<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 3 or 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
for the nine month period ended March 31, 1996; or
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT
for the transition period from _____________to _______________
Commission file number 0-17293
DRUG SCREENING SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 22-2795073
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
604 VPR Commerce Center, 1001 Lower Landing Road, Blackwood, N.J. 08012
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(Address of principal executive offices)
(609) 228-8500
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 5(d) of the Exchange Act during the past 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
----- -----
On March 31, 1996, there were 4,246,017 shares of the issuer's Common Stock,
$0.01 par value, outstanding.
<PAGE>
DRUG SCREENING SYSTEMS, INC.
INDEX
Page
Part I - Financial Information
Item 1 - Financial Statements 3
Item 2 - Management's Discussion and Analysis or Plan of Operation 9
Part II - Other Information
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 12
Item 3 - Defaults Upon Senior Securities 12
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The accompanying unaudited condensed financial statements of Drug Screening
Systems, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-QSB and Item 310 of Regulation S-B of the Securities and
Exchange Commission. Accordingly, the financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three-month and nine-month periods ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1996 ("Fiscal 1996"). The accompanying
condensed financial statements and notes thereto should be read in conjunction
with the Company's Annual Report on Form 10-KSB ("Annual Report") for the year
ended June 30, 1995 ("Fiscal 1995").
Page
Index to Financial Statements
Balance Sheets at March 31, 1996 (unaudited) and June 30, 1995 4
Statements of Operations and Accumulated Deficit (unaudited) for the
three and nine months ended March 31, 1996 and 1995 5
Statement of Cash Flows (unaudited) for the nine months ended
March 31, 1996 and 1995 6
Notes to Financial Statements 7
<PAGE>
DRUG SCREENING SYSTEMS, INC.
Balance Sheets, March 31, 1996 (unaudited), and June 30, 1995
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
--------- --------
<S> <C> <C>
Assets
Current Assets:
Cash $ 282,385 $ 305,108
Accounts receivable, net of allowance for bad debts of
$75,000 at March 31, 1996, and $100,000 at June 30, 1995 133,010 124,975
Inventory 511,910 379,336
Prepaid expenses and other 96,970 63,312
------------ -----------
Total Current Assets 1,024,275 872,731
Equipment and improvements, net 510,179 562,200
Other Assets:
Deposits 10,204 9,397
Patents 26,167 27,292
------------ -----------
Total Assets $ 1,570,825 $ 1,471,620
============ ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt and capital leases $ 144,878 $ 163,927
Accounts payable and accrued expenses 550,527 545,825
Customer advances and prepayments 17,000 63,523
------------ -----------
Total Current Liabilities 712,405 773,275
Long term debt - 26,750
Commitments and contingencies
Stockholders' Equity
Class "A" preferred stock, $0.01 par value; 2,000
shares authorized; none issued - -
Common stock, $0.01 par value; 20,000,000
shares authorized; 4,246,017 shares at March 31,1996 and
2,446,017shares at June 30, 1995 issued and outstanding 42,460 24,460
Additional paid-in-capital 15,070,554 14,638,555
Accumulated deficit (14,254,594) (13,991,420)
------------ -----------
Total Stockholders' Equity
858,420 671,595
------------ -----------
Total Liabilities and Stockholders' Equity $ 1,570,825 $ 1,471,620
============ ===========
</TABLE>
See notes to financial statements
<PAGE>
DRUG SCREENING SYSTEMS, INC.
Statements of Operations and Accumulated Deficit (unaudited)
For the three and nine month periods ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 523,978 $ 759,365 $ 1,524,196 $ 1,984,286
Cost of sales 238,828 328,993 633,145 1,035,682
--------------- --------------- --------------- ----------------
Gross profit 285,150 430,372 891,051 948,604
Operating expenses:
Research and development 114,020 91,711 285,926 263,466
Selling, general and administrative 271,365 333,473 871,444 1,015,414
--------------- --------------- --------------- ----------------
385,385 425,184 1,157,370 1,278,880
--------------- --------------- --------------- ----------------
Income (loss) from operations (100,235) 5,188 (266,319) (330,276)
Interest income 1,444 1,505 3,145 3,919
--------------- --------------- --------------- ----------------
Net income (loss) (98,791) 6,693 (263,174) (326,357)
Accumulated deficit - beginning of period (14,155,803) (14,029,114) (13,991,420) (13,696,064)
--------------- --------------- --------------- ----------------
Accumulated deficit - end of period $ (14,254,594) $ (14,022,421) $ (14,254,594) $ (14,022,421)
=============== =============== =============== ================
Net income (loss) per share
$ (0.03) $ 0.00 $ (0.10) $ (0.16)
=============== =============== =============== ================
Weighted average number of shares
outstanding 3,246,000 2,446,000 2,713,000 2,075,200
=============== =============== =============== ================
</TABLE>
See notes to financial statements
<PAGE>
DRUG SCREENING SYSTEMS, INC.
