damage for any SHP Product shall pass from SHP upon
delivery by SHP to the freight carrier, or Alliance's agent
for delivery, whichever first occurs.
5.11 Alliance Members must obtain an RGA (Returned Goods
Authorization) from an authorized SHP Customer Service
Representative to return Product. Product in new and original
condition, in unopened cases, may be returned to SHP , freight
pre-paid, and will be subject to 10% re-stocking fee. If
opened, SHP Product may not be returned for refund. Defective
Product returned to SHP shall not be subject to any
re-stocking fee as warranted in section 8.2.
4
<PAGE>
Rebates
5.12 On a quarterly basis SHP will rebate to Alliance 5% of the
total SHP Product sales on all SHP Product paid for by
Alliance. On a quarterly basis SHP will rebate an additional
1% to Alliance on paid Product sales exceeding agreed upon
Sales Minimums for the first year as also outlined in Exhibit
B and then will be paid annually for succeeding years.
Alliance will invoice SHP quarterly for the 5% rebate.
5.13 SHP reserves the right to discontinue or reduce the number of
Products supplied to Alliance or Alliance members in the event
of a materials shortage, and any such action shall not be
deemed a breach of this Agreement. In addition, the number of
SHP Products that can be shipped during an initial period will
be limited until SHP's automated equipment comes on line in
the fourth quarter of 1997. Until the automated equipment is
operational, SHP's ability to ship limited numbers of SHP
Product will not be deemed to be a breach of this Agreement.
6 TERM OF AGREEMENT
6.1 The term of this Agreement is three (3) years, September 1,
1997 to August 31, 2000, unless terminated earlier pursuant to
its terms. This Agreement shall automatically renew for twelve
(12) month periods, if not otherwise terminated, unless either
party notifies the other in writing of its intentions not to
renew. Such notice, to be effective, must be given no later
than sixty (60) days before the Term is due to expire. In the
event that the Agreement is automatically renewed, Sales
Minimums shall be increased by a mutually agreed upon number.
6.2 In the event of a material default by either party in the
performance of its duties, obligations, or undertakings under
this Agreement, the other party shall have the right to give
written notice to the defaulting party advising such party of
the specific default involved. A material default hereunder
shall include, but not be limited to, Alliance's failure to
perform its obligations set forth in paragraphs 3.2 and 3.3
herein. If within thirty (30) days after such notice, the
defaulting party has not remedied such default, the other
party shall have the right to terminate this Agreement
immediately upon giving written notice of termination to the
defaulting party.
6.3 Either party may immediately terminate this Agreement at any
time by giving written notice of such termination in the event
the other party (i) becomes insolvent, institutes or permits
to be instituted against it any proceedings seeking
receivership, trusteeship, bankruptcy, reorganization,
arrangement, readjusting of debt, assignment for the benefit
of creditors, or other similar proceedings under any
applicable law; or (ii) becomes involved in a merger, is
acquired by another party, sells substantially all of its
assets, or is involved in a similar transaction. In the event
of such, Alliance and Members will assume responsibility for
paying all outstanding Alliance and Members invoices.
6.4 Right on Termination. Upon termination of this agreement, the
parties shall be bound by the following provision:
6.4.1 No Release from Obligations. Any termination of this
Agreement shall not relieve or release either party
from obligations which shall have accrued under this
Agreement prior to termination. No termination shall
release any party from 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 herein.
6.4.2 No Right to Damages or Indemnification. In the event
of proper termination of this Agreement, neither
Alliance nor SHP shall have any right to damages or
indemnification of any nature arising from such
termination, whether for the loss of future profits
or an account of expenditures, investments, leases
or commitments made in connection with business or
goodwill.
6.4.3 Except to the extent of selling its remaining
inventory of Product, Alliance shall not thereafter
represent or hold itself out as being an authorized
distributor or sales representative for SHP's
Products or engage in any practices which might make
it appear that Alliance or its sub-distributors are
still authorized to distribute Product.