Statement of Cash Flows for the Nine Months (unaudited)
Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Nine Months ended March 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (263,174) $ (326,357)
Adjustments to reconcile net loss to net cash used
Depreciation and amortization 73,322 99,716
Loss on sale of equipment held for sale
Decrease (increase) in assets: (5,861)
Accounts receivable (8,035) (26,518)
Inventory (132,574) (84,354)
Prepaid expenses and other (33,658) (74,704)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 4,702 85,483
Other current liabilities (46,523) (103,000)
----------- ------------
Net cash used in operating activities (405,940) (435,595)
Cash flows from inventing activities:
Proceeds from sale of equipment held for sale, net of expenses 31,602
Expenditures for equipment and improvements (20,176) (14,314)
Payment of deposits (807) (515)
----------- -------------
Net cash provided by (used in)investing activities (20,983) 16,773
Cash flows from financing activities:
Net proceeds from sale of common stock 450,000 375,000
Proceeds from non-bank financing 95,150 77,943
Principal payments on debt and capital leases (140,950) (35,419)
----------- ------------
Net cash provided by financing activities 404,200 417,524
----------- ------------
Net decrease in cash and cash equivalents (22,723) (1,298)
Cash and cash equivalents:
Beginning of period 305,108 280,775
----------- ------------
End of period $ 282,385 $ 279,477
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,537 $ 927
=========== ============
</TABLE>
See notes to financial statements
<PAGE>
DRUG SCREENING SYSTEMS, INC.
Notes to Financial Statements
For the Nine Months Ended March 31, 1996 and 1995
A. Basis of Presentation
Since its inception, except for two quarters in Fiscal 1995, the Company has
sustained recurring losses from operations. The Company has financed its
operations and research and development program primarily through proceeds
received from its initial public offering in May 1988 and subsequent securities
offerings.
The Board of Directors is exploring various financing options, including a
possible sale or merger. The Company raised $450,000 in subscriptions through a
private placement pursuant to Regulation D under the Securities Act of 1933, as
amended (the "Securities Act"), during the nine months ended March 31, 1996.
Under this offering, shares of the Company's Common Stock were offered at $0.25
a share. The 1,800,000 shares sold in the offering were issued in March, 1996.
If operations are maintained at the levels currently expected, the cash raised
by this private placement and the cash generated by operations will be
sufficient to meet the Company's cash needs for the balance of Fiscal 1996. The
Company anticipates increased activity during the fourth quarter due to its new
distribution agreement with the U. S. Distribution business of Baxter Healthcare
Corporation (Baxter"). Baxter has the exclusive distribution rights to the
clinical testing and diagnostic and research laboratories in the United States.
Baxter should create a volume sufficient for the Company to be profitable in the
year ended June 30, 1997 ("Fiscal 1997"). There is, however, no assurance that
this increased activity will be achieved or that the Company will become
profitable when anticipated or thereafter. See Item 2 to of this Part I of this
Report for a more detailed discussion.
Unless the Company can (1) obtain such capital contributions or financing as may
be required to fulfill its development and marketing activities, (2) achieve a
level of sales adequate to support the Company's cost structure and (3)
ultimately operate profitably, the Company may be unable to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
B. Revenue Recognition
The Company recognizes revenues at the time Product is shipped. The Company has
an arrangement with a customer whereby title and risk of loss transfers to the
customers upon transfer of Product from the Company's finished goods inventory
into a segregated refrigeration unit on the Company's premises and, accordingly,
the Company recognizes revenue at the time such Product is transferred. Sales
under this arrangement totaled $766,723 during the first nine months of Fiscal
1996 and $1,164,506 during the first nine months of Fiscal 1995, of which
$660,000 was in the refrigerated storage unit at March 31, 1996 and June 30,
1995.
<PAGE>
C. Inventory
Inventory at March 31, 1996 and June 30, 1995 consisted of the following:
March 31 June 30
-------- -------
Raw Materials $ 262,648 $ 207,031
Work-in-process 192,756 132,739
Finished Goods 56,506 39,566
--------- ---------
Total $ 511,910 $ 379,336
========= =========
D. Equipment and Improvements
Equipment and Improvements at March 31, 1996 and June 30, 1995, which were
recorded at cost, consisted of the following:
March 31 June 30
-------- -------
Furniture and fixtures $ 59,746 $ 59,746
Leasehold improvements 176,299 176,299
Machinery and equipment 457,832 466,763
Construction in process 418,958 418,958
----------- -----------
1,112,835 1,121,766
Less accumulated depreciation
and amortization 602,656 559,566
----------- -----------
$ 510,179 $ 562,200
=========== ===========
E. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at March 31, 1996 and June 30, 1995
consisted of the following:
March 31 June 30
-------- -------
Accounts payable - trade $ 274,641 $ 268,759
Accrued payroll and related expenses 30,817 51,212
Other 245,069 225,854
=========== =========
$ 550,527 $ 545,825
=========== =========
<PAGE>
F. Income Taxes
The tax effects of significant items comprising the Company's net deferred taxes
as of March 31, 1996 were as follows:
Deferred Tax Assets:
Property $ 44,000
Allowance for doubtful accounts 30,000
Vacation accrual 8,000
Operating loss carryforwards 5,900,000
Valuation allowance (5,982,000)
=============
$ -
=============
The change in the valuation allowance was an increase of approximately $90,000
during the nine months ended March 31, 1996.
There was no provision for current income taxes for either the first nine months
of Fiscal 1996 or 1995.
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis for the three and nine months ended March
31, 1996 and 1995 should be read in conjunction with the Financial Statements
included in Item 1 of this Part I of this report.
Results of Operations - Nine Months Ended March 31, 1996 Versus 1995
Revenues - The Company's revenues from sales were $1,524,196 and $1,984,286 in
the first nine months of Fiscal 1996 and 1995, respectively. This decrease of
$460,090 (23%) resulted from decreased sales to Borg-Warner Information
Services, Inc. ("BWIS") of approximately $400,000. Because the Company had
manufactured the maximum amount under its arrangement, it can no longer build
for stock owned by BWIS. Sales to other customers in the first nine months of
Fiscal 1996 decreased by approximately $ 60,000 due primarily to having a large
one-time bid sale in the nine months ended March 31, 1995 which was not totally
replaced with new business in the nine months ended March 31, 1996.
The Company's gross profit of $891,051 for the first nine months of Fiscal 1996
amounted to 77% of its operating expenses as compared with $948,604 and 74%,
respectively, in the first nine months of Fiscal 1995. At the gross profit
percentage for the first nine months of Fiscal 1996, the Company would have had
to generate approximately $1,980,000 in sales to cover such operating expenses
as compared with $2,675,000 in the first nine months of Fiscal 1995.
<PAGE>
Cost of sales and gross profit - The Company's cost of sales for the first nine
months of Fiscal 1996 was $633,145 and its gross profit percentage was 58.5% as
compared with $1,035,682 and 47.8%, respectively for the comparable period in
Fiscal 1995. This increase in the gross profit as a percent of sales resulted
primarily from sales to higher margin customers and certain production
efficiencies in the manufacturing process.
Operating expenses - Operating expenses of $1,157,370 for the nine months ended
March 31, 1996 decreased $ 121,510 from $ 1,278,880 for the comparable period in
Fiscal 1995. This decrease resulted principally from the cost reduction program
implemented in Fiscal 1995. Salaries and wages-selling decreased by
approximately $ 89,000 due to the elimination of the outside sales force.
Net loss - The Company had a net loss of $263,174 for the first nine months of
Fiscal 1996. This was a decrease of $63,183 from the net loss of $326,357 for
the first nine months of Fiscal 1995. The decrease in the net loss was primarily
attributable to the reduction in operating expenses and the higher gross margin.
Results of Operations - Three Months Ended March 31, 1996 Versus 1995
Revenues - The Company's revenues from sales were $523,978 and $759,365 in the
third quarter of Fiscal 1996 and 1995, respectively. This decrease of $235,387
(31%) resulted from decreased sales to BWIS of $249,708 for the reasons cited in
the nine-month analysis. Sales to other customers in the third quarter of Fiscal
1996 increased by approximately $ 14,000.