5
<PAGE>
6.4.4 Any acceptance by SHP of an order after notice of
termination is given shall be separate transactions
and shall not operate as a renewal or revival of this
Agreement or as a waiver of any rights or provision
hereof.
6.4.5 No termination of this Agreement shall 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 herein.
7 INTELLECTUAL PROPERTY
7.1 SHP shall have and retain sole ownership of the patents and
trademarks relating to the SHP Products, including the
goodwill pertaining thereto. Alliance acknowledges that it has
no right in any patents, trademarks or trade names used by SHP
or SHP's suppliers anywhere in the world, whether or not
registered in the Territory. Alliance undertakes that it will
not assert, and will not allow any of its sub-distributors to
assert any rights in any such properties arising by reason of
Alliance's appointment or the use of any such properties. SHP
hereby grants to Alliance the right to use and display the
Trademarks solely in connection with and solely to the extent
reasonably necessary for the marketing, distribution, and
support of the SHP Products within the Territory in accordance
with the terms and conditions of this Agreement. Alliance
shall market, distribute, and support the SHP Products only
under the Trademarks, and not any other trademark or logo.
Alliance shall not use the Trademarks or any other trademarks
or trade names of SHP or any word, symbol, or design
confusingly similar thereto, as part of its corporate name, or
as part of the name of any SHP Products. Alliance shall not
remove or alter the SHP Products' copyright notices,
trademarks, patent notices, and logs, or packaging. To protect
and preserve the goodwill and image of the SHP Products,
Alliance shall (1) conduct business in a manner that reflects
favorably at all times on the SHP Products and the reputation
of SHP; (2) avoid deceptive, misleading, or unethical
practices that are or might be detrimental to SHP and/or the
SHP Products, including any disparagement of SHP or the SHP
Products; (3) make no false or misleading representations with
regard to SHP or the SHP Products; (4) refrain from publishing
or employing any misleading or deceptive advertising material;
and (5) refrain from making any representations, warranties,
or guarantees to purchasers with respect to the
specifications, features, or capabilities of SHP Products that
are inconsistent with the literature distributed by SHP,
including all warranties and disclaimers contained in such
literature.
7.2 During the course of performance of this Agreement, the
parties hereto may disclose certain Confidential Information
to the other party solely to permit the other party to perform
its obligations under this Agreement. The parties hereto shall
use commercially reasonable efforts to maintain the secrecy of
all such Confidential Information. The parties shall refrain
from using, disclosing, or otherwise exploiting any
Confidential Information for any purpose not specifically
authorized by the disclosing party in this Agreement. All
files, lists, records, documents, drawings, specifications
and equipment that incorporate or refer to any Confidential
Information shall be returned or destroyed promptly upon
termination of this Agreement. Either party may identify
Confidential Information by marking it as "confidential". Oral
communications may be identified as Confidential Information
by reducing the confidential portions f the communication
to writing and marking it as "confidential."
7.3 Alliance shall promptly notify SHP of (1) any claims,
allegations, or notification that its marketing, licensing,
support, or service of the SHP Products may or will infringe
the Intellectual Property Rights of any other person or
entity; and (2) any determination, discovery, or notification
that any person or entity is or may be infringing the
Intellectual Property Rights of SHP. Alliance shall not take
any legal action relating to the protection or defense of any
Intellectual Property Rights pertaining to the SHP Products
without the prior written approval of SHP. SHP shall have no
obligation to take legal action relating to the protection or
defense of any Intellectual Property Rights.
6
<PAGE>
8 WARRANTY
Warranty
8.1 SHP warrants that all Product will have been manufactured in
accordance with generally accepted good manufacturing
practices.
8.2 SHP warrants that the SHP Product, when used in accordance
with the directions on its labeling, is fit for the purposes
and the indications described in the labeling. SHP shall hold
Alliance harmless from and against all damages awarded plus
all costs and expenses related thereto arising from any
injuries caused by the use of a unit of the Product which is
proven to be defective when used in accordance with the
direction on the labeling. SHP's obligation under this
warranty are limited solely to Products which may be proven
defective. Alliance shall afford SHP prompt and reasonable
opportunity to inspect any product as to which any claim is
made.