The Company's gross profit of $285,150 for the third quarter of Fiscal 1996
amounted to 74% of its operating expenses as compared with $430,372 and 101%,
respectively, in the third quarter of Fiscal 1995. At the gross profit
percentage for the third quarter of Fiscal 1996, the Company would have had to
generate approximately $708,000 in sales to cover such operating expenses as
compared to $750,000 in the third quarter of Fiscal 1995.
Cost of sales and gross profit - The Company's cost of sales for the third
quarter of Fiscal 1996 was $238,828 and its gross profit percentage was 54.4% as
compared with $328,993 and 56.7%, respectively for the comparable period in
Fiscal 1995. This gross profit percentage of 54.4% approximates the level
achieved for Fiscal 1995.
Operating expenses - Operating expenses of $385,385 for the quarter ended March
31, 1996 decreased $ 39,799 from $425,184 for comparable period in Fiscal 1995.
Salaries and wages-selling was $25,000 of the decrease.
Net loss - The Company had a net loss of $98,791 for the third quarter of Fiscal
1996. This was a decrease of $ 105,484 from the net income of $6,693 for the
third quarter of Fiscal 1995. The increase in the net loss was primarily
attributable to the lower sales in the third quarter of Fiscal 1996.
<PAGE>
Liquidity and Capital Resources
The Company had working capital at March 31, 1996 of $311,870 as compared to $
99,456 at June 30, 1995. At March 31, 1996, the Company had the availability of
$ 282,385 of cash as compared to $305,108 at June 30, 1995. The changes in the
working capital and cash between June 30 and March 31, 1996 were primarily
attributable to the net loss for the nine months ended March 31, 1996 offset by
the private placement described below. See the Statement of Cash Flows in Item
1of this Part I of this Report.
Accounts receivable increased to $133,010 from $124,975 at March 31, 1996 and
June 30, 1995, respectively. This increase is due to normal business
fluctuations.
Inventory increased by $ 132,574 to $511,910 at March 31, 1996 from $379,336 at
June 30, 1995. This increase is due to utilizing manufacturing capacity to build
tests for an anticipated order by BWIS related to the Summer Olympics as well as
a ramp up to meet the expected Baxter orders.
Current liabilities decreased $ 60,870 to $712,405 at March 31, 1996 from
$773,275 at June 30, 1995. This decrease resulted primarily from the decrease in
the level of activity and payment of older invoices.
As of March 31, 1996, the Company had shareholders' equity of $858,420. This
increase of $ 186,825 from $671,595 at June 30, 1995 resulted from the net loss
for the nine months ended March 31, 1996 of $263,174 offset by the private
placement described below.
Net cash used in operating activities was $405,940. This was primarily due to
the net loss for the nine months ended March 31, 1996. Net cash used in
investing activities was $ 20,983 and resulted primarily from the purchase of
capital equipment. Cash received in financing activities was $ 404,200, which
was the result of the private placement described below offset by principal
payments on non-bank financing.
The Company raised $450,000 in subscriptions through a private placement
pursuant to Regulation D under the Securities Act during the nine months ended
March 31, 1996. Under this offering, shares of the Common Stock were offered at
$0.25 a share. The 1,800,000 shares sold in this offering were issued in March,
1996. If operations are maintained at the levels currently expected, the cash
raised by this private placement and the cash generated by such operations will
be sufficient, in management's opinion, to meet the Company's cash needs for the
balance of Fiscal 1996. However, the Company anticipates increased activity
during the fourth quarter of Fiscal 1996 due to the Company's exclusive
distribution agreement with U.S. Distribution, a division of Baxter Healthcare
Corporation. There is, however, no assurance that this level of activity can be
achieved.
<PAGE>
As previously announced, the Company is continuing to seek a strategic partner.
Currently talks are ongoing;however, to date there have been no agreements
reached in these negotiations. There can be no assurance that negotiations will
be completed successfully.
Unless the Company can (1) obtain capital contributions or financing as may be
required to fulfill its development and marketing activities, (2) achieve a
level of sales adequate to support the Company's cost structure and (3)
ultimately operates profitably, the Company will be unable to continue as a
going concern.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10(I)(4) Copy of the Exclusive Distribution Agreement dated March 5,
1996 between the Company and U. S. Distribution, a division of Baxter Healthcare
Corporation.
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DRUG SCREENING SYSTEMS, INC.
/s/ Patrick J. Brennan
-----------------------
Patrick J. Brennan, Vice President and
Chief Financial Officer
Date: May 13, 1996
Exhibit 10(I)(4)
EXCLUSIVE DISTRIBUTION AGREEMENT
Drug Screening Systems Inc., a Corporation of Pennsylvania with its principal
offices located at 604 VPR Commerce Center, 1001 Lower Landing Road, Blackwood,
NJ 08012 hereinafter called "SUPPLIER," hereby grants to U.S. Distribution, a
division of Baxter Healthcare Corporation, a Delaware corporation, with its
principal offices located at 1450 Waukegan Road, McGaw Park, Illinois 60085,
hereinafter called "DISTRIBUTOR," the exclusive right to sell those products set
forth in paragraph 1(a), to clinical testing and diagnostic and research
laboratories in the continental United States, Alaska, and Hawaii (the
"Territory"), and DISTRIBUTOR accepts such grant for the term and on the
conditions here stated
1. Products
a. Products Covered By This Agreement
The products covered by this agreement are those products and
accessories set forth in Exhibit "A," together with the parts
and components necessary for the repair and replacement
thereof, and all modifications, improvements, and developments
pertaining to such products, accessories and components, all
of which are hereinafter referred to as "products." Products
may be added to or deleted from this agreement by mutual
consent of the parties.
b. New Products
SUPPLIER shall submit to DISTRIBUTOR specifications and, where
feasible, samples of each new product which SUPPLIER intends
to manufacture. Within sixty (60) days after such submission,
DISTRIBUTOR may acquire distribution rights for such new
products by advising SUPPLIER in writing that DISTRIBUTOR is
electing to have such new products included within those
products described in paragraph (a) hereof.
<PAGE>
2. Term and Renewal
The initial term of this Agreement shall be for 3 year(s), beginning
February 1, 1996 and ending February 1, 1999. Thereafter, this
agreement shall be automatically renewed for additional and successive
terms of one (1) year each, unless and until terminated as provided in
Section 6 of this Agreement or by either party upon written notice
given to the other party sixty (60) days prior to the end of the
initial or a renewal term.
3. DISTRIBUTOR's Duties
DISTRIBUTOR shall:
a. submit its order for products on its standard purchase order
form, a copy of which is attached hereto as Exhibit "B" and
the terms and conditions of which are incorporated herein by
reference thereto;
b. pay for such orders on DISTRIBUTOR's standard terms of
payment: net 45 days;
c. provide instruction to its customers in the use and routine
maintenance of the products;
d. Whenever feasible, work with and assist SUPPLIER in the
modification and improvement of products and the development
of new products;
e. advertise and promote the products by methods which in
DISTRIBUTOR's judgment are best suited for the sale of such
products;
f. in the event it wishes to take advantage of the provisions of
paragraph 4(c) hereof, advise SUPPLIER in writing of each bid
which DISTRIBUTOR proposes to submit in response to an
invitation for bid for the purchase of the products when that
bid requires the purchase by DISTRIBUTOR from SUPPLIER of at
least $10,000.00 worth of the products and requires a delivery
date for the products by DISTRIBUTOR in excess of ninety (90)
days from the date of the award of the contract.
<PAGE>
4. SUPPLIER's Duties
SUPPLIER shall:
a. ship to all S/P Distribution Centers, collect, F.O.B. Origin.
Carrier is to bill third party freight charges to Baxter
Healthcare, Inc., Scientific Products Freight Payment, P.O.
Box 815, Deerfield, IL 60015. It is understood that Supplier's
pricing, for the products purchased by Distributor, is not to
include transportation expenses.
DISTRIBUTOR reserves the right to determine the carriers to be
selected for shipment to its customers. All Direct (Drop)
shipments to DISTRIBUTOR's customers by SUPPLER must be F.O.B.
Destination, Prepaid and Add.