8.3 SHP HEREBY DISCLAIMS ANY OTHER WARRANTY, EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE.
8.4 IN NO EVENT SHALL SHP BE LIABLE TO ALLIANCE FOR ANY INDIRECT,
SPECIAL, OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT
LIMITATION, LOST PROFITS, COSTS OF DELAY, AND ANY FAILURE OF
DELIVERY.
8.5 IN THE EVENT THAT, NOTWITHSTANDING SECTION 8.3 AND 8.4 HEREOF,
SHP IS FOUND LIABLE FOR DAMAGES BASED ON ANY DEFECT OF
NONCONFORMITY IN THE LANCETS, ITS TOTAL LIABILITY TO THE
ALLIANCE AND MEMBERS FOR EACH DEFECTIVE LANCETS SHALL NOT
EXCEED THE PRICE OF SUCH DEFECTIVE LANCETS.
Miscellaneous
8.6 Products found by Alliance to be defective prior to Alliance's
resale shall be promptly replaced by SHP without charge or
expense to Alliance. Defective Products found by Alliance
shall be, at SHP's election, either returned to SHP or
destroyed. Products reported by Alliance's customers to be
defective will be replaced by SHP in accordance with Sections
4.10, 5.13 and 8.8 of this Agreement.
8.7 At all times during the term of this Agreement, SHP will
maintain in full force and effect a policy or policies of
insurance issued by insurers of recognized responsibility,
insuring it against such losses and risks (including product
liability), and in such amounts, as SHP determines is prudent.
8.8 Alliance shall act as the intermediary between SHP and any
other persons or entities who receive Product from or through
Alliance and who have any Product complaint, including a
complaint of defective material or workmanship.
8.9 Alliance must advise SHP of any discrepancies in shipment or
invoice within thirty (30) days of accepting the merchandise.
Otherwise, it is assumed that Alliance has accepted both goods
and invoice as received.
8.10 Alliance Members shall request a Returned Goods Authorization
Number from SHP before merchandise is returned for credit or
adjustment. This Authorization Number will be obtained from
SHP's Customer Service Department.
8.11 Any returns, other than defective or non conforming Products,
to SHP shall be shipped freight prepaid. Where timely claim is
made, SHP will, at its option and expense, replace product
that is defective prior to leaving an SHP manufacturing
facility or non conforming Product under its warranty.
Allowance for, or replacement of, defective items will be made
following tests and inspection by SHP. Defective merchandise
and shipping errors and associated shipping costs will be
remedied at full credit.
8.12 Alliance shall hold SHP harmless from all claims arising from
the negligent acts of Alliance including any claims arising
from third parties in relation to Alliance's activities in
connection with Product.
7
<PAGE>
9 INDEMNIFICATION
9.1 SHP shall indemnify, hold harmless and defend Alliance, its
directors, officers, agents and employees from and against any
and all claims, costs, demands, liabilities, losses, damages,
and expenses of whatever nature, including reasonable
attorney's fees, made against or sustained by Alliance, its
directors, officers, employees or agents with respect to any
breach of a warranty contained in Sections 8.1 or 8.2 hereof.
The provision of this Section 9.1 shall survive the term of
this Agreement.
9.2 Alliance shall indemnify, hold harmless and defend SHP, its
directors, officers, agents and employees from and against any
and all claims, costs, demands, liabilities, losses, damages,
and expenses of whatever nature, including reasonable
attorney's fees, made against or sustained by SHP, its
directors, officers, employees or agents with respect to any
negligent acts of Alliance or its sub-distributors including
any claims arising from third parties in relation to
Alliance's or its sub-distributors' activities in connection
with SHP Product. The provision of this Section 9.2 shall
survive the term of this Agreement.
10 NOTICES
10.1 All notices, requests, consents, demands and other
communications to be given or delivered under, or by any
reason of the provisions of this Agreement, shall be in
writing and shall be (a) personally delivered (including
courier), (b) sent by postage prepaid registered airmail or
(c) transmitted by facsimile transmission or other electronic
means, and shall be deemed to have been duly given when
received. Notices to SHP shall be sent to its address as set
forth below (Attention: President, SHP ) and to Alliance at
its address set forth below (Attention: Chief Operating
Officer, New Alliance of Independent Medical Distributors,
Inc.) or to such other address as the recipient shall have
last given notice.
11 ENTIRE AGREEMENT
11.1 The terms and conditions of this Agreement, including the
annexed Exhibits mentioned in the main body of this Agreement
and all documents identified as part of this Agreement,
together constitute the entire agreement between the parties
and supersede all prior or contemporaneous communications,
negotiations, representations, or agreements between the
parties with respect to the subject matter hereof.
12 AMENDMENTS
12.1 No modifications, or amendments to the Agreement shall be
binding upon either party unless specifically assented to in
writing by an authorized representative of both parties. No
waiver of any breach or of any term or condition of this
Agreement shall be deemed to be a waiver of any subsequent
similar breach or of the same or any other term or condition.
A failure at any time to enforce any rights by either party
under the terms of this Agreement shall not be considered a
waiver of such rights to enforce any proceeding or succeeding
breach of this Agreement or any rights under the terms of this
Agreement.
13 ASSIGNMENTS
13.1 This Agreement and the rights and duties of the parties hereto
shall be binding upon and inure to the benefit of the parties,
their successors and assigns, but this Agreement shall not be
assignable or delegated by a party hereto without the prior
written consent of the other party, except to a subsidiary or
parent of a party, which consent shall not be unreasonably
withheld.
14 COUNTERPARTS
14.1 This Agreement shall be executed in two or more counterparts,
each of which, when executed, shall be deemed to be an
original, and all of which when taken together shall
constitute but one and the same Agreement.
8
<PAGE>
15 FORCE MAJEURE
15.1 If force majeure prevents SHP from filling any order from
Alliance or otherwise performing any obligation arising out of
this Agreement, SHP shall not be liable for any compensation,
reimbursement or damages. If force majeure prevents SHP from
achieving its obligations, under this Agreement, this
Agreement shall be automatically modified to allow for delays
caused by such force majeure circumstances, provided SHP
notified Alliance in writing of the invocation of force
majeure for this purpose. The term "force majeure" shall mean
labor disputes, flood, fire, rebellion, war, regulations,
requirements or acts of civil or military authorities,
unavailability of materials or finished goods and allocations
or priorities with respect thereto, civil disorder, acts of
God, delays of carriers and any other cause beyond the control
of the party invoking the provisions of this section.
15.2 If force majeure prevents Alliance from performing any
obligation arising out of this Agreement, Alliance shall not
be liable for any compensation, reimbursement or damages. If
force majeure prevents Alliance from achieving its
obligations, under this Agreement, this Agreement shall be
automatically modified to allow for delays caused by such
force majeure circumstances, provided Alliance notified SHP in
writing of the invocation of force majeure for this purpose.
16 GOVERNING LAW: FORUM
16.1 This Agreement shall in all respects be interpreted, construed
and governed by and in accordance with the Laws of the State
of Utah, USA without regard to its conflict of law previsions.
All actions or proceedings arising directly or indirectly or
otherwise in connection with, out of, related to, or from this
Agreement may be litigated exclusively and only in courts with
the State of Utah, and the parties hereto hereby consent and
submit to the jurisdiction of any local, State or federal
court located in such State.
17 SEVERABILITY
17.1 In the event that any provision hereof is found invalid or
unenforceable pursuant to judicial decree or decision, the
remainder of this Agreement shall remain valid and enforceable
according to its terms. WITHOUT LIMITING THE FOREGOING, IT IS
EXPRESSLY UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION
OF THIS AGREEMENT THAT PROVIDES FOR A LIMITATION OF LIABILITY,
DISCLAIMER OF WARRANTIES, OR EXCLUSION OF DAMAGES IS INTENDED
BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER
PROVISION AND TO BE ENFORCED AS SUCH. FURTHER, IT IS EXPRESSLY
UNDERSTOOD AND AGREED THAT IN THE EVENT ANY REMEDY HEREUNDER
IS DETERMINED TO HAVE FAILED OF ITS ESSENTIAL PURPOSE, ALL
OTHER LIMITATIONS OF LIABILITY AND EXCLUSION OF DAMAGES SET
FORTH HEREIN SHALL REMAIN IN FULL FORCE AND EFFECT.