Any deviation from these terms must be agreed upon prior to
shipment by both SUPPLIER and the DISTRIBUTOR's Transportation
Department, McGaw Park, IL.
b. give at least ninety (90) days prior written notice of any
changes(s) in the price of the product(s), and honor
DISTRIBUTOR's existing purchase orders at the prices in effect
immediately prior to the effective date of each such price
increase. SUPPLIER expressly warrants to DISTRIBUTOR that any
such price changes(s) will take effect on the first day of the
calendar year (January 1). Such notice will be sent in
accordance with paragraph 10a to the attention of
DISTRIBUTOR's Purchasing Department and shall contain specific
details of the proposed price changes for each product
affected;
c. in the event DISTRIBUTOR gives a notice of issuance of bid to
SUPPLIER as provided for in paragraph 3(f) hereof, sell to
DISTRIBUTOR the quantity of products required by any contract
awarded to DISTRIBUTOR as a result of the issuance of such bid
at the prices in effect at the date DISTRIBUTOR gives such
notice to SUPPLIER;
<PAGE>
d. adequately package and deliver the products, using those
references to and trademarks of DISTRIBUTOR as DISTRIBUTOR
shall in writing specify;
e. execute, and comply with the provisions of, the DISTRIBUTOR
Continuing Guaranty, a copy of which is attached hereto as
Exhibit "C" and the terms and conditions of which are made a
part hereof;
f. turn over all inquiries for the products from territory to
DISTRIBUTOR;
g. take out and maintain product liability insurance (containing
either a vendor's endorsement or contractual liability
coverage referencing the indemnification provisions contained
in DISTRIBUTOR's purchase order form attached hereto as
Exhibit "B") on all products with insurers satisfactory to
DISTRIBUTOR with minimum limits of $1,000,000/$3,000,000 for
bodily injury and $300,000 for property damage and immediately
furnish to DISTRIBUTOR a certificate of insurance issued by
the carrier evidencing the foregoing endorsements, coverages
and limits and that such insurance shall not be cancelable
without at least fifteen (15) days prior written notice to
DISTRIBUTOR;
h. provide adequate facilities for the major overhaul and repair
of the products and provide, at no cost to DISTRIBUTOR, the
following: in-warranty and out-of-warranty repair service; all
installations requested by DISTRIBUTOR at customer and
demonstration sites; all refurbishment of DISTRIBUTOR's
demonstration products;
i. furnish DISTRIBUTOR, at no cost, reasonable quantities of
SUPPLIER's sales literature and customer instruction manuals
relating to the products; and furnish DISTRIBUTOR, upon
written request and at no cost, suitable copy and photographs
for use by DISTRIBUTOR in advertising and cataloging;
j. allow DISTRIBUTOR to inspect SUPPLIER's facilities during
normal business hours to determine SUPPLIER's adherence to
quality assurance and regulatory compliance standards;
<PAGE>
k. issue credit to DISTRIBUTOR, in an amount equivalent to the
full purchase price paid by DISTRIBUTOR, for any quantity of
products in DISTRIBUTOR's inventory which exceeds
DISTRIBUTOR's sixty (60) days of forecasted sales (based on
DISTRIBUTOR's prior one hundred eighty (180) day history of
the date the credit is sought) and which DISTRIBUTOR returns
to SUPPLIER within three hundred and sixty (360) days of
receipt of such products.
l. notify DISTRIBUTOR immediately in writing should SUPPLIER
become aware of any defect or condition which may render any
of the products in violation of the Food, Drug and Cosmetic
Act, or in any way alters the specifications and quality of
the products;
m. furnish to DISTRIBUTOR, at DISTRIBUTOR's request and at no
cost to DISTRIBUTOR, reasonable quantities of original factory
outer cartons and packaging materials for repackaging of
refurbished, used instrumentation and of returned, unused
instrumentation where original packaging has been discarded by
the customer.
n. make any claims for unpaid invoices in writing within twelve
(12) months of the date of SUPPLIER's first invoice for such
amount. DISTRIBUTOR will not be obligated to make payments
for, or investigate, entries which are dated more than twelve
(12) months before SUPPLIER's written claim or request for
investigation.
5. Patents and Trademarks
a. Patents
SUPPLIER shall prosecute diligently each application for
United States patent which is now or hereafter pending
covering some one or more of the products and on issuance
diligently prosecute each infringer thereof. SUPPLIER shall
defend, indemnify and hold harmless DISTRIBUTOR from and
against any liability arising out of a claim of patent
infringement made with respect to any of the products.