18 NUMBERS AND HEADINGS
18.1 The numbering and titling of sections, paragraphs and
subparagraphs contained in this Agreement is done purely as a
matter of convenience and is not intended to have a
substantive effect upon any of the provisions contained
herein.
19 INTEGRATION
19.1 This Agreement supersedes and cancels any previous
distributorship agreement which may exist between Alliance,
its members and SHP.
20 COMPETITION
20.1 During the term of this Agreement, Alliance agrees not to sell
any products that compete with the SHP Products in the
Territory represented by Alliance without the written consent
of SHP.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 9th day of September, 1997.
New Alliance of Independent Medical
Distributors, Inc. Specialized Health Products, Inc.
d.b.a. Alliance Medical 655 E. Medical Drive
3429 Executive Center Dr., #255 Bountiful, Utah 84010
Austin, Texas 78731
By /s/ Gene Meyer By /s/ David A. Robinson
------------------- --------------------------
Its: President Its: President
10
<PAGE>
EXHIBIT A
PRICING
List # Product Description Price/case
------ ------------------- ----------
0034-001 ExtreSafe Lancet Strips 81.60
480 lancets and 4 carriers
0044-001 Carrier/Actuators (10) 14.90
<PAGE>
EXHIBIT B
SALES MINIMUMS
* 10,550 cases (5,064,000 lancets total) during the first year of this
Agreement including quarterly minimums of:
* 500 cases (240,000 lancets) during the first quarter (the first 3
months) of this Agreement.
* 1,300 cases (624,000 lancets) during the second quarter (the
second 3 months) of this Agreement.
* 2,500 cases (1,200,000 lancets) during the third quarter (the
third 3 months) of this Agreement.
* 6,250 cases (3,000,000 lancets) during the fourth quarter (the
foruth 3 months) of this Agreement.
* 39,584 cases (19,000,320 lancets total) during the second year of this
Agreement including quarterly minimums of:
* 7,500 cases (3,600,000 lancets) during the first quarter (the
first three months of the second year) of this Agreement.
* 8,500 cases (4,080,000 lancets) during the second quarter (the
second three months of the second year) of this Agreement.
* 10,500 cases (4,080,000 lancets) during the third quarter (the
third three months of the second year) of this Agreement.
* 13,084 cases (5,040,000 lancets) during the fourth quarter (the
fourth three months of the second year of this Agreement.
* 64,000 cases (30,720,000 lancets total) during the third year of this
Agreement.
* 14,000 cases (6,720,000 lancets) during the first quarter (the
first three months of the second year) of this Agreement.
* 15,000 cases (7,200,000 lancets) during the second quarter (the
second three months of the second year) of this Agreement.
* 16,500 cases (7,920,000 lancets) during the third quarter (the
third three months of the second year) of this Agreement.
* 18,500 cases (8,880,000 lancets) during the fourth quarter (the
fourth three months of the second year) of this Agreement.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 344,687
<SECURITIES> 0
<RECEIVABLES> 84,662
<ALLOWANCES> 0
<INVENTORY> 29,038
<CURRENT-ASSETS> 597,303
<PP&E> 1,548,428
<DEPRECIATION> 266,017
<TOTAL-ASSETS> 2,125,979
<CURRENT-LIABILITIES> 259,576
<BONDS> 0
0
0
<COMMON> 187,597
<OTHER-SE> (71,194)
<TOTAL-LIABILITY-AND-EQUITY> 2,125,979
<SALES> 177,123
<TOTAL-REVENUES> 427,123
<CGS> 136,241
<TOTAL-COSTS> 3,465,796
<OTHER-EXPENSES> (24,832)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,150,082)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,150,082)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,150,082)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