Supplier agrees to repurchase from DISTRIBUTOR, at a price
<PAGE>
equivalent to the full purchase price paid by DISTRIBUTOR, any
quantity of products in DISTRIBUTOR's inventory which products
DISTRIBUTOR reasonably believes it should not or cannot sell,
based on an opinion of DISTRIBUTOR's counsel that future sales
by DISTRIBUTOR may result in patent infringement, or because
of a decision, whether interlocutory or final, rendered in any
patent infringement action.
b. Trademarks and Trade Names
SUPPLIER recognizes that DISTRIBUTOR is the owner of the
trademarks and trade names connoting DISTRIBUTOR which it may
elect to use in the promotion and sale of the products and
that SUPPLIER has no right or interest in such trademarks and
trade names.
c. Trademark License
SUPPLIER hereby grants to DISTRIBUTOR the royalty-free right
to use SUPPLIER's trademarks and trade names on the products
during the term of this agreement (except for MACH IV(R) which
is expressly committed by previous agreement to Borg Warner
Information Services, Inc.), it being expressly understood
that DISTRIBUTOR shall discontinue the use of such trademarks
and trade names upon the termination of this agreement except
for Mach IV which is expressly committed by previous agreement
to Borg Warner Information Services, Inc. and disclaims any
rights in the trademarks and trade names other than the said
license.
<PAGE>
6. Termination
Either party shall have the right to terminate this agreement on
written notice if the other (a) commits or suffers any act of
bankruptcy or insolvency, or (b) fails to cure any material breach of
the provisions of this agreement within thirty (30) days after written
notice of such breach.
7. Procedures on Termination
a. Windup
On the termination of this agreement, for whatever reason,
SUPPLIER shall continue to honor DISTRIBUTOR's orders for
products up to the effective date of termination and for a
period of sixty (60) days thereafter, and DISTRIBUTOR shall
pay for such products on the terms and conditions of this
agreement.
b. Repurchase of Inventory
Within thirty (30) days after termination of this agreement,
upon written request from DISTRIBUTOR, SUPPLIER shall
repurchase DISTRIBUTOR's inventory of the products at
DISTRIBUTOR's acquisition cost thereof.
c. Product Service
SUPPLIER shall continue to perform service on products as
called for in paragraph 4(h) herein for a period of five (5)
years from the date of termination.
8. Force Majeure
The obligations of either party to perform under this agreement shall
be excused during each period of delay caused by matters such as
strikes, shortages of raw material, government orders or acts of God,
which are reasonably beyond the control of the party obligated to
perform.
<PAGE>
9. Marketing Information
a. Confidentiality
SUPPLIER acknowledges and agrees that pursuant to this
agreement valuable marketing information of a confidential
nature may be disclosed by DISTRIBUTOR to SUPPLIER; that such
information will be retained by SUPPLIER in confidence; that
the transmittal of such information by DISTRIBUTOR to SUPPLIER
is upon the condition that the information is to be used
solely for the purpose of effectuating this agreement; and
that SUPPLIER shall not, either during the term of this
agreement or after its termination, use, publish or disclose
or cause anyone else to use, publish or disclose any marketing
information supplied to SUPPLIER by DISTRIBUTOR, whether
purchased by SUPPLIER or provided free of charge by
DISTRIBUTOR. Notwithstanding anything in the foregoing, the
above restrictions on disclosure and use shall not apply to
any information which SUPPLIER can show by written evidence
was known to it at the time of receipt thereof from
DISTRIBUTOR or which may subsequently be obtained from sources
other than DISTRIBUTOR who are not bound by a confidentiality
agreement with DISTRIBUTOR.
b. Cancellation
DISTRIBUTOR retains the option of canceling the periodic
provision of marketing information to vendor upon fourteen
(14) days notice (2 calendar weeks).
c. Payment
The parties shall mutually agree as to what information, if
any, will be provided to SUPPLIER by DISTRIBUTOR and what the
cost, if any, will be to SUPPLIER for such information. The
nonpayment by SUPPLIER of financial charges for marketing
information is grounds for immediate termination of all such
information.
<PAGE>
d. Remedy
SUPPLIER recognizes and acknowledges that DISTRIBUTOR would
not have any adequate remedy at law for the breach by SUPPLIER
of any one or more of the covenants contained in this
paragraph and agrees that in the event of such breach,
DISTRIBUTOR may, in addition to the other remedies which may
be available to it, file a suit in equity to enjoin SUPPLIER
from the breach of any of the terms of this paragraph.
e. Third Party
Sales to third parties for resale are expressly forbidden.
f. Exclusivity
Exclusivity will be granted to DISTRIBUTOR for the first year
of this Agreement, with no conditions. For the second year of
this Agreement, exclusivity will be granted to include
specific sales goals for the year. These goals will be
established, by mutual agreement, at least 60 days prior to
the end of the first year of this Agreement. For all
succeeding years, exclusivity will be based on achieving the
established sales goals for the previous year.
10. Miscellaneous
a. Notices
Any notice required by this agreement shall be deemed
sufficient if sent by certified mail, postage prepaid, to the
party to be notified at the address set forth in the initial
paragraph of this agreement until notice of a different
address is supplied.
<PAGE>
b. Entire Agreement
This agreement is the entire agreement between the parties
hereto, there being no prior written or oral promises or
representations not incorporated herein.
c. Applicable Law
This agreement shall be governed by the laws of the State of
Illinois, applicable to contracts made and to be performed in
that state. Any lawsuit arising from or related to this
Agreement shall be brought in the United States District Court
for the Northern District of Illinois or a state court sitting
in Lake County, Illinois or Cook County, Illinois. The parties
hereby consent to the jurisdiction of said courts.
d. Amendments
No amendment or modification of the terms of this agreement
shall be binding on either party unless reduced to writing and
signed by an authorized officer of the party to be bound.
e. Existing Obligations
SUPPLIER represents and warrants that the terms of this
agreement do not violate any existing obligations or contracts
of SUPPLIER. SUPPLIER shall defend, indemnify and hold
harmless DISTRIBUTOR from and against any and all claims,
demands, actions or causes of action which are hereafter made
or brought against DISTRIBUTOR and which allege any such
violation.
<PAGE>
11. Assignment
This agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, provided,
however, that neither party shall have the right to transfer or assign
its interest in this agreement without the prior written authorization
of the other party, except that DISTRIBUTOR may assign this agreement
to a parent or subsidiary corporation.
12. Counterparts
For convenience of the parties hereto, this agreement may be executed
in one or more counterparts, each of which shall be deemed an original
for all purposes.
IN WITNESS WHEREOF, the parties have by their duly authorized officers
executed this agreement on the _______________ day of ____________________,
19___________.
-------------------------------------------
Supplier
By:
-------------------------------------------
Authorized Officer
Baxter Diagnostics Inc.
Scientific Products Division
By:
-------------------------------------------
Authorized Officer
<PAGE>
EXHIBIT A
Product Listing
microLINE(R) Screens for Drugs of Abuse of the in-vitro diagnostic detection of
Amphetamines
Barbiturates
Benzodiazepines
Cannabinoids
Cocaine
Methamphetamine
Opiates
PCP
Distributor Price 14.25 each Box 10/142.50
14.25 each Box 25/356.25
List Price 28.00 each Box 10/280.00
25.00 each Box 25/625.00
<PAGE>
EXHIBIT B
Sample Stock Purchase Order Form
<PAGE>
EXHIBIT C
Continuing Guaranty
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000828747
<NAME> DRUG SCREENING SYSTEMS, INC.
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> JAN-01-1996 JUL-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1996
<CASH> 282,385 305,108
<SECURITIES> 0 0
<RECEIVABLES> 208,010 224,975
<ALLOWANCES> (75,000) (100,000)
<INVENTORY> 511,910 379,336
<CURRENT-ASSETS> 1,024,275 872,831
<PP&E> 1,112,835 1,121,766
<DEPRECIATION> (602,656) (559,566)
<TOTAL-ASSETS> 1,570,825 1,471,620
<CURRENT-LIABILITIES> 712,405 773,275
<BONDS> 0 0
0 0
0 0
<COMMON> 42,460 24,460
<OTHER-SE> 815,960 647,135
<TOTAL-LIABILITY-AND-EQUITY> 1,570,825 1,471,620
<SALES> 523,978 1,524,196
<TOTAL-REVENUES> 525,422 1,527,341
<CGS> 238,828 633,145
<TOTAL-COSTS> 385,385 1,157,370
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (98,791) (263,174)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (98,791) (263,174)
<EPS-PRIMARY> (0.03) (0.10)
<EPS-DILUTED> (0.03) (0.10)
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